Hubbell Inc (HUBB) 2006 Q1 法說會逐字稿

Good day everyone and welcome to the first quarter 2006 earnings release conference call for Hubbell Incorporated. Just a reminder today's call is being recorder and at this time I'd like to turn the conference over to Mr. Tom Conlin. Please go ahead, sir.

Thank you, Laurie good afternoon everyone. As Laurie mentioned, this is the first quarter earnings conference call for Hubbell Incorporated. We released our press release a little earlier than usual this morning at about 10 o'clock. And that release is available for all the usual sources, most easily now on the Hubbell website.

The conference call is available by telephone and is being simultaneously webcast also through the Hubbell website. To get a replay of what's said here today in 2 ways 1, by telephone, two hours following the conclusion of the call you'll be able to access a replay by dialing 719-457-0820 and the replay pass code number is 4012570. You'll also be able to access the call on the Hubbell website. It will be archived there for the next year, and to access it to the website, just click on the investor relations tab and then the audio Archives tab.

One other customary comment I'd like to make is to refer all of you to the paragraph in the press release regarding forward-looking statements. We will discuss the year, some of the projections for it in 2006 during this call, and that discussion will involve inherent assumptions that have known and unknown risks that you should be aware of. So accordingly please note that paragraph from the press release on forward-looking statements. And I would like to incorporate it into this call today by reference.

Now, let me turn it over to Tim Powers, Hubbell's CEO for some comments on the quarter.

Thanks, Tom. Good afternoon, everyone and thanks for joining us. I'll provide some introductory comments on our first quarter results and some observations on the markets we serve and then turned over to Dave for a review of our results in more detail. Then I'll come back with some thoughts on the rest of the year and will open up for questions.

We are very pleased with our results for the first quarter. The markets were stronger than we anticipated, and we were able to take advantage of this strength with solid performances in all our businesses. This strength appears to be broad based. Most of our markets have been strong to start the year. And our multi-year initiatives are gaining traction. This was most apparent in Power and Industrial Technology, where lean, low cost sourcing and acquisitions all worked to leverage solid markets. The market trends also helped the Electrical segment, with sales up 11 % over last year.

The year-over-year margins were as we expected, impacted by production and delivery inefficiencies and product outsourcing. However, at a lower level than we anticipated. The Power Systems initiative is proceeding very well. The third implementation of SAP went live just at quarter's end. It was the smoothest so far. This implementation included the entire power business, certain product lines within lighting and the industrial technology platform. It is still early but at this point, we are off to a good start. Another area of positive results is a new product introduction in our wiring business. The market acceptance of the metal raceway product line has been very positive.

Our sales results to date have exceeded our internal goals and we expect this to continue. Overall, we are very focused as a management team on our strategic initiatives and on the execution in our core business. The market is strong, and it is critical for us to manage this year's high level of change.

Now, I'd like to give you an overview of what I'm seeing in our markets. The long-awaited upturn in the nonresidential market, our large markets served, started in the late stages of last year and continued in this quarter, with particular strength from the commercial side overall, we continue to see the nonresidential market as strong throughout the remainder of this year although keep in mind that the comparisons become more difficult as the year progresses, as the market began to turn up in the later stages of 2005.

Industrial production maintenance and repair spending, and capacity utilization have stayed positive and have provided good support for the industrial market. As expected, utilities are spending more on maintenance, some of which is attributable to catch up after storm deferred work.

Additionally our international business is very strong on the residential side, the largest shows -- margins show signs of slowing. Some of the high-profile declines are not surprising in those areas that most recently had the highest growth. South Florida and Las Vegas, to name a few. But these have not affected us at this point. Our residential lighting business continues to show double-digit growth. One area that has the potential to reduce the economic growth is the commodity and oil related costs that will continue to challenge the entire economy. The we have seen a modest level of softening in steel, although there have been some increases starting to show up as we move into the year.

The bigger challenges are the recent uptick in oil, closing yesterday at $72 a barrel and certain commodities that are key to us are continuing to escalate. The copper, zinc, and aluminum to name a few.

