Hubbell Inc (HUBB) 2013 Q3 法說會逐字稿

Good day, everyone, and welcome to the Hubbell Incorporated third-quarter 2013 earnings conference call. Today's conference is being recorded.

For opening remarks and introductions, I will turn the conference over to Mr. Jim Farrell. Please go ahead, sir.

Good morning, everyone, and thank you for joining us. I'm joined today by our President and Chief Executive Officer, Dave Nord, and our Chief Financial Officer, Bill Sperry. Hubbell announced its third-quarter results for 2013 this morning. The press release and earnings slide materials have been posted to the investors 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 may also include non-GAAP financial measures. Those measures are reconciled to the comparable GAAP measures, and are included in the press release and the earnings slide materials.

Now let me turn the call over to Dave.

All right. Thanks, Jim. Good morning, everybody. Thanks for joining us. Let me just give some overview commentary on our results, and then I'll turn it over to Bill for some details. You're seeing our results and certainly we're pleased with another quarter of strong performance. I think our results -- we feel very good -- nice, solid performance.

I have to say, I'm particularly proud of our ability -- the Organization's ability to perform despite what continue to be very choppy markets. You see sales are up 6%, but our end markets are certainly pretty mixed. Our non-res is a little better, but still we're relying on the strength of the renovation market. Not necessarily any meaningful improvement of new construction. The resi market continues to be solid, even with some volatility in that market, as you see on some of the reports as interest rates rise.

The utility side continues to be weak in both the transmission and distribution. It's also impacted by, at least in the quarter, virtually no storm activity. A very quiet year, although I think we've seen -- we did have a little benefit this month from a snowstorm up in South Dakota, but no meaningful activity there.

And the industrial side is mixed. I'm particularly pleased with our high-volt business. It's starting to come back -- some improvement on our harsh and hazardous.

More importantly, we've got margin expansion of 100 basis points year over year this quarter. A lot of that driven by productivity and our continued focus on productivity, and the benefit of lower material costs. And as we announced earlier this week, we increased our dividend payable in the fourth quarter by 11%.

On the platform level commentaries, on our electrical systems, as I said, our high-voltage business is up nicely, and you know that we've talked about that expected improvement in the second half. And until you start to see the orders going out the door, you're not really sure. And we certainly have seen that, so we feel much better about that part of our market.

Acquisitions, particularly in the electrical systems operations, continue to contribute to growth. Our margin there benefited certainly from the lower material cost, as well as some of the volume leverage.

On the lighting side, new constructions certainly show pockets of activity, but still a choppy pattern. I think what we've seen most recently -- some of our larger project orders continue to be on the healthcare side, which is good for now, although I think we anticipate that maybe slowing in that particular market. The renovation's still driving most of the activity on the non-res side. The residential markets, as I say, continue to be strong, and we're participating in that quite nicely.

Our most recent acquisition on the lighting side, Norlux, added to our LED capability and is integrating very well. And on the LED side, I think we've seen close to 30% penetration on our sales level as we exited the quarter. And I think we are also most recently recognized, as you've seen, by some of the industry in terms of our product innovation and recognition.

On the power side, that continues to be a challenging environment for a lot of reasons. The regulatory uncertainty, lower demand, but we're navigating through that. Certainly distribution, as I said earlier this year, that project business was slowing, and we've seen even some of the project business that we anticipated being released in the third quarter being pushed out. But also some continued weakness on the distribution side.

As well, that's become a much more price-competitive environment than we've seen in the past. On the positive side, because we've had lower transmission projects going out and, as we've said, that tends to be more price competitive and lower margin, we've got some of the mix benefit. You see that in the margins on the power side.

Lastly, on the acquisition front, the acquisition of Connector Manufacturing and Norlux are both performing extremely well. We'll talk later, but the pipeline's active and we hope we may be able to close another one or two smaller deals before the end of the year.

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

Thanks, Dave. Good morning, everybody. I'm happy to be using version B of our comments this morning rather than version A -- the government wasn't paying their bills, and we'd be talking about a different world, maybe.

So, as Dave said, our sales up 6% with acquisitions contributing about 5% of that. We had FX headwind of 1 point, so organic volume, as Dave was referring to, is a pretty modest 2% contributed. Those acquisitions that were contributing the 5% are coming from five different investments that we made -- Dave just made. He referred to Norlux and CMC.

What I like about that is they're spread across both segments -- electrical and power. And within electrical, spread across lighting, which Dave mentioned Norlux, but also spread across industrial, as well as harsh and hazardous. So, good evidence of how the acquisition program is complementing the organic volume that's out there.

