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.

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.

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…

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…

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…

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…

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

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?

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.

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?

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.

Great, thanks.

Okay.

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

Hey guys, good morning.

Good morning.

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?

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.

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?

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.

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?

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.

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

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 may be 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?

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.

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?

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.

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.

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

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

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

Hey, good morning.

Hey.

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?

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.

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?

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.

Your next question comes from the line of Robert McCarthy from Stephens.

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 some time 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?

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.

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?

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 some time, 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?

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

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?

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.

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?

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

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

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.

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?

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.

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

Yes.

Thank you both.

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

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

Ladies and gentlemen, this concludes today's conference call. Thank you all for joining. You may now disconnect.