Q3 2019 Earnings Call
They're not sure session. So I'll say question. During this session you will need to press the star one on your telephone. Please be advised that todays conference is being recorded I would now like to how the conference over to your speaker today, Sudan interim or Oddo. Please go ahead Sir.
Thanks, Jamie Good morning, everyone and thank you for joining us I'm joined today by our chairman and CEO , Dave nor in our executive Vice President and CFO Bill Sperry Hubbell announced its third quarter results for 2019. This morning, the press release and slides are posted to the Investor section of our website at Www Dot Hubble Dot 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 considered incorporated by reference to this call. In addition comments May also include non-GAAP financial measures. Those measures are reconciled to the comparable GAAP measures in are included in the press release in the slides now let me turn the call over to Dave.
Okay. Thanks, Dan.
For everybody. Thanks for joining us a the just to discuss our third quarter results. Hopefully you can see from our press release this morning.
Another quarter of solid earnings growth and free cash flow generation for Hubble.
Continue to feel confident about our market position.
And our ability to deliver differentiated results for investors.
I want to start my comments on page three of the presentation. Some of the key takeaways for the for the quarter first you know and key the end markets are growing modestly overall.
You know you could see that you know transmission and distribution continues to stand as driving strong growth both top and bottom line.
And that's driven by our ongoing investment at our large utility customers in hardening and upgrading the grid.
On the electrical side things are a bit more mixed with some pockets of growth offset by some softness in certain markets and we'll talk about that in a couple of slides.
On the margin front, we remain effective and actively managing price cost.
Just a portfolio, which is driving margin expansion.
You will see 30 basis point improvement on an adjusted basis year over year.
Free cash flow remains a critical aspect of our story and we're tracking above prior expectations driven by continued working capital improvement.
We continue to invest restructuring dollars in our footprint optimization initiative with more to come in the fourth quarter and into next year.
Putting a lot of work organizationally and improving our operating intensity, it's paying early dividends with strong cash flow generation and we see these efforts driving significant upside to margins over the next few years.
See we also completed the divestiture of the hastily high voltage test business in the quarter.
And recognize that gain that we've adjusted out of results.
I'd also reached an agreement for a bolt on acquisition for our power segment.
We think these transactions add value for our shareholders and we're exiting non core business with lower return characteristics and redeploy the capital to acquire a higher margin business in an attractive adjacency.
And we'll walk through the details later.
Finally, our strong year to date results position us well to tighten our full year earnings per share expectations.
We are certainly incrementally more cautious around topline trends, particularly the electrical business than we were a quarter ago.
But we have solid visibility into continued strength in our power business in the fourth quarter, and we're executing well on margins across the portfolio gives us confidence to tighten our full year commitments.
We remain confident in our ability to deliver on them.
Before I turn it over to Bill Let me just highlight a couple of key accomplishments as well in the quarter first on the Oclaro front. They launched the pilot program for its Synergized RF communications and controls platform with a large electric IRU customer and was also chosen for an alibi deployment with one of its larger.
Co op customers. This is laying critical groundwork in demonstrating proof points on the scalability of Aclaris amite platform as well as the synergies between the Clara and Hubble.
And our unique breadth of product offerings across the distribution automation space.
Elements of the strategic basis for that acquisition.
Burndy released that tend zinc plating solution for its compression terminal line, which is more environmentally friendly and safer solution with improved corrosion protection.
Lighting won a product innovation award from the architectural solid state lighting magazine for best retrofit for the lighting design for the Duke Ellington School of Arts in Washington, DC. So the fourth consecutive year Hubble Lightings won this award. They also had four products included in the.
Annual progress report for their innovation and unique product attributes all good testimony to their investment in new product development.
Non the electrical side of commercial and industrial they delivered or largest single order for bridge controls ever in August industrial controls division has become a safe and reliable supplier of choice to replace the US is aging lift bridge population.
Organizationally, we we had a net have different changes during the course of the year. Most recently, we had a leadership change in lighting as a previously or has taken on a new opportunity outside helpful.
We named Jim feral as the acting group President of Hubble lighting. Many of you know Jim from his experience at.
