Hubbell Inc (HUBB) 2010 Q1 法說會逐字稿

Good day, everyone. Welcome to the Hubbell Incorporated first quarter results conference call. Today's call is being recorded. Now for opening remarks and introductions, I would like to turn the call over to Mr. Bill Sperry. Please go ahead, sir.

Thank you and good morning, everyone. Thanks for joining Hubbell's first quarter 2010 earnings call. Here with me today are 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 first quarter earnings this morning and hopefully you found the press release off of the wires or on our website. You can also find presentation materials on our website that Tim and Dave will be referring to on our call today.

Let me refer everyone to the paragraph in our 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 that paragraph in our release, and I would like to consider it incorporated by reference into the call this morning.

In addition, we make references to non-GAAP financial measures. Those measures are reconciled to comparable GAAP measures in the appendix of the presentation materials. With that, I will turn it over to Tim.

Thanks, Bill. Welcome, everybody, and thank you for joining us this morning. As is our usual practice with these calls, I am going to provide you with some overview commentary on the results we announced this morning, and then Dave will walk you through a more detailed discussion of our financial performance. I will conclude with my perspective on the outlook for the remainder of 2010 and some closing remarks. Then we will open it up and take some questions from you.

We will refer this morning to presentations materials you have hopefully found on our website. I am starting on page 3. Our first quarter results are reflective of some of the cross currents we are feeling in our end markets, where we are facing volume pressures from weak trends continuing in nonresidential construction. Utilities are continuing to follow their cautious path they began in the second half of last year but are showing signs of improvement on a sequential basis.

We are beginning to see indications of growth in the residential construction sector. Our industrial markets have demonstrated some rebound due to growth in output capacity utilization and spending on capital equipment. Energy efficient buildings have driven growth in a couple of key areas, including building automation and retrofit relight market, where, for example, we have seen orders increase over 30% from last year.

In this type market, our focus continues to be in managing price, costs and productivity. Despite a slight decline in sales for the quarter, we were able to increase operating margins by 170 basis points, primarily through productivity gains. It is also worth noting that we had a book-to-bill ratio above one as we built over $30 million of backlog, implying the market is a bit stronger than our quarterly sales results would indicate. The markets are consistent with our expectations and our financial performance for the quarter was in line with our internal plans. The quarter began slowly and picked up noticeably in March. I believe we have seen the bottoming in sales where we ran our backlog down at the end of the year and built it up during the first quarter.

Beyond the financials we also continue to focus on serving our customers and providing them with the best new products. So I am pleased to highlight that EC&M Magazine named our Prescolite brand retroficient LED downlight as the 2010 LED product of the year. The recognition for our design and engineering capabilities demonstrates the importance of continuing to invest in future growth.

With that, let me turn it over to Dave now, and he will discuss the financials in more detail.

All right, thanks, Tim. Good morning, everybody. I'm going to start on page 4 of our accompanying materials and walk you through some of the details in the quarter.

Let's start first on a sales side. As Tim mentioned, we are reporting sales of $570.5 million, which is down 3% from the first quarter of last year. Two big drivers in there were continuing market weakness, specifically in the nonresidential market where, example, our C&I lighting business saw their volumes down 17%. But on the positive side we had the impact of Burndy's results, which contributed 7% to year-over-year growth. Some of the other elements in the sales comparisons, you saw we had foreign currency translation benefit of about 2 points, which offset 2 points combined price and lower storm volume, so those net to zero. The two big drivers again being the C&I lighting business and Burndy.

As Tim mentioned the $570 million we see as the bottom, as we look out, a little bit lower than the fourth quarter of last year. We saw the weakness in the fourth quarter, and I think importantly as we saw the profile of the first quarter, overall very much as expected. The calendarization turned out to be a bit different with some weakness early in the quarter coming off the fourth quarter. Even probably some weakness in February as a result of a lot of the bad winter weather that actually had more impact on transportation of product than necessarily the storm activity that we would see in the utility business.

Turning to the gross margin side, despite the lower sales volume we had gross margin finished at 30.8%, up 230 basis points from the first quarter of last year. Two big drivers to that is the productivity improvements, including -- you will recall that the first quarter of last year there was a lot of absorption. In fact the whole first half, a lot of negative absorption as we were ramping down production, trying to take inventory out back to more normal levels there, so you get that benefit. In addition, you've got the benefit of the cost reduction actions that we took in the first quarter of last year.

