Hubbell Inc (HUBB) 2010 Q3 法說會逐字稿

Good day everyone. Welcome to the Hubbell Incorporated third quarter results conference call. As a reminder today's call is being recorded. Now for opening remarks and introductions, I would like to turn call over to Bill Sperry. Please go ahead, sir.

Thank you and good morning everyone. Welcome to Hubbell's 2010 third quarter earnings call. I am joined today by Tim Powers our Chairman, President and CEO,Dave Nord, our Chief Financial Officer, and Jim Farrell, our Director of Investor Relations.

A couple of announcements, third quarter earnings this morning, and hopefully you found our press release already off of the wires, or from our website. You will also find presentation materials on the website that Tim and Dave will refer to during the call today. Let me refer everyone listening to the call to the paragraph in our 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 this 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 could cause our actual or future results to differ perhaps materially from what we may discuss or project today. So please note that paragraph in our release, and I would like to consider it incorporated by reference into the call this morning. In addition we may make reference to non-GAAP financial measures that management finds useful in evaluating performance. Those measures are reconciled to comparable GAAP measures in the Appendix to the presentation materials, and with that, I would like to turn it over to Tim.

Welcome everyone, and thank you for joining us this morning. Dave and I will be referring to presentation materials you hopefully have found on our website. I will begin today's call with an overview, and then Dave will provide a detailed analysis of our financial performance. I will conclude by providing my perspective on the outlook for the remainder of 2010 and into 2011, as well as some closing remarks. Then we will open it up and take questions from you. I am starting on page 3 of the materials.

Hubbell's performance in the third quarter was very strong. Sales growth and margin expansion drove a significant improvement in earnings per share for the quarter. I am very pleased with the results Hubbell is delivering. A sign of solid market positioning and outstanding execution. Let's move to a review of our end markets.

Nonresidential construction is our largest market and continues to provide a headwind. Private construction is the hardest hit, as the supply of buildings relative to demand combined with difficult to obtain construction financing continue to drag down new starts. Public spending has been relatively stronger as it has been aided by some stimulus activity. In addition, we continue to experience strong growth in the areas of retrofit, renovation, and building controls. We feel that the sharp contraction of residential construction since 2006 has reached bottom and will likely bump along for a few quarters as foreclosures and unemployment drag on the housing market. However a return to more normal levels of annual construction creates a very positive multiple year picture of growth rates for our residential business.

The industrial market demonstrated real strength during the quarter. We experienced impressive growth in the lines like wiring system, where increase in the output of key manufacturing sectors require spending on Hubbell devices that keep factories running safely and efficiently. In addition, our high voltage testing equipment line experienced a jump in shipments as demand grew from OEM customers, and in emerging markets where infrastructure is being installed.

The utility story for the year is playing out as we have described to you on previous calls. The drop in electricity demand in 2009 felt by our utility customers has been replaced by growth in 2010. And so the abatement spending that was deferred has largely come back, resulting in a growth for our Power segment in the third quarter. The large capital-intensive transmission projects are still being pushed off until 2011 and beyond, as rate increases are not being supported locally. The net result of our end markets was some decent organic growth, but I believe the story of the quarter continues to be our margin and the productivity efforts of our team.

We continue to make progress on Lean activities, product redesign, facilities consolidation, and more efficient and effective centralized services. The full range of these activities is producing impressive results as margin expanded by 180 basis points to over 17%. There are a series of topics from the quarter that I would like to comment on here. First is China, where we opened up a plant near Shanghai that is making Power Systems products. It is encouraging to see a multinational team dig in, and get that effort off the ground,where experience from Mexico and the US was critical to its successful implementation.

Second is Europe. I just got back from a trip with Gary Amato, who runs our Electrical System business. The operations are oriented to harsh and hazardous applications, so the quality is very high, and the specifications demanding. Those facilities are outstanding and our products are well-positioned to thrive as they serve the energy and heavy industrial markets with attractive margins.

