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Hubbell Inc.  (NYSE:HUBB)
Q1 2019 Earnings Call
April 30, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, my name is Jerome, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Quarter 2019 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions) Thank you.

Now, it's my pleasure to hand the call over to your host, Ms. Maria Lee, Treasurer and Vice President, Investor Investor Relations.

The floor is yours.

Maria Ricciardone Lee -- Treasurer and Vice President, Corporate Strategy and Investor Relations

Great, thank you. Good morning everybody and thanks for joining us. I'm joined today by our Chairman, President and CEO, Dave Nord, and our Senior Vice President and CFO, Bill Sperry. Hubbell announced its first quarter results for 2019 this morning. The press release and earnings slide material 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 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.

David G. Nord -- Chairman, President and Chief Executive Officer

All right. Thanks Maria. Thanks everybody. Good morning. I know it's a busy, morning this morning. It appears that April 30th has become a very popular day from when we first decided to move. Our earnings out. (Technical Difficulty) and our ability to deliver differentiated results over the long term.

A couple of key items in the first quarter, let me talk to, and I'm on page three of the slide deck that we sent out. As mentioned, first and foremost , strong organic growth with end-market steady growing modestly. Most of our end markets were up in the quarter, with particular strength in the industrial gas distribution and Electrical T&D. Importantly and one of the key topics we talked about, certainly for the second half of last year was around pricing, and our pricing actions continue to gain traction and we've turned the corner on price cost, which was a net positive for us in the quarter, after being a headwind throughout all of 2018.

We're actively managing price across the portfolio, and remain focused on competing in areas where we can offer differentiated value and earn attractive returns. This is particularly true, in lighting, where we're starting to see the hard work Kevin and his team has put into his business over the last several years, and really is starting to pay off.

True overall, but especially in lighting. As we said in the past, we remain disciplined and not chasing after low margin business and are comfortable with the trade-off that entails on the volume side, and you know some of that is the result of the efforts that we started to put focus on last year in the breadth of our SKU offering and really taking a much more disciplined look into all of our -- and particularly our lower profitable SKUs and determining whether we can raise price, lower cost and if we couldn't do either of those to get the margins to an acceptable level, we would discontinue those products, and we have that as an ongoing effort.

And so, that is going to -- and some periods of time and some businesses and some product lines will affect our volumes, but all for the good long-term. Aclara an another highlight for the quarter, revenues are strong in the quarter, driven by continued strength in customer demand. Although the mix was a little less favorable than we had anticipated, which we'll talk about in more detail later.

Certainly, customer acceptance of the acquisition surpassed our expectations, one year into the deal and Aclara continues to fill the backlog and pipeline with new business. We expect this highly visible backlog and pipeline to drive some strong revenue and operating profit growth over the next several years, as we execute on our longer-term strategy.

The increased penetration large IOU customers of Aclara Technologies and solutions, and what we're -- we're certainly well positioned to do so. Free cash flow; on the cash flow front, we're off to a strong start to the year certainly much stronger than we typically are -- and much stronger than we were in the first quarter of last year, which puts us well on track to achieve our full-year commitments.

Our balance sheet's strong and we're well positioned to start putting it back to work through accretive bolt-on acquisitions. We'll talk a little bit more about that later. We've made additional progress on our previously announced footprint consolidation, and plan to ramp up our investment in the second and third quarter. As we laid out last quarter, this is a multi-year story, which we anticipate driving visible earnings growth and free cash flow generation, regardless of the macro environment. We're also continuing to work aggressively to improve our operational capabilities, talent and in processes. Still early days of the journey, but we expect continued improved productivity and working capital management to drive our ongoing improvement in both operating margins and free cash flow.

And lastly, we're reaffirming our full year expectations for adjusted earnings per share of $7.80 to $8.20 per share and free cash flow conversion of at least 110% of reported net income. We're confident we're on our way --- well on our way to a solid start with our results in the first quarter. And while there's still a lot of work to do in front of us, in terms of our footprint, we believe we're well positioned to execute and deliver on our commitments.

