investor presentation september 2005library.corporate-ir.net/.../investorpresentation_9.05.pdf ·...

Investor PresentationSeptember 2005

11 Solutions. Supply. Service.

Certain statements set forth in this presentation consist of forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and are subject to its safe harbor provisions. These forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause the actual results, performance, or achievements of the Company to be different from any future results, performance, and achievements expressed or implied by these statements. They should be read in conjunction with the Company's most recent annual report on Form 10-K and other reports filed with the Securities and Exchange Commission containing a discussion of the Company's business and of various factors that may affect it, including those factors discussed under the caption "Item 1. Business -Risk Factors" in our annual report on Form 10-K. Statements in this presentation may also include adjusted non-GAAP financial measures governed by Regulation G. For a reconciliation of these measures and other information required by Regulation G, please visit the Investor Relations page at www.hughessupply.com

Forward Looking Statement


Company & Industry Overview


Building For Excellence

Fiscal Year 2005 – Best year in the Company’s history

Continuing to make significant operational, financial and organizational progress in fiscal year 2006 by investing in:

• Businesses - that provide higher returns and geographic expansion

• Technology - to increase automation and improve efficiency

• People - that can execute our strategy

Building for the long-term


30 years Hughes and Industry Experience

Sales & ServicesGradie WinsteadEVP- Strategic Business Development

Rockwell International – 24 years; Allen Bradley -Electronics distribution experience;CEO - GKN Aerospace

General Electric – 20 years; CFO at 4 subsidiariesCFO- Cardinal Health 1989-1998CFO - NCR

Operations

Finance & Technology

Neal KeatingChief Operating Officer

David BearmanEVP and Chief Financial Officer

Genuine Parts – 22 yearsCEO - US Office Products

StrategicTom MorganPresident and Chief Executive Officer

BackgroundLeadershipName

Transformational Leadership


Industry Dynamics & Growth Opportunities

$200 Billion* Fragmented Market– Market Leader with ~ 2% market share

– Mostly small, private, local or regional competitors

Low-Tech Industry – 15 to 20 Years Behind the Times

Increased Spending on U.S. Public Infrastructure Projects– Water Infrastructure and Electric Transmission & Distribution

Upgrades Needed

Recovery in Commercial and Industrial Construction Activity

* Industry and Company Estimates


Competitive Advantages

Leading Market Positions

Comprehensive Product Offering & HighlyKnowledgeable Sales Force

Geographically Positioned in High-Growth Markets

Diverse End Markets and Product Portfolio

Strong Capital Structure


Leading Market Positions

Market Leader in Southeast

Market Leader in Southwest

Market Leader in Southeast

Electrical

Industrial PVFBuilding Materials

#1Apartment MRO

#1Utilities

#2Plumbing/HVAC

#2Water & Sewer

Product Lines National Market Position

Market Leadership Developing National FootprintOver 500 branch locations July 2005

Over 75% of sales generated in highest growth states

Note: Green denotes the highest projected population growth states through 2025. Source: U.S. Census Bureau, Population

Projections 1995-2025


PublicInfrastructure

25%

MRO9%

Plumbing/ HVAC22%

Utilities16%

Electrical9%

Industrial PVF9%

Water & Sewer 26%

Other 3%Commercial 35%

Industrial10%

Residential30%

Product Portfolio - Sales YTD FY 2006End Markets

Diverse End Markets and Product Portfolio

Building Materials 6%

Reduces risk and cyclicality and provides a broad offering to major customers


Leveraging the Portfolio

Building Building MaterialsMaterials

Industrial Industrial PVFPVF

Electrical Electrical MROMROUtilitiesUtilitiesPlumbing / Plumbing / HVACHVAC

Water & Water & SewerSewer

Product PortfolioProduct Portfolio

Marketing ProgramsMarketing Programs

AcquisitionsAcquisitions

Hughes OneHughes One

IT InitiativesIT Initiatives

Supply Chain InitiativesSupply Chain Initiatives

Human Resource DevelopmentHuman Resource Development


Strong management Strong management –– Strong customer relationshipsStrong customer relationships

Expand geographic marketExpand geographic market

High ROICHigh ROICRecent acquisitions: National Construction, RAM Pipe,Recent acquisitions: National Construction, RAM Pipe,TVESCOTVESCO

Customer service Customer service –– Be the bestBe the bestComplete Hughes Unified System Complete Hughes Unified System –– Standard PlatformsStandard PlatformsIdentify best practices Identify best practices –– Standardize across businessesStandardize across businessesEstablish bestEstablish best--inin--class purchasing systemclass purchasing systemBusiness integration with our vendors and customersBusiness integration with our vendors and customersDrive supply chain excellenceDrive supply chain excellence

