Hubbell Inc (HUBB) 2008 Q4 法說會逐字稿

Good day, everyone. Welcome to this Hubbell Incorporated 2008 fourth-quarter earnings release conference call. Today's call is being recorded.

Now, for opening remarks and introductions, I would like to turn the conference over to your host, Mr. Bill Sperry. Please go ahead, sir.

Thank you, and good morning, everyone. We released our fourth-quarter earnings this morning, and that release is available to you from a number of sources. One option is to go directly to the Hubbell website at hubbell.com. The complete release can be viewed by selecting the Investor Info tab, clicking on the Financial link and then Press Releases from the drop-down menu. It is also available from the usual wire services. The Company presentation is also available by going through the Hubbell website and clicking on the Investor Information tab and the Live Webcast link; then click on the link Supporting Materials.

This conference call is simultaneously being webcast from the Hubbell website. 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 4876114. You may also hear that replay on the Hubbell website; again, from the Investor Relations tab, select the Auto Archives link in the drop-down menu, 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 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 that paragraph in the press release, and I would like to consider it incorporated into this call by reference.

And with that, I will turn it over to Hubbell's Chairman, President and Chief Executive Officer, Tim Powers.

Welcome, everyone, and thank you for joining us this morning. I am joined on the call today by Dave Nord, our Chief Financial Officer; Bill Sperry and [Jim Farrell] from our Investor Relations Department.

I am very pleased to have the opportunity to share with you our strong results for both the fourth quarter, as well as the full year 2008. We finished a strong fourth quarter that exceeded expectations and capped off the strongest year in Hubbell's history, with record sales and earnings.

As is our usual practice with these calls, I am going to provide you with a summary of the results we announced this morning. Then Dave will walk you through a more detailed discussion of our financial performance. I will then conclude with my perspective on the outlook for 2009 and some closing remarks. Then we will open it up and take some questions from you.

Before we get into the numbers, I want to describe the organizational changes we made at the end of the year. We unified Wiring Device and Electrical Product organizations under the leadership of Gary Amato. Gary has been with Hubbell for 21 years and has been doing an outstanding job running businesses for us. His role has expanded from running the industrial area to all of Electrical Products, and he has now added Wiring. We are calling Gary's business Electrical Systems, which, together with lighting, comprise our Electrical segment.

The second change we made was moving Bill Tolley over to Wiring to run Power Systems. Bill has had a distinguished career with us, spanning roles in Operations, as Chief Financial Officer, and most recently as a Head of Wiring Devices. I am excited about the impact these leaders are expected to have at our Company.

Turning to the results, I am very pleased to report that despite challenging market conditions we faced, our performance was even better than we guided at the end of the third quarter. We generated sales of $650 million, a growth rate of 6% over last year's quarter, and an operating margin of 11.1%, comparable with last year. We earned $0.82 per fully-diluted share, also equal to last year. This EPS level includes a $0.05 charge for employment actions we took in the fourth quarter.

Now let's turn to the full year 2008. For those following our presentation, I am on page 3. We had highlighted last January that our goal for the year was to grow sales by mid-single digits, add 100 basis points to our operating margin and generate free cash flow in excess of net income. I am very proud to say that our team delivered on these targets.

Our brands generated $2.7 billion in sales, a 7% increase over 2007. And at the operating profit level, we earned 12.8% versus 11.8% last year. Our EPS was $3.94 per diluted share, an increase of approximately 13%, and above the high end of our guidance. We generated nearly $270 million of free cash flow, better than 1.2 times our net income.

These numbers do not tell the full story of Hubbell's management accomplishments. The unprecedented spike in commodity costs during the second half of the year presented a severe test that we weathered well. We continued our relentless pursuit of pricing, productivity and cost containment. Our acquisition program had a very active and successful year. We invested $265 million in seven transactions that added strategically to our suite of brands and contributed financially to our results. And we've made great strides on our people initiatives in developing talent.

