Hubbell Inc (HUBB) 2008 Q1 法說會逐字稿

Good day, and welcome to the first-quarter 2008 earnings release conference call for Hubbell Inc. Today's call is being recorded. Now for opening remarks and introductions, I would like to turn the call over to Mr. David Nord, Senior Vice President and Chief Financial Officer with Hubbell Inc. Please go ahead, sir.

Thank you, Tasha, and good morning to all of you. We released our first-quarter earnings this morning, and that release is available to you from a number of sources. The easiest way is to go to the Hubbell Web site at Hubbell.com and access the complete release by clicking on the Investor Information tab at the top and then Financial Releases on the drop-down menu. It's also available from the usual wire services.

This conference call is simultaneously being Web-cast from the Hubbell website. Audio replays of the conference calls are available in three ways. First, you can have a telephone replay of the call starting two hours after its conclusion, and that replay will be available for the next week. To access the telephone replay, dial 719-457-0820 and enter the pass code, which is 9128475. You may also hear the replay on the Hubbell Web site, again, from the Investor Relations tab and the audio archives in the drop-down. Or you can have this audio as a podcast by downloading it from the Hubbell website.

Let me refer everyone listening to the call today and those who hear a replay to the paragraph in our press release regarding forward-looking statements. That release and this call may contain some expectations based on some assumptions in the future and Hubbell's performance in the future, particularly regarding our earnings. Clearly, these comments are forward-looking. We also may make some comments here today during the call or answer questions which may include forward-looking statements. 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 may discuss or project here today. So please note that paragraph in the press release, and I would like to consider it incorporated into the call here this morning by reference.

With that, I'll turn it over to Tim Powers for some opening comments.

Thanks, Dave. Good morning, everyone, and thanks for joining us. We will follow the regular format, where I will give you my perspective on our 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.

Before I do, though, I would like to take this opportunity to thank Tom Conlin for his many years of service to Hubbell. Most of you know Tom, who just last month informed me of his desire to retire earlier than anticipated. Tom served the investor relations function with distinction for more than 20 years, and he will be missed. I thank him for his many contributions and wish him well in his retirement.

Dave Nord will handle the day-to-day investor relations duties while we complete the process of evaluating potential successors for Tom, both internal and external. Thanks again, Tom.

Turning to the first-quarter results, I am pleased with our performance to start the year, particularly the continuing improvement in our operating profit margin, up nearly 2 points over the first quarter of last year, and nearly a point better than Q4 2007. With sales of $627.9 million, this resulted in net income of $48.4 million, up 16%. Despite relatively flat sales due to weaknesses in certain of our markets, particularly residential, our strong profit performance reflects continued execution in the three areas of focus -- price, cost and productivity.

Pricing continued to be a benefit, although as expected, a lower level than last year. To date, it has been sufficient to effectively offset the commodity cost price equation. However, cost head winds will provide more challenge as the year progresses, and I will talk more about that later.

Productivity gains from the investments in our initiatives over the last few years are beginning to gain traction and will continue to grow in importance to the margin expansion agenda we pursued. The economic environment, while generally consistent with our expectations going into the year, is, nonetheless, a challenge. Continuing weakness in the housing market and the evolving credit crisis have put a damper on the U.S. economy, particularly the construction industry.

International and U.S. industrial maintenance and repair markets are experiencing early signs of slowing, and the CMI lighting fixture business has been weaker than expected with the exception of fluorescent products. For the power business, growth in transmission products and international sales have been offset by slower demand for distribution voltage product sales and are being hampered by the residential market slump.

Before I turn it over to Dave, let me comment on one other matter that impacts our reported results. At the beginning of this year, I realigned our internal operating organization, combining the Electrical Products and Industrial Technology businesses into one operating segment under the direction of Gary Amato. The combined operations are now referred to as the Electrical Products business, and is reported as part of our Electrical reporting segment. This change in internal reporting is required by the accounting rules for segments as a result of the change in the internal organization.

So with that, I will turn it over to Dave for more details on the first quarter, and then come back to address the remainder of the year from a market and a Hubbell perspective. Dave?

Thanks, Tim. Let me go through some highlights of the quarter, some of the numbers, a little bit of color behind it.

First, on the P&L, you see we have sales of $627.9 million, up slightly from last year's $625.7 million. Weaker sales principally in our residential markets continued, but those were more than offset by acquisitions and selling price increase. Acquisitions late last year and the one that closed early this year, as well as the selling price increases added approximately 3% and 2%, respectively, to our top-line growth.