The third area of dimension is LED. We continue to operate at a pace to double that business each year. We are spending a lot of time with national accounts on outdoor applications where we think this is the sweet spot for early adoption. Examples include parking lots and outdoor lighting. Hubbell's products are winning acceptance in those competitive processes, and we stand poised to lead the new technology forward. Of great importance to us is that most of this work is retrofit, so it represents an incremental opportunity to our traditional construction business. With that, let me turn it over to Dave, and he will give you a more detailed picture of our results.

Alright, thanks, Tim. Good morning everybody. Let me give you a little more color on the financial impacts of some of the things that Tim has just talked about. I am going start on page 4 of our presentations and talk about our Q3 sales.

First off, reporting $685 million of sales, that is up $91 million from the third quarter of last year. 15% growth, 9 points of that growth coming from the addition of Burndy. You recall that Burndy was acquired and closed just at the beginning of the fourth quarter. So this is the last quarter that we will have that comparison discussion. As well, strong industrial and utility growth so the core growth underneath the 15% was 6 points.

On the gross margin side very good performance on gross margin reporting 34.3%, up 180 basis points from the third quarter of last year. A lot of things contributing to that. Most significantly is the ongoing productivity gains from the cost reduction actions we have taken last year as well as the long-term investments that we have been making.

As well, Burndy is a positive contributor in the quarter, running at as you recall, we have talked in the past that Burndy runs at a higher gross margin as we will mention later. They have a higher selling cost element to drive that. But that was a positive contributor as well as the higher mix of our industrial products both in our wiring device as well as our high voltage product lines. All that served to more than offset what is still increased commodity cost headwind that cost us a little over a point just on commodity cost with some, but fairly minimal price implication benefiting, or certainly not enough off to offset that.

Turning to page 5, selling and administrative expense of $117.6 million, up 16% largely consistent with our growth in volume, a little bit of just 0.1 of a point uptick as a percent of sales. So we held it fairly constant although within there, there is as I mentioned, the impact of Burndy, which runs at a higher rate, and that actually cost us close to 0.5 point on the rate. So the underlying benefits that we are seeing from the cost reduction actions last year are embedded within that 17.2%. So all that leads to operating profit of $117.6 million, margin of 17.2%, up 180 basis points. And again, largely due to the productivity benefits, the contribution from Burndy, good industrial mix in our products more than offsetting what is the commodity cost headwind that we still face, as many do.

Turning to page 6. Net interest expense of $7.8 million. Fairly constant with last year due to comparable borrowing levels, all as you know we have got about $500 million of long-term debt outstanding, running at an average coupon rate of just over 6%.

Our tax rate we will talk a little bit more about that, for the quarter our tax rate was 34.3%. That is up 280 basis points from last year. A couple of things driving that. First, as you know, we have been tracking for the year to a rate of about 32.5%. It is up even against that. Big driver is that we concluded in the third quarter an audit of our federal tax returns for years 2006 and 2007, and the result of that was an agreement for some additional costs that we have to incur, and that resulted in a $2.2 million incremental expense within the third quarter.

As well on a year-over-year basis, we are still not benefiting from the R&D tax credit that we had last year. Hoping that it will get passed in the fourth quarter but not making any predictions on that. So absent the tax audit conclusion, still running at our 32.5% rate or thereabouts.

Turning to page 7. Net income then all of that driving to net income of $71.3 million, up 24% due to our higher sales, our higher operating income, offset somewhat by our higher tax rate. That leads to earnings per diluted share of $1.18, up 17%.

As I mentioned you have got $0.04 of tax costs that was unplanned, so absent that you would be up 21%. We also have the impact of more shares outstanding. As you recall we had a share issuance in the fourth quarter of 2009 for 3 million shares. To that creates some dilution but certainly for the quarter that was more than offset by the contribution from Burndy for which the equity offering was largely based off of.

Let me get to the segment results now in the quarter. First on page 8, the electrical segment results. Sales of $490.6 million. up $76 million, or 18% from last year. Obviously Burndy providing a big contribution there at 13% but absent Burndy still up 5%. And I think as Tim mentioned we have got strength in a number of areas.

