Hubbell Inc (HUBB) 2009 Q4 法說會逐字稿

Good day, everyone. Welcome to the Hubbell 2009 fourth-quarter earnings conference call. Today's call is being recorded. Now for opening remarks and introductions I will turn the call over to Mr. Bill Sperry. Please go ahead, sir.

Thank you and good morning, everyone. Welcome to Hubbell's fourth-quarter call. We know it's a busy day; we appreciate you joining us. I'm here with Tim Powers, our Chairman, President and Chief Executive Officer; Dave Nord, our CFO; and Jim Farrell, our Director of Investor Relations.

Hubbell announced its fourth-quarter and full-year 2009 earnings this morning and hopefully you found that press release on the wires or on our website. You'll also find presentation materials on our website that Tim and Dave will be referring to today during the call.

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'd 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 turn it over to Tim.

Thanks, Bill. Welcome, everyone, and thank you for joining us this morning. As is our usual practice with these calls, I'm going to provide you with a summary of results we announced this morning, as well as some comments on market trends and conditions; then Dave will walk you through a detailed discussion of our financial performance. Then I will conclude with my perspective on the outlook for 2010 and some closing remarks. Then we will open it up and take some questions from you. Let's begin on page 3 of the presentation material.

The market conditions were challenging, especially in a non-residential construction where we continue to see market declines. The residential construction and industrial and MRO markets showed some signs of bottoming out as indicated by slowly improving new housing starts and improving factory utilization rates. The Power markets softened as demand for electricity shrank and utilities reacted strongly in the second half of the year.

I am pleased to report, considering the challenging markets we faced, our performance was very strong. Our reported sales declined 9% to $592 million reflecting an 18% decline in organic volume. Despite the lower sales rates we were able to generate an operating profit margin of 13.4%, better than the 2 point improvement over our last year's fourth quarter.

Productivity initiatives were the leading contributor to our margin performance. We earned $0.84 per diluted share, up slightly from last year's level. And please note that our earnings were spread over a higher share count as we issued nearly 3 million shares of common stock in the fourth quarter.

I'm also happy to report that the integration of Burndy is proceeding very well. Their volumes are in line with the same markets we serve and their underlying margins are very strong, while fourth-quarter contribution was muted by acquisition accounting. The quicker synergies like centralized purchasing and freight are being realized and the sales forces are coordinating their efforts very well.

Now let's return to the full-year results for 2009. We began the year focused on maintaining margins and generating cash flow given the difficult market conditions we faced. While our sales declined 13% to $2.4 billion we were able to deliver operating margins of 12.5%, only a 30 basis points decline from 2008. We achieved these results through productivity improvements including streamlined actions and facility consolidations while commodity costs contributed as well.

We earned $3.15 per diluted share and generated a record amount of free cash flow, better than two times our net income, driven largely -- driven in large part by reductions in inventory levels.

The year presented many challenges and, considering that productivity improvements with the largest driver of financial performance, I want to express my gratitude to the efforts and commitment demonstrated by our people in responding to markets so swiftly and decisively. Let me turn it over to Dave now and have him discuss the financials in more detail. Dave?

Okay. Thanks, Tim. Good morning, everyone. And as Bill mentioned, we're cognizant of the busy day in earnings releases. So I'll try and go through this as quickly as we can and hopefully, if we miss anything, follow up with a question.

Starting on page 4 of our accompanying webcast materials, talking about the fourth quarter. We're reporting $591.9 million of sales, which is down $60 million from the same quarter last year or 9%. There's broad-based market weakness that contributed to that ranging in businesses from high single-digit volume declines to as much as 20%. On the 20% side the biggest impacts, and we'll talk more, was on those that are exposed significantly to nonresidential construction, the lighting business and some of the weakness that we anticipated in the Power segment.

Adjusting for the acquisitions, principally Burndy, but you'll recall we also had an acquisition late last -- late in 2008 in the lighting business that combined contributed 8% to year-over-year growth. So excluding that and no price impact per se, a little bit of currency tailwind, our core volumes were down 18%.

Despite that significant volume weakness, very good, continuing good performance on the gross margin side with gross margin reported at 32.4%, 390 basis points better than a year ago. A lot of things contributing to that, productivity ongoing, the biggest contributor nearly 2.5 points of that; commodity cost lower year over year, that's another 2 points. And then some favorable inventory adjustments contributing just over 1 point of that benefit.

