Thomas & Betts Corporation Q4 2008 Earnings Call Transcript

Feb.11.09 | About: ABB LTD. (ABB)

Thomas & Betts Corporation (TNB) Q4 2008 Earnings Call Transcript February 4, 2009 11:00 AM ET

Executives

Patricia Bergeron – VP, IR & Corporate Relations

Dominic Pileggi – Chairman and CEO

Ken Fluke – SVP and CFO

Analysts

Christopher Glynn – Oppenheimer

Steve Gambuzza – Longbow Capital

Zahid Siddique – Gabelli and Company

Jeff Beach – Stifel, Nicolaus

Brent Rakers – Morgan Keegan

Bob Cornell – Barclays Capital

Min Cho – FBR Capital Markets

Sandy Goldman [ph] – Hartline Investment Corp.

Operator

Greetings, ladies and gentlemen, and welcome to the Thomas & Betts Fourth Quarter 2008 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator instructions) As a reminder, this call is being recorded.

It is now my pleasure to introduce your host, Ms. Patricia Bergeron, Vice President of Investor and Corporate Relations of Thomas & Betts. Thank you. Ms. Bergeron, may you may now begin.

Patricia Bergeron

Thank you. Good morning and thank you for joining the Thomas & Betts Corporation fourth 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.

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 a review of our business.

Dominic Pileggi

Good morning and thank you for joining us today. 2008 was another successful year for Thomas and Betts despite the economic turmoil that began in the second half of the year that affected to varying degrees every market in which we compete. In the face of this very challenging environment, Thomas and Betts continued its track record of strong execution and timely and appropriate responses to fluctuating commodity costs, lower demand and competitive price pressures. We completed the integration of all six of our recent acquisitions in less than a year and expect to realize benefits from these efforts throughout 2009.

We also took swift and decisive action to adjust production levels when the market downturn began to spread beyond residential related markets. Since mid year, we have reduced headcount by nearly 12%. As intended and previously communicated, we divested the non-core pipe businesses acquired as part of Lamson & Sessions. In addition, we monetized our interest in Leviton Manufacturing.

In total, we realized approximately $350 million in net proceeds from these divestitures. Along with our strong operating cash flow, we used these proceeds to return value to our shareholders through selective acquisitions and aggressive share repurchases. During 2008, we bought back 9% of our outstanding shares.

Looking at the specifics of our performance, sales were down 5% in the fourth quarter reflecting lower sales volumes primary in our US businesses. In response, we adjusted production in our facilities. All of our business segments performed well in the quarter, despite lower sales volume. Consolidated segment earnings were a robust 19.9% in the quarter basically flat with 2007. Despite the significantly more challenging environment, in 2008 compared to 2007, we are very pleased with our overall performance.

On an adjusted basis, diluted earnings per share were $0.81 in the fourth quarter, right in line with the revised guidance we provided in November, and down only 3.5% compared to last year. This excludes the impact from the impairment charge and loss from discontinued operations which together negatively impacted net earnings by $0.50 per share. Ken will provide more details on these two items later in the call.

Turning now to our businesses performed. Our electrical business performed quite well in 2008 despite the weak economy and the tough task of integrating Lamson & Sessions into Thomas and Betts, particularly their four distribution centers into our centralized logistics model. For the first three quarters of the year, strength industrial MRO, infrastructure and international markets helped offset the softness in residential and related construction markets, such as light commercial construction and utility distribution.

As we noted in our November press release, across-the-board market conditions deteriorated in the fourth quarter as the credit crisis spread and cast a large and dark cloud over the health and outlook of the US and global economy. Virtually no sector of the economy or region of the world has been immune from the impact. In the fourth quarter, electrical segment sales were down approximately 7%. The decline is attributable to a number of factors, but primarily the overall slow down in construction and reduced capital spending by industrial companies and utilities and our conscious effort to manage prices to offset higher raw material costs.

Many of you who have followed Thomas and Betts know that our operating culture is rooted in a hybrid system of lean six sigma manufacturing concepts and a manufacturing pool system. In other words, we normally manage production to meet demand, rather than forecast. We have been taking actions to adjust production over the past several months, and as noted earlier, have reduced our global head count by nearly 12%. As it is our largest business, most of this reduction has been in the electrical segment.

Despite all these headwinds, the electrical business executed well in the fourth quarter. Segment earnings were very solid 19.5% of sales. For the full year, electrical sales increased 19% in 2008, driven primarily by acquisitions. We remain disciplined in managing price, which helped to offset lower underlying volume. Electrical segment earnings were 19.8% of sales for the full year 2008. This is down only 20 basis points from 2007 and demonstrates very solid execution in a very tough market. And overall we're very pleased with the contributions the acquisitions are making to this segments performance.

Turning now to our steel structure segment, sales were up 14% helped by the roll over of $6 million of sales from the third to the fourth quarter. As you may recall, we delayed delivery of completed transmission structures in order to allow the utilities to focus on restoring power in the aftermath of hurricanes Gustav and Ike. Steel structures earnings as a percentage of sales were up 24 [ph] percentage points in the quarter to 21.8%, driven by improved project mix. This is clearly excellent performance and is in fact among the highest levels we have seen in this business.

However, it is also outside the normal range that we expect over the longer term. Earnings in this segment will normally vary between 17% and 20% of sales depending on the type and timing of projects in a given quarter. We continue to be very optimistic about the long-term future of our steel structures business as the need to enhance and expand the ageing transmission grid remains a national priority.