Our industrial products continue to show strength, strong high voltage in test equipment, more than offsetting the nonresidential weakness. From a business standpoint, we look at our wiring products business with volume up about 14% from the third quarter of last year. Our electrical products up 10% largely from the industrial and high voltage products, and then lighting down 3% largely from a C&I perspective or commercial industrial down 4%. Certainly much better performance than we were anticipating as we went into the year, but still a negative implication. More importantly on the operating profit of $83.9 million, up 63% with a nearly 5 point margin improvement to 17.1%.

Contributors to that first is the higher volume, providing the incrementals that you would expect from higher volume, as well as the productivity gains that we are getting from the various initiatives from cost reduction actions to plant closures to product redesign. Burndy contribution a positive contributor in the quarter and the higher industrial mix. So all-in-all very good results in the electrical segment.

On the power side, good volume growth in the quarter, up 8% from a year ago. Tracking very much as we have expected. You recall we started the year slow, but we expected the full year to show growth, and we started to see that in the third quarter, and expect that to continue into the fourth with improved spending on distribution products, although the larger transmission products a little bit slower and being pushed out.

On the performance side though, more challenges despite the volume growth with operating profit of $33.7 million, down 15%, and margins down 480 basis points. A lot of that due to first and foremost our increase in commodity costs, which has historically hit the power business most significantly because of the high steel and other metals content. That was almost three points of a detriment. We have got higher selling and administrative costs. Some of that attributable to some of the investments we are making in new products as well as in new facilities.

Tim mentioned our facility opening up in China, and so you have got some incremental costs associated with that. The good news is there still is productivity that we are continuing to drive and that has obviously been our story all along. And I think you have got an element of some mix there despite the higher volume the storm season has been a little weaker than normal and than expected and that generally results in sales of products with higher margin, as well as some of the shifts in some of the distribution products from year-to-year can be to lower from higher volume business. So otherwise we are very pleased with certainly the good growth in the market and the recovery in the market.

Clearly challenges on the commodity side, I think that is going to require us to be even more disciplined and likely more aggressive in pricing going forward as we look into next year. Q3 cash flow, cash flow from operations of $82.9 million, free cash flow after CapEx of $71.4 million equal to net income for the quarter, a little bit less than we would have liked and certainly expected, some of that due specifically to some collections on receivables that rolled from the last couple days of September into the first couple days of October. So it is not something that we are worried about operationally, other than the timing between quarter end and into the fourth quarter.

So turning now to the year-to-date just trying to put the third quarter in perspective. That means we were reporting sales of up 8% compared to the first nine months of 2009 with Burndy contributing 9% of the growth. So the underlying business for the first nine months down but all of that coming in the first half with recovery starting to be reflected as we are in the second half of the year. The industrial market has been an area of strength. The utility spending has improved throughout the year and expect that to continue. And the nonresidential has been weak, but partially offset as we have said in the past with the renovations, relight controls and energy efficiency as well as the public spending that has offset some of the weakness in the private sector.

Margin improvement of 240 basis points driven by productivity. Obviously keep in perspective that is 240 basis points year-to-date. We had 180 basis points in the third quarter so the biggest contributor of that was in the first half where the compares were much easier against the challenges we saw in the first half of 2009. They get more difficult as the year progresses, and I think we will see that even into the fourth quarter as we look at our normal calendarization. We are also dealing with throughout the year, unfavorable price commodity cost impact.

We expected the pricing environment to be difficult. Despite that we put through many price increases throughout the year, have realized some of them but certainly not enough to offset what has been a more challenging commodity cost environment, and so we continue to focus on that, and we will work to get back to our normal standard of parity between price and cost not likely until some time next year. And Burndy is performing well. So all good contributors. Our year-to-date results, as I said, sales up 8%. We really want to the one thing to focus on is the tax rate, so the tax rate of 33.2% year-to-date is up 170 basis points, and if you can think about that very simply as two contributors. Half due to this conclusion of a tax audit and the other half year-over-year due to the absence of R&D. So the underlying run rate that we are experiencing is consistent with what we have expected throughout the yearabout 32.5%. If by chance the R&D tax credit legislation gets approved in the fourth quarter, that rate would change but we will wait until that happens, and then recognize it accordingly.

