Hubbell Inc (HUBB) 2007 Q2 法說會逐字稿

[Audio cuts in] --Webcast also from the Hubbell website. Audio replays of the conference call are available in three ways. First, a telephone replay of the call will be available two hours following its conclusion, and will remain available until August 3. To access that replay, please dial 719-457-0820, and the pass code number is 8317412. You can also hear the audio replay at the Hubbell website, again, from the Investor Relations tab and the audio archives on the drop down menu. Finally, you can receive it as a podcast by downloading it from Hubbell.com, also from investor information and the audio archives menu.

Let me refer everyone here today to the paragraph in our press release regarding forward-looking statements. Both that release and this call today may contain some expectations and some assumptions on the future and Hubbell's performance, particularly regarding our earnings going forward. Clearly, most of these are 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 our actual future results to differ from what we discuss or project here today.

So please carefully note that paragraph in the press release. And I'd like to consider it incorporated in our conference call here today by reference.

With me as usual is Tim Powers, CEO, and Dave Nord, CFO, to discuss the second quarter results. So let me turn the podium over to Tim Powers.

Thanks, Tom. Good morning and thanks, everyone, for joining us. We'll follow our regular format where I will give you some of my perspective on the quarter's results and turn it over to Dave for more discussion on the quarter, then come back with thoughts on the second half of the year, and then take questions.

I am very pleased with the second quarter reports we are reporting today, with sales up 6% and operating margin up a full two points, resulting in earnings per share of $0.89, up 33% from last year's strong second quarter, and very strong cash flow. Free cash flow nearly doubled net income in the quarter. These results built on the improvements we experienced in the first quarter and reflect more progress toward our three primary objectives this year - price realization, productivity improvements, and cost containment.

Planned selling price increases have been implemented with positive realization across all of our markets. Programs to increase productivity and reduce costs are in place and achieving success. The economic environment is consistent with our expectations - positive in the electrical segment for non-residential construction, industrial maintenance and repair, commercial and industrial lighting. Only the residential market continues its significant contraction. And the markets served by our power systems and industrial technology segments continued to grow in the quarter, helped by strong demand in the international parts of these markets.

I am particularly pleased at our ability to report these results in light of the significant headwind we continue to face from the decline of our residential market. In particular, new home construction, which has been most severely impacted to date, and a big piece of the driver of our residential lighting fixture business. Clearly, these results are a testimony to the strength of the Hubbell franchise and the commitment and hard work of every one of our 12,000 employees. Now, I'll have Dave give you more details on the results for the quarter and come back with some views of the market and guidance for the rest of the year.

Dave?

Thanks, Tim. Good morning. I'll just run through the financials quickly here. Let's start with the P&L. We're reporting sales of 640.8 million, up 6% from the 603.2 reported in the second quarter of last year. Acquisitions and selling price increases each contributed a little more than half of the growth. So by definition, it says that the underlying volume was flat to down, but largely as a result of the significant residential volume decline. Absent that, it was actually up high single digits.

Gross profit margin of 29.2%, which is higher than last year's 27.5. Selling and administrative costs of 109.3 million, which is 17.1% of sales, equal to last year. Net operating profit margin of 12.2%, two full points higher than last year, due to selling price increases in excess of commodity costs, lower freight and logistics, and some favorable product mix. Net interest expense of 3.9 million, higher than last year's 2.2, due to cash and investments used for both acquisitions and increased share repurchase levels.

The effective tax--income tax rate in the quarter was 28.9%, lower than last year's 30.3. The biggest contributor of that decline is the R&D tax credit, which you'll recall we weren't able to recognize until the end of 2006, when we can reflect on all of 2007. Brings our full year rate to 29.3% versus 29.9 last year. Net income 53.3 million, up 11.7 million or 28% from last year's 41.6 million. And earnings per share on a diluted basis of 89%, up 33% from last year's $0.67. Contributing to that improvement is a lower share count. Our diluted shares outstanding, 60.2 million versus 61.6 last year's second quarter.

Turning to the balance sheet, continues to strengthen - improvement from first quarter in all areas - receivables, inventory, and payables. Trade working capital as a percent of sales in the second quarter was 20.2% versus 21.6% in the first quarter. Still a lot of work to do here, particularly on the inventory side, but progress continues. Debt to capital of 17.2%, compared to 17.8% at the end of the year, and net debt improved to 119.7 million versus 138.7 million at year-end due to our strong cash flow.

