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Thomas & Betts Corporation (TNB)

Q4 2009 Earnings Call Transcript

February 2nd 2010, 11:00 AM ET


Patricia Bergeron - VP, IR & Corporate Relations

Dominic J. Pileggi - Chairman & CEO

William E. Weaver - Senior Vice President & Chief Financial Officer


Deane Dray - FBR Capital Markets

Scott Davis - Morgan Stanley

Robert Cornell - Barclays Capital

Christopher Glynn – Oppenheimer

Elana Wood - Bank of America Merrill Lynch.

Richard Kwas - Wells Fargo Securities, Llc.

Peter Lisnic -- Robert W. Baird.

Sandy Goldman - Front Barnett Associates



Greetings, ladies and gentlemen, and welcome to the Thomas & Betts Fourth Quarter and full year 2009 Earnings Conference Call. (Operator Instructions).

It is now my pleasure to introduce your host, Ms. Patricia Bergeron, Vice President of Investor and Corporate Relations with 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 and full year 2009 conference call.

Joining me today are Dominic Pileggi, Thomas & Betts’ Chairman and Chie Executive Officer and Bill Weaver, Senior Vice President and Chief Financial Officer. Dominic will begin our formal remarks with a review of business highlights. Bill will then address the fourth quarter and full year financial results.

Following the conclusion of our formal remarks, we will take questions from the investment community. Before turning the call over to Dominic, I would like to remind you that our comments today 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 as outlined in our form 10-K.

Our remarks also include non-GAAP financial information, which management believes may provide useful information for comparing our results to those of our peers. These non-GAAP measures are reconciled to GAAP financial information in an attachment included with our earnings release. This should not be considered to be substitute for or superior to financial measures defined by GAAP.

I will now turn the call over to Dominic.

Dominic Pileggi

Good morning and thank you for joining us today. We are pleased to report that Thomas & Betts delivered a strong finish to what was a very challenging year. Not just for Thomas and Betts and our peers in the electrical industry, but for the global economy as a whole. As we expected, sales in the fourth quarter declined merely 14% compared to 2008.

Consolidated segment earnings were healthy 18.9% sales, down only 100 basis points from prior year levels. We think this is solid performance given the significant decline in year-over-year sales.

Excluding unusual items, net earnings from continuing operations in the fourth quarter were $37 million or $0.70 per share compared to $44 million or $0.81 per share in the prior year period. On a sequential quarter basis sales were up slightly from the third quarter while earnings per share increased 6% from $0.66 per share excluding unusual items.

Each of our businesses contributed to our solid performance with the continued and relentless focus on reducing cost while maintaining price discipline in a very competitive marketplace. As always we continue to closely manage our working capital again delivering best in class performance.

Turning now the performance of our business segments. Sales in our electrical segment declined nearly 16% year-over-year to $391 million although less than the decline seen in the first three quarters of 2009, this is still a substantial year-over-year drop.

We are very pleased that despite this decline our electrical segment again delivered very health earnings of $76 millin or 19.3% of sales. This is only a 20 basis points decrease in margin from the fourth quarter of 2008 and reflects the actions taken earlier in the year to reduce headcount and cost.

We do not believe that there was much if any inventory destocking by distributors in the quarter. As we noted on our last conference call, distributors in general are replacing or replenishing their inventory item for item only as it moves out the door. Our distributors are capitalizing on our fast cycle logistic model that replaces their stock very quickly and helps improve their working capital.

For Thomas & Betts products, we don’t expect distributors to change their inventory management strategy until the economic recovery is more clearly evident and increased demand has proven to be sustainable.

As you might expect, pricing remains highly competitive particularly for commercial construction products. But also as you should expect we remain disciplined in managing price and successfully maintained our price to cost relationship in the fourth quarter.

As we commented on our conference call in October, we increased prices on certain electrical products at the beginning of the fourth quarter. As a result, price contributed approximately 2% to sales when compared to the third quarter.

A frequent question we get is what impact federal stimulus spending is having on our markets? During the fourth quarter, we began to see some stimulus spending trickle into certain markets. However, the amount of money released has not yet had any meaningful impact on demand. For planning purposes, we've assumed no direct impact from stimulus spending in 2010.

Looking now at the specific end markets served by our electrical segment, industrial markets continued to be the bright spot in the fourth quarter with notable activity in wastewater treatment, oil and gas, and food & beverage processing.

The automotive sector also began to show signs of life. From a macro perspective, capacity utilization increased slightly in the quarter contributing to the lift. In utility markets, capital spending remains subdued as utilities grapple with lower demand and lower revenues.

The spending has been largely focused on upgrading conventional power generation facilities and substations as well as some investments in alternative power generation capabilities and necessary maintenance.

As expected, commercial construction spending remain depress with few new projects initiated, older projects winding down and normal fourth quarter seasonality. Fundamental trends remain the same with modest activity in institutional and government project such as schools, hospitals and military basis.

Lastly, residential construction is slowly beginning to improve with housing starts up modestly and consumers more willing to spend again on refurbishing and renovating existing homes. For Thomas & Betts, residential construction spending influences our retail sales, which were up sequentially from the third quarter.

