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Edited Transcript of HUBB earnings conference call or presentation 30-Apr-19 2:00pm GMT

Q1 2019 Hubbell Inc Earnings Call

SHELTON May 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Hubbell Inc earnings conference call or presentation Tuesday, April 30, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David G. Nord

Hubbell Incorporated - Chairman, President & CEO

* Maria Ricciardone Lee

Hubbell Incorporated - Treasurer and VP of Corporate Strategy & IR

* William R. Sperry

Hubbell Incorporated - Senior VP & CFO

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Conference Call Participants

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* Christopher D. Glynn

Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst

* Deepa Bhargavi Narasimhapuram Raghavan

Wells Fargo Securities, LLC, Research Division - Associate Analyst

* Michael Metz

Wolfe Research, LLC - Analyst

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Presentation

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Operator [1]

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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. (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 Relations. The floor is yours.

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Maria Ricciardone Lee, Hubbell Incorporated - Treasurer and VP of Corporate Strategy & IR [2]

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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 materials 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 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 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.

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David G. Nord, Hubbell Incorporated - Chairman, President & CEO [3]

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All right. Thanks, Maria. Thanks, everybody. Good morning. I know it's a busy morning this morning. It appears that April 30 is a very -- has become a very popular date from when we first decided to move our earnings out. So I want to make sure that we get through the stuff. We have a lot of good things to talk about, so try and get through briefly and -- as we can to allow time for some of your other commitments. You can see from our press release this morning, we had another quarter of strong earnings growth and free cash flow generation. I certainly feel confident about our market position, and our ability to deliver differentiated results over the long-term.

Couple of key items in the first quarter, let me talk to, and I'm on page 3 of the slide deck that we sent out. As I mentioned, first and foremost, strong organic growth with end markets 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, in 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 in not chasing after low-margin business and are comfortable with the trade-off that entails on the buying side. And some of that is a 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 could raise price, lower costs. 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, in some period of time and some businesses and some product lines, will affect our volumes, but all for the good, long term.

Aclara, another highlight for the quarter. Revenues were 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 of large IOU customers of Aclara Technologies and Solutions, and we're certainly well positioned to do so.

Free cash flow. On the free cash flow front, we're off to a strong start to the year, certainly a lot 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 is 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 initial 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 processes. Still in 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'd 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 0 defects in the year. And that's the first plastic supplier that they've had to ever accomplish this.

Our commercial and Industrial business, the wiring systems business was named Vendor of the Year last year in 4 major customers. The Lighting business was awarded Plant Engineering magazine Product of the Year awards for Power Hub and the Peloton High Bay light fixture. And most notable, Aclara was named the #2 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 a whole lot of good things going on, but let me turn it over the Bill, and he can take you through some of the details in the financials for the quarter. Bill?

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William R. Sperry, Hubbell Incorporated - Senior VP & CFO [4]

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Thanks, Dave. Good morning, everybody. Thank you all for joining. Dave gave you the highlights from pages 3 and 4. I'm going to start on page 5 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, to talk a little bit about nonres for a second, we've got 3 lines of business with exposure in nonres, all of them seeing growth ranging between the low- to mid-single digits, I think consistent with third-party data on momentum there. So positive story for nonres.

Industrial, it's been a highlight from the quarter; heavy being a little bit stronger than light for us; and again, consistent with some third-party data, where we 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 prefer offshore content versus onshore, and that oil piece was sideways for the first quarter. And I think in contrast to the gas business, where we saw quite strong demand, strong shipments. We're seeing both maintenance as well as new conversions to gas on buildings driving demand there for the last months on the gas side.

Within electrical T&D, distribution a little bit stronger than transmission, but a lot of the order activity and quoting that we're seeing bodes well for transmission and distribution as we look out as well.

On the resi side, we think that we were impacted by some prebuys in the fourth quarter there. And yes, we see the resi market hanging in there low single digits. So kind of, again, across-the-board, very constructive end market, giving us 5% organic growth in the first quarter.

Page 6. We'll switch to talking about our profit performance, and you can see adjusted operating income increase by 6% to $139 million. The margin is 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 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 it added about 0.5 of margin to us. And so we're still seeing on the material side, although not all raws, but as a basket we're still operating in a net inflationary environment there. That 0.5 point of contribution though was absorbed by the impact from the acquisition contributing a lower margin 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 EGR around 24.7% in the quarter versus last year in the low 21% range. We do expect that to be in our guidance of around 23.5% for the year. But that created a little bit of headwind for EPS the operating side, stronger than the EPS performance as indicated there.

