Hubbell Inc (HUBB) 2006 Q2 法說會逐字稿

Good day, everyone. Welcome to the second-quarter 2006 earnings release conference call for Hubbell, Inc. Today's call is being recorded. Now, for opening remarks and introductions, I would like to turn the call ever to Tom Conlin. Please go ahead.

Thank you and hello everyone here.

We released our earnings report this morning a little earlier than usual, and that release is available to you from all the usual sources, most easily at this point from the Hubbell Web site at Hubbell.com. This conference call is available by telephone and it is simultaneously being Webcast on the Hubbell Web site. A replay of the call can be gained in two ways, one by telephone two hours following the conclusion of the call by dialing 719-457-0820 and you'll be prompted to enter a pass code, which will be 4650751. The call will also be archived on the Hubbell Web site beginning 24 hours after our conclusion here today, and that should be available for the next year on the Hubbell Web site. To access the audio archive, go to the Hubbell Web site, click on Investor Relations and then on Audio Archives and you'll have the replay.

Let me also refer each of you, as is our custom, to the paragraph in the press release regarding forward-looking statements. Both the press release and today's call concern some expectations and revisions to our expectations regarding our earnings for the full year of 2006. That subject is clearly forward-looking. We may also make comments here today, either in our marks or in answer to questions which may also be forward-looking. All of these involve inherent assumptions with known and unknown risks and other factors that may cause the actual future events to differ from our expectations here today. So, please note that paragraph in the press release and consider it incorporated into our call today by reference.

With me, as usual, is Tim Powers, president and CEO of Hubbell Inc., and Dave Nord, our CFO. And we'll start with Tim' remarks and then we'll go to Dave. Tim?

Thanks, Tom.

I begin with my customary introductory comments on the second quarter, some observations on our markets. Dave will review the detailed results for the quarter. I will come back with some thoughts on going forward for the balance of the year and then we will take some questions.

Turning to the second quarter, the second quarter was a quarter of very solid performance for Hubbell, in line with our expectations. We saw strength in most of our markets, double-digit sales growth in all of our segments, even above our expectations.

Two factors to keep in mind -- first, in a year of peak change for Hubbell, the Electrical segment profitability is beginning the improvement we predicted and we are on track to exit the year with double-digit OP rates. Areas of change include, as you recall, the Lighting restructuring, some of which is quite complex, completion of the initial SAP implementations and resolution of some production and delivery issues arising out of both SAP and our restructuring, all of which are moving forward to be steadily resolved.

Turning to the SAP discussion, we completed our third implementation, which included Power Systems and about one-third of our lighting business. The implementation went well. We experienced some higher costs at Power Systems as we worked through our distribution center issues, which we encountered back in April and which I've talked about throughout the quarter. Focus and attention on that operation got us back on track by the end of the quarter. We are now ready for the next go-live in October.

Commodity costs continue to be a challenge, but pricing actions across all of our businesses are beginning to close this gap, all in the face of unusually robust markets and demand levels, which have intensified our focus on effective manufacturing and better supply chain reaction. Overall, we are pleased with how we responded and the hard work and dedication of our over 13,000 employees.

Lastly, we have a new addition to the Hubbell family of companies. I want to welcome the employees at the Strongwell-Lenoir City division. The transaction was closed on June 1 and we're off to a good start.

Let me talk a little bit about our markets. Overall, economic conditions continue to be positive and we certainly see this in our volume. The manufacturing sector, production and utilization rates continued to increase in the second quarter. June production announced just the other day was up 6%. The investment fundamentals in this market are still sound with a continued upswing in the global CapEx cycle expected to continue. Corporate balance sheets are very strong to fund this continued capital spending. Factory utilization rates are certainly supported by significant volume upticks as well as the supply chain strain that everyone in our industry has experienced. No moderation is expected in this market for the remainder of the year.

