Jan 28, 2009
Executives
Bill Sperry - VP, Corporate Strategy and Development Tim Powers - Chairman, President and CEO Dave Nord – SVP and CFO
Analysts
Bob Cornell - Barclays Capital Jeff Sprague - Citigroup Christopher Glynn - Oppenheimer Jeff Beach - Stifel Nicolaus Steve Gambuzza - Longbow Capital
Operator
Good day everyone. Welcome to the Hubbell Incorporated 2008 Fourth Quarter Earnings Release Conference Call.
Today's call is being recorded. Now for opening remarks and introductions I would like to turn the conference over to your host Mr.
Bill Sperry. Please go ahead, sir.
Bill Sperry
Thank you and good morning everyone. We released our fourth quarter earnings this morning, and that release is available to you from a number of sources.
One option is to go directly to the Hubbell website at hubbell.com. The complete release can be viewed by selecting the investor info tab clicking on the financial link and then press releases from the drop-down menu.
It is also available from the usual wire services. The company presentation is also available by going to the Hubbell website and clicking on the investor information tab and the live webcast link.
Then click on the link supporting materials. This conference call is simultaneously being webcast on the Hubbell website.
Audio replays of the call are available in three ways. First you can have a telephone replay of the call starting two hours after its conclusion, and that replay will be available for the next week.
To access that replay, dial 719-457-0820 and enter the pass code 4876114. You may also hear the replay on the Hubbell website again from the investor relations tab, select the audio archives link in the drop-down menu, or you can have this audio as a podcast by downloading it from the Hubbell website.
Let me refer everyone listening to the call today and those who hear a replay to the paragraph in our press release regarding forward-looking statements. That release in this call may contain some expectations based on assumptions in the future and Hubbell's performance in the future, particularly regarding our earnings.
Clearly, these comments are forward-looking. We also may make some comments here today during the call or answer questions, which may include forward-looking statements.
All of these involve inherent assumptions with known or unknown risks and other factors that can cause our actual or future results to differ from what we may discuss or project here today. So please note that paragraph in the press release, and I would like to consider it incorporated into this call by reference.
With that I will turn it over to Hubbell's Chairman, President, and Chief Executive Officer, Tim Powers.
Tim Powers
As is our usual practice with these calls, I am going to provide you with a summary of the results we announced this morning. Then Dave will walk you through a more detailed discussion of our financial performance.
I will then conclude with my perspective on the outlook for 2009 and some closing remarks. Then we will open it up and take some questions from you.
Before we get into the numbers, I want to describe the organizational changes we made at the end of the year. We unified wiring device and electrical product organizations under the leadership of Gary Amato.
Gary has been with Hubbell for 21 years and has been doing an outstanding job running businesses for us. His role has expanded from running the industrial area to all of electrical products and he is now added wiring.
We are calling Gary's business electrical systems which together with lighting comprise our electrical segment. The second change we made was moving Bill Tolley over to wiring to run Power Systems.
Bill has had a distinguished career with us, spanning roles in operations as Chief Financial Officer and most recently as a head of wiring devices. I am excited about the impact these leaders are expected to have at our company.
Turning to the results, I am very pleased to report that despite challenging market conditions we faced, our performance was even better than we guided at the end of the third quarter. We generated sales of $650 million, a growth rate of 6% over last year's quarter and an operating margin of 11.1% comparable with last year.
We earned $0.82 per fully diluted share also equal to last year. This EPS level includes a $0.05 charge from claim and actions we took in the fourth quarter.
Now, let's turn to the full year 2008. For those following our on presentation, I am on page 3.
We had highlighted last January that our goal for the year, which is to grow sales by mid single digits, add 100 basis points for operating margin and generate free cash flow in excess of net income. I am very proud to say that our team delivered on these targets.
Our brands generated $2.7 billion in sales a 7% increase over 2007 and at the operating profit level we earned 12.8% versus 11.8%last year. Our EPS was $3.94 per diluted share an increase of approximately 13% and above the high end of our guidance.
We generated nearly $270 million of free cash flow better than 1.2 times our net income. These numbers do not tell the full story of Hubbell's management accomplishments.
The unprecedented spike in commodity costs during the second half of the year presented a severe test that we weathered well. We continued our relentless pursuit of pricing, productivity, and cost containment.
