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Hubbell Incorporated (NYSE:HUB.B)

Q4 2011 Earnings Conference Call

January 26, 2012 10:00 AM ET

Executives

Jim Farrell – Director, IR

Tim Powers – Chairman, President and CEO

Dave Nord – SVP and CFO

Bill Sperry – VP, Corporate Strategy and Development

Analysts

Christopher Glynn – Oppenheimer

Rich Kwas – Wells Fargo Securities

Steve Tusa – JP Morgan

Scott Davis – Barclays Capital

Jeff Beach – Stifel Nicolaus

Brent Thielman – D.A. Davidson

Mike Wood – Macquarie Capital

Operator

Good day, everyone and welcome to the Hubbell Incorporated Fourth Quarter Results Conference Call. As a reminder, today’s call is being recorded. Now for opening remarks and introductions, I would like to turn the call over to Mr. Jim Farrell. Please go ahead, sir.

Jim Farrell

Good morning, everyone and thank you for joining us. I am here today with Tim Powers, our Chairman, President and Chief Executive Officer; Dave Nord, our Senior Vice President and Chief Financial Officer; and Bill Sperry, our Vice President of Corporate Strategy and Development.

Hubbell announced its fourth quarter and full year results for 2011 this morning. The press release and earnings slide materials have been posted to the investor section of our website at www.hubbell.com.

Please note that our comments this morning may include statements related to the expected future results of our company and are therefore forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Therefore, please note the discussion of forward-looking statements in our press release and consider it incorporated by reference into this call.

In addition, comments made here also include some non-GAAP financial measures. Those measures are reconciled to comparable GAAP measures and are included in the press release and the earnings slide materials.

Now, let me turn the call over to Tim.

Tim Powers

Thank you Jim. Welcome everyone and thank you for joining us this morning. As we typically do on these calls, I will provide you with some overview commentary on the results we announced this morning, and then Dave will provide you with a more detailed discussion of our financial performance. I will then share my perspective on the outlook for 2012 and then we will open up the calls for your questions.

I will refer to the presentation materials that you can find on our website, and I will start on page 3. I am very pleased to report that we finished 2011 on a strong note. Our sales increased by 16% with both segments reporting double-digit increases.

We reported operating margins of 14.8% which represents a 60 basis point improvement versus last year’s fourth quarter. Our margin improvement was due primarily to the higher volume and importantly we were successful in offsetting commodity cost increases with pricing actions. We experienced over normal seasonal pattern of incoming orders, where the fourth quarter slows down sequentially after the third, but exhibiting strong growth year-over-year.

The utility market remained strong led by demand for transmission products; the industrial market was also strong lead by our businesses selling into the energy markets. The new construction spending in the US non-residential market was weak, but was offset by demand for renovation and relight projects. That we’re seeing building owner operators make the decision to retrofit their facilities due to the savings in energy and maintenance, and very short paybacks.

On the residential side, single family housing remained soft, while stronger demand for multiple family housing projects has provided some offset. The quarter contained some highlights that are worthy of note. First we were able to overcome the upward pressure from commodity cost increases with price actions to create a tailwind for the quarter. While price cost was a drag on earnings for the entire year, we hope this quarter proves to be a turning point and while commodities have moderated they are volatile, and we are continually monitoring them to determine if and when pricing actions are needed.

Second we had a very successful year in LED lighting. Our business grew at 150% during the year, and we were pleased to see that the adoption rate of LED surpassed 10% of our lighting sales, a great indication of Hubbell’s leadership in this new and exciting technology that offers our customers the opportunity to save money.

Third, our strong financial performance this year has further strengthened our balance sheet, and has allowed us to deploy our cash in several ways. During 2011, we increased the dividend and repurchased over 2 million shares. In addition we closed on two small acquisitions during the fourth quarter. The acquisition pipeline is quite active, and our strong cash position will enable us to continue to pursue additional deals in 2012.

In summary, I am very proud of the results in 2011. Despite half of our businesses being still mired in historic slump, we have managed to exceed our prior year peak in sales and in earnings in just three years. Our focus in driving productivity, carefully managing the cost price equation, and disciplined management of cost have enabled us to achieve these results.

Now let me hand it over to Dave to provide more details on these results. Dave.

Dave Nord

Okay. Thanks Tim. Good morning, everybody. I am just going to start on page 3, and if you follow along in the materials, as Tim mentioned, you know, good fourth quarter results with sales up 16%, double digit in both segments, operating margin of 14.8%. That is up 60 basis points from the fourth quarter of last year, and diluted earnings per share of $1.17, up 22% on an adjusted basis. I would say we don’t normally adjust, but last year had the $0.15 cost of the debt extinguishment. So to be more comparable we have taken that out in the comparison.

