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Hubbell Inc. (NYSE:HUBB)
Q1 2020 Earnings Call
Apr 30, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to First Quarter 2020 Results Call. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Mr. Dan Innamorato. Sir, please go ahead.

Dan Innamorato -- Director of Investor Relations

Thanks, operator. Good morning, everyone, and thank you for joining us. I'm joined today by our Chairman and CEO, Dave Nord; our President and Chief Operating Officer, Gerben Bakker; and our Executive Vice President and CFO, Bill Sperry. Hubbell announced its first quarter results for 2020 this morning. The press release and slides are posted to the Investors section of our website. Please note that our comments this morning may include statements related to the expected future results of our company and are 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 considered 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 slides.

Now let me turn the call over to Dave.

David G. Nord -- Chairman and Chief Executive Officer

Okay. Thanks, Dan. Good morning, everyone, and thanks for joining us. Lot going on. We appreciate everyone taking the time to join us today in the midst of all that's going on. Most importantly, we hope that you and your families are staying safe and healthy. So I'm going to start my comments on slide three with a brief summary of the quarter. You can see from our press release, it was another solid quarter of operating results and free cash flow generation for Hubbell. We met with you less than two months ago now. At our Investor Day, we laid out our investment thesis based on our operational transformation, our unique and differentiated utility solutions platform and importantly, our ability to generate and deploy free cash flow. A lot has obviously changed across the world and the economy over these two short months. But fundamentally, those pillars are still intact. They each drove performance in the first quarter, and we believe they will help sustain us through what we expect to be very challenging, certainly near term environment but importantly, allow us to emerge out of this period as a fundamentally stronger company.

Before we get into the details of the quarter and our forward look, I want to provide you all with a comprehensive update on how we currently view the impact of COVID-19 pandemic, and importantly, our action plans and countermeasures. So if you turn to page four, we've tried to break out for you the major categories or ways in which the situation has impacted us as well as our strategic approach to each issue and the specific actions we're taking. Starting on the left, first and foremost, is the health and safety of our employees. Protecting our people and ensuring the health and safety of them and their families continues to be our number one priority during these difficult times. For our office workers, we've implemented mandatory work from home programs for all employees with the with the ability to do so. We're extremely proud of our employees who have proven to be very flexible and adaptable through this process, maintaining high levels of productivity while juggling other life priorities.

In our factories, importantly unfortunately, we don't always have the same levels of flexibility as we manufacture essential products, which are necessary for the safety and reliability of critical infrastructure. Now continuing to provide our customers with these critical products is more important now than ever and underscores Hubbell's value to our customers and communities. However, we need to ensure that we continue to manufacture these products in a way that minimizes risk to our manufacturing employees. And as such, we implemented a series of safety protocols in our plants and warehouses to enhance cleaning and sanitizing processes, staggering our shifts, introducing social distancing measures. We can't emphasize enough how proud we are of our manufacturing workers for the way they've responded to these challenges and continue to come in to work every day to produce these essential products. To that end, we're providing our hourly employees with additional appreciation pay for the second quarter.

Second is the impact on our customers, and we're focused on continuing to serve our customers with the same level of quality and service they've come to expect over decades from Hubbell. However, this pandemic does create some disruptions in our ability to do so as we saw several temporary facility closures in the first quarter and expect to see continuing impacts going forward. It's been a challenging area for us to navigate as there are often different local orders or site-specific challenges to work our way through. While we've had a thorough review process for any site closures and continue to develop contingency plans that optimize our production capacity across Hubbell under a wide range of scenarios. And certainly, we anticipate the economic impacts of this pandemic will have a significant impact on our end markets. And we'll talk you through that a bit later. Now aside from the facility impacts, we also see operational challenges from the lower productivity and absorption headwinds from what we anticipate will be significantly lower volumes running through our factories, at least in the second quarter.

To that end, we've announced some specific actions around compensation to help offset, including significant reductions across our Board, our executive team and our salaried workforce. We're aggressively cutting discretionary spending across the enterprise. And at this stage, while it's difficult to accurately forecast the magnitude and duration of the downturn in our end markets, we do think the second quarter will be the worst and so we think these actions will allow us to mitigate some of that near-term downside, while maintaining our flexibility long-term when markets start to recover. We'll continue to evaluate our cost structure to determine what actions we may need to take in the future. Finally, in times like these, cash and liquidity are paramount. As you know, and as Bill will walk you through later, free cash flow performance has been a highlight of Hubbell's performance recently, and this cash generation capability puts us in a strong liquidity position. We've also taken various cash preservation actions, including cutting discretionary capex and significantly reducing our raw material spend in anticipation of lower volumes.

We also made the decision with an abundance of caution to draw down $225 million from our revolving credit facilities as a proactive measure to further boost our liquidity position. While the impact of this pandemic is significant, I'm confident the strength of Hubbell's people, products and brands, along with the aggressive actions we are taking to preserve long-term value will continue to position us for success well into the future. I'll turn to slide five, give you some of the financial highlights from the quarter. First, flat sales in the quarter growth with continued strength in Utility Solutions, offsetting softness in Electrical. Relative to our prior expectations, Electrical and Aclara were about in line, while Power Systems achieved stronger growth. We talked to you at Investor Day about our bolt-on acquisition playbook and the two acquisitions we announced last quarter in our Power Systems and Burndy businesses, are great examples of that. They're performing well and fully offsetting the impact of our Haefely divestiture on a sales basis. Operating margins were down slightly, considering some of the headwinds that we've seen, but very pleased with that.