In summary, demand was mixed in the key markets served by our Electrical Segment. We are however very pleased with the earnings performance we deliver and confident that the value proposition we offer our distributors and endusers will allow us to remain a leader in 2010 and beyond.

Turning now to our Steel Structure segment. Sales were $67 million relatively flat with fourth quarter 2008. As we noted in our press release, shipments delayed from the third to fourth quarter positively affected both 2008 and 2009 fourth quarter sales by $6 million.

We consider the production and shipment levels of the fourth quarter to be very solid. Steel Structure segment earnings were $11 million or 16.2% of sales. This is down from the unusually strong earnings performance in the fourth quarter of 2008 and earlier this year and reflects a more typical project mix.

As we’ve noted on previous calls, we are continuing to see a very high level of activity for transmission projects particularly to connect alternative generation sources such as solar and wind to the existing grid.

The need for a more reliable and efficient U.S. power transmission grid remains a national priority and we remain very positive about the long-term growth for this business.

In our HVAC segment, sales were $35 million down 11% year-over-year, but at the high end of our expected range. The exceptionally cold weather in the U.S. contributed to this performance.

The HVAC segment earnings were $6.7 million or a healthy 19.2% of sales, up significantly on a sequential basis and reflecting normal seasonal trends and a more favorable mix of new unit sales and replacement parts.

Turning now to our full year consolidated performance. For the full year of 2009, sales declined 23% to $1.9 billion reflecting the general malice of the global macroeconomic environment.

Despite a very challenging economic environment, we delivered solid full year segment earnings of 17.7% of sales and net earnings from continuing operations of $120 million or $2.27 per share excluding unusual items.

Our ability to deliver strong operating and financial performance without compromising our market leadership, our strong relationships with our distributor partners or our continued investment in our businesses clearly demonstrates that Thomas & Betts has the conviction, flexibility and focus needed to not only execute well in very difficult environment but to move the company forward in anticipation of future opportunities.

In late 2008 and throughout 2009 we responded to the rapid deterioration in U.S and global markets by consolidating production, reducing head count, cutting cost and optimizing our proven lean six sigma manufacturing culture. We asked every employee to help us improve productivity, prioritize spending and manage our cash and they delivered.

As we move into 2010, we will continue to evaluate and act on opportunities that improve our cost position and enhance our value proposition. Everything we are doing, whether it’s in response to our market conditions or to position us for future growth supports our vision of being the brand of choice for our end users and the supplier of choice for our distributor partners.

To maintain our competitive position and strengthen our opportunity for growth in the fourth quarter we continue to invest in our facilities, products and people, expanded our geographic presence and opened new manufacturing facility in Dammam, Saudi Arabia and last week we completed a small but strategic acquisition.

The acquisition of JT Packard & Associates is a good example of our objective to make acquisitions to complement our existing businesses can be successfully integrated and enhance the value proposition we offer our customers and add value for our shareholders.

JT Packard is the nations leading independent service provider for mission critical data centers and maintains a client portfolio, which includes 25% of the Fortune 500. In 2009, JT Packard had $60 million in revenue and we acquired the business for approximately $22 million in cash.

The company is a very nice bolt-on acquisition for our service arm of our power quality business and I would like to take this opportunity to welcome the employees of JT Packard to the Thomas & Betts family.

They truly are leader in their industry and like Thomas & Betts they have very strong relationships with their end customers. We expect to leverage these relationships to pull through the full line of T&B products.

We continue to aggressively seek other acquisitions that will enhance our portfolio of leading brands, lower transaction, and working capital cost for customers, expand the availability of our products and leverage our business model.

While I'm happy to report that the pipeline of potential opportunities is both solid and active, the exact timing of when an opportunity will be realized is difficult to predict.

Turning now to our outlook for 2010. While the U.S. economy ended 2009, stronger than it began and the global economy appears to have stabilized, we approach 2010 with guarded optimism. The reality is that unemployment and underemployment remain very high. Credit is trickling rather than flowing out.

Consumers in businesses remain guarded in their spending, energy and commodity cost continue to increase and pricing remains highly competitive. These are just a few of the many variables that will affect the speed and degree of recovery and continue to make forecasting difficult.

In planning for 2010, we made the flowing assumptions about our specific markets. Non-residential will continue to deteriorate and we anticipate a 20% or greater decline this year. As I noted earlier, a few areas such as institutional and infrastructure projects have been modestly active and we will continue to focus on these vertical segments in 2010.

Well not explicitly included in our financial forecast, stimulus funds are likely to benefit these areas as projects make their way through the bureaucratic red tape and environmental green tape.

We believe that residential construction will only grow in the range of 10% to 15% in 2010. This is more conservative than the expectation of many others who see this market as the key driver of the recovery. As a reference point, approximately 12% to 15% of our electrical segment sales are influenced by residential construction and renovation.

