Hubbell Inc. Q1 2010 Earnings Call Transcript

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 |  About: Hubbell Inc. (HUBB)
by: SA Transcripts

Hubbell Inc. (HUB.B) Q1 2010 Earnings Call April 22, 2010 10:00 AM ET

Executives

Tim Powers - Chairman, President & CEO

Dave Nord - Chief Financial Officer

Bill Sperry - Vice President, Corporate Strategy & Development

Jim Farrell - Director of Investor Relations

Analysts

Bob Cornell - Barclays Capital

Jeff Beach - Stifel Nicolaus

Jeff Sprague - Vertical Research Partners

Christopher Glynn - Oppenheimer

Operator

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

Bill Sperry

Thank you and good morning, everyone. Thanks for joining Hubbell’s first quarter 2010 earnings call. Here with me today are Tim Powers, our Chairman, President and Chief Executive Officer; Dave Nord, our Chief Financial Officer; and Jim Farrell, our Director of Investor Relations.

Hubbell announced its first quarter earnings this morning and hopefully you’ve found the press release off of the wires or on our website. You can also find presentation materials on our website that Tim and Dave will be referring to on our call today.

Let me refer everyone to the paragraph in our press release and in the materials regarding forward-looking statements. The press release and materials may contain expectations based on assumptions and Hubbell’s performance in the future, particularly regarding our earnings. We also may make some comments here today on this call or answer questions, which may include forward-looking statements.

All of these involve inherent assumptions with known and unknown risks, and other factors that can cause our actual or future results to differ, perhaps materially from what we may discuss or project today. So please note that paragraph in our release and I’d like to consider it incorporated by reference into the call this morning.

In addition, we may make reference to non-GAAP financial measures. Those measures are reconciled to comparable GAAP measures in the Appendix of the presentation materials.

With that, I will turn it over to Tim.

Tim Powers

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

We will refer this morning to presentations material you have hopefully found on our website, I’m starting on page three. Our first quarter results are reflective of some of the cross currents we are feeling in our end markets, where we are facing volume pressures from weak trends continuing in non-residential construction.

Utilities are continuing to fall their cautious pathway began in the second half of last year that are showing signs of improvement on a sequential basis. We are beginning to see indications of growth in residential construction sector. Our industrial markets have demonstrated some rebound due to growth in output capacity utilization and spending on capital equipment.

Energy efficient buildings have driven growth in a couple of key areas including building automation and retrofit re-like market, where for example we have seen orders increase over 30% from last year. In this tight market our focus continues to be in managing price, cost and productivity.

Despite a slight decline in sales for the quarter, we were able to increase operating margins by a 170 basis points primarily through productivity gains. It is also worth noting that we had a book-to-bill ratio above one as we built over $30 million of backlog and playing the market is a bit stronger than our quarterly sales results would indicate.

The markets are consistent with our expectations and our financial performance for the quarter was inline with our internal plans. The quarter began slowly and picked up noticeably in March. I believe we have seen the bottoming in sales, where we ran our backlog down at the end of the year and built it up during the first quarter.

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

With that, let me turn it over to Dave Nord, he’ll discuss the financials in more detail.

Dave Nord

Thanks Tim. Good morning everybody. I’m going to start on page four our company materials and walk you through some of the details in the quarter. Let’s start first on the sales side, as Tim mentioned, reporting sales of $570.5 million, which is down 3% from the first quarter of last year, two big divers in there were continuing market weakness specifically in the non-residential market where by example our C&I lighting business, show their volumes down 17%, but on the positive side, we had the impact of Burndy’s results, which contributed 7% to year-over-year growth.

Some of the other elements in the sales comparisons so we had foreign currency translation benefit of about two points, which offsets two points combined price and lower storm volume, so those are net to zero the two big drivers again being the C&I lighting business and Burndy.

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

Turning to the gross margin side, despite the lower sales volume with gross margin finished at 30.8% up 230 basis points from the first quarter of last year, two big drivers to that is the productivity improvements including you recall at the first quarter of last year there was a lot of absorption backed off for first half lot of negative absorption has we’re ramping down production trying to take inventory back to more normal levels where see get that benefit. In addition you get the benefit of the cost reduction actions that we took in the first quarter of last year.