Seeing strong returns on our investment and footprint optimization, which is generating attractive savings. We continue to achieve positive price/cost as we start to lap prior year cost comparisons but are realizing benefits from a lower commodity cost. These positives offset a couple of headwinds, which each cost us about $0.10 of earnings in the quarter. The first being the dynamic we walked you through last quarter on our previously planned timing of long-term incentive compensation grants, which were shifted from the fourth quarter of last year to first quarter of this year. And then we also had some headwinds from some of the operational disruptions related to COVID-19. And we'll give you some more color on that when Gerben provides more color on the segments. Below the line, we picked up a few pennies from interest and other expense as expected. And finally, another quarter of really strong free cash flow generation as we continue to execute on our working capital initiatives. Bill will walk you through our liquidity position in more detail later, but obviously, an encouraging 1Q result, which supports our liquidity position heading into a period of significant uncertainty. If you turn to slide six, here you see some of that information in graph format. We're happy that even with flat sales, as I mentioned, our headwinds we faced we're able to keep our operating profit flat, grow EPS modestly and grow our free cash flow significantly.

With that, I'll turn it over to Gerben to walk you through the results of our two operating segments. And then Bill can walk you through our outlook considerations and framework. Gerben?

Gerben W. Bakker -- President and Chief Operating Officer

Good. Thank you, Dave, and good morning, everyone. Turning to page seven and the Electrical segment first quarter result. We see that the end markets continue to be soft in the quarter, with organic down 3% and the net impact of M&A subtracting another point as our recent acquisition of Connector Products was more than offset by the divestiture of our Haefely high-voltage test business, which you recall we sold last August. C&I Lighting and heavy industrial remained weak as both declined double digits and this is really a continuation of what we saw and communicated last quarter. This was partially offset, however, by pockets of strength in our residential and light industrial verticals, particularly data centers and renewable markets in our connectors and grounding business. Margins were down 120 basis points compared to last year. And as Dave mentioned earlier, we absorbed the impact of a shift in timing of our long-term incentive compensation grant, which cost us $0.10 in the quarter split across both segments.

We also faced headwinds in the quarter from operational disruptions related to COVID-19 with temporary closures of several manufacturing facilities. And to provide you some further insight there, most of our closures were as a result of regulatory mandates and were temporary in nature, with about 2/3 of it international. Our largest manufacturing base, which is in the U.S., has seen more minor operational disruptions mostly related to proactive pauses for suspected or confirmed COVID cases and generally higher absenteeism that we have seen in our factories. While we've been able to continue to serve our customers' need during these times, these disruptions cost us $0.10 in the quarter across Hubbell, and the majority of that impact was in our Electrical segment in the first quarter. Offsetting these headwinds was continued tailwind from price cost particularly from lower commodity cost as we started to see a lap of the impact of price from prior year increases. We also saw the benefits of the investment we've been making in footprint optimization with nice savings coming through in the quarter.

Later in the presentation, we will walk you through how we are managing our decremental margins in the 30% range through this challenging environment. And you can see evidence of that here. When you back out the onetime impact of our LTI timing, we're able to manage to be lower 30% decremental in the first quarter. We certainly anticipate continued COVID-19 related challenges in the second quarter, but we're also implementing accelerated cost actions to mitigate this, as Dave highlighted with some examples earlier. Turning to page eight. You see that we had another strong quarter of performance in our Utility Solutions segment, with organic growth up 5% and the recent acquisition of Cantega contributing another 1.5%. Our Power Systems business posted another strong quarter of growth, up double digits as our utility customers continue to invest to upgrade and modernize an aging grid. We are very well positioned for the long-term here with a differentiated portfolio that is capitalizing on strong markets with unique solutions that our customers value.

Our Aclara business was down mid-single digits as expected in the quarter as we lapped the difficult prior year comparison. You recall the 20% growth last quarter. We also saw disruptions in the quarter as a large smart meter installation deployment was temporarily paused due to COVID-19. While our customers remain eager to upgrade their grid infrastructure with Aclara Technologies, the nature of our installation business, which often requires us to have first in person access to home and buildings makes executing on these projects more challenging during this pandemic. So we expect to see some project delays on certain of these deployments going into the second quarter. Margins were up 110 basis points, and operating profit was up mid-teens in the quarter driven primarily by the strong volumes and continued favorability on price cost. We also benefited from some favorable mix in the quarter, given that our Power Systems business is higher-margin than Aclara and realized stronger growth. In the second quarter, we expect to face some temporary capacity challenges as we continue to manage through the COVID-19 impact, but overall, another very strong quarter for our Utility business. At our Investor Day in March, we highlighted how this business offers a unique and differentiated set of products offering and solution in attractive market space, and the results here continue to prove that out.

So let me now turn it over to Bill.