As in Investor Relations, He's got over 15 years experience at Hubble and he's been at lighting, you'll recall as the VP of finance for several years and has been instrumental in a lot of the activity there in improving their performance. We're excited have Jim continue to executing on our strategy and wish him well in this new role with that.
Let me turn it over to Bill Thanks, very much Dave Good morning, everybody. Appreciate you joining us I know.
And now it's a busy morning.
Like Dave I'm going to use the slides to govern saw my comments I'm going to start on page four or the overall results, you'll see that we generated a billion to of sales in the quarter, 2% growth.
Considering the divestiture that Dave mentioned organic growth was up 3%.
Operating margins expanded 30 basis points to 15.8% that was absorbing some extra investment in footprint restructuring.
It was really driven by a very solid performance on the price cost side.
Adjusted EPS $2.34 as Dave mentioned reported results have the gain on sale, which we've adjusted out to help facilitate your ongoing comparisons of operating results and for free cash flow 151 million generated.
Which has a year to date increase for the nine month period of 16% on cash flow.
So, let's look at sales and disaggregate that into how each of our end markets is contributing.
To our 3% organic story, you can see some bifurcation on the page.
With some strong areas and and some other areas of softness let's start with the strengths.
Starting with non res new construction, we continue to see low single digit outperformance there our commercial construction and roston electrical areas are benefiting from that and as Dave mentioned utility facing markets are really the most noteworthy I'm including gas in.
There as you all recall, we're in the distribution components business, there so utility facing area, where conversions to gas has been increasing and the MRO spend to upgrade and strengthen the infrastructure continues to drive impressive growth there.
As well as across transmission and distribution of electrical side, we're seeing great hardening.
And projects on transmission side, including renewables, so very favorable trends in utility.
On the softer side upstream oil continues to be an area of softness.
In our lighting business, there relied national account area.
Has experienced softness.
Those are proving to be discretionary projects more nice to have in we've seen income deferral of that spending and then heavy industrial where we have quite a bit of exposure into the steel industry. For example, where in sympathy with steel prices were seeing who spending by the producers coming.
Down there so.
The good diversification across that portfolio of end markets delivered us 3% organic growth.
Helped by strong pricing.
So let's see.
How does that sales translate down due to operating income I remember, 2% sales growth now you see here for Percentto key growth.
To $190 million of adjusted operating income a 30 basis point margin expansion to 15.8%.
Thats absorbing the extra investment in footprint restructuring.
Driven by the price cost management, which has been very constructive.
Really all year.
On the earnings per diluted share $2.34.
The increase in LPC on the left being absorbed by higher tax rate.
That that tax rate is quite in line with our expectations. This year around 23% on an adjusted TR rate last year happened to be sub 20% I'd say unnaturally low as we had some favorable true ups for tax reform in the third quarter of last year.
So, let's take that enterprise performance and and unpack it into our two segments electrical and power you starting on page seven will cover electrical you see sales of 689 million.
Roughly comparable to last year.
Considering the divestiture organic growth of plus 1%.
Some of the strong areas.
Gas as we mentioned Nonres construction, both the connector side and commercial construction products benefiting from that.
The industrial and the national account side of lighting.
Being weaker.
And as that translated into operating income see 96 million.
13.9% margin.
Two decisions, we made in the quarter one to invest in the footprint restructuring the other the divestiture.
Drove down those margins had we not than those to the price cost positives I would have offset the lower lighting volumes to have margins the flat in electrical for the quarter.
On page eight I will transition to the power segment, which you see had a really nice.
Formats in the quarter.
Net sales grew 5% to 515 million.
That's essentially all our legacy Hubble power systems products, which grew high single digit.
Clara had flat contribution on the sales line.
They've got some natural lumpiness as they live off of large project orders and as some roll off.
The new ones role on in different time periods, we've got a very nice.
Pipeline of projects in front of Declara and their growth for the year, he's going to be solid in the mid single digits, Despite a flat quarter.
The operating income for power segments, you see 95 million up 160 basis points to 18.4%.
You are seeing both strong volume and good price cost.
So really attractive incremental drop through on the volumes there.
On page nine we wanted to give you.