The biggest variable is when the numerous and necessary projects needed to achieve a more reliable grid will come to fruition for conventional and alternative power generation. Like other industrial sectors, utilities are also being more cautious with their capital spending right now.

Turning now to our HVAC segment, sales in our HVAC segment were down 14% in the fourth quarter due to soft market demand. As a result, segment earnings also declined although as a percentage of sales, earnings were still a healthy 21.9% of sales. We have taken significant action to adjust production and manage expenses in this business, and we will continue these efforts as needed. While in the short term will undoubtedly prove challenging, we continue to have positive long-term outlook for this business.

As I noted at the beginning of my remarks, 2008 was a year of significant accomplishments for Thomas and Betts, and a year that underscored our ability to adapt and execute quickly and effectively to changing market dynamics. We met our objectives and effectively and efficiently integrated the acquisitions and divested the Lamson & Sessions pipe businesses. We also monetized our investment in Leviton. We adjusted production and expenses and remained disciplined in managing pricing and working capital. We also returned value to our shareholders through selective strategic acquisitions and share repurchases. I am extremely proud of and want to personally thank all Thomas and Betts employees for their contribution to another record performance in 2008.

Turning now to the outlook for 2009, there is no question that the markets today are dramatically different than anyone expected last year at this time, or even six-month ago. The banking failures have created an unprecedented credit crisis and the domino effect is a global downturn, unseen in our lifetime. Commodity costs and currencies remained highly volatile and visibility as to what the future may hold is extremely limited. Having said that, we remain very confident in our ability to continue to respond and execute in a manner that will ensure that Thomas and Betts remains a leader in innovation, service and quality in the markets we serve, and remain the brand of choice and supplier of choice for our customers.

Internally, we had several key initiatives underway that we believe will continue to drive performance improvements going forward. They specifically addressed growth opportunities, productivity, supply chain management, technological superiority, and organizational capacity. These initiatives are intended to take select processes and refine them to help maintain our momentum well into the future, our internally driven strategic looks at how we can better ready ourselves for the next phase of our growth.

So what do we expect in our markets going forward? Unfortunately, we do not expect much to change in the near term. The residential market, while near or at the bottom, will continue to languish throughout the year. Light commercial construction will also remain depressed. Large commercial construction projects will be driven by the availability of credit and commodity prices.

Especially stimulated by the government, institutional and infrastructure projects could be a bright spot later in the year. The MRO and OEM markets which are driven by capital spending and capacity utilization will continue to spend on maintenance and productivity improvements, but factory expansion projects will be limited. Utility and communication customers like the industrials will focus on necessary maintenance, although we should see some improvement in specific upgrading and expansion projects, especially in transmission.

We fully expect the first half of 2000 mind to be especially challenging. However, if the credit markets began to thaw, and the new administration and its global counterparts push forward stimulus programs aimed at helping industries, we could begin to see some recovery in the back half of 2009. The timing and magnitude of government initiatives is critical. With all matters taken into consideration, we expect consolidated company sales could be down 7% to 12% for the full year 2009. We should however benefit from the acquisition integration activities completed in 2008, and the fundamental strength in utility transmission markets.

Considering these factors and the positive impact of our aggressive share repurchase in 2008, we are currently targeting full-year 2009 earnings per diluted share in the range of $3 to $3.50 per diluted share. The biggest risk to achieving these results in 2009 are the risks that we read about everyday and the risk facing every company in our industry. Prolonged disruption in credit markets and the negative impact on credit availability, excessive fluctuation in foreign currency versus the US dollar, volatility in commodity costs and availability, and additional or heightened slowdowns in key market segments and geographic regions.

I strongly believe the actions we have taken, the initiatives we have launched, and our unrelenting focus on innovation, service and quality, coupled with our strong and flexible balance sheet, leaves Thomas and Betts extremely well-positioned to respond rapidly and successfully as our markets began to recover.

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

Ken Fluke

Thank you, Dominic, and good morning.

As Dominic noted, we are very pleased with our 2008 results. We successfully managed increasingly challenging market conditions, particularly in the US, and delivered excellent segment earnings. We also completed the divestiture of the non-strategic pipe asset acquired as part of Lamson & Sessions, continue to exhibit strong cash generation, and exited the year with a strong and flexible balance sheet.

Let me now turn to the financial highlights of the fourth quarter. Sales decreased 5% in the quarter compared to last year. This breaks down approximately as follows. Two points from acquisitions, six points of price, eight points negative net volume, and five points negative foreign currency. In our key electrical segment, sales decreased 7% in the fourth quarter, with two points from acquisitions, four points of price, eight points negative net volume, and five points negative foreign currency. The negative net volume comparison in electrical segment was mainly seen in the US, and was across all product markets.

Despite a significantly weaker sales volumes, the company's segment earnings remained a healthy 19.9% of sales in the quarter, and on a dollar basis were only $5 million lower than last year, as the businesses worked hard to reduce costs in the face of declining volumes. Items of note in the quarter include year over year share-based compensation expense was higher by approximately $5 million because of a one-time realignment of timing of issuing stock grants to better match the budgeting process and other compensation decisions for executives made by the Board of Directors.

We also incurred a $32.7 million asset impairment charge during the quarter, reflecting the impact of revised revenue assumptions used to value trade name intangible asset values, primarily for Lamson & Sessions. The revised revenue assumptions reflect the current and forecasted recessionary market conditions. The impairment charge doesn't necessarily reflect earnings expectations as the calculation is based on changes in revenues only.

