Thomas & Betts Corporation Q3 2008 Earnings Conference Call Transcript

Oct.26.08 | About: ABB LTD. (ABB)

Thomas & Betts Corp. (TNB) Q3 FY08 Earnings Call October 23, 2008 11:00 AM ET

Executives

Patricia A. Bergeron - VP, Investor and Corporate Relations

Dominic J. Pileggi - Chairman and CEO

Kenneth W. Fluke - Sr. VP and CFO

Analysts

Christopher Glynn - Oppenheimer & Co., Inc.

Bob Cornell - Barclays Capital

Noelle Dilts - Stifel Nicolaus

Sandy Goldman - Hartline Investment Corp

Min Cho - Friedman Billings Ramsey

Operator

Greetings ladies and gentlemen, and welcome to the Thomas & Betts Third Quarter 2008 Earnings Conference Call At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions].

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Ms. Patricia Bergeron, Vice President of Investor and Corporate Relations for Thomas & Betts. Thank you. You may begin.

Patricia A. Bergeron - Vice President, Investor and Corporate Relations

Good morning. And thank you for joining the Thomas & Betts Corporation third-quarter 2008 conference call. Our comments today contain time sensitive information that is accurate only as of today's live broadcast.

These comments may also include forward-looking statements, which make assumptions about our operations, business, economic and political environment, including without limitation customer demand, government regulation, terrorist acts and acts of war.

These forward-looking statements are subject to risks and uncertainties detailed in the Risk Factors Section of our Form 10-K for the 2007 fiscal year. Dominic Pileggi, Thomas & Betts Chairman and Chief Executive Officer will begin our formal remarks with a review of business highlights. Ken Fluke, Senior Vice President and Chief Financial Officer will then review the financial results.

We will then take questions from the investment community. I will now turn the call over to Dominic for review of our business.

Dominic J. Pileggi - Chairman and Chief Executive Officer

Good morning, and thank you for joining us today. Thomas & Betts turned in a very strong performance with record sales and profits in the third quarter. Consolidated sales and segment earnings both increased 20% year-over-year. Segment earnings as a percent of sales exceeded 20%, and earnings per diluted share from continuing operations increased 26% to $1.11 in the third quarter.

I'm also pleased to report that all of our acquisitions are now fully integrated into our core Electrical business and contributing significantly to earnings. Completing the integration of six acquisitions as quickly as we did was no easy feet, but as we've seen in the past when faced with a challenge our employees rise to the occasion and get the job done. For this I applaud and thank them.

Turning now to how our businesses performed in the quarter. In our Electrical segment, sales increased 25% year-over-year. Major contributors to this growth were the acquisitions and price increases to offset commodity and energy-related costs. Market conditions in the quarter were very similar to what we've seen all year and what we expected. We saw continued strength in industrial MRO markets. Infrastructure and international markets offset the softness in certain residential related construction markets, such as light commercial construction and utility distribution.

Heavy commercial construction including large infrastructure projects again remained healthy in the quarter. These are typically non-speculative, longer-term projects that are unlikely to be discontinued once underway. Notably the recent storms in the Gulf Coast did not significantly impact Electrical segment sales in the quarter.

The Electrical segment turned in an excellent earnings performance driven primarily by a favorable product mix in our underlying business and the performance of our acquisitions. Segment earnings were a very solid 20.6% of sales. And overall, we are very pleased with the contribution the acquisitions are making to this segment's performance.

Turning now to our Steel Structures segment. The third quarter was a good example of the types of issues that can affect the top and bottom lines in our Steel Structures segment from quarter-to-quarter, and why this business should be viewed over a longer time period. The storms in the Gulf Coast region actually had a negative impact on this segment's third-quarter results.

Specifically at our customer's request, we delayed the delivery of $6 million of completed transmission structures in order to allow the utilities to focus on restoring power in the aftermath of hurricanes Gustav and Ike. Typically this business works on adjusting time production flow model. In this case the structures were ready to ship, when the request to delay delivery was received. The material was shipped in early October.