Now what's in there is -- the biggest piece that's in there is our LIFO cost benefit, as we've experienced throughout the year and we anticipated would accelerate late into the year. As you know with LIFO inventory valuation, it's only when you start to take your inventories down to a level that gets you into much older inventory valuation layers. And so it was expected to be more significant in the fourth quarter, ended up a little bit more than we expected, the value was about $7 million of contribution.

That was a couple million dollars more than we expected because we were able to get our inventories, continue to bring them down in the fourth quarter. But there are some offsets to that, some fair market value adjustments, some excess inventory adjustments as well as some of the adjustments that result from some of the purchase accounting requirements in acquisitions. So when you net all that down it was about $5 million contributing in the fourth quarter.

Turning to page 5, on our selling and administrative costs, down 1% from last year at $112.3 million. Included in there is the acquisition impact -- both the costs for executing the acquisition transactions and, more significantly, the costs in absolute terms that come from the acquisitions, particularly Burndy. Excluding those costs on a comparable basis selling and administrative costs were actually down 13%, consistent with our overall volume levels.

We're benefiting on the margin as a percent of sales from our streamlining actions, which gave us a little bit more than a half a point of benefit. But offsetting that was some of the headwind that we have been facing throughout the year on pension cost and that was a half a point of headwind.

So when you roll all that into our operating profit, we reported $79.5 million on a consolidated basis, up 10% year over year despite the significant volume decline and a 230 basis point improvement in margin for all the benefits of productivity and our commodity costs and our favorable inventory, obviously more than offsetting the impact of our lower volume and absorption impact. So we talked about the 390 basis point improvement in gross margin and that's offset by the 160 basis point detriment coming from selling and administrative costs.

Turning to page 5, our net interest expense of $7.6 million, comparable to last year's level, so no real change there, principally due to comparable borrowing levels year over year. We did have in the fourth quarter, you'll recall, some commercial paper borrowings resulting from the acquisition -- associated with the acquisition of Burndy that were quickly repaid through strong cash flow generation as well as from the proceeds of the stock offering in November.

On the tax line you'll note that on a year-over-year basis in the fourth quarter we're reporting a 28.5% effective rate, which is up 90 basis points from last year and that's due to more higher-level of cost or a lower level of benefit attributable to our foreign operations. And then what our normal year end or what are typically fourth-quarter adjustments that occur.

You'll recall last year's fourth quarter was impacted and the rate was lower in the fourth quarter because we had to recognize the full-year impact of the R&D tax credit. And that drove the rate of down in the fourth quarter last year.

This year we have a couple of items that are impacting our rate from what we had been running and what we had been anticipating. You'll recall we have been running at 31.5%. And we are, for the full year, running lower and all that comes through the fourth quarter giving us a rate of 28.5%.

The two items, two principle items contributing to that -- one was as we evaluated and continued to review our deferred tax accounts we identified deferred tax accounts that were no longer necessary and required adjustment and that required a -- resulted in a net reduction of our income tax expense.

At the same time we also have ongoing IRS audit analysis and ongoing consideration of our potential exposures. And so we had an adjustment under FIN 48 that partially offset the benefit that came from our deferred tax account adjustments. When you put all that together that contributed to what was a 3 point lower rate in the fourth quarter or about $0.04.

Now all of that is driving the comparisons and the results in the fourth quarter. But as we'll talk later, the rate is expected to return to a rate higher than 31, in fact we're anticipating even more headwind next year from a lower foreign tax benefit contribution, and so our rate next year will be 32.5% at this point.

So when you put all of the operating and non-operating results together you end up with our net income as reported at 49.6%, up 7%, and earnings per diluted share of $0.84, up $0.02. And I think we've talked about everything but the impact of the share issuance in the fourth quarter.

You'll note that our outstanding shares for diluted purposes is up $2.5 million, largely as a result of the impact of the equity offering, but there's a piece that's just attributable to the recovery in the stock price over the last year. So all in that provided about $0.03 of headwind to our earnings per share.

Let me turn to the segments for the fourth quarter. First the Electrical segment. Electrical segment reported sales of $436.4 million, down about $22 million or 5%. Saw the broad end-market weakness, but with acquisitions adding 12% to our growth year over year. All of the acquisition impact for the Corporation was reflected in the Electrical segment results.