Update on our operations starting with the footprint work that we're doing that we've spent a lot of time talking to you. All about just the level said remind everyone. We add started the year with with 58 manufacturing facilities and about 11 million square feet.
We've got 10 projects underway that.
We'll take about half half a million of square feet out this year.
Those projects are all going well, we think we've got some good ones right now and one case.
Consolidating two foundries into a big 24 seven operation.
Moving out of a high cost northeast location into Puerto Rico, and another couple of regional consolidations, one in our harsh and hazardous business, one and gas distribution. So.
Those projects are all proceeding and we're happy with them we've been talking to you about 40 cents of spending in this year to improve our margins next year.
As we enter the fourth quarter here it turns out some of our cost estimates were a little bit conservative and some of those costs are coming in a little bit under budget, and we're going to reinvest that into incremental productivity actions in fourth quarter.
And help the deal with some of the electrical volume softness Dave was talking about.
We've indicated sales per square foot at the bottom of the page and the target of improving that by 20%.
We have improved 20% from 17 to 19, so we want to keep that momentum going as we go from 18 2018 to 2020.
And of note that we think those footprint actions really helpful. Two important free cash flow levers, which is a high area of focus for US number one were taken out fixed costs and that allows us to enhance margins and increase our income, but secondly, the fewer facilities and more efficient operations.
Our allowing us to reduce inventory days.
Less working capital that's also helping us drive free cash flow. So we're really looking to have free cash flow outstrip our earnings growth.
And you'll see 16% year to date.
We're trying to get to you recall last year, we did 420 million trying to get next year 2022 to 500 million that we promised you.
So the $460 million would be about half way, which would be about 105% conversion rate on adjusted net income and we think we've got a path to get there so operations really helping us drive free cash flow.
[noise] also wanted to comment a little bit on the portfolio actions that Dave mentioned at the outset, starting with divestiture of hastily our high voltage test equipment business based in Switzerland.
As you may recall, they made large impulse generators and transformer test systems.
And we found.
That that business.
Was noncore with what we were trying for.
They had atypical project sizes, a large systems.
Different than the rest of the company the drivers of the business tended to be electrification in developing economies as well as transformer technology changes and we found it to be a cyclical business and had been in a trough for an extended period of time and so we found.
An opportunity, where we think the business was more valuable.
To another player.
I would take the proceeds from that which were 38 million redeploy that into our next acquisition, which is in the power systems Arena.
Business that.
Protects substation assets with.
Tight fitting components that are fire resistant.
It's got a high margin high growth profile.
So for balance sheet neutral just redeploying those proceeds.
We think thats.
We think thats a good portfolio moved to make.
That acquisition signed but subject to customary closing conditions and so we're expecting either in late fourth quarter early first quarter to close that.
I'd say it also on the on the business development front.
We've got a potential other acquisition that could close in the fourth quarter those are often hard to predict but.
Wanted to just highlight that that we're reinvesting in acquisitions as our balance sheet is very supportive of that so on with that I want to hand, it back to Dave talk about outlook for markets and outlook for the rest of the year.
Okay. Thanks, though.
Turning to page 11 stock about the end markets first on the outlook.
As we've talked about this morning, we're seeing some mixed end market trends.
And some puts and takes across the portfolio.
On that I think end markets are trending a bit below our prior expectations that you know closer to 2% versus 2% to 3%.
That's a result, we've tweaked down our growth expectations across a few of our electrical end markets.
But again were once again seeing stronger growth in the full year in transmission and distribution.
You know going around starting clockwise the electrical transmission distribution is now we think 4% to 5% of was ratified prior.
No closing in closer to the high end on better visibility.
The non residential still one to three well we've talked about the softness in lighting, particularly on national accounts, but core non res, we think is still solid.
Industrial now zero to 1% versus the ones. The three prior that's driven by softening mostly on the heavy industrial side steel.
And heavy industries, the latest still holding okay.
Oil and gas now zero to 1% versus one to three prior.
Oil markets, you know I think most people lower haven't been recovering.
Rig counts down and so.
We've seen that we're taking that down a bit and then residential zero to one versus zero to two prior we continue to expect modest growth, but a little more modest than than prior.
So if we turn to page and pull that together for our overall outlook.