Speaking of cash flow, you see cash flow from operations of 106 million in the quarter - 69 million better than last year's second quarter due to our improved operating results and more importantly improved working capital. That brings our year-to-date operating cash flow to 139 million, compared to last year's 54 million. Free cash flow, even more improvement in the quarter - 93 million, compared to 16 million in last year's second quarter, due to the better operating cash flow and a lower amount of capital as we have decreased spending that was associated with our Hubbell 2006 project and the lighting headquarters [built].

Share repurchase during the quarter - 57.2 million for--we purchased 1.1 million shares, bringing our year-to-date repurchases to 88.7 million for 1.7 million shares. We're on track. This continues to be on track with our previous guidance of $150 to $200 million for acquisitions and share repurchases combined in the year.

Turning now to segment results. First, the electrical segment sales of 421.9 million, up 2.7 million, or 1%. If we exclude the residential decline, the segment sales are up nearly 7%. Operating income, 41.7 million, up 6.3 million, or 18%, from last year's second quarter, and operating profit margin of 9.9%, up 8.--up from 8.4 in last year's second quarter. And this is the segment most significantly impacted by the residential decline, which was nearly a point of drag on margin. So had residential been at least flat to last year, we would have seen another point of margin.

Within the segment, some of the businesses, the wiring systems products, had volume growth of 8%, including some of the benefit from our new products. Profit margin improved due to productivity improvements, including some of the lower freight and logistics costs I mentioned, as well as some favorable product mix.

On the lighting side, the C&I business had 6% growth, offsetting the residential decline. Profitability is down solely due to the lower sales in residential, but with significant improvement in the C&I business due to good price realization and productivity improvements. And on the electrical products side, very strong markets in the harsh and hazardous with double-digit volume growth, and good pricing leading to profitability improvements with all the businesses contributing there.

Power segment, sales of 156.8 million, up 22.5 million, or 17% from last year's second quarter, and operating profit of 24.3 million, up 32% from last year. The Lenoir City acquisition, which we completed at the beginning of June last year contributed about two-thirds of the sales growth and about half of that operating profit growth. Selling price increases accounted for nearly a third of the sales growth. And then, on the margin side, some productivity improvements, particularly in the sourcing area, also contributed to margin expansion.

The industrial technologies segment had sales of 62.1 million, up 12.4 million, or 25% from last year's second quarter. Operating profit of 12 million, up 58%. The Austdac acquisition that we completed in October last year contributed about half of the sales growth and about a quarter of the operating profit growth. The rest of the operating profit growth was really broad based in all of the businesses due to pricing, productivity, and good cost management.

So with that, I'll turn it back to Tim.

Thanks, Dave. Let me talk a little bit about our markets. We expect economic conditions to be positive for the balance of the year in most of our markets, although there will be some short-term variation in demand during the remainder of the year. Domestic utility is an example of--softened somewhat toward the end of the second quarter.

The manufacturing sector is good with growth forecast in the low single digits, and continuing strength in the energy sector domestically and internationally. On the non-residential side, the overall market is positive for the remainder of the year. We think the full year will be up mid single digits, and continued strength in commercial office, healthcare, and public projects offset by softening in the retail sector.

Residential continues to be the challenge. It continues to decline, and we don't see this market reaching bottom until midway through 2008 at the earliest, although the year-over-year negative comparisons may decrease as the year moves on.

The utility market continues to grow. Utilities are continuing to spend on maintenance and repair to improve reliability and for storm preparedness. The early storm season has been mild, but of course, the peak doesn't begin for several weeks.

The first half of the year has had some pockets of softness for a number of reasons - inventory levels at the beginning of the year, weather related delays in construction progress. Both have--may have contributed to the weak levels of stock and flow business. While some of this may continue into the second half, we believe the fundamentals of this market support are continuing with modest growth.

So what does this all mean for our outlook for the remainder of the year? First, on the sales side, we anticipate second half increases to be a bit more modest than the first half for a couple of reasons. First, strong comparables in the third quarter of 2006, some price increases which began midway through last year, smaller contributions from acquisitions, and a discipline to achieve better price realization, and finally, the continuing drag from the weak residential market.

So all things considered, we see sales in the 5 to 7% growth level compared to last year, including a three point drag from residential. Let me be clear. This means that the balance of Hubbell will have growth of 8 to 10%, excluding residential.