Our acquisition programs have a very active and successful year. We invested $265 million in seven transactions that added strategically to our suite of brands and contributed financially to our results and we made great strides on our people initiatives in developing talent.
We also returned cash to our shareholders while maintaining our conservative balance sheet. We raised our dividend by 6% and repurchased approximately $100 million of Hubbell's common stock.
We termed out our maturities and exited the commercial paper market by issuing $300 million of bonds in May. Obviously we are facing a very challenging economic environment as we enter into 2009 and I will offer my outlook on that later in the call.
For that does not diminish the pride that I have in the Hubbell team accomplishments in 2009 and I want to pause here and thank all Hubbell employees through out the organization and applaud a job very well done. Now let me turn it over to Dave to have him discuss the financials in more detail.
Dave Nord
Thanks Tim. Before I get started let me just reiterate, we are referring to a supplemental information document that has been posted on our website.
If you have downloaded it, that is what we will be referring. Turning to page 4, Tim talked about most of the highlights but there are two additional items to mention.
One, our fourth quarter also includes the costs associated with actions taken to begin to reduce our infrastructure focused mainly on the salary side for incremental costs but as we will talk later, more cost reduction focus. As we announced in December we acquired Varon Lighting Group and we added a good business and a leader in providing energy efficient lighting fixtures, with a good growth market for our lighting platform going forward.
Let me get into the details on page 5 for the fourth quarter sales and operating profit. On the sales side, $652.1 million an increase of 6%.
That increase is attributable to acquisitions of 6% and price of 4%. Offsetting that combined 10% increase is some currency headwind.
While we do not have significant currency exposure relative to others in the industry, the magnitude of the change actually hurt us in the fourth quarter for 3%. So, that left us with a core volume decline of 1 point negative.
Within there is the continuation of the drag from residential market being down more significantly absent that the core volume was actually up a point. On the operating profit side $72.4 million in the quarter also up 6% consistent with our topline growth, but a lot of moving parts in there with some challenges on the gross margin side being offset by the cost containment.
So turning to page 6, you see that the gross margin and a decline of 90 basis points, a number of things contributing to that. One is the impact on absorption as we have started to ramp down our production facilities in the fourth quarter, a little bit of negative implication in the mix of products sold in the fourth quarter and then some of the currency headwind that flows through on the cost side.
Offsetting that is was an equal amount 90 basis point improvement in our SG&A expenses down to 17.4% coming from both the leverage – leveraging or existing base across higher volume and more importantly our focus on cost containment and that is an area that we will continue to focus on going forward. Turning to page 7, a number of items below the line, net interest expense up $4 million from the fourth quarter of last year, all attributable to the higher borrowing levels.
You recall we issued $300 million of long-term debt in May and we have been pretty active in the acquisition front. So that is all attributable to the higher borrowings.
At the tax rate higher than last year’s rate, you recall last year's rate had the benefit of some audit settlements. This year’s fourth quarter also has the benefit lower than our run rate through the third quarter as we have the impact of the R&D legislation that was reenacted at the beginning of October, which we commented on in our third quarter release and contemplated in our guidance for the fourth quarter.
So all that leads to net income of $46.4 million, 4% lower than last year in the quarter because of the higher interest and higher tax rate, but on a earnings per share basis we are able to maintain our earnings per share at 82% as a result of lower average shares outstanding from our share buyback program earlier this year. Let me turn now to the segments.
First on the electrical segment, where we had sales of $458.2 million up 1%, a number of things in there favorable price and acquisitions price contributing about 4 points and acquisitions about 3. Foreign currency headwinds about a 3 point drag, so you are left with about 4 points of growth, core volume against the 1% that shows core volume being down 3 points.
A big part of that is attributable to the residential business down in the neighborhood of 20%, what was continuing good contribution, on the electrical product side both on the high voltage and the harsh and hazardous business. On the operating profit, slight decline to $44.7 million for the quarter.
A number of things are contributing to that. Slightly favorable price costs finally in the year, our focus on productivity improvements and then the incremental benefit of our acquisition in the year particularly the Kurt Versen acquisition earlier in the year.
Of course we continue to deal with the headwind from residential and the margin drag that is contributing. Turning now to page 9, the power segment continued good performance as we have seen all year with sales of $193.9 million up 21%, acquisitions and price contributing 14% – 14 and 6 points of the back, 21%.