You know that market dynamic plus price, we expect sales growth of 3% to 3.5% for the full year.
As we've talked about in the prior slide this embed this modest end market growth, but we expect to continue to achieve solid traction on price.
The wrap around of a Clara the impact of the Hay fleet divestiture adds about a point on net.
And then we think that foreign exchange headwind of a little less than a point.
We're tightening our full year.
Adjusted EPS expectation 795 to 810 based on our strong year to date results and the expectations for continued execution in the fourth quarter.
I guess, what we anticipate will be somewhat softer market conditions leased in the electrical segment.
And we're raising our expectations for full year free cash flow conversion to more than 100% of adjusted net income based on our results through nine months and what we see in the in the fourth quarter, we feel good about our ability to continue.
Executing on our working capital initiatives in generating good cash for shareholders.
So if we turn to page 13, we put this in a little bit of a graphical form. So we expect strong growth from core operations with some well called non fundamental headwinds from incremental.
Our and our investment.
And the higher tax rate that bill talked about.
So in closing I.
I think.
We all start to think about Buck about next year 2020, and we're certainly committed to continuing to execute on the fundamental drivers within our control.
We continue to actively and effectively managed price bar and we'll start to reap some of the cost saving benefits from the restructuring actions we've taken this year.
We expect to invest another 40 cents and in restructuring spend next year.
And continue delivering significant cost savings in margin improvement over a multiyear period.
As far as markets. We continue we see continued runway in our CND markets with all the fundamental drivers around grid hardening and modernization still intact, maybe though at a potentially more moderating growth and.
As we have more some difficult comps, but still certainly continuing to grow.
On the electrical side things a little more uncertain some puts and takes across the end markets, but were we remain focused on executing again on the fundamental drivers within our control.
And we're confident in our ability to deliver differentiated results regardless of the macro economic while continuing to position the company for long term success. So with that let me open that up two questions.
Yes, so your mind or tell US a question you will need to press star one on your telephone.
With your question press the pound Keith.
Again that is star one for questions.
Your first question comes from the line of Christopher Glynn Oppenheimer. Your line is still open.
Thank you good morning monogram.
Hey.
It was just wondering a little bit more on the power fundamentals.
Mentioning great hardening and modernization.
From a couple other perspective just wondering.
You know how much runway, you're seeing with respect to maybe utility capex fundamentally shifting from power Gen. Two TMT and also besides that.
Is california, starting to come into play prospectively.
Well I think a on the first part I mean, I think that the shift from power Gen. Two C and D has been a contributing factor. We expect that you know dynamic to continue and that all as part of.
Modernization grid hardening you know.
Smart in the grid.
On the second on California, certainly there has been increased investment increased intention attention too.
The need to focus on.
More reliability of the grid.
Throughout California, certainly.
In the northern parts and we're seeing some of the implications of that right now with you know the need to shut down power to protect.
And so we expect that to continue although that's only been part of the story for US I think it's the broader shift into.
TNT from Powergen that's contributed.
Okay and then.
On your acquisition pipeline I'm, just wondering if that's you know skewing more power or electrical.
Yes, we're seeing opportunities Chris you know in both.
If you looked backwards, we've had a a skew towards power over the last five years or so.
But as we look forward, we're seeing opportunities in both segments.
Okay. Thank you Bill.
Thanks.
Your next question comes from the line of deep.
Deeper Raghavan of Wells Fargo. Your line is now open.
Hey, good morning, all.
Couple of questions for me.
Just one.
Did you benefit from storm activity this quarter E view, Ethiopia can you can't quantify that that's right.
I was also thinking on a Clara coming in flat is that something what do you expect was that slightly below what you expecting.
Well first on the storms.
There was no meaningful incremental impact I mean, it's more of a normal level of storm activity that we saw so nothing that was a positive.
Year over year.
You know on that on the Aclaris side, you know I think it was a little less than we expected, but remember that last year, we had some very significant growth.
You know high double digit hi, 20% plus or in some of the periods and so that the the comps got a little tougher this year.
I think Theres also some projects that you know have pushed out a little bit to the right.
So.
But there's a whole lot of order activity that we expect to be coming online.
Certainly in the next several quarters.