William R. Sperry -- Executive Vice President, Chief Financial Officer and Treasurer

Thanks, Gerb. Good morning, everybody. I hope you're being safe and well. page nine, we're talking about cash flow. Dave highlighted in his remarks, you all remember over the last couple of years, the high degree of focus we've been placing on cash flow. We had set the $0.5 billion target that we reached a year early. And so it's gratifying in 2020, during the first quarter to get off to a very good start. You can see an increase of 65% to $91 million in free cash flow. The drivers of the improvement in performance start with income but got important contributions from working capital management, most notably with inventories. Also capex later than last year as we're preserving cash. And notably, net income is burdened by some noncash charges, including the stock-based comp that Dave mentioned that was put in the first quarter of this year, not in last year. So very strong cash flow, a topic that we're managing on a daily basis with tools and working capital management.

But the good cash flow really helps drive a strong liquidity position, which you see on the right-hand of the page. We finished the quarter with $300 million of cash. We typically rely for our short-term fixed rate sorry, floating rate debt on commercial paper markets to fund ourselves. During this quarter, we essentially switched our reliance on that market and went to our revolver instead where we've got a really strong bank group, very supportive bank group. And we tapped our $750 million revolver for $225 million, which leaves us $525 million available to complement the $300 million of cash. I think interestingly, of note, the CP market is improving. We have access to it. We've been able to tap it. And we anticipate reverting back to that market and paying off the revolver and leaving that fully loaded at $750 million. I also wanted to comment on the long-term debt portion of the capital structure from our bonds. Next maturity is 2022. So really nothing urgent about that in terms of refinancings although it is interesting to note that the bond market has been quite supportive of industrial issuers with attractive quite attractive rates. So ultimately, this cash flow and our liquidity position drives and informs our capital allocation strategy.

And then let me just run through those capital allocation priorities. A lot of you will have noticed, last week, we announced the maintenance of our dividend for the second quarter of 2020. On the capex front, we're anticipating a 20% reduction this year. We started that already in the first quarter, very similar to how we approached 2009, focusing only on really mandatory capex. Those marginal projects that won't get done still have a nice IRR, so we want to get to them. We'll just make sure liquidity is in good shape before we do. On the share repurchase front, we would typically buy $40 million of shares, and we would typically and that would be to offset dilution. We typically would spread that over four quarters, and we effectively did all of that in the first quarter given the attractive prices to buy stock in. So we've got that effectively done in Q1. And that leaves acquisitions as the fourth lever within capital allocation. And it's worth noting Gerben talked about Cantega, and he talked about reminded everybody that we sold the high-voltage business.

So there was some good portfolio management that you saw acting in the quarter where the low growth, low margin, high-voltage business was had sold off. We took those proceeds that allowed us to buy connectors business in the Electrical segment and Cantega that Gerben referred to, a fireproof components business for the Power Utility segment. So we added high-growth and high margin. That was positive changes to the portfolio that we saw in the quarter. As far as new investments, we did have a couple that I might have expected, a couple of acquisition candidates that we may have been closing on in the near-term that through COVID, I think, get pushed out. And at the same time and I think it's a little bit difficult to get buyers and sellers to see eye to eye on value right now. But as we did in '09, at the time of some distress by many, we were able to buy Burndy, which was at that time in '09, Hubbell's largest investment. And so we also think that in the coming months and quarters, there'll be other attractive opportunities for us as well. So it's important to us to have this balance sheet in great shape to be able to be an active investor. So on page 10, I'm going to shift to our outlook.

And you all saw our press release earlier this month, which suspended guidance. So we're going to conduct this in a slightly different way, which is really give you how we're looking at things in the future in three different buckets. First is demand, second is supply, and then the third, we'll give you the analytic framework that we're using as to how we think our financial performance will proceed during the course of the year. So on page 11, we've got the end market demand picture laid out. And we'll really start with electrical T&D during the first quarter, but also through March, double-digit order and demand growth. So very healthy, not different than the '09 experience, where the utilities really kept buying for a couple of quarters after much of the shock that was experienced in September of '08. As Gerben was commenting on the Aclara side and the meter smart meters and AMI infrastructure, difficult to get deployments when you need access to a residence or a building. And so even though there's demand there, difficult to get the products installed and that impairs growth. On the nonres side, really seeing in the order of magnitude in April, orders down 20%.

And on the industrial side, also seeing orders down in the magnitude of 20%. There's some bright spots in data centers and elsewhere. But broadly speaking, we're seeing slowdown there. Resi, which had a good first quarter. We saw inflect downward now in orders in April, and that also in the down 20% range. And the energy businesses, which are coming off of low basis here, but also seeing declines. And so the net result of how we're seeing the markets through April demand and buttressed as well by third-party analysis, but more importantly, by customer input and during this COVID, we're only spending a lot of time with our customers. Not face-to-face, but a lot more time with them over the phone and in teleconference, and we think we've this outlook and what we're seeing is aligned with what they're seeing. And so you got a net-net bifurcated demand picture where the Electrical T&D part of Utility has double-digit growth. Electrical, much more in the down 20% range. It's also worth noting, I think, that this inflection was dramatic as we transitioned from March to April and has been for such a dramatic inflection, it's been pretty stable at that 20% level.