We also returned cash to our shareholders, while maintaining a conservative balance sheet. We raised our dividend by 6% and repurchased approximately $100 million of Hubbell's common stock. We termed out our maturities and exited the commercial paper market by issuing $300 million of bonds in May.

Obviously, we are facing a very challenging economic environment as we enter into 2009, and I will offer my outlook on that later in the call. But that does not diminish the pride that I have in the Hubbell team accomplishments in 2009, and I want to pause here and thank all Hubbell employees throughout the organization and applaud a job very well done.

Now, let me turn it over to Dave to have him discuss the financials in more detail.

Thanks, Tim. And before I get started, let me just reiterate we are referring to a supplemental information document that has been posted on our website, that if you've downloaded it, that is what we will be making reference to. If you haven't, it will be available continually.

Turning to page 4, let me first -- Tim talked about most of the highlights, but there are two additional items to mention. One, our fourth quarter also includes the costs associated with actions to begin to reduce our infrastructure, focused mainly on the salary side for incremental costs, but as we will talk later, more cost reduction focus. And as well, we had -- as we announced in December, we acquired Varon Lighting Group, an add to our lighting platform, a good business and a leader in providing energy-efficient lighting fixtures, a good growth market going forward.

Let me get into the details. On page 5, for the fourth quarter, sales and operating profit. On the sales side, $652.1 million, an increase of 6%. That increase attributable to acquisitions of 6% and price of 4%. Offsetting that combined 10% increase is some currency headwind. While we don't have significant currency exposure relative to others in the industry, the magnitude of the change actually hurt us in the fourth quarter for 3%. So that left us with a core volume decline of 1 point negative. And within there is the continuation of the drag from the residential market being down more significantly. Absent that, core volume was actually up a point.

On the operating profit side, $72.4 million in the quarter, also up 6%, consistent with our top-line growth. But a lot of moving parts in there, with some challenges on the gross margin side being offset by the cost containment.

So turning to page 6, you see that gross margin and a decline of 90 basis points. A number of things contributing to that. One is the impact on absorption as we've started to ramp down our production facilities in the fourth quarter. A little bit of negative implication in the mix of products sold in the fourth quarter. And then some of the currency headwind that flows through on the cost side.

Offsetting that was an equal amount, 90 basis point improvement, in our SG&A expenses, down to 17.4%, coming from both leveraging our existing base across higher volume, and more importantly, a focus on cost containment. And that is an area that we will continue to focus on going forward.

Turning to page 7, a number of items below the line. Net interest expense up $4 million from the fourth quarter of last year, all attributable to the higher borrowing levels. You will recall we issued $300 million of long-term debt in May, and we've been pretty active in the acquisition front. That is all attributable to the higher borrowings.

The tax rate, higher than last year's rate. You recall last year's rate had the benefit of some audit settlements. This year's fourth quarter also has the benefit lower than our run rate through the third quarter, as we have the impact of the R&D legislation that was reenacted at the beginning of October, which we commented on in our third-quarter release and contemplated in our guidance for the fourth quarter.

So all of that leads to net income of $46.4 million, 4% lower than last year in the quarter because of the higher interest and higher tax rate. But on an earnings per share basis, able to maintain our earnings per share at 82% as a result of a lower average shares outstanding from our share buyback program earlier this year.

Let me turn now to the segments. First, on the Electrical segment, where we had sales of $458.2 million, up 1%. A number of things in there. Favorable price and acquisitions, price contributing about 4 points and acquisitions about 3. Foreign currency headwinds, about a 3-point drag, so you are left with about 4 points of growth.

Core volume, against the 1%, that shows core volume being down 3 points. But a big part of that, again, is attributable to the residential business, down in the neighborhood of 20%. What with continuing good contribution on the Electrical Products side, both on the high-voltage and the harsh and hazardous business.

On the operating profit, slight decline to $44.7 million for the quarter. Number of things contributing to that. Slightly favorable price cost, finally in the year. Our focus on productivity improvements. And then the incremental benefit of our acquisition in the year, particularly the Kurt Versen acquisition earlier in the year. But of course, we continue to deal with the headwind from residential and the margin drag that that is contributing.