Also for the fourth quarter, corporate expense was lower than last year, mainly because 2007 included $5 million for an environmental charge. Other expense for 2008 was $4 million higher than last year, reflecting foreign currency losses generated by the significant movement in currencies that happened within the quarter. The effective tax rate of 8% in the quarter reflected the impact of the asset impairment charge, as well as adjustments necessary to reflect the impact of lower earnings when estimated for the full year.

And the loss on discontinued operations of $0.14 in the quarter primarily reflect the loss on the sale of the remaining pipe business. We received cash of $13.8 million and a note for $4.4 million in the quarter for these assets. All intended divestitures reported under discontinued operations has now been completed. Net earnings for the fourth quarter 2008 was $17.1 million or $0.31 per dilutive share, including the $0.36 per share impairment charge and the $0.14 per share loss from discontinued operations. This compares to $48.3 million or $0.83 per diluted share last year.

Turning now to our full-year results. With the current market sentiment, it is easy to overlook the excellent year that Thomas and Betts had in 2008. Sales increased 16%, segment earnings were up 15%, and earnings were a record for the year. The 16% sales increase breaks down approximately as follows. 15 points from acquisitions, four points of price, four points of negative net volume, and one point favorable foreign currency.

In our electrical segment, sales increased 19% with 18 points from acquisitions, three points of price, three points of negative net volumes, and one point favorable foreign currency. The acquisitions impacted total company gross profit favorably as a percent of sales and were a major factor in the 15% increase year over year in segment earnings. Unusual items for the year included the net $1.31 per diluted share of benefit from the gain on the sale of our minority interest in Leviton, a favorable legal settlement, and non-cash tax charge all recorded in the second quarter. Also included is the previously mentioned fourth-quarter asset impairment charge.

Discontinued operations for the year impacted fully diluted earnings per share by a negative $0.15. As a reminder, all operations previously classified as discontinued operations were divested by the end of 2008. Net earnings were $265 million for 2008, or $4.64 per diluted share, including the net $1.31 benefit highlighted previously, as well as the $0.15 loss in discontinued operations. 2007 net earnings were $183 million or $3.12 per diluted share.

Now I would like to make a few comments about cash flow and the balance sheet. We again did an excellent job in cash generation. Strong operating earnings and working capital management were again the major contributors. Net cash flow from operations was nearly $260 million, and was negatively impacted by approximately $14 million for the merger-related costs and approximately $70 million in tax payments on divestitures made during the year. We believe these two items distort the true strength of our operating cash flow performance for the year.

The company prides itself on its working capital management, and in 2008, we again demonstrated excellent performance. Working capital as a percentage of sales is approximately 13%, helped in part by excellent collections and inventory management. Our inventory levels are in good shape going into next year. Foreign currency and weak fourth-quarter sales also contributed favorably to the metric. Cash proceeds from divestitures totaled approximately $345 million and major uses of cash in 2008 included $161 million for the repurchase of 5.2 million shares of common stock or 9% of our float. Also $154 million of debt reduction and $19 million for two strategic acquisitions.

The company ended 2008 with $292 million of cash and $661 million of total debt. We also had approximately $390 million of availability under existing credit agreements at the end of the year. The company exited the year in a very strong financial position and maintains a lot of flexibility to pursue its strategic initiatives. We have $150 million of notes coming due next week, and we will use a combination of existing cash and availability under our credit agreements to repay them. No other material debt obligations are due until at least the fourth quarter 2012, although we have the flexibility to reduce debt levels further if we believe it is prudent to do so. Again, we believe we are in excellent financial shape to weather these current market conditions.

Finally, a few comments about our 2009 guidance. This year presents a very challenging environment in which to forecast. We believe it is better to take our best shot at providing an estimate based on what we see today, rather than not giving any guidance. Looking first at sales, we expect total company sales to be down by 7% to 12% year over year. In our electrical segment, we anticipate sales will decline by 10% to 15%, with currency negatively impacting sales by approximately 5%, and net volume contributing to the remaining 5% to 10% deterioration.

We expect to experience lower volumes in nearly all geographical and product markets with the US market deteriorating much more significantly than the other geographic regions we cover. In the steel structure segment, we anticipate low double-digit sales growth, driven by volume and higher comparable steel prices. While the outlook for transmission spending remains strong for the longer-term, this estimate may be optimistic if a significant number of projects get pushed out into the future. In the HVAC segment, we anticipate a mid single digit sales decline primarily volume related.

Our full-year 2009 EPS guidance of $3 to $3.50 assumes average shares outstanding of approximately 53 million. As a reminder we bought back 9% of our float in the last half of 2008. An effective tax rate of approximately 30%, net interest expense of approximately $35 million, reflecting lower average net debt levels when compared to 2008. This guidance also reflects corporate expense of approximately $50 million a quarter, acquisition related amortization of approximately $25 million, depreciation of approximately $55 million, and a similar amount of capital expenditures, and also share-based compensation expense of approximately $15 million.

Our 2009 full-year guidance includes approximately $20 million in benefits from the acquisition integration efforts undertaken last year, although this will be entirely offset by higher pension cost. When thinking about the quarterly split of profitability, please note that we anticipate 40% of 2009 earnings to happen in the first half of the year. On a year over year basis, we also expect the first quarter comparison to be more unfavorable for both sales and earnings than the other quarters. Specifically, we expect first quarter sales volumes to be at the high end of the range we provided for full-year sales deterioration. The first quarter will also reflect cost versus price pressure as we sell our higher cost inventory.

