Hubbell Inc (HUBB) 2008 Q2 法說會逐字稿

Good day everyone. Welcome to the second 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 CFO of Hubbell Inc. Please go ahead sir.

Thank you, good morning to all of you. Joining me on the call today is Tim Powers, our Chairman, President and Chief Executive Officer. We released our second 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 website at Hubbell.com and access the complete release by clicking on the investor information tab at the top. It's also available from the usual wire services.

This conference call is simultaneously being webcast from the Hubbell website and audio replays of the call 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 that replay, dial 719-457-0820 and enter the pass code which is 1614565.

You also may hear the replay at the Hubbell website again from the investor relations tab and the audio archives in the drop-down. Or you could have the audio as a Podcast by downloading it from the Hubbell website.

Let me refer everyone listening to the call today as well as 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 question-and-answer period 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. I would like to consider it incorporated into the call here this morning by reference. With that, I will 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 second-quarter results and the markets we serve, turn it over to Dave who will provide more of the details, and then I will discuss some views on the remainder of the year.

I am pleased with our performance for the second quarter particularly the improvement in operating profit margin. This marks the sixth consecutive quarter with year-over-year operating profit margin improvement.

Operating margins were up 160 basis points from the second quarter of last year and almost 200 basis points better than the first quarter of 2008. Sales were $689.6 million which resulted in a net income of $61.5 million. Earnings per diluted share were $1.09 or 22% above the $0.89 reported in the second quarter of last year.

After flat sales growth in the first quarter, sales rebounded with an 8% growth in the second quarter. Our strong second quarter profit performance benefited from ongoing execution in price realization, cost management and productivity; this in spite of continuing rise in commodity costs.

Pricing continued to be a benefit although at a lower level than last year. To date, it has been sufficient to effectively offset the commodity cost price equation. However, cost headwinds will provide a bigger challenge as the year progresses. Productivity gains from investments in our initiatives over the last two years are beginning to gain traction and will continue to grow in importance to the margin expansion agenda that we pursue.

In June 2008, the Board of Directors approved increasing the common stock dividend from a rate of $0.33 a quarter to $0.35 a quarter reflecting the confidence in the earnings and cash flow capabilities of the Company. The economic environment while generally consistent with our expectations going to the year and is nonetheless a challenge. The ongoing weakness in the housing market and the crisis in the credit markets have put a braking effect on the US economy.

Our international and energy markets remain strong while the nonresidential construction and industrial maintenance and repair are slowing. For the Power segment, transmission products continued to grow with the demand for distribution voltage products being negatively impacted by the condition in the residential markets.

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

Thanks Tim. Let's go through the financials first with the P&L. As Tim mentioned we had sales of $689.6 million up 8% from the second quarter of 2007. In that 8% about three points of acquisition, two points of price and just a little bit of currency. Gross profit margin of 30.4% up more than a point from last year's 29.2% as a result of selling price increases and productivity gains.

Our selling in the administrative costs were 16% of net sales, down about 40 basis points from last year's second quarter. So all that contributed to our net operating profit margin of 13.8%, 160 basis points higher than last year's 12.2% due to the higher sales, our productivity improvements and our selling price increases.

Net interest expense of $5.5 million increased from last year's $3.9 million due to the investments we made earlier in the year and acquisitions and share repurchase and the borrowings associated with that. In addition, in May this year we entered into a $300 million bond offering to support our strategic growth initiatives.

Our effective tax rate in the quarter is 30.5% consistent with our full-year guidance. Of course that is higher than last year's second quarter which was 28.9%. So all that results in net income of $61.5 million up $8.2 million or 16% from last year. Our diluted shares outstanding in the quarter were 56.4 million versus the 60.2 million in the second quarter of last year resulting in earnings per diluted share of $1.09, up 22% from the $0.89 reported last year.

Let me turn now to the balance sheet. We continue to maintain a strong balance sheet with ongoing focus on working capital which provided some very good cash generation. Receivables are a particular area of focus given the potential risks as the economy slows and credit availability tightens.

Measured in terms of day sales outstanding, we decreased our receivables outstanding to 50 days. That's three days better than we were at the end of the first quarter. More importantly our past dues are at historically low levels; so a keen focus on receivables.

Inventory as well improved by three days from year-end to 62 days outstanding. We see more opportunity in this area in the second half of the year. This results in trade working capital as a percent of sales in the second quarter of 19.3% compared to 20.2% at year-end.

With our investments in the first quarter for acquisitions and share repurchase and the impact of our $300 million debt issuance in the quarter, our debt to capital at the end of June was just over 31% compared to about 18% at year-end. At the same time, our solid cash flow resulting from our working capital efforts allowed us to finish the quarter with $218 million in cash on the books resulting in an increase in net debt of only $125 million from year-end.

