Hubbell Inc (HUBB) 2009 Q3 法說會逐字稿

Good day, everyone. Welcome to the Hubbell 2009 Third Quarter Earnings Conference Call. Today's call is being recorded. Now for opening remarks and introductions, I would like to turn the call over to Bill Sperry. Please go ahead, sir.

Thank you, and good morning, everyone. Welcome to Hubbell's third quarter call. I am joined today by Tim Powers, our Chairman, President, and Chief Executive Officer; Dave Nord, our Chief Financial Officer; and Jim Farrell, our Director of Investor Relations. Hubbell announced its third quarter earnings this morning, and hopefully you found that press release on the wires or on our website. You will also find presentation materials on our website that Tim and Dave will refer to during the call today.

Let me refer everyone listening to the call to the paragraph in the press release and in the materials regarding forward-looking statements. The press release and materials may contain expectations based on assumptions and Hubbell's performance in the future, particularly regarding our earnings. We also may make some comments here today on this 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 perhaps materially from what we may discuss or project today. So please note the paragraph in our release, and I would like to consider it incorporated by reference into the call here this morning.

In addition, we may make references to non-GAAP financial measures. Those measures are reconciled to comparable GAAP measures in the appendix to the presentation materials.

And with that, I'd like to turn the call over to Tim.

Thanks, Bill. Welcome, everyone, and thank you for joining us this morning. I will begin today's call with a summary of the results we announced this morning, then I will turn it over to Dave who will go through a more detailed analysis of our financial performance. Finally, I will provide my perspective on the outlook for the fourth quarter and some general comments on 2010. Dave and I will both be referring this morning to the presentation materials you have hopefully found on our website.

Turning to page three, in the third quarter, our sales were 594 million, a decline of 19% from the third quarter of 2008. Despite the volume decline, our operating margins increased to 15.4%, or 130 basis points above last year's third quarter, while earnings per diluted share were $1.01 or 14% below 2008. I am pleased with our operating margin performance in the quarter. We were able to increase those margins through productivity, including the benefits of restructuring actions in previous quarters and lower commodity costs. In addition, we continued to generate very strong cash flow - 240% of net income, helped by an additional $32 million reduction in inventory.

We announced the completion of the purchase of Burndy on October 2. We are excited to begin a new chapter in Hubbell's history with Burndy joining our portfolio of high quality brands. We'll talk more about Burndy in the outlook.

Now, let me turn it over to Dave, who will discuss the financials in more detail. Dave?

Thanks, Tim. Good morning, everyone. I'll start on page four, take you through the third quarter results, and then the year to date. Starting with sales, as Tim mentioned, we're reporting $593.9 million of sales. That's down 19%. There is a benefit from acquisitions. It offset a negative from foreign exchange price in the quarter being neutral. So when you adjust those out, the core volume was down 21%, really with a broad based market weakness in the electrical segment from the high teens to as much as 27% in the residential lighting, and in the power business down mid-teens, and we'll talk about that more.

Gross margin was a positive up 250 basis points, really two contributors to that that helped to offset the significant volume decline. Commodity cost reductions - you'll recall that third quarter of last year were the peaks of many of the commodities that impact our business and we're back to more normal levels. And more importantly, the productivity improvements that we've continued to drive from freight and logistics, better plant operations, as well as the benefits of our cost reduction actions and our staff reductions that we have been taking since the fourth quarter of last year.

Let me turn to page five. On the other expense side, the selling and administrative costs were 101.6 million in the quarter. That's down 15 million or 13%, but obviously not down as much as sales, so as a percent of sales, up 120 basis points. Some of the key drivers to that are around employee benefits, particularly pensions as we've talked about in the past. Pension headwind year over year was 2.5 million related to SG&A, over 4 million in total in the quarter. We also had the impact--impacting us on the S&A line is the costs that were associated with the acquisition of Burndy.