On the profit side, while there is still a lot of work ahead of us, our focus is on three areas - price, productivity, and cost. And the results we have seen so far this year from this focus give us confidence in our ability to drive continuing margin improvement. In fact, we believe our margin improvement this year will be 150 basis points over 2006. So with these sales and margin assumptions, we are increasing our forecast for the full year earnings from the previous 290 to 310 to our current estimate of 310 to 330. And free cash flow will still be equal to or exceed net income.

We have much more work to do, but our strong start to the year provides us with a solid foundation for continuous improvement. So with that, Tom, I think we're ready to take some questions.

Katie, if you would reiterate the instructions on how to register to ask a question, we'll proceed to that.

Thank you. (Operator Instructions.) And we'll go first to Christopher Glynn, CIBC World Markets.

Good morning.

Good morning.

Good morning, Chris.

A question on--the commercial kind of guided to mid singles. What are you thinking about the real growth there stripping out the pricing?

It's modestly higher, consistent with what we've been saying. A few--1, 2% real growth, and the rest is price. And that's basically how we have seen the year since the beginning. Not a lot more unit growth - just a little bit. But that's how we saw the year coming in and that's how we continue to see it.

Okay. And then, on the lighting pricing. What's the difference in the pricing dynamics in the stock and flow business versus the project business?

I'm not--I don't differentiate--I don't know any differentiation between that. We're getting price realization on both sides of the equation. It's different by geographic region of the United States, but generally, it's being accepted. So generally speaking, we're doing quite well with price increases in lighting this year.

Okay. A competitor suggested yesterday that the industry price increases that were slated for the end of July might get--looks like they're getting pushed out to September 1. Could you comment on that?

That's information that I--I'm not familiar with, so I can't really comment on it.

Okay. And then, finally, the new focus on operations as opposed to some of the projects I think really looks good for the margins for electrical. So I was just wondering if you could comment, Tim, on if you have any idea when the timing of projects was--I think it's some lighting and international SAP, and then some transfer of production and factory closings with lighting. Is there any specific operating threshold you're targeting before you resume that, or just--?

--We have a series of internal objectives, and we're taking them in a very deliberate way one step at a time. We will get back to relocation of manufacturing facilities toward the end of this year or the beginning of next year. But certainly, we are not going to--we are going to make sure that we don't have too many objectives to try to perform at one time. So you can see that while we're focusing on mostly operational matters, our margins have bounced up quite nicely. So we're going to continue that process.

Great. Thanks very much.

Sure.

And we'll go next to Jeff Beech, Stifel Nicolaus.

Yes. Great quarter.

Thank you.

Thanks.

Two questions. First, can you give us an update on the status of the closing your florescent lighting plant and shifting that business over into Pennsylvania, and when you expect to complete that, as well as any associated SAP go-lives that you've got planned? And then, second, can you just give a little bit more color on the utility market? You were talking about some--sounds like erratic trends. But talk about--a little bit more about what you see in terms of the spending patterns in transmission and distribution and over--the overall comments about--again, it sounds like an ebb and flow of business.

Okay. All right, Jeff. Let's go back to the objectives to continue to reduce our--the cost levels of where we make things by moving around manufacturing. We put those on hold toward the end of last year. We have not resumed any major moves other than the one we announced in the first quarter where we closed one lighting plant in Cincinnati. We haven't resumed any of the major moves and will likely not do so until toward the end of this year or the beginning of next year.

With the SAP, we're focused this year on better utilization of it. And I'm very pleased with the kind of operational knowledge we're gaining and a better utilization of the system, particularly in the areas of how we organize and schedule our factories and how we promise make-to-order product in the marketplace and delivery time. So it's mainly been an operational focus and we have not got a lot of SAP implementations planned for the near term.

With respect to the utility market, I think part of what's happened is last year the market was giving us an enormous amount of orders, because most of the manufacturers could not deliver. And so, our lead times were going out, and the longer the lead time the more orders we got. It seems as though this year, at least I can say for Hubbell, that we've gotten our lead times back to very traditional levels and our service levels are probably a size they've ever been. So during that process, I think we created some extra inventory in the pipeline and we're working through that, not formally, not with every distributor, but certainly in a few product lines.

And I don't attribute this to anything of a broader market situation. Utilities certainly are continuing to invest in the grid, both distribution and transmission. There is still good demand in the transmission side. It still is for the smaller projects at this point. So there's no--nothing that I see that would change my view of the market in total. But I think we're going through a period where we're actually lowering inventories at public utilities for our product and in our distribution channel. And it's a little bit uneven now.