Expand markets in MRO and UtilitiesExpand markets in MRO and UtilitiesBuild national account relationshipsBuild national account relationshipsIntroduce new products and servicesIntroduce new products and servicesImplement industryImplement industry--leading, innovative sales andleading, innovative sales andmarketing programsmarketing programs

Focus onBest-In-ClassOperations

Focus onBest-In-ClassOperations

Capitalize on Organic Growth Opportunities

Capitalize on Organic Growth Opportunities

Pursue Disciplined Acquisition Program

Pursue Disciplined Acquisition Program

Business Strategy


Expanded OfferingsExpanded Offerings–– AMRAMR–– Voice Data VideoVoice Data Video–– Outsourcing Supply Outsourcing Supply

ChainChain–– Tools InitiativeTools Initiative

Improved Market Share Improved Market Share –– Loyalty & Incentive Loyalty & Incentive

ProgramsPrograms–– CatalogsCatalogs–– Marketing ProgramsMarketing Programs–– Training & DevelopmentTraining & Development

Hughes OneHughes One–– Owners / DevelopersOwners / Developers–– General ContractorsGeneral Contractors–– National AccountsNational Accounts

AcquisitionsAcquisitions–– GeographicGeographic–– Products / ServicesProducts / Services

New

New

Existing

Existing

Customer Market

Products / Services

Growth Opportunities


Innovative Sales and Marketing Programs

Hughes BrandingPromotional Product BrochuresProduct Line CatalogsAwards & Affinity ProgramsMajor Marketing Events


Strategic Acquisitions


Southeast MarketsUtilitiesTVESCOPlumbing/W&S products in

ArizonaPlumbingRam Pipe & Supply

Tilt wall construction in AtlantaBuilding MaterialsNational Construction Products, Inc.

Utilities

Water & SewerMRO

Water & Sewer / Plumbing / Electrical

Plumbing

Utilities West & Northwest Markets / Purchasing leverage

Southwest Power & Western States

Alliance ContractsUtiliserve

California MarketNational Accounts

Las Vegas Market

California & Las Vegas Markets

Marden SuscoCentury

Standard Wholesale

Todd Pipe & Supply

Recent AcquisitionsRecent Acquisitions

Market leadersGood operations managementServe high growth end markets

Generate high ROICReduce overall cyclicalityExpand our national footprint

Acquisition Criteria:Acquisition Criteria:

Business SegmentBusiness Segment Strategic AttractionStrategic Attraction


Upgrading and Developing Talent

Heightened focus on attracting, recruiting, Heightened focus on attracting, recruiting, training and retaining talented associatestraining and retaining talented associates–– College Recruiting ProgramCollege Recruiting Program–– Management in Training ProgramManagement in Training Program–– Mandatory advanced sales training Mandatory advanced sales training –– 360° feedback and development360° feedback and development–– Total rewards managementTotal rewards management–– Succession planningSuccession planning

Building bench strength for the future


Organizational Development

Business President

VP Operations

ControllerDirector of Purchasing Director of HR

Developing self-standing capability by business

Director of IT


Great Progress in FY 2005, but still in the early stages of transformation

We are Leveraging Technology, Challenging our People

Building a Solid Foundation for Sustainable, Profitable Growth

Will Demonstrate Progressive Improvement Each Quarter

Building for the Future


Operational Initiatives


Best-in-Class Operations

Completion of Hughes Unified Platform

Implement best-in-class financial, analytical and purchasing systems

Supply chain excellence: maximize branch profitability – rationalization and ROIC focus

Business integration with vendors and customers


Operational InitiativesAsset

ManagementExpenseGross

Margin

XX

XX

XX

XX

XX

XSelection made; in

negotiations

Purchasing System Upgrade– Centralized purchasing by business– Demand Forecasting system

OngoingMegacenter Rollout– Miami: opened 2004– Atlanta: opened 2005– Orlando: 2006

XOngoingEnterprise Data Warehouse

– Marketing e-wards application – Live Feb 2005

– Vendor/Customer/Product Profitability

Jan 2005Jan 2006

Oracle Financials– Phase I – G/L, Credit Mgt, Fixed Assets– Phase II – A/R, A/P modules

X3Q FY 2006Hughes Unified (Eclipse & SX.e)

– Provides a single view across businesses

– Over 93% of Branches, 90% of Sales Converted

Benefits / ImprovementTargeted Completion

DateProject


Strategic Initiatives-Supply Chain ExcellenceCorporate / Business level

Hughes Unified – common systemsIdentify best practice / process – standardizeEstablish best-in-class purchasing system

Regional / Branch levelDisciplined process executionSystemic training programStandardized plant & equipmentKPI measurement and reporting

Optimize Hughes distribution networkMegacentersTraditional branch


Strategic InitiativesMegacenters:

