Hubbell Inc (HUBB) 2007 Q1 法說會逐字稿

Good day, everyone. Welcome to the first-quarter 2007 earnings release conference call for Hubbell Inc. Today's this call is being recorded. Now, for opening remarks and introductions, I would like to turn the call over to Mr. Tom Conlin, Vice President of Public Affairs with Hubbell Inc.

Thank you, Tom. Good morning to everyone. As Tom noted, we released our first-quarter earnings this morning and that release is available to you from all of 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 at the top and then on Financial Releases on the drop-down menu.

This conference call is available by telephone and is simultaneously being webcast at the Hubbell website. Audio replays of the conference call are available in three ways. First, a telephone replay of the call be available two hours following its conclusion and will remain available until May 3. To access that replay, the replay code dial number -- I'm sorry, the replay telephone number is 719-457-0820 and the pass code number is 6973646. You can also hear the audio replay at the Hubbell website, once again, by clicking on Investor Information and then Audio Archives in the drop-down menu. Finally, you can receive it as a pod cast by downloading it from Hubbell.com, again from Investor Information and the Audio Archives menu.

Let me refer everyone on the call today to the paragraph on our press release regarding forward-looking statements. Both that release and this call today will contain some expectations and some assumptions on the future in Hubbell's performance, particularly regarding our earnings going forward as we discuss the remainder of the year. Clearly, most of this is forward-looking. We may also make some comments here today or answer questions which may also be forward-looking. All of these involve inherent assumptions with known and unknown risks and other factors that can cause actual future events to differ from what we discuss here today. So please note that paragraph in the press release and consider it incorporated in our conference call here today by reference. Now, let me turn the podium over to Tim Powers, CEO, to discuss the first-quarter results.

Thanks, Tom. Good morning, everyone, and thanks for joining us. We will follow the regular format, where I will give you my perspective on the first-quarter results and the markets we serve, turn it over to Dave who will provide more of the details, and then come back with some thoughts on the rest of the year. I am happy to report that the first-quarter results are much improved from the difficulties we experienced in the fourth quarter of 2006 and is an important first step in our campaign to return Hubbell to its historic market-leading profitability and performance.

Sales in the first quarter were up 9% and earnings per share were up $0.06 from last year's first quarter. Operating margins of 10.2, while a modest improvement from last year's first quarter, is more importantly a significant improvement from the fourth quarter, up more than 300 basis points. We are off to a good start toward the full-year cash flow objective, with a first-quarter operating cash flow of $33.6 million. This includes a $15 million contribution to our domestic pension plan.

Looking at the market overall, the environment is consistent with the market outlook we discussed a quarter ago. Growth continues in most of our markets. After what appeared to be some short-term market and distributor inventory adjustments in the fourth quarter, industrial production, MRO spending, and capacity utilization have recovered in the first quarter, and we expect to remain positive in 2007. Utilities spending is picking up again and we believe most of any excess inventory in the channel at year-end has been worked through.

The residential markets, of course, continue the downward trend that began in the third quarter of 2006. The bottom is not yet in sight. The latest projections put the decline in housing starts at 25% compared to 2006, with the biggest year-over-year gap in the second quarter, but with continuing negative compares for the second half, as well. Now, I will have Dave give you more details of the numbers for the quarter and come back with some market perspectives and guidance for the next year, this year.

Thanks, Tim. Good morning. First, go through the P&L. As Tim mentioned, sales were $625.7 million, up 9% from last year's first quarter of $573 million. Acquisitions accounted for approximately 4% of this sales growth and selling price increases accounted for approximately four to 5% of the sales growth. When you take those out, you're left with sales in the residential business down about 12% year-over-year, offsetting growth in the remaining business, organic growth, volume growth of 3%. Gross margin of 27.6%, comparable to last year's 27.7%.

Selling and administrative costs were 17.4% of sales, comparable to last year's 17.3. Higher spending on the new residential product launch and cost rationalizations, including headcount and facility costs, were offset by the cost containment actions that we've taking since the fourth quarter. So, operating earnings were $63.9 million, up $6 million, or 10%, from last year's first quarter. Operating margin was 10.2%, up slightly from last year's 10.1. Net interest expense of $4.1 million, higher than last year's $1.9 million due to cash used for acquisition activity last year and share repurchase last year and this year.

