Hubbell Incorporated (HUBB) Q1 2016 Earnings Report, Transcript and Summary

Good morning. My name is Jeff and I will be your conference operator today. At this time, I would like to welcome everyone to the First Quarter 2016 Results Conference Call. [Operator Instructions] Maria Lee, Vice President, Treasurer and Investor Relations, you may begin your conference.

Thanks, Jeff. Good morning, everyone and thank you for joining us. I am joined today by our President and Chief Executive Officer, Dave Nord and our Chief Financial Officer, Bill Sperry. Hubbell announced its first quarter results for 2016 this morning. The press release and earnings slide materials have been posted to the Investors 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 our 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 may also include non-GAAP financial measures. Those measures are reconciled to the comparable GAAP measures and are included in the press release and the earnings slide materials. Now, let me turn the call over to Dave.

Okay. Thanks, Maria. Thanks everyone for joining this morning. Let me give some opening remarks and then Bill can take you through the specifics of our results. Certainly from our perspective, we had solid results in the first quarter, consistent with our long-term strategy of supporting shareholder value creation. Pretty much in line with our expectations, but certainly it feels a lot better than the last few years start to the year, more reliable, more consistent, so really felt good about that, particularly felt good on the top line, with sales up 3% and that had a combination of both organic growth as well as the acquisition benefits. We continue to execute on our restructuring and related actions and we continue to make investments in enhancing our presence in growing markets and growing businesses. And of course, we still have an ongoing deployment of cash, completing two acquisitions in the quarter as well as the share repurchases of $200 million. So, as a result of all this was earnings per share are up 4% year-over-year, adjusted for the restructuring and related costs. Before I hand it off to Bill to take you through the slides, let me just highlight a few other events in the quarter. As you know, we held our Investor Day in New York in March and many of you hopefully were able to participate either in person or by phone. It was great to see many of you there. This event allowed us to really showcase the leaders of our groups and particularly the new organization. You had a chance to hear directly from them how they feel about the bright future for Hubbell. Some of the highlights: Kevin Poyck talked about our 10% annual growth target in lighting. Darrin addressed the role of innovation in driving customer value and maintaining strong competitive positioning in our wiring business. Rodd Ruland covered moving into adjacent markets within our Harsh and Hazardous products as well as the acquisitions in the natural gas infrastructure space. And Gerben highlighted Power’s consistent top line performance, the achievement of $1 billion of sales in 2015 and the promising prospects for business outside of our traditional transmission and distribution markets. We expect to continue the process we started last year of having the Presidents to join us during investor meetings during the coming year. I think next up the schedule as you will see Rodd Ruland somewhere over the next month or two out in the field. Also, in March, we held an Executive Summit, which brought together 125 of our top leaders within Hubbell. It was an amazing show of the energy and excitement from that group. It was our fourth in the series that we launched when we first launched our initiative on One Hubbell, lot of sharing of ideas, best practices and continued collaboration for our leadership to drive to the future goals that we shared with the investment community back at our Investor Day, really fantastic to be part of that meeting. And on the customer side, as I mentioned in March, it all starts with the customer. And over the last few months, I have had the opportunity to spend some time with quite a few of our channel partners of all sizes. In general, I would say they see the market in a similar way. They are optimistic about growth, but realistic about a market that’s likely to be choppy and sloppy and certainly very positive about the way they see Hubbell, our emphasis on One Hubbell where it makes sense and can make their lives easier and their businesses more successful and the energy and attitude they see from our new organization. And we hear similar things at the various industry events, most recently at the AGA meeting commentary around the gas distribution businesses that we put together in support of a market that is and will continue to experience good growth potential. At some upcoming events, it can give you an opportunity to see some of us in action amongst the various industry participants. Hopefully, some of you might be joining the call from LIGHTFAIR in San Diego. Kevin and the Lighting team are sharing their significant offerings and plans for new products. And next week, our Power Systems team will be doing the same thing at IEEE Convention in Dallas. I plan to be there for part of the event with the entire Hubbell senior leadership team as well. So, a lot of good things happened, a lot of positive things happened and we just are optimistic that the market will continue to allow us to perform and deliver positive results. So with that, let me turn it over to Bill and he can take you through the specifics of the quarter.