Turning now to page 9, on the Power Segment, continued good performance, as we've seen all year, with sales of $193.9 million, up 21%. Acquisitions and price contributing 14% -- 14 and 6 points of that 21%. The remaining 1 has some currency headwind of about 2%, so you are left with some underlying core growth, still in the 3% to 4% range, although with flattening demand.

And the operating profit of $27.7 million in the quarter, up $4.5 million. Again, finally seeing some positive benefit on the price/cost equation. We've got the benefit of acquisitions contributing, as well as continued benefit coming from productivity, in particular continuing to advance on low-cost country sourcing.

If you turn now to page 10, a summary of the full-year results. As Tim mentioned, with sales up 7% and operating profit up 16%, margins up a full 100 basis points, and with a tax rate headwind, still resulting in earnings per share up 13% at $3.94. So a strong performance, a lot attributable to our continued focus on price, cost and productivity.

Just summarizing the segments for the full year, first on the Electrical Segment, 3% sales growth to $1.958 billion. Acquisitions and price being big contributors, as well as strong demand throughout the year on the harsh and hazardous and high-voltage products, being offset by residential weakness. And more importantly on the profitability side, despite that margin drag from the residential business, we were able to increase operating profit to $227.3 million for the year and operating margins up nearly a full point to 11.6% in the Electrical Segment.

On the Power Segment side, page 12, top-line growth of 17%, us to $746.2 million, for all the same reasons that we saw continuing in the fourth quarter. Acquisitions and price giving us 8 and 4 points of that growth, respectively. But also some very good unit volume growth and some incremental storm business, although not significant -- less than a point of the year-over-year contribution.

And then on the profitability side, a continued good performance on the volume increase, getting our prices to meet and exceed our costs by the time we finished the year. The acquisition improvements, as well as our productivity benefits. So good, absolute profitability growth, as well as margin growth from 15.3% to 15.9%.

Let's turn now to cash flow. Cash flow for the year finished very strong. Operating cash flow, $319 million. Free cash flow -- that is operating cash flow after CapEx -- $269.8 million, 121% of net income. Well north of our plan going into the year of equaling net income. A lot of things contributing to that, not the least of which is a good focus on working capital, as well as good scrutiny around our capital investments.

You see the working capital, turning to page 14, and our improvements there. Receivables are up for the year 7%, pretty much consistent with our volume uptick. But as we typically see, very good performance in the receivable collection in the fourth quarter, as we are collecting those sales from the peak period of the third quarter. We are tracking credit quality very closely here as we go forward, and trying to make sure that we are doing all we can to manage any risk that might come up.

On the inventory side, increase in inventory year-over-year, but a lot of that is due to the acquisitions that we've added. In fact, in the month of December, we actually had a reduction in inventory of $9 million, and we expect that to continue well into 2009.

And you see that from a days outstanding, we've actually improved our days on inventory by two days. And on the payable side, we have increased our days on the payable side by a day. So our trade working capital, while it is up $22 million from the end of last year, trade working capital as a percent of sales is actually down to 19.4% from 19.8% in 2007.

So what are we doing with all that cash as we generate it? We turn to page 15, and you will see the profile of the uses of cash. First and foremost is our dividends. You recall that we increased our quarterly dividend by $0.02 a quarter, or 6%, in the July period. So that we are investing $19.6 million in the fourth quarter, $76.9 million for the year.

Second is on our capital expenditures, investing for the future in the business. Fourth-quarter capital expenditures were $15.4 million, bringing the full-year total to $49.4 million.

The third piece in the fourth quarter was in the acquisitions, totaling $61.5 million for the acquisitions, principally for the Varon deal in December. For the full year, we also have the investment for share repurchase of $96.6 million. You recall that was all focused in the beginning of the year. As we continue to review our uses of cash, we look at both share repurchase and acquisitions in the early part of the year. The acquisition pipeline was not as active. There wasn't as much of activity that we saw to invest in. So we looked at our own shares as a good investment opportunity.