So, our core volume down 18% and, as I mentioned earlier, you've got the lighting business most with the biggest exposure to non-residential construction, that was down 18% year over year, our Electrical products down 13% and our wiring business down 8%. And I think that's really indicative of two things contributing.

One, that's the business that has the most quick reaction to market declines, so it had the first to feel the impact of slower order rates in the industrial sector in the fourth quarter last year, so to some extent you've got easier compare. And at the same time you also have the quickest recovery and so there's some element that is indicative of the beginnings of recovery on the industrial sector.

On the operating profit side, reporting of $53.3 million of profit, 12.2% margin up 240 basis points from the fourth quarter last year. And that performance, while the market weakness is across the board, the improved performance is equally across the board, attributable to our productivity improvements, our commodity cost reductions, the favorable inventory, more than offset our lower volume in the negative dragged from the significantly lower core volume.

Turning to page 9 on the Power segment. Sales of $155.5 million, down 20% with weaker demand in all of the sectors, transmission, distribution. No impact from acquisitions as all of the activity that occurred in 2008 was before the fourth quarter, so it's now all comparable.

On the performance side -- and that volume decline is consistent with what we were anticipating in the second half of the year as we started to see the slowdown begin in the third quarter. So not a big surprise there and we'll talk more about the going forward view.

On the operating profit, $26.2 million of operating profit; operating profit margin of 16.8%. Still a 250 basis point improvement due to the same factors as we've seen in the electrical segment, commodity cost reductions, the favorability of the inventory adjustments, productivity but with offsetting lower volume and pricing.

And I think one thing that we've talked about from the third quarter through now, that sequentially margins are down just over 5 points, nearly 3 of that 5 points is due to lower contribution year over year from price cost as we had indicated at the third quarter. The biggest year-over-year benefit was in the third quarter, but was not an ongoing run rate. And the remaining decline from the third quarter is really due to the lower volume from the third quarter.

So let me turn now to the cash flow, which is continues to be a very strong performance. Fourth-quarter operating cash flow of $100 million and CapEx of $10 million, giving us free cash flow of $90 million. Let me talk about a couple of the elements in there.

Obviously we still have good performance in our working capital contributing with our accounts receivable, contributing significantly to the fourth-quarter cash flow. But also continuing improvement on inventory, certainly at a lower rate than we saw in the first nine months, but still a $9 million contribution in cash flow.

We also have -- what you'll see in the other line, the $19 million, we also have the beginning of realizing the benefits from the Burndy acquisition. You'll recall as we talked about Burndy, one element of the acquisition in addition to the underlying operating company, was some of the tax attributes that existed principally from net operating losses that as part of our ownership we can utilize. And we began to utilize those in the fourth quarter and that contributed $17 million to cash flow.

On the capital expenditure side, that $10 million, although while lower than last year, is actually a 50% increase from the run rate that we were experiencing through the first nine months. We're very, very conscious of cash control and management and we've started to let off of that. And I think you're going to see that trend, we expect that trend to continue going into 2010 and get back to more normal operating CapEx investment levels probably in the $50 million to $60 million range.

Okay, so let me turn now to just some of the numbers on the full year and how that fourth quarter contributed to the full year. So we finished up with sales of $2.4 billion, down 17% year over year and excluding the benefit of acquisition and pricing down 17% organically. Despite that organic volume decline operating profit down only 15% and, most importantly, margin only down 30 basis points despite that significant volume weakness that we had to deal with.

Our tax rate for the full year then is 30.7%, up from last year's 29.9%, so a higher tax rate, although lower than we had been anticipating. All that giving us our earnings per share of $3.15, down 20% from last year's $3.93, but with a higher share count providing about $0.03 of drag to earnings per share.

And most importantly, when you take what has been exceptional cash flow performance throughout the year, add the fourth quarter, we end up with free cash flow of $368 million, just under 16% -- if you measure it against sales just under 16% of sales. A really outstanding performance by the entire organization.

Touching quickly on the segments for the full year, the Electrical segment finishing with sales of $1.65 billion, down 16% with broad-based weakness throughout the year. There was the benefit of acquisitions on the full year of about 4%. We've managed through some foreign currency headwinds which were at 2 point detriment. And the one business within that segment that had still strong market performance was in our high-voltage test equipment.