As a result of the delayed shipments, sales in the Steel Structures segment declined 4% compared to last year. This also negatively impacted the segment margin, which although was within our targeted range for this business, was down year-over-year to 16.2% of sales compared to 18.9% in the third quarter of 2007. We continue to be very optimistic about the long-term future of this business, and the need to enhance and expand the North American transmission grid remains a national priority.

Turning now to our HVAC segment. Sales in our HVAC segment declined about 6% in the third quarter due to soft market demand. As a result, segment earnings also declined on both the dollar and percentage sales basis to $5.3 million or 17.2% of sales. As a reminder the fourth quarter is typically the strongest for this segment as our product portfolio is heavily weighted toward heating products.

We believe that this trend will again play out this year. We have the leading market position in this segment and continue to have a very positive long-term outlook. I'd like to now provide an update on our divestiture of the plastic pipe business acquired as part of Lamson & Sessions.

We have completed the sale of the PVC portion of the pipe business and the Lamson & Sessions headquarters building in Cleveland for slightly more than $50 million. We continue to progress with the process of selling the remaining HDPE pipe business, and will provide you with additional details at the appropriate time.

Turning now to the outlook for the fourth quarter, and beyond. As I noted earlier, market trends in the third quarter were very similar to what we saw in the first half of the year and in fact came in pretty much as we expected. We don't expect dramatic changes in market conditions in the fourth quarter and believe that demand in industrial, infrastructure, and international markets will continue to help offset weak residential-related construction.

Having said that there has clearly been a change in the overall market sentiment, not surprising given the extraordinary events of the past few weeks. The lockup of the credit markets has caused financial institutions to be very cautious in their lending practices. We have not seen an outbreak of project cancellations, but rather a slowing of activity related to new commercial construction even in geographic markets that have been fairly resilient thus far.

We do not believe that it will impact us significantly over the next six months, but if the credit markets do not loosen in a reasonable amount of time, the back half of 2009 could be very challenging. Of course new residential construction remains very depressed and as we've stated deviously, we don't expect to see the resumption of growth in these markets until at least late 2009.

Let me now comment on our guidance for the full year 2008. Since the time of our last conference call, we've seen significant strengthening in the exchange rate of the US dollar versus the Canadian dollar, the British pound and the euro. This of course will negatively impact both sales and earnings.

Overall the fourth quarter, we expect consolidated sales growth to be in the mid-single digit range including the impact of price increases and foreign exchange. As a reminder, we are approaching the one-year anniversary of the acquisition of Lamson & Sessions. This means that year-over-year acquisition growth will be dramatically less significant in the fourth quarter than what we've experienced in the first nine months.

As noted in our press release, we have revised our 2008 annual earnings guidance, primarily to reflect the impact of foreign currency exchange rates and reduction in our overall assessment of market growth for the second half of the year. Our new earning guidance is a range of $5.35 to $5.45 per diluted share. Given the dramatic uncertainty in credit availability, it is difficult to look much further out in the next few months.

There is however, no question that 2009 will be a tough and challenging year, if access to credit remains restricted and the slowdown in speculative commercial construction intensifies. Should our industry experience an extended downturn, one thing is certain Thomas & Betts, and our 10,000 plus employees worldwide will remain focused on delivering value to our shareholders.

We've demonstrated our ability to manage in tough environments, successfully achieving a comprehensive turnaround of the company during the last down cycle. We have proven to be adept at covering unprecedented commodity cost increases and we've done it quickly, while minimizing the impact to margin performance.

We have added and successfully integrated six strategic businesses including moving production and closing facilities in less than a year. And we've shown our commitment to using our strong cash generation in a well-balanced manner to return value to our shareholders, whether it be through value-based acquisitions, capital investment designed to strengthen our leadership position, or through stock repurchases.

We thank you very much for your continued interest in and support of Thomas & Betts. I will now turn the call over to Ken Fluke to review our financials in more detail.

Kenneth W. Fluke - Senior Vice President and Chief Financial Officer

Thank you Dominic and good morning. As Dominic noted, we are very pleased with our third-quarter results. We again balanced the continued strength in the industrial and the international markets, against the slowdown in residential related construction markets and delivered record sales and earnings performance for the quarter. We also continue to exhibit strong cash generation and maintain a strong and flexible balance sheet.