We note that we completed that acquisition at the beginning of the fourth quarter, so no profit contribution to offset those costs incurred in pursuing and closing that acquisition. So those are probably the two biggest drivers to the increase as a percent of sales. So when you combine the gross margin with the selling and administrative, our operating profit finished at 91.3 million, down 12%, but as a percent of sales our margin at 15.4%, up a full 130 basis points. Again, lower volume and the unfavorable absorption being more than offset by productivity improvements and commodity cost reductions.

Turning below, operating profit on page six, our interest expense up slightly from last year end. And it's a net interest expense, so the real driver there is lower earnings on our investments as the interest rate environment has come down from a year ago. And then, continued increase in our tax rate from a year ago. The tax rate in the quarter at 31.5%, consistent with what it's been through the first half of the year. So all of that leads to net income of 53--57.3 million, down 14%, and earnings per diluted share down a comparable 14% to $1.01 as our outstanding share count for diluted purposes was similar to third quarter of last year.

Looking at the segment results on page seven, first, the electrical segment. We reported 414.2 million of sales. That's down 21% from the third quarter of last year. As I mentioned, broad end market weaknesses. Residential lighting down 27%. C&I lighting up a little bit--down, not quite as much as the overall segment, so slightly better. We had acquisitions that benefited the quarter by 2% from last year and foreign currency that was a detriment of 2%. All of that led to operating profit in the quarter of 51.5 million, down 25% to an operating margin of 12.4%, down 70 basis points. A lot of that margin compression due to the lower volume at 21% lower volume. And the productivity improvements and commodity cost reductions in the electrical segment didn't quite offset that detriment from the volume, but still pretty relatively good performance considering the tough end markets.

Turning to page eight on the power segment results, very good performance on the power segment. On the top line, weakness continued, particularly for demand and distribution products, so volume was down 15% to 179.7 million. Acquisitions benefited us in the quarter by 7%. We had a number of acquisitions in late September and November of last year that are still carrying over some benefit. And offsetting that was lower storm volume this year. You'll recall the third quarter of last year had higher than normal storm volume. Recall the likes of Ike and Gustav and Hannah. And this year, an exceptionally quiet quarter, so the impact of that was 6% lower volume from storms.

On the operating profit side, operating profit in the quarter was 39.8 million, up 15% with margins improving nearly six full points to 22.1%. And the two drivers to that as well are the commodity cost reductions. As we've talked in the past, the power segment is the most material, particularly steel content based, of our businesses, so has the most volatility from those costs, both up and down, and as well, the productivity benefits flowing through that business.

Turning to page nine in our cash flow, continued very strong cash flow performance. Operating cash flow of 143.4 million in the quarter driven largely by our improvements in working capital, specifically inventory, and capital expenditures of 5.6 million, down from last year. Principally last year had included in it the costs associated with our facility in China that we opened last year, so that gets us our free cash flow of 137.8 million.

That's it for the quarter. Now, how does that fit into the year to date? So year to date through September, the sales have been impacted by our declining end markets, year to date sales down 14%. Excluding the benefits of acquisitions, pricing, and currency, it would be down 17%. That results in margins and earnings impacted from the unfavorable absorption and this lower volume giving us margins year to date down 110 basis points. Offsetting the lower volume, of course, is the productivity and favorable commodity cost impacts, as well as the actions that have been implemented to reduce our workforce and our inventory levels, but with continued focus on generating good cash flow. So you see on page 11 the year to date results in absolute terms. Year to date earnings per share at $2.31 versus last year's $3.11, but free cash flow year to date of 277.8 million, more than 200% of net income and--versus last year's 200.9, which was over 100% of net income.

So let me turn to year to date results for the segments quickly. On page 12, you see that the year to date sales in the electrical segment of 1.213 million is down 19% - the broad based weakness in our markets, the currency headwinds. A bright spot within the electrical segment is our high voltage test equipment, which is up year over year. The operating profit of 110.4 million year to date, down just over three points in margin, obviously most of that coming in the first half of the year when we were ramping down inventory, taking a lot of absorption cost, as well as the cost of reducing our fixed cost structure, but the productivity and favorable commodity costs helping to offset the lower volume.