Gross profit margin, 29.8%, up nicely from the 27.6% last year. Selling and administrative costs as a percent of sales, 17.8% compared to 17.4% last year. And some of that increase is attributable to the lower volume, as well as the impact of acquisitions and increased advertising.

Net interest expense of $4.6 million, a little higher than last year's $4.1 million due to higher average borrowings used for both acquisitions and share repurchases.

Our effective tax rate, as we talked about in our guidance for the year, with some head wind in the quarter, consistent with our full year of 30.5%, up from last year's first quarter of 29.7%. So all that results in net income of $48.4 million, which is up $6.7 million or 16% from last year.

Our diluted share count is down 3.4 million shares as a result of our share repurchase program from last year and this year, to 57 million shares. And that results in our earnings per diluted share of $0.85, up 23% from the $0.69 reported in last year's first quarter.

On the balance sheet, our cash includes payables of $8.1 million, offset by an increase in receivables of $29.3 million, although DSOs, a lot of those sales came in the latter part of the quarter. In fact, our DSOs are four days better than last year. Inventory, up slightly, a little worse than last year, but there's some impact from acquisitions in there. So trade working capital is a net use of cash, a little higher than last year.

Trade working capital as a percent of sales in the first quarter improved to 21.4% compared to 21.6% last year. And net debt of $308.2 million compared to $119.4 million at the end of 2007, so our debt to cap in the first quarter, 30% compared to 18% at year end.

Cash flow from operations of $32.4 million, down slightly from last year's first quarter, as some higher working capital requirements in the first quarter of this year compared to last year, partially offset by lower pension contribution and, of course, the higher earnings.

Our CapEx in the quarter is down by $8.8 million to $11.9 million, primarily due to completion of the Lighting headquarters in the first quarter of last year. And share repurchase in the quarter was $92.2 million for the repurchase of 1.9 million shares.

Let me turn now to the segments. First on the Electrical segment, sales of $470.3 million, up $8.5 million or 2% compared to last year's first quarter. Operating income of $50 million, up $11.3 million or 29% higher than last year, resulting in a margin of 10.6%, up 220 basis points in the first quarter of 2007 due to the price realization, improved productivity and the favorable impact of the acquisition of Kurt Versen earlier this year.

Some of the businesses within the Electrical segment, the wiring products, volume was essentially flat with profitability negatively impacted by the lower unit volume and higher commodity cost, but this was partially offset by productivity.

On the Lighting side, overall sales are down slightly due to the lower residential volume, which was off just over 20%. And that's largely offset by the acquisition of Kurt Versen and some selling price increases. The operating profit margins increased due to these selling price increases, the favorable contribution from Kurt Versen and productivity improvements.

These increases, of course, were partially offset by the lower margins. As you know, the residential business has historically and continues to have better than average margins within the Lighting business.

And on the Electrical Products side, good sales growth, up 7% due to selling price increases, a minimal amount of foreign currency translation, and continued good demand on the harsh and hazardous and high-voltage products. And profitability continued to improve, largely due to higher sales, productivity gains and some profitable product mix.

On the Power segment side, sales were $157.6 million, which is down $6.3 million or 4% from last year's first quarter.

Sales are down year-over-year for a couple of reasons. One, year-over-year storm-related orders. As you recall, we had some very strong volume in the first quarter of last year from storms, some winter storms. We also had some working off some of the backlog that had built up in the latter part of 2006. And then, there was also -- we also experienced some very soft market conditions early in the quarter, although the order rates improved very nicely as the quarter progressed. And, in fact, we -- as demonstrated by the fact that we have backlog up nearly $7 million from the end of the year in the Power segment. Despite the lower volume, O.P. was $25.3 million, up $100,000 from last year.

Within the segment, we have the PCORE acquisition impact completed in the fourth quarter of last year. That contributed about 5% to sales and modestly accretive to earnings. And also, contributing to profitability were selling price increases, productivity, and some favorability in the product mix in the segment.

So with that, I will turn it back to Tim for some comments as we go forward.

Thanks, Dave. Now let's turn to the outlook for the balance of 2008.

Looking at the markets overall, our plan for the year was based on a slowing U.S. economy, with the rate of the slowdown still uncertain. Our largest served market, nonresidential construction, is forecasted to remain modestly positive for the remainder of 2008. We think put in place to be up zero to 2%. Industrial production and MRO spending growth has slowed but are expected to remain positive for the rest of the year. Utility spending will continue to expand, but much of it continuing to be toward transmission versus distribution. I think that distribution will be up 2 to 3 points. And as expected, the residential markets will continue to decline at a rate comparable to 2007 and more rapidly than many had projected with the rate of decline flattening as we exit the year.

