Hubbell Inc (HUBB) 2008 Q3 法說會逐字稿

Good day, everyone, and welcome to the third 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. Bill Sperry, Vice President of Corporate Strategy and Development of Hubbell Inc. Please go ahead, sir.

Thank you. Good morning, everyone. Thanks for joining us. This morning we released our third quarter earnings, 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 and then Financial Releases from the dropdown menu. It's also available from the usual wire services.

This conference call is simultaneously being webcast from the Hubbell website. Audio replays of the conference 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 a week. To access the telephone replay, please dial 719-457-0820, and the pass code is 4568303. You may also hear the replay on the Hubbell website, again from the Investor Relations tab and then Audio Archives from the dropdown menu. Or you can have the 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 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 or future results to differ from what we may discuss or project here today.

So please note the paragraph in the press release, and I'd like to consider it incorporated into this call here this morning by reference.

With that I'd like to turn it over to our Chairman, President, and Chief Executive Officer Tim Powers.

Thank you, Bill. Welcome, everyone, and thank you for joining us this morning. I am very pleased to have an opportunity to share with you our strong results for both the third quarter as well as the nine-month period for 2008.

Before we get started, I want to make sure I introduce two new people who will be interfacing with you in an investor relations capacity, Bill Sperry and Jim Farrell. Bill joined us in August with the responsibility for our strategy, corporate development, and investor relations function. His expertise in strategy, acquisitions, and corporate finance represents a skill set that we can put to good use here. And Jim has been a valuable member of our finance team for five years, including supporting [Tom Conlan] behind the scenes, and thus is very familiar with the process and is now Director of Investor Relations.

I know many of you have talked to Bill and Jim already, but we look forward to all of you getting to know them better in the near future.

Now, let's turn to the structure of the call today. I'm going to provide you with a summary of results we announced this morning, as well as an update on the markets we serve. Then Dave will walk you through a more detailed discussion of the financial performance. I will conclude with my perspective on the outlook for the rest of the year and 2009 and some closing remarks. Then we will turn it over to all of you for some Q&A.

Moving to the results then, I am very pleased to report results that despite the challenging conditions we face, are even better than what we promised you at the beginning of the year. We generated sales of $735 million, a growth rate of 13% over last year's quarter, and an operating profit margin of 14.1%, a 50 basis point increase over last year. Our fully diluted earnings per share were $1.18, an increase of 17% over last year after adjusting for a tax benefit to make the periods comparable. We also generated $100 million of free cash flow, an increase of 42% over last year. These are the best results in our Company's history and are a testament to the talent and strength of our businesses and the dedication and focus of the team.

For the nine-month period year to date, our sales grew nearly 7% to over $2 billion, while our operating profit margin increased to 13.3% or 130 basis points above a comparable period in 2007. Our earnings per share increased 16% to $3.12 per fully diluted share. We generated over $200 million of free cash flow, an increase of 14% from the prior year.

I am particularly gratified with these results because they show Hubbell to be performing well along several dimensions. The accelerating sales growth demonstrates the ability of our brands to earn price increases from customers, as well as the introduction of new products and the execution of a successful acquisition program. Our ability to expand margins in the face of a dramatic ramp up of commodity prices is due to the relentless focus on low-cost sourcing and productivity improvements.

Let me comment quickly on the acquisition front. We invested in three acquisitions in our Power segment in the most recent quarter, and in our lighting business, acquired a high quality specification-driven business called Kurt Versen in January. These acquisitions added 4 percentage points to the sales growth we experienced in the quarter and 3 percentage points to the nine-month period.

In all, we invested about $200 million year to date on acquisitions, and they are immediately accretive. We have also maintained a conservative balance sheet with low leverage and sufficient liquidity. This structure is appropriate in our view given the environment. Obviously we are seeing a remarkable level of volatility in the financial sector in a time of economic uncertainty looking forward.

I will offer my outlooks later in the call but turn it over to Dave now and let him discuss the financials in more detail. Dave?

All right. Thanks, Tim. I'm going to put a little more detail to the financials and really just focusing on the third quarter.