Lighting really led the organic growth side of that. As Dave mentioned, the resi side of lighting quite strong, and the reno side really helping that grow. Another strong grower was high voltage in the quarter.

The operating margin was up 100 basis points to 18.1%. EPS of $1.62, up 12%. Free cash flow continuing in excess of net income, which is to get to our annual goal of equal or better. And I hope you all saw a couple days ago raised the dividend to $2 a share, an increase of 11%.

I'm going to be using the slides Jim referred to. I'll go by the page numbers. So I'm on page 4 looking at the end markets contributing to the 6% sales. In non-res -- really that new construction is really still soft thanks to the public market being particularly soft, and the institutional side of public, in particular. Public is in better shape, but the net of those is quite flat still. And it's that reno and relight growth that's helping us grow overall in non-res, which is really an important driver.

On the industrial side, you'll see the extractive industries, our harsh and hazardous markets, were reasonably flat through the quarter. And to try to make sure we provide clarity, the high-volt test equipment -- we are indicating the orders here, ie, the end-market orders for the quarter were quite flat. The sales from earlier quarters were very, very strong. So this is really insight into 2014's high-volt business, and we'll talk about our outlook -- Dave will come back to that at the end.

Dave mentioned utility -- still some softness at transmission and distribution. I'll just add, off of a pretty high level of spending still. And resi, despite all the mixed signals out there of mortgage originations and fears of interest rates, our Business still experiencing very strong residential spending.

Page 5 -- we show the gross margin up 80 basis points to 34.8% -- largest contributor was productivity. And I just want to kind of draw some highlight to that. Productivity for us comes through a lot of small capital projects that are focused on productivity. To us as a management team, it's part of our paradigm of management company very, very important, and I'll comment on that when we get to cash flow; I'll show you the CapEx (technical difficulty).

And we had a lower material costs, particularly on the steel and copper side. Good news here for gross margin, not great news for industrial markets and end markets.

On the S&A side, really look at it both as a dollar matter and as a percentage of sales. The increase in dollars was due to acquisitions that Dave mentioned, while, as an overall spending matter, we benefited from the volume leverage, and actually reduced percentage of sales to (technical difficulty).

Page 6 -- we show our operating profit, $151.6 million. 18.1% representing a 100-basis-point improvement over the third quarter of 2012, and describes how productivity and the lower material costs drove the gross margin and leverage at the S&A level.

In other expense on page 7, in non-op here, really have (technical difficulty) interest, which is very flat always, and FX gives us the volatility. So, we had some losses versus gains, so you see a couple million dollar difference there. The tax rate -- very comparable to last year. We had R&D favorability versus some of the discrete adjustments in the quarter absorbed that favorability to have very flat tax rate.

On page 8, show net income up 11%, really derived from all those drivers we just mentioned. You'll see we picked up an extra percentage of growth at the EPS line, up 12% to $1.62. That extra point really being driven by the fact that we had 240,000 fewer shares based on some repurchasing we did in the quarter.

We'll switch to the segments now. Page 9 shows you the third-quarter view of electrical segment. You see 8% growth, with 5% coming from acquisitions, 3% from volume. Again, that residential really was strong at 17%. And the non-res increase on renovations we've talked about.

Industrial was quite mixed, as we saw. High-volt being up big double digits versus some of the steel-oriented and mining-oriented industrial businesses that we serve actually were down in the quarter. So, mixed on the industrial side.

At the OP level, we see a 15% increase to $145 million, up 110 basis points. The lower material costs were helpful here. And the drop-through on the higher volume -- and again, we'll comment on the productivity that has all those projects to offset other inflation costs.

Page 10 is the power segment. You see very flat sales environment. But our Trinetics acquisition added 2%, so it's really showing some negative organic with weaker distribution and transmission. But the importance of those productivity projects you see now at the OP level where we earned $47.1 million of operating profit, 19.8% of sales -- a very nice improvement -- 110 basis points over the prior year.

Page 11 -- we look at cash flow for the quarter. When you look at that working capital usage, our inventory days were up just a little bit -- an area of focus for us. The other line -- the fact that we did not have a pension funding this year versus we did last year based on the high funding level of our pension fund. And you see that increase in CapEx. Again, very important to drive those productivity projects, as well as new product development work, which Dave made mention to some of those new products in the lighting sector that have won some awards recently.