We expect industrial market trends to mirror 2009 with positive activity in areas such as wastewater treatment, oil and gas, and food and beverage, and other infrastructure verticals. While capacity utilization is predicted to increase slightly to the low 70s range, it will remain well below levels that would drive significant investment in new facilities. Instead, we expect companies to use their cash to upgrade existing facilities, replace ageing equipment and return to more normalized maintenance schedules.

In utility markets, we expect capital spending to be weighted toward transmission and power generation rather than power distribution. This is understandable given the soft outlook for construction. In addition to improving the reliability of the grid, utilities will likely spend more to connect alternative energy sources to the primary grid, and as mentioned earlier, to perform necessary maintenance.

Looking now at how we believe Thomas & Betts will perform in 2010, we expect consolidated and electrical segment sales to be essentially flat year-over-year. Our Steel Structure segment sales should increase in the high single low double-digit range, while our HVAC sales which are tied to non-residential construction but also benefit from replacement spending are expected to decrease in the mid single-digit range.

From an earnings perspective, we will continue to benefit from actions taken into 2009 to lower cost and right size manufacturing to demand. Our employees have proven time and time again that they are capable and willing to meet the challenges put before them and we are confident that they will continue to execute effectively in 2010.

However, significant macroeconomic risks remain, which could easily derail or delay the recovery and make it difficult to forecast longer term. These include the availability of credit for businesses and consumers, sustained high levels of unemployment, increasing commodity costs and volatility and foreign exchange.

Taking into account the risks outlined above, we are currently targeting full year 2010 earnings per share to be in the range of $2.20 to $2.60 per share on an operating basis.

In summary, Thomas & Betts finished 2009 in a position of strength in the face of very challenging conditions. We took swift action to manage significantly lower demand without compromising our market leadership, our investment in future growth and we delivered what our shareholders expect, strong earnings in cash flow.

Moving forward, we will continue to leverage our proven lean operating culture and pursue effective, organic and acquisition growth strategies, while we execute our vision of being the brand of choice and supplier of choice to our customers.

Thank you for your interest in Thomas & Betts, I would now like to turn the call over to Bill Weaver.

William Weaver

Thank you Dominic, and good morning.

I share Dominic’s view that the fourth quarter represents a strong finish to a very challenging year. In addition to delivering solid fourth quarter results, we also took actions in the quarter to further strengthen an already strong balance sheet and o mitigate future earnings volatility.

Let me turn quickly to the specifics of our fourth quarter 2009 financial performance. On a consolidated basis, sales declined 14% compared to last year. This breaks down approximately as follows: 11 points of negative net volume, 3 points of positive foreign currency and 6 points of negative price of which the majority is attributable to our Steel Structures business and I’ll comment further on Steel Structures in a moment.

In our global electrical segment, sales decreased 16% year-over-year. Electrical segment sales break down as follows: 16 points negative volume, 3 point of negative price and 3 points of positive foreign currency. On an overall basis, fourth quarter consolidated and electrical segment sales comparisons were much better than the same comparisons for the first three quarters of the year.

In our Steel Structure segment, fourth quarter sales declined by 1% as follows: 26 points of positive volume and 27 points of negative price. This significant price component is largely a result of the year-over-year decline in steel prices. And as a reminder, steel costs are largely a pass through in our Steel Structures business.

In our HVAC segment, sales declined by 11% year-over-year, reflecting 12 points of negative volume and 1 point of positive currency.

Let me shift gears quickly from our segment results and back to the consolidated financial statements. Gross profit, as a percent of sales was 31% in the fourth quarter, a 60 basis point improvement on a sequential quarter basis and less than 1% point below the prior year quarter.

This is a tremendous accomplishment considering the decline in year-over-year volume and reflects the actions we took to reduce headcount and control cost, the impact of lower commodity cost, and our strong discipline in managing pricing.

Fourth quarter gross profit, as percent of sales is also notable because Steel Structures, which has a dilutive impact on the measurement accounted for 14% of the quarter sales. Year-over-year selling general and administrative expense was lower by a 11% or approximately $12 million. We ended the quarter with SG&A of 19.3% of sales.

Our effective tax rate was 25.8% in the quarter and on a sequential quarter basis, this is down approximately 3 percentage points and reflects refined estimates of the global distribution of Thomas & Betts earnings.

Fourth quarter results were affected by several unusual items and let me take just a minute to cover those. As we discussed on our last conference call, we initiated the consolidation of an electrical segment manufacturing facility at the beginning of the fourth quarter.

I’m pleased to report that we have essentially completed this process, the impact on fourth quarter was $0.4 per share. We incurred a $5.8 million or $0.07 per share non-cash impairment charge related to certain intangible assets in the quarter. In the fourth quarter of 2008, we incurred a similar non-cash impairment charge of $32.7 million or $0.36 per share.

Finally given the very favorable environment in the investment rate debt market in the fourth quarter, we took the opportunity to reposition our debt capital structure by exercising the call option in our 2013 notes.

Including the call premium and unamortized issuance cost, the impact from debt refinancing charges was $0.08 per share in the fourth quarter. Excluding the unusual items described above, fourth quarter net earnings from continuing operations were $37 million or $0.70 per share in 2009 compared to $44.2 million or $0.81 per share in the prior year.

