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Hubbell Inc. (NYSE:HUB.B)

Q4 FY07 Earnings Call

January 24, 2008, 10:00 AM ET

Executives

Thomas R. Conlin - VP of Public Affairs

Timothy H. Powers - Chairman of the Board, President and CEO

David G. Nord - Sr. VP and CFO

Analysts

Robert Cornell - Lehman Brothers

Jeffrey Sprague - Citigroup

Christopher Glynn - Oppenheimer

Jeffrey Beach - Stifel Nicolaus

Steven Gambuzza - Longbow Capital

John Emrich - Ironworks Capital

Operator

Good day everyone. Welcome to the Fourth Quarter and Full Year 2007 Earnings Release Call for Hubbell Inc. Today's call is being recorded. Now for opening remarks and introduction I will like turn the call over to Mr. Tom Conlin, Vice President of Public Affairs with Hubbell Inc. Please go ahead, sir.

Thomas R. Conlin - Vice President of Public Affairs

Thank you Nicky. And good morning to all of you. We released our fourth quarter and full year earnings this morning at about 7:00 and those earnings and that release are available to you from a number of sources. The easiest way is to go to the Hubbell website at Hubbell.com and access the complete release by clicking on the Investor Information tab at the top, then Financial Releases on the drop down menu. It is also available from the usual wire service.

This conference call is available today by telephone and is simultaneously being webcast also from the Hubbell website. Audio replays of the conference call are available in three ways, first, you can have the telephone replay of this call starting 2 hours from its conclusion and that replay will be available for the next week. To access the telephone replay dial 719-457-0820, and enter the passcode which is 5456476. You may also hear the replay on the Hubbell website again from the Investor Relations ad and the audio archives on the drop down menu or you can have this audio as a podcast by downloading it from hubbell.com, once again, on the Investor Information tab at the top.

Let me refer everyone listening to the call today and those who hear our replay to the paragraph in our press release regarding forward-looking statements. That release and this call may contain some expectations based on some assumptions on the future and Hubbell's performance in the future particularly regarding our earnings. Clearly, these comments are forward-looking. We may also make some comments here today during the call or answer questions which may include forward-looking statements. All of these involve inherent assumptions with known and unknown risks and other factors than can cause our actual future results to differ on what we may discuss or project here today. So please note that paragraph in the press release and I would like to consider it incorporated into the call here this morning by reference.

I'll turn the call over now to Tim Powers, CEO of Hubbell Incorporated for some comments on our fourth quarter results.

Timothy H. Powers - Chairman of the Board, President and Chief Executive Officer

Thanks Tom. Good morning, everyone. Let me begin with some comments regarding the highlights of our results for 2007, then I will let David Nord take you through some of the details and I will come back to discuss the markets for what we see in 2008. Hubbell reported the highest sales, net income, earnings per diluted share, and cash flow from operations in our 120-year history. The results are directly attributable to the focus, hard work and dedication of our 12,000 employees.

The fourth quarter was a strong finish to an excellent year. It continued to build on the improvements in operating performance that we have seen over the first three quarters of this year. The results have been accomplished despite the continuing challenge in the residential business. Sales in the fourth quarter of $614.7 million and operating profit margins 11.2% were up more than four full points from a similar period last year contributing to earnings per diluted share of $0.82, up 71%. This brings our full year sales to over $2.5 billion, up 5%, and more importantly operating margins up two full points to 11.8%.

We continue our focus on three key elements. Price realization, cost containment and productivity improvements have been clearly effective in our drive to increase our operating margins and continued strong cash flow. Free cash flow was more than twice net income in the quarter and 134% for the year.

Selling price increases continue to be an important contributor to our margin improvement efforts, although this will be less of a contributor in 2008. Programs to increase productivity and reduce costs are achieving success and contributing to margin expansion. The markets for our products remain consistent with our expectations.

Order volume overall in non-residential construction and industrial maintenance and repair markets continue to show growth but at slowing rates. The residential market continues its decline and will probably show negative comparisons throughout next year. The market served by our Industrial Technology segment, particularly, the international markets provided strong demand in specialty communications and industrial applications.

From my perspective, a strong quarter and a great finish to an excellent year. A one that provides a solid foundation to the market challenge we are likely to experience in 2008.

Now I have Dave to give you more details on the results and come back with some views on the markets and next year. Dave.

David G. Nord - Senior Vice President and Chief Financial Officer

All right. Thanks Tim. Good morning. Let me take a few minutes to go through the consolidated results on P&L and cash flow and then we'll get into a little more color on the segments. First on the P&L in the fourth quarter, sales were $614.7 million, which is up 4.4% from last year's fourth quarter.