From a segment standpoint year-to-date we have got the electrical segment with sales up 12%, and Burndy adding more than that at 13%. Underlying businesses though, with wiring up 12% year-to-date, electrical products up just over 1%. Offset by the weakness in the lighting business, particularly the C&I business, 10% down year-to-date, most of that in the first half. The magnitudes of the decline diminishing as the year is progressing. More importantly on the performance, operating profit up 68% year-to-date at $185 million, with productivity the biggest contributor to that margin improvement.

Lower Burndy contributing some, although on a year-to-date basis not as much as in the quarter. And lower restructuring costs under the cost actions that we took last year certainly in the first half, the absence of those is a positive. As well as the positive mix of industrial products in particular. On the power segment, page 14, year-to-date, sales flat or actually down 1% year-to-date, and that is with the weakness in the first half. But we are seeing the higher spending on distribution products as the year progresses.

Our backlog has been built some what with the transmission projects delayed and lower storm volume year-to-date, year-over-year costing us about a point in volume year-over-year. On the operating profit, down 13% at $91.7 million, just over 2 points largely due to the pricing and commodity costs. You recall that last year we had some very strong positive price costs, so we expected some of that to turn around this year and we have been just faced with higher commodity costs that we are working through to get recovery. But all of that being managed against a continuing focus on productivity gains. And then year-to-date cash flow, year-to-date cash flow, free cash flow of $142.2 million. That is after $33.8 million of CapEx.

More of our normal run rate targeting to a $45 million to $55 million capital expenditure. A lot of emphasis on working capital. We have had some billed on our receivables. A lot of it. And if I turn the page and really talk to working capital you see that we have had, on page 16, you see the continued increase overall you will note if you look back to the third quarter of last year there is a normal seasonality to our business, a very predictable seasonality to our business, and we see that first and foremost in cash flow right here as we have the normal build of receivables from the strong volume performance in the construction season in the third quarter, as well as some of the inventory. A lot of that comes back in the fourth quarter.

You will recall last year's fourth quarter I think had free cash flow order of magnitude $90 million. So we typically have very strong cash flow performance. I think that is actually offset by what is also weaker operating performance. Our normal calendarization, our third quarter is always our strongest quarter, and it has followed if you go back and look at the last five years our volumes are off on average over the last five years in the mid to high-single digit range, and there is a significant margin decline sequentially, partially due to that volume decline, as well as a lot of year end timing issues that occur, fewer shipping days, some compensation costs that can only get recognized in the fourth quarter. So very normal dynamics that we have seen in the past, and we clearly expect to see again on both working capital and operating profit.

Turning to page 17,our capital structure continues to strengthen with our increase in cash flow generation. Our debt to capital moving to 26% from 28% at the end of the year,and our net debt to cap down to 6%, although keep in mind that that is reflective of all of our cash balances, some of which as we have talked about in the past, are not readily available for, on a cost-effective basis because they are offshore. We continue to look at additional investment opportunities, and we focus generally in an order of use of our cash flow on dividends, maintaining, and when appropriate, increasing our dividends.

Investing first in our business from a CapEx standpoint of new products at productivity and efficiency, acquisitions, a key element of our growth strategy in the past and going into the future, and lastly, share repurchases, if the market is opportune, and quite honestly, if there is nothing else that, if we think there is no better use of that cash. In this market, we clearly believe that the best use of our investments are in the first three, and we are very actively and aggressively looking at the acquisition pipeline. So with that, I will turn it back to Tim to provide some perspective on the rest of this year and next year.

Thanks, Dave. Let's turn to page 18 in our outlook for the remainder of 2010. We expect organic sales to be roughly comparable to last year, but an increase of 7% when including Burndy. This would include the level of seasonality that we typically experience in the fourth quarter of the year, mainly where lower volumes result in the impact of cold weather on construction activity,a calendar with fewer days, and distributors who are considering year-end incentives and inventory levels as they close out the year.