Turning to page 5, on the selling and administrative expense side. So in absolute terms $110 million in the quarter, comparable to last year's level. But importantly, two big drivers going in opposite directions. One is that includes the incremental selling administrative costs from Burndy, and the Burndy operation which actually operates at a higher percentage of sales because of their selling effort than our norm.

And that was more than offset by the cost reduction actions that we've seen in really three big buckets. The salary and benefits from the headcount actions that we had to take in the early part of last year that are reflected -- we saw later last year and certainly into this year. Some of the variable costs that are associated with the sales volume, specifically commissions. And then some of the discretionary items that we continue to control very tightly, including things like advertising. So all of that, despite lower volume, improved gross margin and a little bit of selling and administrative headwind, operating profit for the quarter of $65.7 million, up 15% from last year, finishing at 11.5% overall.

Turning to page 6, some of the below the line items, net interest expense of $7.6 million, comparable to last year's first quarter due to comparable borrowing levels and relatively stable interest rates. On the tax line, effective tax rate in the quarter of 32.3%. That's up 80 basis points from the 31.5% we recorded in the first quarter of last year. One of the things impacting our tax rate is the R&D tax credit, the extender bill for R&D tax credit was not passed in the first quarter, so we couldn't reflect that benefit in our full year rate.

But offsetting that is more focus on the international operations. I've talked in the past about there being headwind from our international operations and a lower level of international profit. We're focused on a combination of operating improvement and better results from some of our international operations, as well as some effective tax strategies around our international operations to help reduce that rate. So going forward right now the rate would be 32.3% for the year, assuming that R&D doesn't pass. There's no telling when and if it will pass. To the extent that it does pass that would provide us opportunity for a lower rate as the year progresses.

Turning to page 7, that all results in net income of $38.6 million, up 14%. So again, despite the lower sales, we've got a higher operating margin and we're still overcoming a higher tax rate. All in line with what we expected to see in the first quarter. And earnings both -- per diluted share of $0.64, now that's up only 7% compared to the net income up 14%, primarily because of the dilution for the additional shares that we issued in the fourth quarter of last year. So that cost about $0.04 against earnings per share. And that effect will be -- start to be mitigated as the year progresses.

So let me turn now to the segment results on page 8. First, on the electrical segment. You see that sales in the electrical segment were up 2%. A big driver to that of course was the benefit of the acquisition from Burndy adding 11%. And a little bit of currency, about two points on the segment. So when you adjust for those, no measurable impact from pricing. Kind of neutral.

So core volume down 11%. And again, the two big drivers, the nonresidential construction, particularly in the lighting business, as well as some lower volume in our high voltage test equipment, double-digit year-over-year declines but largely due to the timing. That's project business, it's --- so it can be lumpy and you had some projects that get pushed out into the second quarter. So it just creates a level of volatility, but not an indication of underlying demand.

Within the segment, some of the operations, wiring -- actually the wiring business had volume up 5%. That's a business that serves both nonresidential construction and more importantly the industrial and commercial where we're seeing strength, and so overall up 5%. The other electrical products, which includes high voltage tests, down 10%. And then lighting overall down 14%. And that's a composite of the C&I business up 17% and residential actually flat -- down 17%. And residential being flat in the quarter.

On an operating profit, $40.1 million of operating profit, 9.8% margin. 45% year-over-year growth in operating profit due to the productivity gains and improvements, lower restructuring costs year-over-year, slightly lower commodity cost reflected in the quarter, all overcoming lower volume. When you look at the productivity and restructuring, recall that the electrical segment in the first half of last year was the one that was most significantly impacted by lower volume, absorption, reduced demand. So a lot of opportunity, and we're realizing that opportunity in that compare.

Turning to page 9, the power segment results, sales of $161.2 million, down 12%. Recall that the first part of last year was still strong while other markets were weakening. But we still have a weakening of the power segment in the second half as utilities put the clamps on spending. So this is not a surprise, as we're starting to work our way back from the low levels in the fourth quarter -- third and fourth quarter of last year. And actually the 12% overall volume down includes 4% impact within the segment from lower storm volume. You recall last year's fourth quarter was still impacted by some significant ice storms in the Midwest that have a -- from a business standpoint a positive effect. And you didn't see that level of activity in the first quarter of this year.