Thank you for your continued interest in Thomas and Betts. I'll now turn the call back to Patricia.

Patricia Bergeron

Thank you. This call is a property of Thomas and Betts Corporation. Any redistribution, retransmission, or rebroadcast of this call in any form without the express written consent of Thomas and Betts Corporation is strictly prohibited. A telephone replay of today's call will be available through 12 o'clock midnight on Wednesday, February 11, 2009. The numbers to access the replay is 201-612-7415, account number 9517 and pass code 308874. In addition, a recorded web cast is available on our corporate website, www.tnb.com.

Thank you. We will now open the call up for questions. Operator?

Question-and-Answer Session

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 from Oppenheimer. Please pose your question.

Christopher Glynn – Oppenheimer

Thanks. Good afternoon.

Dominic Pileggi

Hi, Chris.

Christopher Glynn – Oppenheimer

Looking at the balance sheet, astonishingly large reduction in receivables, could you talk about that a little bit?

Ken Fluke

Well I think there's a couple factors as I called out in my prepared remarks. I mean one of them was the fourth quarter sales themselves by nature were down. Also remember that the foreign currency deterioration also just happened in the fourth quarter, and that was a factor that you see there. And again, don't forget, as usual, our collections efforts were again strong.

Christopher Glynn – Oppenheimer

Okay. And do you have increased bad debt allowance?

Ken Fluke

Nothing of any significance now.

Christopher Glynn – Oppenheimer

Okay. And could you talk about the acquisition environment you're seeing and maybe continued expectations for share repurchase?

Dominic Pileggi

Okay. I will talk to you about the M&A activity, Chris. You know there is not a lot of activity at the moment. And our preference, as you well know, is to acquire leading brands, and quite frankly those types of companies have little interest in selling in trough multiples and trough earning periods. But acquisitions are still a very important part of our strategy going forward. And I think as Ken outlined in his reports, we think we are in a good position to capitalize should opportunities present themselves.

Christopher Glynn – Oppenheimer

Okay. And then last one, if I could, the headcount reduction, what was the associated severance expense in the quarter end and second half?

Ken Fluke

Chris, it wasn't that significant, or I would have called it out. But a couple of factors there. As a reminder, a good portion of that would have actually been a part of the acquisition integration activities and that would not have shown through the earnings, it would have gone through purchase accounting into good well ultimately. And the other is, that we have been doing that over really primarily the whole second half of the year, and you know it's not significant enough to highlight as being a big factor in cost. I mean obviously there were costs in both quarters, but nothing big enough we believe to call out.

Christopher Glynn – Oppenheimer

Okay, thanks a lot.

Dominic Pileggi

Thanks, Chris.

Operator

Thank you. Our next question is coming from Steve Gambuzza from Longbow Capital. Please pose your question.

Steve Gambuzza – Longbow Capital

Good morning.

Dominic Pileggi

Good morning Steve.

Steve Gambuzza – Longbow Capital

You called out you expect to generate $20 million of synergies from acquisitions in 2009, but that that would be offset by increases in pension cost, is that correct?

Ken Fluke

Yes, correct.

Steve Gambuzza – Longbow Capital

And that would be incremental synergies to what you realize in 2008?

Ken Fluke

Yes. That's pretty close.

Steve Gambuzza – Longbow Capital

Okay. And what was the – my recollection is that the total amount of synergies – that represents a substantial increase in kind of your expected synergies from the deal if I'm not mistaken, what's the level of…

Ken Fluke

Well, originally, when we went into the original deals, it would have been an increase, but we have been seeing that here in more recent periods of time.

Steve Gambuzza – Longbow Capital

What was the – what would you call out as the 2008 level of synergies?

Ken Fluke

It was not that much significant and what I called out, if I remember right, on the last call was that we would be trying to get that run rate sometime within the fourth quarter. And I’d say that's what we actually did accomplish.

Steve Gambuzza – Longbow Capital

Okay. In terms of your guidance, you talked about the volume and the currency aspect, just curious, your expectation with respect to prices, you know now that we have seen a sharp reversal of most underlying commodity prices, I know you implemented some price increases in 2008 which helped the year quite a bit, are you making no assumptions with respect to price either way in 2009?

Ken Fluke

I think the way to look at it is it's been significant swings in pricing throughout 2008, but when you normalize that out, and then look at 09, we are seeing on an average basis, we don't expect much moment due to price for the whole year. But remember, you did have big spikes and then big drops here recently.

Steve Gambuzza – Longbow Capital

But you don't anticipate having to adjust your pricelist down at all to reflect kind of normalized spot commodity prices?

Ken Fluke

No I think overall that we do have to do that. A lot of that we had big price increases in the third quarter and shown in the fourth and what we're seeing is when we normalized those out for the whole year, you're not going to see much change of price. Quarter to quarter, it will be flips and flops.

Steve Gambuzza – Longbow Capital

Okay. Because prices were so much lower in the first quarter of the year of ‘08. You mentioned that steel prices where – the prices will actually be a positive driver for the steel structural segment, is that correct?

Ken Fluke

Yes, we believe that it will probably be a little bit positive for the year.

Steve Gambuzza – Longbow Capital

Is that plate steel that you use there or is that…

Ken Fluke

Partially, yes.

