Hubbell Inc (HUBB) 2010 Q2 法說會逐字稿

Good day, everyone. Welcome to the Hubbell, Incorporated Second Quarter Results Conference Call. Today's call is being recorded. Now, for opening remarks and introductions, I would like to turn the call over to Mr. Bill Sperry. Please go ahead, sir.

Thank you. Good morning, everyone. Welcome to Hubbell's Second Quarter Earnings Call. We know it's a very busy day, so we'll try to be concise. It's a special call for us as we're speaking to you from our new headquarters building and we hope you come visit us soon here. I'm here this morning with Tim Powers, our Chairman, President, and Chief Executive Officer, Dave Nord, our CFO, and Jim Farrell, our Director of Investor Relations. Hubbell announced its second quarter and year to date 2010 earnings this morning and hopefully you found our press release on the wires and on our website. You'll also find presentation materials on our website that Tim and Dave will be referring to during the call. Let me note for everyone listening to the call the paragraph in the press release and in the materials regarding forward-looking statements. The press release and materials may contain expectations based on assumptions and Hubbell's performance in the future particularly regarding our earnings. We also may make some comments here today on the call or answer questions, which may include forward-looking statements. All of these involve inherent assumptions with known and unknown risks and other factors that can cause our actual or future results to differ, perhaps materially, from what we may discuss or project today. So please note the paragraph in our release, and I would like to consider it incorporated by reference into the call.

In addition, we make references to non-GAAP financial measures. Those measures are reconciled to comparable GAAP measures in the appendix of the presentation materials. And with that, I'll turn it over to Tim.

Thank you, Bill. Welcome, everyone, and thank you for joining us this morning. As we typically do on our quarterly calls, I will provide you with some overview commentary on the results we announced this morning, and then Dave will walk you through a detailed discussion of our financial performance. Then I will share my perspective on the outlook for the remainder of 2010 and some closing remarks. We will open it up and take some questions from you. We refer to the presentation material you can find on our website. I am starting on page three.

Our strong financial results in the second quarter are reflective of performance in our end markets that was better than our expectation. Residential construction market has improved year-to-date, but remains soft in the near term as available tax credits expire. I expect the market to slowly make the turn upward as we proceed through the rest of the year.

Our industrial end markets grew significantly in the quarter. Positive signs we have seen watching improving capacity utilization and manufacturing production have been felt across many of the industrial segments we serve. On the utility side, the return to growth in electric demand experienced so far this year has been a welcome development. This is enabling our utility customers to spend their capital budget on maintaining their networks to drive reliable performance. We believe some inventory restocking is occurring and there is some anticipation of an active storm season in the channel. The result for us was a large sequential up tick in our utility business and a return to levels consistent with our expectation. The non-residential market continues to decline, but less than we anticipated. The two bright spots are public spending and the need for more energy efficient lighting. Energy efficiency is driving strong growth in three key product areas for us.

Building automation and controls, solid state lighting, and retrofit lighting. An update on Burndy would be appropriate here. This is the third quarter since our acquisition and Burndy is performing as expected and the integration has gone well. Top line performance is consistent with comparable Hubbell end markets and the margins are being realized as we planned, so good news on the Burndy front. Another noteworthy item is the successful consolidation of several wiring system locations and our corporate headquarters into one building. The wiring team combined our executive offices, engineering, sales and marketing, which had previously been in three locations. The new setup saves money and enhances communication and teamwork.

Let's turn our attention now to some recent developments in the news. The first item is the concern that many of you have had about the economic situation in Europe and the impact that it will have on us. Our European based operations generate less than 10% of Hubbell's total sales, but these units are selling around the world. The percentage of volume going into Europe is much smaller. The second issue is the oil spill in the Gulf of Mexico. Our harsh and hazardous business has a strong presence in the energy markets in general and the offshore drilling market specifically. A ban on Gulf drilling would be a temporary small negative for us, but most likely that capacity would be shifted to other parts of the world where we would hopefully fall. A third topic is our global supply chain. In general, our suppliers have responded very well to the downturn we face, but we are feeling some constraints. Most notably in electronic components, including lighting ballast that are in short supply and will likely take a few months to smooth out. The impact on Hubbell may be delays in service levels, but our lead times remain unchanged and the ultimate demand will be satisfied during the fiscal year, so we do not expect any financial impact.