From an operating profit standpoint, $25.6 million, down 14%, consistent with the volume decline with margin of 15.9%. That's actually down slightly from the fourth quarter's 16.8%. Recall that we talked a lot in the second half of last year about the positive price cost, but that started to turn in the fourth quarter. And so pricing in year-over-year was down about a point in the power segment. But we also are now dealing with rise in commodity cost that's putting more pressure on the price and commodity cost measure that we target to try to maintain parity on. And I think that increase in commodity cost, underlying commodity costs are being felt by everyone in the industry. And I think you're starting to see price increase. I think Tim will talk more about it later.

But we've already implemented price increases in some of our businesses. And there's others that are being announced daily. And the rest will come along sometime in the course of this quarter. So it's a challenge that's been put in front of us across the organization. But it's one that we faced before, and we're confident that we'll manage through over the course of the rest of the year.

On the first quarter cash flow, cash flow was positive of $12.8 million. On a free cash flow basis, operating cash flow of $24 million. Now, certainly lower than last year's level, but we get kind of used to record cash flow in every quarter of last year. But it's not surprising as the market's declining and volume is going down, and you have the other side of that equation when in a market recovery where you start to have some working capital built, specifically around inventory. We're still managing our receive -- our inventory very tightly.

But on the receivable side, as your sales start to ramp up, you have an increase in your receivables. So that's probably the biggest driver impacting the first quarter. When you look at page 11 you see that spike in receivables from the fourth quarter, largely due to the profile of our sales. Some -- a few-day increase in the days outstanding. But, in fact, an improvement in the quality in the overdue status of our receivables. So nothing at all that I'm concerned about, more of something that I have the organization clearly focused on making sure that we're realizing our cash flow as timely as possible. You see on the inventory side pretty stable inventory throughout the third, fourth, and into the first quarter. So we've had some build in the first quarter, but we certainly expect that all to improve as the year progresses.

Page 12 we have our capital structure. No significant changes. Very stable there. A little bit of increase in cash from the cash generation. But our outstanding debt is consistent. No commercial paper borrowings. So the only ratio change is on our net debt-to-capital, which improved from 12% at year end to 11% at the end of the first quarter. So with that let me turn it back to Tim to talk about the end market outlook and the rest of the year.

Thanks, Dave. Let's turn to page 13 and our outlook for the remainder of 2010. Nonresidential construction is our biggest market, and some indicators have weakened since the beginning of the year. Based on our order flow, our expectation is for a decline in the 20% range. That is consistent with what we thought in our last quarterly call. Our outlook for residential construction calls for modest growth, where multifamily construction should hurt but renovation is expected to help.

The signs from our industrial market are very encouraging where we expect growth in those markets. Our power segment is expected to show some growth. We see utilities remaining cautious with regard to spending until decision makers see more evidence of a sustained pickup for demand in electricity. On the distribution side, the growth of residential construction should be joined by the return of maintenance spending on the network necessary to achieve required reliability.

Transmission projects, while needed, are likely to be pushed out on the timeline as utilities further assess the economic conditions and the current and future demand levels for electricity. We expect to find second half comparables to be more favorable than the first half. The net impact of this outlook is a fairly flat expectation for volume in Hubbell's end markets, including the incremental contribution from Burndy.

Let's turn to page 14 for some concluding comments before we take some of your questions. A flat outlook on our end market implies we will be focused on new product introductions and acquisitions to generate volume. If we use the last decade as our guide, an average year's worth of acquisition would add five years -- five points of potential growth. And being recognized for having the best LED product of the year is a good indicator of our focus on new products. Managing price, costs and productivity will also be key.

The price-cost equation will create some headwinds over the next couple of quarters as we expect that cost increases may be difficult to cover with price. So productivity will continue to be the focal point. Last year's productivity actions have created 100 basis points of tailwind for us. And we have many new initiatives for 2010, including more facility consolidations, product redesign, and further improvement of our lean processes.