The remaining one has some currency headwind of about two, so you are left with some underlying core growth still in the 3% to 4% range although with flattening demand. The operating profit of $27.7 million in the quarter was up $4.5 million, again finally seeing some positive benefit on the price cost equation.
We have got the benefit of acquisitions contributing as well as continued benefit coming from productivity in particular, continuing to advance on low cost country sourcing. We turn now to page 10, summary of the full year results.
As Tim mentioned, with sales up 7% and operating profit up 16%, margins up a full 100 basis points and with the tax rate headwind still resulting in earnings per share up 13% at $3.94. So a strong performance, a lot attributable to our continued focus on price, cost and productivity.
Just summarizing the segments for the full year. First on the electrical segment, 3% sales growth to $1.958 billion, acquisitions and price being big contributors as well as strong demand throughout the year on the harsh and hazardous and high voltage products being offset by residential weakness.
More importantly on the profitability side despite that margin drag from the residential business, we are able to increase operating profit to $227.3 million for the year and operating margins up nearly a full point to 11.6% in the electrical segment. On the power segment side page 12, topline growth of 17% bringing us to $746.2 million, for all the same reasons that we saw continuing in the fourth quarter.
Acquisitions and price giving us 8 and 4 points of that growth respectively, but also some very good unit volume growth and some incremental storm business, although not significant less than a point of the year-over-year contribution. Then on the profitability side, continued good performance on the volume increase getting our prices to meet and exceed our cost by the time we finish the year, the acquisition improvements, as well as our productivity benefits.
So, we had good, absolute profitability growth, as well as margin growth from 15.3% to 15.9%. Let’s turn now to cash flow, cash flow for the year finished very strong.
Operating cash flow $319 million free cash flow that is operating cash flow after CapEx $269.8 million, 121% of net income, well north of our plans going into the year of equaling net income. A lot of things contributing to that, not the least of which is a good focus on our working capital as well as good scrutiny around our capital investments.
You see the working capital turning to page 14 and our improvements there. Receivables are up for the year, 7% pretty much consistent with our volume uptick but as we typically see very good performance in the receivable collections in the fourth quarter as we are collecting those sales from the period of the third quarter.
We are tracking credit quality very closely here. As we go forward and trying to make sure that we are doing all we can to manage any risks that might come up.
On the inventory side, increase in inventory yield over there – year-over-year but a lot of that is due to the acquisitions that we have added. In fact in the month of December we actually had a reduction in inventory of $9 million and we expect that to continue well into 2009.
You see that from days outstanding. We have actually improved our days in inventory by two days.
On the payable side we have increased our days on the payable side by a day. So our trade working capital, well it's up $22 million from the end of last year.
Trade working capital as a percent of sales is actually down to 19.4% from 19.8% in 2007. So what are we doing with all that cash that we have generated?
You turn to page 15 and you will see the profile of the uses of cash. First and foremost is our dividends, you will recall that we increased our quarterly dividend by $0.02 a quarter or 6% in the July period, so that we are investing $19.6 million in the fourth quarter, $76.9 million for the year.
Second is on our capital expenditures investing for the future in the business. Fourth quarter capital expenditures were $15.4 million bringing the full year total to $49.4 million.
The third piece in the fourth quarter was in the acquisitions totaling $61.5 million for the acquisitions principally for the Varon deal in December. For the full year, we also have the investment for share repurchase of $96.6 million.
Recall that was all focused in the beginning of the year as we continue to review our usage of cash, we look at both share repurchase and acquisitions in the early part of the year. The acquisitions pipeline was not as active, there was not as much of activity that we saw to invest in, so we looked at our own shares as a good investment opportunity.
As the year progressed, more activity around acquisitions and so we invested significantly on the acquisition front and as a result had no share repurchase in the fourth quarter. So, we are broadly distributing our strong cash flow.
At the same time we are managing our capital structure as we always have with conservatism and discipline. We have at the end of the year – we finished the year with $178 million of cash on the balance sheet.
We have no commercial paper borrowings outstanding. We have $500 million of long-term debt, $300 million of which was issued in May, none of that debt due before 2012.