Despite that significant volume, while operating profit for the year was down $163.7 million, margins finished just under 10% at 9.9%. With the margin compression impacted by the lower volume compounded by our drive to take inventory out, but significantly offset, not completely, by our productivity efforts and our favorable commodity cost.

And I think importantly, you have to remember that the 9.9% for the year was significantly impacted on the negative side from the results that we were dealing with in the first half, both the rapid decline in volume, rapid impact of reducing inventory, as well as some of the cost reduction actions that we took in the beginning of the year that we didn't start to realize the benefits until the second half. So I think that bodes well for finishing the year strong to start 2010 strong.

On the Power side, the weakness in the second half more than offset the strength in the first half, so the full year results having $705 million of sales down 5% with an acquisition benefit of 8% year over year. In the second half, significant slowdown with the distribution side of the end markets most constrained.

Despite that volume decline very good performance on operating profit and margin, full year operating profit of $131 million, up 10%, and operating profit margin of 18.6%, up just under 3 full points due to both commodity cost reductions and favorable price cost, as well as the productivity benefits more than offsetting the volume decline.

And again, the cash flow on a full-year basis of $398 million on an operating basis, $368 million after capital expenditures, big drivers on the working capital, both accounts receivable and inventory leading the charge there.

You see that on the working capital performance on page 15 where we have receivables continuing to improve. In fact we, despite weak markets, maintaining good discipline around our dating and our collections. Our overdue balances are at -- continue to be at historically low levels and we've reduced our days outstanding by nearly three days from the fourth quarter.

As well inventory down, although the reported inventory that you see of $263.5 million includes inventory that was acquired in the fourth quarter with Burndy. Excluding that, that was about $23 million. So excluding that we have taken down our net inventory for the year by $95 million. A very strong performance. All of that leading -- that cash flow giving us the ability to further strengthen our balance sheet with an increase in our cash balances of $81 million from last year, that after making an acquisition of Burndy for approximately $360 million.

While we did have some commercial paper outstanding in the beginning of the quarter, there are no outstanding balances at the end of the year. Our long-term debt position is consistent with what it was last year at $500 million before unamortized discount. So we've improved our debt to capital from last year end by 5 points to 28% and our net debt to capital with our strong cash flow performance by 7 points to 12%. And we still have our unused currently available revolver for $350 million, which still has two more years to run.

So with that let me turn it back to Tim to wrap up the year and give some thoughts on next year.

Thanks, Dave. I'm on page 17. To sum up the year, we experienced challenging end market conditions, but Hubbell's financial performance was excellent. We took swift and decisive actions to get our resources in line with sales levels, namely staffing facilities and inventories. The result was the generation of substantial free cash flow which we were able to invest in Burndy. We also issued equity in order to maintain our strong balance sheet, to retain the flexibility to make opportunistic growth investments in 2010.

Let's turn to page 18 and review our outlook for 2010. Our largest market is non-residential construction and the outlook there continues to be challenging. The drag from weak demand and unavailable credit will keep project starts down and our expectation for this market is to be off roughly 20%.

Industrial markets have been showing some signs of improvement. For example, in capacity utilization. We expect these markets to be up between 2% and 5%. The residential construction market is operating at a very low level and we expect there to finally be some growth in 2010. Though we are cautious compared to the speed and magnitude of some forecasts we have seen, we are planning for a 5% to 10% pickup here for 2010.

Despite the caution displayed by utilities in the second half of 2009 the demand for power products is expected to improve slightly in 2010. Distribution, the larger component of our business, should benefit from the expected increase in housing starts and the rebound in maintenance spending that was deferred last year. The transmission side should benefit from pent up demand and the need to upgrade and enhance the grid despite the fact that some projects are being delayed. Our expectation is for a low- to mid-single-digit growth in our utility markets.

On page 19 you will see that this outlook distills down to roughly flat sales for Hubbell. Although we expect some tax headwind, we also anticipate that productivity measures will benefit us. We will also continue to focus on generating free cash flow. We look forward to some rebound in several of the markets this year and believe that we are well positioned to exploit growth in pockets showing the most profit.