Our selling price increases accounted for about half of the increase with the remainder due to combination of acquisitions and foreign currency translation offset by continuing lower residential volume. Gross profit margin was 29.5%, up nearly 2 points from last year. This was principally driven by price realization and excess of commodity cost increases, and productivity improvements.

Selling and administrative cost as a percent of sales were 18.3%, up from the 18% we saw in last year's fourth quarter. The workforce reduction cost that we referred to in the fourth quarter, negatively impacted this line by 50 basis points. So on a comparable basis it's down slightly year-over-year. Net interest expense was $3.7 million higher than last year's $3.1 million due to cash investments as we use for acquisitions and our higher share repurchase levels this year.

The effective tax rate in the quarter was 25.2% higher than last year's by 3.3, as we note, in the quarter we had a $0.05 benefit associated with adjustments principally around settlement of open tax years, absent that, the rate would have been 29% in the quarter. Net income... so all this results to net income of $48 million, which is up $18.8 million or 64% from last year's fourth quarter and earnings per diluted share of $0.82, up 71% from the $0.48 we reported last year.

For the full year, we finished with sales of $2.53 billion, up 5% from the $2.41 billion reported last year. Net operating profit margin of 11.8%, more than 2 points higher last year's 9.7% due to the selling price increase in excess of commodity costs and improved productivity including freight and logistics, and cost containment initiatives executed throughout the year. So net income finished at $208.3 million, up $50.2 million or 32% from last year and earnings per diluted share of $3.50, up 35% from the $2.59 we reported last year.

Turning now to cash flow, in the fourth quarter cash flow from operations was a $114 million, double the amount from last year's fourth quarter due to improved working capital performance and higher earnings. Capital expenditures were $11 million in the quarter, down $8 million from last year's fourth quarter as last year had the higher spending associated with their new lighting headquarters building and the spending on the implementation of our enterprise reporting systems. So free cash flow in the quarter of $103 million compares to $37 million last year.

Acquisition expenditures in the quarter were $50 million, principally for the PCORE acquisition in our Power segment that closed on October 1st. Share repurchases in the quarter were $19.7 million or a little over 300,000 shares. For the full year, cash flow from operations was $335 million, significant improvement from last year's $140 million due to better working capital, primarily at inventory and higher earnings.

Trade working capital as a percent of sales for the year was 19.8%, compared to 22% last year. Capital expenditures for the year were $55.9 million, down $30.9 million from the 06 levels. As we completed the lighting headquarters early this year and had significantly reduced cost associated with our enterprise system implementation. So free cash flow for the year of $279 million compares with $53 million last year, 134% of net income well above our the 100% target we set earlier in the year. And cash used for share repurchase for the full year 2007 was $193.1 million for the purchase of 3.6 million shares, compared to $95.1 million for $2.1 million shares in '06.

So the balance sheet finishes the year strong with good cash flow performance, some deployment of that for share repurchase and acquisition. But we finished the year with net debt of $119.4 million, compared to $138.7 at end of 2006.

Let's turn now to the segment results in the fourth quarter on the Electrical segment first, sales of $388.7 million, essentially flat at 2006, but included in there is a residential lighting business, which was down 24%.

Operating income was $30.8 million, up $11.7 million or 61% from 2006. Operating margin in the quarter of 7.9%, up full three points from the fourth quarter '06, and this includes the impact of the incremental fourth quarter cost reduction costs year-over-year and the drag from the lower volume in the residential lighting business, combined these two impact the margin in the segment by nearly three full points year-over-year. Within the segment, we had volume increases in wiring and electrical products while the lighting was down principally for residential.

The wiring growth was mid single digit essentially flat operating profit due to the impact of the product quality issue that was resulted in the fourth quarter we mentioned on the last call earlier in the quarter there was some continuing cost associated with that and the charges associated with the workforce reductions.

On the lighting side, some growth in the C&I business while residential was down 24% as I mentioned. Operating profits though increased 54% due to good price realization in excess of commodity cost increases and productivity improvements including strategic sourcing and value engineering. And the electrical products component of that segment had 18% volume growth, big driver being in the harsh and hazardous markets. Operating profit more than doubled due to the price increase in excess of cost productivity gains and some favorable product mix.

Turning now to the Power segment, sales were $159.6 million, up $12.8 million or 9% from last year's fourth quarter, operating profit of $23.2 million, up 61%. The PCORE acquisition contributed $7 million of sales in the quarter. Price realization in excess of commodity costs was about $2 million in the quarter, and productivity improvements from strategic sourcing initiatives, as well as some good product mix contributed to the increase.