Turning now to our full year results. On a consolidated basis, sales declined 23% compared to last year at the low end of our earlier guidance range of down 23 to down 25%. This breaks down approximately as follows, 20 points of negative net volume and 3 points of negative foreign currency. Price was negligible for the full year comparison.

In our Global Electrical segment, sales decreased 26% year-over-year, which breaks down as follows, 23 point of negative volume and 3 points of negative foreign currency. Price was also negligible in the year-over-year Electrical segment comparison reflecting our strong discipline around pricing.

On a consolidated basis, segment earnings were 17.7% of sales compared to 19.7% in the prior year. We believe this is a very solid financial performance given the broad-based contraction in our global markets, which resulted in a 20-point decline in volume.

It demonstrates the strength of our brands and our excellent relationship with our distributors as well the swift action we took to reduce headcount and control cost. In addition to the unusual items in the fourth quarter, full year 2009 results were impacted by $4 million pre-tax charge in third quarter for revised estimates related to an environmental remediation side. Excluding unusual items, 2009 net earnings from continuing operations were $120.3 million or $2.27 per share.

We also had a number of unusual items which affected 2008 results, including the gain on the sale of our minority interest in Leviton, a favorable legal settlement and non-cash tax and intangible asset impairment charges aggregated these items contributed $1.31 per share to 2008 full year earnings, excluding them net income from continuing operations in 2008 was $198.8 million or $3.48 per share.

I'd like to make a few comments now about free cash flow and the balance sheet. Free cash flow was over $245 million through the end of 2009, more than two and a quarter times our reported net income. This was excellent performance and reflects our continued focus on effectively managing working capital.

At the end of the quarter, working capital was 13.6% of sales. We maintained a very balanced approach to how we put our cash to work during 2009. CapEx was $41 million, we reduced our aggregate in debtedness by $26 million repurchased 1 million shares of common shares for $25 million and made a voluntary contribution to our pension plans of $50 million.

We ended the year with $479 million of cash and cash equivalents availability under our existing credit agreements was over $380 million. All in all, we ended 2009 with a very solid liquidity position.

Total debt at year-end was $639 million and represented 32.3% of our total capitalization and 2.6 times annual free cash flow.

As noted earlier, we took advantage of a very favorable investment rate debt market in the fourth quarter and issued $250 million of 12 year unsecured notes at a coupon rate of five and five-eighths and used part of the proceeds to redeem our 2013 notes.

This significantly extended the duration of our debt capital structure at a very attractive price. Notably, we have no material debt obligations due until the fourth quarter of 2012.

Finally, we announced our decision to freeze our defined benefit pension plan for U.S. non-bargaining employees beginning in January of 2011 and replace it with a defiant contribution plan.

Taking this action will limit the growth and what is a significant long-term liability and will ultimately enable the company to lessen the impact of changes in the capital markets on reported earnings.

More details of the freeze will be included in our form 10-K which we expect to file later this month. All in all our strong balance sheet and liquidity position leave us in excellent financial shape to pursue our longer terms strategic initiatives of organic and acquisition driven growth.

Lastly, let me make just a few additional comments about our full year 2010 earnings guidance. As Dominic noted, we are guiding full year 2010 EBS to a range of $2.20 to $2.60 per deluded share on an operating basis.

Overall, this guidance assumed some tailwind from foreign currency and from our ability to maintain price-cost parity despite inflationary pressure on energy cost and raw materials.

We have provided a fairly wide earnings range, because as Dominic emphasized a very real potential exist that macro economic and environmental factors may differ significantly from what we assumed in our model.

From a full year segment earnings perspective we assume the following. Electrical segment earnings will continue to benefit from the head count and cost reduction activities we undertook last year and should remain in the high teens as a percentage of sales.

Earnings as a percentage of sales in our steel structure segment will moderate from the unusually high levels we saw in 2009 toward a more normal range of 17% to 19% of sales. Finally as a percent of sales HVAC segment earnings will decline slightly as a result of anticipated declines in volume.

Additional items of note in our guidance include average shares outstanding of approximately $53 million and an effective tax rate of approximately 30%.

On a quarterly basis, we expect 2010 will return to a more typical seasonal revenue pattern. As you know the rapid decline in commercial construction combined with de-stocking activity at distributors effectively mask the normal seasonal trend in 2009.

Compared to the fourth quarter we expect consolidated sales in our first quarter of 2010 to decline in the mid-single digit percent range. On a consolidated basis and within our electrical segment margins will likewise return to more normal seasonal patterns.

In other words, first quarter margin levels should be the lowest of the year, given that plant production activities are generally at a seasonal low point in the fourth quarter of the preceding year. For the first quarter we expect earnings per share in the range of $0.50 to $0.55 per share on an operating basis.

Thank you for your continued interest in Thomas & Betts and I will turn the call back to Tricia.

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 & Betts Corporation is strictly prohibited.