Clearly, today's business conditions present us with a fairly dynamic operating environment. We remain focused on managing price, cost, and productivity. I have to say it is very encouraging for us to see our hard work on productivity pay off. Namely, a better than 300 basis point improvement in margins for the quarter. Productivity involves everything from capacity reduction to streamlining the manufacturing process and redesigning our existing products. I am proud of our team for delivering on this diverse set of initiatives. We have traction in all areas and there is opportunity for improvement ahead. We continue to improve our positioning of the company to succeed in the future. There are a couple of additional developments worth mentioning. On the international side, the first power system products rolling off the assembly line in our new factory in China. This is an important new facility for us with a very competitive cost structure and a significant opportunity to expand. On the new product development front, we have had some exciting wins in the solar energy area. Our anchor systems were recently selected when the second largest installed solar farm in the U.S., a project capable of providing enough electricity for 7,500 homes. We are looking forward to continued success in serving clients needs as our technologies are applied to the renewable energy market.

In summary, we have had a strong quarter moving forward in both the markets and our financial results were better than planned. But let me hand it over to Dave to give you the details. Dave?

All right. Thanks, Tim. Good morning, everybody. I'm going to start, take you through some of the details on the webcast slides, starting on page four, and a little bit of color, first on second quarter sales and gross margin. As we reported, sales were up 11% in the second quarter of last year with Burndy contributing 9% to that 11%. The non-residential, that's--we've got some continued weakness there, although as Tim mentioned, not as bad as we anticipated, at least so far this year. And I think within the quarter a little bit stronger performance in the industrial sector as well as on residential, at least in the quarter. That led to gross margin reported of 32.6%, up 280 basis points. And the big contributor to that is obviously the productivity gains as we continue to work those issues over a long period of time, as well as some of the benefits from last year's cost reduction actions.

Of course, offsetting that is a little bit of unfavorable price against commodity cost. We went in to the year obviously expecting and targeting to maintain parity, as is our case. But with a little bit of risk on price and some commodity headwind, that was a bit negative in the quarter. But the good news is we're more than able to offset that with productivity gains, as well as some of the absence of the costs that we incurred in the second quarter of last year for workforce actions and some inventory adjustments.

Turning to page five, selling and administrative costs up just under 10 million to 117.5 in absolute terms, but as a percentage of sales, down to 18.2%. Burndy obviously contributing to the incremental dollars. And as we've said in the past, Burndy runs at a little bit higher S&A rate just from their selling efforts. But offset that with lower restructuring costs and the ongoing cost reduction action. So all that contributing to our operating profit in the quarter of 93.5 million, 14.5% of sales. That increase largely attributable to two main items. Productivity probably contributing three-quarters of that gain. Burndy in absolute terms contributing another quarter of that gain. Now, of course, there's other things that go on in there and we've got the price cost negative, which was just under 9 million in the quarter and that's offset by some of the costs that were incurred last year second quarter for restructuring and inventory. So a good--very good story on operating profit and margin.

Net interest expense flat year over year at 7.5 million. No significant change in comparable borrowing levels. Low interest rate environment and even some of the short term borrowings we incurred to fund Burndy were in the latter part of the year and were all repaid with the proceeds from the equity offering in the fourth quarter. Our tax rate does reflect an increase from last year to 32.3%. That providing a little bit of headwind principally due to the lack of the extension of the R&D tax credit that continues to be on the agenda in Congress but keeps getting pushed out. We expect that that will occur--or certainly hope that will occur sometime later this year, but very uncertain legislative environment relative to taxes.

So that leads us to page seven, net income of 57.6 million in the second quarter, up 46% from the second quarter of last year, all due to the higher sales, our increased operating income, and our higher--offset by our higher tax rate, giving us earnings per diluted share of $0.95 compared to last year's second quarter, $0.70, that's up 36% and of course that also includes the dilution from additional shares issued in the fourth quarter, so an all in all good result. Let me now turn to the segments and give you a little color on the segments.

