Good morning. My name is Teresa, and I will be your conference operator today. At this time, I would like to welcome everyone to the first quarter 2018 results call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Ms. Maria Lee, you may begin your conference.
Thanks, Teresa. Good morning, everyone. Thanks for joining us. I'm joined today by our Chairman, President, and Chief Executive Officer, Dave Nord, and our Senior Vice President and Chief Financial Officer, Bill Sperry. Hubbell announced its first quarter results for 2018 this morning. The press release and earnings slide materials have been posted to the investor section of our website at www.hubbell.com. Please note that our comments this morning may include statements related to the expected future results of our company and are forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Please note the discussion of forward-looking statements in our press release and consider it incorporated by reference into this call. Comments may also include non-GAAP financial measures. Those measures are reconciled to the comparable GAAP measures and are included in the press release and the earnings slide materials.
Let me turn the call over to Dave.
Okay. Thanks, Maria. Thanks, everybody, for joining us this morning. You see from our press release this morning, it certainly has been a busy quarter but a productive one as well. We've seen some strong top-line results. Of course, the good news always has some offsets. As we talked back in our Investor Day earlier in March, we've got the price-cost challenges that we're fighting through, but I think we see that more broadly in the market. The good news, we've got a tax tailwind benefiting us, and I think benefiting the overall economy. Of course, the biggest level of activity in the quarter has certainly been the acquisition and the continued efforts in the integration of Aclara, certainly the largest in our history. I think all those things certainly contribute to a challenge.
It's all good news, particularly on the Aclara side, but I think all of that activity certainly adds to the complexity of telling our story. We're going to try to work through that the best we can. We've heard from you all on different topics. I've had some discussions, and we try to address a lot of those, obviously. Appreciate that input. One of the things we also want to do is make sure that we're not changing the rules every quarter and making it even more difficult to follow. We try to maintain some consistency. Bear with us as we go through that. You see that sales are up 16%. 3% of that is organic. End markets across all of our five major market segments expanded. We saw particular strength in oil and gas and hope that continues.
With the increase in oil prices, certainly that is what we would expect. We've also had some benefit from the long-awaited turnaround in heavy industrial, which you recall was still in decline in the back half of last year. While there's been some softness in pockets in broader market categories, specifically on the C&I lighting side, most notably, it's encouraging that we can finally see more general consistency in market growth to varying degrees, especially across some of our higher-margin businesses that we're hoping to begin to contribute more. I've been out in the market recently spending time with customers, and I think certainly the market is still positive across the board. They all have an element of caution around the uncertainty of some of the trade discussions. They're all still benefiting and seeing the benefit from tax reform.
We think that'll continue to add value. On the operating income side, on a reported basis, it was $100 million, which is a margin of 10%. Excluding Aclara's deal and acquisition-related costs, margin was 12.3%, 30 basis points lower than last year. Certainly not directionally where we want to be, but considering what we've seen as the impact, at least in the early part of the year on price cost, we're at least satisfied with that. Never happy, but we're satisfied. The rise in material costs, especially steel, certainly had a significant impact in the quarter. As you know, we're targeting offsetting material cost increases with price, but typically with a three to six-month lag. I think we're getting price in certain key markets. The net impact of price and material cost increases in the quarter was a point and a half margin for us.
I mean, it was a significant deal. Bill will cover that in more detail, but we certainly think that the pricing actions will start to show the benefit as we progress and can certainly turn positive sometime in the second half of the year. I can tell you that while there's certain businesses, a few of our businesses that might have been behind in pricing, I think we have found that there's other parts of our business where we were ahead Others are now trying to catch up in some of those markets. Specifically, we've got some high material content markets where we were out early and no one seemed to follow. Then come two or three months later, some in the industry are then coming out with bigger increases and scrambling to catch up. Kind everywhere, in some cases, we're ahead.