So our total debt being just under $500 million brings our debt to capital at 33% and our net debt because of our cash position at 19%. We also have our revolving credit agreement which we renewed in the fall of '07 at $250 million with expansion capability to $350 million which we took advantage of earlier this year.
So we have that readily available through 2012 with no borrowings outstanding. So we are maintaining our flexible capital structure as well as maintaining our conservative balance sheet.
So with that I will turn it back to Tim.
Tim Powers
Thanks Dave. Now let’s turn to our outlook for 2009, on page 17 of the materials.
Our largest market is non-residential construction and the outlook there is challenging. While put in place spending continued through the fourth quarter, there has been a significant decline in new project starts which will hurt our volumes next year.
Lack of available credit will likely continue to hamper projects starts. Residential construction will continue its slide through 2009, and while some forecasters see a rebound late in the year, our orders lag starts and so we will not see any benefit from that activity this year.
Our industrial markets were in better shape but still we expect a decline in volumes in those businesses. While we see the need for more power and the grid to be enhanced, our expectation is that the utilities will spend less during the year on transmission and the housing slump will drag down distribution spending.
On the positive trend, there is a stimulus package expected from the new administration. The indicated focus on infrastructure and energy efficiency should generate sales across both of Hubbell's electrical and power segment.
Estimated the sizing or timing of any of these potential benefits is premature at this stage. Distilling and symphazing all of these factors into a precise view of the future is difficult in the best of times.
Given the uncertainties we see today providing a reliable forecast is even harder. The bottom-line to Hubbell is an expectation of market volumes being off mid-to-high teens.
We continue to work diligently in analyzing our end markets and creating plans and contingency plans to manage through the uncertainty. We began to work in the fourth quarter to reduce our staffing levels in anticipation of the challenging markets ahead.
Further resource reduction efforts will be ongoing in the first quarter. To conclude we are very pleased with the performance in the quarter and extremely proud of producing record results in 2008.
The markets ahead will be difficult for us but we believe the strength of our brands and the focus on pricing productivity and costs will allow Hubbell to navigate through the challenges and emerge as a more potent competitor. Thank you for your attention.
Now let's turn it over to your questions.
Operator
(Operator Instructions). We will take our first question from Bob Cornell with Barclays Capital.
Bob Cornell - Barclays Capital
Hi. Good morning, everybody.
Tim Powers
Good morning, Bob.
Bob Cornell - Barclays Capital
You know Tim you are usually pretty good at taking a crack at the guidance. I am surprised you did not, you know, take a fling out here.
So, you know, I know it is in the press release you talked about free cash flow being greater than net income this year, but you must have a plan for what the net income might be. May be you could share with us, you know, how that minus 15 to 18 translates into a net income number, you know, considering you already got an idea that cash flow is going to be net?
Tim Powers
We are not giving any specific guidance. We are certainly looking at the same market conditions as everyone in the construction industry.
We certainly expect volumes to be down double digits from the rate at which our orders have declined early on. Certainly the huge movement of the credit markets and the banking crisis overwhelms where we are and adds a dimension to us doing business that makes it much more difficult to predict.
While you can normally project a lot of things in the construction business, the fact that debt is very restricted and it is a moving target represents the most difficult element of that.
Bob Cornell - Barclays Capital
So, I mean, what you did you see in the fourth quarter, Tim with regard to these market dynamics and if not in the fourth quarter. How do you expect the first quarter layout, in other words when do you expect to see your topline running down this 15% to 18%?
Tim Powers
The month of October was a very strong month both from our shipments and on orders side. The month of November like many others have reported was a steep change of declining order rates and December continued that trend.
So what we are seeing now is a book to build ratios below one as we enter the 2009 year. There is no clear trend available other than to say that we are comfortable that it is not a single digit decline.
Beyond that we do not really have the visibility into the future to make the projections that we normally do.
Bob Cornell - Barclays Capital
You made a comment on the first quarter. Do you expect the first quarter unit volumes to be down on this 15% to 18% cap or is that still looking at a more moderate decline?
Tim Powers
I do not really have a good feel for that at this time. The month of January is off to a slow start, and would be consistent with what we are saying.
Distributors are making adjustments to their inventories full time the utility side as well as the electrical side and whether we are seeing the end volume dynamic or the rapid response that happened from the November downturn in business is something that we are not clear on.