So we haven't seen a dramatic amount of variation, and that feels really for us like the bottom of that U that we now are experiencing. So the second part of our outlook after demand is what's happening on the supply side. You heard from Dave that we had some facility disruptions in the first quarter, a little bit in China, a little bit in Puerto Rico, a little bit in the U.K., that all ended up costing us about $0.10 of impact, both the volume and cost, but those facilities that were disrupted are largely back up and running strong. I would say that most of our facilities in general being evaluated by local authorities have been deemed to be essential. And so the exceptions are where something happens. And most recently now, just over the last week, we have seen in Mexico along border towns, the Department of Labor there making recommendations to close capacity. We've complied there. We serve both segments out of Mexico. I think the area where we see the most potential impact is on the Power Systems side. But there's already signs of progress with the authorities, and we've got ability to mitigate some of that disruption. So just more to manage through.

And on the cost side, you certainly lose absorption as the volume gets disrupted, but you also have inefficiencies with shift changes and training and extra expenses, one should opening and closing facilities. So on page 12, we sort of net out to our framework of the demand and supply. So the second quarter, we're assuming Electrical continues at this down 20% pace. For Utility, we think Power, we are expecting to decline in the low single digits with some of the capacity constraints, Aclara in more like double-digit declines as they can't get the deployments out. So Utility, much better off than Electrical. On the margin side, we're able to take pretty good cost action to offset some of the manufacturing output headwinds that come naturally with lower volumes. Most importantly, on the people cost side, you heard the salary actions from our every from our Board, our senior executives and our salaried workforce given us about $20 million of savings. Some of the restructuring work that we had implemented last year, given us $5 million of savings in the second quarter. We're going to have positive price/cost. And so the margin result of that, we're going to manage to a 30% decremental margin with all of those cost actions.

And as we think about the balance of the year, the second half of the year, we think a lot of those cost actions can be repeated, and we can continue to offset any headwinds. So should those volumes persist, we'd be able to continue to manage to a 30% decremental, but we're also, with these actions poised as spending returns, to be able to get our fair share of the volume. And on the cash side, we'll continue to manage, and we talked about cash flow before to a with capex reductions and tight monitoring of working capital. And as Dave said, making sure to curtail purchasing of incoming materials. So that's the way we've framed up our financial performance for the balance of the year in the absence of formal EPS guidance.

And with that, I would turn things back to Dave. Dave, you're on mute. Just.

David G. Nord -- Chairman and Chief Executive Officer

Got it. Sorry. Let me just wrap up here with some thoughts on why we have the confidence in getting through this successfully. We refer to it as a recession playbook, but it's probably broader than that. It's managing through uncertainty. But I think there's three key issues here that I would talk to. One is the less cyclical nature of our Power business. We are selling critical components to utilities. Back in the '08, '09 recession, this business took longer to experience weakness and spent a shorter period of time at the trough relative to the shorter-cycle Electrical business. From a market perspective, we think we're certainly in a similar position currently with the visibility to continue strong customer demand in the utility space. Based on the ongoing recognition among our Utility customers of the need to upgrade the grid, although capacity challenges for us are something that we will work through. The second is our margins that historically tended to correlate with price/cost performance given our significant raw material buy. And recessionary environments tend to lead the deflation in the commodities.

In the '08, '09 period, we're able to hold margins relatively steady while absorbing significant volume declines due to the big drop-off in commodity prices. Currently, we see some potential for commodity tailwind, but not at this point at the level seen back then. So that's something we're monitoring closely. But we also have other margin drivers within our control, particularly around our footprint optimization savings and our discretionary cost actions. Finally, our free cash flow performance tend to significantly outperform net income as we aggressively manage inventories and capex. We note that during the last recession, our strong liquidity supported the acquisition of Burndy, which those of you who were here know that, that was completed at the depth of the recession and was at that time, at $360 million, the largest acquisition in our history. It also turned out to be one of the most successful in our history. So we feel well positioned currently under a wide range of scenarios. And while we're certainly not contemplating anything of that magnitude near-term, we think we can manage through this period successfully and eventually take advantage of some of the opportunities that may emerge down the line. At the end of the day, what has gotten us to where we are even in the early stages of navigating through this is the experienced team.

Most of our senior team and even levels down, have been through this before. While this has got some differences, some of the issues are the same. Some of the key issues are being conservative in your outlook and getting ahead of the actions necessary. That's why even in the first quarter, that was really pretty much humming along for most of the first quarter. Having to be able to say, we think the second quarter is going to be down, and we need to take the actions and plan for those actions and put those in place to start the second quarter was not necessarily an easy message to deliver to the organization when they were cranking to get stuff out the door. But that's the kind of stuff that we have to do. That's the kind of stuff that we have done. We've learned from history. And that's the stuff that we're going to continue to do. So I'm very confident that this team is going to execute successfully through this period.

So with that, let me open it up to questions.

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from the line of Jeff Sprague of Vertical Horizon or Vertical Research, rather. Your line is open.

