Hubbell Inc (HUBB) 2006 Q4 法說會逐字稿

Good day, everyone. Welcome to the Fourth Quarter and Full Year 2006 Earnings Release Conference Call for Hubbell Incorporated. Today's call is being recorded.

Now, for opening remarks and introductions, I would like to turn the call over to your host, Mr. Tom Conlin. Please go ahead, sir.

Thank you, Steve, and good morning to everyone. As Steve noted, we released our fourth quarter and full year 2006 earnings this morning before the market opened, and that release is available to you from all the usual sources, probably most easily by going to the Hubbell website at Hubbell.com. You can access the press release by clicking on Investor Information and then on Financial Releases.

This conference call is also available by telephone and is simultaneously being webcast on the Hubbell website. Audio replays of this conference call are available in three ways. A telephone replay of the call will be available two hours following its conclusion and will remain available until February 1st of '07. The replay can be accessed by dialing (719) 457-0820, and you'll need a replay pass code for that telephone replay, and that pass code is 5034201. You can also hear the audio replay at the Hubbell website by clicking Investor Information and then Audio Archives. And finally, you can have it as a podcast downloaded from Hubbell.com by clicking on Investor Information and, once again, on Audio Archives.

Let me refer each of you to the paragraph in our press release regarding forward-looking statements. Both that release and today's call will concern with some expectations and some assumptions on the future and particularly regarding our earnings going forward as we discuss 2007. Clearly most of this is forward looking. We may also make some comments here today or in answers to questions which may also be forward looking. All of those involve inherent assumptions with known and unknown risks and other factors that can cause actual or future events to differ from what is discussed here today. So please note that paragraph in the press release, and I'd like to consider it incorporated in our conference call today by reference.

So to the subject at hand, the fourth quarter and full year 2006 earnings results, with me, as always, Tim Powers, President and CEO of Hubbell, and Dave Nord, CFO of Hubbell. Let me turn it over Tim Powers [inaudible].

Thanks, Tom, and good morning everyone, and thanks for joining us. We'll follow the regular format, where I'll give you my perspective on the fourth quarter and full year results, turn it over to Dave, who will provide more details, and then come back for a look at 2007.

Our fourth quarter was a very challenging finish to a year of significant investment in the future of Hubbell. The initiatives we have been working on for the last several years reached the peak of their required effort and investment. At the same time, the markets for our products was stronger than anticipated at this time a year ago, but this put additional strain on our organization throughout the year, and a negative impact was amplified in the fourth quarter, as we had to react to a weakness in some of our markets and in our business activity. We recognize the work ahead to begin realizing the benefits of our effort as soon as possible and are committed to do this.

I'll talk more about this later, but it is also important that the fourth quarter performance not overshadow the significant accomplishments for the year. We implemented our new enterprise-wide information system in nearly half of our company, more than double the accomplishments in either of the prior two years. We launched the largest new product in the history of our company of residential product line and wiring systems business. We completed the second largest acquisition in the history, with the Strongwell Lenoir City business in the Power Systems segment.

We are nearly complete with our new lighting headquarter building, which will allow us to drive the market-leading advantage of a single company. Our delivery performance in our wiring systems improved to the best performance we have ever experienced, and we continued to leverage bolt on acquisitions and lean efforts in our Industrial Technology segment.

But this was not without a cost. In addition to the higher than anticipated market strength, we faced significant increases in cost, particularly commodities, such as steel, zinc, and copper, which we did not recover through price actions as quickly as needed. And the attention to support our initiatives, particularly our SAP initiative, limited us from realizing the productivity gains we would normally expect from the higher level of volume. And in our attempt to react to strong markets, we got ahead of ourselves in building inventory, which further exacerbated our fourth quarter performance, and we took the actions necessary to react to slowing demand.

Now, I'll have Dave give you some more details of the numbers for the quarter and then come back with some market perspective and some guidance for next year. Dave?

Thanks, Tim. Let me just go through the financials and provide a little more detail and color.

First turning to the P&L for the fourth quarter -- sales were $589 million, up 10% from the $535.7 million in the fourth quarter of last year, with acquisitions accounting for about 4% of this growth. Our gross profit margin was 25.7%, 2.5 points below last year -- a third of that decline attributable to the continuing cost price headwind that we were challenged with all year and into the fourth quarter, the remainder due to the productivity and buying decline issues that we faced in the fourth quarter.

Selling and administrative costs as a percent of sales were 18%, which is up from last year's 16.4%. But remember that this year included the cost for stock compensation, which is worth about 60 basis points, and last year had the gain on the sale of a building worth about 90 basis points. So adjusting for that, our S&A costs were essentially flat

Special charges associated with lighting were $3.7 million in the quarter. Net interest expense of $4.3 million was higher than last year's $2.6, due to the cash and investments that we utilized for acquisitions and a higher level of share repurchase this year.