First, the electrical segment, on page eight. Sales of 458 million, up 15%. Burndy, the biggest contributor to that adding 13%, and of course we have the continued weak non-residential, but with improvement in industrial and residential. Within the segment, good performance in the wiring business, a lot of that attributable to strength in the industrial sector with sales up 16%. The electrical products business a mixture where a lot of our industrial businesses, both in the pure traditional industrial business, whether it's wiring devices or electronic--or controls, a lot of good double-digit growth there. But mitigated by some of the other businesses that we include in our industrial sector, particularly a high voltage business, which is down year over year, but expected to recover in the second half. And the lighting business overall, sales down 5%, but that's a combination of the commercial industrial business down 9%, offset by the residential business being up 11%.

On the operating profits side, operating profit in the segment of 61.1 million giving us operating margin of 13.3%, a very impressive improvement from last year, 540 basis points. A big contributor to that is the productivity gains, both the cost reduction actions, as well as some of the ongoing activities to wrap that segment and particularly in our lighting and wiring device businesses as we've reduced costs, closed facilities, and improved our overall cost structure.

Obviously, Burndy contributing incremental profit there. And then, some of the lower restructuring costs compared to the second quarter of last year.

Turning the page to the power segment, the second quarter power segment sales of 188 million, up slightly from last year. And that reflects improved spending on the distribution product side, which is coming from construction, MRO, and housing, that growth being in the mid single digit range, with the transmission side of the business, a smaller part of that business, impacted by some slowing of larger transmission projects. But we think that that will see some improvement as the year progresses.

On the operating profit side, operating profit of 32.4 million, down 8% from last year's second quarter, but still maintaining a good high teen margins of 17.2%. That decline, despite relatively flat volume attributable largely to what is the one segment that has the most significant impact from unfavorable price and commodity cost. The area we expected the most challenge in pricing and we saw early in the year. More importantly, most impacted by the spike in some of the commodity costs, particularly steel and copper. That will begin to mitigate itself as the year progresses, as the cost of the commodities have moderated, and as we have implemented price increases across all of our businesses.

Also included and impacting the results are some costs associated with consolidating facilities, a couple of facilities that were part of the acquisition several years ago are in the process of being closed, and so those--some of those costs are included. But offsetting all of that is some productivity, good productivity gains. So all in all, a good performance in an improving market in power.

Turning to cash flow on page 10, you see our free cash flow, that's cash flow from operating activities less CapEx of 58 million, just about 100% of net income, which is our target to meet or exceed. A good improvement from the weak start that we experienced in the first quarter. Obviously, not at the levels that we had in the first quarter of last year as we were liquidating inventories and receivables and bringing the costs down. We have somewhat the drag in the quarter this year coming from working capital, principally accounts receivable as the volume starts to come back, and a little bit of inventory as we manage through recovering markets and some of the supply chain issues that many are experiencing in the market.

And then our capital expenditures of 11.2 million, up from last year's 5.7, back to a more normal level of capital expenditures that we expect to incur and invest in the business.

Let me turn now to just how does that then result in our year to date performance through June. So we've got sales year to date, good recovery from what was a weak first quarter as we expected. Mixed by end market as well as we expected, with industrial and residential up, non-residential down, and of course, power business down in the first half because of the weak start, but clearly expected to improve as the year progresses at least on a year over year comparison.

Improved order trends continually build in backlog with backlog up 42 million--yes, up 42 million. As always, productivity actions are a key driver and we're realizing those benefits, trying to navigate through the unfavorable price cost impact in the first half, most significantly in the second quarter, but combined down 11 million, which is worse than expected. And so, we've had to offset that with a lot of it--more attention no the productivity. And of course, a bright--a very bright spot is Burndy performing very well. So first half results better--slightly better than our expectations with margin improvement on lower organic sales.