And on the Industrial Technology side, the story there continues that we have experienced throughout the year, sales of $66.4 million, up $13.2 million or 25% from last year, with operating profit of $14.6 million, up 78%. The acquisition we completed in the fourth quarter of last year Australia contributed about 5 points on the sales increase. And the operating margin improvement was broad-based due to all the things that we focused on this year, higher volume, price increases and productivity.

So, turning now to the full year just a close out 07 on the segments. Electrical sales of $1.63 billion, up 1% with operating income of $151 million, up 21%. Margin of 9.2 up from the 7.6, and that includes the negative impact of the residential decline that the Electrical segment faced. Within the segment, the similar trends as in the quarter with volume increases have wiring and electrical products and the full year down in lighting principally due to residential.

On the Power side, sales of $636.6 million were up 62.9 or 11% and operating profit of 97.3, up 28%. So, Lenoir City acquisition that we completed in the middle of 2006 and the PCORE acquisition late in 07 contribute about two-thirds of the sales growth and about a quarter of the operating profit growth, compared to 2006. More significant to the operating profit increase was very good price realization and good management of the commodity cost increases as well as productivity improvements including the strategic sourcing and freight and logistics.

The Industrial Technology side, sales finished the year at $257.4 million, up $48 million or 23%, and operating profit of $51.1 million, up 53%. The Austdac acquisition accounted for about 10 points of the sales increase and the operating profit increase attributable to all of the things that we have focused on throughout the year price, cost and productivity,

So, with that I'll turn it back over to Tim.

Timothy H. Powers - Chairman of the Board, President and Chief Executive Officer

Thanks Dave. Let's review the outlook for our markets. The manufacturing sector will continue to show growth but at very modest levels with continuing strength in the Energy sector both domestically and internationally. We'll provide some on growing support in this area.

On the non-residential side, the overall market will slow to low single digits perhaps being flat to 2007 for periods during the year. The residential market will continue to be difficult, I believe the market will decline at a rate of 25% to 30% next year this would put single family housing starts at 700,000 to 800,000 unit level with a possible bottoming late next year. Of course, since our business is at the end of the construction cycle, we won't see any turnaround in our residential business until 2009.

The utility market continues to grow, but with some bias towards transmission versus distribution. I think the fundamentals of this market support continuing modest growth. The two variables to our economic outlook continue to be the unfolding crisis in the credit market and the price of commodities particularly energy, each of which is contributing to the slowing U.S. economy.

So, what does all this mean for next year? In 2008, we expect sales to increase 4% to 6%, excluding any effects of the fluctuation of foreign currency exchange rates. Sales increases compared with 2007 are expected to be relatively balanced across our three segments. Within the Electrical segment the acquisition of Kurt Versen will essentially offset the continuing decline in the residential market in 2008. The full year impact of 2007 acquisitions is expected to contribute 2% to 3% to these amounts.

Operating margins are expected to improve by 1 point compared to 2007. In 2008, we will continue to focus on the same areas as in 2007; price, productivity and cost. These key initiatives are expected to benefit operating margins including the expansion of global product sourcing initiatives, improved battery productivity and the continuing improvements using lean processes. The tax rate increased from 26.7% in 2007 to 30.5% in 2008 is due to the completion of the 2004 and 2005 Federal tax audits in 07, with the absence of the R&D tax credits and higher U.S. earnings in 2008. Earnings per share in 2008 is expected to be in the range of $3.70 to $3.90.

And with that, we will open it up to questions.

Thomas R. Conlin - Vice President of Public Affairs

Nicky if you would repeat the procedure for asking a question, we will proceed to that.

Question And Answer

Operator

Thank you. [Operator Instructions]. We are going to take our first question from Robert Cornell with Lehman Brothers.

Robert Cornell - Lehman Brothers

Hi everybody.

Timothy H. Powers - Chairman of the Board, President and Chief Executive Officer

Hi Bob.

Robert Cornell - Lehman Brothers

You mentioned the Electrical was up nicely year-over-year, but it wasn't that strong sequentially as I might have thought. So you mentioned the cost reductions that type of thing. If you go back over what actually happened in the fourth quarter in electrical, wiring, lighting, Hubbell Electrical Products and give some more visibility into whatever is going on there?

David G. Nord - Senior Vice President and Chief Financial Officer

Sure Bob, I think one of the things as you look at it at a high level, I think you probably focused on the margin from sequentially from Q3 to Q4 down about three points.

Robert Cornell - Lehman Brothers

Right.

David G. Nord - Senior Vice President and Chief Financial Officer

Just about half of that is associated with the cost reduction. And then another big piece of it is we have a normal trend as we have talked about from Q3 to Q4 were volumes down and you lose some on the conversion there. And then the other drivers is on the residential side, residential continued to decline and we saw some pressure on margins in the residential business as we finished the year, some attributable to some product returns, so put some pressure on the margins there.