Our effective tax rate in the quarter was 21.9%, which is higher than last year's 6.3, but again, we had in this year's fourth quarter the full year benefit of the R&D tax credit legislation that was enacted on the final day of Congress in December. And last year had the benefit of the audit settlements in the fourth quarter, so when you adjust out both of those unusual items, the effective rate in the quarter was actually up a little over a point from last year, being at 27%.

So all that results in reported net income of $29.2 million, which is down from last year's $22.9, and earnings per share on a diluted basis of $0.48, which is down from last year's $0.84. And as we cited in the release, there were a number of things in both fourth quarters. This year included the stock-based compensation of $0.04 and the favorable impact on the R&D tax credit of $0.03. Last year's fourth quarter included an $0.18 benefit from the tax settlement and the $0.05 gain on the sale of the building. So if you adjust for those items, comparable earnings per share are down 20% this year.

Looking at the full year P&L, sales of $2.4 billion is up 15% from last year's $2.1, with acquisitions, again, accounting for about 4 points of that growth. Operating profit margin was 9.7%, which is lower than last year's 10.8. That includes the impact of the stock compensation, again, worth about 50 basis points, but the bigger component is due to the commodity cost increases that were not covered by price increases and are factory unabsorbed costs.

Net income of $158.1 million, down $7 million from last year's $165, resulting in earnings per share on a diluted basis of $2.59, compared to last year's $2.67. But when you take into account the items in the fourth quarter and earlier in the year, adjusting for the stock compensation, as well as special charges, such as the lighting restructuring this year, and last year's tax settlement and the special charges last year, you end up with an earnings increase of 7%.

Turning now to the balance sheet -- we have finished the year with net debt of $139 million, compared to a net cash position last year end of $82 million, so an increase of net debt of $221 million, largely due to the utilization this year for acquisitions -- $145 million for the Lenoir City and the most recent Austdac acquisition, as well as share repurchase, and the working capital drain that we saw this as a result of the build-up in receivables and inventory in support of our higher volume of business. Trade working capital as a percent of sales for the year was 21.9% compared to 18.4 in the prior year.

Cash flow in the fourth quarter from operations was $57 million, equal with last year's fourth quarter. Our lower earnings in the quarter were offset. We did not have a pension contribution in this year's fourth quarter, as we did last year. Free cash flow in the quarter of $37 million compares with last year's $30 million in the fourth quarter, our capital being lower in this year's fourth quarter, as we're seeing the spending associated with the Hubbell 2006 SAP implementation, as well as the lighting headquarters starting to come down. And share repurchase in the quarter was $20.7 million for a repurchase of 400,000 shares.

So our full year cash flow from operations is $140 million, down from last year's $184 million, primarily due to our working capital needs, and free cash flow impacted by the increase for the full year in CapEx of $13 million to $87 million, attributable largely to the investment in the new lighting headquarters. Share repurchase for the full year was $95.1 million, for the repurchase of 2.1 million shares.

Let me turn now to the segments, and I'll just deal with the fourth quarter results. The Electrical segment first -- sales of $389 million, which was up nearly $19 million or 5% compared to last year. Operating income of $21.5 million, down $12 million from fourth quarter last year. This includes the special charges associated with lighting of $3.7 million. The operating profit margin ended at 5.5%, down from the 9% in the fourth quarter of last year. You recall, that's where the gain on the building sale was reported, so the comparable margin last year was 7.7%.

Within the segment, wiring business and the electrical products business saw volume growth in the low double-digits, with lighting being at low single-digits, as they were impacted. The commercial industrial increases were offset by decreases on the residential side. In wiring, despite their volume growth, their profit margin was negatively impacted by commodity cost headwinds and higher costs associated with their new product launches in fourth quarter of this year versus last.

In the lighting segment, C&I growth offset by the residential decline and profitability decline, some due to the mix or with the movement away from the residential volume, which is good margin business and some higher costs to support the higher level of business that was experienced earlier in the year. As that volume turned down, we could not get those costs out rapidly enough. And on the electrical products, double-digit growth in the harsh and hazardous business. Profitability essentially was unchanged, as the higher sales and some favorable pricing were offset by some unfavorable factory performance.

The Power segment -- the Power segment sales of $146.8 million were up $26 million, or 22%, from last year's fourth quarter, but operating profit of $15.3 was down 22% from last year. The Lenoir City acquisition completed in June contributed about two-thirds of the sales growth in the quarter. Commodity cost increases in excess of price negatively impacted the segment, as well as the incremental costs incurred due to factory inefficiencies as they dealt with some lower level of order intake in the fourth quarter.

The Industrial Technology segment -- sales of $53.2 million, up $8.3 million, or 18%, from last year's fourth quarter. Operating profit of $8.5 million up 49% from last year. The Austdac acquisition, which was completed in the fourth quarter, contributed approximately one-third of the sales growth in the quarter. Strong profit contributions in the harsh and hazardous and industrial controls business contributed to the profit improvement.

I'll leave it at that and turn it back to Tim to talk about the 2007 and our market.

Thanks, Dave.