Jeff Sprague -- Vertical Research Partners -- Analyst

Thank you. Good morning, everyone.

Gerben W. Bakker -- President and Chief Operating Officer

Good morning.

Jeff Sprague -- Vertical Research Partners -- Analyst

Just a couple from me. First, on the utility side, not surprised, but, of course, pleased to see that hanging in. Although we are hearing some rumblings of pressure on rate cases and the like in the Utility sector. Regulators, obviously, sensitive to people's electricity bills in a time of recession. Are you seeing or feeling that in any way in your business? And you did mention kind of a natural lag anyhow. So obviously, the business will slow down. But just how do you see that kind of playing out over the balance of the year?

Gerben W. Bakker -- President and Chief Operating Officer

Thanks, Jeff. This is Gerb, and I hope you're doing well. Just a couple of comments on the utility side of the business and starting with what we've talked about, which is the need to invest in this critical infrastructure and in this aged infrastructure. So there's still an underlying need to invest here. And that certainly is imbalance or in the reality of rate cases, I think, to a certain extent, utility companies are seeing their demand down as well. So they too are challenged during this time like many others. We haven't seen it in our business. Our order rates have continued to hold up nicely in the first quarter and have continued in the first quarter. And have continued here in April with a double-digit growth. So we haven't seen it. It tends to lag for us.

So certainly, as we look later into the year, we do expect and plan for that to decline a little bit. But what we've also seen in past downturns is that there may be stimulus to continue to invest in this infrastructure. Particularly, we saw that, and we expect to perhaps see that again on the renewable side. And as you know, when there's investment there, we benefit there well with our whole transmission portfolio. And we see strength there as well right now. So we're optimistic about this long term, certainly. We do expect on the second half of this year, a slowdown from what we're currently seeing. But as Dave said, it's one that will probably go through this period better than our Electrical segment.

Jeff Sprague -- Vertical Research Partners -- Analyst

Yes, makes sense. And then kind of unrelated, but your revenue declines seem pretty much in line with what the market is doing. In other words, it doesn't appear that you're subject to or experiencing any significant inventory liquidations in the channel. Perhaps I'm wrong on that. But what are you seeing in the channel? Is there kind of a liquidation hit that you're feeling here in April? And do you see that kind of stabilizing as you move forward a little bit further?

William R. Sperry -- Executive Vice President, Chief Financial Officer and Treasurer

Yes. Jeff, as we're looking at the point-of-sale data and talking to our customers, it feels like they have been during the very late part of March and April, managing to a couple of months' worth of inventory. And so I think that does feel in line rather than we're subject to some big swing coming up either way.

Jeff Sprague -- Vertical Research Partners -- Analyst

Great, thanks.

William R. Sperry -- Executive Vice President, Chief Financial Officer and Treasurer

Okay.

Operator

Your next question comes from the line of Steve Tusa from JP Morgan. Your line is open.

Steve Tusa -- JP Morgan -- Analyst

Hey guys, good morning.

William R. Sperry -- Executive Vice President, Chief Financial Officer and Treasurer

Good morning.

Steve Tusa -- JP Morgan -- Analyst

Thanks for all the detail on the outlook. It's very helpful. Some companies aren't giving a lot. You guys are, I think, doing a good job there. So I appreciate that. On the free cash, looking back at '08, '09, I mean, you guys generated just on the cash flow statement, something in the range of like 5% to 6% of sales and kind of working capital benefits, something in that range, I think, depending on how you define working capital. Is this different than that? Or you feel like you can kind of really press hard on that and then generate that type of benefit?

William R. Sperry -- Executive Vice President, Chief Financial Officer and Treasurer

Yes, there is two elements, Steve. I think as we looked at our conversion on net income, it got very high in '09 compared to historic levels. There were a couple of important drivers to that. And one of which was the fact that price/cost was quite favorable. So that was being supportive. But as you point out, there was a quick reaction on the part of the buying side and of the operational planning to not buy raw materials that you don't need and don't turn raw into whip or whip into finished goods that you don't need. And as Dave made reference to, we do think that's the same this time. And it was hard as Gerb and I sat down with the operating teams and say stop buying when they saw order rates still growing. But we stepped on that right away. And I think that element, Steve, is the same. But it's an important part of how we manage cash flow. I think the other part was we didn't experience in '09, any deterioration of the receivable quality that was extraordinary or material. And thus far, through April, that's proceeding similar, but that also was important to buttressing that cash flow profile was as a customer base that paid its bills.

Steve Tusa -- JP Morgan -- Analyst

So do you think that there is a I mean, is there any chance that with these capex cuts and with kind of working capital benefits that you could hold cash flat year-over-year this year?

William R. Sperry -- Executive Vice President, Chief Financial Officer and Treasurer

Yes. I would say that would be a good target, Steve, right, is to try to have the volume and income offset be backfilled through working capital management.

Steve Tusa -- JP Morgan -- Analyst

Got it. Now we came back into a net income number. No, I'm just kidding. And then just always trying to get guidance. It's totally kidding. Just on the side of nonresi, what are you kind of seeing there? And it I assume that will be kind of a delayed impact a bit in that market?