Our productivity programs have made good progress in the first quarter and are on track for our full year goals. So we expect that the mix of brands, people and processes will continue to deliver value to our customers, while our conservative balance sheet will support investments in our future growth as our end markets rebound, allowing Hubbell to continue to lead the way. So thank you for your attention, and now we'll be happy to take your questions.

(Operator Instructions). We will take our first question from Bob Cornell with Barclays Capital.

Yes, thanks. A lot of questions. I guess first of all, I ask this every call recently. What visibility do you have? You talked about nonres being down 20. What's the visibility you have looking out, and how far can you look out in that space?

As we've said before, our backlog is about a month. And we look at order rates and quotations. And probably we have, I would say, two to three months of visibility ahead. So maybe through the second quarter. And what we're saying certainly is consistent what we said before. We don't have any different outlook on volume for the entire year than we had at the beginning of the year. So from our point of view, the markets have not changed significantly. I think we're seeing slightly less decline in nonresidential, slightly less utility, and more on the industrial and other businesses. So it adds up to about the same number.

Yes, Tim. The year-over-year numbers -- comps make things different -- difficult. In terms of dollars of business, I mean when you project out, of the dollars of business trending up or -- the nonres trending up or down ex-seasonality.

I would say -- geez, that's a -- they're trending along the line of down 20. We should see some sequential improvement from the first quarter as the normal construction cycle. But that gap of 20 should be pretty much maintained I would say. I'm not suggesting that nonresidential and particularly commercial construction will be better than those forecasts.

Okay. Let me switch a little bit --. Huh?

I am optimistic about the rest of our markets (inaudible - multiple voices).

I understand. Could you give a little more insight how Burndy actually did? What the revenues were, the profitability, any sort of earnings accretion, dilution?

Their revenues were exactly in line with our expectation. Their earnings were a little bit below, which had more to do with the transition to a new company and the startup costs of establishing your own services that were provided by a parent. But from an operations point of view they were in line with expectations.

Yes. I guess finally when you look at the power margins looking forward, what would you expect those margins to be for the year? If they're 15.9% in the quarter, what would you expect them to be? I heard the comments about price-cost. I mean, at end of the day what do you look at as a good number for the year?

Well, first let me stop and talk about price for a moment. Certainly all -- any of us can follow those trends where we see the metals rising, whether it's steel, copper, aluminum, zinc and so on. And also oil. So our Company is in the process of increasing price across the board. The industrial price increases are out. The lighting business will increase price June 1, 4% to 6%. And the rest will follow sometime during Q2. So it's a typical year. Last year was one where commodity costs fell, prices softened at the end of the year. This is the reverse of that, and we've been through that before. So that's what we're seeing on the broadest sense. And the costs, ours started up in Q1, and we expect them to continue into Q2. But we expect that between productivity and price we will offset the cost increase.

Well, the power margins peaked in the third quarter of last year, 22, came down in the fourth quarter, came down again in the first quarter. Are we going to see those margins sequentially decline because of the price-cost timing differences? Where would I trough the -- ?

I wouldn't expect us to -- as we said last year in the third quarter, it was an unusually good one-time event. But the average margin that we experienced last year should be close to what we see this year.

Okay. Thanks. (Inaudible - multiple speakers.)

Yes, Bob, I would tell you that I think that first quarter margins are probably what we would say are trough. Because it's volume dependent. I mean, we see the first quarter volume as the lowest, and that's what an element that drives that impact. And you'll see sequential improvement throughout the year. You might see some weakness as the year ends just because again some volume issues. But as Tim mentioned, the issue around price-cost, we've got to manage through that, and I'm confident that we will.

Got it. Thanks.

We will take our next question from Jeff Beach with Stifel Nicolaus.

Yes. Good morning.

Good morning.

Good morning, Jeff.

Just looking sequentially here at the sales decline and the earnings and realizing the fourth quarter benefited from LIFO, it still looks like a pretty high contribution margin decline. I went back and looked at the comments you made about the fourth quarter. There were productivity, continued cost reductions, not much pressure from raw material costs. And I'm looking and just trying to figure out but making some adjustments here why the profits went down more than what I would have calculated off of your leverage.

I can only tell you that when we put our plan together we're right exactly where we thought we would be as compared to looking at the quarter -- last quarter. So it's hard to respond to that exactly. Certainly the volume has a negative impact on factory performance. There's a little headwind on the material side. But I don't know exactly how to respond to that.