Let me give you an overview of the market and what I'm seeing today. Growth continues in most of our markets but at a slower pace than what we realized in 2006. The exception to that, obviously is the residential market where the slowdown is accelerating. After what appeared to be some short-term market adjustments in the fourth quarter, industrial production MRO spending and capacity utilization are really expected to continue to be positive throughout 2007. Utilities will continue to spend on infrastructure, and this spending will continue for the foreseeable future.

Residential markets will certainly be down from last year's level, currently estimated at 20% on single-family starts, with most of the decline in first half comparisons. Year-over-year levels could level off in the second half. Non-residential construction markets remained a variable. Overall, we continue to see positive indicators in most of our markets but a more modest growth than in 2006.

We are currently forecasting our full year 2007 sales to increase 6 to 8%, or $150 to $200 million higher. About half of this comes from acquisitions and pricing already completed in 2006. The remainder is consistent with GDP growth forecasts and the impact of new product launches. We expect full year margins to improve at least 100 basis points over 2006.

Our 2007 earnings per share is expected to be in the range of $2.90 to $3.15. We expect that cash flow from operations net of capital expenditures will approximate net income as we improve our inventory performance and anticipate lower capital requirements associated with our recent initiatives. As you saw in 2006, we are investing our cash in a number of areas to create shareholder value -- investments and acquisitions and share repurchases based on market condition favorability, which we can currently expect to be in the range of $150 to $200 million.

And finally, our focus is a very sharp focus on operational improvement in three very specific areas -- first on price realization, where we still need to realize prices to recover the full measure of cost increases. About 60 to 70% of what is needed is already in the marketplace and completed, but we still need actions from recent price increases that have been implemented in the fourth quarter or since the beginning of the year in wiring, RACO, harsh and hazardous, and lighting, and in power systems for about 30 to 40% of the price realization.

Productivity certainly begins with the better use of SAP, both in our planning and scheduling and management of our supply chain, and certainly as we get more experienced with this and we get farther past some of our recent restructuring, we expect plant productivity to significantly improve. And we have four of our plants which are the key priorities in that area.

Further, on cost containment, we have more initiatives for low-cost country sourcing, the redesign of several new products which will be produced, better products at a lower cost, and better supply chain management. And as a result of our improved delivery performance and scheduling, we would expect lower costs in freight and logistics, as well.

So in summary, 2007 will be a year of focus, focus on the beginning to realize the benefits for the investments and our initiatives, improving the profitability as we continue to grow the company. We are cautiously optimistic -- execution of these key priorities. We believe that our efforts will make 2007 another year of growth in sales and, most importantly, in earnings for Hubbell. Thank you. I think, Tom, now we can take some questions.

Steve, if you review the procedure for registering a question, we'll proceed to the Q&A.

Certainly, sir. [OPERATOR INSTRUCTIONS]

We're going to go first to [Bob Cornell], Lehman Brothers.

Yes, good morning, everybody.

Good morning, Bob.

Yes, a lot of questions. I'll ask some of them. First of all, where are you on the inventory levels and working them down to where they should be?

Well, as you can see, in the fourth quarter, we began to turn the tide there, and certainly we would expect that to continue through the first half of 2007. We've adjusted our employment levels by the end of the year down about 500 during the quarter, and we still have a few hundred more to go in smaller batches during the first quarter. But certainly we would expect to take another quarter or two until we get everything back to exactly where we want.

So we're going to see adverse factory variances for how long?

I don't know how much adverse factory variances we'll see, because at the same time we are very keen on improving our productivity, so I'm not sure that will be as significant a factor, but certainly you won't get -- it'll sort of blunt some of the negative impacts of negative factory performance on lower volumes because of improved productivity.

You know in pricing, you guys sound like you're more behind the eight ball than I would have thought. I mean, is that just that everyone was distracted by virtue of all the other initiatives going on? Or why did you get so far behind the eight ball on pricing?

We don't feel we are that far behind the eight ball. As I indicated, about 60 to 70% of the price realization we need to make our plan is in our hand, but that, as you know, commodity costs began to rise dramatically in the second and third quarter of this year, and not all of that rise has been recovered in price. And so there's another increment to go pretty much across-the-board with steel and copper and aluminum and zinc. So I'm not trying to over dramatize it, but certainly there are further pricing actions to be done.

What's an update on the Spokane-Bristol plant transition?

Where we're going on restructuring is going very slowly and carefully. And so we have, at the moment, not resumed any movement of product lines in the fluorescent area. We have restored the delivery performance in all of our units back to as good as we've ever delivered, and we will proceed with that very carefully and slowly as the year progresses.

Yes, I guess the final question -- you mentioned the launch on the wiring device. Maybe you could bring us up to date both on the wiring device and the Raceway launches. And you mentioned the cost of the launches. What were those costs?

The costs -- what I mentioned Bob was the incremental costs in the quarter year-over-year, which was --

Yes, I didn't hear the number.

Oh, it was a little over $1 million incrementally in the quarter.

And then just in general, I mean, are you getting some sales traction in wiring device and/or Raceway?