On balance, I think we're in a good position. Certainly more to do, and I can tell you that all of our operating leaders are fighting for that each and every day. I think the market is certainly expecting it, but are always going to challenge any price increase. We've got a lot of work to do to continue to put that through. This price cost headwind impact, we're fortunate because we were able to mitigate some of that with the tailwinds that we have from a lot of the cost reduction actions that we've been taking over the last three years. As well as ongoing cost controls in the short term to try and mitigate some of that impact. Bottom line, execution on improving that margin, particularly around price and productivity, is a priority for us.
Earnings per share on a reported basis was $1.05. This includes $0.34 of Aclara-related deal cost and acquisition-related costs. I say that specifically because obviously Aclara has some other impacts within the Power segment, and Bill will talk about that later. Those results also includes $0.12 of intangible asset amortization from acquisitions other than Aclara. You can put those together and come up with what the total amortization is. We're specifically focusing on an adjusted basis to address Aclara's deal activity. Of course, our earnings per share in the quarter also benefited from a lower tax rate. Back on Aclara, the integration's going well, and it's on track after the first two months. With all the activity, we sometimes forget that it's only been two months because it's certainly a lot of work to integrate a significant acquisition for us.
The business is performing as expected, strong sales growth, and continued positive customer feedback. I was just down at IEEE in Denver last week. I know some of you were out there as well. Hopefully, you had a chance to see the Hubbell booth. You could see firsthand how significant our presence is in the utility space, and more importantly, hopefully you could see how integrated and the effect of One Hubbell where you could see within the Hubbell booth the Burndy product offerings right next to the Aclara product offerings, the high voltage product offerings, and all that comes to play in that space. Specifically, when I think about Aclara and what I was hearing consistently from participants at IEEE was a very positive reaction.
In fact, a lot of the good Hubbell channel partners and customers are keenly interested in how they can add that to their portfolio, which is exactly part of the strategy, confirms the strategy for the acquisition. We think that's really a very positive. We're also seeing results in working together, more examples of One Hubbell outside of acquisitions. One example of this is in the quarter, we won a utility order for a submersible pump bus connector that had specific design and delivery requirements. The product, in order to do that, was made by one of our businesses within the Construction & Energy business. Of course, you know that's in our Electrical segment, but it's sold by the Power Systems team.
A really nice win for a coordinated effort across the businesses with guys like Gerben running the power business and Rod running the Construction & Energy business, really working together to make sure we can provide the solution to an important customer. You also probably saw our board approved the quarterly dividend of $0.77 per share last week. That's important because I hope you recognize it demonstrates our continued focus on shareholder return and the need to drive cash generation, and our commitment to effective deployment of capital. We're able to repatriate about $180 million of cash, and began to pay down debt as expected. I'll say, though, if you see our results, our free cash flow in the quarter was disappointing. It's typically our lowest quarter, and this year is additionally dampened by some one-time items.
The timing of collections, certainly some tax payments and payments around Aclara. Still, you could look at the results, and our working capital performance certainly has a lot of room to improve. That's the other area that we are keenly focused on. As a result, we expect free cash flow will be greater than net income for the year. With that overview, let me turn it over to Bill to go through some more of the specifics of the quarter. I'll come back and talk about our outlook.
Thanks very much, Dave. Good to be with you, everybody. Just to highlight what Dave was saying, really four trends in the quarter that are going to be woven into our performance here. One, end market strength
Two, the commodity inflation that's coming with that market strength. Three is the benefit of tax reform, and four is the Aclara, the new acquisition. All four of those trends you're going to see everywhere in our results. Dave really gave you the results on page three. I'm going to start on page four of the slide material that Maria referenced at the beginning of the call. You'll see our first quarter sales of $991 million, a 16% increase over prior year, 13% of that coming from acquisitions. We can be quick to forget that that's not all Aclara. Aclara is about 11 points of that. There's another two points coming from previously executed acquisitions earlier in 2017.