Turning to page 4, a little more color on the sales and gross margin, reporting sales of $740 million, up just over $100 million from the fourth quarter of last year, 16%. It really is attributable to broad based improvement. Virtually all of our businesses reported increases, certainly a big part and very positive results in our utility business. Within that 16%, price adding a very strong 2%, and as Tim mentioned, we closed a couple of small acquisitions. So we have got about a point of growth from the acquisitions.

On the gross margin side, gross margin of 31.9%, down a little bit from last year’s fourth quarter, and a big part of that is attributable to the fact that a lot of the increase in volume coming from project business, both in our harsh and hazardous, as well as in our utility business around transmission. And that business tends to have a little bit lower margin because it has been in bigger bulk. But of course we did have the benefit of price exceeding the commodity cost for the first-quarter this year, and that was worth about $5 million in the quarter.

Turning to selling and administrative cost, we’re reporting selling and administrative of $126.5 million, up 9%. That is the trend we like to see when sales were up 16%, and SG&A is only 9%, driving down the S&A as a percent of sales, at least on a reported basis to 17.1%. In there though, I will note that there were some benefits, specifically a gain associated with some asset sales. Most significantly associated with the property from our old headquarters, the land associated with our old headquarters. It has been in the news a lot.

We were able to close on the sale of that land, and recognize a gain. Absent that, we are running generally still around 18% for S&A and managing that very closely. So all that leading to operating profit of $109.8 million, up 21% from last year due to the increased sales to our price cost being positive, and a little bit of offset with some higher cost in the quarter, some of that typically happened in the fourth quarter around our sales effort, customer incentives, employee incentives, but a lot of that being offset not completely, but largely offset by productivity. So all in all good performance there.

Turning to page six, on the other expense net, a big decline in that from last year. You can recall that last year that is where the cost of the debt extinguishment was. Absent that, we were still down from what would have been 8.3 million to this year’s 7.9 million really due to lower net interest expense. On the tax side, higher rate than last year for sure. Recall that last year’s fourth quarter we had full year’s impact of the R&D tax credit. That was packed that had a run through the fourth quarter. That was a two year extension. So we were benefiting from that all year ratably this year, and then there is some other yearend adjustments, both last year for the debt extinguishment, and this year typical year-end underlying rate still tracking around the 31.5% that we have been targeting all year.

All that, turning to page 7, leads us to net income, net income of $70 million, up 19% on an adjusted basis, 41% on a reported basis, really due to the increased operating profit, offset by some of the higher tax rate. Earnings per diluted share, as I mentioned, $1.17 up 22% on an adjusted and comparable basis due to higher net income, and a lower share count, average share count in the fourth quarter, as a result of the aggressive share buyback we had throughout the year, and into 59.5 in the fourth quarter. So all in all very good results on a consolidated basis.

Turning to the segments, first the electrical segment, reporting sales of $513.6 million, up 14%. Again broad based increases, price contributing 2%, and acquisitions giving 1%. The acquisitions that Tim referred to you would see in the cash flow. We invested about $30 million in two transactions, all in the electrical segment. One can add on interestingly to Burndy. The Burndy management team identified and executed on a transaction in the connector business that supports the renewable energy sector, very good add on, not a large transaction, but interestingly in both cases, the other acquisition in industrial controls acquisition, and in both cases businesses that will be able to fold into our existing facilities, and not take on additional bricks and mortar. So immediately giving us the benefit once we get through the initial acquisition cost, which were admittedly and not surprisingly a drag in the fourth quarter.

That sales growth giving us operating profit up 17%, margins up 20 basis points to 14.3%, with the higher sales, the price cost favorability really all attributable to the electrical segment. But otherwise very good results. We are very pleased. One thing I will point out and we see it in the electrical segment, and we see it even more in the power segment, the reported increase in sales some part attributable to working through what was strong order rates earlier in the year. So you will note that we had a big drawdown of inventory and we were delivering on the orders that were building up in the course of the second and third quarter, and particularly around some of the lumpier project business in the electrical segment. You see that in the harsh and hazardous business, you see that in the industrial high-voltage test equipment.

But underlying run rates still very positive. As Tim mentioned, year-over-year still positive, but more in line with what we are expecting to see as we enter ’12. Power reporting sales of $226.4 million, up 20%, really attributable to the higher transmission and International growth. Recall transmission is where there was a big uptick during the year in the release of project bids, and our success in that market. A lot of that had longer cycle deliveries, and we saw a lot of that delivery starting to come through in the fourth quarter.