One further note before I review the results… we have discontinued showing the profitability profile for our recent acquisitions, as the integration process is now complete, and we no longer have good visibility around separating certain expenses. This is particularly true for the remaining Lamson & Sessions product lines that have been incorporated into our centralized logistics model.

Let me turn now to the financial highlights of the quarter and year-to-date. Consolidated sales were up 20% year-over-year in the quarter in line with the guidance we provided on our last conference call. This increase breaks down approximately as follows… 15 points from acquisitions, five points of net price, one point from foreign currency, and one point of negative net volume.

This negative net volume is attributable to both of our non-electrical business segments. In our key Electrical segment, which includes all of the acquisitions, sales were up 25% year-over-year with 18 points from acquisitions, five points of net price, one point from foreign currency, and one point of net volume gain. Increased volume primarily in our international businesses was largely offset by continued weakness in markets influenced by residential construction such as utility distribution and some areas of light commercial construction.

Gross margin in the quarter increased 40 basis points to 31.3% compared to 2007. Improved mix in our Electrical business as well as the addition of higher-margin products from the acquisitions contributed to this improvement. SG&A as a percent of sales was flat year-over-year at 16.1% of sales. Synergies from the recent acquisition activity began to take hold in the quarter and had a favorable impact of approximately $2.5 million.

Year-over-year, earnings from operations grew 24% in the quarter with the acquisitions and synergies contributing significantly to the performance. As expected, there were no significant integration expenses in the quarter as all major efforts had been successfully completed. Net interest expense increased by $3.5 million, largely as a result of funding required for our acquisition activity.

The effective tax rate in the third quarter was flat with last year at 31%, and we recorded a small loss from discontinued operations in the quarter. This leaves us with net earnings including discontinued operations of $1.09 per diluted share, compared to $0.88 per share in the third quarter of 2007, a 24% increase compared to last year.

And now a few comments about our year-over-year results for the nine-month period. Total company sales increased 24%. This breaks down approximately as follows. 20 points from acquisitions, three points from foreign currency, three points of net price, and two points of negative net volume. The Electrical segment showed negative net volume of approximately one point.

The 50 basis point improvement in gross profit as a percent of sales reflects a more favorable product mix in our Electrical segment, as well as the favorable impact from acquisitions. As a percent of sales, SG&A was flat with last year. Higher SG&A related to acquisitions was partially offset by a $12 million favorable legal settlement recorded in the second quarter.

The nearly 30% increase in earnings from operations primarily reflects the positive impact in Electrical segment had on the total company performance, including earnings contribution of the acquisitions and higher earnings from the underlying Electrical business. The favorable legal settlement in the second quarter was also a factor.

Net interest expense increased $21 million, reflecting the funding required for acquisitions, and the effective tax rate was more than seven points higher than last year reflecting the $170 million second quarter gain from the sale of our Leviton interest, and a second-quarter non-cash tax charge. Year-to-date net earnings including discontinued operations of $248 million were significantly higher than last year, recognizing the previously mentioned second-quarter net benefits and the favorable nine months operating results inclusive of the acquisitions.

Turning now to cash flow and the balance sheet. We expect to again have an excellent cash generation performance for the full year 2008 with a strong fourth-quarter performance as usual. In the quarter, we received approximately $52 million from the sale of part of our assets held for sale, namely the Lamson PVC pipe business and the Lamson headquarters building.

As Dominic noted, we still are working on selling the remaining HDPE pipe business and this business remains classified as discontinued operations. Also in the quarter, we paid $62 million in income taxes related to our former minority ownership interest in Leviton sold in the second quarter. Though not truly operational, these tax payments are reflected as a reduction in cash provided by operating activities on the cash flow statement.

We finished the quarter with $203 million in cash and $665 million in total debt. We also repurchased 2.3 million shares of Thomas & Betts stock at a cost of $101 million during the third quarter. The share repurchase had a negligible effect on earnings per-share. We now have about 0.5 million shares remaining on the share repurchase authorization that expires in March 2009.