Nonresidential construction, our largest single market at over 40%, continues its upward trend. Commercial strength and mostly in the office segment. Some postponements or rebids happened as builders dealt with the flow-through of higher material costs. Widespread strength in institutional, educational, dorms, healthcare and recreation sectors are all being seen by Hubbell. Solid levers are expected through 2007. We are watching closely for the impact of rising interest rates and material costs leading to a softening of the broader economy and a ripple effect of the residential slowdown, although that'll be lagged more like late in 2007 and in 2008.

Residential, or about 15% of our business, is clearly slowing. Housing inventory levels are up, builder confidence levels at the lowest in more than ten years and housing starts are likely to be down at least 7%, maybe a little more. But the absolute level of starts is still high. June reported at 1.85 million units. Our business continues to show strengths with volume up more than 10% for the quarter.

The utility market continues to grow. Utilities are continuing their spend on maintenance and repair to improve reliability and for storm preparedness. The early storm season has been mild, but of course, we are just starting to enter the heart of the season. So, I'm expecting some moderation in economic growth as housing cools and higher interest rates and commodity cost increases have some dampening effect -- but overall activities at historic high levels.

Now let me turn it over to Dave for a more detailed review of the quarter. Dave?

Thanks, Tim.

Just to go through some of the specifics of the quarter, first looking at the P&L, we see sales of 603.2 million, which is up 16% from last year's 520.5 million. Included in that year-over-year increase, acquisitions, both the end of last year and this year, contributed about 4% of that growth and pricing added a little bit more than a point. So excluding those, we're still looking at about 11% organic growth.

Selling administrative costs were 102.9 million, or 17.1% of sales, up slightly from last year's 16.9%, but you have got to remember that that's where we have included 2.6 million for the stock-based compensation, which is about 40 basis points. So selling and administrative costs are really down, and that also includes the absorption of the SAP implementation costs. Most are on the administrative cost line. Our special charges primarily associated with lighting were lower this year, 1.4 million versus 2.2 million, but we are still on track for charges this year close to last year's level for the full year.

Net interest expense of 2.2 million, lower than last year's 2.8, due to the maturity of $100 million of long-term debt that was paid off last October but offset by lower cash and investment balances that have been used for acquisitions last year and this year.

You'll see our effective tax rate is 30.3%, slightly higher than our guidance and higher than last year by 1.6 percentage points. Two reasons for that -- reduced benefit this year because our domestic source of earnings is higher than our internationals, so it reduces the benefit that we derive from our international tax structure. Then an R&D tax credit -- we have not assumed this year, as the legislation reinstituting it is still pending. This is worth about 0.5 point on our rate this share. So the result is net income of 41.6 million, up 5.9 million or 17% from last year's 35.7 million. Average shares outstanding on a diluted basis, 61.6 million, just slightly lower than last year's 61.9. So all that translates into the earnings per share on a diluted basis of $0.67, up 16% from last year's $0.58.

Turning now to some segment review, on the Electrical side, sales of 419.2 million, up 42.8 million or 11% from last year's second quarter. Operating income of 37.3 million, up 4.8 million from last year, including special charges associated with the Lighting streamline I mentioned. Operating profit margins, 8.9%, up 30 basis points from the second quarter of last year.

Within the segment, the Lighting business had overall double-digit growth, strength in both the residential, commercial and industrial. Profitability also improved at both the C&I and residential business due to higher volume and improved factory performance.

On the wiring side, volume growth remains strong and higher costs associated with our new product launches held down our profit improvement, as well as some of the commodity cost headwind that we are working through with price increases. The electrical products saw a double-digit volume growth in the [harsh and] hazardous business and the metal box business is up modestly. Profitability probably most impacted in that business on the material cost side with steel at RACO and aluminum on the Killark side.

Turning to the Power segment, sales of 134.3 million, up 24.4 million or 22% better than last year's second quarter.