The order rates for the quarter for the normal business are more in the mid-to high single digit range. So a lot of catch up in delivering on that backlog. Price in the power segment contributed 3% to that volume growth as well. On the margin side, margin of 36.1 million, up 32%, and operating margin of 15.9%. So very good performance, good incrementals on that business, despite the fact that as I mentioned, the transmission business has more project orientation, and therefore a little bit more, a little lower margin associated with it, all in all very good performance on our power business.

Turning now to cash flow. Cash flow also very strong in the quarter, operating cash flow of $117.8 million, and free cash flow of $103.7 million, almost 1.5 times net income in the quarter, a big part of that coming from working capital, you know, as I highlight the liquidation of the inventory as we are working through some of the backlog, but also our continuing focus on our working capital efficiency we talked about throughout the year, and particular on our accounts payable, where we have improved our accounts payable outstanding year-over-year by nearly 6 days. So very good performance, keen focus on cash flow.

So let me just put that into context of rolling into the full year. turn to Page 11, so for the full year we are reporting sales up 13%, just short of $2.9 billion, operating profit up 15% due to our 30 basis point margin improvement to 14.8, a little short of what we have been working for and hoped for in the year, and really attributable to the challenge we faced through most of the year in trying to get price to offset commodity cost. We are encouraged that we were able to turn that corner in the fourth quarter, but for the full year it was still negative on margin, otherwise very good performance in a very exciting year.

Our tax rate down a little bit from last year, contributing there to net income up 23%, and our earnings per share equally up 23% to a record $4.42, and free cash flow of $280 million, all good performance. On the segment side, for the full year on page 12, you know, sales we reported up 11%, we saw a strong industrial market throughout the year, particularly in the first half, increased renovation and relight activity. That is a big part of particularly in the lighting business that business represents 15% to 20% of the lighting business today.

Lower residential demand, we are still facing, although most of that was in the first half, in fact that turned around in the second half, particularly on the renovation retail side of the business. And then currency and price added 3% to our sales growth. On the operating profit side, good performance reporting 14.1% margin, all of that coming from higher sales, despite the cost increases that we were challenged to offset with productivity, but with price largely offsetting commodity cost in the electrical segment for the full year.

On the power side, turning to page 13, very strong performance there with sales for the year up 18%, with higher spending in both distribution and transmission, a big part coming from the transmission project success. But also some increased international demand, very good performance in our Latin American, our Brazilian operation, and price giving us three points of that growth year-over-year, and the operating profit up 19%, margin up slightly with the higher sales.

We did have the challenge of increased commodity costs that tamped that down a bit, although that is recovering. And then we had some cost increases, and particularly spending on some growth initiatives, new product development, as well as productivity, and you recall we opened a new facility in China for manufacturing parts. There were some cost headwinds associated with that facility, largely offset by the productivity. So all in all good performance there.

We finished the year with our cash flow, cash flow for the year, as I mentioned, free cash flow of 280 million, that includes capital spending of 55 million, up from last year’s 47 million, more a level that we would expect going forward, 55 million or more, and again attributable to good focus despite the high level of growth activity in managing our working capital very tightly.

And you see that on page 15, and our trend in working capital, trade working capital as a percent of sales actually drifting down to below 17% now the fourth quarter is traditionally the low point in our working capital as we are realizing the cash from receivables on the sales from the peak third-quarter activity. So that will trend back up, but we are working to continually report year-over-year by quarter improvement in working capital.

All that has led to continued strengthening of our capital structure. That 280 million of free cash flow after we have invested in the business has also been returned to shareholders. As Tim mentioned, between our dividend increase and our share repurchase, $215 million returned to shareholders, an additional $30 million invested in acquisitions. So we took 50 million of that free cash flow, added it to the bank, but with the intention that that is going to help fund, particularly the increased pipeline and acquisition activity that we are confident is going to start to be realized as we move through 2012.

So all in all very pleased, very strong results, a very good year in 2011, and with that I will turn it back to Tim, and let him give you some insights into how we see 2012 shaping up.

Tim Powers

Thanks Dave. Well, let us turn to Page 17 for the discussion of 2012. We expect sales to grow in the 4% to 6% range, with both of our reporting segments contributing to the growth. While the macro concerns persist about the global economy, we remain cautiously optimistic about the outlook.

Let me take a moment to address the potential impact on Hubbell of the financial crisis in Europe. We have a small amount of sales into the European markets, and we do have some facilities based in Europe that sell into global markets. We do not anticipate any significant direct disruption caused by the European volatility. However, we would not be immune from any pullback by large global players in the resulting secondary impact on capital spending in our industrial markets.