In addition, we announced today that our Board of Directors has approved a new authorization to repurchase up to an additional 3 million shares. This new authorization expires in two years. Further impacts to cash flow in the first nine months, included the repayment of $150 million of notes that matured in May, an additional $35 million for debt reduction, $90 million for acquisitions, and $30 million of capital expenditures.

We anticipate spending less than $50 million in capital expenditures for the full year 2008. Overall our balance sheet is well positioned to support our strategic initiatives and exhibits excellent financial strength and flexibility. Of further note, at the end of the quarter, the company had more than $390 million of availability under its existing credit agreements.

Finally a few comments about our 2008 guidance. As Dominic highlighted, we are looking for fully diluted earnings per share to be in the range of $5.35 to $5.45. We do not expect discontinued operations to have a significant impact on our fourth-quarter results. Additional items of note in this guidance include for the fourth quarter, average shares outstanding of approximately $56 million.

And an effective tax rate of approximately 32%, and the combination of corporate expense, depreciation amortization share-based compensation, and interest expense net are expected to be roughly similar to the third quarter. Thank you for your continued interest in Thomas & Betts. I will now turn the call back to Patricia.

Patricia A. Bergeron - Vice President, Investor and Corporate Relations

Thank you. This call is a property of Thomas & Betts Corporation. Any redistribution, retransmission or rebroadcast of this call in any form without the expressed written consent of Thomas & Betts Corporation is strictly prohibited. The telephone replay of today's call will be available through 12 O'clock midnight on Thursday, October 30, 2008. The number to access the replay is area code 201-612-7415. The account number is 9517 and the passcode 300026.

In addition, the recorded webcast is available on our corporate website www.tnb.com. Thank you. We will now open the call up for questions from investors.

Question and Answer

Operator

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. [Operator Instructions].

Our first question comes from Christopher Glynn with Oppenheimer. Please state your question.

Christopher Glynn - Oppenheimer & Co., Inc.

Thanks. Good afternoon I think for you. So…

Dominic J. Pileggi - Chairman and Chief Executive Officer

It's still morning in Memphis, Chris. And raining.

Christopher Glynn - Oppenheimer & Co., Inc.

I always go in the wrong direction with that. The synergies from the acquisitions… it looks like the electrical operating margin, at least sequentially was just kind of in line with your normal operating leverage. Maybe there was some price cost in there as well, but did you realize the full kind of $5 million run rate or is that more of fourth-quarter event?

Kenneth W. Fluke - Senior Vice President and Chief Financial Officer

That's going to be more towards the back half of the year Chris. I think, I called out in my prepared remarks that we had about $2.5 million in the quarter.

Christopher Glynn - Oppenheimer & Co., Inc.

Okay. Okay, so you…

Kenneth W. Fluke - Senior Vice President and Chief Financial Officer

And, we are pretty comfortable of where we are, and I expect we will be at those run rates sometime in the fourth quarter.

Christopher Glynn - Oppenheimer & Co., Inc.

And then, just to be clear on the guidance, because we've had a lot of moving parts this year, but the $5.35 to $5.45 that would reflect the 429 all-in number year-to-date?

Kenneth W. Fluke - Senior Vice President and Chief Financial Officer

That will reflect total GAAP. Yes, that will be the total GAAP bottom line including discontinued ops the wholesale bank [ph].

Christopher Glynn - Oppenheimer & Co., Inc.

Okay.

Kenneth W. Fluke - Senior Vice President and Chief Financial Officer

Including the gain on Leviton and things like that we had in the second quarter.

Christopher Glynn - Oppenheimer & Co., Inc.

Okay. And any further tax outflow related to Leviton or is that put to rest?

Kenneth W. Fluke - Senior Vice President and Chief Financial Officer

Yeah. There still be some more drag on cash in the fourth quarter from that.

Christopher Glynn - Oppenheimer & Co., Inc.

Okay. And then the mid single-digit sales guidance that excludes the acquisitions for the fourth quarter?

Kenneth W. Fluke - Senior Vice President and Chief Financial Officer

No.