Now I'll have Dave give you some more details on the numbers for the quarter, and then I'll be back to talk about the balance of the year.

Thanks, Tim. Let's start with a P&L overview. Going right down the P&L sales of 573 million, up 18 % from the 487.6 million last year. Included in that 18%, an impact of acquisitions was about 3 % of that growth. Selling and administrative costs and 9.1 million, 17.3 % of sales, down from 18.9% last year. Now, a couple things in there, in 2005 we had 4.6 million of transaction costs and in 2006, we have 2.7 million of stock based compensation. So on a comparable basis, when you adjust for those items, we were down a little over a point. As we successfully leveraged a higher sales and focused a lot on cost management. Special charges associated with Lighting were about the same, 1.7 million this year versus the 1.9 million last year. So all this results in operating earnings of 57.9 million up 15.5 million, or 37 %, from last year, 140 basis points.

Even after we adjust for the items I mentioned above, still nearly a point of operating margin improvement. Net interest expense was 1.9 million, a million lower than last year's 2.8. Partially due to the maturity of $100 million of long-term debt in October of last year, with a little bit of offset for the cash used to support our first quarter share repurchase. The effective tax rate was 29.5%, consistent with our guidance for the year. Higher than last year by just over 2 points.

All this resulting in net income of 39.7 million, up 10.9 million or 38 % from last year's 28.8 million. Share count down 2.4% to 61.2 million average shares. Due to the share repurchase levels in the first quarter. So all this translates into earnings per share on a diluted basis of $0.65, up 41 % from last year's $0.46.

Turning now to segment results, let's go Electrical segment first. Sales of the 391.1 million, up 37.7 million or 11% compared to 2005, with [order] rates are running higher than that. Operating income of 31.4 million, comparable to 2005, including the special charges associated with Lighting streamlining. All 3 of the businesses within the segment reported higher sales double-digit rates of order. All 3 have been reporting steady progress in addressing the specific issues that have lowered profitability to levels below where we want them to be, where we expect them to be.

OP margin of 8%, down 90 basis points from the first quarter of 2005, were all of the businesses within the segment contributing to that decline. The were certainly not at the threshold that we expect. We're not satisfied. But we totally expect to get back to a double-digit rate of operating margin as we enter into next year.

Wiring Systems going through the businesses that comprise electrical wiring systems, but volume was up in all businesses, reflecting participation and strong market conditions. The profit was impacted as expected by production and delivery issues but these are on track for resolution over the next several months. In addition, commodity cost exceed price increases, product mass was unavailable and we had some higher project related expenses associated with our new product introductions.

On the positive side, new product introductions, particularly the metal raceway lines received good market acceptance and is ahead of our plan for sales. Lighting, that overall double-digit growth, particular strength in residential, and the commercial and industrial exclusive of fluorescent business. Improvements in both stock and project business. All 5 regions of the U.S. reported higher sales. Residential volume as Tim mentioned, also positive despite slowing in the housing market. The profit, as expected, was impacted by the Business integration streamlining activities resulted in some duplicate facilities and increased logistics that are expected to be resolved by year end.

And electrical products business, improving demand in their markets. They continue to work the cost price issues particularly at Raco as they continue to deal with material cost increases. Steel prices increasing on April 1. The March market for hazardous application in the quarter were particularly strong. Turning now to the Power segment, sales of 132.3 million, up 33.6 million or 34 % from last year's first quarter. Operating profit of 20.5 million, nearly doubled last year with operating margin topping 15%. Strong order import across all the businesses allowed us to leverage this increased volume and higher profitability. The the segment also includes also results in the Del Mar acquisition and the third quarter of last year, which contributed 6 % of the sales growth it was moderately accretive to their operations. Price cost was slightly positive in the quarter.

In addition, there was some level of incremental volume in anticipation of the system implementation that went live at the beginning of April. It's difficult to quantify precisely, but there is some level of pre buy, but were monitoring that situation closely to ensure that we're -- there's no impact in the second quarter forecast. Industrial Technology sales of 49.6 million, up 14 .1 million or 40 % from last year's first quarter. Operating profit of 8.7 million, up 78 % from last year. Acquisitions completed in the third quarter of last year contributed approximately 1 half of the segment's sales growth and about a quarter of the operating profit improvement. Growth in this business was broad based with all businesses within the segment reporting double-digit sales increases, most notably the high voltage and the real business.

