Hubbell Inc (HUBB) 2006 Q3 法說會逐字稿

Good afternoon, everyone. Welcome to the third quarter 2006 earnings release conference call for Hubbell, Inc. [OPERATOR INSTRUCTIONS] Now, for opening remarks and introductions, I would like to turn the call over to Mr. Tom Conlin. Please go ahead.

Thank you. Good afternoon, everyone. We released our third quarter and nine months earnings this morning between 10:00 and 11:00. And that release is available to you from all the usual sources, most easily probably at the Hubbell Website at hubbell.com. This conference call is available by telephone and it's simultaneously being Webcast on the Hubbell Website. A replay of this call can be gained in two ways. One by telephone beginning two hours following the conclusion of the call, and that telephone number to access the replay is 719-457-0820, and the replay passcode is 4583466.

The call will also be archived on the Hubbell Website beginning 24 hours following the conclusion and it will be available there for the next year. To access that audio archive or any of the others that are on our Website, go to hubbell.com, click on Investor Relations, then on Audio Archives, and you'll have the replay.

Let me also refer each of you to the paragraph in our press release this morning regarding forward-looking statements. Both the press release and today's call concern some expectations, and -- on the future and particularly regarding our earnings going forward. That subject and others are clearly forward-looking. We may also make comments here today or in our remarks to questions which may also be forward-looking. All of these involve inherent assumptions with known and unknown risks and other factors that can cause the actual future events to differ from what we might discuss here today. So please note that paragraph in the press release and consider it incorporated into our conference call today.

One additional note this time around, we're beginning a little late because we had some telephone difficulties. The line was dropped for whatever reason. We had to redial. We will begin, first of all, by apologizing for that. And secondly, by noting that beginning with the fourth quarter earnings release, fourth quarter and full year of '06, which will be in January of '07, we will begin releasing the earnings before the open of the market, probably about 7:30 in the morning. And have a conference call sometime later that morning, perhaps 10:00 or 11:00.

I'll be talking to each of you I'm sure in the next couple of weeks, and I'll ask you your opinions on when you would best like that conference call to take place. So once again, beginning with the next quarter press release, we will release our earnings prior to the open of the market on the usual day rather than during trading. So the subject at hand, with me as always is Tim Powers, President and CEO of Hubbell; and David Nord, CFO of Hubbell. We'll start with Tim's remarks and then go to Dave for some other comments. Tim?

Thanks, Tom. I'll make some introductory comments on our third quarter and some observation on current market conditions. Dave will review results in more detail, then I'll come back for some thoughts going forward and take questions. Our third quarter was another solid quarter of performance. Continuing strengths in most of our markets, double-digit sales growth in many of our segments even above our expectations.

More importantly, as we have been saying throughout the year, this is a peak year of change with our focus on several major initiatives. I'll talk about those in a moment. For the quarter just completed, we continue to make progress in resolving the production and delivery issues in the electrical segment, and that is evidenced as we improve its margin to double digit.

In addition to the high level of operational effort, significant time was spent in preparation for two achievements that occurred this month. First, Hubbell wiring systems launched the largest new product line in the Company's history. The Home Select and Net Select residential wiring and data communication product lines, more than 1,700 SKU's, which opens a $1.4 billion U.S. market to Hubbell.

Second, we completed our fourth major SAP implementation covering the industrial technology business and most of the remaining electrical segment businesses. So this year alone, we brought 50% of our Company on to this enterprise-wide system and absorbed the direct and indirect costs and investment to substantially complete the domestic implementation.

The cost price equation continues to be a challenge. While the rate of increasing commodity costs has moderated, pricing across our businesses began to close this gap but not as quickly as we had planned. We expect this trend of an improvement to continue as we finish the year. And while we all prefer strong markets, this year's market strength has put additional demands on our facilities and suppliers as we work diligently to respond to a very significant increase in volume, putting even more emphasis on effective manufacturing and supply chain management.

So all, once again, in this peak year of change and initiatives, a lot of effort and attention to these initiatives has had an impact on our current result. But there is no doubt that these investments will help us be a stronger Company in the future.

Let me talk a little bit about our markets. Economic conditions continue to be positive, with the exception of residential housing, and we certainly see this in our volume. In the manufacturing sector, the cycle is maturing, with some weakening from housing and auto sales but capital spending will continue to support economic growth into 2007. A certain amount of moderation is occurring and providing some help from an inflation and inventory perspective. The MAPI inventory index rose in September, which indicates some drag on growth going forward.