Page 12 -- we switch now from Q3 look to the first nine months -- year-to-date look. You see here $2.4 billion in sales, up 4%. Operating profit at $381 million, 16% of sales, up 20 basis points. Earnings per diluted share of $4.09, up 8%.

Page 13 -- break out the electrical segment, and you'll see sales growth of 5% to $1.677 billion. Acquisitions being 4% of that 5%. So, the story for the year to date quite consistent with the third quarter where we've got resi being very strong, non-res being aided importantly by renovation and the mixed level of industrial markets. Operating profit at $255 million was 15.2% of sales, 40-basis-point improvement, 8% increase. There was some favorable pricing and material cost tailwind there helping drive that and, again, the importance of productivity that offset inflation from the wages and healthcare and other items.

On the power segment, you see on page 14, for the year-to-date period, very flat. Sales flat at $700 million. Operating profit flat at $126 million and 18.1%. They had some favorable product mix, which is essentially the lower mega transmission projects is favorable to mix. Those tend to be a little more price competitive. Again, you can see the high levels of productivity. They absorbed facility consolidation that we talked about (technical difficulty) quarters.

Cash flow year to date on page 15 -- you see that $186 million -- continue to see the usage in working capital, which is inventory driven, and you continue to see the pension funding differential in that other line. And CapEx -- higher levels of CapEx (technical difficulty) new product development into our productivity.

The trade working capital on page 16, third quarter, was just below 20%. Again, the inventory days were a little bit higher. It's an area of focus for us of making sure we've got very high levels of customer service, and trading off trying to be as efficient as we can with our working capital.

Our capital structure on page 17 -- you see the cash down a little bit based on some of the acquisition activity Dave highlighted. The two bonds that are out there, and you see a debt-to-cap of 25%. So, very liquid capital structure -- very poised to make the investments that Dave was describing in terms of acquisitions.

And, Dave, I'll switch back to you for outlook.

Okay. Thanks, Bill. So, just looking out for the rest of this year, we're certainly continuing to be focused on meeting our financial goals. We're looking at our sales growth for the year finishing at about 5%. That's -- you recall our last guidance was at 4% to 6% range, so that's right at the midpoint.

That's not an insignificant level of year-over-year growth in the fourth quarter. That would require high-single-digit growth. Some of that obviously coming from the acquisitions we've done. But a solid mid-single-digit market growth, which before today could have been highly uncertain. Now it just has the normal level of uncertainty that we would typically see in the fourth quarter with a little bit of keeping our eye on what happened, we all recall, a year ago in the fourth quarter when things slowed down.

But our order patterns to date, at least halfway through this month, are consistent with our forecast. In some areas, slightly better, which we prefer to get ahead of it in October because the end of the fourth quarter tends to be a slower period. So, we feel pretty good about that.

On the margin side, we think based on the performance in the third quarter, that we're more likely to finish at 40 basis points up for the year. So, all in all, a very good result, and I think it would set us up nicely going into next year.

Now, next year is a whole nother story. The things that Bill referred to as our option A or option B on our disclosure -- the solution that was designed yesterday, from our perspective, only takes away the near-term crisis uncertainty, but, unfortunately, it doesn't solve the long term. And so that's going to -- we've got to monitor that closely.

I've spent a lot of time out in the market with customers, and everyone is paying attention. No one's seeing any real -- from our perspective -- any real negative impact but, of course, that could of all changed if we didn't get to a solution.

As we look at the markets for next year, I think we're still in our planning process. But for 2014, as we're looking at the third quarter, the third-party data that we start in our planning process -- we certainly see market growth in 2014. I think construction markets in general are going to lead that growth. Residential is still going to be in the double-digit growth area. And we're hoping that the non-res new construction improves.

I think you see the industrial markets all should grow low-single digits. And I think certainly the high-voltage turnaround that we've seen will certainly add to that, and the energy markets will be positive. And the utility probably will be the most challenging, certainly in the short term.

Electricity demand continues to be weak. You've got a lot of investment in generation changeovers. A lot of pressure -- little or no rate relief going on. So, I think the near-term investment profile -- we think the data supports is going to be pretty modest growth. We all know that the infrastructure needs the investment long term and it will ultimately be there. But we're still a little cautious, and I think most people are still pretty cautious.

So, overall, we think that the end-market growth, based on third-party data, as I say, is going to be in the low-single digits -- 2% to 4%. What we do over the next couple months is obviously continue to monitor the market, see how we finish this year. But we also spend a lot of time with our end users as well as our channel partners, and getting their take on what they are planning. Because at the end of the day, that's what really is going to drive our Business. And we've often found that that certainly is a more reliable indicator than some of the third-party data.