Turning now to the balance sheet, continues to be strong. Continued to be in a net cash position, 36 million compared to 82 million at year end with the use of our operating cash and our cash position for a share repurchase and some increase CapEx and support of new product introductions. Some build in the receivables due to increasing volume in the quarter and an inventory and support of its higher volume of business. With some offset from payables management. Working capital was a net use of cash of 38.8 million, an improvement from last year's first quarter. Working capital as a percentage of sales overall was 18.7%, better than last year's 20.9 % in the first quarter. All that resulted in cash flow from operations of 16.5 million, a could improvement from last year's 1.1 million, largely driven by stronger earnings and the working capital improvement. CapEx was 17.2 million, up 4.2 million from last year, and share repurchase in the quarter was 32.9 million, representing the repurchase of 760,000 shares. So all in all, a very good solid quarter and a good start to what we hope will be a promising year. I'll turn it back to Tim for more thoughts on the market and the year.

Thanks, Dave. Let's talk about all our outlook for the year. We expect the full 6 year sales for 2006 to be slightly better than our earlier guidance. Likely high single digit above 2005. This includes slightly better than GDP forecast of organic growth along with 1 to 2 points of price carryover and new product sales impact. We continue to expect full year operating margins to be at or near the levels reported last year. Remember that this includes about half a point of drag coming from our cost of stock based compensation through 2006. Also on a couple basis it will be up about a half a point. I little bit less than our long-term expectations of a point per year.

Much of this is due to the head wind and our guidance as we navigate through this peak year of change. Our full-year earnings per share is still expected to be in the range of $2.60 to $2.80, the strong start of the year that we produced in Q1 gives me a lot of optimism in the potential for this year. However, it is still only April and there are many things in this process, in this peak year of change, that are still yet to be completed. The completion of our SAP implementation and domestic operation, half of the company going live this year. The substantial completion of the lighting streamlining and significant new product introductions. These impacts are more significant in the first half of the year.

In addition, there continued to be cost head winds in commodities and energy at levels than we anticipated when we set our plan for 2006. The we are working aggressively to manage the cost price equation, but it's too early to call the extent to which this will add to our performance in 2006. We continue to expect that cash flow from operations, less acquisitions, will exceed our net income for the year. Despite the need for sales growth and strategic inventory builds with additional working capital. We expect to use our strong cash position to support our share repurchase in growth initiatives, both in new product introductions and acquisitions. So let me stop here and open it up for questions.

Thank you, gentlemen. [OPERATOR INSTRUCTION] Will go first to Robert McCarthy CIBC World Markets.

Good afternoon, everyone. Congratulations on a pretty good quarter.

Thank you.

Talking about the trajectory perhaps in the electrical segment margin throughout the course of the year, I think-- there was a statement on the call that suggested that what you exited the year are double-digit rates. Is that correct? How should we think about the trajectory for the full year?

We just have the risk of the second quarter and the system of implementation, but all the inefficiencies and operational problems that we have our steadily getting better. So we would expect our margins to slowly improve as the year goes along.

Would you expect a double-digit rate in the third and fourth quarter?

In the third and fourth quarter I wouldn't say we would expect them in there, but by year's end we would expect to reach that.

As you exit going into '07 you expect that?

That's right.

The other thing, Rob, this is Dave, to keep in mind is that some of the project costs associated with the new launches are more front and loaded, so there's a little bit more of a drag in the early part of the year.

How should we think about, is there anything flowing through the P&L with respect to getting new headquarters on line? Any on a corporate level that we have to think about?

No, none.

Okay. In terms of the utility ends market, obviously a lot of strength there and were seeing that right now, obviously, I think it typified it as the fact that there was a carry over or hangover affect from the last couple of quarters due to the hurricanes. But on a competitor's call today they mentioned the fact that there might even be some inventory build occurring ahead of the hurricane season this year, and there might be in fact some demand been pulled into the first quarter. Would you agree, disagree, or how would you typify this phenomenon?