Non-residential construction, our largest single market, representing 40% of Hubbell's total, continues to be positive. Strength in the commercial side, particularly hotels and offices, are up 60% and 11% respectively. The continued strength in institutional, particularly educational buildings, are up 5% year to date. We see growth continuing into 2007 but probably at about half the rate of the growth in 2006. Residential, 15% of Hubbell's total, is slowing quickly. The market has simply overshot the underlying fundamental support of demographics and interest rates.

Affordability, when considering the total cost of ownership that is maintenance taxes, has deteriorated, driving up inventory levels of unsold homes and prices down. I think this imbalance will continue downward pressure on pricing, which is likely to lead to further volume declines. Less dramatic but still an area of concern is the home improvement sector. Remodeling activity slowed in Q2 on negative sentiment in overall housing. This market is less volatile than new home construction with aging housing stock that continues the need for repair and replacement.

The utility market continues to grow. Utilities are spending on maintenance and repair to improve their reliability. The storm season is nearly over and has been well below prediction and even well below average. This may have a somewhat dampening effect on the near-term growth as storm level inventories need to be worked out. So, I'm expecting some moderation in economic growth as housing decline continues.

The fundamentals of other markets are still solid. The growth indicating in the non-residential construction market well into 2007. But with a close eye on the impact of inventory rebalancing and the ripple effect of the housing decline. Now, let me turn it over to Dave for some comments on the results. Dave?

All right. Thanks, Tim, and good afternoon, everybody. Let me go through the numbers for the quarter and a little bit of color where appropriate. We'll start first with the P&L. Sales of $649 million in the quarter, just up 16% from 2005 where we had $561 million. Within that 16% acquisitions accounted for about 5 points of that growth.

Gross profit margin was 27.9%, lower than last year's 29.3%, with the single largest contributor to that decline the continuing cost price challenge. Selling and administrative expenses were $107.3 million, about 16.5% of sales, up from last year's 16%. But keep in mind that this year includes $2.6 million for stock-based compensation, worth about 40 basis points, and it also includes the majority of the costs associated with the new product development and launch in wiring systems of close to an equal amount.

Special charges associated with lighting, about the level of last year, $700,000 compared last year's $1 million. But still more to come in the fourth quarter, approaching last year's level. Net interest expense of $3.1 million, $300,000 higher than last year's $2.8 million, due to the use of our cash and investments for acquisitions and our increased share repurchase levels of this year.

Effective tax rate was 30.2%, on a reported basis lower than last year by almost 1 full point. But remember, last year had a charge for $1.9 million associated with the dividend repatriation that we did last year. That's worth almost 3 points on the rate in the quarter last year. So on a comparable basis, we're running at a little higher rate, consistent with the guidance that we provided throughout the year.

Net income, $47.6 million, down $800,000 or just under 2% from last year. Outstanding shares on a fully diluted basis, 61.1 million compared last year's 61.5 million. So all that translates into diluted earnings per share of $0.78, compared to the $0.79 reported in the third quarter of last year.

Turning to the balance sheet, a number of items of note. The increase in -- particularly in receivables and inventory, I'll talk more about that under cash flow. And then with the acquisition activity and our cash flow year to date, net debt at the end of September stood at $123 million, up $84 million from the $39 that we started the year with.

Turning to cash flow. Cash flow from operations, $82.9 million year to date compared to $126.9 million in the same period last year. So that means for the quarter, operating cash flow was $29 million, down from last year's $76 million, due primarily to higher working capital. Now this -- now these requirements attributable to a build in receivables of $34 million and inventory of $35 million. Both of those are a big contributor to that increase in support of our higher volume of business, with our 16% higher volume.

But in addition, it includes the impact of inventory build and preparation of new product launches, as well as the impact of the SAP implementations. All this is expected to improve significantly in the fourth quarter. Capital expenditures, $67 million year to date, $29 million in the third quarter, with about half of that $29 million attributable to the initiatives in 2006, specifically the new lighting headquarters and the finishing of the SAP project. We repurchased 700,000 shares of common stock in the quarter for $31.9 million, bringing our year-to-date purchases to 1.7 million shares, a little over $74 million.

