Hubbell Inc (HUBB) 2012 Q2 法說會逐字稿

Good day everyone. Welcome to the Hubbell Incorporated second-quarter 2012 earnings conference call. As a reminder, today's call is being recorded. Now for opening remarks and introductions I would like to turn the call over to Jim Farrell. Please go ahead, sir.

Good morning everyone and thank you for joining us. Hubbell announced its second-quarter results for 2012 this morning. The press release and earnings slide materials have been posted to the Investor section of our website at www.Hubbell.com.

Please note that our comments this morning may include statements related to the expected future results of our Company and are therefore forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Therefore, please note the discussion of forward-looking statements in our press release and consider it incorporated by reference into this call.

In addition, comments made here also include some non-GAAP financial measures. Those measures are reconciled to the comparable GAAP measures and are included in the press release and the earnings slide materials.

Now let me turn the call over to our Chairman and CEO Tim Powers.

Thanks, Jim. Welcome and thank you for joining us this morning. Before we go into the specifics of the quarter I want to bring everyone up to date on some recent organizational changes. Dave Nord, who has been our Chief Financial Officer since joining Hubbell in 2005, has been promoted to President and Chief Operating Officer. Dave has done an outstanding job as CFO, implementing change and driving organizational focus to help support our profit margin expansion. We look forward to Dave's leadership in his new role.

Bill Sperry, who has been our Vice President of Corporate Strategy and Development has been promoted to Chief Financial Officer. Bill joined Hubbell in 2008 and has been instrumental in supporting our acquisition strategy, as well as providing valuable insights into our Company to the investment community. I am confident that Dave and Bill will continue to provide the necessary leadership and direction to enable Hubbell to reach higher levels of performance. I wish each of them much success in their new roles.

I have just a couple of high-level comments, and then I will turn the discussion over two Dave -- on the quarter. First of all, on our execution. I was very pleased that the second quarter provided our Company with an opportunity to provide the highest levels of service that we have seen in many, many quarters. Customer delivery performance was excellent. Our plant/factory performance was excellent, resulting in good overall execution for the quarter, as you can see in our results.

Second, on one of the markets that we participate in -- that is residential -- we see a bottoming and positive signs of improvement. We had higher levels of business with the national home builders through our DIY channels and over the Internet. So we feel that we are at the bottom and beginning to start up in the residential market.

And then to discuss the macro uncertainty of the economy and our view of that, and while there is great uncertainty, we remain focused on our own performance. We understand what is going on around us, but we remain committed to introduce more new products, have higher levels of capital spending, and greater efforts on acquisition in 2012 than we have done in 2011.

And with those comments I will turn it over to Dave.

Okay, thanks, Tim. Good morning everyone. Before I get into the quarter let me just provide a little commentary on the new role. I am obviously honored and delighted that Tim and the Board have the confidence to give me this responsibility. I certainly view it a bit of -- I have done such a great job at helping the organization set targets that they thought it would be a good opportunity for me to go and get more involved in the operations to help deliver those targets. So I welcome the challenge and the opportunity.

I have been out in the last month and a half visiting some of our locations, spending some time on the factory floor. And I can tell you that just gives me more confidence in the capabilities of the organization, what we have achieved to date and what the runway is going forward. We have got a strong team. We have got great programs in place and a lot more opportunities to go. So I'm really looking forward to this.

I am also really delighted that, as you know, Bill joined us several years ago, brought him on board, and he has clearly been instrumental in energizing our acquisition activity, a lot of focus on our strategy, as well as enhancing our image and our relationship with the investment community. So all those things, I think, are a natural fit. I think the transition here has been very seamless.

With that let me get into a little color on the second quarter. Turning first to page 3. Sales in the quarter were up 10%, and that was really based on broad-based growth. Certainly strong growth continues in our Harsh and hazardous business, up 20%. The power business continues to perform well on all fronts, including the benefit a little bit at the end of the quarter, but certainly leading into the third quarter, the recent storms that were experienced in the Midwest and mid-Atlantic, we did what we normally do and were very responsive -- delivered almost three-quarters of the requirements within the day the utilities need them, which is one of our signature capabilities. So not a lot of benefit in the second quarter, but some volume benefit that will occur in the third.