Cash flow from operations is $93 million in the quarter due to the higher earnings as well as the good working capital performance. Our capital expenditures were $12.2 million in the quarter comparable to last year's level.

So free cash flow in the quarter was $81 million or a very solid 131% of net income. One thing that we use that cash flow for is continued share repurchase although at a fairly nominal level, $3.5 million in the quarter, bringing our full year share repurchase to $95.6 million.

Let me turn now to the segment results and a little more color on the segments. First in the Electrical segment, we had sales of $506.8 million up almost -- just short of $23 million or 5% compared to the second quarter last year. And residential impact in that was about three points. So excluding residential it would have been up 8%.

Operating income was $63.9 million up $10.2 million or 19% from the second quarter of last year resulting in operating profit margin of 12.6% up from the 11.1% or 150 basis points from the second quarter of last year. And that includes more than 0.5 points of drag from the residential market decline.

Sales within the segment, sales of our Electrical products were up mid-teens; wiring products up low-single digits; and Lighting just slightly down but that's largely due to the -- in fact completely due to the residential decline. On the wiring side, that modest body of growth was driven by strong growth for energy management controls and sensors and some good performance in our international businesses, some of that coming from foreign currency. And profit margin improved slightly due to the productivity improvements.

On the Lighting side, looking at the C&I business at 7% growth, they contributed to that with the Kurt Versen acquisition that we did in the first quarter this year as well as selling price increases while the residential business was down 23% due to the weakness in the housing market. Overall profitability improved as the lower sales in residential were more than offset by improved margins due to the selling price increases, acquisition impact and the productivity gains.

And the third part of that segment, the Electrical products, had the mid-teen growth overall lead by our high voltage and harsh and hazardous products. Profitability improved as well with all the businesses contributing; margin expansion due to both higher sales and a favorable mix of higher margin harsh and hazardous products and the strong performance from our high voltage business.

Turning now to the Power segment, they reported sales of $182.8 million up $26 million or 17% from last year's second quarter. Half of that increase came from a combination of the PCORE acquisition that we closed in the fourth quarter of last year and selling price increases. Operating profit of $31.1 million was up 28% or $6.8 million from last year.

In addition to the acquisition, sales growth was driven by strengthening incoming orders and the selling price increase. And importantly the strengthening of income of orders was coming off of the slow start we had to the year but is consistent with the way we saw order rates trending as we exited the first quarter. Margin improvement in the segment due to the higher volumes, continued productivity improvements, the selling price increases and acquisition.

So all in, a really good quarter; continued improvement in both topline and bottom-line; certainly a lot of moving parts but a lot of good work by the entire organization. With that, I'll turn it back to Tim.

Thanks Dave. Now let's turn to the forecast for the balance of 2008. Looking at the markets overall, I anticipate that the current trends will continue in the US economy gradually slowing with strengths in the energy and utility sectors. Our plan for the year has been based on the slow growth in the US economy.

Nonresidential construction, our largest market, is forecasted to grow at a lower rate in the second half of 2008. Utility spending will continue to expand but much of that continuing to be toward the transmission versus distribution. And as we expected, the residential markets will continue to decline for the remainder of the year.

So what does that mean for Hubbell? The first half results were in line with our expectations despite volatile markets. While we do not expect to see any improvements in the market overall, we see the full year tracking as originally planned.

At this point, we see full year 2008 sales increasing 4 to 6% above 2007 primarily from selling price increases and the impact of acquisitions. And with our continuing focus on price realization, productivity and cost management we expect the full year operating profit margins to improve at least 100 basis points from the 2007 levels.

And this results in our 2008 earnings per share expectation in the range of $3.70 to $3.90. Included in this range is approximately $0.07 of incremental interest expense associated with the $300 million 10-year bond offering that was entered into in May 2008.

So to conclude, our first half performance gives us confidence in our ability to achieve our full-year forecast despite volatile markets. Our focus and execution on our priorities continues to be key and we believe that our efforts to make 2008 another year of growth in sales and most importantly earnings for Hubbell will continue. With that, I'll turn it back to Dave to open the call for questions.

At this point I'll turn it over to the operator to give instructions on the question-and-answer.

(OPERATOR INSTRUCTIONS) Christopher Glynn, Oppenheimer.