Just to remind everybody, we had made an investment in the natural gas distribution space, some smaller acquisitions within Power Systems, notably in telecom hardware space, as well as extending our bushing product line, as well as iDevices, which is a real leap forward for us in terms of IoT R&D work that underlies a lot of our new product development. There's actually a lot of acquisition previous to Aclara. A lot of that's also rolling off after Q1. You'll see really the balance of the year being dominated just really by the Power Systems deals. Beyond the acquisitions, you have our end markets. It's good to see a page like page four with such consistent green on it, but quite a consistent positive market backdrop for Hubbell. On the non-res side, the ABI data is supportive.
The starts data is favorable, still green arrows there in non-res. In electrical transmission and distribution, continue to see the IOUs CAPEX analysis suggest supportive activity there. On the transmission side, the projects are really dominated by small and mid-size projects. On the distribution side, a lot of grid reliability spending. Again, small projects. Industrial for us, again, you did see the ISM data and the manufacturing production data positive. As Dave had highlighted for us, the real switch there is seeing heavy convert from shrinking really through most of 2017 to now growing. That's very good news for us given its margin contribution, maybe a little late versus other peers of ours that you're looking at, but nonetheless, good news in the quarter for us for heavy. The oil and gas story continues to be a positive.
On the oil side, the commodity price firming, obviously with land-based activity continuing to drive growth for us. On the natural gas distribution side, still very strong demand for that infrastructure product there. On the resi side, household formation continuing to drive growth on the single-family side. Quite a consistent organic market backdrop for Hubbell there in the first quarter. On page five, you see operating income, we show the adjustments here that Dave had referenced of the transaction costs for Aclara, as well as their acquisition-related accounting. That $122 million relates to the 12.3 points of margin, the 30 basis point decline that Dave highlighted. Essentially, we've got the point and a half of material cost headwind to overcome, as well as the acquisitions bringing additionally drag as they are coming on at lower margin than average.
You're overcoming both of those with the productivity and nearly overcoming all of it to a 30 basis point decline. Page six, we show our earnings per diluted share, you can see the $1.13 last year. Again, we're showing the adjusted of $1.39, which again excludes the one-time transaction cost for Aclara, as well as the acquisition-related accounting. The $0.26 of improvement from the $1.13 to the $1.39 is really $0.05 coming from Aclara, as well as the balance being essentially split between tax tailwind as well as legacy operations. You see that $0.26 tailwind there. As well, you see on the right-hand bar, the $1.39 down to the $1.05 that's reported. Those $0.34 is really split between the transaction expense and the amortization, a little bit more towards the amortization than the transaction expense.
There's a lot of movement there between those adjustments, hopefully you see that clarity. Just to comment on the taxes, the tailwind there, we were about 29.7% last year, down to 21.1% this year. A big part of that coming from the tax reform, a little bit better from discrete items as well. That 21.1% below the level we have forecast for the whole year. Page seven, we talk about the electrical segment, and you can see a 5% growth rate to $618 million. Organic markets providing 3% of that growth. Non-res and res both helping drive that growth, the oil side, the gas side, and the industrial side all really starting to pick up and helping us on the mix side and providing attractive margins in those product markets.
On the operating income side, you see a healthy increase from 9% OP to 9.9%. I think you can believe that 90 basis points of margin expansion absorbing more than 2 points between commodity cost headwinds as well as the investment in IoT R&D capability. You really can see the impact of lighting stabilizing its cost structure through this quarter, really helping get some of those inefficiencies we had last year out, helping lift the segment operating income margins quite a bit. Page eight, we talk about power segment, and it's going to be worth just a second to go through this. Power tends to be a steady eddy, you see quite a bit of movement here, it's worth some discussion. You see our sales grew from $265 million to $373 million, a 41% increase driven by acquisitions.