And I think within that 10% growth we also had the benefit of acquisitions, the acquisitions that we had done through the first quarter. And then you'll note that we had an acquisition early in the second quarter. The company is named TayMac. It was a $42 million acquisition. It is a business that makes nonmetallic enclosures, weatherproof enclosures that was a nice add and a fold-in into our RACO business.

The pipeline is very active. There are a lot of similar type properties that we are evaluating. And I would expect that we would have more activity hopefully closing in the third or fourth quarter of this year.

On the profitability side, our margins for the quarter were 16%. That is more than 1 full point improvement from a year ago. Now a lot of those coming from the favorable price commodity cost benefit. You recall last year we were still facing some very severe headwind from the commodity cost before we got our prices in. But as the year progressed it improved, and I think this is the -- probably the peak quarter of that turnaround. So a big benefit there.

All of that leading to our diluted earnings per share in the quarter of $1.29, up 21%. And I think all of that is consistent really with our own expectations for the quarter and the first-half of the year. We thought the shape of the year -- sales increases and margin improvement, and we have talked about it -- was going to be really biased toward the front end, with more challenging comps in the second-half, and we will talk about the outlook later.

We have had some commodity tailwind, a little more than we expected, and to date pricing has held. But that is always a challenge and we are cautious going forward. We have used some of that benefit to continue to focus on those things that will continue to drive growth and margin improvement going forward and continue to make those investments.

So with that let me turn it over to Bill, and he can take you through some of the details of the quarter.

Thanks very much, Dave. I am starting on page 4 of the materials. So looking at the sales for the second quarter, Dave gave you a sense of the broad-based nature of it. I'll just comment on the end markets here in sort of descending order of size to us, non-res being the biggest. And we continue to see the trends we have been experiencing where the public side, new construction continuing to be soft. We are seeing some strength in private, but the renovation and relight market really helping us net grow there.

On the industrial side we do have some mix performance where high-voltage test equipment is proving to be soft. But certainly the energy markets in our Harsh and hazardous business that serves those markets are doing very well. Utility strong across both transmission and distribution.

And maybe something we have been waiting quite a while for here, signs that the resi market is starting to allow us to see some very decent growth. We're still getting most of our lift from the multi-family side, but we are also starting to see some positive signs from the single-family side.

So flipping over to gross margin. We have seen 100 basis point improvement to 33.4%. A great piece of that coming from price/cost dynamic that Dave described. At the selling and administrative level we are also getting some pick-up in margin, primarily based from the volume providing some leverage there.

So on page 6, we are on operating profit, 120 basis point pick-up as Dave described. Essentially 1 point coming from the price/cost dynamic, but we are certainly encouraged to see contributions from both the gross margin and S&A line items there.

So at the total other expense, very small dollars there, but some lower FX losses included this year. And the tax rate running slightly higher than last year. We are at 32.8%, but we have -- we do not have the R&D tax credit included there. So as you will see, we are targeting the year to be around 32.5%, so we are in line with what we are expecting there.

So at the net income line we are at $77.5 million, an increase of 19% -- really the result of what we have described, the drivers of operating profit. And we did a little bit better at the EPS line, $1.29, as Dave highlighted, but it increased to 21% where we picked up a little bit from having our average share count about 1 million shares lower during the corporate than the previous year.

So let's switch over now to talking about the segments, and let's start with Electrical. We see $536 million of sales, an increase of 8%, with acquisitions adding 3%, so really 5% coming organically.

We described the industrial market being mixed, with Harsh and hazardous doing very well and high-vol showing some softness. We described the resi strength, and how well we are doing non-resi-wise given some of the renovation spending that we are seeing, particularly getting experienced by our lighting business.

Dave talked about the acquisitions. There have been four over the past few quarters. We are happy to have made those investments. As you can see, they become meaningful to the segments here in terms of driving growth, and we are eager to do more as Dave highlighted.

The POP line here, we have got 120 basis point improvement in the electrical segment. And again we are getting a price/cost tailwind here which is helpful, as well as some leverage from the sales, so good performance here in electrical.

And switching to power on page 10, also very strong performance, 15% sales growth, coming in at $242 million. And we are seeing that above 10% growth rates in both our transmission market as well as our distribution market.

You will all remember our distribution is a larger piece of our business, but the transmission spending has been a big contributor to these very attractive growth rates. And you see 90 basis point OP profit improvement to 17.9%, very attractive levels and good direction lift. So good quarter from power.