On a year to date basis on the power segment, we had sales flat to last year at 550 million, acquisitions contributing 10% of that volume year over year, with price realization from earlier in the year contributing a couple of points, but with weaker spending for distribution products. And again, operating profit year to date of 104.8 million, up 15%; operating margin of 19.1%, due to the focus on productivity, price realization, and the commodity costs. So that gives us our year to date cash flow on page 14. Again, the biggest contributor to our strong cash flow is working capital and specifically on inventory. And if you turn to page 15, the two areas of keen focus in working capital, one is on receivables and making sure that we're maintaining our focus on our receivables, our days outstanding. So you see that we're at just about 50 days, consistent with last year and it improved from the same quarter last year, with underlying credit quality and overdues maintained at a historically low level, so very good credit quality there.

On the inventory front, you see the decrease again in the third quarter as we have continued since the first quarter. Inventory is down 87 million since the beginning of the year, so the biggest contributor to our cash flow generation.

Turning to page six on our capital structure, you see that we finished the quarter with 412 million of cash on our books. No additional borrowings other than the two bonds outstanding, so we finished the quarter with a debt to cap of 31%. What I put in here you'll see as additional information is a pro forma to reflect the balance sheet after we funded the Burndy acquisition. You'll recall the Burndy acquisition price was 360 million. We used 278 million of our 412 million in cash and 82 million of commercial paper. So that brought us to a debt to cap of 34% on a post acquisition basis.

So with that, I'll turn it back over to Tim to provide some color on the rest of the year.

Thanks, Dave. Now, let's turn to page 17 and our outlook. We expect full year sales to be down roughly 13% compared to 2008, and that includes Burndy contributing 7% to our fourth quarter sales. Our margins for the full year will continue to be negatively impacted by factory absorption issues resulting from lower volumes. But our productivity and cost reduction actions are expected to provide a partial offset. The price cost favorability we enjoyed much of the year will lessen during the fourth quarter. And Burndy is expected to provide a modest contribution in the fourth quarter as purchase accounting items reduce operating earnings. We intend to concentrate on market opportunities and cash flow.

Looking into 2010, our largest market is non-residential construction and the outlook is for another year of decline expected to be in the high teens. This negative outlook is supported by a significant decline in contract awards, which continues to be hampered by high vacancy rates and very limited supply of financing. Residential markets are expected to improve, although we remain cautious about the rate of improvement. As a reminder, our residential business tends to lag construction starts by an additional two quarters.

In the industrial market, we expect to see modest improvements coming from historically low levels of activity. We expect capacity utilization rates to increase helping to generate a low to mid single digit growth in this market. Our end utility market is expected to be up slightly in 2010. Demand for distribution products should modestly improve as housing starts begin to improve. And maintenance spending also should improve, as much of it is being restrained in the second half of 2009. On the transmission side, opportunities for modest growth are expected as the need for more reliable and efficient grid remains, but the timing of activity slows due to the uncertainty of energy policies and reduced electrical demand in the near term.

We will continue to take the necessary actions to manage Hubbell, which I have highlighted on page 19. Similar to 2009, we will remain focused on managing the cost price equation, continue to reduce inventory levels, and generate positive cash flow. Our margins will benefit approximately 100 basis points from the actions earlier in 2009, including facility consolidation, low cost country sourcing, centralized shared services, and reducing staffing. As we demonstrated in 2009, we expect to perform well despite another challenging year of challenging markets through our disciplined focus on price, cost, and the relentless pursuit of operational efficiencies. Hubbell is financially strong and disciplined. Our products are as important as ever and we are here to serve our customers as their businesses return to growth. We expect to be more capable and more profitable as end markets begin to improve.

Thank you for your attention and now we'll be happy to take some of your questions.

Thank you very much. (Operator Instructions.) We'll take our first question from Jeff Sprague with Citi.

Thank you very much. Good morning.

Good morning, Jeff.

Could we just talk about power I guess first? Obviously, the year over year comparisons are tricky and skewed somewhat. What's kind of jumped out interestingly is on a modest sequential revenue decline there still is a very significant step up in the margins sequentially. Clearly, you are citing year over year cost benefit, but I wouldn't think you would've had sequential cost benefit. Perhaps I'm wrong. But can you just give us a little bit more color underneath what's going on in those power margins?