Bob Cornell - Barclays Capital
One more question from me. So, when you have a volume decline like this you are going to be idling plants and working down the inventories.
Here we have the adverse factory variances and then it is going to be very difficult to get price costs, with volumes going down that much. So many competitors have already talked about pricing issues.
So, could you address, the significance that you see in terms of adverse of volume variances from under-absorbed overhead and then the issues around price costs and productivity possibly reversing here in the first quarter?
Tim Powers
Well for certain as all manufactures would do in the face of economic change of this magnitude. We have moved in a very orderly and disciplined way to reduce the output of our factories.
We cannot make all of those adjustments at one time and it will take us at least till the end of the first quarter, to continue to reduce the output in an orderly way while keeping our deliveries at the high level that we usually do. So hopefully by the end of March we will be at a run rate of production that gets us to where we think the business will head and from there we just have to see where it takes us.
From my point of view we were running at pretty hard rate for the month of October and really only began to make these kinds of adjustments in the month of November and December.
Bob Cornell - Barclays Capital
What about price cost?
Tim Powers
Well certainly, cost has done a 180 degree turn, although this is on the spot price of a lot of products. Although we have not seen all of that or a huge extent of that come through to us.
Bob Cornell - Barclays Capital
I mean in terms of commodity prices.
Tim Powers
From sub-metal, steel, aluminum, copper, certainly some of the products we buy are indexed. Some of those indexes are mostly lagged by a quarter so we will see some better relief in Q1 than we did as things turned down in Q4.
We were still taking a lot of inflation pressure during Q4. So you know the story about managing costs and prices, is one that you know is far beyond the volatility that we would normally see in down turns in 2000 or '91 because of the magnitude of the run up that we saw coming into this.
So I'm having a hard time predicting it given the set of variables. There is just not enough visibility to make great clear statements.
All of us in the business as suppliers are working in our own economic best interest so we are going to be hanging on to prices much as humanely possible. To predict this with the declines in copper from like $4 to $1.50 and steel from $1,100 a ton back to $600 a ton in four or five months, are movements that we are not used to dealing with and we will certainly have some lumps in the market as the market adjusts for that.
Bob Cornell - Barclays Capital
Okay. Thanks Tim.
I have taken up a lot of your time.
Tim Powers
Sure.
Operator
We will move on to our next question from Jeff Sprague with Citigroup.
Jeff Sprague - Citigroup
Thank you. Following on some of that, those were really, mostly the key points of this whole dialog.
I just wonder Tim, if you could shed a little more light on what you think the state of distribution inventories are. I frame my question from the thought that your volumes really were not down that much in Q4 to your point.
I wonder if you think the sell through was actually quite a bit weaker in the quarter so we will keep on striving to get inventories down may be they are actually still going up. How does that relate to your comment about Q1 in trying to throttle back the factories, do you think the distributor inventories are already headed down on a nominal basis or are they still higher than people would like them?
Tim Powers
I think our head is down. When we look at our flow goods business for wiring devices and for metal outlet boxes and fittings, certainly you can see the decline in demand and distributor response to taking it down.
We did lot of shipping of projects and jobs late in the year and that really I think more than the stock and flow business aided our revenues. I do not think that distributors have fully grasped the magnitude as none of us have yet of this reduction in the size of the markets.
So, while I think they are taking their inventories down I certainly believe that all during the first quarter they will be further reducing their inventories in attempt to keep up with the change in market conditions.
Jeff Sprague - Citigroup
Your comments on the complexion of power certainly very logical and we are seeing that in a lot of our own work. When you drilled down into what utilities are planning from a CapEx standpoint, really budgets are coming down but they are not being eliminated obviously.
Where do you see the priorities to spend where spending is happening?
Tim Powers
I would say that there are many projects around transmission that are far enough underway that that they will continue. If you are a utility and you have the decision to make to go forward with the next one those who are going to slide to the right by a year.
So there still is a work coming on transmission. I think we are going to see a gap as the year goes along for new projects to start.
On the distribution side you are going to see them replace whatever obviously needs to be replaced and upgraded and storm damage and all those kinds of things that they would normally do, but they also work systematically to upgrade the system. This is where you can pinch pennies in your operating budget or in your capital budget and really we think that this number is somewhere in that 10% or so of our utility business.