Talking about cash flow. Obviously, we are starting with a nice pick-up in net income. At the working capital line we essentially kept our days in line there. We will talk about working capital a little bit more in a minute. But certainly to support 10% sales growth we have got a little bit of investment there in working capital. And on the other side we have got some -- we made a pension contribution in the second quarter that we hadn't last year, and there was some deferred taxes that changed that.

So we are still holding to our annual target of trying to achieve 1 times net income with our cash flow. And obviously this isn't at 1 times, and we are a little bit below last year, but we feel good that structurally we are on pace to be able to meet that full-year target.

So summary of the quarter, we feel it was very, very solid, 10% sales growth, 120 basis points of margin and 21% EPS.

So let's switch to the year-to-date period. Also a very solid period, 10% sales growth, 130 basis points at the OP margin line, and 24% increase EPS. So very solid results here at half-time.

Let's take a look at the segments on page 13, starting with electrical. Similar drivers to what we saw in the second quarter -- Harsh and hazardous being strong, high-voltage being softer, but great demand for resi and good non-res performance given some of the benefits we saw on the private side, but also in the renovation spending.

OP up 70 basis points at 13.9%. And about -- again, about 1 point coming there from price/cost. There is some good tailwind coming in behind us there.

At the power segment year-to-date very strong, 14%. Price giving us about 2%, but very good organic performance in the transmission and distribution side -- trends that we have been showing you for quite some time.

And at this point we are going to be -- and Dave will talk more about the outlook -- but some of this power performance we're going to start now to run up against in tougher compares in the second-half where we really started to see the transmission spending pick-up vary dramatically last year. But sticking with power year-to-date, 230 basis point improvement at 17.6%, very solid performance from power.

Cash flow in the year-to-date period similar to the second quarter. We feel reasonably in line with our working capital days from a receivables, inventory and payables perspective. The other line being driven by the pension and deferred tax, as we discussed.

CapEx, just to remind you, last year we had investment in a building in Basel, Switzerland for about $13 million that drove up the CapEx last year. And I think both Tim and Dave alluded to our desire to spend CapEx and keep investing in the Company, and so that shows an increase in investment there.

Here we are talking on page 16 focusing on straight working capital. We are happy to be under that 18% level, and second quarter of 2012 looking very much in line with second quarter 2011. It continues to be an area of focus. You never do enough on inventories, payables and receivables, and we are going to keep working those. But those levels seem to be reasonably good in terms of helping us drive cash flow.

Switching to our balance sheet. We are in very, very good shape here, $545 million of cash, essentially in a zero net debt position. So we will fill very well-positioned to make the kind of investments, both of the capital nature and in an acquisition nature, to continue to grow the Company.

So, again, we feel very strong. Second-quarter performance very strong, year-to-date performance. And I'm going to turn it back to Dave to provide our outlook for the rest of the year to you.

Okay. Let me first talk about our view of the end markets and our four key end markets on page 18. And I will start up on the upper-right in utility. That market we see for the year growing 6% to 8%. That is about 1 point improvement from our last communicated look. I think a lot of that is driven by continued strength on the transmission side in particular.

The residential side, as you have heard Tim and Bill talk about, I think there is clearly indications of a recovery that has been -- that is in place. We are still cautious about the pace of that recovery. Certainly housing starts continued to increase. Builder sentiment is improving. But keep in mind that it is all relative. Even builder sentiment is up to 45, which is still less than the middle ground of 50. But certainly a dramatic improvement from the low- to mid-teens levels that they were feeling for a long time.

And we hear that from our customers as well. So that market, we think, for this year will be up 10% to 15% for us, which is up dramatically from the 5% to 7%. But not as big a contributor because it is unfortunately still a small part of our business, but actually bodes very well for one element of the growth prospects going forward.

The nonresidential market as well, 2% to 4% growth. That is also up a little bit from what we last forecast, a big part of that being the continued strength in the relight retrofit and energy efficiency.

The one market that we see some softness in is on the industrial side. At 3% to 5% that is down a 1 point our last look. There are a number of businesses driving that -- the industrial production sector. As Bill talked about, our high-voltage business that you recall last year we thought was going to be down, and it surprised us and turned out okay. This year we thought it is going to be down, and in fact it is going to be down, although we are feeling a little bit better because the order book is starting to fill. And you should know this is a product business, longer leadtime, and so that is more opportunities for going into next year in 2013.