Turning to page five, on the selling & administrative expenses side, and absolute terms $110 million in the quarter comparable for last years level, but importantly two big drivers going in opposite directions one is that includes the incremental selling administrative cost from Burndy, in the Burndy operation with actually operates at higher percentage of sales because of those selling effort than our norm and that was more than offset by the cost reduction actions that we’ve seen and really three big buckets the salary and benefits from the headcount actions that we had to taken in the early part of last year that had reflected, we saw the later last year and certainly into this year.

So of the variable cost that are associated with the sales volumes specifically commissions and then some of the discretionary items that we continue to control very tightly including things like advertising. So all of that despite lower volume improved gross margin and a little bit of selling & administrative headwind operating profit for the quarter was $65.7 million up 15% from last year finishing at a 11.5% overall.

Now turning to page six, some of the below the line items net interest expense of $7.6 million comparable to last year’s first quarter due to comparable borrowing levels and relatively stable interest rates on the tax line effective tax rate in the quarter of 32.3%, that’s up 80 basis points from the 31.5% where we recorded in the first quarter of last year. One other things impacting our tax rate is the R&D tax credit, the extended build for R&D tax credit was not past in the first quarter. So, we couldn’t reflect that benefit in our full year rate, but offsetting that is more focus on the international operation, I talked in the past about there being headwind from our international operations in a lower level of international profit.

We’re focused on a combination of operating improvement and better results from some of our international operations, as well as some effective tax strategies around our international operations that help reduce that rate. So going forward, right now the rate would be 32.3 for the year assuming that R&D doesn’t past, there’s no dulling when and if that will pass through extend that it does pass that would provide us opportunity for a lower rate as the year progresses.

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

So, let me turn it out to the segment results on page eight, first on the electrical segment. You see that sales in the electrical segments were up 2% big driver to that gross would be benefit of the acquisition from Burndy adding 11% and a little bit of currency about two points on the segment. So when you adjust for those no measurable impact from pricing and a neutral.

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

With in the segment, some of the operations wiring, actually the wiring business had volume up 5%, that’s the business that, it is shows both non-residential construction more importantly the industrial and commercial where we’re seeing strength and so overall up 5%, the other electrical products, which includes high voltage tests down 10% and then lighting overall down 14% and that’s a composite of the CNI business up 17% and residential actually flat down 17%, and residential being flat in the quarter.

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

Turning to page nine, the power segment results sales of $161.2 million down 12%, recall that the first part of last year was still strong well other markets were weakening, but we saw the weakening of the power segment in the second half as the utilities, put the clams on spending.

So this is not as surprise as we are staring to work away back from the low levels in the third and fourth quarter of last year, and actually the 12% overall volume down includes 4% impact within the segment from lower storm volume you recall last years first quarter were still impacted by some significant ice storms in the Midwest that have from a business standpoint a positive effect that you can see that level of activity in the first quarter of this year.

From an operating profit standpoint $25.6 million down 14% consistent with the volume decline with margin of 15.9% that’s actually down slightly from the fourth quarter’s 16.8% recall at, we talked a lot in the second half of last year about the positive price cost, but that started to turn in the fourth quarter and so pricing in year-over-year was down about a point in the Power segment.

We are also now dealing with rise in commodity cost that’s putting more pressure on the price and commodity cost measure that we target to try to maintain partita and I think that increase in commodity cost underline commodity cost are being sell by everyone in the industry and I think that you starting to see price increase.

I think Tim will talk more about it later, but we’ve already implemented price increases in some of our businesses and result us that are being announced daily and the rest will come along sometime in the course of this quarter. So, it’s a challenge that’s been put in front of us across the organization but its one that we face before and will confident that will manage through over the course of the rest of the year.

On the first quarter cash flow was positive of $12.8 million on a free cash flow basis operating cash flow of $24 million now certainly lower than last years level, but we get kind of used to record cash flow in every quarter of last year, but its not surprising as the market declining and the volume is going down and you have the other side of that equitation, when in a market recovery were you start to have some working capital build, specifically around inventory were still managing our inventory very tightly, but on the receivable side as your sales start to ramp up, do you have an increase in your receivables that’s probably the biggest driver impacting the first quarter.