We're very pleased with our metal Raceway launch and our expansion of our delivery systems, and we're on track with that. But certainly, that isn't -- those aren't numbers that we're going to discuss in public. But the residential wiring device launch has just started. We've had very good market reception to that, and it'll be some time before we begin to talk about it and you can see in our volume a higher trend of sales. But we're very pleased with where we are on both of those initiatives at this point, so I can just say these are big product launches and long-term changes to our company and that we fully expect them to bear the kinds of returns that we anticipated. But they don't happen in the short-term. They happen over a little bit longer, so we'll be talking much more specifically about those as time goes on, but right now we're in a crucial period where we're not in a position really to talk about the quantification of that.

Okay, lots of other questions, but I'll let somebody else ask them. Thank you, guys.

Sure.

We'll go next to Robert McCarthy, Banc of America.

I'll tag in. Good morning, everyone. First, on the non-residential construction markets, I mean, your commentary is, at the margin, I would say, a little more negative or conservative than some of your peers. So could you first comment on that, and then could you also comment [on the] prospects? Are you losing share at the margin?

Let's start with the market conditions and then move to share. I would say that we think that the markets have slowed down and that there was a definite slowing. This is our orders now. I don't know whether I can say 'the markets,' but I would say our orders have slowed in the fourth quarter to the point where our lighting business in C&I was about equal to last year's level. Okay? And part of that is improving your lead-time. If you have a lead-time that was, say, two or three weeks longer than should be the case, and now you pull that lead-time back to normal, then your distributors and customers don't have to order as much. So whether those are events that are unique to us or whether they are broader levels of slowdown, you'll have to put that mosaic together with a lot of companies and see what happens, but that's what happened to us.

And then with regard to share, we have no indication that we changed our share position. Based on the win/loss ratios of our job bids, we just don't see any change that's significantly one way or the other to that. So we don't have any -- we certainly don't believe we've lost any share on [inaudible].

Now, I guess there's prospects of a price increase in lighting in the January, February timeframe. And do you have any anecdotal data about the reception of that or if there's any pull-through of volume in the fourth quarter in anticipation of that? Any kind of detail or color around that --

Sure, we have taken some very specific actions. Without regard to the rest of the industry, we've raised prices in our decorative residential product line, on Progress, and we have raised prices in our outdoor industrial product line, whether or not there's an industry price increase. Now, there is -- there seems to be an industry price increase gathering steam, but that remains to be seen, and if it does, certainly we will be right there.

And how do you feel about your independent reps right now? Because there has been some talk among competitors that perhaps maybe it's not a top down strategy, but at the margin they might have been a little more elastic in terms of pricing and caused some softening of pricing in kind of the third and fourth quarter for commercial lighting fixtures.

Our reps don't price anywhere out of the span of control that we give them, and certainly we haven't changed our span of control. And almost any job of substance at all is specifically approved, and the bigger the job, the higher the level of approval. So there isn't any degree of freedom there for a rep to begin doing something different than they ordinarily would. So I --

Yes, and I hear you there, but then on -- would you say your SKU set versus some of you large peers is much more the stock and flow versus larger projects in commercial lighting?

No. No, our -- we're sort of in the middle of the pack on the difference between jobs and stock business. In our C&I, where we have product lines that have stock, they are about 30% of our business.

Okay, fair enough. And then just maybe talking about your guidance, I mean, clearly you're obviously auguring for kind of double-digit declines, residential for the full year with some -- as the comps get easier. The trajectory kind of changes throughout the back half of the year. What is the outlook for utility markets, and can you talk about some of the slowing orders there? Is it similar phenomena going on as what has occurred in lighting, in terms of your lead-times? What is going on there?

Certainly our lead-times are improving everywhere. During the course of the year we were faced with some significant increase in demand in particularly anchors and a few categories like that and needed to make some capacity increases to keep up with that demand. I would say that our lead-times are quickly moving back or have moved back to industry standard lead-times and that we have some more capital going in an automated robot cell in Centralia on this specific area in the first quarter. So I would believe that virtually every single product within Hubbell would be at a normal lead-time within two or three months, and probably over 90% of them are already.

Okay, and then in terms of execution, that has been definitely an issue with the company and the stock over the past couple of years. I think you would readily admit. I mean, driving you to the top end of the range, what variables do you think really are under your control and what prospects do you have, do you think you're going to execute better prospectively than, frankly, you have historically?

Well, certainly the reduction of complexity of the effort going on, that SAP is in about 90% of our companies, and that we now need to begin to better utilize it. And the areas that we're concentrating on is really to improve our planning process and scheduling process within our plants and the responsiveness of our supply chain to that scheduling. And it has been a big learning curve adjustment for us. It has affected our productivity negatively, and certainly we are concentrating all of our efforts to begin to improve that process.

In addition, we have very specific programs to improve our warehouse operations and our order entry productivity as we learn to better use SAP. So those are the areas that certainly internal productivity is where we would expect to improve, and if there is upside in this, certainly it's within our range and realm to do better.

Could you quantify that kind of [anniversarying] of costs out from just no more SAP implementation, year-over-year, '06 to '07, and then just the range, the benefit your would envisage?