Just as I like to do, a couple of key accomplishments in the quarter, in different businesses on the construction and energy side, our continental business, which is our gas distribution, the core of our gas distribution business; they won an award from a major national customer for zero defects in the year and that's the first plastic supplier that they've had to ever accomplish this.

Our commercial industrial business, the wiring systems business, we've named vendor of the year since last year in four major customers. The lighting business was awarded Plant Engineering Magazine Product of the Year Awards for PowerHUBB and Peloton High Bay light fixture. And most notable Aclara was named the number two vendor by Navigant Research in field area network applications for electric utilities, a very significant recognition of the capabilities that they have built and the opportunities, and confirms what we see as the opportunities for that business in the market.

So, all a lot of good things going on. But, let me turn it over to Bill, and he could take you through some of the details on the financials for the quarter. Bill?

William Sperry -- Senior Vice President and Chief Financial Officer

Thanks Dave, good morning everybody. Thank you all for joining. Dave gave you the highlights from pages three and four, I'm going to start on page five, where we break-down our end market performance. And as you can see, the end markets are continuing to provide a constructive backdrop driving our financial performance.

Of the 10% sales growth to achieve over $1 billion of sales in the quarter, 5 points of that were organic, so nice strong organic performance, and if we disaggregate that into its individual end markets, just talk a little bit about non-res for a second. We got three lines of business with exposure in non-res, all of them seeing decent growth ranging between the low to mid single-digits.

I think consistent with third-party data, our momentum there, so positive story for non-res. Industrial had been a highlight for the quarter; heavy being a little bit stronger than light for us, and again consistent with some third-party data where see industrial production and manufactured goods and durable goods showing some good strength.

On the oil and gas side, we do see a little bit of mixed performance there. On the oil side, despite having constructive -- energy cost, in terms of price per barrel of oil, our exposure there being -- just to remind everybody, more in the upstream, we'd prefer offshore content versus onshore and that oil piece was sideways for the first quarter, and that's in contrast to the gas business, where we saw quite strong demand and strong shipments. We're seeing both maintenance as well as new conversions to gas on buildings driving demand there for last month, on the gas side.

Within electrical T&D, distribution a little bit stronger than transmission, but a lot of the order activity in quoting that we're seeing bodes well for transmission, distribution, as we look out as well. On the resi side, we think that we were impacted by some pre-buys in the first quarter there, and yet we see the resi market hanging in there in most little digits. So, kind of again across the board, very constructive end market, given us 5% organic growth in the first quarter.

Page six, I'll switch to talking about our profit performance and you can see adjusted operating income increased by 6% to $139 million, the margins at 12.8% compared unfavorably to last year by 40 basis points. And as Dave highlighted, we had very successful execution on the pricing front, that was quite a broad effort shared by across both segments Electrical and Power and across all the business units, and we believe that, that price overcame inflation that we experienced in the form of tariffs as well as material inflation and added about a half a point of margin to us.

And so, we're still seeing on the material side although not all (inaudible) but as a basket, we're still operating in that inflationary environment there. That half point of contribution though is absorbed by the impact from the acquisition contributing lower margins than average, and thus creating some headwind.

On the earnings per diluted share side, you see a 4% increase to $1.57 and that those earnings had to absorb a higher effective tax rate in the first quarter. We had in an ETR (ph) of about 24.7% in the quarter versus last year in the low 21% range. We do expect that to be in our guidance release around $23.5 million for the year. But that created a little bit of headwind for EPS -- the operating side stronger than EPS performance as indicated there.

Page seven, let's switch to breaking down that performance into our two segments and I will start with electrical. You can see, sales increased 2% to $630 million with FX creating a point of headwind. So organic growth at 3% through which price was very large component. And in terms of where the growth came from, business units that were helping to drive growth included gas area, industrial, particularly on the heavy side, then commercial construction areas, harsh & hazardous which is exposed to the oil market that he talked about, would have been example of lower gross area, and we think we're actually down so they were able to drag that number down a little bit.