We would suggest that raw material prices have declined on a quarterly basis, especially led by steel, first second and third. And we would expect the third to be the quarter in which particularly steel prices hit their lows. So we would expect to see some increase in our commodity costs beginning in the fourth quarter.

And Tim, can you give us a little bit of a--kind of a walk on the variances as we think about 2010? In other words, thinking about kind of the carryover benefit that you have from restructuring that you've done in '09, the benefit into 2010, and any other related variances. I think you probably have a little bit more pension headwind perhaps.

Probably, yes. Certainly, once the depths of the recession takes us all as manufacturers a while to react to, and certainly there is kind of a delay as you ramp down plants and you get through the period of highest under absorption. And so, now we're on more of a steady tracking as inventories continue to fall. We still have several quarters to go. But probably not at the rate that you've seen us in the first three quarters. But reflecting the fact that continued weakness will occur in the non-residential markets, we would see the need to keep reducing inventories for the next three quarters or so, but just at a diminishing rate. So we think we have our plants down to the current market levels. And you still get under absorption, but it's more of a steady pace than the initial wave that happens when a big step down in volume occurs.

On the material side, we've seen the ramping toward a favorable material variance as commodity prices have declined. And steel--and basically all of them have started back up. I'm not sure if it's really related to increase in demand or maybe not domestic demand, but world demand. But certainly, it has started back up and for Hubbell the benefit of the cost price equation will diminish as time goes on, because the last industry wide price increases were fourth quarter last year. So that gives you an idea that certainly the third quarter was kind of the peak benefit of that. But the ongoing restructuring has continued and will continue. We have a whole series of action plans to shrink our footprint, to reduce costs on a continuing basis. And there's a whole series of small steps that we are taking even today and into next year. And I would expect that these kind of actions will continue at about the same pace as we have taken in 2009.

Will you attempt to price up anywhere in 2010, catalogue price or what do you think really the state of play is there? Obviously, there's perhaps an argument for price to go down on still weak demand, but people will have cost pressures. What's the state of play there?

I would say that prices move pretty quickly with changes in raw material costs on products that are--(a) tend to be commodity, and (b) tend to be largely made up of one or two materials. So you will see switch and outlet boxes, you'll see florescent lighting, you'll see some of the utility products have moved already, they have moved downward. They haven't moved downward as quickly as the rapid dip in raw materials, which is now coming back up. So they will continue to I think gradually decline. But we're not expecting any rapid change in price levels anytime soon. And I would say that to the extent there would be a spike in commodity costs, I would say that in this same category we would expect to be able to get some modest price increases in the face of a bad market anyway. Because if the cost increase is going to overwhelm your margin, you're willing to take even less volume just to keep profit on whatever you have. So I think there will still be a pretty--not a--certainly, a more muted, but not without the possibility of getting some price increases, if raw material costs go up.

And just tying it all together, all of those puts and takes, price, cost, restructuring, and everything, your comment on 100 basis points of margin for 2010, is your reported margin all in for all of those dynamics, up 100 basis points?

Yes.

All right. Thank you.

We go next to Bob Cornell with Barclays Capital.

Yes. Continuing on with some of Jeff's line of thinking, I mean, the power margins at 22%, I mean, those are margins I don't think I've ever seen before in that business. I mean, so it would look like you're running like 300 or 400 basis points above normal. I mean, is that a fair way to look at this?

Well, we can't say for sure how much the third quarter is above whatever a sustainable run rate is, because it's also a function of volume. And as I said before, we're expecting and we are seeing steel prices rise and aluminum prices rise. And certainly, those kinds of costs are some of the primary materials of our utility business. So we are expecting some decline and I really can't pinpoint for you the magnitude of that decline. But you would expect, because the fourth quarter has fewer work days, fewer business days, our volume will be down, I don't know, 8 to 10% or something like that on our core business, you would expect some decline in the profitability of each and all of our businesses. Power also would see that.