So all of that adds to end market growth of 4% to 6%, which is like up 1 point from what we last saw. How does that play out into our segment sales growth? Well, on the power side we are still holding at the 7% to 9%, really led by the transmission project spend. That is continuing to be strong, although the second-half compares on the sales side are more difficult.

You recall last year in the second-half we had a lot of releases on projects, and so it creates a lot more volatility in this business. But the order book here continues to build. Conceivably you could get some early releases, but they're impossible to predict, and so we don't anticipate early releases until they come.

Distribution is up on higher maintenance, although I think that is a market where we have seen clearly a change in the shape of the year. We talked earlier in the year about the weather impacts and some of the projects and work being done because of the warmer weather. And I think what we are hearing from some customers really they are spent at a higher level to their budget than they would typically be at this point. So a little more cautious over the summer, so less of a peak in the construction cycle in the summer. So I think that is also going to have a little bit of an impact on the year-over-year. And then the price benefit being offset by the unfavorable foreign currency.

On the electrical side, 6% to 8% growth, with the construction market is slowly recovering. The energy industry is still strong, although certainly with volatility as you track the significant volatility in oil prices. And then acquisitions adding 2 points. So overall 6% to 8% sales increase.

So that gives us -- turning to page 20 -- that 6% to 8%, acquisitions giving us 2 points of that growth. And those are just for the closed deals, the deal that have closed so far this year. Certainly if we could close any other deals it could add to that 2%. But as we are in late July, unless they close pretty soon the contribution this year won't be significant, but certainly, again adds to what we are looking at in 2013.

We do have more foreign-currency headwind than we had originally thought. And I think that is more offsetting the price increase that we expected. So we had within our sales guidance 1 point of price, and I think that is being offset by the foreign-currency headwind that we were experiencing and expect for the rest of the year. So in essence our core volume growth assumptions overall are up 1 point from what we last thought.

On the margin side we are still expecting to increase our margins at least 50 basis points, and our target is 50 basis points. Certainly there are opportunities that come from price/cost capability if that holds, as well as some of the incremental margins.

But I think there is also things that we have talked about, some of the cost headwinds that are in excess of our productivity gains -- the pension cost, the health care cost. And as well as some of the things that I mentioned where we're looking at things that we need to do this year in anticipation of the continued growth and margin expansion. And particularly if some of the markets slow more than expected, we want to be ready for that.

And, again, the other thing to keep in mind is that the second-half compares are much more challenging. One, because of the volatility on -- that is created from the strong sales level on the utility side in the transmission market, but also for some of the other things that occurred in the second-half last year. In particular you recall that we had some gains from some facility sales, and particularly we probably sold some of the excess land that is associated with our old corporate headquarters, and so all in all that was about $4 million in the second-half that we don't expect to repeat.

Free cash flow, we are still on target to deliver free cash flow equal to net income. And all assumes that we are maintaining our 32.5% tax rate. So strong first-half and certainly on track to deliver record earnings per share for this year.

So with that let me turn it back to Jim and we will open it up to questions.

Okay, thanks, Dave. Why don't we take this time to take any questions you may have.

(Operator Instructions). Christopher Glynn, Oppenheimer.

Just looking at guidance of at least 50 basis points from just kind of 50, directionally positive, in reading it maybe just a little upside there. It still implies a flattish second-half year-over-year on the margin. You did explain that, but just curious what might drive some sources of upside and actually year-over-year improvement in the second-half of March despite the tough comps?

Of course, certainly, if we exceed our volume assumptions that would be one. If some of the headwind -- for example if some of the transmission projects have some early releases those would come with some good incremental margins.

Plus there is always a mix element, because within our businesses we have some pretty high-margin businesses that aren't necessarily forecast to be as strong. So if the mix of those businesses turned out to be a little bit better you could have some of that.

I think if we are able to -- certainly, if we are able to hold price and commodity cost stay down, there could be some there. But I think we are feeling that there is going to be a lot more pressure on price going forward. Particularly in one business in particular, which we have always had the biggest challenges is on the lighting business.

A lot of activity in the lighting business, a lot of dynamics occurring there as that business transitions into LED, and some more entrants starting come in, and deal with some of the pricing levels. So I think there's a lot of factors that go into it. We are certainly not satisfied in stopping at 50. A lot of pieces to occur and a lot of volatility in the second-half.