Just a last question associated with that. If you look at the end market demand and you could put a rough estimate on growth you see, say, over the next 12 months away from your inventory changes, can you give us a rough idea there, what you see?

I would say for our product, which is primarily distribution oriented, it would be in the 6 to 8%. And perhaps that would be the end demand for those products. Utilities move around their investment. There has been some more investment lately in the automation end of the grid. So they're automating substations and things like that. But still, our products go hand-in-hand with any upgrade. But the movement within transmission and distribution investment certainly has an automation component to it.

Thanks very much.

Thank you. (Operator Instructions.) And we'll go next to Robert McCarthy, Banc of America Securities.

Good morning, everyone.

Hi, Rob.

Hi, Rob.

I guess my first question is there's been some commentary out there that some aspects of the commercial construction market are starting to see some of the derivative effects of the residential [contagion], specifically kind of light commercial, on the retail side, strip malls, things of that nature. First of all, could you just comment on what you're seeing from your perspective, and then maybe comment on your--quantitatively to the extent you can--your overall exposure to that end market?

Well, let me comment first on--this is anecdotal information, because there are no statistical facts that would give you that. But in talking to our distributors and others, I would say there is some slowdown that goes with the slowdown of housing. But it is--there's a lag effect to it. So not every strip mall and not every McDonald's gets built the instant a new home does. There's--it's still running behind. So it has not fallen off certainly at the rate of new home starts decline, but it is not as strong as it was last year. I would say for the rest of the market it is still a pretty good market. And there are soft spots in it in the big box retail where you know that the guys like Wal-Mart and Home Depot and Lowe's and that are collectively building many millions of square foot less than they did a couple of years ago. So that aspect is smaller.

But where the larger profit margins lie is still good opportunities for us - in commercial office space, in hospitals and institutional, educational. These are still very good markets for us right now. And our view of the non-residential market has not changed, nor is any of the current turbulence on Wall Street we think going to affect that between now and the end of the year.

On the residential side, I mean, obviously, you have declines probably in line with starts or on the order of probably 20% declines. But you do a lot of contract outsource manufacturing. Could you talk about where margins could kind of bottom there? I mean, I think you're talking about kind of the low teens. And then, just talk to us going forward if there will be any effect given the repeal of I believe the VAT tax credit coming out of China, whether we should think about that for your underlying profitability within that segment.

We have been able to manage our margins in the teens through this downturn with our residential lighting business. Our people have done an excellent job of reshaping the organization to the existing market. We have not had the plant absorption issue since most of the decorative lighting that Hubbell sells is sourced in Asia. We do make the down lights for the residential market in our Tijuana plant, but our Tijuana plant is filled with also non-residential product. So we have a very high level of production at that plant.

So we haven't seen the--sort of the operational downside of this decline in the market inside of Hubbell, other than to reshape the front-end of our business to the right size. And we've done--we think we've done a very good job of this. And we think that we will manage our margins. Once we get to sort of the bottom of this, which we think will be next year, we will then begin to see margins rise in that business. So we're--despite the negative outlook of this, we think we've managed that very well and that the prospects for us beginning to grow that business once we hit bottom are excellent as we are--we think we may be even gaining a bit of share as time goes on here.

Yes. I certainly think you're gaining share, particularly in some of the more commodity warehouse and industrial lighting. It seems you're taking significant share there, but at probably the prospect of some price softness. Have you been fairly aggressive in that market, and have you thought about the potential competitive response? Because anecdotally what I'm hearing is you are being very aggressive on price.

I can only tell you that uniformly our C&I business margins have risen substantially. And it's no small part due to increase of price. And we have been as disciplined as we know how to be in terms of getting price up everywhere. And--.

--But you are coming from a different absorption level than peers, right?

It's possible. I mean, our industrial lighting is contained in basically one manufacturing plant. And that plant has seen modest growth, but nothing dramatic. So I would say it's in line with the change in volume of the rest of C&I. So there isn't any change in proportion of that business of sales--that product of sales to others.

All right. Well, you had a good quarter, particularly in incremental margins. And you definitely are in line with your peers now. But still, on an aggregate basis, you're 400 basis points lower than peers right now and still dramatically under-earning. What kind of view can you give us over the next couple of years how you will make up that ground? And you're still well off your peaks as well. What do you think are the couple critical factors that you need to execute upon on your own business plan? And what environment would allow that to occur?