When you look page 11 you see that’s spike in receivables from the fourth quarter largely due to the profile of our sales and some few day increase in the day’s outstanding but in fact an improvement in the quality and the overview status of our receivable, so nothing it all but I’m and concerned about more and something that I have the organization fully focused on making sure that we’re realizing our cash flow as timely as possible. You see on the inventory pretty stable inventory throughout the third, fourth and into the first quarter, so I think some build in the first quarter but we certainly expect that all to improve as the year progresses.

Page-12 we have capital noted significant changes very stable there little bit of increase in cash from the cash generation, but our outstanding debt is consistent no commercial paper borrowings, so the only ratio changes on net debt to capital, which improves from 12% at year end to a 11% at the end of the first quarter.

So with that, let me turn it back to Tim to talk about the end market outlook and the rest of the year.

Tim Powers

Thanks, Dave. Let’s turn to page 13 and our outlook for the remainder of the 2010. Non-residential construction is our biggest market and some indicators have weakened since the beginning of the year. Based on our order flow, our expectation is for a decline in the 20% range that is consistent of what we thought in our last quarterly call. Our outlook for residential construction calls for modest growth, where multifamily construction should hurt the renovation as expected to help. The signs from our industrial market are very encouraging where we expect growth in those markets.

Our power segment is expected to show some growth, we see utilities remaining cautious with regard to spending until decision makers see more evidence of a sustained pickup for demand in electricity. Under distribution side, the growth of residential construction should be joined by the return of maintenance spending on the network necessary to achieve required reliability.

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

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

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

Our productivity programs have made good progress in the first quarter and are on track for our full-year goals. So we expect at the mix of brands, people and processes will continue to deliver value to our customers, while our conservative balance sheet will support investments in our future growth as our end markets rebound allowing Hubbell to continue to lead the way.

So thank you for your attention and now we’ll be happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Bob Cornell - Barclays Capital.

Bob Cornell - Barclays Capital

I guess first of all, our accessory call recently. I mean what sort of visibility do you have? You talked about non-residential at down 20%, I mean what sort of visibility you have looking out and how far can you look out in that space?

Tim Powers

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

Bob Cornell - Barclays Capital

Tim, numbers and commerce make things difficult and in terms of dollars of business, I mean when you project that the dollars of business turning up or down ex-seasonality?

Tim Powers

They are trending along the line of down 20%. We should see some sequential improvement from the first quarter as the normal construction cycle, but that gap of 20% should be pretty much maintained I would say. I'm not suggesting the non-residential and particularly commercial construction will be better than both forecast -- domestic about the rest of our markets.

Bob Cornell - Barclays Capital

Could you go more inside, how Burndy actually did? What the revenues, where the profitability in each of the earnings accretion dilution?

Tim Powers

Revenues were exactly inline with our expectation. Their earnings were a little bit below, which had more to do with the transition to a new company and the start up cost of establishing your own services that we’re provided by a parent, but from an operations point of view they were inlaying with expectations.

Bob Cornell – Barclays Capital.

Yes, I guess finally you know when you look at Power margins looking forward who would you except those margin be for the year there 59 in the quarter would you expect be I had the comments about you know price cost, I mean end of the day what you look at is good number for the year.

Tim Powers

Well, first let me start and talk about price per movement. Certainly all any of us can fall those trends were receive the metals rising whether its steal, copper, aluminum, zinc and zone and also oil, so our company is in the process of the increasing price across the board of the industrial price increases throughout the lighting business will increases price June, plus 46% and the rest will follow sometime during Q2.

So, at the typical year, last year was one were commodity cost fell prices soften that the end of the year this is the reverse of that and we’ve been through that before, so that’s we’ll seeing in broad assumption and the cost you know are started up in Q1 and we expect them to continue into Q2 but we expect that between productivity and price we will you know the offset the cost increase.

Bob Cornell – Barclays Capital.

Well, the Power margin is peaked in the third quarter last year 22 we can down the fourth quarter can down again the first quarter, I mean I’m going to see those margins sequentially declined because the price cost timing difference, I mean where we are drop the…?

Dave Nord

I wouldn’t expect us to as we said last year in the third quarter was an unusually good one time of that but the average margin there experience last year should be close to what we see this year.

Tim Powers

Yes, Bob I would tell you that, I think that you know first quarter margins are probably were we would say a trough, because it volume dependent. I mean we see the first quarter volume has the lowest then that’s what an element that drives that impact and you will see sequential improvement throughout the year, you might see some weakness at the year and just because again some volume issues, but as Tim mentioned the issue around price cost you know we got to managed through that and confident that we will.