Thanks, Dave. Good morning, everybody. Thanks for joining us. I am going to use the slides that I hope you found this morning to help guide my comments and I am going to start on Page 3, first quarter summary. Solid quarter that gets us off to a good start for the year, net sales of $835 million, an increase of 3%, driven by organic growth of 2% absorbed by FX headwinds of those same 2%, but then acquisitions contributing another 3 points. The operating margin, adjusted for restructuring related, was at 13%, a 50 basis point decline. We continue to wrestle with the FX and mix headwinds that we have had. And we have had some unfavorable price cost productivity as we have invested, as Dave was mentioning in some of the high cost businesses. And we are getting some really good benefit from the restructuring that we have started. The results were $1.08 of earnings per share or $1.16 adjusted for the restructuring and related, a 4% increase from last year. On Page 4, I want to share with you some of our highlights from the quarter. I really think these help us illustrate the fact that our strategy is working and our business model is succeeding despite the uneven and mixed end markets that we are facing. As the starting point, we had a strong balance sheet that we can continue to deploy capital where we wanted to. In the quarter, we bought two companies for $172 million, one you heard Gerben talk about at Investor Day, the outside plant opportunity that he has got with telcom companies as people are building out fiber to the home, a good growth opportunity for us and one we feel we are taking good advantage of. The more significant was the natural gas distribution company called Lyall. And you heard Rodd Ruland mention again at Investor Day the 72 million buildings that are served by natural gas and the 2 million miles of pipeline and the high degree of maintenance and repair that, that infrastructure requires to be a leading provider there, good investment, both those businesses growing very, very strongly and good investment and growth for us. Dave also mentioned the repurchase of shares. So, we completed about $200 million in the quarter. You remember we started after the reclass was voted and closed very, very late last week of last year. And also the first few weeks of April, we were able to continue to purchase. And so at this point, I am happy to say that we have completed the $250 million of share repurchases that we mentioned and we can talk more about that later. Second driver, I think of showing that our model is off to a good success here, is the restructuring activities that we are investing in. So on the first hand, we have talked about spending another $0.35 this year in restructuring related activity and about $0.08 of that we got done in the first quarter. The emphasis of the first quarters activities continue to be on the lighting group and continuing to get their cost structure as competitive as possible. And secondly, in the construction and energy group where harsh and hazardous business is located and continuing to make sure we have got our resources properly sized for that opportunity. We did talk a little bit about the shift towards facilities this year. And on the industrial side as I mentioned, the construction group needed to do some – make some staffing decisions to right size there. I think also the good news around restructuring is that we are experiencing savings from the initiatives that we implemented last year. And those are well in line with the expectations of the savings that we expect to earn throughout 2016. So I feel that we are both realizing on the savings from prior actions and continuing to implement value creating actions this year. And I think that’s we are improving our income statement greatly with those investments. Now the third bullet you will see on Page 4, we are also investing to grow. And you see the engineering and sales area, you heard Gerben Bakker of our power business talk about adding resources there to help him grow. And you also heard Kevin Poyck talk about the channels to market where he is investing in the lighting side, both on the agents and the big box distribution side to help grow that lighting business for us. So Page 5, we talk about our first quarter sales of $835 million as we said, a 3% growth rate. We break it down to the end markets. And it’s really been consistent with our recent quarters where you see dramatic mix differences between the red and the green on the page. So on the green side, you we continue to see strong growth out of our non-residential and commercial construction areas. Lighting businesses continued to benefit from that as well as the renovation and relight trends that exist within the non-residential space. The natural gas areas that we mentioned that Rodd has invested in growing strongly as well. Residential up significantly and you would see a little bit of a shift there where multifamily had been driving the growth and now we see the single family construction helping pull that forward. On the net downside, you see the red and industrial, our heavy industrial businesses that serve areas like steel mills are down significantly. And we continue to see significant headwinds in the oil area of our harsh and hazardous. So that end market story, it continues and we will talk about how that affects our segments in just a few minutes. You are going to see now, we have implemented a slightly new format here. We are portraying all the same information for you, but just trying to streamline the number of pages just a little bit and I hope you find it easier to follow. So on Page 6, we are starting with adjusted operating profit of $109 million or 13%. And at the gross margin level, our gross margins were down about 20 basis points driven by the mix and FX headwinds. On the S&A side, you see up 30 basis points to 18.4% of sales as the 3 points we added through acquisition are add to our S&A costs in that first bit of time we own the new businesses. Page 7, we have earnings per share you see of $1.16 adjusted, a 4% increase from the $1.12 of last year. We get there with comparable amount of total non-op expense where interest expense from new bond deal that we offered in the first quarter was offset by lower expenses from the FX side. On the tax line, you saw the “permanent implementation” of the R&D credit, which helped lower our effective tax rate. And you also see the impact of our share repurchases helping to drive that 4% growth in earnings per share. I am now going to switch the talking about the segments and start with Electrical. The first quarter, you see Electrical segment delivered $583 million of sales, a 2-point increase from the prior year. The acquisitions really helped drive that as 2 points of FX drag absorbed the 1 point of organic growth. And again the similar trends we have had were the lighting and commercial construction businesses within non-res and res showed solid growth where oil and core industrial had weak quarters on the volume side. And that continues to push a significant mix headwind into the Electrical segment and combined with FX created more than a point of drag there that you see ultimately affected the adjusted operating profit of 10.6%. Page 9, we have got the Power segment shown here with a really solid quarter from them, 5% growth $252 million of sales, 4 points coming from organic, acquisitions adding 2 points and FX a drag of 1 point. You heard Gerben Bakker at Investor Day talk about that telecom growth, significant driver and nice market adjacency for them. While the core distribution business, that last mile to the home was flat in the quarter, we saw a little bit of growth coming from the transmission and substation side. That 5% growth translated into 10% adjusted OP growth, $47 million or 18.6% of sales. They had a favorable price cost productivity and higher volumes and just a nice strong quarter coming from the Power segment. For cash flow, you will see that we had improved free cash flow generation to begin the year here as we had $43 million of free cash flow compared to $10 million last year. You see quite a lot of comparability between the drivers there. One of the most meaningful differences was a more favorable pension contribution in – between ‘15 and ‘16. Capital structure on Page 11, you will still see our A balance sheet listed here, still poised to be an investing balance sheet. You will see the new bond offering with the 2026 maturity date listed there and the change that, that causes on our debt to cap ratio and net debt to cap of 24%. Revolver still with – all available, with no outstandings, at $750 million available to us. So we put more cash to work as you can see here, but still a conservative balance sheet and one we hope to continue to support our investing activity. So that concluded my comments on the performance in the quarter. And I was going to hand it back to Dave to share his perspective on our outlook from here.