The telephone replay of today's call will be available through 12 o'clock midnight on Tuesday, February 09, 2010. The number to access the replay is 201-612-7415, the account number is 9517 and the pass code 341837. In addition, the recorded webcast will be available on our corporate website,

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

Question-and-Answer Session


Thank you. We will now be conducting a question and answer session. (Operator Instructions). One moment please while pause for questions. Our first question comes from Deane Dray - FBR Capital Markets.

Deane Dray - FBR Capital Markets

I was hoping we could get some further color on specific assumptions underlying the 2010 guidance, you had said that a tailwind from FX and a positive price cost equation -- could you be more specific as how that fits in with both the low and the high end of the guidance?

Dominic Pileggi

Deane, I don't have specific numbers to share with you but you certainly got the directional components right. We do expect a tailwind from foreign currency. And if you recall, our exposure from a currency standpoint is principally Australian dollar, euro and Canadian dollar, to a lesser extent GDP.

We do expect some inflationary increases in energy and commodity costs, which we do expect to pass through as part of price. And then not surprisingly, we anticipate lower volumes than in 2009 largely because of the significant decline we’re calling out in commercial construction. So directionally very much in agreement, just don't have specific numbers to share.

Deane Dray - FBR Capital Markets

Sure and just follow-up on that, what I thought was interesting is your conservative approach or expectation on non-res specifically, so you called out a 20% decline. And if you look at all the different estimates, whether it's Dodge report or some of the other forecast, they’re not quite as low. So is this a question of mix or you just taking a more conservative slice on it?

Dominic Pileggi

Well, Deane I would say when we look at all the environment out there that we mentioned in our prepared remarks such as high unemployment, high underemployment, the availability of credit for the consumers, and also a lot of people believe that there’s going to be a wave of more foreclosures, we would like to see that it'd be more positive, so we would certainly enjoy that. But when we look at it, we do believe a more conservative approach is appropriate.

Deane Dray - FBR Capital Markets

Great, and then with regard to the assumptions, is there any restructuring built into your guidance, and then specifically for this past quarter, I know you had called out an expectation of a $0.05 charge related to that facility consolidation, it worked out to be $0.04. Is there anything baked in for 2010?

William Weaver

There is not explicitly deemed, the guidance we gave, the 220 to 260 is on an operating basis. I think Dominic called out in his remarks, we are certainly always looking for opportunities to improve our cost relationship, but at least the guidance we gave is all op with no expectation of restructuring.

Deane Dray - FBR Capital Markets

Just a last one from me if I could, just to clarify on the asset impairment, I know that is an annual test that you do, which businesses were involved?

William Weaver

The charges we took were principally non-amortizing intangibles, so they were principally traded names and they impacted principally the electrical segment and very slightly the HVAC segment.

Deane Dray - FBR Capital Markets

Would these be specific brand or any further color?

William Weaver

They are trade names. The leading charge gives us to what last year was the LMS brand.


Your next question comes from Scott Davis - Morgan Stanley.

Scott Davis - Morgan Stanley

Dominic, I was a little intrigued by your comment on stimulus at a trickle and more so because we are clearly hearing that from everybody and we have been hearing that for about 12 months, but there are some thoughts at least that, that spend is going to have to start accelerating to make it on time to be kind of done by 2011-2012. What is your thought there, I mean when is kind of trickle start to become something become something real and tangible?

Dominic Pileggi

Well, I obviously can't answer when that will happen. We hope it happens. If it happens at all, we hope it happens. As we have mentioned before, we’re very well positioned when starts to move more from a trickle to a flow, and as I also mentioned in my comments Scott, I think a lot of it is tied up bureaucratic red tape and environmental green tape and I just think that that’s beyond our control or any other manufacturer’s control when that happens.

So, hopefully the administration will take a more serious approach to, what I would call, job creation and start to break that ice there and move that stimulus money into infrastructure projects and industrial companies and construction projects.

Scott Davis - Morgan Stanley

One of the things – that the pricing on these commercial construction projects, why is it – and may be this is just asking your opinion more than anything else – but, why is it that pricing just seems to be so rational? Everywhere else -- among the electrical world, and then pretty much everybody who is bidding on commercial projects talks about pricing being just brutal.

What makes that particular process more challenging to get priced? Is it more competition, just the gloves are off and everybody’s getting more aggressive, trying to keep their factories running? Can you just give us a sense of why it’s different on that vertical versus pricing that we’re seeing in other areas and say what your business, industry or units where the pricing seems to be holding much more firm?

Dominic Pileggi

Sure. I think it’s obviously – in the most simple terms, is the fact that there’s not as much demand as there is supply for commercial construction projects or products. So, that obviously leads to more price pressure and then it does for in the industrial, where you are dealing with lower capacities or more specified products. So I think it's just simply a matter of supply and demand.

Scott Davis - Morgan Stanley

And they’re just different products, so they are not fungibles, you are kind of saying you can’t use those products for other applications?

Dominic Pileggi

Well, some of them, so we cited a specific commercial construction product.