You see that on page 12 our sales year to date of just over 1.2 billion, up 4%, that's got an 8% contribution from Burndy, two points from currency, the rest being attributable to volume. So despite that poor underlying volume weakness in the first half, 250 basis point margin improvement to 13.1% in the first half, giving us earnings per share of $1.59 against last year's $1.30, up 22%. And free cash flow short of our goal of 100% of net income year to date, but very much expected to recover in the second half. So the segment results in the first half on electrical, sales that are up 9% to 867.7 million, with Burndy adding 12%, offset by weak non-residential markets, particularly in lighting and within the industrial sector lower high voltage test equipment, but that business is also significantly project oriented, and so the results are very lumpy. Again, we expect that business to finish the year at or slightly above last year's level, so we expect good performance in the second half. Operating profit of 101.2 million, up 72% from last year's first half, with operating margins in the electrical segment for the first half of 11.7%, up 430 basis points, the biggest contributor being the productivity gains, the contribution of incremental profit from Burndy, and then some of the lower restructuring costs, obviously more than offsetting the negative impact of price cost. On a year to date basis for the power segment on page 14, sales of 349.2 million, down 6%. The utility spending gradually improving so that comparison will clearly improve as the year progresses. Our orders exceeding our billing, so back--a little bit of backlog build, which provides some support for our second half forecast. But of course, dealing in the first half with lower storm activity and that's always a wildcard as we look out into the future depending on the weather forecast. Operating profit of 58 million for the first half, down 11%, but still with good margins of 16.6% and the first half being the most significantly impacted by the unfavorable price and commodity costs, as well as the lower volume with a lot of it being offset by productivity, but not all of in the first half. So first half cash flow of 70.8 million. Free cash flow down from last year, but certainly improving, and on track to get back to our target of free cash flow equal to or exceeding net income.

And I think you can see that clearly on page 16, a little bit of quarterly trend on two elements--key elements of working capital. First, on receivables, obviously an increase in absolute dollars of receivables as the market recovers, our sales recover, but importantly an improvement in days outstanding. Our credit quality is very high. It continues to be at record levels, so that's the good news. There is some increase in the days outstanding managing through the growth, but we expect that as it typically does to be continually improving on a seasonal basis throughout the year and getting down to a more normalized level by the end of the year. Inventory as well, 276 million at the end of the quarter, up 6 million in the quarter, 13 million year to date. But importantly, improved four days from last year in days outstanding. So all of that gives us confidence in our ability to meet our target of free cash flow equal to net income.

Turning to page 17, just a quick summary on our capital structure, not much change other than continued improvement. No--with good cash flow, increase in cash from year end of 29 million, a slight increase in our total debt of--to 504 million, that $7 million increase largely due to some incremental debt in a foreign location put in place for operating funding as well as tax advantages. So all that leads to a very strong capital structure with debt to cap of 27%, net debt to cap of 10%, very good, giving us a strong, conservative position to continue to pursue acquisition opportunities.

So with that, let me turn it back to Tim, give you his thoughts on the market outlook.

Thanks, Dave. Let's turn to page 18 in our outlook for the remainder of 2010. In the residential markets, we expect to see 5 to 10% growth. While we recognize that some of the recently monthly data on housing and home sales were disappointing, we believe that these are bumps that should be expected along the road to recovery that should provide us with growth for years to come. For our utility market, we expect modest single digit growth in the second half for us should be more favorable as we will be comparing to last year's soft levels when utilities were grappling with declining demand. They all--have also done cost cutting and are in a more solid financial position. That said, the transmission project work continues to get pushed out as it appears that rate cases in front of local PUCs are meeting with uniform resistance. The strength in the industrial market should provide us with mid-single-digit growth this year. Many of our core served markets in manufacturing sectors will do better than that, but our harsh and hazardous and high test business will dampen those gains. Non-residential construction is our largest most diverse market and is proving difficult to predict. While private building starts are expected to remain weak, the benefits of some public spending and the growth provided by retrofit projects are providing some counterbalance. Therefore, our outlook for 2010 has improved. The net impact of this outlook from Hubbell's end markets combined with expected new product development and market share gains is a fairly flat sales level on our base business, but will lead to a 4 to 6% growth when we include the incremental contribution from Burndy.