Page 7. Let's switch to breaking down that performance into our 2 segments, and we'll start with Electrical. You can see sales increase of 2% to $630 million, with FX creating a point of headwind. So organic growth of 3%, to which price was a very large components. And in terms of where the growth came from business units that were helping drive growth included gas area, industrial, particularly on the heavy side, in commercial construction areas; Harsh & Hazardous, which is exposed to the oil market that we talked about, would have been example of a lower growth area. They were actually down. So they would really drag that number down a little bit.

When we look at the operating income there, impressive, 11% increase on that sales growth and a noteworthy 90 basis points of margin expansion to 11.8%. Solid execution of pricing strategy across all 3 operating groups in the Electrical segments. We had solid execution on the productivity front as Dave had referred to, and we certainly have adopted not wanting to chase volumes for volume's 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 shared with you Lighting performance typically within the segment. Lighting business grew at 2%. There was balance between the resi and commercial and industrial has in the business. Lighting, too, executed on price, which is quite good news for us. They covered both the tariffs and material inflation experience to have a positive price cost, and we were able to expand margins after solid contributions from Lighting into the segment.

Page 8. 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 contributor to that growth. You'd see we refer to organic as well as acquisitions. So Aclara was an acquisition for the 1 month of January as we closed on it on February 2. So January incremental acquisition month, which we added drove 14% of 23%. And they also were a big contributor of the organic during February and March, as Dave highlighted, customer acceptance there, very strong demand of the product -- very strong. And so as well, we 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, a similar story for the company there. We executed well on the 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 to the average and brought the margin down. The Aclara has pronounced seasonality in the first quarter as they have done historically. They planned 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 impacts the mix. And so, we anticipate that will normalize in the balance of the year, and that's the seasonality they have that you see here.

Turning to Page 9, free cash flow, which Dave had highlighted. A comparison year-over-year here between 2018, 2019 is exaggerated by some of the onetime outflows we experienced last year resulting from the Aclara acquisition as well as some tax reform items. There's about $25 million, you recall, from last year of those onetime items. But even adjusting for that, an impressive increase. I think it's also constructive 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 as a much higher percentage of what we expect for full year contribution.

So it's good to feel ahead on the free cash flow fronts. And despite driven by, obviously, the higher net income, but really what's helping is the working capital improvement, and we are really working hard across the board between receivables and payables. But I think the area that is consuming the most effort on our part is on the inventory side. And just continuing to drive our days down there and we continue to get a good cash flow conversion. So certainly, we feel good about being on track to that 110% net income for the full year. And the 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 with you.

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Maria Ricciardone Lee, Hubbell Incorporated - Treasurer and VP of Corporate Strategy & IR [5]

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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 4 tranches of senior notes have favorable rates in the low to mid 3% range and have maturities that are well spread out, with the next in 2022.

Our net debt-to-cap ratio is healthy at 42%, and our leverage in terms of gross debt-to-EBITDA is about 2.5x. This is down from more than 3x a year ago, pro forma for the Aclara acquisition.

On a net basis, debt-to-EBITDA is about 2x. 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 bolt-on acquisitions near term. Now I'll turn the call over to Dave to talk about the outlook.

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David G. Nord, Hubbell Incorporated - Chairman, President & CEO [6]

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Okay. Thanks, Maria. So on page 11, talking about our end-market outlook for the year, our dynamics there are pretty steady. We continue to see low single-digit growth, overall. The one change here is a little tweaking down of the oil and gas. Originally, we had said 3% to 5%, [keep it] down to 2% to 4%, mainly given the softness we saw particularly in oil in the first half, not on the gas side. But again, we expect some pickup in that in the second half. So -- and gas should be good for us and remaining strong throughout the year.

As we talked about before, we do think there's 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're reaffirming our outlook for the full year, where 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.

I think that growth rate is very much consistent with what we saw recently in a survey 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 1 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 I -- we take that as a fairly reliable source. Obviously, it would 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, and it -- but it does include $0.40 of restructuring and related investment. 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 can 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'll 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 at 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.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Nigel Coe from Wolfe Research.

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Michael Metz, Wolfe Research, LLC - Analyst [2]

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This is actually Michael on for Nigel. Could you just walk through how you guys are seeing the cadence for price/cost? We're kind of assuming that 1Q was toughest quarter. How do you see the remainder of the year?

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William R. Sperry, Hubbell Incorporated - Senior VP & CFO [3]

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Yes, 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 piece, actually, as you get through the second half, you end up passing some of the price increases that we had 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 effects you're saying where you can end up with some contribution from that as the year progresses.

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Michael Metz, Wolfe Research, LLC - Analyst [4]

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Got you. That's helpful. And then just one more. On the Lighting spend, does this change your view at all on the Hubbell portfolio in its totality?