The Delmar acquisition, completed in the third-quarter last year, as well as the strong Strongwell-Lenoir City in June of this year, contributed about half of the sales growth in the quarter. It was modestly accretive to our operating profit of 19 million, which is up 17% from last year. One of the things on a margin basis in the power business that put a damper on their margin performance was really related to the SAP implementation and the incremental support costs that were incurred during their go-live in the second quarter.

On the industrial technology side, sales of 49.7 million up 15.5 million or 45% from last year's second quarter. Acquisitions that we completed in the third quarter of last year contributed a little more than a third of the sales increase and somewhat less than that to the operating profit growth. Operating profit of 7.8 million was up more than 80% from last year. Sales growth other than acquisition was broad-based with all of the businesses within the segment posting double-digit sales increase and strong operating profit contributions from the high-voltage industrial controls businesses.

Turning now to cash flow, cash flow from operations of 46 million in the first six months compares to 50.7 million in the first six months of last year. So if we do the math for the quarter alone, second-quarter cash flow from operations was 29.5 million this quarter compared to 50.6 million in last year's second quarter. That decline in operating cash flow largely attributable to some buildup in receivables and inventory in the quarter in support of this higher volume of business and new product introductions with some offsetting payables management. So our trade working capital was a net use of cash in the quarter of 31.6 million.

Capital expenditures year-to-date were 38.1 million compared to 28.6 last year -- increased spending attributable to new product launches and spending associated with the Lighting restructuring, specifically the new Lighting headquarters in the quarter. Just as a point of information, the capital expenditures was 20.9 million.

Other uses of cash -- share purchase of 9.6 million associated with the repurchase of 203,000 shares, bringing year-to-date purchases to 42.5 million for 963,000 shares. All that has led to net debt as of June 30 of 79 million compared to a net cash position of 36 million at the end of the first quarter. The net change in the first quarter to second quarter largely attributable to the acquisition of the Lenoir City business on June 1 -- otherwise, constant level of net cash debt.

So with that, I'll turn it back to Tim for some comments on the forecast.

Now, we will turn to the outlook for 2006. First, on the sales side, we anticipate that the first-half strength will continue throughout the year. Keep in mind that the second half of last year was particularly strong when you consider the storm impact in the third quarter, so some of the comparisons are a bit more difficult. In addition, we have the benefit the Power Systems acquisition for all of the second half, which will add about 3 to 4 points of growth for the second half and a couple for the whole year. So all these things considered, we see the sales growing by about 12 to 14% as compared to with 2005.

On the profit side, there are a few more things for us to navigate through -- the next SAP implementation, the continuation of the Lighting streamlining, particularly in the fluorescent business, and the impact of the commodity cost headwind as our pricing actions take effect. When considering our plans to manage each of these factors, we're increasing our earnings guidance to the range of $2.75 to $2.90 for the year 2006.

So let me stop here and open it up for questions.

(OPERATOR INSTRUCTIONS). Bob Cornell, Lehman Brothers.

A couple of questions -- while the power business had a good quarter, the revenue, relative to the first quarter, looked unusually level. I mean, typically you would have a stronger second quarter than first quarter. But maybe there were some unusual factors in the first quarter relative to the spill-over, the repair, at the East Coast. Maybe you could comment on why there doesn't seem to be the normal seasonality there.

First of all, the extraordinary strength of the first quarter, and second, just a bit of slowdown in our operations from the SAP go-live. Otherwise, we probably could've shipped another 5 or $6 million. But we are through that now and May and June activities in our plants and out the door are at the market levels. So you always go through a little dip like this, Bob, with each one of the businesses and you can see that dip a little bit in our performance in Power in the second. But you'll see, in the third and fourth, the normal a kind of rebound in strength that you would expect.

Yes, that explains that my model is missing 5 million.

The other big question I had was just a more detailed explanation of how you are doing on the transition from Spokane to Bristol and how Bristol is doing in their ramp-up.