The base organic market growing at about 3%, a decent level of growth there. Important to look at the operating income side where you see, again, all the Aclara adjustments. Basically, the base business absorbed a couple points of price cost headwind. From that 20.8% operating profit margin last year, you see the base business operating in the 18s during the first quarter here. In addition, there's another couple of points from Aclara coming on at about half the margins here of last year's segment. That creates another couple points of drag, you have the cost and the accounting taken down to 10%. It's really that price cost that creates the top priority for Gerben going forward in terms of driving the price actions that Dave referred to as we go forward to the balance of the year.
Page 10, we show cash flow for the quarter, you can see that we had some one-time items that related both to the Aclara transaction in terms of fees and expenses, as well as some tax reform payments on things that were expensed in the fourth quarter. Excluding those items, we generated just a small amount of cash. As Dave said, we're looking to do better than that. You can see on the depreciation amortization side, an increase there as we do more deals. The working capital side, you see strong increase in receivables. A big contributor to that is Aclara, who had strong sales in March. The quality of that receivable base, we believe is very, very high. You also see at the current liability side, an increase of the use there.
On the payable side, it's an area, as Dave referred to, an opportunity to improve, where we think those payables should be helping to finance our inventory and our growth as we grow the top line. On the CapEx side, you see an increase to $22 million. Aclara accounted for about $2 million of that. That's a little bit lighter than what we had communicated to you at Investor Day. We had been talking about Aclara's pace based on all the R&D spending that they were doing, where their CapEx could be up around the $30 million range. As we've spent more time inside the business and conforming the accounting with the way we have been doing our R&D spending, we're actually going to be expensing much more of that, capitalizing much less.
That CapEx number will be less than we had communicated to you at Investor Day. This is an area of great focus for us. First quarter, usually our seasonal low. Despite that seasonality and the one-time outflows, we'd still like to see that working capital performing tighter and become a stronger source of cash for us. We anticipate that improving as we go throughout the year. We also wanted to show on page 10 EBITDA. We used this first at Investor Day back in March
Got some favorable feedback from everyone, that it's a helpful measure to help neutralize what's going on with taxes and interest and amortization. Here in a simple schedule, you can see 12% growth in EBITDA in the quarter from $132 million to $148 million, or $16 million improvement. I think we'll keep providing this for everybody, and we certainly use it internally. The amount of generation here in the first quarter, consistent with the seasonal contributions to the goal as we had showed you at Investor Day of about $730 million of EBITDA for the year. I was going to ask Maria to comment on the cap structure on page 11.
Sure. Thanks, Bill. We ended the first quarter with $216 million cash. Approximately 90% of this was held outside of the U.S. The decrease in cash from year-end was because we repatriated about $180 million of international cash and used it to pay down commercial paper, which had increased from year-end as a result of borrowings for the Aclara acquisition in February. We ended Q1 with $149 million of CP outstanding. There are a couple of new items related to financing the Aclara acquisition. We added a pre-payable five-year term loan A for $500 million, as well as a fourth tranche of long-term debt. As you can see, all of our long-term senior notes have attractive rates in the low to mid threes. These additions, along with the higher CP, increased our debt to cap to 56% from 39% at year-end.
Reducing our leverage by paying down CP and the term loan is one of our capital allocation priorities. At the bottom of the page is our $750 million credit facility, and that backs our commercial paper, and it's fully available to us. Let me turn it back over to Bill.
All right.
Sorry.
It's okay. I'm going to just give some closing comments here. I think first on our outlook. If you look at the market, with one quarter completed, this year is so far shaping up pretty much as expected, although admittedly, some of the material cost headwinds are greater than we anticipated. The combination of positive markets and some of the other activity benefits of our cost reduction actions are going to help to mitigate that, and we're working to get the price. I think as we look at the end markets, we think most of our end markets are still anticipated to perform at the levels that we have forecasted from the beginning of this year. Going around all in the 2%-4% range, non-res, maybe a little bit lighter. Some of the indicators on that just suggest that it's not as robust, but still growing.