When we looked at the operating there, impressive 11% increase on that sales growth, and a noteworthy 90 basis points of margin expansion to 11.8% a solid execution of pricing strategy across all three operating groups in the Electrical segment. We had solid execution on productivity front as Dave referred to, and we certainly have adopted, not wanting to chase volume for volume sake.

And as Dave highlighted, some of that SKU rationalization work, combined with some of that pricing work really helped drive very strong performance in electrical. We typically share with you lighting performance typically within the segment.

Lighting business grew at 2% there was balance between the resi and commercial and industrial haz business. Lighting too executed on price, which is quite good news for us. They covered both the tariffs and material inflation, they have a positive (inaudible) and we're able to expand margins as a solid contributions from lighting and then into the segment.

Page eight, we talk about the Power segment results and you'll see strong growth at 23%, increase in sales in the first quarter to $457 million. Aclara was the largest attributor to that growth. If you'll see, we refer to organic, as well as acquisitions. So, Aclara was an acquisition sort of one month, January as we closed on it on February 2, so January an incremental acquisition which she added drove 14% of the 23 and they also are a big distributor of the organic during February and March as Dave highlighted, customer acceptance there, a very strongly demand to the product group.

And so, as well, saw on the legacy side domestic distribution was a growth driver. But the legacy business also had some difficult compares from strong volume -- strong last year as well as some softness on the international side. On the performance front, in terms of operating income, we saw 2% growth to $65 million margins at 14.2% were down from last year and again, similar to the story for the company where we executed well, pricing strategy and we got price to be above tariffs as well as material inflation, but that was absorbed by including Aclara which contributed lower margins than the average and brought the margin down.

They -- Aclara has pronounced seasonality in the first quarter that they have done historically. They plan their year to include that -- the seasonality is stronger than other businesses of ours where weather impacts the installation productivity on the one side, as well as the timing of shipments, which impact mix. And so, we anticipate that will normalize during the balance of the year and that's the best seasonality we have that you see here.

Turning to page nine. Cash flows as Dave had highlighted in comparison year-over-year, 2018-2019 is exaggerated by some of the one-time outflows we experienced last year, resulting from the Aclara acquisition as well as some tax reform items. There was about $25 million, if you'd recall from last year of those one-time items. But, even adjusting for that, an impressive increase I think it's also constructed to think about how much on average, we tend to see of our annual cash flow in the first quarter and seasonally, the first quarter is always our lowest and so it's very positive for us to see this level at a much higher percentage of what we expect for full-year contribution.

So, it's to good to see a head on the free cash flow of fronts and despite driven by obviously the higher net income, but really what's helping is the working capital improvement and we're really working hard across work between the receivable and payables, but I think the area that's consuming the most effort on our part is on the inventory side and just continuing to drive days down there and continue to get good cash flow conversion.

So, certainly feel good about being on track to that 110% net income for the full year, and our team is working very hard to do better than that, and that certainly helps drive some of the capital structure considerations, which I'll ask Maria to share when you.

Maria Ricciardone Lee -- Treasurer and Vice President, Corporate Strategy and Investor Relations

Thanks Bill. Capital structure on page 10, our balance sheet remains strong. We ended Q1 with $205 million of cash and $50 million of commercial paper outstanding. During the quarter, we paid down amortization on our term loan, as well as funded the dividend, invested $23 million of CapEx and bought back $10 million worth of shares.

Our four tranches of senior notes have favorable rates, in the low-to-mid 3% range and have maturities that are well spread out and the next one in 2022. Our net debt-to-cap ratio is healthy at 42% and our leverage, in terms of gross debt-to-EBITDA is about 2.5 times. This is down from more than 3 times a year-ago, pro forma for the Aclara acquisition. On a net basis, debt-to-EBITDA is about 2 times.