It will be down combined around that amount.
Jeff Sprague - Citigroup
On the M&A front, first just to totally get the base right for '08. What were the total annualized revenues of all the acquisitions that you did in '08 and then what is the carryover acquisition impact on '09 revenues given that these are sprinkled in over the course of the year?
Dave Nord
Jeff, its Dave, It is a little over $200 million on the annualized revenue and about half of that flow through this year. So, you get probably incrementally next year about $100 million.
Tim Powers
Yes. I would like to comment on the last lighting acquisition.
Certainly we have talked about – many of us have talked about the energy efficiency of lighting in the application of modernizing existing buildings and the business that we have bought is exclusively in the business of re-lighting existing buildings. We considered whether it was in our best interests to start from scratch and build up a business or whether it was more, wise for us to get buy one that had an existing market position.
We are very pleased with the acquisition of Varon. It gives us that big head start into what I think will be the fastest growing element of the lighting business going forward.
Jeff Sprague - Citigroup
One other on that whole topic. You did get seven deals done, I believe they were all private companies.
Where is the deal flow coming from? Are they private Stanley companies?
Is it stuff buried in private equity that is coming back out? Do you see any change in availability or change in people stock process in some of these smaller electrical companies?
Is there actually like to be more deal activity in ’09?
Bill Sperry
Yes. Jeff, this is Bill.
I think, we see from all those sources you mentioned. I think where – what will be interesting to figure out is whether or not seller’s expectations on valuation can mesh with buyers' analysis on the right valuation given some of the down drafts that Tim and Dave have been highlighting.
So I actually expect that the dialog activity will be heavy early. That it may take a little while to get everybody’s expectations synced up so that price can be agreed to.
Tim Powers
Yes. So if you are willing to buy something at eight times earnings what the heck are earnings for 2009.
Jeff Sprague - Citigroup
Great. Okay.
Thanks. Good luck out there.
Tim Powers
Thanks.
Operator
(Operator Instructions). We will take our next question from Christopher Glynn with Oppenheimer.
Christopher Glynn - Oppenheimer
Thanks. Good morning.
Bill Sperry
Good morning.
Tim Powers
Hi Chris.
Christopher Glynn - Oppenheimer
On the 15% to 18%, Bob's interpretation in the mid-to-high teens it is a pretty good one. Was that for electrical or the entire enterprise?
Tim Powers
We do not think that our total business will be down 15% to 18%, but more than 10%. Let's put it that way.
Christopher Glynn - Oppenheimer
So, are you characterizing that as conservative now the mid-to-high teens?
Tim Powers
Mid-to-high teens is the market conditions will shrink by that. We think that Hubbell will do a little better than 15% to 18%.
Christopher Glynn - Oppenheimer
Okay.
Tim Powers
Do not try to pen me down for content.
Christopher Glynn - Oppenheimer
No, I will not. I am just trying to clarify what you meant.
What is your guesstimate on the currency for the year?
Tim Powers
Still a little bit of headwind but again as I mentioned since we do not have significant exposure it will not be you know what others will be facing.
Christopher Glynn - Oppenheimer
Yes. I was surprised by what it was in the quarter and then in the outlook just passing some of the language in the press release.
Utility expected lower, industrial markets weaker, is there any difference between lower and weaker?
Tim Powers
No.
Christopher Glynn – Oppenheimer
No difference. Okay.
In particular on the lighting side of pricing are you seeing any of the majors initially start to be a little more aggressive?
Tim Powers
I think as you quote jobs out into the future for deliveries out several months, most manufacturers are using what they would expect their costs to be as the basis for their bid versus what their costs has been, if I could answer it that way.
Christopher Glynn - Oppenheimer
That is helpful, yes absolutely. Thank you very much.
Operator
We will move on to our next question from Jeff Beach with Stifel Nicolaus.
Jeff Beach - Stifel Nicolaus
Yes, good morning and congratulations on a very good quarter.
Tim Powers
Thank you.
Jeff Beach - Stifel Nicolaus
I have two questions. I want to go back to the inventory levels of the electrical products and relative more to this massive decline in raw material costs that occurred.