Well, I would tell you that the first thing is we're swallowing this year more than 100 basis--or about 100 basis point margin decline from the rapid decline of the residential market. And as that subsides, we'll pick up that difference. Further, we expect to continue, as I said, to increase our margins by 100 basis points a year. So we will get there. But the preciseness of the timing of that is something that we'll talk to you about in installments.

Thank you for taking my questions. Congratulations on the quarter. And you guys should get on the road soon.

Thank you.

And we'll go next to Elana Wood, Merrill Lynch.

Good morning.

Good morning.

Good morning.

If you look at your three let's call them buckets of operating initiatives - price, productivity, and cost, is there any way to rank them in terms of their importance to the 200 basis points of year-over-year margin improvement?

Elana, this is Dave. Clearly, price is the number one component. I mean, we talked all of last year about whether we were or were not behind. And so, that was a focus area and that is clearly the number one area of attention. Probably the second would be--it's a combination of cost and productivity, I guess. It depends on how you define it. But we had a lot of headwind last year in efficiencies associated with the initiatives. And you see that actually manifesting itself, as an example, in the freight and logistics, where we improved more than 50 basis points over last year. And that's because that's an area that we had known inefficiencies resulting from the SAP implementation - so getting those behind us.

But price is clearly number one, productivity, number two, and then, just managing our way through any cost headwinds and further reducing costs.

Do you know how much price--net price added to EBIT this quarter? And what's your assumption for the full year?

Net price for the quarter?

Yes.

Low teens.

Low teens in millions?

Yes.

Okay. And what about your full year forecast?

The full year forecast--that's probably a good run rate.

Okay. Your--you took your top line guidance down just by a point. Just wondering what that point is attributable to. Is it due to resi markets weakening on the margin, or--?

--I would say it's the more and continuous rapid decline--or steady decline of the residential business. So if you look at what we thought the situation was coming into the year, we predicted that the residential business would be down around 15%. But as the year has rolled out, it's closer to 20 to 25%. And so, as we see more clearly the slide to the future of the recovery here, that's factored into our guidance on revenue. And certainly, a bit of the softening on the utility side is a factor.

Okay. And then, just lastly, do you have any sense for the incremental margin on the non-resi piece of the electrical segment?

Incremental margin? I don't have that here, Elana. We'll get back to you on that.

Okay. And actually, just one more question. How much did price contribute to electrical segment top line growth?

A little over 3%.

Okay. So in line with last quarter?

Yes.

Okay. Thank you very much.

Thank you. (Operator Instructions.) We'll go next to [Gib Dunham], [Beck Mack].

Hi, it's [Jim Dunham]. How are you?

Very good.

A couple of questions. If--what would you say the residential business will be down in the first half of '08, if that is indeed the turning point? Is it down another 20% early next year?

That's pretty hard to call right now as this--these events are sort of unfolding. Our view is that the decline would be less--quite a bit less than the rate of decline this year. But anybody that could predict that with certainty, given all of the dynamics of that market--.

--Yes--.

--Is a pretty tough call. But we're pretty certain for our business that we're looking for a year that is--2008 would be below 2007, because our lighting business lags the recovery of residential by two quarters. So at mid-year, if you have a recovery, we still have until all those housing starts at mid-year come to close to the end of their construction cycle. So we're in our thoughts thinking about a rate of decline that would be half of this year's. But that's a very preliminary number, and just basically our educated guess.

Okay.

And anybody that can come up with a precise number on that is pretty tough.

Sure. My next question is what percent of your business that you sell to utilities is for new developments, i.e., plantation type build-outs, those type of residential homes, versus kind of upgrades or maintenance?

About 85, and in some areas of the country 90% is maintenance and repair, and about 10% of the expenditures to 15% of the expenditures are for new construction.

Got you. And just a quick--one other question. Your home select business, when do you expect that to break even?

We said in the third year following launch.

Okay. Thanks very much.

You're welcome.

Thank you. And it appears we have no further questions at this time. I would like to turn the conference back over to Mr. Tom Conlin for any additional or closing remarks.

Thank you, Katie. And we'd like to thank all of you for joining us today. And as usual, I'll be available if anyone has a question or two. Thanks, again.

We thank you for your participation. That does conclude today's conference call. You may disconnect at this time.