Robert Cornell - Lehman Brothers

Actually, you sourced most of that stuff, it's not that volume sensitive, so why would the... when you see the pressure on margins and the resi business?

Timothy H. Powers - Chairman of the Board, President and Chief Executive Officer

I think one of the reasons you see that pressures is that while we do source the product, there is still a cost infrastructure, particularly the direct sales force, we haven't took any actions to reduce the direct sales force anywhere near the level of the volume decline because you just can't do that. And so there is a negative margin drag with volume, you can't cover it all.

Robert Cornell - Lehman Brothers

So, you passed the critical mass point of view, I get it.

Timothy H. Powers - Chairman of the Board, President and Chief Executive Officer

Okay.

Robert Cornell - Lehman Brothers

For a while you were able to hold the margins, but now the volumes are down so much you rally... you got an infrastructure cost that's impacting the margins?

David G. Nord - Senior Vice President and Chief Financial Officer

Yes, I think its one of those things you adjust in steps rather than on a sort of a flowing basis, and we continue to trim our overhead costs and adjust them as we can in step function, but certainly when you are getting 25% and 30% year-over-year declines, its not a smooth movement.

Robert Cornell - Lehman Brothers

So David, you finished with that answer to the follow-up is, I mean, in the guidance what do you have anticipated for the electrical business in terms of growth in sales and OP and that type of thing?

David G. Nord - Senior Vice President and Chief Financial Officer

Most of the increase in the margins are going to come from the Electrical segment because that's clearly the segment that still has... is still trailing the market. I think we have seen on the power and industrial technology, some very good performance. So I think they are improving year-over-year on the margin side will be very modest and more focused on the volume growth for them. On the Electrical segment, we are looking at more of the improvement and getting that segment up probably close to a 1.5 point, since that's about 60% of our business with mid single-digit volume growth.

Robert Cornell - Lehman Brothers

One other questions, sorry I mean, just an update on Spokane, Bristol [ph]?

Timothy H. Powers - Chairman of the Board, President and Chief Executive Officer

We have commenced the restructuring and the moving from Spokane. Bristol is operating normally.

Robert Cornell - Lehman Brothers

You are starting to move product again to complete that move?

Timothy H. Powers - Chairman of the Board, President and Chief Executive Officer

Yes.

Robert Cornell - Lehman Brothers

And you don't expect any adverse impact on the margins as the result of that?

Timothy H. Powers - Chairman of the Board, President and Chief Executive Officer

No.

Robert Cornell - Lehman Brothers

Okay, thanks. I have taken enough of your time, thank you.

Timothy H. Powers - Chairman of the Board, President and Chief Executive Officer

Sure.

Operator

Thank you. And we will take our next question from Jeff Sprague with Citigroup.

Jeffrey Sprague - Citigroup

Hello everybody.

Timothy H. Powers - Chairman of the Board, President and Chief Executive Officer

Hi, Jeff.

David G. Nord - Senior Vice President and Chief Financial Officer

Hi, Jeff.

Jeffrey Sprague - Citigroup

Hi, just a couple of questions. First, Tim, just a point of clarification, you said next year a couple of times when we are talking about res, did you mean 08 or 09, just a little unclear whether you really...

Timothy H. Powers - Chairman of the Board, President and Chief Executive Officer

08, we are saying that new housing starts are going to be down 25% and really a big chunk of our residential business... the residential lighting business is key to that particular part of the residential market, and I think it's going to decline perhaps more than our current forecast out their predict, but in our view and in our plan that's what we have, 25% reduction.

Jeffrey Sprague - Citigroup

Right, and therefore you've got some pressure into '09 just given the lagging nature of your business?

Timothy H. Powers - Chairman of the Board, President and Chief Executive Officer

Yes, we have a 4 to 6 month lag to housing starts on the lighting side of our business.

Jeffrey Sprague - Citigroup

And then Dave, you kind of bounced around this a little bit, but just trying to tie together some of the pieces of the revenue composition in the quarter. I guess if I look at... power revenues were up 9, looks like may be peak or at it, that $7 million was may be 5 points up. It seems to me was kind of 4% core, can you give us the sense of price versus volume in the power business?

David G. Nord - Senior Vice President and Chief Financial Officer

Price... of the 9, about half was from the acquisitions. And the other half was a combination of price probably about half of that you know may be about 2 points of price with the rest currency... little bit of currency and then volume. As we mentioned, we had a little incremental storm volume from the ice storms in the Midwest.