Rob, I think from a cost standpoint, we're looking at probably a $5 million improvement year-over-year. There's still --

Right, and then the X factor is just the enhancement or improvement.

Right.

Okay, and then one final one. I'm just talking about free cash flow generation going looks pretty good prospectively. Is there any sense that you'll go back to the Board and have any kind of accelerated buyback, more than what you've contemplated? And I do apologize. I think you might have mentioned something to that effect in the call, but if you could just review kind of what your buyback plans are now or your capital deployment plans are.

We are currently working on an existing authorization and have --

How big is that authorization?

It was $100 million. I think we have --

About $45 million left on it, Rob.

Okay.

And so we have an upcoming Board meeting, which will be -- it'll be a topic of discussion.

When is the Board meeting?

It's in February.

February -- all right, I'll pass it to someone else.

We'll take our next question from Jeffrey Sprague, Citigroup.

Thanks, good morning.

Morning.

Morning.

Just on the price/cost issue, I think it was Bob asked maybe about the receptiveness of costs. Maybe it was someone else, but I'm just kind of thinking, it feels to me that the psychology around price and cost is changing. Obviously you're behind the curve, but costs are coming down in some places. Obviously zinc and other things are still problematic, but I mean, we're picking up some signals of some pushback on some price in the channel in different places. So I just wonder if you could give us a sense of your cost profile over the course of the year, and if you don't get additional price, do you ultimately converge anyhow, because costs are coming down and/or just anything you could give us about the initial reception to future price increases.

I would say right now I'm optimistic about the price increases that are in the marketplace today. The year-over-year cost of most all of our raw materials has gone up, even though you could say maybe at the end of the year, they might not still be at the peak. But if you look at year-over-year, you needed to get some price to offset that. And despite what's in the marketplace, this element of galvanized steel still is a particular challenge to us, as a significant part of our products are either galvanized after fabrication or are made from galvanized steel to begin with. And that continues to be an area of inflation, where price needs to be realized to recoup the cost of zinc in the galvanizing process.

So it's true that the commodity costs have moderated somewhat. I don't have to tell you about [the] copper [soffit's] high and all that, but it's whether or not prices have caught up with this, and I think that with this round of price increases that we will catch up. And whether we realize as much of the price as we hope to or whether cost sags back, I think the result will still be the same that we will net what we need to get from that combination.

And then I know you don't have a habit of giving quarterly guidance, but just thinking about the progression, it feels like you start out in still a pretty tough hole in the first quarter here as you work through these issues. I mean is that a fair characterization? I mean, when you really look at the jumping off point from December to January, how much of these [technical difficulty] you versus kind of still lingering? And how should we think about the slope of that margin recovery you're talking about for the year?

Certainly that is the challenge in our guidance, in that you can't make $0.48 in a quarter and then jump back to an enormous improvement, and we can see that in comparison to our prior year quarter. So first quarter, second quarter, will be the toughest areas for us to match up against, but we are taking a whole series of actions, as we talked about with price, cost, spending, and so on to try to improve our first half of 2007.

Jeff, I think the other things to keep in mind is that the first quarter comparison is particularly tough, because that's going to be where the biggest year-over-year change is on the residential side. As you know, the first quarter of last year, we have that head fake with some record levels of housing starts. So that's where it's really front end. And then the other is on the new product launch, particularly the residential wiring. That's going to ramp up during the course of the year, but we're still dealing with the continuation of the front-ending of those costs until the volume starts to come in to mitigate that up front investment. So those are two things to keep in mind.

And then separate and apart from just the way the year-over-year comp looks -- should we expect, though, fairly linear improvement in the margin rates over the course of '07 to get to that annualized target you're talking about? Or is --?

Yes, the answer to that is clearly yes. We should see definitely steady improvement quarter-over-quarter in our margins.

And I'm wondering if you could shed a little bit more light on inventory levels in Power, certainly around the winter storms and things like that. Has helped clean things out, and is there any preliminary view on how utilities are positioning themselves into '07 in terms of larger project work versus MRO-type work and just anything that's in the pipeline of not that kind of distinguishes the outlook.

There have been, as you know, some storms in Oklahoma, Texas, and so on, which have given us some business in January, but certainly in the fourth quarter one of the -- one note was the absence of virtually anything, any storm activity. So it certainly is helping at the margin with us taking down inventory, but still Power will be working on inventory reductions like the rest of Hubbell for a couple of quarters until it gets everything where it needs to be.

With regard to the level of business in utilities, I think it will continue, but I think if you're really anticipating big steps upward from where we are, I think there'll be more modest improvements to spending. Public utilities still are not getting free reign to spend what they need to spend on capital, and they are still -- focus their attention quite a bit on transmission distribution. So I would expect business to be good, but I wouldn't expect it to jump by a significant amount -- just another good year, a little bit better than 2006.