Now, let's turn to page 19 for some concluding comments before we take a few of your questions. The return on sales growth is a clear positive for our financials. In addition, our strong focus on productivity will continue to drive margin expansion. These improvements will be needed to overcome the negative cost price environment we face. The net result is a growing top line with margins expanding by at least 1% of sales. So with that, we would conclude our presentation and be happy to take questions from you.

(Operator Instructions.) We will take our first question from Chris Glynn from Oppenheimer.

Thanks. Good morning.

Good morning, Chris.

A question on I guess mix in the electrical segment - high voltage and even harsh and hazardous a little pressured in the first half. You talked about being up year over year in the second half I think. But is that actual sequential improvement? Would we expect better mix of electrical in the second half?

I would expect the third quarter to be like it traditionally is, a little bit higher than the second, and the fourth quarter to, you know, be a little bit lower as we end the construction season. But probably a little bit more revenue in the second half than the first and total.

Okay. And then, just looking at the balance sheet and prospective lower growth environment for the economic outlook. Do you have any thoughts on industry consolidation on a larger scale as opposed to the traditional kind of bolt-on acquisitions?

I don't really have any specifics on that. Certainly, we continue to look for our typical acquisitions. We have quite a few opportunities we're looking at now, so you just can't tell if you can get those done or not, as is the typical story. But I really don't have any comments on--specific to your question about larger combinations.

Okay. And then, just last one, Tim. What are you seeing in the early signs of industry price increases in the lighting space holding in the marketplace?

I would say we would expect to see a little bit on the stock side where as you can expect with volumes where it is it's kind of tough to get much in the way of price on projects. But we're trying. I think our margins in lighting in just about every single one of our brands has improved and part of that is some small incremental pricing. But I would say the larger the project, the tougher the price environment. And I would also characterize the market as much more public sector than typical. So again, on the private side of non-res, this is a very tough side of the market.

Yes, I guess with all the public sector stimulus potentially, what's your kind of sense or thoughts on the duration of that?

We believe that that will continue through 2011. As you know it took forever to get this started, and I think there's the best of intentions to spend the money, so I think the benefits from that will continue on for the next 18 months.

Great. Thanks a lot.

Yes.

We will take our next question from Scott Davis from Morgan Stanley.

Good morning, guys.

Good morning.

I know you guys are on LIFO and that's been an issue in the past and kind of industry pricing because some of your competitors are FIFO. But is there a sense of kind of how to quantify that in the quarter? And then, I guess the natural follow on question is your average price increase, is it more of a May 1, June 1, July 1 or somewhere in between?

Well, let me just go back and address the pricing. The pricing really on our part really never reflects our inventory accounting practices, but more the real inflation. And of course, we see that inflation immediately because of the nature of our accounting. But going to market and trying to get the recovery for cost increases is something that we do as we see it. We have completed all of the price increases that are--we intend to have, which I believe are May, June, and July. Power systems being the July one. So we have attempted as best we can given weak market conditions to recover the commodity cost increases. But as you can see, while last year was a positive, this year is still a little headwind, which we expect that price will moderate a little bit as the year goes along.

I think that partially answers the question. But let's move on to utility, because I think it's important. The--I understand the rate increase challenges for the UDs, but my understanding is that electricity demand has picked up materially and there has been a fair amount of storms in the Midwest and obviously some heat in the northeast. Is your view kind of if you drill down between distribution and transmission, and understanding that transmission tends to be more impacted by kind of the rate increases in distribution more by the other impacts. Can you think about how that--your outlook hasn't changed since the April call, but how those two pieces have changed?

Yes, I would say that--when we're talking about transmission projects, we're talking about 2011. And we're optimistic that even with some of these delays that enough of these projects will get approved so that 2011 on the transmission side at this point looks like a stronger year than 2010. But you know, there's a battle when the economic situation is difficult for PUCs to allow utilities to execute their plan on a timeframe that the utility would like to do it. So I don't think that we're seeing projects shelved. I think we're just seeing a slowdown in the rate of approval and lengthening in the process that it takes to get through these approvals in a very tough economy. So I hope that answered it.