Looking to our end markets, the third-party forecast of US residential new construction has not changed materially since the last call. The forecast is for new construction spending to be flat overall, with private investments slowly recovering, while the public sector is likely to be negative as stimulus related spending declines. We expect that we will be able to grow that in the non-residential market through higher demand for renovation, relight, and controls. We believe that the demand for the energy-efficient products with short paybacks will continue in 2012 and beyond.

The opportunity to retrofit existing commercial buildings, as well as adding lighting controls is very significant, and is only in the beginning stages. The utility market was strong during 2011, and we expect continued growth in 2012. On the transmission side, we believe that project activity will remain well above historic levels, and that we will get our fair share of those projects.

The distribution side of the business should grow in line with GDP levels on the maintenance of the network, while housing starts will not provide any meaningful lift. On the industrial side of our business we expect growth, but at a slower pace than the last couple of years. Industrial expansion is likely to be driven by such areas as automotive and steel, which use our products.

We also expect that the energy markets will be strong as the continued high price of oil should stimulate project activity. We are not expecting any meaningful recovery for single family housing. However, higher demand for multiple family housing will provide opportunities in 2012, and allow for modest overall growth in the residential market.

Turning to our operating margins, we expect to increase margins by approximately 50 basis points in 2012. Our goal is to offset all cost increases, including commodity, normal inflation, and investments with pricing action and productivity efforts. Our ability to manage those cost challenges should enable us to leverage our higher sales and achieve higher operating margins.

In summary, we are pleased that we have been able to exceed our prior peak earnings in 2011. Our organization has changed into a more nimble and capable company that was able to achieve record results in 2011. Over the past several years, we have navigated through choppy end markets, and volatile commodity costs through staying focused on productivity to reduce cost throughout the organization, and utilizing pricing to manage through difficult commodity markets.

We remain optimistic that we will be able to continue to achieve higher levels of performance in 2012 through a modest top line growth, and expanding our margins to increase shareholder returns again in 2012.

And this concludes our prepared remarks, and now we will open up the call for questions from you.

Question-and-Answer Session

Operator

(Operator instructions) And we will go first to Christopher Glynn with Oppenheimer.

Christopher Glynn - Oppenheimer

A question on the power systems international opportunity, your global growth there, I just noticed it was bullish in the segment sales outlook slide, but what has that business become outside the US, and how much open space do you see and what is Hubbell’s value proposition penetrating some of the newer international markets?

Tim Powers

First of all, as we opened up our factory in China, the initial phase of that is to produce products for importation back to the US, but on a secondary basis begin to sell products into the Chinese market, and we have just begun to succeed in that effort. So we would expect China to begin to open up slowly for our power system business. In addition Brazil is a key market for us, and we have an expanding business in Brazil as we’re trying to build out a mini version of power systems in the Latin American economy.

And throughout the rest of the world, in the Middle East we have some opportunities to sell our products in that area. But depending on electrical standards and a number of other things, it still represents an opportunity for us that would be at least 25% of our total, and growing from there.

Christopher Glynn - Oppenheimer

Okay, and on the gain on sale Dave, just wondering how much that was and you know if it was recorded in one of the segments, and if the acquisition cost pretty much offset it?

Dave Nord

It is just under $3 million Chris.

Christopher Glynn - Oppenheimer

Okay.

Dave Nord

And it does hit both segments in proportion to their sales volume.

Christopher Glynn - Oppenheimer

Okay, and great top line there, are you seeing any, I know you have talked about taking some share in a couple of spaces during the year, are you seeing any acceleration of that?

Dave Nord

No, I would say that you know our power system business has been well received by our customers, and our very high levels of on-time delivery have proven to be well worth customer value in storms, and in times when our customers are in key needs. But I wouldn’t describe market share change as anything dramatic or just really we are being able to deliver quite well in just about all of our products. So we’re taking advantage of those opportunities and we have done well on some of the large projects in the power system business.

Christopher Glynn - Oppenheimer

Okay, great. Thanks for the help.

Tim Powers

Thanks.

Operator

And our next question comes from Rich Kwas with Wells Fargo Securities.

Rich Kwas - Wells Fargo Securities

Hi everyone.

Tim Powers

Good morning Rich.

Rich Kwas - Wells Fargo Securities

Dave on the margin guide for 12 to 50 bps, when we look at incrementals on a year-over-year basis, electrical you had a pretty good first half of ’11 that tailed off in the second half, power was the opposite. Should we think of this as electrical first half incrementals kind of build momentum as the year goes on and power strong in the first half or how should we think about that when we rolled this up into the operating margin guidance?