The full year expectation for margins would be a 180 basis point improvement over the prior year, and free cash flow is expected to be roughly equal to net income, which would imply the seasonal liquidation of working capital during the fourth quarter. Let's turn to page 19 and our preliminary outlook for 2011. We will provide more detail for you at the end of our year at the call in January. But our directional expectation is that three of our four markets will be growing, and this should provide us with modest growth overall for the Company.

Hubbell is providing its value to customers each and every day. We are providing a broad array of high quality and excellent brands with high service levels. We are focused on weaning out our operations to retain a competitive cost position in the industry. Cash flow generated from the business allows us to return an attractive dividend to our shareholders, as well as to make investments in growing the Company,both organically and through acquisition,and we manage our leverage and liquidity position conservatively to best position us for the future.

Thank you for your attention and now we would be happy to take your questions.

(Operator Instructions). We will go first to Bob Cornell of Barclays Capital. Please go ahead, sir.

Obviously you paint a good picture but I want to focus on some of the opportunities as I say. You talk about the non-res still being on the weak side. But again, maybe give some color in terms of inquiry rates and quotation rates and pipeline and types of visibility down the road, Tim.

I would say that the year on nonresidential construction has turned out to be certainly lower than the previous year, but not as bad as we anticipated it would be, and I would say the comparisons are steadily moving in a more favorable direction. We would expect some modest, that is mid single digit declines next year, but then there is favorable trends as we pointed out with retrofit and lighting controls and certain area of growth. So less bad is kind of the story of non-res.

I guess in that view for 2011 would there be a point where you see the -- even though the number is down for the year would you expect the numbers to track positive given the way the comps are tracking at some point second half of next year?

It could possibly be that case, Bob, but I think we will have a lot more clarity as we get through the fourth quarter and a better view of that. But the trend is improving.

Right. I guess the other question is on transmission, the other part that is lagging. You talked about those projects being deferred. I mean by how long, by how much? When do you see those comps turning positive as well?

I would say we are back in an active cycle at the moment in quotation of these projects, which means they have been delayed some of them a year, up to 18 months, but we are encouraged by what we see at this time and we are hopeful that some of these could come back for 2011.

You kept mentioning the price cost issue as you and Dave went through the presentation. Last year you had the very favorable tailwind at this point and so we are comping an anomaly almost with regard to price and cost. How about some just color on the go forward in terms of the ability to get price to cover costs?

As this period of lower economic activity stretches out it is not easy to recover it, but I would say we are determined to do that and we put the price increases in place to be able to do that, and the negative balance of price cost is improving as we get to the end of the year. And I would say there is probably some further price increases that are appropriate based on what is happening to metals. Copper in particular is one.

Okay. Thanks. I'll turn over the queue. Thank you.

Sure.

Next to Christopher Glynn with Oppenheimer. Your line is open, sir.

Just going back to the expected mid single digits decline for the non-res next year. Tim, is that the market commentary or rolling in your favorable trends with some of the areas of lighting?

That is a market commentary. We would expect to do a little better than that when you include the areas of growth that are growing, say, at 20% or our comments on LED doubling would be modifiers to that trend.

Okay. And a lot of commentary on the productivity. I know that versus last year, this has certainly been a year's worth of productivity initiatives, but just sequentially we saw something like 70% conversion of the revenues and on the sequential dynamics we have the HV test and the Burndy. I mean how significant were those?

I would say we had across-the-board improvement in the electrical segment. The wiring device business was significantly better. The lighting business performed quite well in the face of a very difficult market. And, of course, the harsh and hazardous and test equipment business also performed well. So there were just about every piece of the electrical segment contributed to the upward trend here.

Okay. And HV test - I think it is a little bit more of a backlog oriented business for you. Can you talk about the visibility into the continued improvement there?

Yes, I would say, certainly the margins are terrific and we shipped a couple of very large orders to an emerging market parts. Incoming orders are not quite as high as what is being shipped, but still looking like quite a good year coming up for 2011. Not quite as good as 2010.

Okay, great. Thanks a lot.

We will go next to Jeff Sprague with Vertical Research Partners. Your line is open, sir.

Thanks, good morning.

Good morning.

Good morning.