No, I think it does. And lastly, just on non-res construction PV has improved a bit and you talked about that. The retrofit--I mean, the construction side of it we know is problematic. But the retrofit side we keep hearing from everyone has been accelerating at a rate far faster than expected. I assume that's consistent with what you're seeing as well?

It is and certainly that leads back to the discussion of the ballast story where the ballast associated with new high energy efficient fluorescent lighting is really what's in short supply because the demand has accelerated at a significant rate and the manufacturers and suppliers are just having a tough time keeping up with it. So that's just an indication of the ramp up there. And I think it's only going to improve from the levels that it's at. I think that the new sources of fluorescent light combined with electronic ballast and the rapid expansion of LED lighting and the controls that are added to it so the systems really present a positive opportunity for our company as we look forward.

Okay. Good quarter, guys. Thanks.

Okay.

We will take our next question from Jeff Sprague from Vertical Research Partners.

Thanks. Actually, Tim, just to pick up on your closing part of your comment there, are you implying that you're going to backward integrate into ballast in some of these solid state components to take advantage of what's going on in the market, or are you just talking about ultimately the supply chain untangles and it works itself out?

We're in a mixed mode right now. We buy ballast, or as they're referred to, as--on the LED side we buy ballast from others, we buy complete units from others, and we manufacture them ourselves. So we have the most vertical integration we've ever had in this category on the driver's side. So we have more value added to contribute there and it's just the spreading of risk as there's so many people in the business now that we want to keep every opportunity available as this technology is advancing. And we're pretty pleased with the partners that we have. And also, our own capability to make the product.

Okay. Just on the comment about the oil spill and the impact, I may be mistaken, but I thought Killark and your kind of explosion proof heavy duty products were only NEMA qualified products and if those rigs go elsewhere maybe in an IEC world you can't play. Am I incorrect about your product offering there?

Killark is predominantly as you described. But then, we have Hawke, which are cable glands, which are IEC, and we have Shawmut lighting. And we also have GAI-Tronics for the safety systems on rigs which are applied to all standards. So it's just Killark that would see a little bit of softness if the Gulf slows.

Okay. Can you--or Dave, can you just give us specifically what the FX impact was in each of the two segments?

Sure. On volume it was about 1% incremental in both electrical and power.

Okay. And can you give us color also on realized price in both of those segments?

Sure. Price overall was down about 3 million and it's split about a third in electrical and two-thirds in power.

Okay.

Okay. So actually one of the earlier questions around the cost and inventory, like when I mentioned that there was 9 million of cost price headwind, that's a combination of 3 million of lower price and 6 million of higher cost, just to try to size the order of magnitude of the commodity cost headwind. And that negative price is what we are expecting to turnaround to be a positive contributor in the second half.

And what percent now--I'm sure it's changed given the downdraft. But what percent of your total non-res business would you say is actual office type commercial construction new build these days?

That, Jeff, would be--that's a number that I couldn't give you because we don't track it that specifically because some sales, as you know, happen directly from the distributor and would not be on a project where we could keep score knowing where the end location is.

Yes.

But I can tell you that the general numbers that you see about the decline in office construction would be very reflective of our market share decline and that's--or our volume decline in that side.

Okay. All right. Terrific. Thanks a lot.

Yes.

We will take the next question from Bob Cornell from Barclays Capital.

Yes. Just looking at the electrical business, guys, is it fair to say that the Burndy margins are above the average, maybe well above the average? Maybe you could help me get a perspective there.

No. The answer is Burndy is almost up to the average, but not quite.

Okay. The--.

--A lot of improvement in wiring device, some improvement in lighting. So I mean, a strong contribution from just about everywhere.

The--that leads to my next question. I mean, in lighting, we made all these structural changes. I mean, are you happy with the way the business is coming around, even though obviously CNI is still tracking down. But I mean, how comfortable are you with the way that restructured business looks at this point?

I'm very pleased with our lighting business given the difficult market it faced. We expect that its margins will improve year over year in line with the 100 basis points that we talked about for the average. They're doing a great job of reconsolidating or shrinking their footprint to the size of the market. They've gone through a number of product redesigns to take costs out. And as our progress lighting business makes the turn, it's already performing significantly better on the margin side with very little volume increase. So it's got a lot of upside potential, if we can just get a little bit more volume from the market.