Let me turn now to the segments. First, the electrical segment. Sales of $431.8 million, up $35.2 million or 9% compared to last year's third quarter. Operating income of $42.5 million. That's down $2.8 from last year, including the special charges. But remember, it includes the additional costs associated with new product introductions. The operating profit margin of 9.8%, down from last year's third quarter but that's, of course, after restructuring, after our special charges. Before those charges, it's at the double digits that Tim referred to.

Within the segment, lighting and wiring businesses showed double digit volume growth, while the electrical products were mid-single digits. The wiring volume growth of 12% had their profit margin negatively impacted by the commodity cost headwind, and the project-related costs associated with new product launches. Lighting had double digit volume growth in commercial industrial, while the residential was down slightly due to the weakness in the housing market. And profitability was also impacted by the commodity cost headwind principally.

And the electrical products business had double digit volume growth in the harsh and hazardous business. With the Reico closure business, volume down from the third quarter of last year. And profitability, again, impacted by cost increases primarily at Reico for steel and for aluminum at Killark.

Turning now to the power segment. Sales of $160.3 million, up $33.7 million or 27% from last year's third quarter. Operating profit of $23.8 million, up 6% from last year. The acquisitions completed earlier this year and in the third quarter of last year contributed 17% of the sales growth in the quarter. But also remember, that we had significant storm activity volume last year in the third quarter.

And I think it's clear that the activity this year is certainly below last year and also significantly below average. So, adjusting for both the acquisitions and the drag from last year's storm activity, the power business still showed organic growth near 20%. Margins were impacted, though, in the quarter from commodity cost increases as well.

Turning now to the third segment, industrial technology. Sales of $56.9 million, up $19 million or 50% from last year's third quarter, an operating profit of $9.4 million, up 68% from last year. Sales growth was broad based with all businesses posting double digit sales increases. Acquisitions accounted for 11% of the growth, with strong operating profit contributions from the high voltage and communications businesses, as well as the industrial controls business. With that, I'll turn it back over to Tim for the balance of the year.

Thanks, Dave. Let's look at the sales side first. The market has been stronger than we expected so far this year, and we think some of that will continue into the fourth quarter. So, when considering this and combining it with our backlog levels and the impact of acquisitions, we think our sales for the year will likely finish closer to 15% higher than 2005.

On the profit side, we are still on track to finish the year in line with our previous guidance but we are narrowing the range to $2.80 to $2.90 for the year. So while we don't provide quarter lie guidance, if you take the $2.10 so far year to date this, leaves a balance of $0.70 to $0.80 for the fourth quarter. So let me stop here, and I'll open it up for questions.

If you would get the queue going.

[OPERATOR INSTRUCTIONS] Our first question is from [Ms. Alana Wood] from Merrill Lynch. Go ahead, please.

I'm wondering if you could give us a sense of the magnitude of the charges for the incremental SAP support costs that you mentioned in the release? I'm wondering if those costs are part of the roughly $9 million of SAP expense guidance that you provided earlier in the year?

Alana, we have within the quarter about $3 million of directly associated costs with SAP. That's both project costs and the amortization. Some of the other costs are not easily quantifiable because they're attributable to some of the inefficiencies that we typically run into, post implementation period.

So year to date, what is that number running? The $3 million, how does that compare year to date?

That is running just over $10 million.

Okay. And are you ahead of schedule with the SAP implementation expenses? It wasn't clear from your release. I know that you had planned for an October go live.

I would say expenses are generally on track with our expectation. And they should begin to tail down, at least the direct expenses following this implementation. But the amortization portion as we've capitalized, I don't know, $30 million plus will still continue to rose for a few months. But just exactly in line what we've said in the past.

And the implementation is itself, the project itself is on track and on schedule except for one element that we've mentioned in the last quarter. The implementation around the fluorescent business was deferred to allow for the restructuring to be completed and the transition of those product lines. So, that piece will be done earlier next year.

Okay. And then could you talk a little bit about pricing trends in the three segments? And your 15% top-line guidance for this year, how much of that do you think will be from pricing, and how much from acquisitions?

Well, let me talk first about pricing in the marketplace. There have been a number of price increases in the third quarter and some yet to come in the fourth quarter. And -- in the catch-up mode of keeping up with escalating materials, even though you may have read about moderating energy costs or moderating steel prices somewhat, our industry is just now catching up with those levels or the levels we're currently seeing. So in June, there was an industry-wide price increase in the lighting fixture business. Those products that are steel related, such as Reico or our utility business, have had multiple price increases, and some that will continue on.