So just a really, really strong quarter and wondering about the guidance. Thought maybe it would have been bumped up a little on a quarter like this. I mean it -- really at the midpoint of the range is a little lower than the second half of '07. Given the strength you're seeing on your operating momentum and it looks like the share repurchase would offset the higher interest expense. So I'm kind of neutralizing that. How do you go from over 20% year-over-year growth in the first half in the EPS to really what's implied about flat in the guidance, I think?

There's a few things in there. First is the most simple is that the second half earnings when you're looking year-over-year remember last year had a very low tax rate because we had some audit settlements and we had a few other things. So that has a significant impact on the earnings per share compare.

But beyond that, the actual underlying operations are showing improvement year-over-year. But as we've said throughout -- since the beginning of the year in our guidance, the second half was going to be more challenging from a price cost. The biggest component of our price cost was really going to be to manage through the second half. The early part of the year was not as dramatic.

And just to put that in perspective, we're looking at commodity cost increases that we've got to manage through for the year on a year-over-year basis of about $60 million, nearly three-quarters of that coming in the second half. We've got pricing in place and you're going to see the pricing impact on volume continuing to increase as the year progresses. But that is really the biggest point of uncertainty that we have got to navigate our way through. So we are just cautious on that going forward.

Great, and the pricing was about 3% in each segment?

It was 2% -- 2% this year in the second quarter, (multiple speakers) two points.

On the residential, however, wherever the bottom is we're closer to it than we were at one point. Where would you kind of put your thoughts on kind of [timing a] bottom there?

I am at -- that the new housing starts will bottom by the end of this year and that most of our business is in Lighting which then would lag the housing start pickup by about six months. So for us the trough is 2009 for our Lighting business. Unless something dramatically changes between now and the end of the year, I would say that that is our best view with a caveat about mortgages and whether you can get one and all that stuff.

It looks like as you can see, you follow any of the charts, the rate of decline is slowing dramatically. We think we are approaching that bottom. And then there's a six-month delay and we should be starting up which what ought to be a long and sustained recovery, not a V-shaped type recovery but more of a gradual recovery just based on certainly the inventory of unsold homes.

Jeff Beach, Stifel Nicolaus.

Good morning and great quarter. A couple of questions. Can you just comment more specifically about the growth in harsh and hazardous, your former industrial technology businesses? Specifically within Power it sounds like you had modest growth in distribution as well as comment on the -- just generally on the profitability, the profit margins of those businesses.

Let's go back and being but harsh and hazardous. There is very strong demand both domestically and internationally for the full range of product lines that serve the energy market. It doesn't really matter whether it's new ethanol plants, maintenance and repair in the oil and gas business or expansion of that worldwide. Just the price of energy today makes it worthwhile to spend a great deal of money on capital. So the demand is very large and it's certainly far above 10% growth year-over-year.

So we're looking pretty strong at that. And as well we have very strong demand for our test equipment coming from Hipotronics and (inaudible) just for the benefit of those on the line, this is the kind of equipment that tests cables and transformers and it is the kind of equipment where the final test of a transformer is completed. And we have products that allow for the automation of that process in a step function improvement from prior types of equipment.

So we are seeing exceedingly strong demand in that category and we're booking business well into 2009 at this point. So those two areas in particular are very strong along with our other industrial technology businesses that are serving both the OEM and the steel industry. So, those are all doing extremely well, profit margins are rising, growth is steady and I would -- steadily at double-digit and I would expect that to continue.

Going to the utility business for a moment, we have seen a growth in distribution products. Part of it is from some of our newly launched products that are gaining some share. Part of it is from I would say when I look at customer specific initiatives. So some of our core utilities are doing things in their transmission and distribution system but in this case distribution system which is causing us to see some increase in that business.

So, we're quite pleased with the strength of the distribution side so far this year; a little bit stronger than we anticipated but it looks like it's continuing on in July. So I hope that answered your question.

(OPERATOR INSTRUCTIONS) Steve Gambuzza, Longbow Capital.

Can you comment on what the volume growth in the Electrical segment was in the quarter?

Volume was about three points.

Three points for just the Electrical segment?

Just the Electrical segment, yes.

It seems like the incremental margin in the Electrical segment was very strong this quarter which is somewhat surprising given very modest volume growth. Was there just a substantial amount of price increases?

No, it's really -- it's the combination of -- we have the decline in the residential business which -- our margins have not -- they've declined a little bit but not dramatically combined with the rapid growth in our industrial and harsh and hazardous businesses (multiple speakers)

(multiple speakers) mix benefit on the margin front?

That is the way to say it, yes.

Great, and then on the growth in the Power systems business this quarter which was 17% and half of that was a combination of acquisition and price and half was volume. (multiple speakers)

Yes.