As the year progressed, more activity around acquisitions. And so we invested significantly on the acquisition front and as a result had no share repurchase in the fourth quarter. So we are broadly distributing our strong cash flow.

At the same time, we are managing our capital structure as we always have, with conservatism and discipline. We have -- at the end of the year, we finished the year with $178 million of cash on the balance sheet. We have no commercial paper borrowings outstanding. We have $500 million of long-term debt, $300 million of which was issued in May. None of that debt due before 2012. So our total debt being just under $500 million, bringing our debt-to-capital at 33% and our net debt, because of our cash position, at 19%.

We also have our revolving credit agreement, which we renewed in the fall of '07 at $250 million, with an expansion capability to $350 million, which we took advantage of early this year. So we have that readily available through 2012 with no borrowings outstanding. So we are maintaining our flexible capital structure, as well as maintaining our conservative balance sheet.

So with that, I will turn it back to Tim.

Thanks, Dave. Now let's turn to our outlook for 2009, on page 17 of the materials. Our largest market is non-residential construction, and the outlook there is challenging. While put-in-place spending continued through the fourth quarter, there has been a significant decline in new project starts, which will hurt our volumes next year. Lack of available credit will likely continue to hamper project starts.

Residential construction will continue its slide through 2009, and while some forecasters see a rebound late in the year, our orders lag starts, and so we would not see any benefit from that activity this year. Our industrial markets are in better shape, but still we expect a decline in volumes in those businesses.

While we see the need for more power and the grid to be enhanced, our expectation is that the utilities will spend less during the year on transmission and the housing slump will drag down distribution spending. On the positive trend, there is a stimulus package expected from the new administration. The indicated focus on infrastructure and energy efficiency should generate sales across both of Hubbell's Electrical and Power segments, but [estimating] the sizing or timing of any of these potential benefits is premature at this stage.

Distilling and synthesizing all of these factors into a precise view of the future is difficult in the best of times. And given the uncertainties we see today, providing a reliable forecast is even harder. The bottom line to Hubbell is an expectation of market volumes being off mid to high teens. We continue to work diligently in analyzing our end markets and creating plans and contingency plans to manage through the uncertainty. We began the work in the fourth quarter to reduce our staffing levels in anticipation of a challenging market ahead. Further resource reduction efforts will be ongoing in the first quarter.

To conclude, we are very pleased with the performance in the quarter and extremely proud of producing record results in 2008. The markets ahead will be difficult for us, but we believe the strength of our brands and the focus on pricing, productivity and cost will allow Hubbell to navigate through the challenges and emerge as a more potent competitor.

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

(Operator Instructions) Bob Cornell, Barclays Capital.

Good morning, everybody. Tim, you are usually pretty good at taking a crack at guidance. I'm surprised you didn't take a swing at it here.

So I noticed in the press release you talk about free cash flow being greater than income this year, so you must have a plan for what the net income might be. Maybe you could share with us how that minus 15 to 18 translates into a net income number, considering you've already got an idea that cash flow is going to beat net.

We are not giving any specific guidance. We are certainly looking at the same market conditions as everyone in the construction industry. We certainly expect volumes to be down double-digits from the rate at which our orders have declined early on. But certainly, the huge movement of the credit markets and the banking crisis kind of overwhelms where we are and adds a dimension to us doing business that makes it much more difficult to predict.

And while you can normally project a lot of things in the construction business, the fact that debt is very restricted is -- and it's kind of a moving target --represents the most difficult element of that.

So what did you see in the fourth quarter, Tim, with regard to these market dynamics? And if not in the fourth quarter, how do you expect the first quarter to lay out? In other words, when do you expect to see your top line running down this 15% to 18%?

The month of October was a very strong month, both from a shipments and an orders side. The month of November, like many others have reported, was a steep change of declining order rates. And December continued that trend. And so what we are seeing now is book-to-bill ratios below 1 as we enter the 2009 year.