So, the industry is moving forward that way. There are many small individual product line increases. So, this is just an ongoing process of trying to keep up with where we see raw material costs. But it is catching up.

So, can you give me a sense of that 15% guidance, what have you baked in for pricing and for acquisitions?

Wow. For the year, Alana, it's about 2 points for pricing.

Okay.

And it's about 4 points for acquisition.

Okay. And then just lastly, for your new home flood product launch, can you give us some color on the competitive landscape and if you have any approximate market shares for competitors?

There are three competitors for the residential wiring device. Levitan, which is the leader in the industry, represents approximately 50% of the business. And Cooper and [Lagrande] divide the remainder. There are other small players in that market space but those are the principal three competitors.

Okay. And what would you say your competitive advantage is here?

We are the industry leader in industrial wiring devices. We are among the top two in commercial wiring devices. And this is our effort to extend to a complete product line as our other competitors have. So, it is our intention to get to a sort of the same market share as the average of the rest of them in the residential business over the next few years.

Okay. Thank you very much.

Sure.

Our next question is from [Rob McCarthy] of Bank of America Securities. Please proceed with your question.

In talking about -- maybe we can just talk about the industrial technology business. It looks like you had very strong growth there. Maybe you could give us a little more complexion around that and particularly on the high voltage side. And that plays into the utility, probably T&D market a little bit. Could you just give a little more color on that?

Rob, it plays into the utility business, and also some of its equipment is used in factories that manufacture transformers and cables. So it plays into the capital spending cycle that you see and you're hearing about. And so companies who manufacture power transformers or distribution transformers would use this to test product in the final stage, cable companies who make this -- make a high voltage cable would use this. So it's part of the capital spending flow, it's part of utility spending. And it's in an up cycle right now. And we expect that cycle told continue through 2007. Also, our GAI-Tronics business is doing extremely well because it sells communications equipment into the harsh and hazardous industry, into the oil and gas sector. And that industry is moving along quite well also. And we would expect that to continue in 2007.

Would you call that high voltage business more short cycle or long cycle business? Long cycle with big book to bill and visibility, how would you characterize it?

It has two different kinds of products. It has system products which have quoted lead times of maybe 16 to 20 weeks, and we have good visibility to that, and a very solid backlog. And we have kind of short cycle standard products with lead times of four to six weeks, so you have a blend of both. And right now both are in pretty good shape.

And then just on pricing trends, maybe drilling down there a little bit, there has been some commentary among competitors that despite the fact that you have a pretty robust non-residential market now, there seems to be, in the marketplace, maybe some easing on price on the lighting and fixture side. Have you seen any of that occurring?

We're not aware of any. We're not aware of any. That's all I can say about that.

Okay. And just in terms of thinking about your outlook for non-res going into '07, it sounds like still strong activity but half the level you've seen this year. And how would you characterize the underlying volumes that you've seen this year and we would expect to exit kind of '06 and going into '07?

I'm looking for, sort of physical space growth in 2006 of around 5%, 6%, here, 2.5% to 3% increase in physical space. Not shift around where it occurs because this year we're seeing a tremendous expansion in hotels.

Right.

Things like that. You could see it move from place to place but we're still expecting real physical growth next year. So, office space might continue but at a force lower level. So, we'll have to see how that plays out. But still, 2007, we look to see a better year than 2006.

Understood. And what do you think really drives kind of the low end of the range and the high end of the range, in the near term for you in the fourth quarter? What do you think are the biggest variables around that guidance right now?

Well internally, let's just say execution on the fourth implementation of SAP. And certainly that's going -- each one of these have gone successively better as our experience has built. But there's always a dip after you implement and you start up production in your plants, and all those look very good right now. So, we don't have any concern but that would be one. The second one is the -- whether or not all the price increases in the marketplace hold, as we expect they will. And they certainly have every indication, that consistent with our guidance, there's enough price in those numbers. And that there's no sharp change in the direction of raw material costs, whether they be steel or zinc or aluminum or copper. But we don't anticipate that either.

Have you seen continued pricing pressure on the cost side with respect to ballast? I guess presumably so since it's made up of a lot of predicate metals?

Definitely. And we could contemplate further price increases in ballast.

Okay. And then just looking forward, it sounds like your overall tenor is you're still seeing probably measured price increases here. Walk me through the scenario, though, if raws ease, could you see a scenario where basically you could hold price and maybe get a little bit of spread going into '07?