Okay. Bill thanks. Just first on the end markets on page 12, very similar, no changes at this point to our outlook for the end markets from although certainly based on their performance in the first quarter, some of those markets performed a little better and may indicate some upside, particularly on the residential and non-residential construction. Certainly also, happy I guess is maybe too strong a word to say that with a little moderation of improvement of oil prices, you have got a little moderation of the declines in the energy sectors. So that should bode well for the rest of the year and some improvement at least to get us to our outlook of 15% to 20% declines in that market. I think overall very simply, turning to Page 13, we are reaffirming our expectations for the full year. So, flat end markets, as we have indicated in those markets with the growth in construction-related markets, declines in oil and the core industrial markets. I mean, I think that flat when you look at the previous pie is plus or minus a point. So, we are just calling that flat. Hopefully, we have a bias to the upside, but at this point, that’s what we are looking at for the markets. That gives us our diluted EPS and the range continues to be $5.20 to $5.40 and that includes approximately $0.35 of restructuring and related costs. And free cash flow at least 90% of net income, slight change here. We are focusing putting more emphasis on working capital. And we are looking to improve from our original guidance. I think the team feels pretty confident about these expectations certainly given our good start to the year, 2% organic growth in the first quarter in a generally flat composite market, so on track with our full year expectation of outperforming those underlying end markets. Our first quarter acquisitions of Lyall and EMC should contribute 3% to our sales this year. And you demonstrate that acquisitions continue to be a key part of our growth strategy. Currency headwind will continue to be a headwind certainly if rates remain at the current levels although that will be less severe than it was last year. And operating margins, we are getting the incremental restructuring savings of about $0.30, consistent with what we have said prior and with our restructuring-related costs, good payback projects. And we believe that the unfavorable mix that we have been experiencing for some time should start to moderate throughout the year. And with the completed – completion of our previously announced share repurchase program, we have a lot of opportunities to deploy capital in our historic and varied ways whether it’s in investing in the business, dividends, acquisitions or additional share repurchase. So, we continue to position our business and cost structure for sustainable earnings growth focusing on the things that we can control and that’s really focusing on the cost side, cost actions. And if the market performs at least at the level that we are expecting, we feel really good about the prospects for the year. So with that, let me open it up to questions.