Dave Nord

I think certainly power will still be strong and building in the first half as they to some extent remember you got some easier compares with the negative cost price items in the first half, as well as I think you are still going to see a lot of (inaudible). When you look at the full year top line guide, there is a bias towards the first half from the second half. The second half gets to be tougher compares, and of course that is where we have less visibility as we go out. So the combination of those two is where I would suggest that we put our caution. Okay.

Rich Kwas - Wells Fargo Securities

Okay, so and then on electrical though with price turning positive here that will go into the first half and then that kind of fades, and obviously it is going to depend on how commodities play out over the next several months, but you know it appears that incrementals in electrical should be still pretty good in the first half and start to potentially fade, is that the way to think about it?

Dave Nord

Well, I don’t know about, I don’t know if I like the term fading, but certainly they are still positive. I think within electrical the thing to keep in mind is that there is a lot of movement that can occur on the incrementals based on mix. In some of the businesses, certainly we expect continued good performance in the lighting business. But some of the higher margin harsh and hazardous project business could be an offset.

Rich Kwas - Wells Fargo Securities

Okay, and then just on the Tim on the non-residential outlook 1 to 3, is that all retrofit growth and no growth in construction, is that the way to think about it?

Tim Powers

Yes, I think our view is that on the new construction side we are really seeing what I would call the healthy transition that must occur from reliance on projects in the public sector to a degree that is at a historic high, slowly moving back to the more balanced proportion where private enterprise comes in. But if you take those together, we are not really looking for any positive improvements from the construction of new square footage.

What we are doing though, and what we are seeing is quite a healthy relight and retrofit business and that because of the returns that we referred to for building owners, we expect that business to continue to grow and offset weaknesses on the new construction side.

Rich Kwas - Wells Fargo Securities

And Tim you have been talking about this for quite some time now in terms of the strength on the retrofit relight, when we think about contribution from that, is that accelerating, staying at the similar growth rates, or is there any kind of, it doesn’t sound like there is any pull back in terms of the momentum there?

Tim Powers

We haven’t seen any yet. We were very pleased with the results on the retrofit and relight side, and as you recall we have an acquisition named Varon a couple of years ago, and that was quite timely in us being able to address this whole market with products that are already in it for retrofit and relight, and also the other market dynamic that it is very short delivery.

So it is not uncommon for us to take an order for $1 million and turn it around in a matter of just a couple of weeks. So different market dynamics, but pretty strong performance. And again the key clients in this area would be people, customers who own their buildings. So the largest corporations in the United States are the ones that are really investing significantly in the energy efficiency of the space they occupy. So really strong customers on that side.

Rich Kwas - Wells Fargo Securities

Okay and then just last question on the LED number in excess of 10% of lighting, does that put you close to $100 million at year-end ’11 in terms of contribution from that.

Tim Powers

I would say closer to 80.

Rich Kwas - Wells Fargo Securities

80, okay, great. Thank you.

Tim Powers

But I would say that here, it has been a remarkably quick adoption in the marketplace, and when you back out residential, which is still in the – decorative, which is in the incandescence mode, and fluorescent, which probably represents maybe a third of our business, the adoption rate of LED for the replacement of high intensity discharge and other forms of light is reaching numbers in the 25% to 30% of the accessible market, and accelerating at a fast pace.

So I would say we are looking at you know, a rapid change to this industry that we have been talking about for a couple of years. So it is turning as fast as we predicted it would.

Rich Kwas - Wells Fargo Securities

Thank you.

Operator

(Operator instructions) And we will go next to Steve Tusa with JP Morgan.

Steve Tusa – JP Morgan

Hi, good morning.

Tim Powers

Good morning Steve.

Steve Tusa – JP Morgan

Just trying to reconcile these growth rates a little bit. When you look at the kind of the 1 to 3 for non-residential. I guess you have been guiding electrical up 3 to 5, and you know I understand the lack of visibility on non-residential markets. But I mean your fourth quarter in electrical grew pretty strong double-digit, and you know, I know you are expecting the non-resi market to get worse in 2012, I’m just trying to understand how to bridge the gap from double-digit growth down to a 3 to 5 with seemingly what should be stable if not a little bit better end markets?

Tim Powers

Yes, remember here we are predicting growth. So it is not markets getting worse, it is getting better at a slower rate. So if you were to see our seasonal trend, we would see our orders in December and in the beginning of January coming down into the single digit areas, and in line with year-over-year increases, and in line with what we are predicting here. And so as Dave pointed out, we have less visibility to the second half, and the other part of that discussion is how strongly our power business was up year-over-year.