Okay, and then as far as mix goes, the residential lighting, I am curious, are the incrementals there favorable to the -- relevant to the overall mix?

The margins on residential are coming up from slightly below the average to approaching the average. And it is a very profitable business for us once it reaches its normal levels of activity. So we are encouraged that as our business continues to improve that it will get back to where it is, which is one of our margin leaders in the Company.

Great. And then just a last one. Tim, with all the technology change in lighting, and Dave alluded to that, is there a way to think about your content per square foot -- or if we think of the same type of project now as versus five years ago, is that project worth 1 point something times what it used to be?

Yes, certainly, when we sell a LED light we produce the driver and we produce the source of light, not counting the LED chip, but the board and all the other components that go into it are manufactured by us. And those sales are approaching now 15% of our total, and so it is moving at a very high rate again and we are pleased with that. But our value contribution is higher than it was in the previous technology where we would buy a lamp and buy a ballast from the outside.

So it is better, and additionally there are more systems or retrofits that are beginning to include controls and dimming than ever before. Because certainly the best energy efficiency story is when you can turn a light off, and these controls are developing -- and wireless controls are developing to advance that story.

Okay, thank you.

Rich Kwas, Wells Fargo.

Bill or Dave or even Tim, could you comment about Harsh and hazardous? You have seen strong growth there. You have seen oil come down a bit here, although it is rebounding lately. Natural gas is pretty low as well in terms of pricing. Are you seeing any signs that activity on Harsh and hazardous side could be pulling back at all?

You know, Rich, the -- I think looking at total rig count has proved to be an interesting indicator for Harsh and hazardous. And as Shell -- as gas prices have tanked the number of rigs doing that work was decreasing. But the oil rig count was increasing kind of offsetting that, and just very recently those numbers have flattened a little bit.

So I think you are right to point out that there is a little bit of risk inherent in that in the short term. I would say long-term we are pretty bullish on the energy infrastructure spending scene, and we like our positioning in the sector. But you are right that the energy prices being higher help enable people to make more investment, which is good for us.

And then is that -- when you adjusted your end market outlook for industrial, was that a big part of that adjustment or is that broader-based than that?

I would say it is all of the above, right. So certainly our outlook for high-voltage test equipment, which Dave mentioned, is part of that. But as you know, really half of our industrial exposure is related to general manufacturing industries. And so we tend to look for example at the auto picture, which you obviously are very familiar with, and that tends to be a reasonable bellwether for us in terms of general manufacturing.

And even though that picture has some bounce around the number of cars is at a reasonable level to induce some spending. But that picture overall when you blend all that stuff together, including Harsh and hazardous, caused us essentially to take about 1 point out of our outlook for that.

Okay, that is helpful. And then on the transmission CapEx side, could you provide us any color on the makeup of that for your business specifically, meaning how much of that is alternative energy sources, how much of that is just maintenance or changeover in terms of new transmission lines from expansion? Regionally, what is kind of the solar wind mix of that and how should we think about the makeup of that business?

Well, this moves around substantially from quarter to quarter. And when you see peaks and valleys of the alternate energy just lately it has been less of that and more of the traditional, but we are pleased with our overall market share. The level of market activity in the entire market sector has been good.

I think Dave alluded to some of the difficulty we have with predicting it. Normally you can win an order about this time of the year or early in the third quarter and it will take 4 to 6 months for the utility then to begin to release shipments against that. Last year we had an unexpected event where several of those jobs were released almost with immediately with placing the order, and gave us large incremental revenues in the third and fourth quarter last year.

We are still winning about the same percentage of market share, but we are not in a position yet to see whether there is going to be any early releases. So we're back to what I would describe as a more normal pattern, but I would say that we are looking at more traditional transmission lines at this time. While there is always the new sources of energy this is a little bit more skewed to the traditional stuff.

Okay. That is helpful. Thanks so much.

Steve Tusa, JPMorgan.

Did weather at all play in any of the recent storm activities, or just harsh weather in general play any role in the distribution side or the power side?

Not within the second quarter, although I think you will see some of that in the third quarter. I think our latest estimate was the storm impact was about $4 million to date, but the majority of that was in July.

okay, so that is like not really -- I mean, you are obviously not planning for that kind of stuff in your guidance, right, or that is booked as business -- wouldn't you say?