Sure, I would be happy to do that. First of all, let me start with Wiring Systems and close that issue for you, that our delivery performance in our Wiring Systems business is back to all previous levels that we've seen. So we are at the end of discussing that issue and you would expect to see good activity from sales going forward. So that issue is over.

On a Bristol side, just to review what we have been doing is to move a shift of our fluorescent business, part of which is moving from Philadelphia/Bristol, Pennsylvania to Mexico, and then some of our made to order or low-volume high-variety product to our Pennsylvania plant. We have had some difficulties in that transition and I can report that we are making steady progress there and the situation continues to improve and that we are on track with what we told you, that by the end of this year we would be completely through that situation.

We still have some products in Spokane and they will remain in Spokane until Bristol is up to -- totally up to speed, which we would expect to go for about three or four more months until -- the other situation is even as you improve the effect of the increase in prices and lighting brought forward a bunch of orders which only increased our backlogs. So even though we are doing better than we anticipated, our backlogs are all higher than we would've thought for this time of the year. So we have a lot more volume to push out. So good news, but it is just affecting the timing.

So we're on track. We're doing just exactly what we've explained and productivity is getting better, lateness is improving. I was just their last week and we are on pretty good track for that situation.

Tim, just one other question -- you mentioned the residential business in Lighting had held up well. It was at 10% I think you said. Was that true through the whole quarter? I mean, did you see any transition and strength in the business as you track through the quarter from May/June?

Remember, lighting fixtures are the last thing in a house and the builders are still cranking away. So we would be -- we would lag a little bit the story of trending down. We saw a very strong second quarter. The third-quarter is where we would expect softening, quite frankly. We have not seen enough evidence of that to predict it but with all the macro evidence of the slowing, this is what we're anticipating. But up to now, through the end of the second quarter, our business has been very strong.

Jeffrey Sprague, Citigroup.

Just to kind of make sure we've closed the loop on what to expect for the SAP go-live, I guess first, Tim, what is the logic of only doing a third of lighting in this transition?

Jeff, it has to do with the number of legacy business systems, so that lighting was not on a single system. So what we have tried to do in a logical fashion is to take maybe 8 or 900 to 1,000 users and transition them from their old system into SAP. So it's not -- Lighting is actually going in three separate stages. A portion of it went earlier; another portion when this time and a third portion will go in October. It all has to do with the way it was situated when we bought the company from LCA.

The way you characterize in the press release, 75% done, obviously meaning 25% to go. Is that just Lighting or are there other some other random -- (multiple speakers)?

No, there's seven legacy systems that are smaller, many of which are in our Industrial segment. These are our ICD, Gleason, Pulsecom, along with some of our lighting business. So it's just how we group them. There's nothing in particular outstanding about the way in which we schedule them. It is just who is left at the end. It is Kim and AAL and things like that. Those business systems are changing at this coming go-live.

Can you give us a little color on price, just actually the magnitude of price in Electrical versus Power and do you need to go after another round? If so, how much, given where commodity costs are?

The industry in Lighting went out with a sort of a -- somewhere between a 5 and a 12% and I think there's even a few SKUs that when up as much as 20%. But what you just call it -- probably average of 5 to 10 and I would say the initial reaction in the market is very strong. Most of lighting manufacturers are completely loaded with orders, so I have very high expectations of the broad success of this, at least initially. So I'm very optimistic about that. We all have a couple of months of backlog to ship at old price, as is the case with every one of these across-the-industry price increases; there are some orders that you protect. So that one is going extremely well. Just about any product that contains copper, aluminum and zinc, however it crosses our businesses, are seeing price increases. So even things in the Wiring Systems, such as floor boxes and items like that that would be made of galvanized steel, we're raising prices on. Items that are like cable that contain copper, we are actually pricing those by the week. If you are buying wire from the cable guys, you price it differently morning and afternoon. So that is the extent to which the volatility and cost rise has affected materials in the industry.