So what does this mean for Hubbell? At this point, we continue to see the full-year 2008 increasing at 4% to 6% above 2007. Although, with a slow start to the year and the impact of commodity costs driven price increases, potentially having some dampening effect on demand, sales may be closer to the low end of the range. And with our continuing focus on price realization, productivity and cost-containment, we continue to expect our full-year margins will improve 100 basis points over 2007 levels. And this results in our 2008 earnings per share expectation in the range of $3.70 to $3.90.

So to conclude, our performance in the first quarter gives us confidence in our ability to continue to improve our margins despite weak markets, and we are carefully watching for any indications of further market weakness so as to be able to respond in an orderly fashion. Our focus and execution on our priorities continues to be key. We believe that our efforts will make 2008 another year of growth in sales, and, most importantly, earnings for Hubbell.

With that, I will turn it back to Dave to open the call to questions.

Okay. Tasha, I'll turn it over to you to open it up to the question-and-answer session.

(OPERATOR INSTRUCTIONS). Robert Cornell, Lehman Brothers.

I was interested in the comment you guys made about the improvement in orders as you went through the quarter in power. Could you just maybe expand on that point, please?

We started the year with kind of a weak opening to the year, and the order rate per day increased throughout the quarter, and our backlogs grew $7 million by the end of the quarter and --

Would these be blanket contracts the utilities are letting, or what type of order are you seeing here?

Well, Bob, they are always a combination of discrete orders and releases against blankets. But I believe utilities themselves just got off to a slow start. They may have been watching inventories, but I don't think it's really going to affect our Power business for the year. We are pretty comfortable that it's going to be up mid single digits and we are looking for some small margin improvement on it. And orders have continued into the second quarter at a strong rate. So we're pretty comfortable where we are.

I guess the other comment you made was in Lighting, you started to just talk about some of the evolving trends in non-res and some weakness in C&I. Maybe you could expand on that point too.

Sure. Like everyone is reporting, fluorescent continues to be the technology of the day, and the retrofits and energy upgrades are becoming an increasingly important part of the business. And this type of lighting is becoming a substitute for high-intensity discharge HID lighting. So we are seeing a growth in fluorescent, and some softness in some of the other types of lighting.

Just a general comment and I will give up the phone here. It seems like the Company is pushing price and margins at the expense of volume. Is that a right way to look at it? Maybe you could expand on that point.

I -- not consciously. Certainly we have a focus on trying to improve our profit margins. But I don't think there's any conscious effort to do anything but get to the -- as high a top line as we possibly can generate.

Okay, thanks very much.

(OPERATOR INSTRUCTIONS). Christopher Glynn, Oppenheimer.

Just a little on the top-line guidance, 4% to 6%. I think we've had pretty good detail on the Power Systems segment. But that would imply some nice acceleration in the electrical, too, relative to the first quarter. Just wondering where that might come from.

Actually, we think each one of the business groupings in the Electrical segment will experience growth with the exception of residential lighting of course. And residential lighting is expected to decline more than 20%, in line with housing starts. So actually housing starts are expected to decline more like 30, but because not all of our residential businesses directly tied to new housing starts, some of it is in remodel and renovation, those markets haven't declined at the same rate.

But we believe that our wiring devices business, our industrial business, our harsh and hazardous business and our C&I lighting business will all show growth in the mid to upper single digits.

What gets better from the first quarter though?

Could you just elaborate on the pathway to that? Because collectively, the mid single for those groupings, wasn't apparent in the first-quarter number.

We are comfortable that we're going to continue to see in the harsh and hazardous area, double-digit growth in sales. It's not as -- not a huge part of our business, but it's 10% of the total sales of the Company. We think that our Industrial business will be high single-digit growth, as it's shown, when you include a couple of percent of unit growth with price.

We think that our wiring device business will continue to show growth in our new products, that it will be at a rate of growth above the market in general. And that our C&I lighting business, like others, will continue to grow as our fluorescent business stays at high levels because of the retrofits and upgrades.

Okay. And then just in breaking out the top line for the different segments, could we get the price for Power Systems if possible; and then in Electrical, just breaking out the price acquisitions and currency?

Chris, the price on -- the price overall was about a 1.5 points. Within Power, it was a point, so the electrical side had a little more than 1.5 points on price. Within electrical, you also had about 2 points from the acquisition.

Okay.

And the rest is the volume.

Okay, got you. Okay, thanks very much.

Jeff [Hecht], Stifel Nicolaus.