Effective tax rates of 29.7% is essentially flat with last year's 29.5%. All that results in net income of $41.7 million, up $2 million, or 5%, from last year's 39.7. The share count was 60.4 million used for diluted EPS purposes, which is down about 1% from the first quarter of last year due to the share repurchases exceeding the issuance for option exercises. Earnings per share on a diluted basis, $0.69, up 6% from last year's $0.65. Lastly, one comment on employment levels. We ended the quarter at just over 12,300, which is about 450 people below where we ended the year, or about 3.5%, as we continue to drive our cost structure to more efficient levels.

Let me now turn to the segment results. An important note you'll see in the release, the segment operating income amounts in both 2007 and 2006 now include the impact of stock-based compensation. Last year, it was shown separately. So the comparisons I talk about will reflect these reclassified amounts. First, the Electrical segment. Sales were $399 million, up $7.9 million, or 2%, compared the first quarter of 2006. Operating income was $27.6 million, down $1.9 million compared to first-quarter last year. Reported operating margin in the Electrical segment was 6.9%, down 60 basis points from the first quarter of 2006.

Three significant items impacting segment margin in the quarter. First, there's the impact of the unfavorable mix of lower residential product shipments. Second, the negative margin impact, as we have talked about, relating to the wiring new product launches. And, third, the negative absorption impact that results in -- that we anticipated from our inventory reduction efforts. Combined, these three are worth nearly 200 basis points. These factors were partially offset by stronger Electrical product margins due to price realization and some productivity gains.

Some additional color on the operations within the segment. Wiring systems volume was up, as distributors replenished inventories, solid order levels, up 13% from the low levels of the fourth quarter, and profitability negatively impacted by the new product launch costs, most significant in the year-over-year comparisons in the first quarter. Still slightly negative on the price cost equation.

On the lighting side, the C&I lighting saw higher sales due to increased units sales, as well as higher average selling prices. Residential sales, however, were down significantly, 21%, and the profitability impacted by these lower residential shipments and the lower factory absorption as they have worked their inventory down. Also in the quarter, we completed the closure of the Cincinnati facility without disruption. As well, we recently completed the move into the new lighting headquarters building, a multistep process that was completed on time and on budget. The electrical products part of the Electrical segment saw strength in all their product lines, with improved factory performance and favorable cost price contributing to their higher profitability.

The Power segment, turning to Power, sales of $163.9 million, up $31.6 million, or 24%, from last year's first quarter, with operating profit up 25.2, or 27%, from last year. The Lenore City acquisition that we completed in the second quarter last year contributed about a half of the sales growth, the other half coming from selling price increases and some incremental storm business from late last year that rolled into the early part of this year. Also contributing was, as a result of selling price increases, some favorable cost price product mix.

Industrial Technology segment sales of $62.8 million, up $13.2 million, or 27%, from last year's first quarter, with operating profit of $11.1 million, up 31%. The acquisition of Austdac that we completed in the fourth quarter of last year contributed over one-third of the segment's sales growth. The sales in the quarter were also impacted by two large shipments, one in our high voltage business and one in our specialty communication business, contributing to that volume.

Let me turn now to the balance sheet. You'll see that we have had some build in receivables from year-end, about $40 million in support of our higher volume of business, with DSOs creeping up a day to 58 from last year's 57. A really good start to the year in our planned inventory reduction, as we were able to reduce inventory over $20 million from the year-end balance. Still a lot more work to do here. We are working toward at least another -- a reduction of at least another $20 million throughout the year in net inventories.

So are working capital was a net use of cash of $5 million, nearly $30 million better than last year. Net debt of $175 million increased from $139 million at year-end, as we had an increase of use of cash for our share buyback. All this leads to cash flow from operations of $33.6 million, a good improvement from last year's $16.5 million in the first quarter, particularly when you consider the operating cash flow, as Tim mentioned, includes the impact of a $15 million pension contribution made in January. Capital expenditures in the quarter were 3.5 -- increased $3.5 million to $20.7 million largely due to the completion of the lighting headquarters building, and that will not be the quarterly run rate and we expect to be on-track toward our guided level of 60 to $70 million for the year. Also in the quarter, we repurchased 660,000 shares of Class A and Class B common stock for a total cost of $31.5 million. So with that, I'll turn it back over to Tim.