I would love to have that scenario. Right now I'm not -- I would be very reluctant to talk about any downward movement in commodity costs because everyone who's predicted that has only seen the next round of rising raw material costs. And I think what's different about the cycle that we're in right now is the international demand for these commodity costs as compared with previous cycles. So, what China is doing is very important in worldwide demand. And for us to not totally understand that and make a comment, I think it would be a little shortsighted. So I just take it a month at a time, a quarter at a time, and see what happens and try to stay up with the battle. That's all.

And just one last question -- indulge me. On the residential and market side, could you just provide a little more composition around your end market exposure? Obviously, great positions for the top 25 homebuilders. And give us some view directionally -- well more than directionally but give us some quantification what should we expect in terms of weakness there going into '07.

Well, we've seen sort of an inflection point in our residential business, the first half of the year was stronger than the first half of '05. And now in the third quarter, we've seen that number turn to the negative side in comparison to last year, we were still going very strong. And I think it reflects the decline in the housing starts of the national homebuilders as well as the DIY sales being softer.

So, it's an overall market view here, and my view is it's not a short cycle to the bottom. I think there's probably in the range of a 5% to 10% decline coming in '07 versus '06. But it's a matter -- I don't think interest rates will play much of a part in this, as I don't think long-term interest rates are expected to rise. But as I indicated in my comments, the cost of ownership is tough when you consider the property taxes and the rising values of the individual properties as well as energy costs.

So really these are the headwinds of going through what people are describing as a soft landing and coming out the other side. So we have quite an inventory of unsold homes and really that inventory needs to be brought down to a couple of months supply from where it is for the new homes to really get back on track. So I think these cycles are a little bit longer than maybe some folks are predicting. But I think progress will still do well during this cycle.

Thank you very much for your time.

Our next question is from Bob Cornell from Lehman Brothers. Please proceed with your question.

So the first question is to give us more of a view of the manufacturing relocation at lighting, what's Spokane doing, Bristol doing, how is that going?

Well, I would tell you that we're very pleased to report improvement in our Bristol plant. We were hit with a significant increase in our backlog caused by the price increase in the lighting industry, in June. And we had to extend our lead times and work a lot of extra overtime and thing. And our folk there did a very nice job of getting that product out the door. And our lead times now are back to normal. And our on-time delivery performance is returned to at least our historic levels of performance. With respect to the efficiency, it's steadily rising, but it has still not reached where we'd like to see it. But it's improving, is the answer to that.

Well, how much of the Spokane production has Bristol gotten, or conversely, how much is Spokane still doing?

Spokane's running at a rate around $40 million a year.

Right. And so that would -- that's down from, what, $125, so it's still like a 1/3 of capacity?

Yes, it's 1/3 of the run rate, certainly not the capacity. But 1/3 of the run rate that it once was. And many products have been shifted to Mexico. So probably now 40% to 45% of our output in fluorescent is coming from Mexico, and certainly we're trying to raise that total as we continue to shift products from one place to another.

Well Bristol, my understanding was that Bristol was going to take over much of the Spokane production. And so what percentage of ultimate load is Bristol at at this point?

I -- my guess is around 80% of what it will have. Even maybe a little higher, 80%, 85%. And so some of the products that will still be moved will be moved from Bristol to Mexico. There's some shifts -- there's a couple shifts going on there.

So, I think in the second quarter the residential business was still running positive. How did the residential business track on a monthly basis in lighting as you went through the quarter and sort of what of the exit rate in terms of rate of change?

I don't have that in front of me but we --.

Well, it was down for the quarter. I think it started out the quarter up.

It -- just a second.

Let me get some --.

Bob, this is Dave. We finished the quarter down about -- for the full quarter, we were down about 2%. We finished September a little over 10%.

Right.

So, we're trending down.

Right. And have the margins started to suffer as a result? You were running double digit margins in that business.

The margins have not changed much at all. So they're still solid, double digit margins. It's just a function of decline in the market price. And as you know, most of the decorative products remain in China so we don't really have factory exposure on volume swings. It's really getting our supply chain to be adjusted for any changes in market conditions.

Yes. Okay. Actually, I didn't know that. Go back to the wiring systems and the new product launch. Do you have commitments from distribution to handle these products, or are you going to be sort of working your way through that this year?

We're working our way through that right now. We have a very good initial response. But if you know how these things work, distributors sign annual agreements with manufacturers and expect rebates at the end of the year. So, changes occur following the end of the year generally speaking. And so, we're working on 2007 commitments from distributors to handle our product.