Then just one final one from me -- kind of putting the lighting product transition on hold, at least temporarily, obviously that's a near-term positive for margins, because the transition was pressuring margins. But leaving it on hold, how detrimental is that to the margins relative to where you want them to be? And how instrumental is actually getting the transition done to your guidance outlook?

We need to move in this exact sequence, which is number one, we have a small plant being closed now, which it'll be closed in the first quarter, which is going quite well, which is not in the fluorescent area. Number two, we are moving into our new lighting headquarters, so we're moving 4- or 500 folks into that new building beginning in February and ending in April, and that's all going well and one schedule. When those two are completed, we will resume any other activities on restructuring, but I would say the number one area for opportunity of improvement in lighting is just the operational side and productivity improvement in our existing plants where products are already located. That is the key to us performing better, and it is not as much focused on whether we resume restructuring or not after these first two actions.

Perfect, thanks a lot.

Yes.

We'll take our next question from Christopher Glynn, CIBC World Markets.

Good morning, everybody.

Morning.

Morning.

In a couple separate statements, you referred to declining orders and non-res trends and then also about order rates impacted by higher inventory levels at customers and distributors. I'm just wondering how you separate those out or if it's really possible to do that?

Well, I think for us, we're a -- in the utility business, we're a company that services the storm activity, and certainly our distributors prepare for that, and Hubbell prepares for that. And when it doesn't happen, you stop getting orders for those categories where the channel is already loaded in anticipation of normal levels of business. So we saw some weakness in our Power business related to that. We also saw some softness, more than usual, in our wiring device business, and we felt that in checking with our distributors that they seem to be adjusting inventories, as well. So those would be the ones that affected us, I would say, and lighting in general slowed to the pace where it was equal -- incoming orders were equal to last year, dead flat with last year, and that we were rapidly catching up with our backlog, and that's what caused us to ramp down our plants, the sum of those three. So that's really the story as best we can tell it.

Okay, and then it seems like the Electrical segment revenues maybe came in a little better than we might have expected after the December 11 call, so just looking into that a little more. I mean, residential is clearly down a lot, and you said non-res orders is down, so those are disproportionate amount of the Electrical segment, because the other two segments really have the utility and chunk of the industrial exposure. So was the industrial side really through the roof there or is the slowdown in the non-res orders that you referred to, was that not seen in the volumes realized in the quarter?

I would say some of the upside to our expectation came in harsh and hazardous to the end of the year and the commercial products of our RACO line, with some late ordering there from the retail side. It was also improved from our guidance, because we actually did a bit better than we anticipated in some of our lighting units where we were implementing SAP, and they responded more quickly with shipments than we first anticipated, but that was in backlog to begin with. So it's very specific here and there, but I wouldn't attribute it to any general market situation.

Okay, and then finally, on the power systems, just wondering, the margins were really down very significantly. I'm wondering why is the price/cost so bad there -- it seems particularly acute -- and also to what extent the SAP issues are lingering there, and just kind of give some color to the magnitude of that margin fall-off.

I would say if we were listing what contributed most negatively, first it would be productivity in our plants, somewhat caused by SAP and our scheduling challenges. We understand what we have to do to improve the productivity there, and I think we're on track to get that back in place. Certainly ramping down the use of overtime in employment based on lower demands for orders was a factor there, so we're expecting Power to come back and improve its margins as 2007 rolls out.

Okay, and just on the Strongwell margins, are those roughly above the segment average on a normalized basis?

Yes, they're very good.

Great, thanks very much.

Mm-hmm.

We'll go next to [Alena William], Merrill Lynch.

Good morning.

Good morning.

Good morning.

I'm wondering if you could quantify how much restructuring is left in the first quarter of '07?

What we're looking at more broadly, Alena, is this year -- the restructuring this year was a little over $7 million, and next year we expect that to be somewhere in the $3 to $5 range, at the level that -- we're not planning to continue the special charges, separate disclosure of that. It's more of an ongoing cost, but in that order of magnitude.

Okay, so it's not going to be broken out?

Right.

No.

Okay, and then tax rate -- I assume it'll probably be a little bit higher than previous years?

Yes, that guidance includes an assumed tax rate of 29.5, a little bit higher, as we have more domestic earnings, higher earnings coming out of domestic at a higher rate and, therefore, not getting the benefit of some of the other tax credits and other organizational structures that have benefited us in the past.

Okay. You may have mentioned this, but how much did unrecovered inflation drag EPS this quarter and for the full year?

Unrecovered inflation on the cost/price?

Yes, exactly.

The negative cost/price in the quarter was about $0.05. For the full year it was about $0.15.

Okay, and then just lastly, can you just give us some color around the headcount reductions that you talked about in December, full-time versus part-time employees?

Sure, we cut back our activity in our plants across-the-board, and as you do that, certainly if you're using part-time employees, that's where you begin. But I would say across Hubbell, in almost all of our operations, we reduced the effort and activity first by the dramatic reduction of overtime during the quarter and then on into reducing employment. And since we've hit our peak, during the third quarter, we reduced our employment by 1,000 people, and that we would expect this to continue modestly downward depending on market conditions. And in addition, we've gone from an overtime schedule that would be significant to one that's very marginal. So you could say the average activity in a plant has dropped 15% or more. In some cases, it's a lot more than that. In some cases, it hasn't changed very much.