Jeffrey Sprague - Citigroup

The volume is basically flat in power and...

David G. Nord - Senior Vice President and Chief Financial Officer

Yes, on the distribution side you could say there is continuing softness in the market right now. So that I mean we are just seeing that as a continuing situation.

Jeffrey Sprague - Citigroup

And it sounds like electrical volume is basically flat, although again that's largely tied to lighting. Can you give us a sense of volumes ex-lighting in the Electrical segment?

David G. Nord - Senior Vice President and Chief Financial Officer

No, that's right. They are about flat on core volume ex to resi.

Jeffrey Sprague - Citigroup

Okay, that's flat ex-resi and with resi, your core volumes are down how much in electrical?

Timothy H. Powers - Chairman of the Board, President and Chief Executive Officer

About 3%.

Jeffrey Sprague - Citigroup

And then Tim, just a bigger picture question may be on that, I mean you continue to highlight prices and opportunity, just I guess the question mark some of us have, certainly I have is just with not a lot of volume growth and an economy that's may be faltering a little bit, I mean how you really feel about being able to get price on flat volumes?

Timothy H. Powers - Chairman of the Board, President and Chief Executive Officer

We think that next year the price will be half of the impact that it is this year, more in the 1 plus percent range. Certainly, there are products that are very much impacted by energy costs and really that's the key driver at the moment for oil year-over-year as even though it's down from the quarter, it's been up significantly. So it's a driver in the operation of our plans in inflation for us. So, but I agree with you in a softer market there will be less of an impact and that's our view next year. It will be there, but it will be smaller.

Jeffrey Sprague - Citigroup

And could you tell us how much the C&I lighting business was up in the quarter?

David G. Nord - Senior Vice President and Chief Financial Officer

C&I was up a couple percent, mostly on price.

Jeffrey Sprague - Citigroup

And may be just one last macro one for me. Tim, you actually were may be a year ago a little more bearish on commercial construction, kind of ahead of the market, expressing any concern. Now your comment of flat actually sounds a little more optimistic than some of the big forecasters like AII and Portland Cement and all these guys are putting out. Could you just give us a little more color on how you just see the complexion of the whole commercial cycle playing out?

Timothy H. Powers - Chairman of the Board, President and Chief Executive Officer

Sure. I think, if you're looking at awards, you are looking at a negative number which has implications for '09. But if you look at put in place, its closer to flat or flat, and that's where you sell the product. So I think that we're still looking at a relatively level playing field for '08. As we put this, we finish up the jobs that have been started for sometime. I think it indicates that '09 will be a year of declining put in place activity for the non-residential markets, and then again that's subject to what's going on in the credit markets and which still has a big impact of how much the US economy is gone move forward and at what rate.

Jeffrey Sprague - Citigroup

I am sorry, may be I'm going on, but may be just one more different topic. Any change... the weakness in D part of C&D, obviously understandable its kind of the resi high, any change in kind like complexion of the demand on the more project side, I mean there has been some MRO activity, but anything beyond that apparent?

Timothy H. Powers - Chairman of the Board, President and Chief Executive Officer

No, I think we see a steadily slowing growth in the business in general, with the exception of the residential business which is continuing decline at a pretty good pace. So, we are taking the kinds of actions you would expect us to which are adding to our portfolio of buying back shares. We have done an excellent job of generating cash this year and putting that to work, so you can expect for... to see us perhaps more aggressive in the M&A area certainly to combat the slowness in the general economy.

Jeffrey Sprague - Citigroup

Great, thank you very much.

Operator

Thank you. And we will take our next question from Christopher Glynn with Oppenheimer.

Christopher Glynn - Oppenheimer

Hi, thanks. Top line growth in the quarter came in at above 4%; I think the guidance was 4% to 8%. What didn't happen in the quarter and maybe specifically take another timing of non-res project completions perhaps?

Timothy H. Powers - Chairman of the Board, President and Chief Executive Officer

I would say, Chris, that the last two weeks of December were slower than we anticipated they would be. I wouldn't attribute... I would distribute that more to distributor actions than anything certainly maybe they are becoming more conservative about their level of inventories, but we saw it in a number of our businesses where even though we calculate very closely, week three and week four of December and what the follow-ups might be they were a little bit bigger than normal. But January is coming back to kind of our expectations, so I think it's just a general indication of the level of concern of all of us on the U.S. economy slowing down.

David G. Nord - Senior Vice President and Chief Financial Officer

Well Chris, also... just a little point, our view was that it was four to five if I recall our guidance was four to five. So it's a little bit, we are on the low-end of that, but while there was some slowness it wasn't really a significant, we are talking in the $5 million to $10 million range.