You talked about the prices coming down, but was there a lag between the realized impact of the raw material declines and the price declines?

I would suggest that commodity costs move much more up and--they're much more volatile in their movement than prices. Prices are going--let's say in the case of an inflationary environment, there's a lag on the price side. And in a case of a deflationary environment and material costs, there's a lag on the downside in price. And so, it's kind of more smooth than the gyrations of raw materials.

So the bottom line is you've got--the prices are coming down to reflect the raw material adjustments, but with a lag so you're getting a net benefit relative to adjusting to customer input, right?

Yes. And as you'll recall, last year when we were talking about the rise in raw material, we were explaining the fact that we were experiencing higher material costs before we could recover these increasing costs. So I'd say that where we are today, we would say that we have recovered the increasing costs that we have seen in the prior year, and that this next quarter will be something more of an equilibrium between gently declining prices with rising material costs.

Was there anything in the way of a LIFO gain in the quarter?

Dave?

There's $0.02 in the quarter, Bob.

The--how about--you mentioned non-res, but when you look at the funnel, your bid and quote activity, I mean, what does that look like and sort of what's your visibility at this point?

I would say basically what I said last quarter. There's a lot of churn in that quote activity, meaning that there's delays between or a longer time between quotation and beginning of jobs. This is related to the difficulties of securing financing. And every one of those is involved in trying to value engineer whatever the building was to begin with. So they're trying to find more efficient ways to light it, less expensive ways to light it. Those are the kinds of things where iterations take place and they may be willing to accept products that aren't the best products. They might--in a good, better, best scenario, they might be willing to step down on product level to get into their budget that they need to meet. So a lot of churning, certainly less quotation activity than a year ago, certainly the competitive landscape that you would expect to see as the market becomes smaller. But it appears that nobody is willing to give up all their profit margin at some low price.

Well, how did you come up with the down high teens forecast? I mean, what's that made up of?

We're really looking at the forecasting services that we use and the awards--the new construction awards being down substantially higher than put in place. And we're just trying to give you the flavor of what we anticipate that we could see. I don't have any better way to look at it than any of you, so you guys can plug in whatever you believe it's going to be. So my--our estimates I think are just one among many. But we're trying to indicate that non-residential will be down by a significant amount and that our other markets will be up somewhat from a little to a reasonable amount in residential.

Well, when you look at the--again, when you look at your funnel in the bid and quote activity, using that as a measure, what would you expect the non-res business to be doing in the context of your--of visibility the next three to six months?

I would say that to characterize what you can read in the public about what is really getting built in terms of buildings, there is very little in the way of shopping centers or hotels, and that most of the bid--or a larger portion of the bid activity is around public buildings, like government buildings, like schools, hospitals, things like that, and certainly very small, but there is still a noticeable amount of jobs that are supported by the stimulus package. So--.

Say again? There's what--what did you say?

There is a small amount of these jobs coming from the stimulus package that we can actually identify, but not a big deal.

Final question from me. What's the update on the lighting integration? I think Spokane is finally closed. I mean--and was the reconfiguration of the lighting business a big part of the overall profit jump in the quarter?

On the--Spokane has been closed for about a year. And we are in--we are past the heavy lifting on the lighting side. Our margins have improved sequentially each quarter on the C&I side. And I'm pretty sure--I'm just speaking from memory on the residential side. And it's just cost takeout and the general kinds of things we're doing in the rest of the business. We're still reducing our footprint everywhere on an incremental basis. But nothing bigger in lighting than anywhere else.

Okay. Thank you.

(Operator Instructions.) We go next to David Lim with Wells Fargo Securities.

Hi. Good morning. Most--in place of Rich Kwas, I had a couple of questions here. What was the margin--I mean, can you guys quantify the margin impact from the raw materials in the quarter?

The margin [overall]?

Yes, overall. I mean, how much has raw materials impacted your margins, if that's quantifiable?

You mean margin year over year?

Yes (inaudible).

It's between two and three points.

Two to three points?

Yes.

Got you. Now, if you could remind us, do you guys have any like hedging activities for your raw materials or is that pretty much on spot buys or how does that work again?