I mean, Jeff, I think that two things that you need to keep -- and I think probably two of the biggest drivers, because the volume certainly is down. But you'll recall in the fourth quarter was our biggest impact from our inventory reduction on LIFO coming through, as well as the fourth quarter still had the good price-cost favorability, not at the level of third quarter but in the fourth quarter that we said would mitigate back to more neutral in the first quarter. So when you take those two things into account, that's pretty much what we're seeing, that's pretty much what we expected.

Do you think there's any meaningful change in the mix that you can think of?

No.

All right.

I just mentioned that it's a little less worse in nonresidential than we thought. Where we are encouraged, certainly our residential business for the first time has passed -- the orders and sales have exceeded the prior year. So we see that as an important place to be right now, and hopefully that will continue to turn more positive as time goes on. That's what we think is going to happen. The industrial markets are a little better than we thought, and very hopeful signs there. So we're encouraged generally, and we don't have a different view. We have the same view of the year, just a little bit I think different from a timing of revenue perhaps than you guys thought that we should have.

All right. Thank you.

We will take our next question from Jeff Sprague with Vertical Research Partners.

Thank you. Good morning, everyone.

Good morning.

Hi, Jeff.

I wonder if we could just explore a little bit more the idea that power margins would have troughed here given -- I mean obviously we're maybe at a little bit of a seasonal low. But given what you're saying about transmission projects sliding, given that's 20% of your business perhaps, but it certainly seems the general tone out there on all things T&D is actually maybe getting a little worse, not better. Do you have a little bit more visibility in that business now than perhaps your generalized answer to Bob's earlier question.

Well, I think the transmission revenues for us relative to projects for 2010 are fairly secure, because the ones that we have won are multiple-year projects. What we're saying is that the growth in those revenues for years further out is being reduced by the fact that some new projects which we felt we have an excellent chance to win are being pushed out as public utilities have the luxury of time to delay those starts based on lower demand for energy. So we would like them to proceed. We're in a great market position to prosper from that. But we see one after the other sliding out by a year. But the ones that we have are multiple-year projects. And this is just in the midst of them.

Okay. And just a little bit more on price. I think you said you're going out for another 4% to 6% on lighting. I believe order of magnitude you went after 4%ish at the beginning of the year. I just wonder if you could give us a little color on kind of the acceptance and the distribution channel for that type of price increase and any push back you're seeing.

We really haven't had any price increase up to this point in the year. There have been limited price increases, so on the residential side we have some, but on the C&I we don't have any yet this year. But I'd say that clearly our industrial product lines have increased price. Burndy's increased price. So I would see the industry catching up with the inflation that's happening in the first half of this year during this second quarter.

Okay, great. Thanks a lot.

We will take our next question from Christopher Glynn with Oppenheimer.

Thanks. Good morning.

Good morning, Chris.

So just looking at the electrical margins into the second quarter, it looks like besides some better seasonal volumes that some factors moving into there would be mix with high voltage test coming back, Burndy post, I guess, what sounded like some integration issues and maybe timing of the industrial product line's pricing. Is that all fair to think about?

Yes.

Yes. You got me nervous, Chris. You make it sound like you've got some insight here. That was pretty good.

Okay. Good. I'll do your call for you next time. And on the utility, the power systems, would have thought some storm benefits. Is that a timing issue? Should we still see something? I mean, the weather was pretty dramatic.

No. We had some storm volume, but if you recall the prior year had an exceedingly large amount. So relative year-on-year comparisons was lower. It's not like we didn't have storm business. But the previous year we had a lot more.

Okay. And then on the lighting, the 4% to 6% increase, can you just reference the other majors, what their timing is relative to yours, magnitude and --?

I don't know. I can't tell you that. But I don't have any specific information on what the other guys are doing.

Okay. And do you think market share is moving around at all in that space?

At the margin maybe. But I don't see any significant trends there. Nothing major.

Okay. Thanks a lot.

Sure.

That does conclude today's question-and-answer session. I'd like to turn the call back over to our presenters for any additional or closing remarks.

Thank you, everybody, for joining us this morning. And to the extent anybody has follow-up questions, Jim Farrell and I are around to take those calls. So thank you for joining us.

That does conclude today's call. Thank you for your participation.