It depends on the type of product.

Ok.

But that isn't anything that we've seen a lot of.

Ok.

It could very well be taking place and we don't see it, you know. I wouldn't disagree with that, but we just haven't been able to determine that if it is taking place. We had some buying ahead mainly by our distributors as we went live on SAP for power systems. So we had a little bit of that for April still, order rates remain unchanged.

It could you talk a little bit about, obviously, the journey of lean has gone through the Power and Industrial Technology segments pretty well. This reflected in these first quarter margins. The where, I meant where the expect the journey of lean really to take hold and electrical across the board?

Well really it is, it's being masked by a couple of the bigger issues that were going through right now. One is, certainly the lighting restructuring, which is causing us difficulties, and inefficiencies, and also with some supplier issues that we've had in the power business. But if you went and viewed any of our individual plants, you would see dramatic productivity improvement. So I think we will see those appear in our future income statements as we get through the short term difficulties.

Could you review, just in terms of on the capital side, the operating expense side, you typify '06 as kind of a peak year for spending and expensing on initiatives. Can you just review those initiatives and how we should think about 06 versus 07, those initiatives rolling off?

Let's start with the system implementation. Work concluding our fourth go live in October and certainly the expense portion that we've been seeing in our P&L at the rate of $10 million a year, it won't go to 0 and '07, but it will certainly drop by a dramatic amount. But also we have increased, amortization of the capitalized portion. So we have to get a run rate on that. But there should be a net positive benefit to the conclusion of that project. That will begin in 2007 and get better.

Okay. And then finally, on just commercial lighting volumes, what kind of volume did you see both inclusive that exclusive of a florescent and was a sense -- could you perhaps comment on a price, and cost dynamics right now?

Than the comment on price cost dynamics. While we check our numbers year just to make sure I have them. Right now, if you say at this very moment, we are kind of cost price neutral. But we haven't seen the full impact of the most recent rises in commodity costs, nor have we felt anything like a 72-dollar a barrel oil so we need to get price increases and there will be priced price increases in the second quarter. In virtually, you know, two-thirds of our products. So there's more coming, but at this point, you know, we're -- the cost inflation and price is about -- is about neutral. All but the cost is accelerating and the price, these price increases that were implemented last year, are going to more of a neutral position. So we will need further price increases to stay ahead of the curve.

Okay, and as far as volumes are concerned?

The C&I business was up about 8%.

On volume?

Yes.

Exclusive of fluorescence, was fluorescence down?

No, it was up but less than 8

And then finally, I mean out just ask about your guidance, obviously there's a lot of execution you have to have for the balance of the year and that markets got to help you. But would you consider, even just raising the lower end of your guidance range? Do really think 260 to 270 realistic given the kind of quarter you put up?

We are comfortable to see will likely end up in the higher half of the guidance. But, we are still concerned about the execution on SAP, 2 go lives is a big number and while we've done well in this third go live at this point, we're just want to see a little more time take place to get our power business through and out the other side. And that kind of thing is, in part of our outlook here.

Understood. Well congratulations on a good quarter. Thank you for your time.

Thanks, Ron.

Moving on will go to Bob Cornell with Lehman brothers.

Hello, everybody. To my appeal better than the sound, man. Get some rest this weekend.

I'm fine.

You know, you said on the electrical business, the orders were better than the rates of sales. Would you flush that out a little bit? Is that and end market strength or is that and an inability to get shipments out the door and meet demand?

We're being tested. All our supply chains are being tested to respond to the, kind of an expected increase the magnitude increase in business. So typically most of us would have begun ramping down our employment levels in our plants as the fourth quarter, unfolded. And some of us, including ourselves, began to do that. And the orders, instead of following a normal patterns, but up. So a little bit, it's just catch up here with catching our breath and getting organized. But our backlogs are certainly higher leaving the first quarter than they were entering the first quarter right across the board. And so at this point, the market looks very strong, and we will respond to that better in each succeeding quarter if it stays this high.