Steve Gambuzza – Longbow Capital

It’s plate?

Dominic Pileggi

Yes.

Steve Gambuzza – Longbow Capital

Okay. And in terms of margins, I mean I guess you’ve given as essentially all the key information related to your $3 and $3.50 guidance, but I'm just curious, what were the implied margin essentially, roughly is it relatively stable margins or –

Ken Fluke

I exhausted all my comments about various pieces in the prepared remarks, I’ve got everything I have had there what we were going to talk about for the 2009 guidance.

Steve Gambuzza – Longbow Capital

Okay. But would you expect – it sounds like you expect – well, I'll leave it at that. Thank you very much for your time.

Ken Fluke

Okay.

Dominic Pileggi

Thank you, Steve.

Operator

Thank you. Our next question is coming from Zahid Siddique from Gabelli and Company. Please pose your question.

Zahid Siddique – Gabelli and Company

Hi. Good morning guys.

Dominic Pileggi

Good morning Zahid.

Zahid Siddique – Gabelli and Company

How are you? Just a couple of questions, the first one is on the guidance, you talked about the revenues being down, I believe from 7% to 12%, yet the EPS guidance is to be between $3 and $3.50, and you expect the electrical revenues to be down even more. So is it really realistic, the $3, $3.50, given that the revenue are going to fall and usually you do have significant leverage to the revenues, so is that a realistic number? That is my question.

Dominic Pileggi

Well, Zahid, we put a range there of $3 to $3.50. If there are some thawing out of the credit markets, and there is some recovery in the market, we believe we could move to the higher side of that. However, if there is not, then I think we will move to the lower side of that.

Ken Fluke

Yes. We think it is realistic based on those assumptions around the various volume assumptions we had in our 2009 guidance.

Zahid Siddique – Gabelli and Company

Sure. My second question is just with regards to some of the macro indicators that you're looking at, if you could comment on perhaps some of the construction related indicators that you are following. I think you touched on it briefly but if you could may be expand on light commercial or large commercial indicators, the various indices that you're looking at?

Dominic Pileggi

Zahid, we cover that in our prepared remarks, but if you break those down, you know the residential market, you know we believe that that’s going to have a long bottom, and we don't see any growth in that market until around 2010. In the light commercial markets, as we define, as you are aware strip malls, things like that, we believe that is going to follow the residential trends.

The heavy commercial projects, that's going to depend on the access to capital which we hope eases up as the year goes on, and it also depends on commodity prices and availability, which currently is more favorable. The industrial market, keep in mind, there was really no bubble in that industrial market, so the decline or increases for that matter really is not very dramatic.

The utility, if we break that down into the utility distribution, that is a portion related to residential, we think that's going to track the residential construction trend. The balance of that business related to as I mentioned in my comments maintenance, expansions and upgrades, I think the utilities are going to proceed cautiously based on their budgets.

We did say a bright spot was the utility transmission, which I think is pretty clearly – we laid out pretty clearly. And as Ken mentioned in his reports, if you just look at international, today it is not as severe as the US; in most markets residential and residential related is not a big part of the products we offer in the areas that we cover. And we think if you look at the commutations market, just add that in there, we believe that that’s going to behave like the utility distribution market, split between residential, the activity following residential, and activity following maintenance and expansion.

Zahid Siddique – Gabelli and Company

Okay great. Thanks a lot.

Ken Fluke

It is important and remember that more than a third of our businesses is outside the US. And as Dominic said, and I think I did too in my remarks, we don't see that as significant deterioration like we are seeing in the US in those markets.

Zahid Siddique – Gabelli and Company

Okay, thank you.

Operator

Thank you. Our next question is coming from Jeff Beach from Stifel Nicolaus. Please pose your question.

Jeff Beach – Stifel, Nicolaus

Good morning.

Dominic Pileggi

Good morning.

Jeff Beach – Stifel, Nicolaus

Could you comment a little bit on some of the acquisitions you have made, and that you are going to, your experience now, the downturn specifically, what you see occurring at the Lamson & Sessions businesses, the do-it-yourself part of that business, and a little bit about a couple of the acquisitions, how they seem to be performing so far that you have made from Danaher, and then just remind me on the Homac, what the division there is between T&D and what is occurring there? Thank you.

Dominic Pileggi

Okay. Generally, if you look at the acquisitions, as we said, we are very pleased that how they have affected our company and our performance. And obviously, they are responding the same, they are very market-driven, they are not outperforming or under performing the market, just what you would expect. And that was across all the acquisitions that we talked about, whether it is Lamson & Sessions or Danaher, I think they are all performing as well as you would expect them to perform in this market, and I think we're extremely pleased at the positive impact they have had on the company. Your question on Homac, could you – what was the question there?

Jeff Beach – Stifel, Nicolaus

Division between T&D?

Dominic Pileggi

Yes. That's mostly in the distribution.

Jeff Beach – Stifel, Nicolaus

Yes. Back on what I was trying to get a little feel for on the acquisitions, because particularly the acquisitions from Danaher, part of Danaher, hidden in Danaher, like to get an idea, maybe you could just describe as what you see as the cyclicality of those businesses. I know there are some international exposure and everything and then back on the Lamson & Sessions, my interest is historically do it yourself has been somewhat recession resistant, but we are in this deep residential decline, I just wondered if you could just describe what you see occurring right now, maybe compared to history?