Well, it is now or in our guidance, since we know that is there. We normally plan for normal storm activity over a 20-year period. And the one thing that has occurred as long as I have been here is that we have always been wrong. Because it has always been either a lot higher or a lot lower, but that is the best we can do. And I think in fact the second quarter had very limited storm-related activity against what we have historically experienced until this last storm. But again, it all happened on the 29th, 30th of June, so a lot of that rolled into the first couple of days of July.

Got you. (multiple speakers).

I would say generally too in a second level the hot weather is good for the utilities. I think we have been talking about how retail electricity demand had been a little bit sluggish in the start of the year, as maybe the warm winter weather. And so now a hot summer though helps them, I think, on the revenue side, which is net good for us to get -- to support some of the spending we are looking for. So it had a general impact on them as well.

And then just to be -- kind of the pacing of your US short cycle industrial businesses, June and July type of -- what is the dynamic there?

Well, I would say that that those things related to the markets that are doing well, like automotive is doing quite well. We have supplied some equipment into locomotives, which is doing well. The slower part is the products we sell into the steel industry, as steel prices have declined. So it is a little bit a mixed picture. The big systems and high-voltage test equipment, which are long lead items, have slowed because capital spending has been reduced by some of the global players. So it's a mixed picture, and you can almost look at end industries, and if the end industry is doing well then our products are selling through well.

Right. And then one last question from an end market perspective on the non-resi side. Obviously, the ABI has been reasonably weak. Employment has not really held up. Do you see any chance of that non-resi activity is actually down in 2013?

Down in 2013?

Yes.

That is a very good question. That is not how we are viewing it. Right now we are viewing a bottoming of, let's say, put in place. But where we are getting the business -- good business right now, it is certainly the retrofit area, both replacing fluorescent and LEDs going in to replace traditional incandescent sources of light.

Got you. And then one last quick question just on balance sheet strategy. Are you -- you guys obviously have a great position on the balance sheet. Is there any thought to whether it is accelerated buyback or a special dividend, more acquisitions, maybe just update on the capital allocation priorities.

We are at continually evaluating our capital allocation, but at this point we see it as continuing at what we have historically done with our focus on investing in the business on CapEx, on paying our dividend and continually increasing it as conditions warrant.

Share repurchase to the extent of dilution through equity awards, and there hasn't been much of that. And acquisitions if the pipeline is active and likely, and we see the acquisition pipeline being very robust. Obviously, that is no guarantee of closing, but certainly there is a lot of opportunities. And that is really our priority if that market opportunity exist, if it doesn't then we would tend to look more at other alternatives.

Okay, got you. Okay, thanks.

Jeff Sprague, Vertical Research Partners.

A lot of ground covered. I guess maybe on your new product initiatives, are you seeing any traction yet that is notable, particularly on the power side? I was thinking about the switchgear product line you have a working on. I don't know if that is in the market, if there is anything else that is going on in the portfolio that might be driving out-growth versus overall end market trends?

Let's say you have a couple of categories of new product introductions. One is taking traditional products and making them smarter with a feedback loop. So distribution automation in the public utilities is something that they're spending money on and working toward to improve the feedback loop in distribution line so they can deal better with outages and restore service better. So we are producing things like cutouts and traditional items that are more automated with feedback loops than we have ever had before.

We have a number of products where we are expanding the product line into areas that we haven't had that have been covered by competitors. So where we haven't been in that space we have been would leave whittling away at those gaps as well as buying companies to fill them.

And we are coming out with a couple, I think, of significant products probably next year, which are more for power lines to provide more utility feedback as to real-time and what is going on in the environment. So there is a lot of development in several categories. We have a very high attention to that right now across all of our businesses. And we could go on and talk almost business by business of what we are doing, but there is a lot coming through the pipeline right now.

And just thinking about the general landscape, are you seeing any competitive opening around the edges for any distraction, disarray or whatever at Thomas & Betts and Cooper as they go through this phase of digestion by bigger players?

I would say it is too early to see any disturbances in any of these kinds of activities. It is looked upon very commonly by distributors. It is just too early for us to really have any comment about what is going on there. There is no appearance of any unusual activity.

Have you hired anyone a level or two down that we didn't see on the outside looking in from Thomas & Betts or Cooper in the last 3 to 6 months?

Nothing out of the ordinary.