Yes, that takes me the direction I'm going here. Because what I'm really looking for is what you consider your normal earnings power now on the electrical business given the contribution to Burndy? I mean, I guess the margins aren't that high now, but they have historically been. I mean, what would be your view that--of the normal profitability of the electrical business mid-cycle type of thing in margin?

Well, I would--we're not really sorting it out between one segment or the other. But I would reiterate our objective which we're approaching now, which is 15% operating profit over a business cycle meaning that as we get toward the upper end of the business cycle we would be exceeding that number. And I would say right now, our performance is very good because we prepared for a market that's worse than we're seeing. So we have reduced our costs substantially, and now I think you're seeing some of the incremental profits start to flow as volumes are just a little bit better than we anticipated. So I think we're performing very well and I would expect that to continue with volume that we're forecasting for the second half. So I'm very comfortable where we are in a very low market. So I think we're quite happy.

Yes, just--I may have missed this because it's come up a couple of times. I mean, why are you anticipating improvement in price cost in the second half of the year?

Price.

Price. What--.

--We've implemented a number of price increases. May, June, July, we would expect below the average realization due to market conditions. But any help there is--would be beneficial. Further in the third quarter, we're seeing some moderation in steel prices. But a lot of volatility on the other areas like just when you think copper is beginning to go down, it goes down for about a month and then spikes back up. So it's a lot of moving around. And up significantly from a year ago at this time. So also, when you're thinking about and calculating your performance for us in the second half of the year, you have to remember that last year in the third quarter we had a huge benefit from low cost of commodities, and also in the fourth quarter we had the LIFO inventory benefit. But I would still expect quite strong performance for us in the second half of this year.

Okay. Final question for me. You mentioned your outlook for non-res is not as really down as it has been. But again, the question I would ask is how are the dollars of orders tracking sequentially relative to normal seasonality in non-res?

They are following the normal seasonality, because it really doesn't matter where you're doing the construction. You're still having the typical calendar of the construction year. So we would expect coming from a low first quarter to a much better second and typically a little better third and then back down in the fourth. So that kind of typical cycle we would expect to see.

Okay, thanks.

Sure.

We will take the next question from Jeff Beach from Stifel Nicolaus.

Good morning, Tim, and great quarter.

Thank you.

A couple of things. The price increases you've mentioned a couple of times. It sounds like it's pretty broad based in power. I'd like to know if that's correct. And then, is it also at least the attempts here pretty broad based across most of your electrical products as well?

Well, in the utilities side, you have--you can announce a price increase, which we did on stocking materials. But you have a number of annual blankets where you really can't modify those prices until the end of the year. Some other blankets we have have commodity indexes in them, so as commodity costs involved in those specific products move up and down, the prices do, too. So it's more muted on the utility side, but it will be helpful. On the electrical side, if we look at lighting, like I said before, really tough to get much in the way of benefit on a project, a little bit on the stock. But if your business is down around high single digits or 10% or something like that, tough market conditions are hard times to get price increases.

Some of our other things, like where we've increased price on wiring devices and that, we will pretty much get all that. So it's a mixed bag, but like I said before, you take it on average it's pretty--a little bit below what we would realize. So if you announced three to five or something like that, so you were targeting 4%, you would expect to get 2.5 or two, you might get 1.5 to two. That's the kind of expectation we would get with about a quarter lag, because we're sitting with a lot of quotes there and you don't always reprice every quote in these times. And you're sitting with at least a month's worth of backlog at previous prices. So--but so, a little bit of help as the second--third quarter rolls out and more help in the fourth.

Okay. The businesses that you used to call industrial technology I believe had carried when demand is good, margins well above the Hubbell average. I just wondered, has the volume come back that's generating above average margins there? And is that helping that mix shift--some of the margin improvement you're seeing?