I think as we mentioned earlier, the upside that we're expecting a little bit more positive results is in the oil and gas, particularly with the price of oil increasing. The good news is, continues to be consistent growth across all of our end markets. Turning to page 13, specifically on the outlook. That end market growth, combined with acquisitions, translates into top-line growth of 15%-20%, which are big numbers for us by historical standards. The end market embedded in that is in the 2%-4% range. The acquisitions at about 15%. Our new product development and focus on technology is going to drive some modest market outperformance. All of that leading to us maintaining our original guidance on diluted earnings per share of $6.10 to $6.50 reported, and on an adjusted basis of $6.95 to $7.35.
That adjusted excludes the Aclara acquisition related and transaction costs, but it did include our legacy intangible asset amortization of about $0.50. As Bill mentioned, I mentioned earlier, we're working and we expect to deliver free cash flow greater than net income. I think when I think about in sum, we're benefiting from U.S. tax reform, lower taxes, ability to repatriate cash, pay down debt, and even after 2 months or so of completing the largest transaction in our history, we're even more excited about the prospects of what we can offer to our customers. The outlook has a lot of moving pieces. The objectives for this year are very clear for us. Capitalizing on the market growth, which is there, and we need to make sure we take full advantage of that. Getting price, which we are doing. It's easier with differentiated products.
It's harder in some of the commodity space or more competitive environment, but we're getting price. We expect to continue to get price. Spending appropriately on the actions that will support long-term growth. We got to make sure that we're continuing to invest in the future.
Obviously generating cash to pay down debt, but also to reinvest in the business. Obviously integrating Aclara effectively. I think there's a lot of things going on. We certainly are focused in those key areas. I think the team and I laid out our vision for 2020 back in March, Investor Day, with sales growth of twice to market over the next few years. We certainly have line of sight to high single-digit earnings growth in the base business, and then you add Aclara's contribution to that. I'm quite confident we're doing the right things to make this vision a reality. It starts with this year's performance, which we expect to be a very strong basis for that ongoing vision. With that, let me open it up to questions.
At this time, I would like to remind everyone, in order to ask a question, press star, then the number 1 on your telephone keypad. Again, that is star, then the number 1. We will pause for just a moment to compile the Q&A roster. Your first question comes from Christopher Glynn with Oppenheimer.
Thanks. Good morning.
Morning, Chris.
Morning, Dave. You called out the lighting margins being up. That certainly looks pretty good in the context of the industry. Just wondering if you expect to be able to continue that through the balance of the year.
Yeah, Chris, it's really driven by cost management. From the volume side, lighting was down about 3% with about a point of price contributing to that from the sales perspective. It's really coming off the backs of more effective cost structure, which, yes, continues throughout the year. Hitting our plans and our guidance is not dependent on big volume. It's dependent on us controlling those costs, which we feel much better about than we did last year.
I also think, Chris, there's an element of really more price discipline, some of that being just what business you're going after. Some of that even goes to a focus on those businesses and those product offerings where we have a differentiated advantage. Obviously, as I mentioned earlier, those are the areas across our entire portfolio, not just in lighting, where you have more ability to get price to offset some of the cost headwinds. Naturally, those are higher margin businesses too. That's another area of focus within the lighting business that we see.
Sounds good. If we look very wide-angle lens at electrical margin, in 2011 to 2014, you did 14%-15% margin. That was before the oil and gas crash, it was also before you had a pretty intensive restructuring program. I'm just wondering if there are any kind of barriers to ultimately returning to those types of levels for electrical.
Yeah, I think that the role that the oil and gas business played in contributing to that is important. They're obviously not back at that level. As we come back, we're seeing more land-based rigs rather than the deep water. We're seeing more diverse, i.e., less pure oil for harsh and hazardous. I do think, Chris, I could see as we go forward, as harsh and hazardous volumes come back, that their margins could be a little bit lower than the peak in that era that you're describing. At the same time, our goal would be to find productivity and other things to get back to those levels. Those are good motivating benchmarks for us to get back to them.
Okay. Good color. Thanks.