Dominic Pileggi

Okay. Let's talk about the Danaher ones you mentioned and they are very different acquisitions you know. One is in our utility group for the distribution of power which has allowed us to help manage power above ground versus underground. The strategic reason for that was to balance out our product line and the product line’s doing quite well considering the economy and what we discussed about utilities.

So I think it is doing just what we wanted it to do, and again like the Danaher one, these were not huge in themselves, but the Danaher one, as you would expect, that is a business that works in the power protection business. So you would imagine that most of the business in there is for things like data centers, or banks and retail things. So that is responding to the market conditions. That market is a little bit slow right now but the technology is outstanding, the pull through capability of that is outstanding, so we are still quite happy with it.

And your question about Lamson & Sessions and the do-it-yourself, I would just remind you there that that's only a portion of the Lamson & Sessions business. I mean those products are used in normal construction and industrial applications as well, and of course, that do it yourself markets are down, and like you have heard some other companies and ourselves. We are feeling that right now, but we also believe that that's not for ever. It is a tremendous product line, a tremendous brand, and we will recover when those markets recover quite nicely.

Jeff Beach – Stifel, Nicolaus

All right. Thank you.

Dominic Pileggi

Thank you.

Operator

Thank you. Our next question is coming from Brent Rakers from Morgan Keegan. Please pose your question.

Brent Rakers – Morgan Keegan

Good morning. I guess a couple of points of clarification, I just want to get a better understanding on the I guess your currency assumption, your currency contribution in revenues was much higher than I would have thought in the quarter, could you remind me what the revenue mix is from areas like Canada and Europe? And then also maybe talk me through where the cost structure is located on operating costs so that I can get a sense for what are the impact might have been on that line item from currency as well?

Ken Fluke

(inaudible) First of all, I would say if you are talking at the earnings impact to the sales from the currency, I would say the best way to look at it is just as if it was volume. In other words, it is going to have a margin, comparable margin deterioration go along with the sales deterioration. That's probably the best guidance I can give you there. The other thing I was mentioning is the major currency movers for us overall would be the euro, the pound, the Canadian dollar, and probably to a small extent the Aussie dollar. Those will be the bigger drivers for us in that.

Brent Rakers – Morgan Keegan

Okay, great. And then Ken, I think you commented in the earlier comments that – you mentioned something about 30%, and I'm not sure if it was earnings or revenues or what specifically in the first half of the year, could you maybe clarify that please?

Ken Fluke

What I said – you are talking about 2009 now?

Brent Rakers – Morgan Keegan

Yes, your 2009 guidance.

Ken Fluke

Okay. What I'm saying is you take the total year guidance for earnings, okay, and earnings I'm talking, say the EPS, you look at the whole year, and I'm saying, split it such that 40% of those earnings are going to show up in the first half of the year, okay, which then the assumption is 60% will be in the second half of the year. And then I also made the comment, also taking consideration that the first quarter is going to be tough. First quarter on the top line, the sales deterioration is going to be a very similar to what we had on the high end of the total year range for deterioration in sales. So take that into consideration and also taking consideration it is going to be a tough quarter from the standpoint of cost versus price pressure as we sell our higher cost inventory.

Brent Rakers – Morgan Keegan

Okay, fair enough. But maybe just

expanding upon – and I think Dominic also talked about the modeling for the second half recovery, and that would effect where within the guidance numbers fall out, I was wondering if you could may be address just the broader non-res construction applications of that? I recall things like last call the company felt pretty comfortable with their levels of visibility in non-res construction through the first or second quarter and then didn't have much visibility past that. I just wondered if you can give me a flavor for how you expect it to roll out non-res construction portion of your business?

Dominic Pileggi

Yes Brent. I would say the first thing, kind of the whole marketplace exploded there which changed visibility everyone had into the first half or second half for that matter, and everyone had to kind of refocus there. So I think that kind of reset what we have, and now we have gone back and took a look in all of our forecasting and came up with what we came up with. Ken just explained, we think the first quarter is going to be tough, and then beyond that, I think as far out as we can see now, is what we are saying, in 2009, I think it is very tough to look into 2010 at this point because it depends on so many factors, whether it is commodity costs, whether it is credit availability, commodity availability or even the normal indicators of vacancy rates et cetera.

Ken Fluke

And really the one other thing I think I’ll highlight quickly too as you would say the second half is going to have some kind of recovery, all we're saying is you are going to have less deterioration potentially year over year than maybe you will have earlier. It is not like it's going to be a big recovery. We are not saying that you're going to see big volume improvements in the second half year over year. What we're just saying is you're not going to see in comparison to year over year, maybe a significant percentage in year over year deterioration as you may see earlier in the year.

Jeff Beach – Stifel, Nicolaus

Great. Ken, just one final question, if I might, just to expand upon the 12%, I think it is 12% reduction in headcount mid year, just to clarify, is the divestiture headcount included in that number?

Ken Fluke

Yes. We would add those people. It would have been Thomas and Betts employees at that time and that's part of…

Jeff Beach – Stifel, Nicolaus

Do we have a sense for, Ken, excluding those employees what the – because that was again, that was in the discontinued items for the last several quarters, correct?

Ken Fluke

Yes. But what I remember – looking at it – I don't have it in front of me Brent. But what I do the number is the more significant amount of change in that were actually Thomas and Betts employees, not so much the people that were part of the acquisitions.

Jeff Beach – Stifel, Nicolaus

Okay, great. Thanks a lot.