Operator

Your next question comes from Jeff Beach - Stifel Nicolaus.

Jeff Beach - Stifel Nicolaus

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

Dave Nord

I can only tell you that when we put our plans together, we’re right exactly where we thought we would as compare to looking at the last quarter. So, it’s hard to make to response to that exactly certainly the volume as a negative impact on factory performance there’s a little headwind on material side, but I don’t know exactly how to respond to that.

Tim Powers

Jeff, I think the two things that you needed to keep and I think probably two are the biggest drivers, because the volume certainly is down. If I recall in the fourth quarter was our biggest impact from our inventory reduction on LIFO coming through as well as the fourth quarter still has a good price cost favorability not as the lower third quarter, but in the fourth quarter, I will say, would mitigate back to more neutral in the first quarter. So, when you take those two things into account, that’s pretty much what we’re seeing that’s pretty much what we expected.

Jeff Beach - Stifel Nicolaus

You think there is any meaningful change in the mix that you can think off?

Tim Powers

No, I just mentioned, it’s a little less worse in non-residential than we though, we are encouraged certainly our residential business for the first time as past the orders and sales have exceeded the prior year. So, we see that as an important place to be right now and hopefully that will continue to turn more positive as plan goes on that’s what we think is going to happen.

The industrial markets are little better than we though and a very hopeful signs there. So, we’re encouraged generally and we don’t have a different view, we have the same view of the year just a little bit I think different from a timing of revenue perhaps been that you guys thought that we should have.

Operator

Your next question comes from Jeff Sprague - Vertical Research Partners.

Jeff Sprague - Vertical Research Partners

One of you could just explore a little bit more the ideas that power margins would have crossed here, given I mean obviously we’re maybe at a little bit of the seasonal low, but given what you're saying about transmission project sliding given that's 20% of your business perhaps, but certainly seems the general turn out there on all things. T&D is actually maybe getting a little worse not better, do you have a little bit more visibility in that business now than perhaps your generalized answer to pick ups earlier question.

Dave Nord

I think the transmission revenues for us relative to projects for 2010 are fairly secure because the once that we have won our multiple year projects. What we’re saying is that the growth in those revenues for years further out is being reduced by the fact that some new projects that, which we fell.

We have an excellent chance to win or being pushed out as public utilities have the luxury of times to delay those parts based on lower demand for energy. So we would like them to proceed. We’re in a great market position to prosper from that, but we see one after the other sliding up by year, but once that we have our multiple year projects and this is just in the midst of them.

Jeff Sprague - Vertical Research Partners

Just a little bit more on price, I think you said you're going up for another four to six on lighting, I believe order magnitude you went after a four-ish at the beginning of the year, I just wonder if you give us a little color on kind of the acceptance in the distribution channel for that type of price increase and any pushback you're seeing?

Dave Nord

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

Operator

Your final question comes from Christopher Glynn - Oppenheimer.

Christopher Glynn - Oppenheimer

Just looking at the electrical margins into the second quarter, it looks like besides some better seasonal volumes that some factors moving into there, would be mixed with high voltage test coming back, Burndy post I guess with some integration issues and maybe timing of the industrial product lines pricing is that all fair to think about?

Tim Powers

Yes, you get me nervous Chris you make me sound like you got some insight here. That was pretty good.

Christopher Glynn - Oppenheimer

On the utility the power systems would have though since storm benefits. Is that a timing issue? Should we still see something? I mean the weather was pretty dramatic.

Tim Powers

No we had some storm volume, but if you recall the prior year had an exceedingly large amount, so relative year-on-year comparisons was lower its not like we didn’t have the storm, but the previous year we have a lot more.

Christopher Glynn - Oppenheimer

On the lighting, the 4% to 6% increase, can you just kind of reference the other majors what their timing is relative to yours magnitude and…

Tim Powers

I don’t know, I can’t tell you that but I don’t have any specific information of what the other guys are doing.

Christopher Glynn - Oppenheimer

Do you think market share is moving around down that space?

Tim Powers

At the margin, maybe, but I don’t see any significant trends there, nothing major.

Operator

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

Tim Powers

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

Operator

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

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