I guess your comments for the back half of the year of modest growth, is modest a deceleration from that 8% volume growth that you experienced this quarter or is modest -- would you characterize the quarter's growth as modest?

You know I think we're looking mid-single digit growth.

Okay great. Thank you very much.

[Carry Kelly, Ironworks Capital].

Hi, thanks for taking the question. You know just actually to follow up on the last one about the Power growth, the strong organic growth you saw in Q2, you mentioned that it was something that was in line with order rates exiting Q1. Can you comment on order rates exiting Q2? And then I have follow up.

We are having a July that is consistent with our outlook and consistent with third quarter which is your strongest period in the construction cycle during the year.

Great, thanks. Follow-up is actually just sort of your qualitative perspective on nonresidential construction in '09, if you have any thoughts on that it would be appreciated.

Sure, let me go back to '08. I think the headlines are worse than the reality that so far there hasn't been a huge decline in nonresidential. There are signs that it will slow. We're expecting it to slow some but we're not expecting it to be a dramatic slowdown next year.

So, I think that there along with all the turmoil in the markets, there is a sense of negativism that is beyond what I think our view is likely to happen. So we don't see the dire circumstances that apparently some in the market to. Because we think for instance if you look forward in the mix of businesses -- the industrial business, the utility business, the energy-related component business -- are all going to be doing well in 2009. The rest of the business will slow. We have dealt with that.

We certainly are in a position to continue to acquire. That's part of why we turned out more of our debt. The pipeline for acquisitions is very good right now and we're hoping to do some more of those things in the not-too-distant future. So we're feeling pretty good right now but always concerned about the dramatic crosscurrents at the top with energy prices where they are and the mortgage price where it's sitting today.

Great, thanks. I appreciate your thoughts there. And great quarter.

Stephen Tabb, Tocqueville Asset Management LP.

I was interested in this new bond issue of $300 million. I'd like you to give us soe color what interest rate you have, is it unsecured, does it have any provisions for restricting your acquisitions or the amount of goodwill you incur et cetera. I assume it's a public issue the way you describe it.

It was a public bond offering. The coupon rate on it was 5.95%. It has no unusual covenants to it, no restrictions on our ability to acquire or anything like that.

When you make acquisitions what sort of payback do you look for and the accretion -- how soon do you expect accretion et cetera? In other words what are some of your parameters on acquisitions financially?

One of our first parameters is that it's not dilutive. The second is that it's accretive as soon as possible and generally that occurs within the first few quarters if not the first quarter of acquisition. That is pretty much a standard now.

Of course going forward that might change is the accounting rules around acquisitions change and you have to expense some things that you today are able to capitalize into the future. But generally it has some level of accretion but of course increasing over the course of the life of the acquisition.

And we're making acquisitions that are consistent with our targeted 15% operating margin. We are mindful of that as we acquire these businesses to make sure that they are not taking us out of that 100 basis point a year improvement that we are aiming for.

And as far as a payback period on your investment?

It varies. But certainly cost of capital thresholds are an important part of the decision-making and I've tried to describe this before. You almost of two kinds of acquisitions -- one that would bring you a very well-recognized brands in the marketplace under which you could put as an umbrella, other products you would be willing to pay more for; and what I would call the nice to have acquisitions that fit well. You pay a little bit less but we've paid what six to nine times EBITDA and our payback periods have been relatively short.

Another area I think in the past you had some movement of your manufacturing facilities and so forth. Can you give -- do you plan on any consolidation or movement of your manufacturing facilities? And about -- how would you describe percentagewise the distribution throughout the world? (inaudible) what percentages in the US, what percentages in Mexico, percentage if any in Asia and so forth?

We have had a strategy to move to a lower-cost environment. We've increased our sourcing in Asia steadily every year since 2000 and that process will continue. We have moved constantly toward Mexico and we've just completed the expansion of our Juarez facility. And yesterday we announced the closing of our Spokane lighting facility by the end of the year.

This is an ongoing events for us. It's not out of the usual or the ordinary. We're doing some steps every year to try to make product in lower-cost environments. It's just something that we do as a normal course of business and probably the costs involved in this are somewhere between 7 to $10 million a year on a typical year. And it is included in our guidance. We don't [haul] it out separately.

How would you -- what percentage would you say is in Mexico and Asia and the US? You have rough percentages or --

Of our manufacturing?

Yes, in terms of producing revenue.

Roughly half.

Thank you very much.

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

Okay, well appreciate the joining us this morning and I will be available for the rest of the day as well as next week if there's any follow-up questions that I might be able to help with. So thank you again for joining us today.

Once again ladies and gentlemen, we thank you for your participation. This does conclude today's conference call. You may disconnect at any time.