Create leverage across our businesses

Provide a unique market position

Significantly improve efficiency and customer service capabilities

Provide support to smaller branches

Integral to Hughes One strategy

Atlanta Megacenter:

440,000 square feet on 32 acresPrime access to major interstatesHouses national Tools & Fasteners center


Megacenter Model

Customer

Supplier

Branch Branch

Customer

Megacenter

National Account

Financial Overview



Strategic Financial Goals

Established January 2004 … Annualized Over a Period of TimeEstablished January 2004 … Annualized Over a Period of Time

Sales GrowthSales Growth … Organic 5% … Organic 5% –– 10%10%

… … Acquisitions 5% Acquisitions 5% –– 10%10%

EBITDA RatioEBITDA Ratio … 4.5% 6% 8% … 4.5% 6% 8% –– 9%9%

EPS GrowthEPS Growth … Twice Rate of Organic Sales Growth… Twice Rate of Organic Sales Growth

Operating Cash FlowOperating Cash Flow … Exceed Net Income… Exceed Net Income

Internal ROICInternal ROIC … 16% 25% 30% +… 16% 25% 30% +


(10%)

(6%)

(2%)

2%

6%

10%

14%

18%

3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q

7% Estimated Growth in FY 2006

FY 2003 FY 2004 FY 2005

Organic sales calculation includes all branches, including newly opened, closed and those acquired during the comparative fiscal periods and excludes any divested businesses. For comparative purposes, prior period sales are reported on a pro forma basis to include pre-acquisition sales activity.

FY 2006

Price Impact

FY 2002

Organic Growth Rate Trend


MRO9%

Plumbing/ HVAC22%

Utilities17%

Electrical9%

Industrial PVF8%

Water & Sewer 26%

Other 3%

Product Portfolio - 2-Year Sales Growth


MRO5%

Electrical11%

Industrial PVF9%


Utilities11%

Plumbing/ HVAC26%

Water & Sewer 28%

Other 4%

Organic Growth Rate – 11% CAGR FY 2004-2006 (12% excluding acquisitions)

Sales FY 2004 = $3.3B Expected FY 2006 Sales = $5.2B


Acquired Sales Growth

FY 2003 FY 2004 FY 2005 FY 2006 E

Prior Year Sales Organic Sales Acquired Sales

$3.1B $3.3B

$4.4B

$5.2B

Acquisitions contribute two-thirds of growth in period


First Half FY 2006 Results

* Excludes depreciation and amortization.**Rolling 12 month measurement.

Asset management initiatives120 bps25.2%26.4%ROIC**

Working capital improvement & timing of disbursements71($1)$70Operating Cash Flow

4.7 million, or 8% additional shares outstanding(2)%$1.12$1.10EPS

6%$69$73Net Income

(50) bps5.7%5.2%%

10%$121$134$

Operating Income

Productivity gains & mix150 bps17.7%16.2%SG&A Expense Ratio*

Change in cost/price equation & mix(200) bps24.0%22.0%Gross Margin Ratio

Organic growth rate of 9%20%$2,136$2,573Sales

COMMENTCHANGEFY 2005FY 2006($ in millions, except EPS)


($40)

($20)

$0

$20

$40 Volume$27

Cost/Price($29)

Productivity$15

Total$13

($ Millions)

Volume: Acquisitions - 65%, Organic growth rate - 9% Cost/Price: Primarily higher inventory costsProductivity: Lower personnel costs and investment spending moderation

First Half Operating Income Variance FY 2006 versus FY 2005


Current Business & Financial TrendsGood demand continues, but with pricing

pressures in several BusinessesChanges in commodity prices manageableAcquisitions in second half, primarily FY 2007

earnings impactImprovement in core Businesses offsets expected

moderation in IndustrialProductivity gains continue, expected to accelerate

in FY 2007Investment spending shifts from Systems

Implementation to Utilization Optimization (Training)


Three-Year Financial Performance

FY 2006 Outlook

FY 2005

FY 2004

Net Sales EBITDA Ratio

Diluted EPS

$3.3 B

$4.4 B

4.6%5.6%

$1.23$1.95

$5.2 B

5.6%

$2.05 - $2.11

33%18%

59% 5%-8%


Three-Year Financial Performance

Operating Cash Flow Internal ROIC *

($ in millions)