Scott Davis - Morgan Stanley

Okay, all right I won’t be that dead horse. Okay lastly just briefly I’m not sure you commented, and if you did, my apologies. But on the order rates, or how things looked in January kind of sequentially from November to December to January, are you sequential improvement as there any type of book to bill type metrics that you can quote?

Dominic Pileggi

I would tell you that we’re seeing activity levels about what we would hope to see and that are built in our forecast.

William Weaver

And we for the first time, we called out our expected revenue guidance and EPS guidance for Q1, so the order rates we are seeing are baked into that guidance.


Your next question comes from Robert Cornell - Barclays Capital.

Robert Cornell - Barclays Capital

In our prior call you had said, Dominic, that the cliff event in the non-res market was over. Is that still the case? And let me ask you a follow up.

Dominic Pileggi

Well, obviously we thought that that would have bottomed out, and we think it’s pretty much still the case that it’s bottomed out. However we don’t see the recovery coming in 2010 that some people predicted early, the comments you are talking about were early in 2009.

And lot of people expected, kind of the previous question that Scott asked about stimulus money, would hit and credit would be available. And those things Bob really didn’t materialize, so consequently we haven’t seen the rebound, which is now hopefully pushed out into 2011.

Robert Cornell - Barclays Capital

I guess what I'm really asking is for the profile of dollars, I mean because obviously, when you look at last year, you are comping against higher level, so obviously it's down. So I'm trying to figure out whether the slop of your business is flat or whether it's down independent of these stimulus comments?

Dominic Pileggi

You are talking about in the construction part of the business?

Robert Cornell - Barclays Capital

Yes in the commercial construction business.

Dominic Pileggi

I would say it's pretty much flattened out.

Robert Cornell - Barclays Capital

So it's flattened out and that just the recovery is invisible?

Dominic Pileggi

It's not visible to us, yeah. Then as you saw we took a more conservative approach of that having an immediate recovery.

Robert Cornell - Barclays Capital

I think again -- because there was some of the other question that have been asked, the price was sort of flat for the year but in electrical down 3 in the quarter. What gives you confidence and I know you hedged on the guidance in this regard, but that you can maintain prices as you go forward independent of the project answer to Scott's question?

Dominic Pileggi

Bob, I think if you go back and you look at history, Thomas & Betts has actually demonstrated a pretty solid ability to manage price cost parity. So as we called out in the guidance, it is certainly our expectation that we will be able to manage price cost successfully in 2010. We do expect some inflationary pressure on the underlying cost but we think we will have the ability to past it through. But as we also called out, one of the reasons we provided a fairly wide earnings range is simply because there is some uncertainty in our minds as to what the macro environment is going to deliver.

William Weaver

And Bob I would add on to what Bill just said, the fact that we will maintain our discipline at the sake of sounding like a broken record, you've heard me say this before. We're always willing to lose an order but we won't lose the market. So we understand the market and we will compete as we have to there.

And also I would add to that, we have to look the Thomas & Betts as our whole value proposition, which really I think, is a help to us. When you look at that broad product lines, you look at the services we provide, the distributors, you look at the lower transaction cost, the working capital cost, I think that really does help us to maintain our pricing disciplines. As well as our direct selling sales force is working out there with the endusers, so I think all those things combined our help in maintaining that discipline.

Sometimes, the old saying is, when all you have is price that's all you could sell with, we don't sell just on price.

Bob Cornell – Barclays Capital

Yes, you made that point before. A final question for me, could you go into more detail with regard to your structural cost out and then you talked about the cost out so forth, but and may be you can talk about permanent cost out, temporary cost out, facilities you might have taken out, head count you might have taken out. Then give us some dollar conclusions on what the cost out is?

William Weaver

Well, Bob if you look at 2009 as a whole, right? Between -- let's start from, let's say fourth quarter, maybe third quarter of '08 to the end of '09, we took out somewhere in the range 22% of our total head count.

So arguably a lot of those costs are temporary in nature but I'll tell you, we will be very judicious before we add back $1 of cost or one head count into the operation without seeing sustainable demand to support it.

The things that I think you would more frequently characterize as permanent costs, the ones I would call out to you would be the obvious, the electrical facility consolidation that we did in the fourth quarter. I think as we said at that time, our expectation was it would be $0.05; it actually came in at $0.04. it will be accreted in the current year and somewhere in the neighborhood of three-quarters of a cent to about a cent per quarter.

Robert Cornell - Barclays Capital

Okay is that the 1%, did you take out other facilities or is it the one you are talking about, just the one.

William Weaver

It is one. We closed a very very small facility in the first quarter of last year, but was not large enough to call out. So we did two last year.


Your next question comes from Christopher Glynn – Oppenheimer.

Christopher Glynn – Oppenheimer

Looking partly at valued proposition you talked about the short cycle logistics model, I wondering how you think about any share gain opportunity in the period of restocking related to that.

Dominic Pileggi

Actually Chris, we feel pretty good about that and I'm not talking that there is going to be major numbers, I don’t want you to get too excited about that. But I think in the down environment like our distributors have had and as we referenced, they are kind of replacing stock on a real time basis.