Getting back to our Power business, July 15 is the effective date of their price increase and really it's an attempt to get back the cost of galvanized steel and the zinc that goes into many of the products, along with the rising cost of aluminum. Those are the primary ones. I would expect, as demand is strong in that industry, that the prospects are very good for getting that cost recovered back.

So generally, I would say that the magnitude of the cost increases are enough that the industry should have relatively high degree of success of getting a good portion -- greater than average portion of these price increases back.

How large is that July power increase, Tim?

It's going to be 7 to 10, something like that. It is hard to -- I'm generalizing, you know, because there's a lot of product categories. But some may even be higher than 10 again, depending on copper content and things like that. So -- but that 7 to 10 would be just a general, broad statement.

I don't know how widespread this weekly price thing is, if it's just wire, but is that causing any distortions in the channel, people either prebuying in front of future increases or maybe drawing down because they think price is going to decline? Anything --

No, we are all used to it at this point. It's volatile enough that people are not guessing and not speculating and I think it's just a market adaptation to the fluctuating price situation. It very, very marginally affects Hubbell. It is more a cable and wire story.

But it just causes distributors, if you think their job through, every quote they really have to go back to those -- that set of suppliers and get a new number every morning when they try to finalize quotes. Most of their quote say price at time of delivery on that component of their material. But I think -- I don't want to over-characterize this as a big issue. The driving cost of construction in our country is the price of concrete and the price of structural steel. So relatively, how those are doing is outweighing even the fact that ours are going up higher. So I think that is more the driving factor than maybe the price of the electrical system in the building.

Now, along those lines, I did not completely follow everything you said right at the beginning. You did say there were some delays in a few places on project rebids and things like that. Could you just elaborate on that?

Sure. We are seeing some of that. That -- every time there is a price increase, we tend to see rebids when some electrical contractor though he had something fixed and he did not make -- get his quote through before the price increase. And now he has to go figure out if he can value engineer his quote. So we are getting some of that. We are getting some of that little bit of slowdown with buildings; building quotes are going to the same thing more the once. But I would not characterize it as any change in the overall nonresidential construction market. It is just another ripple of what we're going through.

Just one final one? Understandable that strong revenue growth puts pressure on working capital, but with all the work around lean and SAP, shouldn't we expect that really working capital management improves in these type of environments?

It will as soon as -- we are sort of behind the delivery curve, I'm sure as other manufacturers are and in Lighting and in Power Systems, we have some extended lead times. The whole industry is in that situation. So the battle is really to get your material lined up. So we're not in the most efficient position at the moment. We're trying to get a lot of material in the door so we can get the shipments out and get our lead times back down. So lighting, for instance, we tend to be -- some of our product lines are weaker too beyond normal; and this is across the board in our industry. So it is just that there is very strong demand, which is a good thing, and we're not always perfectly effective of managing these demand lifts when they get beyond really 10% of physical volume. We don't look as smooth as we could in these short terms to match rising demand. But it will certainly straighten out in the next quarter or to and you'll see it even on a day basis if you measure it in days of inventory and days of receivables. These are definitely not out of line with our normal practice.

(OPERATOR INSTRUCTIONS). Christopher Glynn, CIBC World Markets.

A couple of questions on Power Systems and the margins -- I guess the SAP had some impact and it sounds like that is largely local to the quarter, but probably some carry-over, and then just the impact on of Strongwell on the margins in the quarter and going forward.

Let's start with the SAP. Certainly, we had some difficulties in our warehouse earlier in the quarter and we expended some extra labor and freight costs to get things really going, but by May and June, had largely been completed and over with. As all of these start-ups go, you have hired some temporary transaction people to help you through the transition. This will certainly dissipate through the end of the year, just as they are for all of our other businesses. So we're experiencing this as sort of a normal situation as we put up SAP. So that is the kind of situation we experienced in the quarter and I would say it's isolated to the quarter.

With respect to the Lenoir City business, it is a strong margin business that is above the average.

Okay. In Lighting, I guess residential was very strong in the quarter and that will come down as starts have. Was residential actually stronger than not-res in the lighting business?