And then just finally, I just wondering on price/cost, obviously you will get some pressure on price as costs have come down. Does that price/cost -- cost gap narrow you think in Q3, or you have another quarter or so where it is stable or maybe even wider before price starts to catch up?

We are not expecting it to get wider, but we are -- as we have been cautious in our guidance about margin you have rapidly fluctuating commodities. For instance, oil has been down as low as like $82 or $81, and then in a week or so it is back up to $89. So we have lots of moving parts on that, but generally speaking we would expect price to diminish slowly and hopefully commodities to hold and give us a positive spread, but probably at a decreasing rate.

Great, thanks for your help.

Brent Thielman, D.A. Davidson.

Just a question on the power segment. Obviously the domestic transmission market has been robust, but have you seen similar strength on the international front? And then as you're talking about this acquisition pipeline either for this year or beyond, does that include some more expansion in that area?

Let's take -- let's discuss the international part of our business. It is mixed. So in our power business we have a business in Brazil. We have some decent business in Brazil. It is not always as high as previous years, so it is a little spotty there. We have some very good markets going on, but I would say all in all it has been better than 2011.

Whether it remains so with all the turmoil in Europe and other places is really the question of the second-half. So we are just as cautious about those macro events as we can be and still keep our heads down and keep going.

As far as acquisitions are concerned, we have a variety of potential that include some in the space of power.

Okay, fair enough. And then on the high-voltage test business, I think you obviously mentioned the order book starting to fill. Any sense for markets are driving that rebound? And then I was just curious historically what has been the cancellation rate in that order book?

We haven't really seen -- we have seen very few cancellations. So what typically occurs is sometimes they will try to delay an order to give them more -- perhaps a corporation will try to move it out of the current year so the expenditure in the next year. But there is advanced payments and progress payments that go with this that doesn't make it so easy to cancel the order without penalty.

And it is quite lengthy, so that if you fall behind a large order it could move your deliveries out more than a few weeks. So we have a great market position in that business, and I think we are the standard of most transformer and cable manufacturers in the world there.

Okay, great. Thank you.

Mike Wood, Macquarie Capital.

You had mentioned the utility companies spending above budget so far this year. Can you give us some sense of the severity of that? And have you yet seen the utility companies actually start to spend below what their budget is?

Like it is really tough to quantify that. Some of that information is just anecdotal from some of our customers. But it is not at all surprising, because we expected that. They have an annual budget. The fact that they have the ability to spend earlier in the year just means it is coming out of the latter part of the year.

And I think what also added to some of the volatility uncertainty was -- the good news is it was warmer at the beginning of the year, and therefore you could do some of the construction work. The bad news is it was warmer at the beginning of the year, so the meters weren't turning. You weren't generating the revenue so that caused them to be a little bit cautious.

I think we last couple of months of record heat, I think they are all singing because the meters are spinning. As Bill mentioned, that is generating some revenue so that -- we think that is likely to at least for those who are holding back because of revenue concerns, they might start to release. Those who are holding back because they were running up against a budget, I think that is just going to be a matter of the timing of their full-year budget opportunities.

So I think there is a combination of some of the things that might happened in the second-half won't, but we are hoping that is offset by those things that will as a result of the warmer weather.

Great. And within lighting are you able to get the growth rates for the relighting or retrofit piece and the residential lighting component to the builders?

Those are the areas of highest growth within the lighting sector, the relight and the residential, yes.

Great, thanks.

Jeff Beach, Stifel Nicolaus.

Yes, I was going to ask about this strong growth in distribution. You already cited at least part of it being very hot weather. But looking out into the third quarter with orders is there a pick-up or acceleration of spending going on, or do you not have enough information to tell you?

We are not expecting there, other than around storms and emergency repairs, to be really a change in the spending pattern. I think we are more on the side of this goes hand-in-hand with revenue generation. And they have been running a little behind, and now they are getting caught up. So there could be a little bit more, but this isn't a year of extra strong growth on the distribution side. It is more in line with lower levels of spending increases, and where we are experiencing better results have been on the transmission side so far.

Not surprisingly that we saw this phenomenon in the Northeast last year with the storms between the hurricane and the winter storm, and the market then becomes a lot more in tune to the reliability of the grid and the infrastructure needs. You are hearing a lot of that already from the Midwest and mid-Atlantic storms, you know, and the challenges to the utilities. Unfortunately, just like we have seen.