Thank you. [Operator Instructions] And your first question comes from the line of Rich Kwas from Wells Fargo Securities. Rich, your line is open.

Hi, everyone.

Hi, Rich.

Dave, on the outlook for resi, non-resi, you kept those at 3% to 5%, it looks like resi is coming in better at least here at the start of the year and it looks like the outlook seems that, that growth should sustain itself. So, that is starting to look conservative. Should we interpret that as just wait till we get into more of the meat of the season and then reevaluate and so there is potential conservatism in there? Is there something you are seeing that’s causing you greater concern?

Well, I mean, Rich, there is certainly admittedly maybe some conservatism in there. It’s early in the year. I think consistent with the view that I have expressed that I have heard from our customers, there are some mixed messages that come out. You saw within the last few days, new home sales dropped for the third month in a row, which – how does that play into the homebuilders’ permit starts, their activities. The good news on that is, since we are sort of at the tail end of that that would be something that wouldn’t really impact us until certainly later in the year, but that’s the kind of data that I look at and just I am a little bit cautious as we – until we get a little further into the year and see how some of that plays out. Hope that helps.

Yes. And then on non-res, what’s your – it seems like all the data points are stable to improving. Anything noteworthy there in terms of what you are seeing in terms of quoting activity particularly as it relates to your lighting and wiring business?

Nothing other than the – what continues to be the volatility in activity. You have good days and good weeks and bad days and bad weeks and so you have got to take enough of that. There is not enough of a consistent pattern that I would say everyday is up 10%, so I feel really good about that. You have got to – but certainly the first quarter was good. And the second quarter, I expect to be similar. But as you know, we also still have albeit less than historically still a dependence on a construction bias in the second and third quarter. So really it takes getting through the better part of the second quarter to start to get a reliable view as I would look at it.

Okay. And then does the guide still assume FX headwinds? I think I had $0.15 between translation and transaction for the year embedded in the outlook.

Yes, there is, Rich. Even though there is a little bit of weakening there, we are still – compared to the average level of last year we still have those kind of headwinds.

Okay, so no change. But if the dollar weakens, then there is potential that, that could soften a bit later in the year?

Yes, for sure. Yes.

Okay. And then last one, just on oil price, you kind of referenced around – a), what was harsh down in the quarter? And then, b), the 15% to 20%, is there any potential that – what would you characterize the potential that you come in at the low end of that range in terms of negative revenue growth year-over-year?