Yes, actually, yes.

Okay. Lastly, last quarter, you mentioned free cash flow expected to be greater than net income for the year. Is that still intact?

Was that operating cash flow, Chris?

I thought I heard a free cash flow.

I don't know that free cash flow, because we have -- as you recall, we have a heavy investment on the capital side. So our target was to approach net income, but I don't think we've -- I don't think we've -- (multiple speakers).

To tell you the truth, we haven't looked again at that as a forecast for the year. Wait a minute here. Maybe we have it. I don't know.

Okay.

We won't be getting to, at this point, free cash flow equal to net income. It will be short of net income this year.

Okay. So I can replace CFO for free cash flow in that equation as greater than net income.

Correct.

Sorry?

I thought you were suggesting we are going to have to replace the CFO, Chris.

No. You are safe, Dave. Industrial technology -- operating margin down sequentially. Is that some getting ready for the SAP, or is it all (indiscernible)?

It is just different margins from different businesses. It is not -- there is no preparation cost to speak of. I guess GAI-Tronics went live, right? GAI-Tronics went live in the quarter. So there is maybe a little, but I would not -- there is not enough in there to cause you to read that into it. It is just which businesses sold how much at what margins. So it is mix.

I got you. Okay, thanks.

Tony Boase, A.G. Edwards.

Just to get back to a couple of other questions here, what was -- can you tell us what the exact amount of the impact was from the SAP implementation in the Power biz?

No. That is not a number that we could drag out with precision, okay, but just to say that it is definitely more than 1 million, but beyond that, for me to say precisely what it is would be pretty much estimating. So it is just a lot of extra warehouse activity and some additional freight costs.

Tony, just to help with that, the expense associated -- direct expenses associated with the implementation for the entire corporation was 2.7 million. Of course, the Power business was a portion of it, so it is not 2.7. It is something less than that. We don't have that broken out but it is in that magnitude; it is in that range.

Okay. Have you given guidance as far as CapEx for the year and has that changed?

We have given guidance and it has not changed. And it is 85 million.

Then were backlogs up for Lighting and for the Company?

Backlog is up, and it is, again, an industry-wide -- you know, it is a good level of business and certainly it is the effect of the June price increase and the rush by customers, some of whom we've protected their prices at old prices. So the industry saw a surge like they did, say, in November of -- what was it, '4 something like that, or May -- I guess it was May of '05 we saw a similar effect, and that looks like it tends to be kind of an industry -- particular to that part of our industry.

Just back to pricing, can you tell us what the effect of pricing was by business? You talked a little bit about lighting, talked a little bit about power, there being -- price increases being introduced. But in the quarter, what was the impact of price on Electrical, on Power and on Industrial?

Dave?

Yes. In the quarter, the Electrical was a little more than a point and Power and Industrial were around 2.

Ryan Wick, Systematic Financial.

Are you in the habit of quantifying backlog or do you just give -- say that it is up or down?

We don't really quote it specifically. You know, in our business, it's primarily a very small backlog compared to some industries and our backlog would be a month or five weeks or -- and in some product lines six weeks and some only two weeks. So it is insignificant until you get a bubble -- a blip at a price increase or something like that. But it is higher and lead times in a couple of our businesses, like Lighting and Power Systems, are extended out due to industry conditions. So it's not -- it would tell us that we are in very good shape for the third quarter relative to volume on those businesses and we have all that we can manage to get the product out the door. So it is that kind of positive thing, but it isn't anything you could use to extrapolate beyond the third quarter, I would say.

That's my only question. Thanks.

That is all the questions we have at this time. I'll turn it back over to Tom Conlin for any additional or closing remarks.

We would like to thank all of you who joined us here today. I will be available starting tomorrow for anyone who wants to give me a call. In the meantime, we will speak to you about three months from now. Thanks again.

This does conclude today's conference call. You may disconnect at this time. Thank you for participating.