So that if you go through the next six months the products you make you will be making at a lower price and likely selling at a lower price and then relating it back on to the distributors are better faced with high cost inventories. Are they in your opinion lowering this price umbrella inline with their costs and trying to maintain a disciplined market so that they can escape inventory losses and how much do you think this playing out the lowering costs anticipated ahead on distributor inventories versus just their perceived demand?
Tim Powers
I think that distributors follow the umbrella's pricing structure of manufactures and that the I would say the single biggest impact on distributors in the second half of 2008 has been the decline of copper as it is incorporated into the wire they sell and steel in the metal conduit and other metal products that they sell. So they have seeing a deflation on this aspect of their inventories but if that stuff moves through at a pace at which they really would not get burned too badly it would happen pretty quickly and it might have some margin compression but I would not expect them to see many losses from this.
The rest of where Hubbell plays is products for which the cost decline really has not caught up yet. So right through the end of the year while we were expecting to see some of these massive declines we hadn’t seen all better as I said earlier in the spot price of many of the products.
So when we rolled our standards we actually have a small increase in the standard value of inventory from one year to the next. That nearly would have might have been if all the prices that we saw in September and October had held.
Okay. So when you look at the current value of Hubbell's inventory at standard there is probably 2% or 3% increase in standards year-over-year.
Jeff Beach - Stifel Nicolaus
What I was really trying to get at is how do you think this is playing out with the end customer out there that buys lots of electrical products that are made out of let's say 90% steel. How much deferred orders are going on right as opposed to the recession, do you have any gauge for that at all?
Tim Powers
I think the decision has come down this way. A project underway is a project underway.
When you have the opportunity as a developer to slow down right now it is in your great advantage, because what you do is continue to re-bid this until you get the prices where you need them to be. So this is a naturally delaying factor when the cost of all materials is headed down.
I want to remind you that in a whole building the electrical cost is quite small and what they are more interested in is what is happening to concrete rebar and structural steel as well of glass and things like that. So the whole lighting package or whole electrical package in a building may only be 3% or 4% of the total building.
So it is more that the other factors that will weigh on whether a project goes forward or not. So, even the cost of oil as it applies to asphalt on a parking lot factors in going forward or not.
Jeff Beach - Stifel Nicolaus
All right, thanks. Just one other simple question.
Back on defining your volume, are you talking about actual volume and not volume and price and is that volume organic as opposed to that you are seeing in the industry and for yourself, excluding acquisitions?
Dave Nord
Jeff are you referring to the actual results or the forecast?
Jeff Beach - Stifel Nicolaus
.
Tim Powers
When we are talking about volume we are anticipating some decline in price as well as physical volume. I do not really, I can not quantify that.
We have our guesses on that and that we have our estimates that were seen now but events are changing at you know at which it causes us to not make annual estimates of those.
Jeff Beach - Stifel Nicolaus
Okay. Your comment that the market might decline mid-to-high teens is that volume only or is that volume and more pricing?
Tim Powers
More physical volume like square foot.
Jeff Beach - Stifel Nicolaus
Okay. All right.
Thank you.
Tim Powers
Okay
Operator
(Operator Instructions). We will take our next question from Steve Gambuzza with Longbow Capital.
Steve Gambuzza - Longbow Capital
Good morning.
Tim Powers
Good morning.
Dave Nord
Good morning.
Steve Gambuzza - Longbow Capital
On the, the comments you made about the cost basis of your inventory, would you expect that to, you mentioned it was a high, you mentioned that you are in an elevated inventory level and it was for a cost basis. Will that have negative impact on margins?
Tim Powers
No, what I was trying to make the point is that the metal’s prices we saw going into 2008 ramped up significantly during the 2008 which probably hit its peak around September, October and then came back down. So levels still a little bit higher than the beginning of 2008, but certainly not to the levels that you are seeing in the spot price that you can see on any of the published metrics.
My point was that has it really caught up with all manufactures yet? It will continue to come down and certainly then that balance will come between the trade off of price and lower input costs.
Steve Gambuzza - Longbow Capital
Okay. On working capital, you pointed that you did have clearly improving working capital metrics deep in over the course of the year.
Just given the extent of the downturn and the suddenness of it in Q4 and how the outlook has changed on the margin pretty severely. I was surprised to not see even more working capital pulled out of the business in Q4 and the balance sheet looks a little better than it did at the end of last year, but the environment is very different.