These areas include energy-efficient buildings, both in the retrofit and new construction; building automation products; residential lighting; and the core products required to enable an expanded and upgraded electrical grid. Hubbell is well positioned to serve its customers with a broader range of high-quality reliable products and I am looking forward to a rewarding 2010. Thank you for your attention and now we'll turn it over to you for your questions.

(Operator Instructions). Bob Cornell, Barclays Capital.

Hi, everybody. A couple of questions. Tim, you talked about non-res being down 20%, I understand. Do you see that being a first half load decline, a second half load decline or how do you see the profile of that decline?

I see the extension of this trough in the economic recovery being slow. I'm not looking for any big movement one way or the other there. But if I were to guess I would say certainly a little stronger second half than first half.

Right. That is consistent. So, then the other question just on initial timing. In Power for example, how much would you say the commodity cost reduction benefited margins this year, Tim, Dave, somebody? Leaving out productivity and all the other factors, if you just focus on the commodity cost benefit, how much was that a contributor to Power margins in the quarter?

Just a second.

In the quarter?

Take the year, I'm sorry, give me the year.

I think in the year the price cost on the commodity side gave, hold on one second -- this is an important number, I don't want to -- it was probably about 2 points.

Do you want to take a crack at the Electrical, same question?

Electrical probably about the same. Power is maybe a little bit more and Electrical is probably about 2 points. Power might've been closer to 3.

And so when we look into 2010 we see those dissipate and then maybe go negative a little bit. How would you suggest that we look at that same contribution in '10 versus '09.

Certainly we have much more limited ability to raise price, but even in the fourth quarter we had some selected price increases reflecting the rise in copper and aluminum. But the ability to do that on a broad scale is much more limited. So we're not anticipating any big price increases in the face of the markets we serve.

On the other hand we're not anticipating a great increase in the commodity cost. So while there was a bit of a bump up in steel in the fourth quarter, we've seen that abate in the first quarter. There's a little pressure on copper aluminum. We don't see that as sustainable. There's just not the demand for these metals. We think it's -- well anyway, speculation about that is hard, but let's just say that we're not expecting any great swing in the cost/price equation as we go forward this year.

One final question. What about the Burndy contribution to op profit in '10?

We would anticipate that its margins after purchase accounting will be at or slightly above the average of the Company. And that's on a before purchase accounting basis they would be several points higher than that.

Okay, thanks.

(Operator Instructions). Christopher Glynn, Oppenheimer.

Thanks, good morning. Question on the Power systems using your utility outlook as a proxy for that segment next year. The fourth-quarter revenues were really well below the run rate of the last three. So how does that roll into slightly up next year? And it sounds like the demand levels that rolled through in the quarter, you're calling it a pretty isolated event it sounds like.

Well, Chris, I would say that if you look at the kinds of products we sell, they're kind of flow goods products. So we saw the utilities begin to cut back on their purchases of these standard materials as early as June of this year. And certainly that accelerated as the year went on. So if you look at 2010 you'd expect to see almost the reverse from our business and our revenue meaning that you'd have negative comparison the first couple quarters on the utility side and probably positive compares on the backside of the year.

We don't think the spending curtailment by utilities is sustainable. We think that they reacted late but swiftly. But on the other hand we think that the channel has been reduced in terms of the utility distributor inventory as well as public utility inventory. So we're anticipating a year that begins to get stronger as it goes forward.

Okay, would you anticipate that the fourth-quarter revenues were the low watermark, so to speak?

I would.

Okay. And then I guess we've got a lot of detail on the electrical margins and the factors in the quarter. But summing up from a high level, usually your fourth quarter is down quite a bit seasonally. So I'm wondering if there was a reset really in the quarter with some of the productivity benefits flowing through net of the other moving parts.

Be specific about what you're saying about a reset. What are you asking me so I can --?

Well, the last several years the fourth-quarter margins there tend to go down quite a bit from the third quarter. And here they're roughly flat. So whereas you referred previously to the benefits from your rightsizing really taking hold in the second half. Was it another step up in the fourth quarter?

Are you factoring Burndy in there?

I thought Burndy was not accretive to margins in the fourth quarter.

Talking about operating profit.

Yes, operating margins.

Overall we experienced very good productivity the whole year. We were in a significantly better position in the fourth quarter of this year from staffing of our factories. As you recall, last year we were all scrambling to reduce the level of production there. So productivity was better this year in the fourth quarter than last year in the fourth quarter. So those were contributing factors to a better fourth quarter for this 2009.