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William R. Sperry, Hubbell Incorporated - Senior VP & CFO [5]

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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.

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Operator [6]

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

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Christopher D. Glynn, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [7]

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Was -- worried about the comment of investing on the agency side of Lighting, can you talk a little bit about, specifically, what's going on there?

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William R. Sperry, Hubbell Incorporated - Senior VP & CFO [8]

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Well just over the last couple of years, we had added and strengthened our representation on the front end in specific markets in, for example, the Southeast, in the Midwest, 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 years.

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David G. Nord, Hubbell Incorporated - Chairman, President & CEO [9]

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But I think importantly, Chris, that's something that Kevin and his team focused on, one of the reasons that contributed to our underrepresentation 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.

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Christopher D. Glynn, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [10]

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Sounds good. And on Aclara, could you talk about the growth there a little bit? I'm curious about, obviously, your win rate's 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?

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William R. Sperry, Hubbell Incorporated - Senior VP & CFO [11]

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Yes, I think it's a little hard for us to attribute that other than anecdotally. I think we've gotten a lot of really positive feedback from our core customers that they're happy that it's in our portfolio, somebody who they value and trust in relationship with us and the quality of the products we provide and standing behind our products. So I do think there is some benefits there. But I think the -- and I'm not sure if there is displacement that we see, specifically. I do think that the thing that will be good for us is to get more communication -- higher-margin communication products into that mix, Chris. And I think that combines the two halves of your question, where our traditional customers and those sell cycles are over a couple of years, right, if not over a couple of months or quarters. And that's where we're really looking forward to, is the communication side of that growth catching up to the other side of the business.

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David G. Nord, Hubbell Incorporated - Chairman, President & CEO [12]

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Yes, Chris, I think one of 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, ones that you wouldn't notice of where there's 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. [One of them was] bring in the 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.

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William R. Sperry, Hubbell Incorporated - Senior VP & CFO [13]

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And I've had the benefit of sitting in, Chris, on some customer meetings where we have both Aclara senior management with Hubbell Power Systems senior management and as Dave said, it's a really powerful meeting that's different than meetings that we used to have in either half. So I think there's a big complementary nature to that, that our customer base is favorably reacting to.

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Christopher D. Glynn, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [14]

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And last one. It sounds like price cost favorability might widen a little bit with the steel factor there. You also have restructuring was a little lower in the first quarter, that's going to step up. Should those 2 -- as we think about the first quarter base, are those 2 kind of offsetting going forward? Or is it more the net restructuring kind of lifts off?

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David G. Nord, Hubbell Incorporated - Chairman, President & CEO [15]

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

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Operator [16]

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(Operator Instructions) Your next question comes from the line of Deepa Raghavan from Wells Fargo.

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Deepa Bhargavi Narasimhapuram Raghavan, Wells Fargo Securities, LLC, Research Division - Associate Analyst [17]

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Good Q1. It looks like it was better than your expectations.

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David G. Nord, Hubbell Incorporated - Chairman, President & CEO [18]

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Thank you.

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Deepa Bhargavi Narasimhapuram Raghavan, Wells Fargo Securities, LLC, Research Division - Associate Analyst [19]

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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 gases, restructuring steps up, but generally if you can help me, why the guide remains unchanged and some puts and takes, that's helpful. And I have a follow-up.

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David G. Nord, Hubbell Incorporated - Chairman, President & CEO [20]

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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 give 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 we think it's -- it would be premature to change anything specifically, unless there's a major mover in there, which we don't have.

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William R. Sperry, Hubbell Incorporated - Senior VP & CFO [21]

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Yes. 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 underline some of Dave's confidence that it feels good to be off to a good start.

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Deepa Bhargavi Narasimhapuram Raghavan, Wells Fargo Securities, LLC, Research Division - Associate Analyst [22]

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Got it. Can you talk about how the quarter played out by months, 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?

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William R. Sperry, Hubbell Incorporated - Senior VP & CFO [23]

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Yes, I'm not sure there's much significance to monthly analysis as the year went by, Deepa. I think January 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 incentives. So I think as we analyzed 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 to the year, and it felt good to have reasonable comparisons there that were not depending on a back-end load or anything like that.

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Deepa Bhargavi Narasimhapuram Raghavan, Wells Fargo Securities, LLC, Research Division - Associate Analyst [24]

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

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William R. Sperry, Hubbell Incorporated - Senior VP & CFO [25]

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

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Operator [26]

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

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Maria Ricciardone Lee, Hubbell Incorporated - Treasurer and VP of Corporate Strategy & IR [27]

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

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Operator [28]

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