Your next question comes from the line of Steve Tusa with JPMorgan.
Hey, guys. Good morning.
Morning, Steve.
I was at the T&D show. Sorry I missed you. I don't know, I got the sense that the pricing was a little bit slower to come, you sound very confident on that front. Is there something I'm missing? Are there more specific pockets of your business that you're seeing better price put through than maybe I would have picked up at the show talking to perhaps transformer guys or some of the other guys that are there? Just a little more color on the confidence, because you guys are typically conservative, and you don't go out and kind of say stuff that you're not really seeing on the ground level. I do trust what you're saying. I'm just curious as to what maybe the difference is.
Well, I guess we could start with slow is a relative term. You might have expectations of timing that's different than ours. My confidence is based on what we're seeing in some cases is signs that, one, the actions that we're taking. Two, the signs of acceptability. Not necessarily on the utility side. I mean, the utility side has certainly put more pressure as the utilities are under pressure from a cost standpoint, particularly on the O&M side.
Yeah
Even on the capital side. I don't think that what you heard at the show is necessarily out of line with what we're dealing with. When we talk about pricing, I think it's certainly, I can be more bullish on the C&I side.
Yeah.
We're getting some of that. The utility side has got a little more challenge in it. I'll remind you that from our business, I think you guys used to give Gerben a little hard time over the last year because for a number of years, he was saying that it's coming and we've been able to hold price in a commodity weaker environment. Well, the commodities turn, and the utilities remember that in some cases. It's a tougher battle, but, I think we also believe that we have a bit of an advantage versus, for example, a transformer market where it's a much bigger spend, so a lot more price sensitivity versus some of our component products that are critical, and lower element of a project cost.
It gives us a little bit more flexibility, but don't get me wrong, the utilities are still pushing back as much as they can.
Okay. That makes some sense. In the electrical channel, what are the degree of price increases that you're seeing? I know nVent was out there talking about they're on the enclosure side, obviously, so a little bit different. They're talking about obviously kind of a mid-single-digit type of thing that they're putting through. Is that kind of the magnitude that all you guys are looking at on the electrical side of the equation?
On average, I'd say that's true. Somewhere in the 4-6 on average. I mean, we have pockets, though, that are working on 8-10, if they've got a lot of higher material content, which sounds bad. It is what it is. I would say on average, it's in the mid-single digit.
Okay. Then one last one. I probably should ask this at the Investor Day, the Aclara CapEx that you guys are running this year and I think you said next year as well, is that something that kind of builds up here in the next couple of years and then fades over time? Is this kind of a, not necessarily one time, but more lumpy, that kind of fades out into the kind of later in the decade, kind of 2020 time period? I believe it was like $15 million-$20 million of CapEx.
Yeah, I think it starts, Steve, with the R&D effort, right? We had showed you R&D spending sort of in the 10% of sales kind of range based on last year's sales and the amount of R&D that's going on there. That's obviously significantly higher than a typical Hubbell business. There's a question of how much of that you expense versus how much you capitalize. I think we're going to end up expensing a little bit more than they have historically done. Nonetheless, I think what happens is that $50 million does not grow. What happens is your sales grow, your percentage of R&D comes down is, I think, how we're imagining that playing out over the next few years.
Okay. On the CapEx side as well?
Yeah. CapEx then becomes a function of how much of that R&D you capitalize, which would not be growing, and then how much is on the PP&E side which would not be growing at anything beyond just replacement stuff.
Okay.
Needs growth, yeah.
Great. Thanks a lot, guys. Appreciate it.
Okay.
Thanks.
Your next question comes from the line of Rich Kwas with Wells Fargo Securities.
Good morning, guys. On Aclara, anything on seasonality we should be thinking about as we go through the rest of the year in terms of contribution?