Christopher Glynn - Oppenheimer

Okay and I must have missed it, I [ph] remembered.

David G. Nord - Senior Vice President and Chief Financial Officer

Yes, not a big surprise... there is nothing other the ordinary in all of this.

Christopher Glynn - Oppenheimer

Okay. And on the 4% to 6% top line for next year, I guess just stepping back at 5% this year we would certainly expect slower next, but I guess the acquisition is the delta there, the acquisitions?

David G. Nord - Senior Vice President and Chief Financial Officer

Yes.

Christopher Glynn - Oppenheimer

Okay.

David G. Nord - Senior Vice President and Chief Financial Officer

That's an acquisition about half.

Christopher Glynn - Oppenheimer

Okay, and with regard to Power Systems acquisitions, PCORE and Lenoir City was about two-thirds the top line only the quarterly operating profit first year in there, what's kind of a swing factor and then coming up to segment level margins in 08?

Timothy H. Powers - Chairman of the Board, President and Chief Executive Officer

Well PCORE has initial purchase accounting matters which is holding back its earnings, but Lenoir City has already attained earnings equal to the average of the segment. So, I think you will see PCORE as the year goes along strengthen its margin and get up to at or above the segment margin.

Christopher Glynn - Oppenheimer

Okay, and on Kurt Versen, can we get a little detail on the size of that business and the margins I believe it's pretty high margin business?

Timothy H. Powers - Chairman of the Board, President and Chief Executive Officer

It is a high margin and it's an excellent addition to our lighting lineup. It is the probably best known indoor specified down light business in the U.S. market. Certainly it's just another brand that will help lock some specifications and help us win some jobs and it's located in New Jersey and has very good access to the New York City market which we are expecting will strengthen our position there and the New York City market we would expect to be pretty good over the next couple of years as there is a number of construction projects that are expected to take place. Businesses in the $50 million range in sales, but quite good margins.

Christopher Glynn - Oppenheimer

Okay and could we revisit, I think, you might have commented on the third quarter, but what kind of benefits you are expecting from the work force reduction in '08?

David G. Nord - Senior Vice President and Chief Financial Officer

Generally speaking, it's a little bit less in a one year pay back and it was $7 million.

Christopher Glynn - Oppenheimer

Okay, okay great thanks a lot.

David G. Nord - Senior Vice President and Chief Financial Officer

Okay.

Operator

Thank you. We'll take our next question from Jeff Beach with Stifel Nicolaus.

Jeffrey Beach - Stifel Nicolaus

Again congratulations on a good quarter.

David G. Nord - Senior Vice President and Chief Financial Officer

Thanks Jeff.

Timothy H. Powers - Chairman of the Board, President and Chief Executive Officer

Thank You.

Jeffrey Beach - Stifel Nicolaus

A couple of things. In Industrial Technology the sales continue to boom, the margins continue to move to all time highs is this the orientation around basic industry and a lot of energy infrastructure and is it likely we are going to see this kind of strength to continue into not necessarily this pace of growth but is this likely going to be one of your best performing segment you see and a weak economy in 2009?

Timothy H. Powers - Chairman of the Board, President and Chief Executive Officer

Yes the answer to that is clearly yes, the underlying support for infrastructure investment in the energy related sector and also as you know we have our test business of Hipotronics and Haefely and the expansion of utility infrastructure particularly on the transformer side is where they participate and this is a world leading market share company for this test equipment for transformers, and there continues to be a huge demand for this product and we don't see anything happening but upward movement on this for 2008.

Jeffrey Beach - Stifel Nicolaus

All right. Residential lighting with the volume continuing to drop-off, can you make a commentary about the profitability of that business, is it still holding in the double-digits?

Timothy H. Powers - Chairman of the Board, President and Chief Executive Officer

Yes, the answer to that is yes. We think it will be in the low teens for 2008. We are managing as best we can, our infrastructure costs, and the hardest part in something like this is maintaining your inventories and balance while you are keeping business at a declining rate of 20% or 25%, but I think we are doing a pretty good job on that score. And the good news for us is that the forecast is for a turnaround in 2009. So, hopefully we can see the end of the decline for this very strong business segment for us, and I hope that bodes well for our improvement and profit in 09.

Jeffrey Beach - Stifel Nicolaus

All right. Last question. Pretty strong stock buyback in 2007, but as the stock price has gone lower; it didn't look to be a high level in the fourth quarter. Are you looking here and trying to weigh M&A against stock purchases or is this a price level where you anticipate being very aggressive?