Operator

Thank you. Our next question is coming from Bob Cornell from Barclays Capital. Please pose your question.

Bob Cornell – Barclays Capital

Hi. You guys covered a lot of ground. One of the finer point, you mentioned the premise of working capital but inventory did come up a bit and I was wondering if you did end up with a bit of an overrun in inventory relative to production in the fourth quarter?

Ken Fluke

No. I think the key thing there Bob is twofold. One is we had a couple acquisitions that came into the fold within the year of 08, so they weren’t obviously reflected in our 07 balance sheet. So that would be just new inventory. And the second thing is do remember, we had very high commodity inflation in the second half of the year that obviously would manifest itself in inventory levels too, okay. I would say those were two big factors when you're looking at that kind of comparisons that will have an influence.

Bob Cornell – Barclays Capital

Yes. So you got – I mean the last couple of questions on the commercial construction element, but falling back to the last conference call, you guys talked about the strength likely in commercial through the first half of this year with a likely weakness in the second half, could you just sort of update us on that point, how is the current view is consistent with that or different?

Ken Fluke

Well, as I mentioned to Brent in his question, that was – in the last conference call was a little bit where the explosion in the credit markets, but certainly we have seen some push outs, some reductions in projects and a flattening of that slope. So we have to live with that, and I said, well, now you have got to reset that going forward. So, yes, we did see a change to answer your question.

Bob Cornell – Barclays Capital

Okay. Now – and commercial construction is about 30% of total sales, I mean how does that split between light and heavy?

Ken Fluke

Well, Bob, I don't have an exact number on that.

Bob Cornell – Barclays Capital

I will take a good guess.

Dominic Pileggi

I would say it is probably close to 50-50. And keep in mind, our products themselves are the same, whether it is a light commercial project or a heavy commercial project. So there's no difference, we don't have products that are just for heavy commercial or just for light commercial. So they are about 50-50…

Bob Cornell – Barclays Capital

Final question on the industrial MRO business, I wasn't quite clear in what you were saying that business is doing. Is that business, we had some people on earnings calls this week talking about the industrial MRO business being off pretty dramatically, I just thought what I would hear from you guys, what are you seeing with regard to industrial MRO spending?

Dominic Pileggi

It is obviously down, I mean dramatically is a relative term, but it is obviously down as factories are pulling in their horns and as I mentioned we're not seeing factory expansion which really happened there, Bob. These people are spending on maintenance, people have drawn a line instead, what’s nice to spend and what they have to spend. And they are primarily spending on what they have to spend, on maintenance and the kinds of productivity initiatives. We are seeing some spending on productivity initiatives but I mean there is no getting or out, it is down.

Ken Fluke

It is down. It is down a good amount, but it is just not as down as much as you see on the construction side which is dramatic.

Bob Cornell – Barclays Capital

Then go back to the heavy construction, what does your front-log look like, or your pipeline of projects look like on the heavier construction side? I mean has it dissipated, are you having cancellations, what does the front view of that business look like right now relative to what it looked like in the last quarter…

Dominic Pileggi

Generally Bob, the work is still going on of things that we’re started. I don't think that situation has changed. And obviously new projects start of, there are lots of new projects have certainly slowed down as people mostly around access to credit. So we have seen some slow down there, but the projects are in the ground are still going, but I would tell you we haven't seen cancellations in any large degree in those projects because they are tough projects to cancel. If we saw cancellations, they were more in smaller projects, just anecdotally.

Bob Cornell – Barclays Capital

The process of going on, I mean is there sort of a run off– what is the timing of the run-off of those projects that are going on?

Dominic Pileggi

Bob, most of them should go on through the good part of 2009. And beyond that, as I said earlier, it is going to be hard to see. If new projects don't start up, I think 2010 could be a little rough. But that is anybody's guess, you know

Bob Cornell – Barclays Capital

Okay, I got it. That's what I was looking for, a little perspective there. Thank you, guys.

Operator

Thank you. Our next question is coming from Min Cho from FBR Capital Markets. Please pose your question.

Min Cho – FBR Capital Markets

Good morning.

Dominic Pileggi

Hi, Min.

Min Cho – FBR Capital Markets

I don't have a lot of questions left here, just quickly in your steel structures business, can you tell me what percentage of that revenue actually came from wind towers if any?

Dominic Pileggi

What percentage of our what utility…

Min Cho – FBR Capital Markets

Steel structures.

Dominic Pileggi

It is relatively small. I mean the point of matter is firstly we don't make the towers. We just build transmission towers the may actually connect to the wind tower generation. And it can vary quarter to quarter just depending on what type of projects that are going on at the time. I don't have the split on that because the same type of transmission pole, whether it is wind or something else. But as a reminder, we don't make the tower itself.

Min Cho – FBR Capital Markets

Okay. And then just finally, if I could get – do you have an end market breakout for your electrical products business for 2008 by construction and industrial and utility and retail?

Dominic Pileggi

We will try to look at that when we put our presentation that we're going to do when we go out, put it on the Web. When we get that, I'll put it together. We don't have that with us right here.

Min Cho – FBR Capital Markets

Okay. All right, thank you.

Operator

Thank you. Our next question is coming from Sandy Goldman [ph] from Hartline Investment Corp. Please pose your question.

Sandy Goldman – Hartline Investment Corp

Thank you. Dominic, could you talk about the distribution chain and what's going on? One of the kinds of leverage you thought you would get with these additions, used to get more products sold by the major distributors under your own different brands, are you – are you losing, gaining share, are competitors being lost because of liquidity problems, what's the situation?