How is that going? What sort of volume do you have lined up?

That -- I wouldn't want to disclose that right now. That would be something that we wouldn't want to talk about at this moment. But I would say that I'm quite pleased with the initial response.

And going back to the gross profit margin question, which a lot of people asked about price cost. When do you see your gross profit margins tracking equal to or better than the year-ago levels? Is that going to be a fourth quarter phenomenon or first quarter?

I would say while I'm expecting to see a fourth quarter improvement over the third quarter, it will be 2007 before we see year-over-year improvement.

I think just a final question from me. On the power business, given the strength in the volume there, I would have thought that you could have gotten a better price-cost balance than you seem to have gotten. What's the perspective there?

Well, we had, as you remember, tremendous surge in orders during the second and third quarters. So we had a price increase that was effective in July but we were sitting on an enormous backlog and we were shipping most of the third quarter at pre-price increase levels. So in fact, we're still working in a number of product lines off full prices. But I would say that we will recover these increased costs, which for this business is steel and particularly zinc that goes into the plating, the galvanizing that goes on a lot of the steel products. But I'm not concerned about recovering that. It's a matter of timing of it due to the high volume of backlog.

Okay. I understand. Has the order of strength continued into the fourth quarter? Is it a little bit of the fourth quarter?

Orders in --.

Power?

In power are good. They're not at the same peak year over year, like say that same percentage increase, but they're still a substantial increase over the prior year. So there was --

Okay, thank you.

There was a peak earlier.

Okay. Thanks very much.

Our next question is from Mr. Jeff Beach from Stifel Nicolaus. Go ahead.

I've got a couple of questions. Just to be -- just to take the guesswork out of this, can you give us a range for the special charges that you anticipate in the fourth quarter?

It will be between $4 million and $5 million.

All right. And the situation in the wiring devices, have you taken all of the manufacturing of the component supply in house now and basically have operations restored so that we'll see a recovery in the wiring devices margins ahead?

The wiring device business in general has been one where -- an area where we have had a hard time recovering the cost increase. So, our response to that has been to redesign products and things like that. So that's an area where competitors have not pushed price as much as they have in some of the other categories in the electrical business. Our manufacturing problems are behind us. Our delivery performance is as good as it's been in the past, which is very good.

And certainly our low-cost country sourcing is playing an important part in the continuing improvement in that area. But this is also one where the margins will be held back by the launch of these new products and the startup costs and things like that going forward. But the base business is improving.

All right. And finally, just to discuss a little bit more the new product launch of Home Select and Net Select, you declined to talk about -- put a number on commitments from new distributors. But can you talk about some sort of sales expectation somewhere ahead in '07 or '08? And then as a whole, will this new product launch overall hurt Hubbell's 2007 earnings, be neutral or be slightly accretive?

It will have somewhat dampening effect on our 2007. We do not expect to be a break-even launching of product of this magnitude. And when we give our formal guidance for '07, which will occur toward the end of this year, we will be more specific about the volume and the profit impact of this product launch. But I'm very excited about this product launch. I think that it is a significant event for our Company, along with the other products that we have launched in terms of metal raceway and other commercial products. I think it reflects just the general nature of our Company in launching major new products in all of our categories. So, I think our distributors are very excited about the prospects of doing business with our Company. And I believe that we are launching more new products than anybody else in our space.

All right. Thank you.

You're welcome.

Thank you. Our next question is from Mr. Alex Rygiel from FBR. Please continue.

Thank you. What exactly caused the volume decline in the enclosures business this quarter?

Volume? Okay, sorry. In the metal box business, that enclosure business, we have weaker demand from our DIY channels, our retail channels than we did a year ago at this time. That would be Home Depot, Lowe's, Menard's, all of those, we have all of those.

Do you believe any of that was due to inventory corrections or was that purely demand?

There's a combination. Last year we were doing some store resets. So, there was some volume uptick caused by that. This year I think that all of those chains are watching inventories very closely with an eye on same-store sales, and they're managing this very -- more tightly than they have in the past.

Great. And then can you expand your comment about storm work inventories that may need to be worked down?

Sure. On an an annual basis, our utility business provides emergency service materials for hurricanes. And we build inventory of specific components or SKU's in support that effort. And usually, we -- you have what an average year would look like, might be $7 million or $8 million of inventory to be sold under those emergency conditions. And so we would build inventory in support of that anticipated sale.