Got it then my follow up is on lighting.
Can you provide a gentle Todd on coupland lighting sale to signify and what this perhaps could mean tier lighting assets such as yours.
If you can help us our some of the company the merits of generic.
I would be helpful. Secondarily, how are you thinking about your timeline to fill in the lighting will they can be thank you.
Well, you know I think the merits and frozen kinds of.
Cooper signify would have to be addressed the buy them you know there those are the ones doing as we look at.
From my history.
In the market you know I think there's been a lot of.
Churn throughout my 14 years.
And it's not clear that all of it has resulted in you know the positive impacts that are intended you know, it's a tricky industry I think theres theres dynamic that you know sometimes suggests that in some places bigger isn't always better unless executed well. So you know with any large transaction like that.
With that in the category of large I think it's all about the execution, we feel very good about our position our position.
In the market our position with our technology and product development. So, but it's always you know we're always paying attention to what's going on from a competitive situation.
So hopefully that answers. The first question the second question around the timeline.
There's no timeline that I can commit to I mean, we evaluate you know candidates.
Internal candidates is as well as you know gyms and position and we expect he's going to be doing a great job. So I don't think we're going to Miss a beat as we're going through.
This process so.
Okay.
Alright. Thank you good luck in thanks [laughter] text.
Again that is part one for questions.
Your next question comes from the line off until Josh Pokrzywinski of Morgan Stanley . Your line is now open.
Hi, Josh.
Or not.
So Josh we can't hear you if your you may be on mute.
Well, let's take the next question operator.
Understood. Sir Your next question comes from the line of my Jewell Coal Awful research. Your line is now open.
Good morning, guys as Michael Good morning, Aastrom Nigel.
Yeah.
Hey, so I just touching up on the implied for Q guidance could you talk about some of the moving pieces inside the segments I'm just looking at normal seasonality. It seems like a bigger drop off than usual and just kind of.
No what you're thinking is that's driving that.
Yes, I think one of the pieces is the pricing and how that layered in.
Over over last year, and as we get to fourth quarter, a we're anniversarying some of those increases and so you kind of lose the lift that comes from that.
And then on the lighting side.
We are anticipating some of that.
We were down mid single digits in the third quarter. So we're anticipating some of that continuing into the fourth and then strength in the rest of electrical and certainly.
As Dave was saying continued strength in the power side.
Gotcha. That's that's very helpful. And then I'm on a clearer just looking at the backlog does that provide more clarity and visibility into 2020 or customers hesitant to spend in the quarter in that got pushed out to the right.
No I think you know we've got two concepts try to backlog, which is even nearer term and then a pipeline and we're finding there's even a little bit of Graeme between those as part of the pipeline starts to become very close to backlog and that's where we start to see some 2020 volume.
Is coming in so.
There does that it is lumpy by its nature of kind of large customers putting in large orders.
And so you do if your question is is there visibility to that there is and we feel confident about the forward look there.
Okay makes sense and if I have time for one more just speaking of the kind of selling to sell out what do you guys hearing from channel inventory levels from your customers and the inventory drawdown from customers that we saw earlier. This year is your perspective that that's mostly over do you expect to continue into that.
You bet ended the year.
I would say that the a meaningful amount of it is over.
I think there are certain customers that we've heard are still working off some of their inventory.
But we're not expecting that to have a significant impact. Although you know you'll find some leased we have found some distributors, who still have some inventory to work off but the vast majority I think I've gotten to the level that they that they want to bad.
Since I leave it there thanks to the help guys.
Your next question comes from the line of Justin Bergner off do you Research. Your line is now open.
Good morning, Dave Good morning, Bill a warning.
First off I want to ask about power margins. They remained very strong in the quarter, I guess or even up a little sequentially.
How sustainable is that I know you have seasonality and some timing of price cost but.
Did that sort of exceed your expectations a month, we expect going forward.
Yes, I think it was it did not exceed our expectations.
We had both volume at the legacy power systems products, which those drop through you know with attractive Incrementals are we also had price cost favorability.
Continuing that price cost favorability I think is the essence of your question where.
That will start to flatten out some of that pricing comps for example in fourth quarter and get harder.