So we’re still telling you that our power business is going to be up mid to high single digits, off of an extremely strong year. so we’re just concerned or cautious about the slowdown in the US economy, cautious about the events unfolding in Europe, and its impact on decisions by our customers, and we think we have a decent prediction of what we will see happening with these lower growth rates.

Steve Tusa – JP Morgan

Right. So, what you are seeing if I understand it correctly is that you have better visibility into the – if I understood the previous question correctly, better visibility in the first half so that kind of growth will be higher in the first half, and then you have a little bit more conservative slowing in the second half?

Tim Powers

I would say…

Steve Tusa – JP Morgan

Or pretty balanced?

Tim Powers

Let us say the first half would be a little higher growth rate, and the second would be related to our let us say the lack of total visibility to the second half of 2012. And when you look at our volume we did produce a lot of sales in the second half. So, it is just conservatism at this point, and lack of visibility.

Steve Tusa – JP Morgan

That sets a lot of companies you are talking about slower growth in the first half, so it is refreshing to hear that, you know, the guidance is more kind of front-end loaded as opposed to back end loaded. Just moving on to the utility stuff, I mean you talked about how order rates were a little bit slower, or slower than sales, is that curve decelerating, I mean it was my understanding that there was a little bit more of a multiyear phenomena there and it doesn’t seem like we are that far into the cycle, so maybe just talk about what you are seeing on the utility said from that perspective?

Tim Powers

Well, we did extremely well in the second and third quarter of taking some large transmission projects, and quite a bit of that was delivered in the second half and quite a bit in the fourth quarter. So we always have a decline in backlog in the fourth quarter. That is very normal, so you can’t predict, you can’t extrapolate Q4 power incremental sales forward just because we were delivering these projects.

On the other hand, we’re very optimistic about the transmission side of our power business, but understanding that lumpiness and nature of those awards. So it's not just a smooth, you know, you can't just draw a straight line on this. So there is still a lot of activity there is lot of bids, and we are optimistic that we will get a pretty good share of all of that. So we don't see that being a single year or even slowing down. We see that continuing on in 2012 and beyond.

Steve Tusa – JP Morgan

Okay great. Then one last quick question just on pricing. How is kind of the forward look on pricing, you guys have done a good job of offsetting you know, raw materials et cetera, you know, is pricing still holding up relatively well in the market?

Tim Powers

I would say yes, the pricing is holding for the moment. My caveat is more of the volatility on the commodity cost side, and all you have to do is look at what happens in a day when the world is feeling good about the news and stock prices shoot up and commodity costs shoot up right with it. So we have not seen any big drop in commodity costs. Oil is hanging up there at $100 and so there isn't any great windfall here. We’ve just turned the corner and we're excited that we have arrived at that point where we finally clawed our way up, you know, to catch up after three negative quarters in 2011.

Steve Tusa – JP Morgan

I just have one more very quick one, how big is your total relighting you know, when you talk about relighting business not just the LED stuff but total relighting or is that the same thing as LED?

Tim Powers

$150 million.

Steve Tusa – JP Morgan

Great, thanks a lot guys.

Operator

Our next question comes from Scott Davis with Barclays Capital.

Scott Davis - Barclays Capital

Hi, good morning guys.

Tim Powers

Hi Scott.

Scott Davis - Barclays Capital

I was going to drill into the conservative sales guidance as well, but I won't do that to you, on margins however, when I think about 50 basis points year-over-year you know, just back of the envelope I'm guessing you probably get 50 just from price cost. A, is that accurate and I understand Tim you said that you know, it's very difficult to carry that forward 12 months, but when I start thinking about the first half of 2012, it would appear that you have a little bit more visibility, particularly given that you are LIFO accounting right. So you probably have a little bit more visibility into margin improvements upfront. Is that accurate?

Tim Powers

We have, you know, better visibility to everything up front Scott. So yes, margin improvements assuming that price falls at the levels that we do get some of the roll over, and that we don't have any negative movement in commodities. You know, there will be more positive benefit from price cost in the first half of the year. I think one of the things that, you know, I think your estimate of the margin impact on favorable price cost is probably a little high.

We love that to be the case but that's you know, not likely to be the case. I think the other thing that we're dealing with is some cost headwinds that, you know, Tim has mentioned, and specifically if you look at pensions, I mean, pensions were anticipating about a $10 million headwind in pension from a combination of you know, we're dealing with low interest rate environment, a discount rate that is almost a point lower than it was a year ago, and some more conservative assumptions in long-term returns on our plan.