William R. Sperry -- Executive Vice President, Chief Financial Officer and Treasurer

Yes. I think there are delays. When we look at nonres, for us, it's about half Lighting and about half other commercial products within Electrical. And the Lighting has been a little bit unique and disconnected for a while now, Steve, where we saw order declines in the first or sales declines, rather, in the first quarter for Lighting at down high single digits. That's really been driven by their national accounts and the fall off and sort of nice to have reno projects as opposed to must have. And so while the other side, during the first quarter was growing a bit, Lighting was down. And so that piece, we think, continues down. But I think nonres, that other half of commercial, we saw orders inflect already in April there. So I think it's reacting reasonably in time, and it was a pretty sharp difference between orders in March and orders in April.

Steve Tusa -- JP Morgan -- Analyst

Got it. Okay, thanks for coming, guys. Appreciate it.

Operator

Your next question comes from the line of Nigel Coe from Wolfe Research. Your line is open.

Nigel Coe -- Wolfe Research -- Analyst

Morning, guys.

David G. Nord -- Chairman and Chief Executive Officer

Morning, Nigel.

Nigel Coe -- Wolfe Research -- Analyst

So well, obviously, great color. There's not a whole lot to really kind of miss from the information here. But in terms of, obviously, the second half, and I mean, who knows how it's going to whether it's a V, U or maybe an L perhaps. But what are the breakpoints on sales such that you continue with the temporary cost actions and you get to a level where you maybe moderate those actions? And at what point do you then decide to maybe take the opposite action and make these costs a bit more structural in nature? So just wondering what sort of boundaries you're working with in the second half of the year on the cost side?

David G. Nord -- Chairman and Chief Executive Officer

Nigel, that's a good question. That's probably one of the biggest challenges that we have going forward. As I said, one of the things that we were pretty certain of coming out of the first quarter was that the second quarter was going to have a dramatic fall off, which we sized at around the 20%, there were a lot of forecasts out there. And so we took the action, but it was unclear what the how this was going to play out. There's always a view that it would have some short-term dynamics to it. And so and importantly, the question is, when the market comes back, you need to be prepared to support that market because a big part of our value proposition is that service component and delivery and reliability. So we want to make sure that we maintain the workforce that we have. As we get into the second quarter and when we start to see more visibility to the back half of the year, we might have to make some more actions particularly depending on how long we see it happening. I would say we would typically do it in 5% increments, right? So if we see that the market's going to be down for an extended period of time, that would require us to reduce our cost by 5%, we would do that. So I think that's the trigger points that we would be working off.

Nigel Coe -- Wolfe Research -- Analyst

Okay. No, that's great color, David. And then moving to the Mexico supply chain issue. I mean, we've been hearing about some mandates that have impacted some other companies. Can you just remind us how much manufacturing do you company have down in Mexico? And then on a different point, we've seen a big depreciation in the peso. Does that help you in any sense in terms of second half in terms of the cost base down in Mexico?

Gerben W. Bakker -- President and Chief Operating Officer

Yes, Nigel, let me give you some perspective on we have four manufacturing locations in Mexico. At this point, two of those are continuing to operate. Those are more in the interior of the country. Those are also smaller sites compared to the other. And then we have two larger sites along the border towns, the maquiladoras that have been temporarily idled because of the local Department of Labor guidance. I can tell you, we're already in discussions with the authorities to on discussions on when and how to at least partially restart these operations because it's obvious, and we've provided the proof and the evidence that these are plants that are serving essential infrastructure. So as Bill stated, we do expect this to be more temporary in nature. It, in total, affects more of our Power business. And it's a little over 1/4 of their production output.

So it's obviously important that we manage through it. We do have inventory finished goods inventory. So that buys us some time to work through it. And we're also, as we speak, taking the actions to partially mitigate this. We have certainly facilities in the U.S., a facility in China, where we can redirect a portion of this work. But it's certainly fluid, where it's one of our highest focus there is right now, as you can imagine, because the demand in the Utility business is holding up quite nicely to solve this. And we're also already working with local authorities to look for ways to restart this operation. So we expect it to be more in the shorter-term by which we can solve this.

David G. Nord -- Chairman and Chief Executive Officer

Yes. And I think, Nigel, this is in that same category. We've seen this before over the last month, we've run into this in a number of places. Probably the extreme was in Puerto Rico, where it was pretty much a full shutdown. And it has taken time to get everyone comfortable with how we're operating, what's important. And so that was some of the drag that we saw in the first quarter. And I think if you keep in mind that Mexico, I think, is a little bit behind and how you're starting to see the impacts. So I think there's a little bit of a similar reaction to a conservative approach, but the conversations that are going on right now are recognizing that we've got the experience. We've been through this. I think that there's some indications that they were looking for indications that the U.S., they weren't going to open until the U.S. opens. So I think the fact that we have plans in states that are starting to implement reopening plans. We understand that that's been viewed positively. So we think this is a will be a relatively short-term issue, but there's always disruption that comes from it.

Nigel Coe -- Wolfe Research -- Analyst

Okay. I'll leave it there. That's great detail. But if you have any comments on potential peso tailwinds, that would be helpful.