That probably is offset by maybe easier raw material comps and then how that plays into next year, we're sort of hoping we can hold onto some of that benefit but hard to have the same as you noted a sequential quarter over quarter kind of kind of walk I think the other driver ultimately of power margins.
We will be from within a Clara and as the previous question talking about some of that.
Project pipeline and the more am I kind of richness that can come through and Dave highlighted in his opening comments some of the.
Am I advancements on some piloting within Io use as well as some larger deployments inside of the co op World you know start to suggest.
Is that margin written this richness comes up that would help power margins as well.
Great. One clarification question, if I may in terms of your revised guidance are you absorbing some additional headwinds in terms of by their tax.
Restructuring or divestiture, yes, so the tax isn't the same as we've thought.
The restructuring is the same as we thought and we are absorbing the loss topia of our divestiture yes.
Is that like five cents or something that yeah. That's a good that's good ballpark.
Great. Thanks for taking my questions Okay.
Your next question comes from the line of Steve Tusa of Jpmorgan. Your line is now open.
Hi, guys morning Auryxia.
Just on the on the free cash I know you guys kind of reaffirmed the long term targets, but it seems like you guys are Ah you know, obviously doing pretty well against that I'm not I missed the beginning of the cost not sure. If you you know kind of clarified is there anything kind of unusual in the base this year that.
You know kind of reverse is at all because it just seems like you're you're really kind of close to the long term targets you know.
Even though there you're not quite there yet on from a timing perspective.
No no I think we though what are you missed is that we don't feel good about this year and you're right. We are but we've been focused on trying to get to get ahead on those long term targets I wouldn't say you're ready to advance those long term targets, but if we can continue to do what we've been doing.
We certainly think there should be upside to those targets as well, but that remains to be saying, well a better insight into that.
So with another quarter behind us when we close out this year and see exactly how this year close out but certainly the things that we've been doing that are driving the focus that we've had on it I think our leading us to you know where we want to be.
Any major influence the out from the supply chain initiatives that you guys have been talking about or is it kind of too early to see the fruit to that labor.
Well I think you've seen Steve you've seen our inventory days improved which I think is a direct result of that and ER to Dave's point. The way. We're modeling next year, we're seeing a continued stepped down a an improvement in inventory days. So I think that feels like it has legs to it.
To help drive as you've mentioned that the long term target.
Right.
Okay, great. Thanks, a lot Craig Thanks <expletive> .
[noise] and again that is to start refer question you have a follow up questions from Christopher Glynn Oppenheimer. Your line is still open.
Thanks for taking my follow up just wanted to go back to that Kinda preliminary 2020 comments, Dave did you.
Suggest that that both segments are positioned for some positive margin trends nextera over.
2019.
Granted if the economy doesn't fall off a cliff.
Well I I certainly the easier wants to say there's got to be positive is on the electrical.
Just because of some of the challenges you know there you know, particularly on lighting, but I think power can continue to to power through it.
You know if there is there a high levels, but but certainly we see the opportunity for those to continue to grow. So you know our objective overall is too is with our focus on margin as well as growth and cash generation that we're going to continue to to improve on those.
Thanks again, okay.
We have a follow up question from Justin Bergner, Oh Gee Research. Your line is now open.
Great. Thanks, again, if I do the math on the lighting down mid single digit that would suggest I guess that the commercial industrial construction energy sort of combined were up 3% organic and my sort of in the right ballpark. There and are you actually doing better than your end markets because that would seem to be a little bit better than your.
And Mark if you even if we maybe ex out the lighting piece Yeah. Your math your math is good and you know the.
I think I think when we consider the a the end markets you know, we're incorporating some of the lighting into that so it feels.
Like our products and brands are doing just fine.
I'm not sure.
I would say, there's a ton of share gainer outperformance. There has been Dave made reference at the top to some new products that have that has done well some new introductions.
But I'm not sure I'd note I'd note any great share shift.
Okay. Thanks.
[noise] against a star one for questions.
No further questions at this time presenters. Please proceed.
Thanks, operator, thank you for joining us today and I'll be around all day for fobs anybody needs us. Thanks.
Ladies and gentlemen, this concludes todays conference call. Thank you for participating you may now disconnect.