But a significant level of activity has been reduced, and part of it is us getting those manufactured products back to the correct levels, and we'll see a little bit more effort, more employment as the year goes on if the markets continue as expected.

Can you give us a sense of the split between salaried and part-time employees?

I don't have that here, Alena. I'll get back to you on that one.

Okay, thank you.

We'll take our next question -- Jeff Beach, Stifel Nicholas.

Yes, good morning.

Morning.

Morning.

Wiring devices -- you just talked about Power. In the fourth quarter, did you end up with volume about what you were expecting that was going to end up with unabsorbed factory overhead? Or was it more or less? And then going into this first quarter, are you going to be operating your wiring device plants at about the levels of last year, so we're not going to see this drag?

We would say that our wiring device orders softened during the fourth quarter, and we did ramp down activity. Both number of employees and certainly extra overtime were reduced at our Puerto Rican plant, which is our biggest wiring device plant. So during the quarter, we did have some unabsorbed cost, and that's continuing in the first quarter, at least for a few months, while we continue to reduce inventory.

All right, and second, just looking at, this morning, the sales forecast, the guidance by Cooper Industries, and looking at some other companies, what they're seeing out there -- higher growth at Cooper forecasted. Are you being conservative on your sales forecast and keying everything off of growth and end markets that's going to be equivalent to GDP? Because it seems like the overall end markets are growing faster than GDP.

We're trying to be very disciplined in our guidance and trying to make sure that it's reliable and that we can achieve it. And then, I guess, we are conservative in our view of markets right now, and we think markets are shifting a little and changing a little, and it's hard to predict that outcome. So we think we're very comfortable with what we see if others who predict higher are correct, and certainly Hubbell would participate in a stronger economy and a growing market, and we would retain our share in whatever that upside is.

Just as a follow up on these end markets, just historically over time, in an economic expansion, don't most of your end markets generally grow faster than GDP and then contract more in a recession?

Yes, they do. Yes, they do.

Okay, thank you.

Sure.

We'll take our next question -- [Chris Conner] with AG Edwards.

Good morning.

Good morning.

Morning.

My first question, I guess, is have you guys spent any time in the last quarter trying to quantify the potential derivative impact that weak residential construction has on your non-res business? I mean, I know that your res is 15%, but as far as a root cause, it seems like its probably more like 20 or 25, but I mean, obviously I'm just throwing numbers at it.

Okay, well our residential business has several different components to it. We serve the do-it-yourself market. We serve the lighting showroom market, and we serve the national homebuilders, and so whether it's our electrical products, commercial products, or our residential lighting, we have different pieces moving in different directions, and so you would expect the most decline in the new housing starts, and certainly Progress is the largest participant in the supply of decorative lighting to that market. So we have, in our forecast, significant decline for that.

But at the same time, we also sell to the Home Depot, Lowe's, and Menards and so on, and you would not expect declines of the order of magnitude you'd see at the other end. So it's a combination, and we think we've factored those components carefully in our outlook. But certainly, it is a negative comparison, significant negative comparison, of 2006 to 2007. In 2006, our residential lighting business was very strong for the first six months, was positive in its comparisons to 2005. And it wasn't until the third and fourth quarter when the comparisons went flat to negative. So now when we're exiting the year, you have quite a gap between the rate of business in January and in December and the strength of the market the year before. But at the same time, Home Depot and Lowe's and those kinds of products continue to be flattish as they open stores, but sales comparisons in existing stores are quite flat. So it's a combination picture.

Well, I think what I'm really asking, though, is here in the Midwest, if you have a downturn in residential construction -- not just in the Midwest but just as an example -- in a rural area where you've got a new home on five acres in the middle of some county in the middle of Missouri here, near Centralia perhaps, you're going to have a lot of non-residential product that could go around the house, right, anchors from AB Chance, other components on power lines. And that's a very specific question, but it's a lot broader than that. I guess what I'm wondering is do you have, beyond the specific, easy to quantify, through the big box, and the clear residential exposure, how much of you non-res business do you think is really pulled along by the res?

Well, you'll have -- there's some. There's a definite impact at the areas you point out. For instance, if you're building fewer home developments, these kinds of things, then all the utility products, mainly underground though, would be reduced by that dramatic amount. You also have a slowing of things like quick-serve restaurants, gas stations, and whatever, that spring up very close to new housing developments. But where we believe the strength will be in 2007 is in the medium to large size non-residential construction projects, and that would be schools and hotels and hospitals and things like that, which we expect to continue to be built at a higher level than 2006.

But the marginal, the smaller projects, certainly the $2 million and under for a building, are the ones that you have to watch out for as residential slows down. And then certainly over time it has an impact on the larger projects. So as new housing slows down, if it stays that was for a long time, you need fewer schools and so on, at least at a national rate than are being built. So over time it has a bigger impact, but right now, we haven't seen the spread of that slowdown spread to anything other than the incremental small project.