And there is no clear trend available, other than to say that we are comfortable that it is not a single-digit decline. And beyond that, we don't really have the visibility into the future to kind of make the projections that we normally do.

I understand. Everybody -- I think maybe you are being a little more candid than others who are trying to forecast -- but I think you made a comment on the first quarter. Do you expect the first-quarter unit volumes to be down in the 15% to 18% camp, or is that sort of looking at a more moderate decline?

I don't really have a good feel for that at this time. The month of January is off to a slow start, would be consistent with what we are saying. But distributors are making adjustments to their inventories, both on the utilities aside, as well as the electrical side. And whether we are seeing the end volume dynamic or the kind of rapid response that happened from the November downturn in business is something that we are not clear on.

One more question from me -- sorry. So when you have volume declines like this, you are going to be idling plants, working down inventories. You have the adverse factory variances. And then it's going to be very difficult to get price/costs when volume is going down that much; some of your competitors have already talked about pricing issues.

So could you address the significance that you see in terms of the adverse volume variances from underabsorbed overhead, and then the issues around price/cost and productivity possibly reversing here in the first quarter?

Well, for certain, as all manufacturers would do in the face of economic change of this magnitude, we have moved in a very orderly and disciplined way to reduce the output of our factories. You cannot -- at least, we cannot make all those adjustments at one time, and it will take us at least to the end of the first quarter to continue to reduce the output in an orderly way, while keeping our deliveries at the high level that we usually do.

So hopefully, by the end of March, we will be at a run rate of production that get us to where we think the business will head. And from there, we just have to see where it takes us. But from my point of view, we were running at a pretty hard rate for the month of October, and really only began to make these kinds of adjustments in the month of November and December.

What about price/cost?

Well, certainly cost has done 180-degree turn, although -- this is on the spot price of a lot of products -- although we haven't seen all of that or a huge extent of that come through to us. It's --.

You mean in terms of commodity prices?

In terms of metal, steel, aluminum, copper, certainly. Some of the products we buy are indexed. Some of those indexes mostly lag by a quarter, so we will see some better relief in Q1 than we did as things turned down in Q4. We were still taking a lot of inflation pressure during Q4.

So the story about managing costs and price is one that is far beyond the volatility that we would normally see in downturns in 2000 or '91 because of the magnitude of the run-up that we saw coming into this. So for me to predict it is another set of variables that I'm having a hard time with. There is just not enough visibility to make great, clear statements.

All of us in the business as suppliers are working in our own economic best interest, so we are going to be hanging onto price as much as humanly possible. But to predict this with declines in copper from like $4 to $1.50 and steel from $1100 a ton back to $600 a ton in four or five months are movements that we are not used to dealing with and we will certainly have some lumps in the market as the market adjusts for that.

Okay. Thanks, Tim. I've taken up a lot of your time.

Sure.

Jeff Sprague, Citigroup.

Thank you. Following on some of that, those are really mostly the key points of this whole dialogue. I just wonder, Tim, if you could shed a little more light on what you think the state of distribution inventories are. And I guess I frame my question from the thought that your volumes really were not down that much in Q4 to your point.

I wonder if you think the sellthrough was actually quite a bit weaker in the quarter, so while people are striving to get inventories down, maybe they are actually still going up. And how that relates to your comment about Q1, trying to throttle back the factories. Do you think distributor inventories are already headed down on a nominal basis, or are they still higher than people would like them to be?

I think they are headed down. I mean, when we look at our flow goods business for wiring devices and for metal outlet boxes and fittings, certainly you can see the decline in demand and the distributor response to taking it down. We did a lot of shipping of projects and jobs late in the year, and that really, I think, more than the stock and flow business aided our revenues.

But I don't think that distributors have fully grasped the magnitude, as none of us have yet, of this reduction in the size of the market. So while I think they are taking their inventories down, I certainly believe that all during the first quarter, they will be further reducing their inventories in an attempt to keep up with the change in market conditions.