I think, Chris, to add to that, we also have historically seen a bigger drop-off in the fourth quarter, more seasonality and I think we saw weakness through the year. So the quarter's sequential volume decline was more muted than has historically been the case. So I think you get that -- some contribution from that.

Okay. And you expect to hold 12%?

Certainly we're working to improve our operating profit margin for the coming year. As you can tell by our guidance that if you take any one of our brands we're expecting the business unit volume to decline and that gap to be filled by Burndy. So plus or minus a couple of percent that would be our revenue guidance for next year. And that we have worked hard to get our resources down to the right level and our productivity up. And we will continue to take further actions during 2010 to assure that our productivity continues to improve.

Chris, I would just -- the one thing I would add, because there's been a lot of discussion. We make the comment about 100 basis points of margin improvement from our productivity actions and streamlining actions and I think it's an important element. But it's not -- to be clear, it's not a net improvement. It is what those actions will contribute and help to navigate through what might be other challenges from lower volume.

We're assuming -- from our purposes we're assuming parity in the price cost, that there's uncertainty around that. But in a steady state the things that we did in '09 should contribute to improved margins but there are a lot of pieces moving both ways.

Okay, great performance last year. Thank you.

Jeff Beach, Stifel Nicolaus.

Good morning. Can you give us a rough estimate of the decline you just experienced in the fourth quarter in the nonresidential? If you gave it I missed it. And what you estimate it was in the third quarter just to get a sense going into 2010 how bad it is right now?

Well, I think the best -- what we would look at is the lighting business in particular, which had fourth-quarter declines year over year on the C&I side about 20%. So that's the magnitude and it's kind of consistent with what Tim has mentioned as we look at that business for all of '10.

So essentially if you're running down about 20% right now you're not looking for much of a change in 2010?

Not on the run rate of change, no. I think if you look at any of the Dodge or other forecasters you'll see a predicted continuing decline of orders of that kind of magnitude. So we're at that the -- we're approaching what we believe is the trough of non-residential construction in 2010, whereas the rest of the markets we think are bottoming and beginning to improve.

Can you -- I don't know if in the last quarter or two you've mentioned this, but the old industrial technology segment, can you just comment about some of those businesses and how they've been performing and whether that's representative of your industrial comments in terms of the outlook?

Yes, I can give you a pretty good idea on some of that. So, we have business units that supply components to really basic industries like steel production and mining and so on. And as we got into the beginning of this year their volumes had dropped 40% to 50%. And we are seeing some rebound in maintenance and repair spending by steel mills, by the automobile industry, by the aluminum industry.

So we are encouraged by that and this is very typical of what happens when you have a severe downturn. So they are contributing pretty good profit margins. I'm quite pleased with how they've been able to navigate, but certainly they've taken major hits on the top line and we see some light there of improvement.

All right. Thanks, Tim.

(Operator Instructions). David Lim, Wells Fargo Securities.

Good morning, gentlemen. The question that I have, I want to stick with commodity cost and the pricing effect. Can you quantify that a little more? I think you mentioned that it's going to be benign. But I guess what I'm trying to get at is with a possible rising commodity cost how confident are you that you can offset that through pricing?

Well, if we were to see a real spike in commodity costs, a significant one, we think it would be quite difficult to get broad level pricing in such a weak market. That is not our view though. Our view is that we will have muted commodity cost increase from the current level and that, for instance, there was a little bit of a spike up in steel which is not a commodity that you can trade in markets and certainly in the first quarter they went down.

So really the underlying demand for all these metals is still looking like recession levels. So really it depends on what happens. But our forecast is that we're not going to see a spike of significant size. And that if we get some pressure it will be one that we can handle, that's what our guidance is telling you.

Got you. Now on the 100 basis points in productivity improvement, now that's a strict -- is that just strictly productivity or the streamlining action? That doesn't include any kind of commodity cost or pricing actions that you might see in 2010, correct?

No, it's just, as Dave pointed out, related to those specific actions. We've been asked continuously, what's the benefit of doing all the lifting and restructuring and that's it. But certainly you've got many variables, as Dave pointed out, which is lower volume and its impact on factories and the price/cost level and things like that. So we're just trying to provide that guidance of that one specific element.