William R. Sperry -- Executive Vice President, Chief Financial Officer and Treasurer

Yes. For us, Nigel, the FX impacts are just not very material.

Operator

Your next question comes from the line of Deepa Raghavan from Wells Fargo, your line is open.

Deepa Raghavan -- Wells Fargo -- Analyst

Hey, good morning.

Gerben W. Bakker -- President and Chief Operating Officer

Hey.

Deepa Raghavan -- Wells Fargo -- Analyst

If the economy opens up near time here, like it's planned, are there any businesses we can expect that could come back to growth by end of the year like Aclara, perhaps one flight access is granted, can that come back to growth? And the flip side of the question, I guess, is should are there any lost sales that may not come back in any of your businesses? And can you give us examples of those?

Gerben W. Bakker -- President and Chief Operating Officer

Yes, Deepa. Certainly, the portion of the Aclara business that's related to project delays, as we talked about, that are difficult to do. We would expect those to come back because these are projects that are not canceled, but more pushed to the right. So we would expect a partial recovery. Now of course though, it's hard to make up for lost ground because we have limited amount of crews and resources and so do utility companies. So certainly sequentially, I would expect that to improve as those crews get back to work. And there, it's not just the impact of the installation work, but the related products that we sell that go along with that, obviously, where we've seen some effect on the short term.

Related to your second question of sales that will not come back. I think, so far, we've managed through this well. If you look at our earlier disruptions when they started three months ago or so in China, that was certainly a pretty significant disruption with plant closures. We were able to manage through that very well with the inventories we had. And in that case, we actually did not see any permanent loss. So I think that's generally probably a good example of how we're able to manage through it all. Will there be a case where we can't provide a certain SKU where somebody needed needs it immediately and they have options, sure, sure it will. But I wouldn't expect a broad loss of business because there's a lot of market competitors and peers that are exactly in the same situation, of course.

Deepa Raghavan -- Wells Fargo -- Analyst

Got it. My follow-up is on Power Systems, double-digit growth. Was there any accelerated backlog conversion that happened in the quarter? Or should we think about backlog being pretty steady at this point in time? So we should see some continued growth for rest of the year in that business?

Gerben W. Bakker -- President and Chief Operating Officer

Yes. Actually, during the first quarter, we built backlog. So the orders were slightly stronger than our shipments. As I stated before, we saw that continuing in April here with the orders continuing strong. We do expect, as we talk, that in prior cycles like this, we've seen a slight delay of a couple of quarters. So we do expect that to come down. So I think we will probably get to certainly, the second half, where we'll be working off some backlog. But so far, we've actually seen the opposite.

Deepa Raghavan -- Wells Fargo -- Analyst

Thank you very much.

Operator

Your next question comes from the line of Robert McCarthy from Stephens, your lines open.

Robert McCarthy -- Stephens -- Analyst

Hey, good morning, everyone.

William R. Sperry -- Executive Vice President, Chief Financial Officer and Treasurer

Morning Rob.

Robert McCarthy -- Stephens -- Analyst

Looks like we've had a lot of really good questions. Let me try to break the rhythm then or break the stretch. I guess the first is following up on some of the questions that I think Deepa and Nigel talked about. I think what's implicit in withdrawing guidance is that you just don't have a lot of visibility overall. But given the nature of your businesses that they're more, I suppose, I would think, more mid to long cycle and short cycle or at least not extremely short cycle, that you could credibly think that this run rate we're looking at for 2Q could extend for quite sometime for this year. In other words, the year could be short from that perspective. Is that the right way to think about it? And as part of that, do you think you'll be able to give us a sense of annual guide when you report second quarter earnings? In other words, are you going to have enough information then to provide some kind of algorithm or range?

William R. Sperry -- Executive Vice President, Chief Financial Officer and Treasurer

Yes. I think, Rob, the first thing I would say is I actually would characterize us as primarily short cycle. So as really a book and bill type business, I think Aclara is a good exception where they would be have pretty long pipeline and be fulfilling off of orders taken for a while. But outside of that, there's generally pretty short cycle. So that's the first point. I think the second point is, I think we've got the visibility to the second quarter that's reasonably credible based on April orders, based on customer feedback. And so I think that has we do have some insight. I think as you start talking about the second half, I do think it becomes harder for us. And if you ask me, is it possible that those volumes continue into the third? I think it is possible.

I was happy that our observation in April is reasonably stable through the weeks of April. So we didn't see any kind of any deceleration of any kind. So if you like shapes of letters, I would just argue, we think we're at the bottom part of that U right now, and it's just hard for us to give you insight as to when the uptick happens, although when the uptick does happen, I think we'll be well positioned with book and bill to get our fair share of that. But hard to comment on how long that could bleed into the third quarter or what the implications are for the fourth.