Timothy H. Powers - Chairman of the Board, President and Chief Executive Officer

Well, for one thing certainly we had the impending purchase of Kurt Versen at $100 million. So, for us it was lining up the money for that, and certainly we think that the share price is as all companies would not value correctly. It looks like an opportunity, so I think all stocks around sale at the moment just from the mentality of the market, so take that for what its worth.

Jeffrey Beach - Stifel Nicolaus

All right thanks.

Operator

Thank you. And we will take our next question from Steven Gambuzza with Longbow Capital.

Steven Gambuzza - Longbow Capital

Good morning.

Timothy H. Powers - Chairman of the Board, President and Chief Executive Officer

Good morning.

David G. Nord - Senior Vice President and Chief Financial Officer

Good morning.

Steven Gambuzza - Longbow Capital

On the share repurchase question, how much have you incorporated within your guidance for 2008?

David G. Nord - Senior Vice President and Chief Financial Officer

What's included in there is essentially an amount to offset dilution roughly 1 million... 1.2 million shares, take the price times that $50 million to $60 million right now.

Steven Gambuzza - Longbow Capital

Okay.So, there is really no net reduction in share count.

David G. Nord - Senior Vice President and Chief Financial Officer

That's correct.

Steven Gambuzza - Longbow Capital

And presumably acquisition opportunities don't materialize during the course of the year you might look the use of cash flow to buyback stock?

Timothy H. Powers - Chairman of the Board, President and Chief Executive Officer

We do.

Steven Gambuzza - Longbow Capital

Okay. I am just still wondering if you could expand on two comments in the release. The first was the $0.07 charge for workforce reductions in the quarter, could you just elaborate on what exactly that is?

Timothy H. Powers - Chairman of the Board, President and Chief Executive Officer

Sure we had a early retirement plan or offering to our employees, and looking at the softness in 2008 I wanted to see if we could reduce our overhead cost incrementally so that's what the nature of the cost reduction was, it was broad-based across the company and it was 100 or so employees. It was not some huge magnitude thing, but was senior employees with lots of seniority and fairly well paid.

Steven Gambuzza - Longbow Capital

Do you get the sense of that... did that action is complete or would you expect similar initiatives in 2008?

David G. Nord - Senior Vice President and Chief Financial Officer

Right now, if the economy excess we think it will in our guidance I would not expect other major actions, however, if the economy softens and certainly like all other companies we would move quickly to further reduce our overheads matching further weaknesses.

Steven Gambuzza - Longbow Capital

And now, I was hoping just to get a little more color on the comment regarding weakness in distribution-related utility products. I was wondering... it seems like I can certainly understand why certain products that might be tied to new customer connects would be weak, but given the overall trends and kind of the utilities are continuing to grow there, reliability driven, distribution spending which is why I am saying the majority of the CapEx. It just seems kind of a large of what the industry is talking about, I am just wondering if there might be some channel issues in terms of the inventory issues within the distribution channel is causing some of those weakness for you?

David G. Nord - Senior Vice President and Chief Financial Officer

I think you probably have it right and I don't think there is any channel distribution issues. Certainly it's the line up of your product and where utilities were spending money and where they are spending money today is in automation systems of meter reading and the kinds of things where you can automate a substation get electronic feedback as to the performance of your system. So we make a lot of bread and butter parts that go with... upgrade and retrofit but if you are doing automation you are going to be focusing your attention more on software and interconnect, and that seems to be where part of the money is going along with, I would say a reliability drive at the moment to replace and upgrade power transformers.

So, I think if you are talking about the range of power transformers about 20 MVA, you are seeing continued extremely strong demand. If you are talking about distribution transformers, which would be more in the range of what goes near homes, you are seeing a tremendous weakness. So it really is where utilities are investing their money right now, I agree with you that they are spending more money and they will continue to spend more money. So, I think we are just having some softness related to the dramatic decline in the residential, but I think that certainly they will continue to spend more money in '08 than '07, and I think they will spend more money in '09 than '08. So there are things like that are still going upward.

Steven Gambuzza - Longbow Capital

What percentage of your utility sales, go through distribution versus direct sale?

David G. Nord - Senior Vice President and Chief Financial Officer

I would say probably 75% of our utility business goes through distribution, because it's the nature of our products that fit that. As you move up in the apparatus levels, so to transformers and things like that, those are direct sales. But what our utility distributors provide for public utilities is logistic support for things that take up an enormous amount of space and for which there are thousands of different skews. So, what they do is keep a lot of that in stock and deliver to the job site and to the depots what's needed for line cruise on a pretty short-term basis.

Steven Gambuzza - Longbow Capital

I guess, what would you look for in terms of a signal that perhaps industry spending might be which continues to be robust might start shifting more towards your product set?