Okay. Switching gears, you did some deals in 2006 to grow the business. How do you see Hubbell proceeding in 2007 from that standpoint?

Our long-term objectives remain unchanged, which is to grow our business to four individual business groupings of approximately $1 billion to $4 billion. We would continue, as I said, to spend between $150 and $200 million on the combination of acquisitions and stock repurchases, and that shifts back and forth depending on the availability of opportunities to acquire companies and the attractiveness of our share price in the market. So we're planning to spend about the same as we normally spend. Our goals and objectives to grow our company remain the same.

Okay, and how would you characterize the pipeline right now?

I would say normal.

Okay.

It goes up and down, and I wouldn't say it's overly loaded. I wouldn't say it's without some opportunity, but -- and it actually comes in spurts.

Okay.

It's hard to predict.

Okay, so coming at this from maybe a little different angle, you're talking about focusing on price, productivity, and cost containment. Does that kind of push acquisitions down, unless they're just homeruns in the near-term?

I would say in the short-term for a few quarters, our mission is clearly to get back on track and to get our margins restored to where they ought to be, and that is management's complete focus right now. And if we -- I would say we would not emphasize acquisitions. We wouldn't -- if something comes along that was attractive, it certainly wouldn't prevent us from going forward, but certainly I think the key thing that we need to improve on now is to get back to where we ought to be on our margins.

Yeah, I think most people would agree with you there. One last question on your product that you build and inventory levels -- how much of your product base would you classify as built to order? In other words, as far as implementing lean in your supermarkets and the whole thing, where you basically -- when your distribution or someone orders the product you supply a new product, how much of it would you classify as that?

I'll go through the businesses for you quite quickly. Our wiring device business has 12,000 SKUs and almost all of them are from stock. Our lighting business, like our residential decorative business, is entirely from stock, right out of the catalog. We have everything in stock, but most of the commercial and industrial business is more heavily directed toward made to order and by the job. So about 70% of the C&I business is either assembled from standard components to an order or assembled from unique components for an order, in other words, a real special. Our utility business is about 90% stock, and our electrical products business is probably 75, 80% from stock. So lots of stock products, except for lighting, and some of our industrial businesses have a lot of made to order. So if you were asking me overall, I would say two-thirds of our product is kind of stock -- or maybe 60% stock and 40% made to order.

Is that an opportunity going forward, as far as basically shifting that to maybe a little less stock and a little bit more build to order? I know some of the stuff's -- you know, high volumes, you really can't do that but --

Yes, to the extent that you can assemble to order within a standard lead-time, you could significantly gain on working capital, and that is a continuing effort on our part.

It seems like it would reduce your volatility in terms of the mismatch between price and cost, too, as you're building closer to when you actually sell the product and you have less inventory at higher pro forma prices than your current prices.

That could help, but most of the stock business is delivered within five days.

Okay, fair enough. All right, thanks guys.

Sure.

We'll go next to [Mark Sanke] at [New Market].

Okay, my question has been asked and answered, so I'll take myself out of the queue.

Okay, thanks Mark.

Last question here -- [Matthew McGee] at Adage Capital.

Hi, guys. Can you help me understand how we get to the 100 basis point margin improvement target for 2007, because it kind of implies there's no recovery of the operating profit loss we've had over the last two years, which I think over $100 million? Because if I just take your 6 to 8% top line growth and assume half of that's going to be organic, which is, I think, what you said, and I put a 35% incremental on that, I get to $25 million, which is basically 100 basis points right there. So when do you guys think we start to recover of the underperformance we've had in the operations? Because it doesn't look like there's anything baked in for 2007.

Certainly, Matt, you have to begin with where we are in the fourth quarter, and we realize that 100 basis points is not what we're aiming at but certainly is a step in that direction and that our internal targets for every one of our business units is beyond this 100 basis points, but we want to make sure that we're giving guidance to the marketplace that is within our expectations of achieving, well within our expectations of achieving. And we recognize that there's ample need for further improvement in our margins, and we are continuing to work those individual activities and will continue that process until we're caught up.

Okay, and then just on the four focus plants, which are, I guess, are key to getting the operations in line. I'm assuming one of those is Spokane. Can you just update what the other three are?

No, it actually is not Spokane.

Okay.

Spokane is operating just fine. It's in a reduced state. It produces $40 million worth of sales, and it's just fine. Where we have the opportunity for improvement more has to do with the units that have been affected by movement of product and certainly some of our fluorescent units are on that list, and our Power business has a couple of plants. And so certainly the opportunities are well within the -- it isn't Spokane. Let's just put it that way. Okay?

Okay, thank you.

Mm-hmm.

And there are no further questions at this time. We'll turn things back to Mr. Conlin for any additional closing comments.

Okay, thank you, Steve, and I thank all of you for joining us today. And we'll see you next quarter.

Thank you. Once again, everyone, that does conclude today's teleconference. We do appreciate your participation today. You may disconnect at this time.