Thanks, Dave. Our current forecast of market conditions indicating growth in most markets and a healthy pricing environment will be somewhat offset by further weakness in the residential market, so at this point, we continue to expect the full-year 2007 sales to increase six to 8% above 2006. About two-thirds of this comes from acquisitions and pricing realization. The remainder, organic growth, is a result of the growth in non-residential, industrial, and utility businesses, offset by the decline in the residential business.

With our continuing focus on price realization, productivity, and cost containment, we continue to expect full-year margins will improve at least 100 basis points from 2006, and this will result in a 2007 earnings per share that is expected to be in the range of $2.90 to $3.15.

Our performance in the first quarter gives us confidence in our ability to meet our earnings targets and we are cautiously optimistic about opportunities beyond. Execution of these priorities continues to be the key. We believe that our efforts will make 2007 another year of growth in sales and, most importantly, in earnings for Hubbell. I think with this, we have concluded our prepared remarks and we are ready to take questions.

Tom, if you will relay the instructions on how to queue up for a question, we will proceed to the Q&A.

(OPERATOR INSTRUCTIONS) Bob Cornell, Lehman Brothers.

First question, just to flesh out the electrical product performance, could you give us an update on the Spokane-Bristol move or lack of move? What is the status there?

We are moving no product lines at this time. We indicated that at the end of last quarter that our priorities had been on just getting ourselves into our new headquarter building and shutting down our Cincinnati plant. And we took those in sequence and did those without any problems at all. And now we will be turning our attention to further restructuring in the lighting business.

Tim, when you mentioned the outlook for the markets, you mentioned the industrial market utility in the res and you didn't talk about non-res and some of the people that have reported so far quarter have talked about some of the non-res projects sort of coming back in the pipeline. Could you flesh out -- and then you just made a positive comment on non-res, so maybe you could give us a comment on the non-res business for you looking forward.

We are optimistic about non-residential. Certainly, we think it is a market that will grow at a rate that is below 2006, but still there is evidence that in some of the components of it, like institutional areas, that they offer good opportunity for Hubbell. Certainly, there is some softening in that market and the growth rate is expected to be lower than 2006, but it is definitely a market that we see as contributing to the upside in this year.

I suspect this first quarter came in better than your plan, although maybe we all out in the street here were too conservative, but I guess I'm a little surprised you didn't change the full-year guidance. So maybe you could just talk about what you look out and see as the major potential positives for the full year and then the major negatives, because your guidance range is pretty wide.

Sure. First of all, part of our thinking here is this is one quarter, and the periodization of quarters or the calendarization of quarters in the year may be a little less growth in sales as the year goes along than maybe some of you all were thinking. From our internal plans, the sales volume was extremely close to our own plans and probably just about 1% higher than we anticipated. So -- and yet, we still think the year looks just about as we carry in our guidance.

Now, if we have another quarter where things are significantly better, we will revisit our guidance, but we are fairly comfortable where we are and we are confident that we can meet these numbers. And certainly given the struggles of the fourth quarter, I think it would be best at this time just to retain our current guidance.

Okay. Thanks very much, Tim. I pass the baton. Thank you.

Christopher Glynn, CIBC World Markets.

Tim, just wondering if you could talk about your comments, much improved from the fourth quarter; very plainly obvious the Power Systems, Industrial Technology. Could you tie that comment into Electrical? Does Electrical really participate in that comment?

Yes. Certainly just about every one of our businesses were improved with the exception of residential in the Electrical segment. I think as Dave pointed out, our investment in the initiatives of new product launches and our decline in residential really muted any improvements, but we have improvements in the C&I business. We have new improvements in HEP and we have improvements in wiring device. So it's just that we have more going on in that segment, but definitely improvements right across the board.

Okay, and then looking out across the year at the margin picture how that is shaping up for electrical. How do we think about how it progresses during the year? Because the res headwind inventory is still high, cost from product launches, and then Spokane to Bristol restarting. So is second-quarter margins probably more along line with where we are trending right now than really second half?