Dominic J. Pileggi - Chairman and Chief Executive Officer

No, that includes them. As I mentioned in my remarks, we are approaching the one-year anniversary of the Lamson & Sessions.

Christopher Glynn - Oppenheimer & Co., Inc.

Okay. So that's all-in. Okay, and then just lastly the Steel Structures, it looks like that might be really good. You basically you have what you get in the fourth quarter plus the $6 million. Is that the way to think about that?

Dominic J. Pileggi - Chairman and Chief Executive Officer

Yes.

Christopher Glynn - Oppenheimer & Co., Inc.

Okay. Great, thanks a lot.

Dominic J. Pileggi - Chairman and Chief Executive Officer

Thank you Chris.

Operator

Our next question comes from Bob Cornell with Barclays Capital. Please state your question.

Bob Cornell - Barclays Capital

Yeah. First of all I want to say congrats on selling the PVC and the headquarters for a lot of money.

Kenneth W. Fluke - Senior Vice President and Chief Financial Officer

Thanks Bob.

Dominic J. Pileggi - Chairman and Chief Executive Officer

I appreciate that Bob. Thanks.

Bob Cornell - Barclays Capital

Yeah. I guess the first question is you said Dominic that you had limited visibility on one hand, and yet you talked about the first half in terms of non-res being somewhat inside in the second half being challenging. So, I'm just wondering how you put those two observations together and where the confidence in the first half comes from.

Dominic J. Pileggi - Chairman and Chief Executive Officer

Yeah. What I said there Bob or what I meant is that we don't really see any change in the underlying demand in the markets, and they've been behaving just like we thought they would. The only difference is the introduction of this credit freeze. So I think, as long as nothing too dramatic happens there, we should see the markets behave as we thought they would. If the credit freeze doesn't thaw that could obviously present some challenges.

Bob Cornell - Barclays Capital

Right. Yeah, tell me about the credit freeze. You know, I guess the other thing I wanted to go over is just you guys were successful on price cost. You know some of the companies are saying that they weren't. Maybe you could just go into whether you were successful… how successful you were on price-cost? In other words are you already getting prices above current cost or hedged cost, and maybe just give it a little more visibility into what you meant by that?

Kenneth W. Fluke - Senior Vice President and Chief Financial Officer

Bob, I will try. You know usually…. You followed us for quite some time. We've had volatile periods of time in the past. I think, we called out pretty confidently at the end of the last conference call that we had enough price increase, we believed in place to offset the cost increases that we were going to see in the third quarter and that was the case in the third quarter. And I think….

Bob Cornell - Barclays Capital

How about in the steel costs? I mean that's one thing that seems to have bitten other people.

Kenneth W. Fluke - Senior Vice President and Chief Financial Officer

Yeah. But, we were on top of that and we were pretty confident that we could get that in place in time. Our model allows us to do that very quickly, and we did. And we believe we got that offset in the third quarter.

Bob Cornell - Barclays Capital

So, I mean Steel City had a good quarter that means?

Kenneth W. Fluke - Senior Vice President and Chief Financial Officer

That means we've got the cost increases for Steel City offset in the third quarter, yes.

Bob Cornell - Barclays Capital

Great. Okay thank you.

Kenneth W. Fluke - Senior Vice President and Chief Financial Officer

Thank you Bob.

Operator

Thank you. [Operator Instructions]. Our next question comes from Noelle Dilts with Stifel Nicolaus. Please state your question.

Noelle Dilts - Stifel Nicolaus

Hi, good morning.

Kenneth W. Fluke - Senior Vice President and Chief Financial Officer

Hi, Noelle.

Noelle Dilts - Stifel Nicolaus

I was hoping you know with… obviously you've had good success recouping higher costs as commodities have increased, but now with a lot of those costs coming down, I was hoping you can give me some of your thoughts on how that will play out in the market, and if you are seeing any kind of push-back from the end market?

Dominic J. Pileggi - Chairman and Chief Executive Officer

Well of course you know, I think you've been hearing the words volatile, those costs are volatile, and I think as Ken answered to Bob Cornell… I think we've done a good job historically in moving price with how the commodity costs come. So that's really something that's determined by the marketplace. And I think what we have is the ability to react very, very quickly to whatever happens.