And then your comments on the complexion of power, certainly very logical, and we are seeing that in a lot of our own work. When you drill down into what utilities are planning from a CapEx standpoint, clearly budgets are coming down, but they are not being eliminated, obviously. Where do you see the priorities to spend where spending is happening?

I would say that there are many projects around transmission that are far enough under way that they will continue. But if you are a utility and you have the decision to make to go forward with the next one, those are going to slide to the right by a year. So there still is kind of a [work coming] on transmission. But I think we are going to see a gap as the year goes along for new projects to start.

On the distribution side, you are going to see them replace whatever obviously needs to be replaced and upgraded, and storm damage and all those kinds of things that they would normally do. But they also work systematically to upgrade the system, and this is where you can pinch pennies in your operating budget or in your capital budget. And really, we think that this number is somewhere in the 10% or so of our utility business. It will be down combined around that amount.

And just on the M&A front, first, just to totally get the base right for '08, what were the total annualized revenues of all the acquisitions that you did in '08? And then what is the carryover acquisition impact on '09 revenues, given that these sprinkled in over the course of the year?

I think that you can use -- it is a little over 200 on the annualized revenue, and about half of that flowed through this year. So again, probably incrementally next year, about 100 million.

Yes, I would like to comment on the last lighting acquisition. Certainly, we've talked about -- many of us have talked about the energy efficiency of lighting and the application of modernizing existing buildings, and the business that we bought is exclusively in the business of relighting existing buildings.

And we considered whether it was in our best interest to start from scratch and build up a business or whether it was more wise for us to buy one that had an existing market position. And we are very pleased with the acquisition of Varon, as it gives us that big head start into what I think will be the fastest-growing element of the lighting business going forward.

And just maybe one other, just on that whole topic. I mean, you did get seven deals done. I believe they were all private companies. Were they -- where is the deal flow coming from? Are they private family companies? Is it stuff buried in private equity that is coming back out? Do you see any change in availability or a change in people's thought process in some of these smaller electrical companies? Is there actually likely to be more deal activity in '09?

Jeff, this is Bill. I think we see from all those sources you mentioned. And I think what will be interesting to figure out is whether or not sellers' expectations on valuation can mesh with buyers' analysis on the right valuation, given some of the downdrafts that Tim and Dave have been highlighting.

So I actually expect that the dialogue activity will be heavy early, but that it may take a little while to get everybody's expectations synched up so that price can be agreed to.

Yes, so if you are willing to buy something at eight times earnings, what the heck are earnings for 2009?

Right. Exactly. Okay. Thanks, guys. Good luck out there.

(Operator Instructions) Christopher Glynn, Oppenheimer.

Good morning. On the 15% to 18%, I guess Bob's interpretation of mid to high teens, that's a pretty good one. Was that for Electrical or the entire enterprise?

We don't think that our total business will be down 15% to 18%. But more than 10%, let's put it that way.

So are you characterizing that as conservative now, the mid to high teens?

Mid to high teens is the market conditions will shrink by that. We think that Hubbell will do a little better than 15% to 18%.

Okay.

But don't try to pin me down beyond that.

No, I won't. I'm just trying to clarify what you meant. And then what is your guesstimate on the currency for the year?

Still a little bit of headwind. But again, as I mentioned, since we don't have significant exposure, it won't be what others will be facing, so --.

I was surprised what it was in the quarter. And then in the outlook, just parsing some of the language in the press release, utility expected lower, industrial markets weaker. Is there any difference between lower and weaker?

No.

No difference, okay. In particular on the Lighting side of pricing, are you seeing any of the majors initially start to be a little more aggressive?

I think as you quote jobs out into the future for deliveries out several months, most manufacturers are using what they would expect their costs to be as the basis for their bid, versus what their cost has been, if I could answer it that way.

That's helpful. Yes, absolutely. Thank you very much.

Jeff Beach, Stifel Nicolaus.