Let's talk a little bit about some of the specific issues. I mean you've got the plan is going on in Spokane and up the area. No, give us an update on how those, the lowest among those plants is evolving? And where are you in terms of completing the process?

We are improving the productivity of our Philadelphia plant and catching up on overdue backlog. This is the one that is producing low-volume, high variety products. So that's a situation is getting better. We are, let's say, having more costs with more plants open at this point than we wanted to have, so we've slowed down because of our difficulties in Bristol. Some of the restructuring actions that we wanted to take place. So we have some more costs and therefore more locations than we anticipated. So we are stopping any further movement of product until we, get ourselves together and Philadelphia, which we would expect, you know, to move right along as we told you.

When do you think Philly is to get stable?

It will be totally on track and it's getting better, know, each quarter. I can certainly feel much more confident about where we are today than where we were 3 months ago. This and the same you could say is true of wiring device, where we were having, difficulties in keeping up with demand. In our Porta Rico plant primarily, and certainly we're in a much better position at the end of Q1 than we were at the end of last year.

Well, having said that, how come margins are so low then?

There are certainly increased costs to service the market when your expediting freight and you're making more individual shipments per order than you would have to under normal circumstances. So let's just say in wiring device, when were operating at, you know, our normal high level of efficiency, its 1.2 or 1.3 shipments per order. Now it's in the range of 1.6, 1.7. So we have expedited for it off the island and multiple shipments so these things kind of stack up. And to the extent to get caught up, they also go away. So we're anticipating that also.

I guess RACO would be the final problem business and electrical? I mean where are you there in terms of cross price parity with RACO and I guess you've got other problems, and with the raws going up?

Guess it's mostly price with RACO and catching up with the steel and getting prices through on metal boxes, which is a product category that's been resistive to the full price recovery of the steel involved in the product. So that's been our challenge on RACO. We will have another price increase this quarter. Those back now I guess the final question for me is last year we talked about the non res project market and cost issues and pricing issues. I mean you mentioned that the market is turning. Once you flush out that on the product side of the business and how your business, whether you're gaining or losing market share? Which business?

The projects part of the lighting business and non-res.

Okay. We really feel we have returned to our normal market position and we think that our sales growth of, 8 or 9% is reasonable in this market. Pricing in the Lighting area is still tough. It is another product area where, in no, it really hasn't recovered full the cost increases that we've seen and Lighting Fixtures. But I'm optimistic that we could have another price increase here in the second quarter. So hopefully, by the third quarter, so we will have done something positive there. So there's a lot of pricing actions taking place in the second quarter, and certainly the fact that we're holding our guidance has a lot to do with, how these will all shake out. But within another say 60 days or so, I'll have a very good view on how our System implementation has gone and how these prices versus costs will have begun to take hold in the market. And then we'll certainly be able to talk, much more clarity with how the year is going to work.

Good. Thanks very much Tim.

Sure. Once again if you'd like to ask a question today please press star 1 now. Will go to Alex Rigel with Friedman Billings Ramsey's. Thank you. Could you please extend upon the electric utility marketplace? Are you starting to see any increase order flow as it relates to a upgrade, rebuilder, expansion CapEx? And secondly as it relates to RACO and the rough in electrical products. When was the last price increase? When you anticipate the next price increase, and can you can just talk about the competitive environment in that business and breakdown whether or not your distribution channels for that business are more commercial oriented or retail oriented?

Okay. Let's start with the utility business. Certainly there have been some transmission line additions in the utility business beginning the latter half of last year and into this year. But they are not the major upgrades to the system. These are 5, 7, 25-mile pipelines that are meant to support, supplement, and correct weaknesses in the utility's power grid. These are not the 100-mile lines that interconnect utilities. Those really have not begun. The but certainly is an attention within the capital budget of utilities toward transmission and distribution. The and less spending on power generation.