Robert McCarthy -- Stephens -- Analyst

The second question is around capital allocation. I think if memory serves, amplified by Google, you bought Burndy July 2009. It was the announcement, I think you closed in October, which was a very interesting time to buy companies and kind of a very difficult time, but with the benefit of hindsight, a great acquisition for you, great return on investment, good opportunity. I remember a senior CEO or excuse me, a CEO at a very high-profile company in our space snorkeling described you guys as a bellwether for acquisitions. And right now, he's sitting on shop visits down about 60% craft engines, but I digress. From that standpoint, are there opportunities that you see out there that you can become more the hunter versus the hunted in this environment? And maybe go after some pretty interesting properties right now, how would you think about the acquisition environment because you did show, as an experienced management team, as David alluded to, pretty nice strategic vision and particularly that sizable acquisition?

David G. Nord -- Chairman and Chief Executive Officer

Yes, Rob, you're right. And I'm glad you're absolutely right on the timing of that. You had your dates right. And I think that's one that wasn't everyone wasn't totally comfortable at that time. And I would expect the same thing. I think my friend, Bill Sperry, would be a little bit more of more reservation as he's focusing on our liquidity position. But I think the operating guys and certainly, Gerben would be in that position as well to be looking opportunistically. And you can be sure that our guys are having contacts on some properties that they have been looking at for sometime, and that's a little bit how the Burndy came along. If you recall, that was something that we had been approaching many times and we're able to take advantage of an owner who had some distress in another part of their business, and it became an opportune time to free that property. So there's no guarantees, but we certainly are looking at those kind of things. So OK?

Robert McCarthy -- Stephens -- Analyst

All right. Thanks.

Operator

Your next question comes from the line of Christopher Glynn from Oppenheimer. Your line is open.

Christopher Glynn -- Oppenheimer -- Analyst

Yes, thanks. Good morning. On the orders, transit power persisting in April versus kind of a low single-digit 2Q outlook. Are you making a call on demand coming off as the quarter goes on? Or are you factoring in the divergence driven by your supply issues that can't meet demand?

William R. Sperry -- Executive Vice President, Chief Financial Officer and Treasurer

Yes. The latter, Chris, right? We think demand persists and that we'll be satisfying that demand with some disruption. And so some of that demand will be satisfying ultimately in the third quarter. But so second quarter is informed by the supply side more.

Christopher Glynn -- Oppenheimer -- Analyst

Okay. And then with the kind of partial shutdowns, rolling shutdown dynamics in the general industrial supply base, do you think current orders are reflecting just some urgency and a desire to get some safety stock in their warehouses?

William R. Sperry -- Executive Vice President, Chief Financial Officer and Treasurer

Yes, you're talking about Utilities specifically there or just.

Christopher Glynn -- Oppenheimer -- Analyst

Yes. Yes, those order rates benefiting from the odd dynamic.

William R. Sperry -- Executive Vice President, Chief Financial Officer and Treasurer

We think there is a little bit of pre-buying going on for sure. And as Gerben was saying, the demand is being driven by real fundamentals, but we do think there's been a few points there of pre-buy that's embedded in that. So I do agree with that.

Christopher Glynn -- Oppenheimer -- Analyst

Okay. And last one from me. Power Systems legacy did double digits quarter on a 9% comp. Historically, either one of those would have been all but unthinkable. Now you have this kind of compound effect, I wanted to just revisit the grid quality urgency. It seems to blow through anything that's transpired in the way you serve that market in 15, 20 years, anyway, the extent of my memory. So is California coming on very strong? They had their kind of disruptive event with the fires in the utility behavior. Or is the grid just faltering that much more over time?

William R. Sperry -- Executive Vice President, Chief Financial Officer and Treasurer

Well, I think, first of all, Chris, I agree with your take that it's historically been very much a GDP business in low single digits. Pretty steady down there because it's driven by MRO, but nonetheless, a GDP business. And the compounding effect is different. I know we've been talking about for years, the need for the grid to be upgraded. So I think that's a major contributor. I do think weather has been a contributor, whether you've been vulnerable to storms, which could either be hurricanes, if you're in the southeast or ice storms, if you're up north as well as environmental effects on the West Coast to fires. I think it's made everybody appreciate that having an updated, modernized, hardened grid is essential to the operation of a reliable, cheap power for everybody. And so I think those factors really have all come together, Chris.

Christopher Glynn -- Oppenheimer -- Analyst

Okay. So no particular region, it's spread systemic?

William R. Sperry -- Executive Vice President, Chief Financial Officer and Treasurer

Yes.

Christopher Glynn -- Oppenheimer -- Analyst

Thank you both.

Operator

Speakers, there are no more questions on the queue. You may continue.

David G. Nord -- Chairman and Chief Executive Officer

All right. That concludes our call for today. I'll be around all day for follow-ups. Thanks, everyone.

Operator

[Operator Closing Remarks].

Duration: 63 minutes

Call participants:

Dan Innamorato -- Director of Investor Relations

David G. Nord -- Chairman and Chief Executive Officer

Gerben W. Bakker -- President and Chief Operating Officer

William R. Sperry -- Executive Vice President, Chief Financial Officer and Treasurer

Jeff Sprague -- Vertical Research Partners -- Analyst

Steve Tusa -- JP Morgan -- Analyst

Nigel Coe -- Wolfe Research -- Analyst

Deepa Raghavan -- Wells Fargo -- Analyst

Robert McCarthy -- Stephens -- Analyst

Christopher Glynn -- Oppenheimer -- Analyst

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