Let's start with the P&L first. As Tim mentioned, sales of $734.8 million, which is up 13% from the third quarter of last year, with acquisitions and selling price accounting for about 4% and 3% of the growth respectively. Our gross profit margin in the quarter was 30% even, slightly better than last year's 29.8%. But it's important to note there that that's impacted by the quarter that we expected to still be fighting significant cost/price headwinds. And we ended up slightly negative in the quarter, and that had a nearly 50 basis point impact on gross profit, as well as what many have seen is the impact of the significant price increases where you're just getting parity having a negative impact on your gross profit margin too. And that can be almost as much as another point. So really good performance considering those two factors.

Selling and administrative costs were $116.9 million in the quarter, which is up $11.2 million, and nearly all of that is due to the new businesses acquired. In fact, as a percent of net sales, selling and administrative costs were down 30 basis points year over year to 15.9%. So all that led to a net operating profit margin of 14.1%, 50 basis points or half a point better than last year's third quarter.

Continuing down, net interest expense of $6.8 million, higher than last year by $3.3 million, due mainly to higher debt balances, particularly as a result of the long-term debt from the $300 million bond offering in the second quarter of this year. Our effective tax rate was 30.5% in the quarter, consistent with our guidance to date. However, keep in mind that it's higher than last year, which had a rate of 23.8% in the third quarter as we had favorable benefits from finalization of our federal tax return.

Relative to the tax rate, jumping ahead a bit, we do expect to see a decrease in the full-year rate to 30% from our 30.5% guidance, solely as a result of the recently enacted tax legislation that reinstates the R&D tax credit. It happened earlier this month, so therefore it's a fourth quarter item, so we've got to reflect that in the fourth quarter. That will give us a rate for the year of 30%, a rate for the fourth quarter currently anticipated at 27.6%.

Net income for the third quarter, $66.5 million, up $1.2 million or 2%. Our diluted shares outstanding for EPS purposes was $56.4 million in the third quarter, compared to $59.2 million in the same period last year. So all this results in earnings per share on a diluted basis of $1.18, up 7% on a reported basis from last year's $1.10, but of course adjusting for the tax benefits in last year's third quarter, up 17%.

Now let me turn to the balance sheet. We continue to maintain a very strong balance sheet, as Tim mentioned, with cash balance at the end of the third quarter of $194 million, more than $100 million better than we started the year; net debt of $268.6 million, up only $24 million in the quarter despite funding over $100 million in acquisitions in the quarter. Receivable quality continues to be strong with our days outstanding at 53, 6 days better than a year ago, and past due balances continuing to be at historic lows. Our inventories continue to improve with days outstanding at 59, 3 days better than last year and last quarter. Still more work to be done there.

And good performance in balancing the trade working capital cycle with a two-day improvement in our accounts payable days. So all that leads to a trade working capital as a percent of sales in the third quarter of 19.1% compared to 21% last year. Our debt to capital just under 31% and our net debt to capital just under 17%.

Cash flow from operations was $109.7 million in the quarter, $28 million better than last year's third quarter due to an improved working capital performance and also to timing of tax payments. Our free cash flow, which we define as cash flow from operations less capital expenditures in the quarter was $99.8 million, compared to the $70.2 million in last year's third quarter due to the higher operating cash flow and slightly lower capital expenditures at $9.9 million in the quarter versus the $11.6 million last year.

Let me now turn to the segment results. First, on the Electrical segment, sales of $522.9 million, up $26.5 million or 5% compared to the third quarter of last year -- half of that increase due to price and half due to acquisitions. Excluding the residential impact on volume, the all but not -- all but Residential growth was equally split between price, acquisitions, and volume. Operating income was $68.7 million, up $4.4 million or 7% from last year. Margins up slightly at 13.1% from the 13.0% in the third quarter, with the continuing drag from residential being worth about a half a point on margins.

Within the segment, all of the businesses excluding Residential showed improved top line growth with the Electrical Products and Wiring businesses up double digit. Wiring, in addition to their volume growth, had profit margin improvement as a result of the higher volume and also their productivity improvements.

On the Lighting side, growth in the C&I business, while residential was down 23% in the quarter. Overall profitability decreased as a result of the lower volume in residential, and the commodity cost increase is not yet recovered through pricing. The favorable impact of the Kurt Versen acquisition and productivity improvements provided some offset.