Yes. So Rich, the – for the quarter, we were down in the mid-20s against a still difficult compare last year. Even though oil prices were dropping, we had some sticky orders that shipped. And the way we see the year unfolding is the sequential dollars of harsh and hazardous start to flatten meaningfully. And so the compares on a VPY basis really start to shrink. And so the way we are guessing we are going to exit the year in sort of a single-digit down level, but it does feel like we are still in that range for the year right now.

Okay, that’s helpful. Thank you.

And your next question comes from the line of Christopher Glynn from Oppenheimer. Christopher, your line is open.

Yes, thanks. Good morning.

Good morning, Chris.

Hey, Dave. So, the markets that you listed as kind of potentially contributing to an indication of an improving outlook, is a pretty diverse group. Do you think – how would you handicap whether that’s restocking, a lack of destocking or actually maybe a bit of fundamental improvement just your kind of guts on those?

Yes. Look, I think if you started with the restocking question, I think it feels to us where we have data and we can see some point of sale, point of purchase kind of information. It doesn’t really feel like there has been a lot of restocking. It feels to us like inventory levels are at reasonable levels. I would say there has been some weather impact into your question. And so, they are right and maybe the construction season was kind of pulled forward perhaps a little bit. And so those are all kind of factors that we kind of keep considering and as Dave mentioned wanting to kind of get through a little bit more of the year to really see what’s happening on the orders side.

Okay, it makes sense. And then I just want to go into the electrical margin a little bit more. I think restructuring expense and payback were probably roughly offsetting and you lost 1.5 points of margin on slightly up organic. Just wanted to understand that, that differential because that 1.5 point difference is kind of apples-to-apples, maybe what was the price in the quarter for electrical in case I missed it? And just if you could quantify, at least qualitatively, the mix and price, cost impacts, that would help?

Yes, sure. So yes, so the mix and FX if you look at both of those impacts, that pretty much accounts for the entire decline. So the mix was the bigger piece of that and was just less than a point, but still a big impact. On the pricing, electrical’s pricing was line with how we exited the year in terms of headwind. So we haven’t seen that getting much worse, but still pretty strong level of pricing headwind.

Okay. And then Bill, lighting comments in March for opportunity to do 10% top line organic for the year in lighting, is that being validated?

Yes. So we did 10% in the first quarter.

Okay, thanks.

Your next question comes from the line of Jeffrey Sprague from Vertical Research Partners. Jeffrey, your line is open.

Hi, good morning. This is John on for Jeff. I just wanted to know if you can run through the lighting in a little more detail, what did kind of C&I do versus resi. And then any comment on the year-on-year change in margin, I think last quarter it was up in the order of magnitude of about 150 bps?

Yes. So between C&I and resi, C&I business was up high single-digits and the resi business was up double-digits to get us to 10% growth rate. And we are still seeing attractive margin expansion from the segment. And so we are enthusiastic that it looks like we are able to get good growth out of that business as well as put some emphasis on the cost side and restructure those costs to make sure that we get margins to come along with that growth.

Great. And then kind of thinking about the non-residential markets, do you have any color on what you are seeing in kind of commercial versus institutional, kind of drilling into healthcare versus educational verticals as well?

Yes. I would say of a commercial side, we have seen particular strength on the office front. And on the institutional side, I would say you call both of them both healthcare and education are kind of the standouts from that side.

Alright, great. Thank you very much.

Thanks. [Operator Instructions] Your next question comes from the line of Brent Thielman from D. A. Davidson. Brent, your line is open.

Hi, good morning.

Good morning Brent.

On the Power segment Bill, I think you talked in the past about kind of thinking pricing might follow the underlying inputs there, lower in steel and copper, do you still see that happening and I guess with some of those commodities moving higher as of late, do you think you can hold the line on pricing there?