And this year certainly for all good reasons, we didn't have those kinds of storm but we had the inventory. And maybe some of our channel partners, that is utility distributors or utilities themselves, have built up inventories. And to the extent they have in those particular categories, it would have to be worked back to normal, just using them as maintenance and repair items. These are the same SKU's but it might dampen the sales of those particular SKU's for the next three or four months.

Okay. Thank you.

Sure.

Thank you. Our next question is from Mr. Christopher Glynn of CIBC World Markets. Please proceed with your question.

On the power systems again, the inventory, talking about the SKU's, and there might be dampening of demand for those SKU's. Would the pricing that you're referring to from the July price increases tend to offset that on a one-for-one basis across the overall scope of the power systems business?

No, I'm not sure of that. It really depends on the magnitude of what -- how much inventory is too much inventory in the short run. But I can tell you that looking at our demand at this point, we're still in good shape. Early in the quarter we haven't seen much from this but we're just saying that as storms haven't happened and people look at their inventory in the fourth quarter, there may be some reaction to that. So, it would be very hard for us to make a quantification of what that might be.

Okay. And in terms of the new product launch and the wiring devices, would this have been a peak quarter for the absolute cost hit? I know it's not going to be accretive until sometime after '07. But any way to quantify what the cost of the margin hit was in the quarter?

I would say that we've certainly added to our sales staff. We had a product launch meeting with more than 400 people at it. We spent a tremendous amount on promotion. We have $10 million of inventory. Etc., etc., etc. I would say as a prelaunch goes, this is about the peak as, Hubbell, you will see from us.

Okay. That's helpful. And on the previous product launch with the raceway --?

Yes?

When does that become not a money loser?

I would say, probably by the end of '07 into '08 we would see that turn to black.

Okay. And earlier at the beginning of the call you mentioned production and delivery issues for the electrical segment. Is that strictly relegated to the lighting business now, or are there a few other components?

We're just talking -- let's take it business by business. We talked about difficulties with wiring device, those are completely behind us. We talked about problems with our lighting business and moving those products along. We are stable, caught up, and all of that, and ready to continue on with the remainder of the restructuring. And our electrical products business, it is a sort of steady state, with no major problems to report. So we're making progress on these.

Certainly the other part that hits you as you go through this is, as you implement SAP and you get to the month where you start up and a cutover, productivity in the plant drops, usually it comes somewhat back in month two and by month three you're back to normal. But we've taken those blows during the course of the year. And hopefully, we should see better sailing ahead. But as you know in this quarter, the fourth quarter, which is in our guidance, we have anticipated some of that for these half a dozen units or so that are going through SAP.

Okay, thank you very much.

Sure.

Thank you. Our next question is from Ms. Joanna Shatney of Citigroup. One moment, please. Proceed with your question.

I think you made a comment in the SG&A commentary that new product spending was about 40 basis points of margin. Is that the total expense in the quarter?

Yes.

Yes.

You said similar to the stock option expense?

Yes.

About that level.

And can you give me an idea what it was, what you're expecting it to be for total in 2006, and just maybe a guess at 2007?

Well, we don't have -- we're not giving '07 yet because we're still working through our '07.

Is it fair to say that it will be less than where we were in '06?

For the launch costs?

Yes.

It will be at or below. It won't be more than.

Okay. And then can we also talk about the price cost. You're recovering dollar for dollar but it's a negative drain on margins, right?

It's really the -- it's a catchup game. And you really always see the cost increase before you get the price recovery. And we're in one of those years where as commodities move up and your pricing follows, you're in -- you have a negative impact each successive quarter. And then when commodity prices flatten out, then you see a positive realization. And we're sort of in a year where we're catching up and hopefully in this fourth quarter we'll be near parity.

When you guys think about the full year, can you give us an idea of how much it hurt in terms of earnings.

We may. Give a guess here. Rough estimate.

$0.02?

For the full year?

Yes.

I think it's about $0.15 for the year.

$0.15?

Yes.

Okay. So realizing we have probably -- well, we'll get to parity on that hopefully in the fourth quarter. And you still have SAP that lasts in the fourth quarter. Is this fourth quarter the quarter where we hope to get operating margin for the electrical products business to at least flat year over year?

I don't know about -- I can't. I don't know what last year's fourth quarter was. But I'm expecting to see improvement over the third.