Though there could be opportunities going forward more in the 2013 and 2014 timeframe. But similarly what we have seen the Northeast a lot of spending is around non -- not our products, but really around tree clearing and other investments like that.

But certainly I think it always -- these events always bring more attention to the reliability of the grid. And I think it will be more emphasis, and we think that certainly bodes well for the future.

Two other questions on the power segment. One, can you estimate about how much faster you think you are growing then your transmission and distribution markets combined -- in other words, taking market share? And then when do you -- with the high growth that has been going on for a long time when you think you would start to run up against capacity restraints?

Well, with respect to market share, that is an imprecise measurement, right? But I would tell you that our delivery performance from our business unit and its leadtimes have never been better. So we have a very good market share. We are performing extremely well. We have had lots of the right things in stock.

When storms came along, and Dave alluded to probably two-thirds of the business shipped within 24 hours, and over 90% within 48 hours. So it is just -- we are hitting on all cylinders there. But it is hard for us to predict exactly what change there is in market share over any interim period of time. Maybe a look back or something at the end of this year we might be able to say a bit more about that.

And capacity or capacity issues?

Capacity for us is -- when we are bumping up against something like that it is usually adding a machine. It is not really footprint. So we are making -- you can see in our capital expenditures we are investing in casting and molding and metal cutting and things like that to modernize and increase our ability to convert to products within our existing facilities. So we are not running into that kind of CapEx look forward that would say we need to expand our footprint.

All right, thank you.

Carter Shoop, KeyBanc.

Congratulations on a good quarter, guys. First question on the lighting sector, can we talk in a little bit more detail -- maybe quantify some of the pricing pressure that you are seeing over the past several months as we transition more to LEDs?

And as a follow-up question on the LED transition, can you talk about how this transition is impacting the way you guys account for inventory obsolescence in lighting, as some of the incandescent and fluorescent fixtures go end-of-life maybe a little bit faster than what people are expecting, and LED products tend to have a much shorter shelf life, I guess, than traditional fixtures?

Let me take that inventory obsolescence discussion first. More than two-thirds of the business in lighting is made to order. So we really don't have lots of inventory sitting around to support incandescent product lines, and so our exposure to the change of mix in that is quite low. So we would be buying ballast and lamps for the traditional sources of light and the older products more on a make to order basis with very small amounts of inventory and work in process.

So it is an easier transition than you might think on the C&I side. Not that there isn't inventory phaseout challenges that are larger than in a traditional way, but it is not as much inventory and finished goods in lighting as there are in some of our other businesses. So we don't really think that is a big problem. What was the other part of the question?

The transition to LEDs and how that is impacting the pricing environments in lighting? Have new competitors come in, and maybe try to quantify that -- try to quantify that a little bit.

Yes, really you're coming down a price curve that reflects the lower cost of the components going into LED lighting. So we have shown that before where light output is rising and cost of chips and other components are declining, adding to the value proposition for customers, lowering prices.

But our margins as a percentage of the total sales have remained fairly constant. It is more of a challenge on that side of building a batch of product and then using it up and then building a different model that is more effective, more light output. So it is more like computer circuit boards, more like that kind of business than our traditional business has been.

As far as price pressure in the market, it has more to do with the weakness in new construction, and therefore, the level of competition that exists for fewer jobs. And I would say that is just a generalized market condition that you would expect as you are nearing or at the trough of a recession in non-residential construction. I think it is not specific to the introduction of new technologies.

Great. As a follow-up question, on the transmission side, when we start to think about 2013 with Latin America slowing down a little bit and in the US some of the wind and solar projects slowing down, how should investors start to think about transmission growth in 2013 to the industry? Is kind of flattish a good way to think about it or maybe a few points down, a few points up?

I would still think we are looking at a growing market despite the general economic conditions in the short run. But some of these projects are years and years in the making. And if you get the green light with all the hassle that there is to reach approval, and the length of construction that they are -- you know, time that there is -- almost all of these are going to go forward. It has more impact on years farther out, I believe. If there is a continuing economic slowdown it might affect, I think, years out further than 2013.

Great, thank you very much.

Okay, that takes us up (multiple speakers).

And at this time there are no further questions.

We are up at the 11 o'clock, so thanks everyone for joining us. Bill Sperry and I are certainly available for the rest of the day should anyone have any follow-up questions. Thank you again.

This does conclude today's program. You may disconnect at any time.