There is very little hedging. It's mostly on pre-buys.

Okay.

And the biggest commodity being steel, so there is no hedging--.

--Okay--.

--The market for buying in advance based on [fees].

Got you. And finally, the other--the last question I had is from a segment perspective, do you guys have any kind of detail on--you guys (inaudible) some stuff on FX and acquisition. I was wondering if there was kind of any pricing impact for your two segments in the quarter?

Pricing was--overall, pricing was net zero.

Net zero? Okay.

Okay? And it was quite favorable in the electrical segment and slightly negative in the power segment.

Negative in the power. Okay, great. That's all I have. Thank you very much.

(Operator Instructions.) We go now to Noelle Dilts with Stifel Nicolaus.

Hi, guys. Good morning.

Good morning.

Good morning.

I was hoping you could provide us with just a little bit more detail on some of the business within electrical products. I know you mentioned that commercial and industrial lighting was down a little bit less and that high voltage test equipment was strong. But can you give us a sense of maybe what went on generally with wiring devices and residential lighting, maybe some info on (inaudible) as well?

I think, Noelle, that it's actually pretty broad based and all within a fairly tight band of that 21% that we reported. So I--and that's--I kind of picked out the outliers, the CNI lighting being slightly better or not as bad, and the high voltage test equipment being one of the positives in there just in the [initial market]. But everything else was pretty much in that band of plus or minus a couple points of that 20, 21%.

Okay, that's helpful. And then, looking just generally, you're citing kind of a mid-teens decline in non-res construction in 2010. What would you say is the general lag between your electrical products that would go into non-res construction in the general market? (Inaudible) nine to 12 months before. So does that give a bit of a negative outlook for 2011 as well? And what would be some factors that might mitigate that?

I would say your estimate of nine to 12 months is probably what we use without any real science behind it. It's just like our comparison to statistical trends. Certainly, a lot of what happens in 2011 is having to do with the credit story in the United States more than any other factor. And it's pretty hard to predict at this point what's going to happen on the commercial mortgage side, how much money is going to be available for those developers who want to build buildings. So it's part of the reason we're not giving specific guidance at this time, which we have this umbrella of an economic story in the United States, which we have not been able to accurately predict its effect on us. So it certainly doesn't look like a huge upturn from this point in 2011, but it's pretty early for us to be seriously thinking about (inaudible) at this point. Maybe six to nine months from now.

Okay. All right. That's helpful. Thanks.

And we take our next question from Steve Searl with Conning Asset Management.

Hi. When you say you're still evaluating your permanent financing alternatives with respect to the Burndy acquisition, is it an issue of deciding whether you want to put another slug of permanent debt on the balance sheet or repairing the balance sheet some with more of an equity or equity related type of security? Can you just elaborate on your thoughts there?

It's really all of the above. It's really looking at our--the impact of the acquisition and you see how we've utilized cash to do that acquisition, and looking at our future cash flow generation and our future cash flow requirements, and taking all of those things into account. So it's really an ongoing valuation.

Do you have a timeframe for coming to some sort of conclusion on that?

Nothing specific.

Okay. And do you expect any inventory reduction benefit to working capital in the fourth quarter or has that pretty much run its course?

I would say we're expecting continued inventory reduction, but certainly not at the rate that we've seen in the first nine months. So a slowing of that and we would expect to see some more inventory reductions in the first half of 2010.

Okay. And one last question. If I missed it, I apologize. Did you give guidance for full year CapEx for '09 and initial guidance for next year?

We gave neither, although I think the remainder of this year will be consistent with the first three quarters. So nothing unusual anticipated in the fourth quarter.

And any sense directionally where it might go in 2010?

I--other than--directionally, it will be higher next year. It will increase next year. By how much, it's too early to tell.

Okay. Thank you.

And Mr. Sperry, there are no further questions in the queue at the moment, sir.

Okay. Thanks very much, everyone, for joining us. To the extent you want to call Jim or I afterwards, we're happy to do follow-up questions.

Ladies and gentlemen, that does conclude today's conference. Once again, we thank you for your participation.