And on the Electrical Products side, continued strong volume growth in industrial at Harsh and Hazardous and even on the construction side, with continued improvement in profitability as a result of the higher volume, selling costs, selling price increases, and productivity.

And on the Power segment side, reported sales of $211.9 million up $55.6 million or 36% from last year's third quarter. A combination of a lot of strength, acquisitions, and the impact of storms late in the third quarter contributed about half of that increase, with the other half due to just organic volume and price increases. All that led to operating profit of $34.6 million, up $10 million or 41% from last year.

Despite -- and included in its performance there's still some of the negative cost/price in the quarter was experienced in the Power segment as they are the biggest consumer in the business of steel, which despite near term reductions in the cost of steel as we've talked throughout the year, we're out three and six months. So declines in prices will take time to work their way back in, not expected for the remainder of this year.

So all in all, a very good quarter with solid performance across all the businesses in just about every measure. With that, I'll turn it back to Tim.

Thanks, Dave. Now let's turn to the outlook for the balance of the year and beyond. With the dramatic upheavals in the financial industry and the seizing up of liquidity that are shaping this financial credit crisis, these are remarkable developments. We applaud the efforts of the government and in fact the apparent cooperation internationally of governments and central banks to address the lack of trust that has emerged. While we view these efforts as helpful, it is too early for us to determine their ultimate impact, and thus our outlook in these markets will continue to have an uneven impact on Hubbell.

In the near term, the residential construction market continues to be on the same weak track as even the September numbers for housing starts show continuing declines on a very low base. With secondary home prices not yet stabilized and the limited availability of financing, we expect these declines to persist into 2009. The nonresidential construction is Hubbell's largest end market, and the spending there continues to hold up admirably, although we are very cautious considering the tremendous upheaval in the credit markets. The industrial market is slowing as capacity utilization is declining.

On the other hand, we continue to see utilities spending to be above last year, even adjusted for storm impacts this year, and we see the same high levels in our Harsh and Hazardous segments serving the energy markets and in the Building Automation segment of our Wiring business. And another growth opportunity exists in our lighting retrofit market of our lighting platform where we anticipate owners of older buildings to elect to install newer, more energy efficient equipment.

Given everything we see, we expect to do better than we indicated at the beginning of the year. We expect to deliver a full year 2008 sales growth in the 6% to 7% range and earnings per share of $3.80 to $3.90 per fully diluted share. Underpinning this forecast is a reasonably strong fourth quarter but some charges related to workforce reductions that we believe are necessary to prepare for the softness in 2009.

To conclude, we are very pleased with the performance in this quarter, and we believe we will finish the year strong. We are confident in the discipline and the energy of the Hubbell management team. We'll continue to effectively utilize our high quality brands, implement growth initiatives, focus relentlessly on productivity, and be supported by a conservative balance sheet to manage the challenges of 2009 to deliver favorable results.

Thank you for your attention. Now let's turn it over to you for some questions.

Austin?

My apologies. [Operator Instructions]. We'll take our first -- well, let's see now. Just one moment. We'll take our first question from Bob Cornell with Barclays Capital. Go ahead, sir.

Yes, thanks. Yes, first of all, Tim and Bill, Tim, could you summarize maybe what the difference is? You said the results have beat the earlier expectations. I mean could you summarize a couple of reasons for that beat, whether it's revenue, cost/price, and which businesses really drove the beat?

Are you talking about for the quarter or the year?

Well, the quarter and the year really. So, I mean you said you did better than you expected. I'm saying what was better than expected more explicitly?

Let's go back and talk about the conditions at the beginning of the year. We said that we really didn't expect much favorable contribution from unit growth looking at 2008, and we thought that most of the year's increases were going to be caused by acquisitions and price. And certainly, we think by and large that has been true, that there have been very limited amounts of real unit growth, and certainly the utility business is one area and some sectors in lighting, and our industrial business of Harsh and Hazardous has contributed some.