They start to understand the value of being able to get one order, one shipment, one invoice, lower transaction costs. They start to understand the value of the lower working capital, not having to raise their inventory levels and be able to depend on good service.

As a matter of fact, there was a report put our recently by an analyst that actually commented that Thomas & Betts, this was a report he did with distributors and commented that Thomas & Betts was actually replacing some people on the shelf. But again, I caution you I wouldn’t say these are going to be dramatic numbers, but I think it is evidence of the value proposition working and getting a little benefit in the down time.

Christopher Glynn – Oppenheimer

And then just excluding steel structures if you could flush out your thoughts on the utility exposure net, the generation and distribution within electrical, what’s kind of your net expectation for the year there?

I’m assuming that’s one of your least visible markets directionally, but maybe some thoughts on that qualitatively.

Dominic Pileggi

Just clarify for me, what did you say is our least visible market, the utility and general?

Christopher Glynn – Oppenheimer

Yeah, if you look at the main exposures in electrical is that utility, one of the toughest one to gauge directionally.

Dominic Pileggi

Yeah, I think when you look at our exposure to the utility market I mean we have the advantage of being in what I call the three major segments of utility, power generation, power transmission and then power distribution.

I think we have a pretty good visibility into those markets, and when you throw all that in the blender I think what we are seeing is we are going to see some elevated spending in the transmission and power generation parts of that business and decreased spending in the distribution side of that business.

When you roll it all up we are expecting it to be about flat when you add in, that they are going to have to do maintenance that has be done. So all four of those factors to us, I mean relatively flat spending and utility for our product lines that we provide the utilities.


Thank you. Our next question comes from Elana Wood - Bank of America Merrill Lynch.

Elana Wood - Bank of America Merrill Lynch

I want to ask you about pension. Is there going to be a pension headwind this year or is it going to be relatively flatter, since you made the voluntary pension contribution in the fourth quarter.

Dominic Pileggi

No pension, if we just isolate pension for the year a lot of pension will be a little bit of a tailwind relative to last year for a couple of reasons. The, we will get a little bit of the hard freeze that we talked about. We'll get a little bit out of the $50 million contribution we made, plus there were some asset recoveries in asset values last year that were contributed as well.

Now, counter veiling against that will be a decline in discount rates and I expect there will be a decline in expected earnings rates. Net, net there will probably be a little bit of positive I expect that that will be offset though largely by elevated levels of incentive compensation and a return to more typical merit compensation increase.

So if you look at pension, little bit of a tailwind, if you look at compensation more broadly, pretty flat.

Elana Wood - Bank of America Merrill Lynch

Okay, can you give me a sense of what the numbers are for the pension tailwind and the incentive comp headwind?

Dominic Pileggi

I don’t have them all at the top of my head Elana.

Elana Wood - Bank of America Merrill Lynch

About the electrical margins in the fourth quarter, what's the pro forma margin excluding the facility charge?

Dominic Pileggi

You're talking about electrical segment margins?

Elana Wood - Bank of America Merrill Lynch


Dominic Pileggi

It would have been, if you take out the fourth quarter charge for the facility consolidation, it would crossed just a little bit over 20%.

Elana Wood - Bank of America Merrill Lynch

Okay and then just was wondering what was driving the sequential increase versus the third quarter. Is it all largely cost savings or is there anything else going on?

Dominic Pileggi

No it's really that, its part of its mix. So as you would expect in Q4, as we began to see some seasonality come in right, commercial construction is declining, anyway it's seasonally declined in fourth quarter in most periods. So part of it is a mix variance that you’re seeing with more industrial products pulling through there. And then some of it is that final full run rate on all the cost saving activities we took in the first half of the year.

Elana Wood - Bank of America Merrill Lynch

Okay and then just lastly on your electrical margin forecast for 2010 -- I mean could you be a little bit more granular about the potential increase year-over-year assuming sort of flattish volumes? And how much carryover from restructuring, how much incremental benefit might be recognized in 2010?

Dominic Pileggi

Well certainly in 2010 within electrical margins, we will continue to get the benefit of all of those cost savings initiatives that we undertook. And as I called out for the full year, we expect electrical segment margins will remain in the high teens.


Your next question comes from Richard Kwas - Wells Fargo Securities, Llc.

Richard Kwas - Wells Fargo Securities, Llc

Just to flush out the guidance commentary little bit, so if we take the midpoint 240, how should we think about price and volume within that? So say the midpoint is -- Well, the midpoint is 240, do we assume that the price input cost portion is flat in that scenario, and that the 220 number assumes some price degradation, and the 260 assumes a price improvement or how do we flush it out between price, cost input and then volume?

William Weaver

Rich, I think we've given quite a bit of guidance around it but I'll tell you in developing the range without giving you specific numbers, we certainly assume some potential variation in volumes as a result of macro factors. We at least modeled the opportunity to a margin compression or expansion on depending on what happens with the ability to maintain price cost parity or do a little better. So there are -- there is a variety of assumption in there, but I can’t give you more color than that.

Richard Kwas - Wells Fargo Securities, Llc

But it sounds like you are assuming that more the swing factors can be volume rather than price cost influence.