We would expect our margins to continue to improve each quarter, reaching about 10% in the Electrical segment at the end of the year, providing that the residential market does not go far below our current estimates. And we think we have it declining correctly, but that is just a proviso.

We are definitely expecting improvements to continue in every single one of our businesses. We've made adjustments to our cost structure in the residential area to account for a longer-term lower level of business, so we see steady improvement each quarter in succession.

Okay, thank you. Last one, Power Systems sounds like maybe no underlying growth if you back out the acquisitions, the price and the storm. Looking ahead, the first quarter was definitely the toughest comp. So is that probably the way to think about modeling the top line through the here?

You know, we're looking at a small amount of physical and real growth and a larger component of price in the products where we serve because of the high inflation that happened in the second half of 2006 on most of the power products. Maybe utilities will spend more as the year goes on, but right now their physical consumption of product is pretty close to last year, just a little bit higher. The rest is mainly price at this point.

Great, thanks very much.

Jeffrey Sprague, Citigroup.

I had to cut in and out a couple times, so I'm sorry if any of this is redundant now, but just a little more color on the power, which I did hear your answer to the question there. Tim, I know you are mostly lined up on the distribution sides, but also have a little bit of play in the transmission. I just wondered if you could give us a little bit of big picture color on T spending versus D and what's going on in projects and what kind of visibility you can see in the pipeline here over the next year or so.

There is still a lot of demand for transformer connectors and transfer products for Hubbell. We were just putting some capital into our connector business to expand the capacity for that end of the business. We think the long-term growth prospects are very good, and right now still our longest leadtime items in the utility business are in the connector area. So demand is quite healthy, but it still remains, as you know, a low 20 something percent of the total business.

But I am encouraged by the number of announced transmission lines, but as I told you before, you can see this coming. What we have at this point is some short distance transmission lines in the under 100 mile in duration and some upgrade and repairs of the existing transmission grid. But good, healthy demand in an area where we're putting some expanded capacity in.

Are those transformer connectors for heavy-duty transmission type transformers, is that more on the distribution transformer side?

Transmission would be 145 kV and above, which is high-voltage transmission that I'm talking about, so it is not on the distribution end. This is on the transmission end where the demand is the highest right now and continuing.

The fact that physical volume is roughly flattish, is that a function of negative response to higher price or you just think the ripple effect of resi slowing down into distribution spending, etc,. has just kind of slowed the pace, or have we caught up on some of these reliability upgrades and that sort of thing?

No, I do not think we have caught up on any reliability upgrades. I think that there is just a long way to go on that side, and most of the utilities could say they have checked off the number one and number two problem, but their lists are long. But what can constrain their spending certainly are public utility commissions and their ability to pass along their increased investment in the rates. That is still an ongoing battle, but I also think that weather-related problems have kept crews working on in a number of areas just repair of the existing system.

So I am still looking for a better year as the year goes along, and I would hope that there may be upside to our view of the current situation. But we're just giving you our view that that is what the current run rate is and that is what our expectations are right now, but there could be upside to this.

Could you tell us or repeat if you already did say how much you're resi business was actually down in the quarter and what you are expecting for the year?

Jeff, the total resi business, including both tied directly to home building as well as the DIY was down about 12%. And we think because of the lag that we have in our -- relative to housing starts, there will still be some continuing drag and we think for the full year, that will probably be around 15%.

Okay. If I think about the 200 basis points of, I'll call it headwind on electrical segment margins on resi, the wiring launch and absorption issues, I guess the resi will just have to play out. But if you think about the issues on your launch and the issues working through absorption and getting inventory right, do you get most of that back over the balance of this year or does it stretch into '08?

The inventory adjustment will take place during this year, so we ought to be back where we need to be, and plant issues relative to lower production should be dissipating as the year goes along, so that should be gone. I would say to the extent we are successful on our product launches, the impact of this will moderate and certainly be better in '08 than '07.

I guess just finally, any update or color on kind of the acquisition pipeline? You've actually been successful being fairly active here over the last year so. More to come?

We are keeping our eye on margin improvement as our number one task, and certainly you've seen our Power business bounce back rather quickly as we expected it would. It is operating at very close to normal conditions, and we are very pleased with that. Our industrial business has performed very, very well. So in these two areas, we would be open to acquisition to the extent we could find them. And the other areas right now we have our head down and are working mainly on margin improvement in the Electrical segment.