Good morning, and congratulations on a very good quarter. I have two questions. I wanted to go back to the inventory levels of the Electrical Products, and related more to this massive decline in raw material costs that has occurred so that as you go through the next six months, the products you make, you will be making at a lower price and likely selling at a lower price. And then relating it back on to the distributors that are faced with high cost inventories.

Are they, in your opinion, lowering this price umbrella in line with their costs, and trying to maintain a disciplined market so that they can escape inventory losses? And how much do you think this is playing out, the lowering cost anticipated ahead on distributor inventories versus just their perceived demand?

I think that distributors follow the umbrella's pricing structure of manufacturers. And that -- I would say the single biggest impact on distributors in the second half of 2008 has been the decline of copper as it is incorporated into the wire they sell -- and steel in the metal conduit and other metal products that they sell.

So they've seen a deflation on this aspect of their inventories. But that kind of stuff moves through at a pace at which they really wouldn't get burned too badly. It would happen pretty quickly, and they might have some margin compression, but I wouldn't expect them to see many losses from this.

The rest of where Hubbell plays is product for which the cost decline really hasn't caught up yet. So right through the end of the year, while we were expecting to see some of these massive declines, we hadn't seen all that are -- as I said earlier -- are in the spot price of many of the products.

So when we rolled our standards, we actually have a small increase in the standard value of inventory from one year to the next, but not nearly what it might have been if all the prices that we saw in September and October had held. So when you look at the carrying value of Hubbell's inventory at standard, there is probably a 2% or 3% increase in standards year-over-year.

What I was really trying to get at is how do you think this is playing out with the end customer out there that buys lots of electrical products that are made out of, let's say, 90% steel? Aren't they -- how much deferred orders are going on right now, as opposed to the recession? Do you have any gauge for that at all?

I think that the decisions come down this way. A project under way is a project under way. When you have the opportunity as a developer to slow down right now, it is in your great advantage. Because what you do is continue to rebid this until you get the prices where you need them to be. So this is a naturally delaying factor when the cost of all materials is headed down.

But I want to remind you that in a whole building, the electrical cost is quite small, and what they are more interested in is what is happening to concrete, rebar and structural steel, as well as glass and things like that. So the whole lighting package or whole electrical package in a building may only be 3% or 4% of the total building. So it is more the other factors that will weigh on whether a project goes forward or not. So even the cost of oil as it applies to asphalt on the parking lot are big factors in going forward or not.

All right, thanks. Just one other simple question. Back on defining your volume, are you talking about actual volume and not volume and price? And is that volume organic as opposed -- you are seeing in the industry and for yourself?

Jeff, are you --?

Excluding acquisitions.

The actual results or the forecast?

The forecast.

When we are talking about volume, we are anticipating some decline in price, as well as physical volume. But I don't really -- I can't quantify that. I have our guesses on that, and we have our estimates that we are seeing now, but events are changing at a pace at which it causes us to not make annual estimates of those.

But your comment that the market might decline mid to high teens, is that volume only, or is that volume and lower pricing?

That is more physical volume, like square footage.

Okay. All right. Thank you.

(Operator Instructions) Steve Gambuzza, Longbow Capital.

Good morning. On the comments you made about the cost basis of your inventory, would you expect that to -- you mentioned it was high -- you ended the year at kind of an elevated inventory level, which was a cost basis. How is that going to impact -- will that have a negative impact on margins?

No. What I was trying to make the point is that sort of the metals prices we saw going into 2008 ramped up significantly during 2008, which probably hit its peak around September or October, and then came back down to levels still a little bit higher than the beginning of 2008, but certainly not to the levels that you are seeing in the spot price that you can see on any of the published metrics.

So it hasn't really -- my point was it hasn't really caught up with all manufacturers yet. It will continue to come down, and certainly then that balance will come between the trade-off of price and lower input costs.