So that's one element and then you know, the ongoing battle around medical costs and we are forecasting that you know that's going to be about $3 million headwind. So you know, that's the problem we have, certainly we are going to work on productivity initiatives as we have, but those are some big headwinds that are kind of new to this year that you know, are providing caution to our margin expectations.

Scott Davis - Barclays Capital

Okay. That's fair. Guys, I want to go back and talk a bit about distribution spend, and one of the things I'm just trying to get my arms around we had a fairly substantial storm year, I think greatest storm year on record since year 2000, so a big storm year. How much of that distribution spend that you experienced in 2011 has a tail on it. Meaning you know, you put, you know, utilities put a band-aid on the problem, and come back and put more permanent fixes in 2012. So I guess what I'm trying to figure out more than anything is that you know, you are going to have tougher comps in distribution, but at the same time you may actually have pretty good visibility on a 12 month or so tail, and I think a couple of your competitors have talked about that in the past. So maybe you can walk into that a little bit for us.

Tim Powers

I would say that you certainly have picked up on a theme where that is one driver on a positive side towards distribution. What's working the other way right now and causing kind of a slowdown in spending is all the mergers and the situations around those mergers where some of them are being held up, and that uncertainty causes all kinds of slowdowns.

So we believe that this trend of consolidation of public utilities will happen. It will cause more efficiencies. It will be in our favor. We believe it will work toward the benefit of us gaining better positions in some of these new, larger utilities, but while this is going on and while some of these are held up, the tendency of both companies is to slow down spending and not proceed because priorities are about to change. So I agree with you, you’ve identified a positive here, but this dampening effect in the short run is somewhat of a counterbalance.

Scott Davis - Barclays Capital

That helps. Last guys, you know, I know we always hear about liquidity challenges for shareholders with Hubbell, and you know, a great deal of that is because of the A and B structure. Is there any potential for resolution in 2012 and again you know, I know it's challenging but I mean a couple of issues. One, you are sitting on a lot of cash in your balance sheet. So if there was ever an opportunity where A shares wanted to cash out now, it is a fantastic time and B, you know, I think the days of the supermajority poison pill are kind of over as far as fashionability, and you know, anyways I guess my point is if there was ever a time to compress shares or take-out additional A shares now would be the time, and is there anything you can share with us on that front?

Tim Powers

Really that story on what's going on with the trust and all that is not in our hands and we really can't comment about it. We are certainly aware that of what current practices are around shares and all that and if and when there was a time when that might occur then we would certainly take it up as a company, and look to see what could be done, but for me to predict that is really not anything that I can contribute to at this time.

Scott Davis - Barclays Capital

But it is a priority I would assume for you guys though.

Tim Powers

We would look at that certainly if something were to occur.

Scott Davis - Barclays Capital

Okay. All right. Thanks. I’ll pass it on.

Operator

And our next question comes from Jeff Beach with Stifel Nicolaus.

Jeff Beach - Stifel Nicolaus

Good morning, I was disconnected, so if I... Thank you. I was disconnected shortly. So I missed a little. I hope my questions haven't been asked already. But on the power segment I'm interested in the whole year growth between distribution and transmission. Can you give us those rates?

Tim Powers

You know, more of the growth is on the transmission side, Jeff as you know, there is a lot of you know, big project activity there. And I would say that the bias is in the full year growth has been there. We don't break out specifically that in detail, you know, but again a big part of the 18% year-over-year is due to you know, transmission business and the large project business.

Jeff Beach - Stifel Nicolaus

And I think for two years it has been growing faster than distribution, so how – can you give us a rough split now going into ’12 between T and D?

Tim Powers

Well, you are right about that, historically it has been pretty stable around 80, 20 distribution. That has clearly moved closer to 70, 30 in the range. It is still a smaller part, but faster growing for sure.

Jeff Beach - Stifel Nicolaus

Okay, and then in the past you have given kind of rough growth rates on harsh and hazardous, on wiring devices, kind of general growth, can you give us any help there either for the whole year or for the fourth quarter?

Tim Powers

For the whole year, harsh and hazardous, and industrial in general were in the mid teens. Wiring device, you know, was high single digits, in the lighting business, particularly because of the relight and retrofit was also high single digit. The fourth quarter, while we saw some change in that trend in that residential turned positive year-over-year, slight positive, but positive after a long run of negatives. But otherwise those trends were pretty much consistent for the fourth quarter as well.

Jeff Beach - Stifel Nicolaus

And lastly, just looking at going back almost a year ago to the day at the sales guidance you provided, and what you ended up with, where were the biggest upside surprises to you versus your expectations for ’11, and where could your best upside surprise be in ’12?