And they have even begun to spend more in total than they were in previous years. So it's all good headed in our direction. But there has not been this building of the sort of electrical highway that's been talked about. That has not begun at all. Let me move to RACO for a moment. RACO is primarily in the commercial construction market. It also has a large presence in the retail chain. So it's and they do it yourself business it services small contractors through that part. But it's used primarily in commercial construction offices, schools, hospitals, that kind of thing. And the market is just beginning to improve.

But the market has not allowed us to recover for a 12 month period or mor. All of the metal increases it's primarily a steel product than more of half of the sale price of steel itself. So if you can't get that back, it's very typical to maintain margins. But there is a price increase from RACO and the field right now and we would expect, within just the last week or so, 2 weeks I think it is. And we would expect that to have some beneficial impact.

Within that business, what is pick mix between commercial and retail again?

We usually don't talk about that level because that would tend to disclose a lot of detail competitive information.

Fair enough. Thank you very much.

Sure.

Thank you And will take our next question today from Jeff Sprague with Citigroup.

Thanks. Good afternoon. Just kind of following up on RACO and Lighting actually, it would seem to some degree that products like this with less value add than some others add that some others. A metal box is just that a piece of metal. Then, the channel would actually try to move in concert are recovering cost given the cost structure of the product. So is it a function of just excess capacity in the marketplace? Is their imports coming and that's impacting it, whats really eroding discipline when everyone clearly should have motivation to try to get price up in the business?

A lot of it has to do with the product mix of the individual companies. Those companies who have, let's say, a small presence in the box business but a large presence in, say, steel fittings, metal and metal fittings, may not be as concerned. Though they may be offering metal boxes at a very attractive price so long as to buy their whole package. It just so happens for Hubbell that metal boxes is a very big piece of the electrical products business. The so what really depends on what proportion of your total product offering and how important mailboxes as to whether you are vitally concerned if you recover all that price or not.

And then just kind of thinking about the profit structure of the business, and obviously competitive dynamics have changed, but if we go back, a decade ago in the good old days, electrical margins were in the high teens. When you look out 2 or 3 years, assuming that kind of this demand in garment continues and you get all this internal stuff behind you, where do you think you can take margins in the business?

We have stated 13 to 15% and that's all of Hubbell's portfolio and that's still what we believe. Over a business cycle. When Hubbell had 18 or 19%, electrical margins, it was much more driven by our industrial wiring device business, which has high margins and it was not as large a company. We have many more commercial and other products that have, added to our portfolio, but we believe that 13% to 15% is a reasonable target and you can see by our power business and our industrial business that we're certainly capable of that.

And can you just give us a little more color on specifically what price did in each of the businesses? There's a lot of this talk about price and cost, but how much is price up and electrical and how much is set up in power? You may have said it, but I didn't catch it.

We think price in the quarter was worth about 1% it was a very small, like under 1/2% Electrical. It was over, like 2 or 3 percent in power. And around 2 percent in industrial. So about 1 percent in total.

And I'm just wondering on power margins clearly looked very good versus last year, but revenues are actually, running higher than they did in the second half of last year. And margins are lower. Is that miss or is that a function of, although you're getting price cost is coming up quicker than your recovering price in the business?

I think you can attribute it certainly to the rapid price of aluminum, which has a high percentage content in the product, along with zinc. A lot of our products are plated with that material, so those have risen, those materials have risen much, much faster than the price as.

And I guess, will actually 2 more things from me. You may comment, Tim, about continued interest in acquisitions. Where does the pipeline stands? I mean valuations are increasingly being bid up in this market. And thing that's interesting of note in the pipeline?

There's always things interesting in the pipeline, but the issue is just what you say. Of the valuations. We certainly have an objective this year to continue to add to our portfolio by acquisitions. And there are opportunities out there that look good to us, so we'll just have to see. But there is definitely some opportunities in the near term.

All right. Thanks. That's it for me.

Thanks. Just a final reminder if you'd like to ask a question, please press star 1 now. Pause for just a moment. And gentlemen, there are no further questions at this time. I'd like to turn the conference back over to you for any additional.

Thank you, Laurie and thank all of you for attending today. The we'll talk to you in about 90 days.

Once again, that does conclude today's conference. I'd like to thank everyone for joining us.