Okay. That will get you above last year on that.

Okay.

Yes. Okay. Thanks.

Sure.

Our next question is from Mr. Jeffrey Sprague from Citigroup. Please proceed with your question.

Good afternoon. I had to jump off the call for a little while and then was back on. But maybe just one question from me and then I'll circle back around. Tim, the comment on non-residential construction kind of running at maybe half the rate of current growth in 2007. Do you have kind of specific visibility on why it should unfold that way in terms of bid and order proposal or what distributors are saying? Or is that kind of a macro judgment based on other things you're looking at and kind of the follow-on effects of the residential and other things going on?

We follow several major forecasting groups, Dodge and others. And we also look at architect activity and many other areas that we're surveying. So it is that plus talking to distributors. And distributors I would say are the -- they're always overly optimistic. So they would be our -- y we rely on them at least unless they have very specific projects and things like that. But we feel that there is sufficient demand out there for non-res to continue to improve. But certainly the growth is dampened by the decline in residential because that will cut the wave of what you would call of strip malls and things like that.

But there's a -- the carry-on behind infrastructure building of -- as you keep -- as housing developments have been built, now you're still catching up with major shopping malls and follow on with bigger thing like hospitals and all that. That still lags behind the front wave of residential growth and that will continue on for at least a year or so in a positive mode. What you lose is the quick-serve filling stations, restaurants, all that stuff that moves more quickly but you don't lose the bigger buildings, educational, hospitals. And those are really just core for our Company. So, I'm still very optimistic about '07.

Great. Thanks a lot.

Sure.

Thank you. And our last question is from [Mr. Chris Aldowitz] from AG Edwards. Please proceed.

I wanted to to ask a couple of questions on the new product launch. I understand that when you develop a new line that you don't expect to make money right away. We invest for the future, of course. But I got a question on -- I would assume that the margins on the residential side of the wiring device business are going to be lower than your market-leading positions in industrial and commercial, right?

That's correct.

Is this going to be like dilutive to the entire segment's margins even once it's profitable?

No. Because --

Okay.

Because we would expect to increase our business in commercial along with our new other product -- the products that we've launched. And we would not expect that to be a drag on Hubbell's earnings in any way.

So there's leverage between the commercial and the residential?

There is because you have distributors -- let's say you have distributors that are mainly industrial distributors who sell most of our industrial products and smaller portion of commercial and residential. Then you have distributors that are primarily residential with some commercial. And then you have large commercial distributors. And so there's a mix of products sold and as long we get a decent mix we'll be just fine.

As far the launch goes, I know you said you had 1,700 SKU's, is that kind of like the full breadth that you're going to need, or are there going to be another 1,700 over the next three to five years that you roll out?

There are as many SKU's as two of the three competitors have today in those product categories. But there are other SKU's that we will add to our lineup to match the number one player in the market. And in a relatively quick fashion, we will match SKU for SKU for anybody we compete against.

Okay. The reason I asked, I just wondered if it was possible to kind of speak into the market with 500 SKU's and kind of get some momentum going. That was the reason for the question.

Not a chance because you're talking about some very well-run companies with very strong and long market positions. And we have a lot of respect for each and every one of these players. This is not an unserved or underserved market. This is a well-served market. And so it's it's going to take a good effort on our part with a broad product line to succeed.

Okay. And then on a different issue, on the inventory level, I wanted to find out -- I think you said some of the inventory that you're carrying is I guess you could call SAP safety stock. Right? As you're going through that migration, you want to have some extra inventory on hand in case you have a production issue.

Yes. Some of that certainly has happened for sure.

How much of your inventory increase is associated with that type of activity?

That would be hard for us to quantify. But we attempted to build in some cases a week or so of standard products, some cases a little more. As our business units have gone through those transitions, we're now trying to reduce our safety stock levels, reduce our raw material levels. We've also had the build for our new product launches, so that's added to it. So we know we have too much inventory and we know that's something that we will begin to work on in a serious way in the fourth quarter. But it's something you can only do so many things at one time and our job was to serve the market first. And we will shortly get our arms around any excesses in inventory that we have.

Okay, thank, guys.

Sure.

Thank you. That was our last question. Mr. Conlin, there are no further questions at this time.

Okay. Thank you for your assistance on this call. And thank all of the people who phoned in. And thanks for joining us.

This concludes the conference call. Thank you, everyone, for joining. You may disconnect.