Just a couple more things on T and D if you could elaborate a little bit more. I had to jump off the call midway so I'm sorry if it is a little bit repetitive. But I caught the comment on T stuff sliding to the right, and I guess to surprise there. But could you give a little more complexion, Tim, on what is happening on the D side where you are seeing some pickup? Is it stock products? Is it storm-related and any particular products or geography standing ouTusa

Certainly not storm-related because the weather has really been quite good and there really hasn't been much in the way of storm business up to this point. But it is a return of the large utilities to spending what they need to, to keep lines maintained as opposed to what happened last year when they were very surprised by the downturn in electrical consumption and put the brakes on spending.

So what I would describe this more as a bounceback to the normal level of spending. It is not a high level of spending but it is better than it was, and it is -- our products are more -- our sales are more distribution oriented just because of this sliding of utility spending on the transmission side, and particularly substations is an area that has been weak on a year-over-year comparison, and that is an indication of the putting the brakes on even the intermediate pieces of spending - not the big high voltage lines, but the improvement of the grade grid overall. I would expect some of that to bounce back up as we get into 2011.

What do you think about the state of inventory at the utility level itself and their yards and the like?

I would say that it is not high. I would say they are buying what they need and managing their cash flow very intently. I would say that even in utility distribution, we do not have an excess inventory out there either. I think what we suffered through in the back half of 2009 was really a draining of the channel both from the end customer and the distributor in the face of that downturn in spending and I think that they have been quite tight-fisted both participants in the market in terms of restocking their inventory positions.

And this notion of substation still being neglected but perhaps picking up, is that just a very, very logical-sounding theory which it does sound logical or is there in fact some early order indications or other activity that suggests maybe that is starting to happen?

It is my view that it has to improve, because the level to which it fell isn't one that is of a normal maintenance level - you know what I mean. It is down below the average for a long time and I don't think that the spending has been at the sustainable rate to keep the grid in normal repair.

Okay. And I'm sorry if this was addressed earlier but just on lighting, could you provide some color on the success of price in the channel distributor's willingness to accept and try to pass on, and what the give and take is there?

I think the distributors are always -- distributors are always willing to try to pass on price as it is to their benefit. As you know in the lighting business, this is more of a job business than the commercial and industrial product lines. Industrial product lines and the pricing on jobs because of the low number of them are pretty tough. So it is in this area of commercial construction, including what would be part of our RACO brands where pricing pressure is the most intense that we see. But not any different than at this time in the cycle, your volume is scarce and the competitive battle over the jobs is at the normal level.

Okay, thank you very much.

Sure.

Our next question comes from Steve Tusa with JPMorgan. Please go ahead, sir.

Good morning.

Good morning.

Good morning.

On the non-res construction side, you mentioned there is a bit of a bifurcation between the renovation and relight controls. What percentage of your business is the stuff that is going pretty well and what percentage is still stuck here in the doldrums?

Well, we don't really give those percentages but I can give you the order of magnitude. The vast majority of the market for most of us in the electrical business is new construction and that is where the amount of square footage being put in place is down substantially. What is the new opportunity and certainly a much smaller part of the business is on the retrofit relight and controls. But it is growing at a quite fast pace so we haven't really been specific in public about what those two relationships are, but I would say the vast majority is of the part of the business that is still going downward.

And we -- Steve, we have mentioned in the past that we have got businesses that are actually very focused in those areas, so we do have pretty good visibility to at least from our own business what is happening there, and those are clearly operating in the double digits, high teens, 20% range in the current quarter and we are seeing an acceleration of the activity there, so that is all consistent with what we expect to be a mitigating factor of what is still weak core new construction and non-res.

And the vast majority of the activity there , is that stimulus-related, and is there a concern that that runs its course over the next few quarters and peters

I would say stimulus isn't exactly the world word I would use. There is some stimulus money being spent on government buildings to improve their energy efficiency, which is badly needed, but there is just some tax credits and things provided by public utilities that I don't really think are going to go away, that are adding incrementally to the return, but the returns are fairly compelling for relighting buildings and just on their own. So I really wouldn't expect this to slow down any time soon. I would expect, if anything, as the adoption of the new lighting technology and controls becomes better understood that this would continue to grow at even a faster rate.