You would say that the--our businesses, if you know them by name, ICD and Gleeson, are showing improvement with strong improvement in operating profit and above the average. Our high voltage test business, when we talk about it being down, it has been on a long run peak cycle. Now, what there--where these high voltage test equipment go is into the construction of transformer plants and cable facilities--cable producing facilities for expanding infrastructure around the world. And this business is the standard, the market leader, for all producers. And we have been on an extraordinary high run and it's now coming back to just what I would call very good. So even though it's down a little over the previous year, its margins are quite north of the average in the electrical business. But just because we don't have as much volume it's a tempering effect, but still performing excellently.

Thank you. The last question, with the I guess concerns about a slowing economy ahead here, when you look across your industrial markets, are you seeing any signs of--that maybe there's been restocking of inventories that potentially ahead here you could see this industrial sector slow down from what you're seeing right now?

I am confident in the second half of the year on industrial markets. The reason I am is I believe that the auto industry will continue to produce for the second half of the year at a run rate of north of 11.5 million, which will provide a big chunk of the economy to continue to proceed with a growth. Probably if you're comparing quarter over quarter, certainly not the growth rate that you would have seen in the first half of the year, but still a pretty healthy growth rate. I think the demand for capital goods as we see that happening through our supply to various sets of machinery manufacturers, computer manufacturers, it's been very, very good and their backlogs are in pretty good shape. The areas of concern for me would be certainly harsh and hazardous. And I think the story around the insecurity caused by our Administration and politics is more or less a constant over the year. So I don't really think it's going to contribute more negatively in the second half than the first. So I think we're pretty much on steady, slow improvement in the U.S. and in Canada and I'm convinced at the moment that the blip in the second half that's predicted will not show up in the markets that we serve. Maybe on the consumer side, but certainly not--just think of the levels that we're at. We're at very low levels of operations in all these markets and I don't see and don't predict or don't forecast that happening.

All right, thanks. That was a good answer.

We will take the next question from Phil Gresh from JPMorgan.

Hey, guys.

Hello, Phil.

On the productivity side, I mean, could you elaborate just a little bit on what you're doing there? And did that accelerate in the second quarter from the first quarter? I know you have some comps there from the second half of 2009 when those started rolling in. So could you just kind of try to quantify for us how to think about that?

Well, clearly, the--on a year over year basis the productivity gains are going to be larger in the first half of the year because we had some fairly significant challenges in the first half of last year from a production ramp down perspective. So from a calendarization the first half is going to better than the second half. Productivity gains are better overall than we expected going in, because we're working harder at those to offset the headwind that we're seeing from the price cost equation. But I think they're going to continue to track very nicely in the second half because we have some of those year over year challenges to mitigate. You recall the strength we had in price cost in the third and fourth quarter, so we're going to have to work through those to be able to meet what Tim has communicated as our expectation that we'll be able to improve our margins at least a point overall. Obviously, a big improvement in the first half, but still needs improvement in the second half in productivity to offset some of those year over year price cost comparisons that are getting more difficult, as well as some of the inventory adjustments that you'll recall we saw in the fourth quarter of last year.

Right. I guess my final question would then be, I mean, you had a roughly 250 basis point increase in the margins in the first half, and you're saying 100-plus for the year. So how should we think about the second half? Are there quarters where it would actually potentially be flat to down year over year, or do you anticipate being able to more than offset the price cost and the inventory adjustment headwinds?

I would say that there's certainly challenge in both. I think if you go back the last year, the strongest quarter from a margin standpoint was the third quarter because that had the biggest implication of the price cost benefit. So as we look out we--if you ask me, I always think every quarter is a challenge, but I think there's a lot of things that are in place that give us confidence that we're going to realize these things. But I think it's probably equally split between the two quarters. We don't see any of the quarters at this point being down year over year. Okay?

Okay, that's helpful. Thanks.

At this time I would like to turn the call back over to Mr. Bill Sperry for any additional or closing comments.

All right. Thanks everyone for joining us. We appreciate what a busy day everybody's got here. But for follow up questions, please feel free to give Jim Farrell or myself a call. And just to be clear, we have moved in the last couple of weeks, so if you don't have the new number, 475-882-4293. And I appreciate it. Thank you very much.

That does conclude today's conference. Thank you all for your participation.