Yeah, I think we do expect some seasonality, Rich. Similar seasonality to what Hubbell experiences, namely that second quarter and then especially third being the stronger areas of both volume as well as margins for them. As I said, when we were together, we had been planning that their margins would be mid-teens, I think after reviewing some of this R&D that Steve was just talking about, we'll expense a little more. We think their margins will come down to lower double digits. They only were operating kind of at double digits in the first quarter, we do anticipate seeing their volumes and margins pick up in the second and third quarter.
Does that change the longer-term prospects for margin for the business, the accounting change around expensing? I mean, can this be mid-teens to high teens, or how should we think about that?
I don't think it materially changes our long-term view, no.
Okay. Bill, on lighting, what was the margin rate? You exited the fourth quarter around 10%, if I recall correctly. Did you duplicate that again this quarter?
Yeah. The cost base is just performing much more in line, much more predictably. Those kind of margins are where we are. As Dave said, I think we're finding that to even try to maintain share of commercial spending, you might have to chase with too much price. I think we're choosing to forego a little bit of that volume and let that cost structure perform and get the margins going better, which is what you're asking about. That's been kind of a decided tactic of ours.
Okay. Just level setting on price cost, the 200 basis points on power and the 150 basis points for the overall company, is that just the commodity headwind or is that net price cost? Is the assumption that improves as we go out Q2, Q3, Q4? I mean, just so that we're all clear on that.
Yeah. For the whole company, the price that we pulled ex lighting was offset by essentially what that point that lighting gave away. The net price cost is essentially material cost because pricing was flat overall. Yes, I would say that as the year goes on, we're anticipating that the second half, and that's part of, I think, underlying some of Steve's question too about does it get better? It gets better in the sense that it becomes more balanced in the back half, especially as we exit the year, you think maybe you start to catch up. With this much inflation, you can't catch up overnight. You got to be vigilant and really be disciplined about it. I think it'll take us the whole year to fight that battle.
Okay, thanks.
Your next question comes from the line of Jeff Sprague with Vertical Research.
Thank you. Good morning, everyone.
Good morning, Jeff.
Just back on power pricing, in particular, Dave or Bill, are you getting none currently or is there some positive price in the business?
We have been getting price, Jeff, yes.
You have been. Okay.
Yes.
Just to be clear on Aclara, can you just put a fine point on what you actually expect the ongoing amortization to be in the year?
If you use the last page of the outlook, which is page 14, you can see that we're anticipating Aclara contributing about $0.50 to the total. That 85 is the add back, sorry, 35 is the combination of the transaction and the reported results. Maria, within reported, the amort versus the actual OP split for Jeff.
Sure. All of the intangible amortization, which includes the inventory step-up and the backlog revaluation, we would expect this year to be something around $45 million. You can convert that into the $45 million-$50 million. I think it turns out to be somewhere between $0.60 and $0.70.
On cash flow, I think your comment free cash flow greater than net income is relative to GAAP net income. Should we expect your free cash flow to be closer to the adjusted EPS? I mean, arguably it could even be more than that with still $0.50 of non-cash legacy intangibles in there. You obviously have some working capital and other noise.
I think the way that we're looking at it, Jeff Sprague, that's really why Dave Nord gave you that $0.50 of legacy intangibles. I think if you saw the $7.15, which we were guiding to on an adjusted basis, when you add those next $0.50 of legacy intangibles, you get up to about $7.65. To us, that cash EPS is quite an important measure because we think free cash flow, even though we think of it as net income and percent, there's an important relationship there. Our expectation would be this year, Jeff Sprague, on a run rate basis, because we did have some abnormal first quarter outflows.
On a run rate basis, we think you should be talking about kind of 110% of net income of free cash flow this year, which would translate into the mid-80s on that higher cash EPS of the $7.65. Our strong focus would be on using working capital management to get more efficient there and get that conversion on the free cash flow basis higher in subsequent years. I think that framework that you're talking about is important to how we as management look at the free cash flow conversion equation.
Is there something specific you're doing on working capital to uncork it here? I think there's some timing noise in the quarter, what's going to change to drive working capital going forward?