But it hasn't been a year of what I would call strong unit growth, and that has really continued through the year. Certainly there's been a spike in the third quarter caused by storm business and a strong year right through the year in the product lines servicing the oil and gas sector; but the year is shaping up pretty much like we anticipated, but we really didn't anticipate such sharp growth in commodity costs when the year began.

And as a result, we've been talking all year about the battle between cost/price, and productivity, and in the third quarter in particular, an unprecedented rise in steel prices and energy prices, even though those have come off just lately. But that's been our battle all year long. So I think we've done a little bit better than we anticipated in that cost/price challenge this quarter. Last quarter is not exactly that in itself, but if you look at the whole year, it's pretty good. And acquisitions, we've had a few more lately than we anticipated at the beginning of the year. (Inaudible) And that summarizes it.

Yes, I guess the question that I always like to know is again you pointed out the non-res and the -- I guess it's holding up a little better than you thought, but maybe you could give us a little more of the visibility you might have out there. What's going on with sort of the inquiry rates, the order rates? And sort of how much visibility do you have out there? Are projects slipping? Just expand on that point, please, Tim.

Sure. I would say that our order rates in October are reasonable and in line with our guidance. Our quotation rates are still good. We hear anecdotal evidence and stories of projects being delayed because of financing. They have not yet showed up in any dramatic way in our order pattern. Certainly the psychology of what's going on here in the credit markets and when the stock market is having a negative effect on everyone, and I would expect our distributors to finish the year with a conservative position towards their inventories. Just because -- whether they see a downturn or not, they're just going to be cautious like everyone else in the business.

So we do not have good visibility far, you know, very far in the future right now just because of the magnitude of what's going on in the credit crisis and how it's kind of undetermined at this point how it's going to affect projects going forward. But just from all that we can see, as it has a negative effect on the general economy, it certainly will not be helpful to the markets that we serve either.

How locked in is the fourth quarter guidance you gave? I mean, how much of that is sort of done, and how much of that is undefined at this point?

Well, we have a backlog that's a month, about a month's worth of sales, and we're halfway through the first month of the quarter. So half of it is in our hands, and half of it is the rest to come.

Okay, I got it. Thanks.

All right, we will take our next question from [Jeff Sprow] with City Investment Group.

Hey, first just on Power, Dave, you said acquisitions and the storms were about half the growth. Can you split that, split those two apart for us so we can kind of understand the impact of these recent deals?

Sure. Acquisitions were about 10 points of the growth and storms about 8.

Okay. And what do you think about the carryon effect from the storms. I'm sure that's part of your Q4 outlook. Is this a two-quarter fix? Does this spill into early '09? You got any thoughts there, Tim or Dave, on how long this kind of remains?

Certainly there's help in Q4. It would be too early to determine whether orders will remain -- you know, this is also across the transom, day in and day out orders, to see whether rebuilding continues at a high level into the first quarter. I'm not sure of that at this point, but I would say certainly our revenues will be higher because we're still fulfilling some orders in Q4.

And your comments to Bob on orders elsewhere were pretty straightforward, but I wonder on oil and gas. Now we've got a six handle on the barrel of oil. Some of those Harsh and Hazardous projects that you're seeing in the oil patch, is there some early signs that some of that stuff is slipping?

Yes, I would say there's a couple of things about that. One is the business we're seeing today was decided months ago or years ago. Right? And -- unless it's the repair from the storm, so it really has more to do with future decisions of those folks developing oil and refining oil and what projects they go forward with from here. So I don't hear of any projects that are underway being stopped, but the rig count and things like that have started to slow a bit. But it determines whether oil stays at $70 a barrel or what the future forecast of that is. But at $70 a barrel there's still profit for everyone there. Whether they continue at that rate, I don't know.

Yes. What is the early dynamic, if any, on price in the channel? You obviously do have the delayed impact of cost coming through. You said it would be three or six months before you start to feel the benefit of cost going the other way. Is the channel already pushing back on price, watching these commodities drop? Just what's the tone of discussion there? How do you -- setting prices for '09, catalog prices, that whole dynamic.

While there's certainly talk by end customers of that, there isn't -- and I would say it's an increasing amount of discussion and some pressure. And it is because of the magnitude and the speed with which commodities have declined. And so -- and it would still be early for us to make any clear statements about the outcome of this, but I would say that if commodities stayed as low as they are, certainly we would have to go back to some prior level of prices I would say.