We feel confident in our ability to continue managing our leverage, given our cash generation and repatriation potential. Importantly and consistent with our long-standing growth strategy, we believe our balance sheet is in solid shape to support full time acquisitions near term.

Now, I'll turn the call over to Dave to talk about the outlook.

David G. Nord -- Chairman, President and Chief Executive Officer

Our guys, thanks Maria. So, on page 11, talking about our end market outlook for the year. The dynamics there are pretty steady. We continue to see lower single-digit growth overall. The one change here is a little tweaking down of the oil and gas, originally we had said three to five, keep it down to two to four, mainly given the softness we saw, and particularly in oil in the first half, not on the gas side.

But again, we suspect some pickup in that in the second half so, and gas should be good for us and remaining strong throughout the year.

As we've talked about before, we do think there are some level of trade-off between price and volumes and so while we typically target outgrowing our markets. We're happy to grow in line -- at least near term at more attractive margins with the market. But, this is something we're going to continue to actively manage throughout the year, I'm very confident in our ability to manage this and deliver on our commitments

Turning to page 12, then on the outlook as I said, we are reaffirming our outlook for the full year. While we continue to expect net sales growth of 4% to 6% with end markets up low-single digit, acquisitions contributing 1 point and then price realization on top of that. Yeah, I think that growth rate is very much consistent with what I saw recently in a survey a of 200 electrical distributors.

I think their forecast for the year was about 6% growth overall, which would include price. My experience says that they tend to be more positively biased. So, I'd probably discount that by a point, but on the other side, we've got 200 electrical distributors who have -- really are on the ground and have a really good insight into what's happening. So we take that as the fairly reliable source obviously will depend on different markets and product offerings.

But, I think that all bodes well for, at least, the market for this year. We continue to expect -- adjusted EPS of $7.80 to $8.20 that excludes intangible amortization of $1 but it does include $0.40 of restructuring and related investments. We expect to ramp up our restructuring related investment in the second and third quarter. We laid out the framework for you last quarter and we're reiterating those targets.

We're well prepared to execute, and excited about the initiative. We've started some, we'll see more initiated in the second quarter and throughout the summer. We'll update you over the next several quarters as we ramp up and make -- take actions that we then could communicate.

And obviously on the cash flow front, we continue to expect free cash flow conversion of 110% of net income. Well on our way with the first quarter performance, and as Maria said, free cash flow is a critical and positive aspect of our story as we execute on our working capital initiatives and use that positive cash flow to reinvest in the business and reinvest in other businesses.

So, we put that all together on in the graph format on page 13. You see, we reaffirm our outlook with positive results year-over-year coming from operations, and I can't emphasize enough how strong we saw the operations in the first quarter, and the results that we put up overcame the less than favorable mix that we saw in Aclara as well as the tax headwind that we saw in the first quarter. So really strong operating performance from the broad team.

And so, we'll manage through our footprint, our tax and expect to deliver consistently with what we've said. so far this year.

So with that, maybe I'll open it up to Q&A.

Questions and Answers:

Operator

(Operator Instructions) Your first question comes from the line of Nigel Coe from Wolfe Research. Nigel, your line is now open.

Michael -- Wolfe Research -- Analyst

Hey guys, this is actually Michael (ph) on for Nigel. How are you?

David G. Nord -- Chairman, President and Chief Executive Officer

Hey, Michael.

Michael -- Wolfe Research -- Analyst

Hey. Could you just walk through how you guys are seeing the cadence for price cost, we're kind of assuming that 1Q was the toughest quarter, how do you see the remainder of the year?