Just to add a little more color to that, there are really two principle elements to that. Half of it or so is associated with the staffing actions, the very difficult staffing actions that we had to take to adjust our capacity levels down. Our staffing levels are down, excluding the impact of acquisitions, our base business down 12% year over year.

So you're getting the benefit of that lower cost structure. And the other part of it is some of the facility rationalization, the actions that we've been taking continually, some of those costs were incurred in '09 that will not be incurred next year as well as the benefits from those closings. So it's really two elements contributing to that.

Got you. Now if we look at operating margins for the full year, I mean I think it was like in the mid-12s. Directionally what should we think of when it comes to 2010 relative to '09, your '09 actuals?

Our ambition is to continuously try to improve our margin and our ambition, as it always is, is to try to add 100 basis points to our margin. We've got headwind here that may not allow us to get the whole 100 basis points, but that's our ambition. So we've got, as we pointed out, the lower volume issue in front of us and the unknown price/cost equation. So we know it'll be quite difficult to get 100 points, but we're certainly looking to improve somewhat.

I guess the read that I'm getting from you is there is more potential for upside margin improvement in 2010 that outweighs more of the downside risk. I mean is that a fair statement?

It would be if you also accept our view on price/cost.

Got you. Okay. That makes sense. Another -- one other question. We've noticed on a sequential decremental margin basis on the Power side was approximately 56% quarter over quarter. And I was wondering if you could provide a little bit more color as to how that came to be?

You're talking about from third to fourth, is that what you're saying?

Yes, exactly. Yes.

Well, there are two factors. One is obviously the volume which is pretty straightforward. And the second is, as we indicated, that the third quarter benefited from an unusually wide gap between price and cost. And so we were at the bottom of the commodity cost story and in the fourth quarter our input costs were at a higher level than they were in the third. So that's how you get the answer.

Got you. And then my final question is related to your tax. If I heard you correctly, is it more of a -- I think you said your tax rate is going to increase. Is that more due to more profitability in North America or less profitability overseas or how should we take a look at that?

It's really the former, more profitability in North America, so that diminishes the benefit that -- the relative contribution from the benefit we enjoy in some of the international operations. So it's not that the internationals are making less, it's that the North American is making more.

Okay, thank you very much, appreciate it.

Jeff Sprague, Citi.

This is actually Brian Konigsberg stepping in for Jeff. I had a real quick question. On your non-res exposure, as far as what you sell what would you say is related to MRO or energy efficiency relative to say new construction type of product?

For non-res?

Yes.

Most of our products that are non-residential would be related to the construction of new buildings or the retrofit of lighting and building automation systems. So the maintenance component, I'm trying to think, would be relatively small, relatively small.

Okay, great. And also, just looking at your channel inventories, I assume they're relatively low right now. Are you seeing any evidence of a restocking at this point or maybe the end of destocking?

I would say that our distributors are in a cash maximization mode that almost all suppliers and the electrical business have very high service levels. Making it quite easy for distributors to maintain their low inventory positions. And I think I'm not expecting any refilling. What we will see probably is some manufacturers as the market moves in the second half of the year doing some inventory rebalancing and adding more inventories.

But destocking is done?

Maybe not quite, it depends. We're still talking about a substantial reduction in non-residential construction and all those commercial products that a distributor would see will continue to decline based on anybody's forecast a double digit amount. So I would say that distributors, to the extent they possibly could, would try to continue to lower their investment in those kinds of products, maybe another 10%.

Okay. And finally, do you have any restructuring plans for 2010, any projects that you have on the docket?

We always have projects like that, but nothing that we would expect to result in being called out in any special way. They're included in our operating results as they have been in the last few years.

And finally, with the tax rate moving up in 2010, does that incorporate the assumption that R&D tax credits get renewed? And if not, what would you say would be the impact if it hadn't gotten renewed based on the historical impact?

It does assume renewal.

Does assume, okay.

Does assume renewal.

Great, thank you very much.

And that concludes our question-and-answer session today. Mr. Sperry, I'd like to turn the conference back over to you for any additional or closing remarks.

Thanks for much, thanks for joining us, everybody. If you have any follow-up questions, Jim Farrell and I will be around to do those. And again, know everyone has got a busy day, so thanks for joining us.

And that does conclude today's conference. Once again we thank you for your participation.