Dominic Pileggi

That’s certainly the expectation if you look at the width of the range you would be right, it is factored more on changes in volume than changes in margin.

Richard Kwas - Wells Fargo Securities, Llc

Dominic, your commentary regarding transmission, this is a two or three quarters in a row where you’ve discussed increased activity. How sure you think about when this stuff could start to come on, I know it’s got some long tale to it, but what do you what's your current thinking there?

Dominic Pileggi

Well, you heard say before that it’s pretty hard to be precise on when you see a project actually come to fruition, when shovels go in the ground and you read the same articles and everything that we read, there is lots of environmental, what we call Green tape or you are hearing that term now there is a lot of waiting around to see if someone could get some stimulus money. So there is lot of projects like that.

The utilities themselves have some lower revenue situations. So it’s very, very difficult to tell when these things are going to actually come to fruition, but the encouraging thing is the fact that the activity level are remained to be very high, which is a really good sign and also there seems to be more demand for hooking the alternative power energy on to the grid particularly winded and solar obviously.

So I just can’t give you an exact answer that that's just that really depends on so many macro economic factors out there.

William Weaver

Rich let me just take it back quickly to Dominic's commentary earlier. We do expect all those activity to bear fruit in 2010. You will recall that Dominic called out in his remarks that for 2010, we're expecting sales in steel structures to be up in the high to low – high single to low-double digit range.

Richard Kwas - Wells Fargo Securities, Llc

So the stuff that you are staying right now is going to have some impact.

William Weaver

We certainly believe that will in 2010, yes.

Richard Kwas - Wells Fargo Securities, Llc

Bill final question. Here in terms of your guidance for HVAC, I think you said that margins or at least income is going to be flat I think.

William Weaver

Yeah, I said that, we expect that volumes or rather sales would be down in the mid-single digit range and I did expect some slight margin compression as a result.

Richard Kwas - Wells Fargo Securities, Llc

So that was really a comment on margin, not so much absolute dollars?

William Weaver

Correct. Just on percentage margin.


Your next question comes from Peter Lisnic -- Robert W. Baird.

Peter Lisnic - Robert W. Baird

First question just quickly on pension. Is there a recorded cash contribution for 2010?

Dominic Pileggi

We do not expect one.

Peter Lisnic -- Robert W. Baird

And then if you could just shift gears back to pricing, as you look at your assumptions for 2010, is it simply on the price cost side, is it just simply you're rolling though the current prices into 2010, or is the forecast assume some incremental price increases throughout the year to get it to that flat price cost?

Dominic Pileggi

Generally it’s the former and obviously as Bill said, if there is a change in commodity cost, if something were to jump up or jump down, we would obviously react accordingly and we believe that, we have to continuously work at that cost-price parity. So right now there's nothing we see but we're very willing able to react, when if something should happen there.

Peter Lisnic - Robert W. Baird

Is there an element of mix in that price cost relationship for 2010 that you could callout for?

Dominic Pileggi

The only mix that I would callout to you, and that would be in total, is that given our guidance we would certainly expect a lower mix of commercial construction related products and a higher mix of utility and industrial related products. So, that will shape both our segment margins as well as gross margins in 2010, but I don't know if that has an enormous amount of influence on the expected price-cost parity relationship.

William Weaver

I would remind you that by a long stretch, the most critical commodity to us is steel.

Peter Lisnic - Robert W. Baird

Last question would be Packard and relatively small from a general perspective, but what sort of impact and forecast for 2010 are we assuming for that business?

Dominic Pileggi

Really very little Pete, we would expect revenues to be something in the range of what that company posted in 2009 but from a bottom line standpoint, the purchase accounting adjustments are probably going to render its contribution to virtually nil for the year.

William Weaver

I think in the longer run just a comment on that, in the longer run, our expectation is to get greater access to their customer base and to be able to pull through traditional Thomas & Betts products into those accounts.


Your next question comes from Sandy Goldman - Front Barnett Associates

Sandy Goldman -- Front Barnett Associates

Dominic I was hearing you talk and looking at the balance sheet, you have never really been in better shape to do deals. You got almost $500 million of cash, which is about 80% of long-term debt. You got more borrowing power, could you talk about what you can do with all these assets?

Dominic Pileggi

Well as we mentioned in our comments Sandy that we are very actively and when we said our pipeline is solid and it is very active and we are very very happy about that. We are getting opportunities to look at acquisitions that we think can continue to add value like our previous ones have. So we are very encouraged by that.

The difficulty is being able to give you an exact time of when we would be able to when one of these things come to reality. So I think everything you say is right. We are in a great position to do. We are willing to do it. We think we have a great capability to integrate acquisitions and improve in a kind of one plus one equals three thing, but it is just a matter of getting them done.

Sandy Goldman -- Front Barnett Associates

Are you seeing larger pieces are available now as opposed to earlier when you said the reading wasn’t much big that was around.

Dominic Pileggi

I would say we are getting a good look at various sides right now Sandy yes.


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

Patricia Bergeron

Thank you very much for joining us.


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

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