I am just curious as to how working capital is trending with your expectations and what you would hope to accomplish prospectively with working capital? How much you can pull out given your views of the end markets?
Tim Powers
Well, first of all, you have to go back to October which was probably our strongest month of the year in which our factories were working as up to the maximum levels of the entire output for the year. Then really only a 60-day period to turn around and go from flat out – not flat out it is a little over statement, but fairly significant output to reduce it.
So, we are somewhere along that path to get the output down to where we want to go and it will take us to the end of the first quarter to do that. So, if business is off double digits we are looking for a decrease from inventory over the course of the year.
Steve Gambuzza - Longbow Capital
So, if you are saying volumes are down, a little bit better than 15% to 18% overall and there was probably some negative price impact also, which is going to result in lower working capital. Essentially you could hopefully reduce your net investment and working capital by something similar to what sales declines.
So basically working capital as a percent of sales should be the same, should stay constant?
Tim Powers
I would say that it will generally follow depending on the severity of decline. Working capital numbers will deteriorate just a little bit because of it – if volume tracks down faster than you are able to burn up inventories, sometimes you have a little deterioration, but generally what you said is true.
Steve Gambuzza - Longbow Capital
Okay, so that would imply usually a pull of a fairly substantial amount of cash out of the business this year based on your topline forecast and if this carries, would you expect to be able to buyback stock in 2009 and reduce your share count?
Tim Powers
All those opportunities were still there, but given the magnitude of what is changing in the dynamics at the market place and the severity of the financial crisis we would certainly be cautious before we proceeded with any significant buyback of shares or things like that. We find actually that in times like this if you can come to the table and find an agreement with a seller to buy bolt-on acquisitions is the best use of money at this time.
Steve Gambuzza - Longbow Capital
Okay.
Tim Powers
Certainly we keep all options available.
Steve Gambuzza - Longbow Capital
Finally can you just give us some comment on what to expect for an effective tax rate this year? As well as what the impact of pension expense from a GAAP and cash standpoint might be?
Tim Powers
Yes I think from a tax rate standpoint as we have said over the last couple of years that there is upward pressure on the tax rate as a result of continued growth or negative application of the mix of our earnings because of the domestic nature of them. The benefit from our foreign operations becomes a smaller percentage.
So, you know it is going to drift up. It is generally been a point a year.
We are still working through that but, certainly a little bit higher. On the pension side that clearly is a point of cost headwind that all are going to face.
We are looking at something in the order of $10 million to $12 million thereabouts, again that is still being worked through. But, you know, the simple math and you can look at our pension fund performance assets, down a little bit over a $100 million with an 8% assumed return.
So you get to you know at $10 million to $12 million headwind in pension expense.
Steve Gambuzza - Longbow Capital
Pretax?
Tim Powers
Pretax.
Steve Gambuzza - Longbow Capital
Okay. I am sorry.
If I can discuss one final question? You made some comments earlier on the re-light opportunity and the acquisition you made.
I was wondering if you might just be able to put some parameters around you know on an LTM pro forma basis what Hubbell's existing revenue base is in terms of re-lighting energy efficiency? Aany comments you might have on what you think the addressable market is with that opportunity?
Tim Powers
Well certainly, we have products that prior to our acquisition that would go into that market but not an organized business to deal with it or selling on to sell to that market. So we have added north of $50 million in sales and a growing group of sales from that business as a jump start to get further into it.
So really that was the basis for us to move into the business.
Steve Gambuzza - Longbow Capital
What was the basis amount? Do you have the statistics?
Tim Powers
We really did not measure it because it was on individual jobs and the degree of difficulty of identifying if job 123 is in a re-light mode, as you know retrofit of office space is quite difficult. So, this business we have now organized and we are now going through a lot of detail to try to identity incremental additional business.
So going forward I think we will have a better statement about that than up to now.
Steve Gambuzza - Longbow Capital
Good. Thank you very much for all of your time.
Tim Powers
Sure.
Operator
(Operator Instructions).
Bill Sperry
Is that it [Lian].
Operator
It looks like we are out of questions.
Bill Sperry
Okay. Thank you every body for joining us this morning.
To the extent you want have some follow-up questions Jim Farrell and I are obviously available to do those. So thanks for joining this morning.
Operator
This concludes today’s conference call. Thank you for joining and have a wonderful day.