So the opportunities in the marketplace for acquisitions are still pretty good, and there are a number of opportunities that we're looking at right now. So I would say the pipeline is at normal conditions and we have passed on a few things during this time when we had to concentrate on improving our margins.

Great, thank you very much.

Robert McCarthy, Banc of America.

Congratulations on a good quarter. It looks like the reduction of complexity continues, so you have listed some pretty nice margins there. Could you talk about your toughest compare on the presidential side throughout the year, and perhaps just tie that into the overall swing factor in your guidance? Where are the biggest risks you see to drive to the low end? Because most numbers are well above $3 now, and my expectation is will go considerably higher after this call.

Certainly, Rob, the peak of the progress lighting business in terms of growth happened in the second quarter of 2006, and I think that the growth at that point was like 12% or 13% above 2005. Then we began to see quarter-over-quarter declines in Q3 and Q4 and accelerating into Q1. So our gap on Q2 is north of 20%, and I don't exactly know, but it is $4 million or $5 million of margin difference, maybe more, maybe another million or something like that as a negative comparison to 2006.

On the other hand, we are expecting improvement in virtually the margins of every other business in the Electrical segment, so you have those working one against the other. So C&I is improving and the resi is declining, so that is our biggest negative comparison.

To that point, could you comment on perhaps fluorescent lighting margins in the quarter and obviously a very easy comp year-over year and probably got some lift there?

We did. We got volume and margin lifts in -- virtually across the C&I business, so we are pleased with the progress on that front. Pricing environment is pretty decent. We have a number of price increases going in right now on the lighting side, so we have every reason to be optimistic about the balance of the year. So really the play for us is in the thinking about the risk going forward in the market is really at what rate resi will decline. It is my own personal view that we will not see the bottom of the residential market until 12 to 15 months from now.

It is just one of these stories that is unfolding, and it is taking longer for the U.S. to digest the overhang of inventory. But we think we are doing the right job of repositioning our progress business to get back on the right track of high margins that it generally produces, but at a lower volume. So we've taken those steps.

Any comment qualitatively on where fluorescent margins are now? Because I think you were basically at negative margin last year.

We are positive.

Positive. Mid single digits, high single digits?

We are positive.

Okay. If you could talk about perhaps the nonresidential and market outlook; obviously, positive. Some comparables have talked about even perhaps an acceleration, particularly in the heavier project side throughout the back half of the year. Do you see prospects for a significant volume pickup year-over-year in the back half of the year on the nonresidential side?

We think that nonresidential construction is going to grow at about 3% in square footage and a little bit more -- some markets will be lower like big box retail should be down. The Wal-Marts and the Lowe's and Home Depots are building a few less units, and we participate in some of that business. So that business per unit will go down, but the institutional part will increase in hotels and things like that, which we do reasonably well.

So we think that if you get 2 or 3% physical unit growth plus price, we're back in that 6 to 8% increase in sales year-over-year. And at this point, we do not have any evidence to talk about a real significant move in the market upward in the second half. I don't see that yet, but it could be, could be, but we don't have that evidence yet.

Right. And then thinking about perhaps your margins for the back half of the year, structurally, I think your residential margins kind of bottom out in low double digits, just given your cost structure. How low could margins go there, given the declines?

They should not go below low double digits on residential.

On the residential side. Just thinking about the state of your international sales such as they are, are you seeing any particular areas of considerable strength or surprising strength? It looks like on the Industrial Technology side, you actually had pretty significant upside there, driven by some international strength. Can you talk about that?

Currently, our industrial communication business, GAI-Tronics, is enjoying tremendously strong markets internationally, along with the oil and gas investment that is going on on a worldwide basis. Our acquisition of Austdac is in the mining control business, the mining safety equipment business. That is enjoying a tremendous area of growth also, so we're very pleased with our little acquisition there.

So along with the Harsh and Hazardous businesses of Hawke and Chalmit are all very strong right now. So what small amount we have along with Haefely, our industrial business for testing equipment, are all enjoying extremely strong markets, and those markets continue to grow.