Right. And then just looking out to next year from a price cost perspective, if the year were kind of -- if we just carried the current pricing you put through today assuming raw materials go nowhere for the next several months, you end the year at a certain level, what would be the net impact of price increases you already have in place and then the raw material costs you are facing? I guess my question is basically, you may be a little squeezed for the next couple of quarters but there is price help on the way and then I'm curious as to how much of that is eaten through by just carrying the current rate of commodity inflation over into next year?

Well, if you -- if I were that good on predicting the commodities to be anywhere near tame they have been very volatile, I would expect with the economic policies in the United States and our need to keep interest rates low and the dollar are weakening that commodities will rise, and that the battle to keep your prices up will be a continuing one into 2011. And we are expecting that and we expect to be able to succeed and get back what we need to from the marketplace, but I would say it is anything but a calm picture moving forward, but it is the same battle we have contended with continuously so it is just part of our normal operating procedure.

And is there any -- incremental productivity for next year?

We would expect incremental productivity next year. We see quite a wide opportunity yet to continue to improve our business. We are speaking about product redesign, better procurement in a shared services environment, plant relocations, product relocations, just a wide variety of activities we continue to work on as a company and we would expect productivity to continue to improve in 2011 and beyond into 2012.

Okay. And then one last question, sorry, just one more here. On the revenue outlook for next year you use the term modest increase, and then earlier in your -- in the Q&A you talked about modest as being mid single digits. When I look at your revenue comps this year, you just basically had your first quarter of meaningful growth here in the third quarter, so it doesn't appear to me that all year you have been benefiting from a significant uptick in demand so why wouldn't that comp be better next year?

It seems to me that you are not exactly facing the toughest level of activities in 2010. There hasn't really been that much snapback in your business especially relative to others, who I'm sure are go are to guide somewhere in the mid single digit range. Is this conservatism, or maybe you could just talk directionally about what modest growth means next year?

Well, I would say from the way we have been describing our four markets, we would expect three of those markets to improve somewhere in the range you talked about but if you remember our largest market, which is nonresidential construction is expected to fall. So when you blend these markets together you get something below 5%, as our next year's expected revenue. And also we are a quarter away yet so we would like another opportunity to talk about the precision of this view, but we expect certainly our revenues to increase year-over-year.

Perfect. And I do appreciate, a lot of companies aren't really talking about 2011 yet, so I appreciate the heads up on that early. Thanks.

Sure.

(Operator Instructions). We will go next to Scott Davis with Morgan Stanley. Please go ahead.

Good morning, guys.

Good morning, Scott.

Good morning.

A couple of things that haven't been covered. One, just on free cash flow generation, which is as you said [inaudible] will be great, full year, can you talk about M&A pipeline, what you do if you think out into 2011 and you are generating all this cash. I mean it doesn't make a lot of sense to pay down your debt at these types of interest rates but what -- are there other Burndy's out there? Are there other smaller bolt-on acquisitions or what can we expect out of you guys the next 12 months in that area?

We are always looking for opportunities to add to our portfolio. Burndy's don't come along all the time but certainly bolt-ons are pretty much we are looking at a series of those all the time and then it is a question of value and price, but certainly we would expect to deploy some of our cash on acquisitions into 2011. That is our goal; that is our objective. That is what we try to do on a continuous basis. That is the best use of our money except for perhaps reinvesting in our own company with CapEx and productivity improvement.

Okay. That makes sense. Now, I want to dig in a little bit to customer inventories. When you think in terms of past cycles what, you know, one of the catalysts for customers to take inventory on is obviously a rising commodity price environment, where they are getting hit with a price increase every quarter, every couple quarters. But we haven't seen that yet. What do you see as far as patterns in your customer behavior, in inventories, is something different this time, or has this just not happened yet ?