Okay. And then on working capital, you guys pointed out you did have clearly improving working capital metrics over the course of the year. But just given the extent of the downturn and the suddenness of it in Q4 and how kind of the outlook has changed on the margin pretty severely, I guess I was surprised to not see even more working capital pulled out of the business in Q4. And the balance sheet looks a little bit better than it did at the end of last year, but the environment is very different. I'm just curious kind of how working capital has trended with your expectations and what you would hope to accomplish, prospectively, with working capital -- how much you could pull out, given your view of the end markets.

Well, first of all, you have to go back to October, which was probably our strongest month of the year, in which our factories were working up to the maximum levels of the entire output for the year. And then really only a 60-day period to turn around and go from flat out -- flat out is a little overstatement -- but fairly significant output to reduce it.

So we are, as I said, somewhere along that path to get the output down to where we want to go. And it will take us to the end of the first quarter to do that. So if business is off double digits, we are looking for that kind of a decrease from inventory over the course of the year.

So is it fair to say that -- okay, so would that be -- if you are saying volumes are down a little bit better than 15% to 18% overall and there is probably some negative price impact also, which is going to result in lower working capital, that essentially you could hopefully reduce your net investment in working capital by something similar to what sales decline. So basically working capital as a percent of sales should be the same -- kind of stay constant?

I would say that it will generally follow, depending on the severity of decline, working capital numbers will deteriorate just a little bit because of the -- if volume tracks down faster than you are able to burn up inventories, sometimes you have a little deterioration. But generally what you said is true.

Okay. So that would imply you would be able to pull a fairly substantial amount of cash out of the business this year, based on your top-line forecast. And just curious, would you expect to be able to buy back stock in 2009 and reduce your share count?

All those opportunities are still there, but given the magnitude of what is changing and the dynamics at the marketplace and the severity of the financial crisis, we would certainly be cautious before we proceeded with any significant buyback of shares or things like that. We find actually that in times like this, if you can come to the table and find an agreement with a seller to buy bolt-on acquisitions is the best use of money at this time.

Okay.

But certainly we keep all options available.

And finally, can you just give us some comment on what to expect for an effective tax rate this year, as well as what the impact of pension expense from a GAAP and cash standpoint might be?

Yes, I think from a tax rate standpoint, as we've said over the last couple years, that there is upward pressure on the tax rate as a result of continued growth or a negative implication of the mix of our earnings because of the domestic nature of them, the benefit from our foreign operations becomes a smaller percentage. So it is going to drift up. It has generally been a point a year. We are still working through that, but certainly a little bit higher.

On the pension side, that clearly is a point of cost headwind that all are going to face. We are looking at something in the order of $10 million to $12 million, thereabouts. Again, that is still being worked through. But the simple math -- and you can look at our pension fund performance -- assets down a little bit over $100 million with an 8% assumed return, so you get to a $10 million to $12 million headwind in pension expense.

Pretax?

Pretax.

Great. And I'm sorry, if I could just ask one final question. You made some comments earlier on the relight opportunity and the acquisition you made. I was wondering if you might just be able to put some parameters around -- kind of on an LTM pro forma basis -- what Hubbell's kind of existing revenue base is in terms of kind of relighting and energy efficiency, and any comments you might have on what you think the addressable market is for that opportunity.

Certainly, we have products that -- prior to our acquisition that would go into that market, but not an organized business to deal with it or a selling arm to sell to that market. So we've added north of $50 million in sales and a growing group of sales from that business as a jumpstart to get further into it. So really, that was the basis for us to move into the business.

What was the base amount that you added the 50 to?

We really didn't measure it because it was on individual jobs, and the degree of difficulty of identifying if job 1, 2, 3 is in a relight mode or in a retrofit of office space is quite difficult. So this business we've now organized, and we've kind of now gone to a lot of detail to try to identify incremental additional business. So going forward, I think we will have a better statement about that than up to now.

Thank you very much for all your time.

(Operator Instructions) It looks like we are out of questions.

Thank you, everybody, for joining this morning. To the extent you want to have some follow-up questions, Jim Farrell and I are obviously available to do those. So thanks for joining this morning.

This concludes today's conference call. Thank you for joining, and have a wonderful day.