One more comment or question about SAP. Obviously, you've halted I think essentially some of the restructuring implementation there. I think you stated that in the fourth quarter. Are you thinking about reinstituting that, or are you just going to put that on hold for the time being?

We will take on the remaining tasks in front of us in a very controlled sequence. As you alluded to, we want to make sure that it is a straightforward process here, a step at a time. So we will pick those tasks up again and begin as we go forward in the rest of the year.

Congratulations on a great quarter, and hopefully we will see more of them.

Jeff Beach, Stifel Nicolaus.

I will repeat, congratulations on a very nice quarter, Tim.

Thank you.

Three questions. One is regarding capacity. I heard that your leadtimes are stretching in some power connectors. Looking across your product lines, are there any areas here where you're facing tight capacity and you're going to have to expand over the next, let's say, 12 to 18 months?

We have very few pinch points of capacity. I was alluding to one in I think our anchor business. We added some capacity which is already in place, a robot cell for that, but very few places where we would be bumping up against any capacity. In fact, with our inventory reduction in most cases, we have more available capacity now than we did 12 months ago.

So we were just running our business harder. We were in an inventory build mode. Now we are in an inventory shrink mode, so we really have -- we're in a good position to respond to any upside. We're sitting with more than ample amount of finished goods, in my mind, so we are really sitting in nice shape from my point of view.

All right. Second question, on the remaining restructuring that you have to do, particularly the shift and closing of the Spokane plant, can you give us a rough idea -- I'm not sure I heard that if you said it during the call -- when that might be completed?

We put that on hold to get through the startup of our lighting facility and in closing that other plant in Cincinnati. We are opening up this new lighting headquarters, which is quite a major event. It will have, I think, a major positive impact on our lighting business as time goes forward. And we have a number of events around that, such as bringing all of our lighting agents and customers in and things like that.

So after we get through that in the second quarter, we will begin to pick up again with all of the tasks in front of us. We have not set any date with commencing of the restructuring of our plants in fluorescent yet, but I will tell you that we will address those before the end of the year.

All right. And third, this new product launch. Will you continue to have -- you're launching into a very weak market. Will this create losses for some time until this market turns around?

The strength of the market has very little to do with the length of our losses or anything else. We are entering the residential wiring device business after more than 100 years in the history of our company. And whether it is 1.2 million new houses or 1.6 million new houses, ours is a door-to-door battle to win distribution shelf. And we are beginning to do that based on the reputation of the Hubble name, the quality of the sales force we have, and the fact that we have a very good product.

But we also said that as in all the products in the Electrical business, it is really about three years before you get to a market penetration that will begin to give you an idea of how successful you're going to be. In metal raceway, we're in year two of that. We would expect to reach kind of the breakeven point on metal raceway and delivery products as we get into 2008. We still have another year of investment in 2007 and again in 2008 in the residential business before we see some benefits begin to accrue, but we are very pleased with both of these so far and very optimistic about our future in this business.

All right. Thanks very much, Tim.

(OPERATOR INSTRUCTIONS) A follow-up from Jeffrey Sprague, Citigroup.

Can you just give us a little more color on where things stand with price and whether there is additional actions in the pipeline or how we think about maybe annualization of price that was put in place last year as that maybe kind of tapers off over the balance of this year?

The situation with respect to price in the market is that virtually all the price increases that we have wanted to have, or we needed to have, have been implemented with the exception -- and most of them have begun to be realized with the exception of the lighting price increase, which on some of our product lines was announced at the beginning of the year. But as you know, I think the lighting industry is in the midst of moving up prices as we speak. So some of that is yet to be realized. So I would say that we are going to see the most realization probably, what is it, Q2 or something like that?

Q2 is somewhat comparable, maybe a little bit less than Q1.

How much did you get in Q1 actually?

About 4 points, 4 to 5 points.

That's total Hubble, right, with a skew towards Power relative to Electrical?

Correct.

Okay, thanks a lot.

There appears to be no further questions at this time. Mr. Conlin, I'll turn the call back over to you.

Thank you, and thank each of you for joining us here today, and we will talk to you about one quarter from now. Thanks again.

This does conclude today's conference call. We appreciate your participation. You may disconnect at this time.