No, I would say that certainly distributors increase their inventories as their volume increases, and if you would take the whole electrical industry and say it is at some small single digit growth, then inventories have probably risen by 4% or 5%. But because of the slow nature of the recovery in the construction business, there is no real pressing need for them to run out and increase their inventories in a short time. They are making gradual adjustments as they need to, because the nature of the recovery has been slow. So I would expect that to continue. I don't expect distributors or end customers to increase their inventories. The one exception to that -- some of our industrial OEMs whose business has picked up more than 10%, then you would see distributors stocking those specific inventories in proportion to the increase in demand.

That makes sense. Can we talk a little bit about tax planning and a couple of things to note? One, clearly you are about, I don't know, 84%, 85% US versus most of the rest of our coverage group is more global, so it as little easier to do tax planning. What can you do, given that we may be in a somewhat not rising on a corporate tax environment for the next several years? Does this argue to get a little more global in scale as you can take advantage of some tax planning strategies that your peers have, or is there any other thing that you can could domestically to make sure that you don't get run over by government policy?

We are always working to try to minimize or pay only those taxes that we are required to. But if you look at our strategy for the entire business it is really to build on the economic power that we have in America and Canada. And really we feel that growing our business and strengthening the North American business has a more positive impact than perhaps some incremental increases in taxes. And I do think that the government is aware that the taxes on US businesses are the highest there are in the western world and that something over time needs to be done about that. So we will have to see what that looks like when we get a new congress and a new attitude towards this, as to whether domestic taxes rise or not.

Sure. Last question, guys, on LED and I know it is still a small but very, very fast growing piece of your business. If you look at creed numbers slowed down or their core organic growth numbers slowed down quite a bit this quarter. Is there any slowdown or pause that you have seen in LED or is it still 50% type growth rates?

It is growing at a fast pace. We don't see any decline in that. We tried to point out that since LED is a very directional lighting, meaning you aim it rather than you give off a general light. Its best applications are used outdoors which really plays well into Hubbell's lighting strength. We are the number one outdoor lighting company in the United States with our parking lot and area lighting, and so as LED expands it should benefit us disproportionately.

Okay. I didn't know that. Thank you.

We will go next to Rich Kwas with Wells Fargo. Please go ahead, sir.

Hi, good morning.

Good Morning, Rich.

I had a question on power margins. This year, 2010, you had a little bit less favorable mix in power, gotten better since the first half of the year. Tim or Dave, how do you think about next year in terms of mix and power?

We would expect power margins to slowly improve over time. We have run into a lot of cost/price headwind. Hopefully we will get some of that back as we get into next year. But you are also comparing it to 2009, which is really a moment that we see very seldom, where commodity costs fell at such a rapid rate, that our prices were going nowhere near that rate, so we had a great third quarter last year. So in the 15% - 20%. In that area.

Okay. Are you seeing anything in terms of projects, that potentially make it more favorable, as you look out a little longer term?

It's -- no, I would not say there is a trend that you could expect steadily rising [inaudible] described us as anything but a very healthy business that is performing well, and is earning a very decent return, and it should benefit from the trends in the utility sector, as it is the number one supplier in its category.

Okay, that is helpful. Tim, I know your longer term outlook has been 15% operating margin. You've done a phenomenal job [inaudible] operating margin this year. It seems like you are ahead of expectations in terms of achieving that goal. How shall we think about, given a productivity, given what you have done so far this year, the potential that you could get to that sooner rather than later?

We have the potential to get that -- we can see it from here. The question is, before we say we can achieve it, really has more to do with cost/price headwind, and those kinds of things, so we will have a little bit more to say about that when we get to December and we have a clear look at 2010.

Okay, great. and then just lastly, [how keep behind on dates.] In terms of lighting, did you say overall lighting was down 10% year-to-date, or was that just commercial lighting, in terms of volume?

That was commercial.

Okay, great. Thanks so much.

If there are no other questions in queue at this time, I would like to turn the conference back over to our presenters for any additional or closing remarks.

Thanks, floor. Thanks, everyone, for joining us this morning. Obviously, Jim and I are around to take any followup questions, clarifications, etc. I know everybody is busy, so thanks for joining us.

That concludes today's conference call. Thank you for your participation.