$146 $145

16.0%

25.2%

$165 30.0%

FY 2006 OutlookFY 2005FY 2004

* 12-month rolling average

Calculation: EBITDA / Receivables + Inventory – Payables + Gross PP&E


30

40

50

60

70

80

90

Q4 Q1 Q2 Q3 Q4 Q1 Q2 LongTermGoal

Day

s O

utst

andi

ngWorking Capital Focus

FY 2004 FY 2005 FY 2006

83

7166

62

5046

69

52

38

62

51

42

Days Cash Gap

Days InventoryOn Hand

Days Sales Outstanding

Days Payable Outstanding

Further 10-day reduction equals $134M

56

48


$0

$50

$100

$150

$200

$250

$300

Q4 Q1 Q2 Q3 Q4 Q1 Q2

Gross Property, Plant and Equipment

FY 2004 FY 2005 FY 2006

($ in millions)

$79

$130

$209

$285

$176

$109

$192

$111

$81

Gross PP&E

Other

Land and Buildings


FY 2003 FY 2004 FY 2005 FY 2006E

Free Cash Flow Capex Dividends

$112

$146 $145

($ Millions)

$165

Cash Flow


FY 2003 FY 2004 FY 2005 FY 2006E

Facilities/Land Technology Other

Capital Expenditures

$15 $16

$27

($ Millions)

$55


Capital Structure and Usage

Borrowing Capacity at 35%

39%29%Debt / Capital Ratio

$667$1,321Equity

$430$537Debt

$4$218Cash

JULY 312003

JULY 312005

($ Millions)

$175-

Capital usage: Fund acquisitions and pay down debt


EBITDA Ratio Improvement Focus

FY 2003 FY 2004 FY 2005 FY 2006YTD

FY 2007Goal

Long TermGoal

4.6%

6.0%

8.0%-9.0%

5.6%

4.4%

Improve Plumbing to 5% - 6% EBITDA margin = 70 Bps of EBITDA

Improve Water & Sewer to 7% EBITDA margin = 60 Bps

Improve MRO to 11% EBITDA margin = 20 Bps

Reduce Corporate expense ratio by 50 Bps

5.8%


Gross Margin Expansion

FY 2003 FY 2004 FY 2005 FY 2006YTD

FY 2007Goal

LongTermGoal

23.1%

22.0%-22.5%22.5%-23.0%

23.5%

22.6%

Key Drivers: Better Purchasing, Pricing Discipline, Business Mix

22.0%


SG&A Expense Ratio Reduction

FY 2003 FY 2004 FY 2005 FY 2006YTD

FY 2007Goal

LongTermGoal

18.5%

16.0%-16.5%

14.0%-14.5%

17.9%18.1%

Key Drivers: Leveraging Technology, Growth Leverage, Investment Spend Moderation, Business Mix

390- 440 Bps Improvement

16.2%

Appendix



Reporting Segments

Water & SewerWater & Sewer

LTM sales and op. inc. of $1,275 and $54 million#2 market position; 107 branches in 24 states18% sales CAGR since FY 2003Driven by infrastructure upgrades and residential / commercial developmentIncreasingly critical natural resourceWell-positioned in high-growth marketsProvides full-line capability to customers

Plumbing/ HVACPlumbing/ HVAC

LTM sales and op. inc. of $1,094 and $19 million#2 market position; 152 branches in 16 statesStrong market positionImpact of incremental improvementsBrand label / import product growthGeographic expansionRefining distribution model


Reporting Segments

UtilitiesUtilities

LTM sales and op. inc. of $695 and $25 million#1 market position; 84 branches serving 29 statesIndustry consolidationIncreased outsourcing of supply chain managementEnergy Bill reinforces need to upgrade / maintain power gridAcquisitions increasing revenue and customer baseAutomated Meter Reading marketEfficient use of capital results in high internal ROIC

MROMRO

LTM sales and op. inc. of $439 and $33 million#1 market position; 51 branches in 27 statesCentury integration – complete / successfulAccelerating sales, highest ROIC businessIncreased interest rates favor multi family constructionTechnology improving productivityCondominium conversionsRenovation market


Reporting Segments

ElectricalElectrical

LTM sales and op. inc. of $468 and $10 millionMarket leader in Southeast; 50 branches in 5 statesImproving financial performanceStrong regional businessExpanding voice / data / video offering

Building MaterialsBuilding Materials

LTM sales and op. inc. of $272 and $20 million30 branches in 5 statesNational Construction integration – successfulStrong regional businessConversion to Eclipse system scheduled for 3Q FY06


Reporting Segments

OtherOther

LTM sales and op. inc. of $191 and $8 millionFire Protection - 18 branches in 13 states Mechanical- 3 branches in 2 statesStrong organic growth in FY 2005 largely driven by commodity prices

Industrial PVFIndustrial PVF

LTM sales and op. inc. of $424 and $63 millionMarket leader in Southwest; 36 branches in 15 statesStrong end user demandGrowth initiatives, including Canadian opportunitiesMargin compression driven by higher product costsPurchasing / inventory based business model

investor presentation september 2005library.corporate-ir.net/.../investorpresentation_9.05.pdf ·...

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