Yes. I think that you are right to point that out. So as some of those commodities feel like maybe they have bottomed and we are starting to see inflation there. We have this challenge of seeing this price have to continue to chase the strong second half of ‘15 where we had real tailwind from those commodities and when can we convince our customers that there is inflation in front of us and kind of firm that price. I would say right now, they continue to have some bit of pricing power where it’s FX supported rather than just kind of general market. But I think you are right to point out kind of a soft pricing kind of the environment in general as commodities appear to be firming. And so that catches us at a time where we are going to have to be nimble with our customers to make sure that doesn’t – that dynamic doesn’t squeeze us.

Okay, thanks for that. And then on lighting, it looks like construction markets are certainly a tailwind, is there a way we can kind of think about what these restructuring and kind of self help initiatives might be doing to kind of that 10% underlying growth versus what the markets are giving you?

Yes. I think the restructuring is much more addressed at the common cost side where we have been taking out some inefficient facilities and putting our volume in lower cost sites. I think that’s really helping us on the cost side. I think on the growth side, you have got what the markets have, but then we have also been investing in some of the verticals, make sure we are going after things like healthcare vertical. And we are also investing in our agents on the front end of the business. And we are also investing in the resi channel. And so I think we are seeing volume paybacks from all of those investments on the top line. And I would say the restructuring and related is really attacking the cost structure.

Okay, great. And one more on Power if I could, it looks like the transmission market contributions maybe improved a little bit relative to I guess what you guys were saying last quarter, you kept 2016 outlook the same I think for the T&D markets, but have the underlying drivers between T&D changed and what’s that kind of mean for the Power segment from a margin perspective this year perhaps?

I think that the outlook is quite consistent with what we have seen. I think the T&D balance is where it’s been. The growth in that adjacency of the outside plant communications products has been notable. And I think the bigger driver on margins for Power would not be driven by any of those volume changes, but more by kind of the price-cost dynamic that we talked about on the last question. So certainly if there is organic growth, there will be good incrementals for the Power folks. But I also think being mindful of this price cost shift as commodities start to re-inflate, that’s where we have to be most mindful, I think.

Okay, thank you.

And you do have a follow-up question from the line of Rich Kwas from Wells Fargo Securities. Rich, Your line is open.

Yes. Just a quick follow-up on the restructuring spend, is that third still targeted for harsh and hazardous?

Yes. I think that it may come in slightly less than that, Rich. We still have good ideas that are coming up. And as we see if those volumes really do start to sequentially bottom and if we kind of find ourselves on the bottom of that, you – we may not have to dedicate as much of those dollars to that area as a full third. But it is a leading area of our attention and it has been getting a lot of those investment dollars for the reasons that you are citing.

And then Bill is the target still to get the cost structure to the $35, $35 to $40 a barrel of oil or doe s that mean when you say less than a third or potentially less than a third that that cost structure moves up a little bit closer to $40 or $45 or...

No...

Yes, I think we are – Rich, you are looking at assuming the cost structure would be more in the mid-$40s to $45 to $50. That’s really the issue if oil stabilizes in the mid-$40s and a little better. And quarters when we see the market then stabilize, we wouldn’t have to do quite as much, but we are certainly prepared to do more. We think we are still at a cost structure in the low to mid-50s so we still have a little more to do.

And then as the – if we get an increase in oil prices, is the margin associated with the business going to be as good as it was a few years ago when you are running hot?

We hope so.

Okay. So that’s the target to get back to your prior margin?

Yes. I don’t think that it was extraordinarily high in most of the business because of volume and absorption. I think it’s the nature of the product than the markets through the question – which is real question would be around pricing going forward.

I think on the way down, Rich, pricing behave reasonably well and constructively, such that our decrementals were kind of in line with what we expected. I think, as Dave said, if that – we have seen a lot more price deterioration on the way down. I think that would have made your question more challenging to answer in the affirmative. But we would say the value add of the product and the fact that the price and competitive dynamic remains kind of balanced should bode favorably for incrementals as the volume kind of comes back for us.

Okay, great. Thank you.

And there are no further questions at this time. I turn the call back over to Maria Lee.

Okay, great. Thanks. That concludes today’s call. We will be around all day for follow-up questions and thanks again for joining us.