William Sperry -- Senior Vice President and Chief Financial Officer

Yeah, I think, Michael we anticipate that we need to continue to pull price, and we had been pulling price all through last year, so that price that you see actually, as you get to the second half, you end up passing some of the price increases that we'd implemented last year. On the second half of the equation though, on the material side, particularly steel, which is a large raw material of ours, you'll start to see potentially some favorability, which creates I think the effect, you're saying where you can end up with some contribution from that as the year progresses.

Michael -- Wolfe Research -- Analyst

Gotcha. That's helpful. And then just one more, on the lighting spend does this change your view at all on Hubble portfolio, in its totality?

William Sperry -- Senior Vice President and Chief Financial Officer

Well look, we've been investing in lighting, as David mentioned, over the last several years. We've been taking some of their fixed costs out -- been reorganizing the business, we've been investing in the front end, on the agent side, and it's good to see those investments paying off right now, for sure.

Michael -- Wolfe Research -- Analyst

Definitely. All right, I'll leave it there. Thanks guys.

Operator

Your next question comes from the line is Christopher Glynn from Oppenheimer. Christopher, your line is now open.

Christopher Glynn -- Oppenheimer -- Analyst

Thank you. Good morning. Was wondering about the comment of investing in the agency side of lighting, can you talk a little bit about specifically what's going on there?

William Sperry -- Senior Vice President and Chief Financial Officer

No, just over the last couple of years we had added and strengthened our representation on the front end in specific markets, for example, the Southeast and the Midwest and not on the West Coast, Chris. So those are -- that's not new news, that's just yields on investments we've made over the last couple of years.

David G. Nord -- Chairman, President and Chief Executive Officer

But I think, importantly Chris that's something that Kevin and his team focused on one of the reasons that contributed to our under representation was our inability to actually perform at a level that good agents were expecting. So, the first was to get the operations in line and performing with the right product mix and the right service levels, which then made it easier for us to be able to convince good agents to move over to a good company with Hubbell Lighting.

Christopher Glynn -- Oppenheimer -- Analyst

Sounds good. And on Aclara, could you talk about the growth there, a little bit? I'm curious about -- obviously your win rate is good, but curious about actual competitive displacements that you're seeing and share gain in that respect from Aclara, and how much of that is because Hubbell now owns them?

William Sperry -- Senior Vice President and Chief Financial Officer

Yeah. I think it's a little hard for us to attribute that other than anecdotally, we've gotten a lot of really positive feedback from our core customers that they're happy -- that it's in our portfolio with somebody who they value and trust relationship with us, and the quality of the products we provide and standing behind our products. As you think there's some benefits there, but I think the -- and I'm not sure that there is displacement that we see specifically.

I do think that the thing will be good for us, is to get more communications -- higher margin communication products into that mix, Chris and I think that combines the two-half of your question where our traditional customers and those sell cycles are over a couple of years right, it's not over a couple of months or quarters. And that's what we're looking forward to is, is the communications side of that gross catching up to the other side.

David G. Nord -- Chairman, President and Chief Executive Officer

Yeah, Chris, I think one of the things that Bill just mentioned is on big projects, the sell cycle is a little longer, but I can tell you that there are examples, at a smaller level, that you wouldn't notice of where there has been benefit on the legacy Hubbell Power Systems in Aclara customers that we historically hadn't penetrated and vice-versa, which is exactly the premise of the strategy for the acquisition, while bringing this technology but also bringing a comparable market presence that we can build off of. So, I think there's a lot of good things going on, but the big hits are going to come over time.

William Sperry -- Senior Vice President and Chief Financial Officer

And that adds a benefit Chris on customer meetings, where we have both Aclara senior management with Hubbell Power Systems senior management and as Dave saying, that's a rare our powerful meeting that's different meetings that we used to and either have. So, I think there's a big complementary nature to that, that our customer base is favorably reacting to.

Christopher Glynn -- Oppenheimer -- Analyst

Thanks for that. And last one, sounds like price cost favorability might widen a little bit, the steel factor there. You also have restructuring was a little lower in the first quarter that's going to step up should those two as we think about the first quarter base -- are those two kind of offsetting going forward or is it more of the net restructuring kind of lift up?