Okay, thanks a lot.

Sure.

We'll take our next question from Christopher Glynn with Oppenheimer.

On the price/cost, going back to some of your comments at the beginning of the call, I just want to clarify. It sounded like you were breaking out the drag from price/cost into two parts. Was there a total 150 basis points headwind from price/cost in the quarter?

Only from -- the biggest part of that, Chris, is from the math of increasing the magnitude of increasing sales to cover cost which just has, you know, it's a simple mathematical detriment to your margin side. From an absolute standpoint not breaking it out it was -- but it was a net negative on an absolute basis, on an absolute dollar basis.

So we -- to make it clear, is when we raise prices, we're just trying to recover the material content of the increase and that we really rely on our own productivity to offset out internal labor costs. So mathematically if you just get back in price that material cost, then your margins do not expand. That's what I think Dave's saying.

Right, and did you say there was a 100 basis point impact from that and then a 50 basis point in the areas where you actually had a shortfall still?

Right.

Yes.

Okay, so a 150 basis point overall drag.

Right.

Okay. And how would you see it playing out if you get some of that pricing pressure but your costs start to flow through a little cheaper? Would that gap tend to close in that deflationary environment?

I mean, we're still trying to get up to the breakeven on what steel prices are even today if they're a little softer. We haven't fully caught up with the magnitude of the price increases in steel. And certainly we're still paying on a delayed basis in our freight rates and things like that, fuel charges, surcharges that are above the $70 a barrel number. So we're still chasing costs up at this point, and I think it will be some months before we talk about a rollover or anything like that. But I would say that I wouldn't expect a decline in margins from this particular phenomenon going the other way. If we would see a decline, I would say it would more be attributable to the change in physical volume going the other way than it would be from this cost/price phenomenon.

Okay.

Or competition, it could be competition also, you know. In a weaker market, more battle over less business, that could contribute also.

Hey, Chris. Let me just clarify one thing too. The 150 basis points that we're talking about was on the gross margin line. You lose some of that obviously because of the higher sales value. You're got to get back in commissions and selling costs, so on an operating margin basis it's closer to a point.

Okay. Okay, and the acquisitions impact on power systems, that was about half peak or half the new ones?

Yes.

Okay, and fourth quarter is typically -- just a couple on working capital and cash flow, then I'm done. The fourth quarter is typically your strongest cash flow quarter. Does that stand, or did you kind of get some of that a little earlier it looks like potentially? And then lastly, what's the inventory opportunity for turns and inventory reductions in '09?

Well, I'll take the cash flow first, and then Tim may jump in on the inventory. But clearly on the cash flow, you're right, fourth quarter is typically our strongest. Third quarter was a nice quarter and there might be some of the fourth quarter benefit that rolled in, but nothing that we're specifically aware of. So we think the fourth quarter should continue to be strong absent some shock in some segment of the market and some difficulty on the customer side, none of which we're currently anticipating or we see. We've gone beyond. As I mentioned, we've got a very good history on our days and our overdues, but we're even going beyond that to try and risk assess some of our customer base to make sure, because some of these things happen without warning. So we're pretty much on top of that.

I would say on the inventory side really it's trying to keep -- be prepared but keep generally slowly reducing your inventory at a gradual pace. It's hard to judge right now what 2009 may look like, but just generally we're trying to take inventories down in the $10 million to $20 million range. That would be our kind of short-term objective.

Okay. Thank you. Appreciate it.

Sure.

[Operator Instructions]. We will take our next question from Steven Gambuzza with Longbow Capital. Go ahead, sir.

I was wondering if the acquisitions that you announced this quarter, would you expect them to be operating close to segment margins in 2009?

Yes.

Great. Thanks very much.

[Operator Instructions].

All right. It appears that we have no further questions at this time. I will now turn the program back over to Mr. Sperry.

Thank you, everyone, for joining this morning. I'm guessing that a lot of you are back to back to back, so thanks for joining, and we're available for questions and calls. Please check in with Jim and I if you have any. Thanks.

All right. This concludes today's conference. You may disconnect at any time.