Dominic Pileggi

Sandy, there really hasn't been much movement. There is much more noise than movement there. Our acquisitions, our strategic acquisitions were made to give us a better footprint in the distributor channel that we serve and we think that's been very successful. We are happy with how that has worked out, but we really haven't seen – there is not a whole lot of change other than that.

Sandy Goldman – Hartline Investment Corp

In terms of their inventories, are they fairly lean?

Dominic Pileggi

Well, I can speak for us, and our distributors, as we told you many times, really have no reason to over inventory because of our fast cycle logistic model. So our inventories by and large are no higher than we'd like to see them and not lower than we would like to see them. I think we are in good shape as Ken mentioned internally. And I think externally, our inventories are in very good shape, and I would add on to that that, when the economy and the markets do start to recover, we should benefit from that very quickly and very successfully.

Sandy Goldman – Hartline Investment Corp

Is there any change in reason why someone would go to one distributor than the other from the old days or is it still fairly the same set of people selling the same kind of thing at roughly the same prices?

Dominic Pileggi

I would say generally that is true. I think that more sophisticated manufacturers like ourselves, for them it's benefit, but generally it is true. But I think we bring particular value, the distributors are learning more efficient, more effective ways of doing business, and we do benefit from that.

Sandy Goldman – Hartline Investment Corp

So you really see – you need volume increase to really see the leveraged you’d get from that?

Dominic Pileggi

Absolutely, that's absolutely true.

Sandy Goldman – Hartline Investment Corp

Thanks Dominic.

Dominic Pileggi

Thank you, Sandy.

Operator

Thank you. Our next question is coming from (inaudible). Please pose your question.

Unidentified Analyst

Hi, good morning. You mentioned your international exposure, could you break that down maybe by region?

Ken Fluke

I don't have that here in front of me.

Unidentified Analyst

I mean could you take a stab at where your international exposures are?

Ken Fluke

The 10-K will be out here in a few weeks or whatever, and there is stuff in there that shows some geographical splits on that, you will be able to see that.

Unidentified Analyst

Okay, fair enough. Thanks.

Dominic Pileggi

Thank you.

Operator

(Operator instructions) Our next question is a follow up from Steve Gambuzza from Longbow Capital. Please pose the question.

Steve Gambuzza – Longbow Capital

I was wondering if you could comment approximately on the mix of cash and credit facility you're going to be using to term out the note?

Ken Fluke

I don't have that split yet. We will make that decision here next week.

Steve Gambuzza – Longbow Capital

And I guess just broadly on – for kind of a target debt or capital structure, should we – what should we think about in terms of debt to EBITDA, how would you – I think you have given comments on this past, if you wouldn't mind repeating what you – what we should use there if that has changed at all in this tighter credit environment?

Ken Fluke

Well, I think historically most industrials like ourselves are very good cash generators. So we can usually sustain a level of debt that is may be higher than some other type of markets. But historically we are also probably conservative and we will be no different from that, and I would say you’d normally see us targeting a debt to cap capitalization ratio that’s probably somewhere in the mid 30s. And quite frankly we are about there as we exit the year in 2008. So hopefully that will just give you some idea. If we took debt levels down lower than where they were at the end of the year, you'd see us more on the lower end of that range.

Steve Gambuzza – Longbow Capital

Okay. And then the guidance that you gave for amortization of acquisitions, amortization expenses, 25 million for 2009, is that correct?

Ken Fluke

Yes.

Steve Gambuzza – Longbow Capital

Was that reduced by the impairment?

Ken Fluke

No.

Steve Gambuzza – Longbow Capital

Okay. What was it in 2008?

Ken Fluke

I don't have that split…

Steve Gambuzza – Longbow Capital

Well, roughly similar? Was it roughly similar amount in 2008?

Ken Fluke

Yes. I wouldn't say – it might be down slightly, if I remember, from 2008, by a few million dollars.

Steve Gambuzza – Longbow Capital

Okay. Thank you very much.

Ken Fluke

Okay.

Operator

Thank you. Our final question is a follow up from Bob Cornell from Barclays Capital. Please pose your question.

Bob Cornell – Barclays Capital

What’s your thoughts about establishing a dividend in here given the number of years you have had since nearly a decade of difficulties [ph]?

Ken Fluke

Bob, that is something that obviously would be a decision of our Board of Directors, but as you have heard us say before, we understand that the cash that Thomas and Betts generates and has belongs to the shareholders, and if we can't find a way to put that cash to work, we know we have to return it to the shareholders in a prudent – prudently in some form. So that's a discussion that we will continue to have but will be made by our Board.

Ken Fluke

We routinely go through that with our Board.

Bob Cornell – Barclays Capital

What's the con?

Dominic Pileggi

Well, so far we have been able to put the money to work you know with acquisitions, and I think we have benefited from that. But should that situation change, we would consider alternatives.

Bob Cornell – Barclays Capital

Okay, got it. Thanks.

Dominic Pileggi

Thank you.

Operator

Thank you. At this time, we have no further questions. I would like to turn the call back over to the speakers for any closing comments.

Patricia Bergeron

Thank you for joining us today.

Dominic Pileggi

Thank you.

Operator

Ladies and gentlemen, this does conclude today's teleconference. You may now disconnect your lines at this time. Thank you for your participation.

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