Tim Powers

Well, Jeff the year in all of the markets, let us say the two strong markets of industrial and utility grew more than we anticipated they would at the beginning of the year. And the other two were less negative than we anticipated. What was different about it? So we got top line growth that was beyond our expectation. What was different about the year, and made the year more challenging was the negative material cost price challenge that we went through for the first three quarters, which didn’t allow us to move the margins like you would expect us to.

So we saw a year where the volume was better than we thought it was, and the cost squeeze was higher and more challenging than we anticipated. So lots of moving parts, market conditions a little better than we thought going into the year. So we were very happy with our success on the transmission side. We were very happy with our growth in the harsh and hazardous and energy fields. So those were kind of the highlights, and the retrofit and relight grew for us more than we anticipated.

Jeff Beach - Stifel Nicolaus

All right. Thanks. Congratulations on a great year.

Tim Powers

Thank you.

Operator

(Operator instructions) We will go next to Brent Thielman with D.A. Davidson.

Brent Thielman - D.A. Davidson

Hi, good morning.

Tim Powers

Good morning.

Brent Thielman - D.A. Davidson

Just a question on power, are you effectively filled out in terms of capacity in the US for transmission products for 2012?

Tim Powers

No, no. Please, we would take more at any time. We have the capacity to do more, to produce more. The challenge for Hubbell is sometimes the lumpy nature and the close deliveries that our customers might want. But certainly our overall capacities are not challenged.

Brent Thielman - D.A. Davidson

Okay. So I guess on the – and so for the sales guidance for the power segment, the 6% to 8%, is that kind of reflect the order you have on hand plus some benefit from the distribution side such that any incremental orders in transmission might be incremental to that guidance, is that kind of a fair way to think about it?

Tim Powers

No, I think we are anticipating when you look at the whole year, we are reflecting run rate of orders in kind of the day-to-day business, and we have anticipated some increase in the transmission business above a very high increase in 2011. So it would have to take a change in both metrics to get a number higher than this 6% and 8%. So we would have to do even better then we anticipate in transmission. So we just haven’t left transmission flat.

Brent Thielman - D.A. Davidson

Got you. Okay and I know they were a little smaller, but just on the acquisitions executed in Q4, any sort of flavor for what markets or product areas you are involved in?

Tim Powers

The one Dave alluded to, which is small, but nice is we bought a connector business that makes connectors for solar panels in the residential and residential space, and added that to the Burndy portfolio, and we also added another business in our industrial controls area, that would move us from probably third in its market to the first. So a nice little bolt on, don’t want to over sell them, but they will contribute to margin at or above Hubbell’s average once we get through our purchase accounting.

Brent Thielman - D.A. Davidson

Okay. Thanks and congratulations on the quarter.

Tim Powers

Thank you.

Operator

And from Macquarie Capital, we will go next to Mike Wood.

Mike Wood - Macquarie Capital

Hi. Thanks for taking my question. One of your peers discussed competitive bidding environment on project work within the lighting business, can you just tell us if you saw that and how you responded to it if you did?

Tim Powers

I would answer it generally in that you are in a significant recession in commercial and industrial lighting that all price levels are tough in these kinds of conditions, and so it is a place where price realization is harder to get, and it is not any different than you would see in any other recession. Just tough, tough sledding. Where you win is if you have some feature benefits that others don’t. So a lot of this runs the energy efficiency on a job, and for us the key to it is the broad offering of LED products into interior and parking area lighting.

So that is our niche to it, but I wouldn’t describe it as anything but representative of the level of the market we are at today.

Mike Wood - Macquarie Capital

Okay, and also can you provide the retail sales in the lighting business, what the growth rate was in the fourth quarter?

Tim Powers

Really, the residential growth that we saw in the quarter was about 6%, and that is all really attributable to the retail side of the business.

Mike Wood - Macquarie Capital

Okay, but it sounds like in your guidance that is a piece that you are not expecting to continue that kind of a growth rate, because you have this year the 5% overall resi guidance, correct?

Tim Powers

We are not anticipating any significant movement there. We are pleased to see the end of the year look the way it did, and we are hopeful that our customers on that side, Home Depot, Lowe’s and others like that are more successful in ’12 than they were in 2011.

Mike Wood - Macquarie Capital

Okay. Thank you.

Jim Farrell

We are at 11 o'clock now. So that is going to conclude the questions for this portion. Certainly, Bill Sperry and I are available for anyone who didn’t have an opportunity to ask a question. So feel free to call us after the call.

Operator

And ladies and gentlemen that does conclude today’s presentation. We thank you for your participation.

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Source: Hubbell CEO Discusses Q4 2011 Results - Earnings Call Transcript
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