I think you're right about the noise in the quarter, receivables are the kind of thing. Our quality of receivables is very high. Collectibility is often very high, those do become the most timing sensitive, as you point out. I think our opportunity is in inventory and in payables. The inventory, I think you all at Investor Day met Susan Hooper. We've hired a new VP of ops, we're excited to be working with her in figuring out and developing ways to really get more focused and more disciplined around getting our inventory days down while keeping our service up. Then on the payable side, becoming more, I think, more disciplined, too, about how to optimize when you're taking advantage of a discount and when you still have some term days left.
When you see a quarter like ours where payables were a use while inventory was a build, that's a good sign that I think we need to be more disciplined there, Jeff.
Just one last one from me. Dave mentioned a little bit, any change in customer behavior now that you own Aclara as opposed to a private equity firm? Any change in discussion, backlog, pipeline? Anything you'd point out?
I think we've seen evidence that the pipeline is growing. The feedback we've got from our customers has been favorable. I think what's been exciting for Dave and me to see is the cooperation at the front end of the house between Hubbell's sales force and the Aclara folks. Really, there's been a couple examples of some selling efforts where we've been trying to sell our legacy hardware to some of their rural customers. Conversely, we've had some larger IOU conversations where we've really helped open the door for their communications business. In those cases where we've been getting our clients together with a broader suite of products, we've received good feedback. It's too early to say of any tangible, quantifiable impact of that, Jeff, but I'd say those early signs are good.
I think more towards the back of the house, it's been interesting watching the rest of our company get to know and understand what the technology inside the Aclara comms can do and how maybe that can help make other parts of Hubbell smart and communicating. So I think you're at the very early days of seeing if one plus one equals more than two. The signs, I would say, are encouraging.
Great. Thanks a lot, guys.
Your next question comes from the line of Joseph Osha with JMP Securities.
Hello there. Just a few from me. First, Maria and Bill, just to clarify, you'd mentioned that you had this $500 million pre-payable paper. Should we expect perhaps not to see any buyback activity until at least some of that gets paid down? Some color there would be helpful.
Yeah, I think that we continue to always evaluate the uses of cash, and share repurchase could be a very viable use. I do think you're right to assume that priority-wise, on a kind of a four-year glide path, we're looking to pay off that CP and that term loan. I think you're right to assume that.
The CP and the term loan over a four-year glide path.
CP will be what serves as our overnight kind of funding source. At any quarter end, you might have some CP. Those are good gauges to think about how much free cash flow the next four or five years we're looking to pay down.
Secondly, as regards yet again, lighting. I'm wondering if we can get a sense as to where the pricing has been really less palatable versus where you've been more able to hold the line. Thank you.
I think as David commented, for us to have 1% of price in the quarter is actually a better experience than we've been having. I think there are some projects with some more commodity products that would lend itself to use price to go chase the volume. I think there's an opportunity for us here that we've shown in the quarter to be a little bit more selective about which projects-
Sorry, I meant in terms of end market. I was just wondering if sorry, I didn't ask the question well. In terms of which end markets you find yourself being able to hold the line a little more. That's what I meant. Sorry.
Well, yeah, if you're saying between non-res and res, I think the pricing's a little bit firmer in resi than it is in non-res, if that's what you mean. If sub-slicing non-res, I don't think you could generalize too easily.
Yeah, I think that, adding to that, within the C&I markets, the challenge is in those projects and those offerings that are non-specified or where our representation isn't as strong as a competition. If we have good representations, we have strong representations in a market, whether it's a vertical or a geographic, it's easier to maintain price than when you don't. That's more how it plays out.
Okay. Thanks a lot.
There are no further questions. At this time, I would like to turn the call back over to Ms. Maria Lee.
Okay, thank you. Thanks, everyone, for joining us. That concludes today's call, and Steve and I will be available all day for questions.
Thank you, ladies and gentlemen, for your participation. You may now disconnect.