William Sperry -- Senior Vice President and Chief Financial Officer

I think it's the net restructuring that starts to pickup, Chris.

Christopher Glynn -- Oppenheimer -- Analyst

Got it, OK. Thanks for the color.

William Sperry -- Senior Vice President and Chief Financial Officer

Okay.

Operator

(Operator Instructions) Your next question comes from the line of Deepa Raghavan from Wells Fargo. Deepa, your line is now open.

Deepa Raghavan -- Wells Fargo -- Analyst

Good morning all. Good Q1. It looks like it was better than expectations, but the full year guidance was maintained though. Just a question on that, how much of the full year guide being maintained is largely a function of historically maintaining guidance in April versus some of the incremental weakness you called out versus your prior expectations example oil and gas, restructuring steps up, but generally if you can help me why the guide remains unchanged and some puts and takes. That's helpful. And then I have a follow-up.

David G. Nord -- Chairman, President and Chief Executive Officer

I'll give you the overall and Bill can weigh in on any specific puts and takes. But clearly, if you go back in history, we just don't change early in the year, because remember we're largely a short cycle business. So, our visibility is somewhat limited. So, we're relying on market expectations, and so we're always cautious going coming out of the first quarter. Certainly, our results in the first quarter, gives me confidence that our guide is good, and as opposed to some periods in the past where we might not have had that level of confidence. But, it would be premature to change anything specifically (inaudible) is a major mover in there, which we don't have.

William Sperry -- Senior Vice President and Chief Financial Officer

Yeah, I think Deepa, we were looking for what we learned in the first quarter. I think there was a couple of important learnings, one was the market strength, hung in there. And two, that our pricing strategy had some traction. So, I think that those things underlined some of Dave's confidence that feels good to be off to good start.

Deepa Raghavan -- Wells Fargo -- Analyst

Got it. Can you talk about how the quarter played out by month, if you can? And specifically, if you can address the momentum exiting the quarter and into April generally, how do you feel about start to the current quarter that would be very helpful, thank you.

William Sperry -- Senior Vice President and Chief Financial Officer

I'm not sure there is much significance to monthly analysis as the year went by Deepa, I think January, it can be --a distorted month for us. There was probably some pull forward in some of the tariff sensitive areas in the fourth quarter that causes some softness in January that can also be affected by customer incentive. So I think, as we analyze our results by month, we didn't draw much momentum conclusions month to month, but rather looked at the quarter as being a good contributor. We spent some time thinking about what the first quarter usually contributes from a sales OP and earnings perspective for the year, and it felt good to have reasonable comparisons there that were not depending on the back-end load or anything like that.

Deepa Raghavan -- Wells Fargo -- Analyst

So, you feel good about April so far, that's the read for me, right?

David G. Nord -- Chairman, President and Chief Executive Officer

Yeah, I think what we've seen is consistent with our outlook. Yes.

Deepa Raghavan -- Wells Fargo -- Analyst

Thank you very much. I'll pass it on.

Operator

(Operator Instructions) At this time there are no question on queue. Presenters you may continue.

Maria Ricciardone Lee -- Treasurer and Vice President, Corporate Strategy and Investor Relations

Okay, great. Thanks everyone for joining, this concludes today's call. Dan, and I will be available, following the call for questions. So thanks again for joining us.

Operator

Thank you, and that concludes first quarter 2019 results conference call. You may now disconnect.

Duration: 38 minutes

Call participants:

Maria Ricciardone Lee -- Treasurer and Vice President, Corporate Strategy and Investor Relations

David G. Nord -- Chairman, President and Chief Executive Officer

William Sperry -- Senior Vice President and Chief Financial Officer

Michael -- Wolfe Research -- Analyst

Christopher Glynn -- Oppenheimer -- Analyst

Deepa Raghavan -- Wells Fargo -- Analyst

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