So the market will determine what we do there, and we'll react accordingly, quickly, and I think efficiently.

Noelle Dilts - Stifel Nicolaus

Okay. And then, additionally could you talk about what you're seeing in terms of inventories in the channel, and if you're seeing your distributors become a little bit more conservative with their inventory level?

Dominic J. Pileggi - Chairman and Chief Executive Officer

Okay. Well, inventory in the channel I can speak only for Thomas & Betts distributors and Thomas & Betts products, and we really see no stuffing of the channel as it relates to us and our distributors.

And you've heard us say before our fast-cycle logistics model is designed just for situations like that and we work very hard with our distributors to make sure that we're helping them keep their working capital down.

So there's no reason for anyone to have to stuff their channel with Thomas & Betts products due to our service levels.

Noelle Dilts - Stifel Nicolaus

Okay, thanks.

Operator

Our next question comes from Sandy Goldman with Hartline Investment Corp. Please state your question.

Sandy Goldman - Hartline Investment Corp

Dominic in this environment with a solid balance sheet, are there any opportunities coming through to make more acquisitions or do anything else in that respect?

Dominic J. Pileggi - Chairman and Chief Executive Officer

Well, we're very happy Sandy that we have the flexibility to do that and we are always looking for opportunities. But, I would remind you that we wouldn't acquire just for acquisition sake. We look for what we call value-based acquisitions that can… we're looking for those strong brands, we are looking for the things that could go to our end users through our logistics model and our distributor channel.

So as opportunities do present themselves, we think we will be able to capitalize on that. I will tell you there's nothing significant eminent right now, but we are always looking for that and I think we've demonstrated we have the ability to react when something does happen, and we feel good about that.

Sandy Goldman - Hartline Investment Corp

Dominic, but in this environment is there getting to be more flow things you're looking at because of people's balance-sheet problems or operating-profit problems?

Dominic J. Pileggi - Chairman and Chief Executive Officer

Not really. We don't really see anything, and remember our focus is on strong brands and good companies.

Sandy Goldman - Hartline Investment Corp

Thank you.

Dominic J. Pileggi - Chairman and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from Min Cho with FBR Advisors. Please state your question.

Min Cho - Friedman Billings Ramsey

Good morning.

Dominic J. Pileggi - Chairman and Chief Executive Officer

Morning Min.

Min Cho - Friedman Billings Ramsey

I'll ask just a quick question about your Steel Structures business. I know that you recently added capacity. I just wanted to know if you were nearing full capacity again given the strong end market. Also just in talks with your utility customers, is there any sense of slowdown or push-out in that end market or just any additional color you might have on the electric utility end market would be very helpful?

Dominic J. Pileggi - Chairman and Chief Executive Officer

Okay. As you've heard us say many times, when you look at that market, you have to look at that as we even said in our prepared remarks. You have to look at that over the long haul, and you have to look at the basic foundation of that market that it is actually a national priority that the grid be expanded and be upgraded.

It's all about when that's going to happen. We have added capacity in that business, because we believe eventually we are going to need that capacity and we try to operate that business all the time as close to full capacity as we can. And we can add capacity to that business relatively quickly, when it's needed.

Now the second part of your question about the activity of the distributor… of the utilities. We really… they are cautious as everyone else, but we really haven't seen any major push-backs of projects yet. We've mentioned in our last call and the situation is the same. Activity levels are high, but when that turns into a project, it's difficult to tell.

Min Cho - Friedman Billings Ramsey

Great. Thank you.

Operator

And, ladies and gentlemen there are no further questions at this time. I will turn the conference back over to management for closing comments.

Patricia A. Bergeron - Vice President, Investor and Corporate Relations

Thank you very much for joining us today. If you have additional questions, please feel free to call. Thank you.

Dominic J. Pileggi - Chairman and Chief Executive Officer

Thank you.

Kenneth W. Fluke - Senior Vice President and Chief Financial Officer

Thank you.

Operator

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you all for your participation. .

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