Timothy H. Powers - Chairman of the Board, President and Chief Executive Officer

Well I think, for one thing we are enjoying and increasing amount of transmission business and the total spending in the T&D area historically is about 80% for distribution and 20% for transmission, and that transmission component continues to grow. I think that we will continue to see flatness for a while, while housing continues to contract. I think the utilities will shift their spending pattern to the kinds of things that are bringing them better reliability and efficiency to their grid, which is substation automation, which is replacing and upgrading small amounts of transmission lines in the 50 to 100 mile length.

So you would see upgrades from say a 144 KV to 345, that kind of thing you can witness just about any crossroads you come to in the United States. So, a lot of that going on where the amount has slowed down is in underground utility components that would be for residential and in some parts of the U.S. above ground, but about half of our business is repairing replacement at least half and so that part is going to go on regardless. So I think just the flattening is the incremental impact of slowing housing starts.

Steven Gambuzza - Longbow Capital

Okay, thank you.

Timothy H. Powers - Chairman of the Board, President and Chief Executive Officer

Sure.

Steven Gambuzza - Longbow Capital

Thanks a lot.

Timothy H. Powers - Chairman of the Board, President and Chief Executive Officer

Yes.

Operator

Thank you. We'll take our next question from Stuart Tavin from Mason Capital [ph].

Unidentified Analyst

Hi, good morning. I have a question about the share buybacks. In the fourth quarter, how many A's and how many B's did you buyback? And then a follow-up about the price differential between the A's and B's starting in the third quarter and continue into the fourth, the A's were priced at a significant premium to the B's and I'm just curious why you would continue to buy those shares when the B's are lower priced and more liquid? Thank you.

David G. Nord - Senior Vice President and Chief Financial Officer

I don't have all those details here in front of me, I will tell you that we buy under as you are aware we have 10b5 program that applies to both the A's and the B's which we put in place last year, so some of the purchases are happening under that program automatically. But I can get back to you with the specifics regarding the A's, B's and the price.

Unidentified Analyst

Okay. But philosophically speaking, would you continue to buy A shares as they are in a premium to the B's? And given that there were enough A share purchases that presumably not all of them were related to the 10b5-1 program?

David G. Nord - Senior Vice President and Chief Financial Officer

We will continue to buy both shares. Normally we would buy a great deal of more of the B's than the A's. That would be typical.

Unidentified Analyst

Okay, thank you.

David G. Nord - Senior Vice President and Chief Financial Officer

Sure.

Operator

Thank you. [Operator Instructions] And we'll take our next question from John Emrich with Ironworks Capital.

John Emrich - Ironworks Capital

Thank you. I am pretty new to this story. I just had a couple of general questions. Your forecast, if you take out a little bit from that the contribution from acquisitions during 07 into 08, you are still forecasting some level of organic revenue growth in 08, is that correct?

David G. Nord - Senior Vice President and Chief Financial Officer

Yes.

John Emrich - Ironworks Capital

Okay. And total company, the run rate today, it's obviously gotten smaller. What is your current exposure, percentage of total revenue to both, residential and non-residential construction?

David G. Nord - Senior Vice President and Chief Financial Officer

Non-residential continues to run about 40% of our business. On the residential side including all business, not just the residential lighting, we have moved down from 15% last year to 12% in '07 and I think you can expect that with the trends, particularly in lighting, to probably move down a point or two for '08.

John Emrich - Ironworks Capital

And I guess, I should ask the question clarification because some of that is for res and non-res would be new construction and a chunk would be the replacement market I guess?

Timothy H. Powers - Chairman of the Board, President and Chief Executive Officer

Yes, but you would say that you know by and large new construction drives the day. I would say probably. More than half of our business is related directly to new construction.

John Emrich - Ironworks Capital

All right, that's helpful. Do you have any international exposure either direct or through export?

Timothy H. Powers - Chairman of the Board, President and Chief Executive Officer

We have very small, I mean if you consider Canada and Mexico as the home market in the Americas, North America, then we only have 6% or 7% of our total revenue that's outside of that, we are primarily a NAFTA company.

John Emrich - Ironworks Capital

Okay, super. I'll follow up after the call, thanks a lot.

Timothy H. Powers - Chairman of the Board, President and Chief Executive Officer

Sure.

Operator

Thank you. And we have no further questions at this time.

Thomas R. Conlin - Vice President of Public Affairs

All right, Nicky, thank you for you help today and our thanks to everyone that called in. And we will speak to you in about three months.

Operator

And this does conclude today's conference. Thank you for your participation, you may now disconnect.

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Source: Hubbell, Inc. Q4 2007 Earnings Call Transcript
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