A couple of questions. On the Power business, where the transmission remains strong or distribution weak, what is this doing to your inventories and what you think with the utilities? Is there a backup and maybe a buildup of inventories at the low voltage distribution that's impacting your business as you shift into other products?

I think we had some of that issue in the tail end of last year. The last couple quarters, as business kind of slowed a little bit and distributors had bought more than they need and maybe some utilities, I think that's dissipated by now. Most of that has dissipated by now. So I'm not really expecting the channel to have an overly large stock, nor do we. The transmission business, by its nature, tends to be more make-to-order products, so as we get the orders for it, we build them and ship them. So it isn't a big portion -- there's definitely some transmission products in stock, but more of them are unique and made to order.

Right. You have stopped reporting the Industrial Technology; but can you provide us a little bit more on the growth within those former segments, or are you not going to make more than general commentary anymore?

We will provide the elements within that the way we have in the past in general terms. But you could -- just for purposes of calculating this, you take the Industrial Technology group and put it into the Electrical segment.

Right, but you didn't report it as -- can you give us an idea of sales growth and profitability there, anything on that order?

Well, to the extent -- one of the reasons for combining it is our GAI-Tronics business, which is industrial communications in the harsh and hazardous environment has been grouped with our other harsh and hazardous businesses for purposes of linking the channel to market and our sales representation. And so that business really has been incurring the same kind of growth as our harsh and hazardous business, more than 10%.

So it's a very strong business, as is that whole group of businesses. The rest of them in there are showing the kinds of growth that industrial -- our rest of our industrial businesses have, which is kind of mid single digits.

And the Industrial Tech that you're not reporting, is still showing high teens type margins?

Yes.

Okay, thank you.

[Levon Von Rennan], Hawkeye Capital.

I want to know in terms of just your overall exposure to the non-res business, what percentage of your sales kind of go into that market?

40%.

And then the next largest bucket would be?

Industrial or --

Power. Power at 25%.

And in the Electrical segment, any sense for -- I know you listed out or talked about some of the things like wire, electrical, et cetera. Any sense for what percentage of the sales come from each of those various groups that you kind of talked about? I know you talked about harsh and hazardous being 10% of total sales.

I think in -- to talk about it in general terms, the industrial market remains positive and I would say kind of mid single digits. The utility business, we think, a couple to 3% on the distribution side. Close to double digits or at double digits on the transmission side.

So if you add that together for us, mid single-digit improvement in sales for the utility business. On the nonresidential construction business, you have it divided where a portion of the commercial activity is actually lower than last year by between 5 and 10% in the outlook so far; and some other categories of institutional and others improving. So definitely the nonresidential market is slowing down. And if I could characterize the primary reason, it would be more than anything else, money and the availability of money and the financial crisis that we know is getting worked out, but certainly will take a couple more quarters before borrowing for building projects becomes -- returns to normal.

Okay. Thank you.

(OPERATOR INSTRUCTIONS). Steven Gambuzza, Longbow Research -- or Capital.

Just a question on your outlook for operating margin improvement over the balance of the year. You demonstrated some decent success in improving the operating margin with kind of flat to down organic sales growth in the first quarter. And I guess I'm just wondering, when you look out for the balance of the year, how contingent is your operating margin forecast on your sales growth? So if the market softened a little bit more than you anticipated and sales come in lower, are you able to kind of achieve your targets through internal productivity initiatives, or does lack of fixed cost absorption start to become an issue towards the lower end of your sales range?

Well, I would say the biggest variable in the future of our margins has more to do with the cost price equation and the coming increases in the cost of steel and the effect of the $100-and-something-teen per barrel of oil and our ability on the timeliness to recoup that from the market.

So like all of us in the electrical business, we're just staring at double-digit increases in steel, and we have price increases out there in the market. So our ability -- I have no doubt in our ability to recoup it. It's a question of the timing to get back those cost increases with price increases, and that probably is a bigger variable than I see in the risk of revenue between now and the end of the year.

So it doesn't sound like unit volume is as big an issue for you?

Unit volume is flat to down and price obviously makes it higher. If you took all of Hubbell together in the U.S. market -- and really that reflects I think the general construction trends for this year -- that's exactly what we thought the year would be. So I don't think we see much difference at least at this point.

So the balance of your forecast assumes kind of the continuation of kind of flat to slightly down volume?

Yes.

Thanks very much.

(OPERATOR INSTRUCTIONS). It appears that we have no further questions at this time.

Well, we thank you all for listening and certainly we are open for questions following this conference call for further clarity. So we thank you for joining us and say good bye.

Thank you. This concludes today's teleconference. You may now disconnect your lines and have a great day.