The third-party data, at least over the last few years, has tended to be a little bit high in most markets. But I think the -- what I've heard so far from our end markets is -- when they look at this year and next year -- certainly this year not as good as we had planned and not as good as we believe it could be. And hopefully next year it will be as good as it could be and as good as we expect. So, I think there's a positive view on the opportunities next year.

And we're going to continue to focus on margin expansion for next year. I think it's -- from our standpoint, next year productivity will be even more critical on that side because you recall we had some benefit this year from favorable price over costs, particularly in the lower material costs, that we don't expect to continue next year. So, we're going to be depending a lot on our productivity.

That's why you've seen, during the course of this year, where we have continued to make investments in facility rationalization. We've closed a Mexican facility at the end of the quarter. We announced the closing of a smaller lighting facility. And we're going to continue to do that to help support our efforts around productivity.

So, I think our performance year to date demonstrates our ability to deliver improved performance. And I think it continues to support the premise that we've always used, which is -- the markets are volatile, they're unpredictable, and we can't control them. What we focus on is the things that we can control, which is the effectiveness of our operations and driving for continuous improvement.

So with that, let me turn it over to -- back to Jim, and we can open up for questions.

Okay, Debbie, let's go ahead and open it up to the callers.

(Operator Instructions)

Christopher Glynn, Oppenheimer.

Dave, you commented -- the volatile end-markets clearly and the effectiveness of the programs you can control and obviously that's showing up. Can you elaborate and maybe give a little detail on specifically some of the productivity programs that are washing through in the here and now?

Some of them are the things that we've been doing for a number of years. First and foremost is on our coordinated sourcing efforts. That was a big element of the business case, you recall, for SAP. And we still have a lot more opportunity in that area. And it really comes around more coordinated. As I talked earlier in the year back at our investor day, we're focused around a more coordinated one-Hubbell strategy.

So that's really a key to what we're -- what we continue to do and what continues to provide a benefit to us. But we were also looking at other functions within the organization where we can drive productivity and improvement, whether that's in finance or HR or some of the other support functions, as well as getting a more coordinated selling effort. When we're out in the market, we obviously have a great reputation, great name and we've been built on more than 60 very valuable brands. But a lot of the end-market is not familiar with the collective value of that so we're spending a lot more time on those and we're seeing some of that benefit as well.

I think, Chris, if you were to peel apart our capital projects, productivity projects, you'd see in a typical year that 5 to 10 level of spending on two or three facilities that get consolidated and then just lots of little projects. It's how lean philosophy gets implemented. It's at the cell level. Ideas can come bottoms up from very small idea and you push productivity by doing lots of sit-ups and lots of push-ups every day.

Sounds good.

And then on the -- I got cutoff a little while so I may have missed something -- but on a transmission anticipated for the 3Q, some got pushed out. Does that -- I take it that stuff that was already awarded -- does that show up in the fourth quarter?

Well, we hope. We thought it would in the third. It's just a question of when those projects get released. And so that's a bit of the volatility that we deal with. So some of that should be in the fourth quarter but we thought it would be in the third.

Okay. But it's correct to think that it's stuff that's already been awarded?

Yes. Yes it is.

Great. Thank you.

Rich Kwas, Wells Fargo Securities.

Just a couple quick questions. On 2014 with the 2% to 4% market growth, Dave, could you give us some color on product introductions and just potential out growth versus that? I know you've gone through a product cycle with lighting and I think that's ongoing. How are you thinking about the rest of the businesses in terms of new product introductions and the ability to outgrow that end market target, or what you think the end-markets going to grow?

That's an interesting question, Rich. Certainly we continue to invest in new products. On the lighting side, is a good example where we're -- those new product introductions are not necessarily incremental to the market growth. They're critical to participate in that market growth. However, we've seen examples where some of those product introductions have been able to capture some more market share than we would have had in the legacy products.

So there are those examples but I wouldn't say that there's any particular areas that are going to drive, at least at this point, out growth but that's still remains to be seen. Certainly our strategy is to outgrow the core markets through share gain and our preferred approach to that is through product innovation, not through price. So we think we can win on the product innovation but we may lose some on the price so it could be net-neutral at the end of the day, unfortunately.

Okay. All right.

And then on industrial missed mix for next year, that was a bit of a headwind. And I know you had some headwind with utility not being as strong. It sounds like for next year you're thinking utility's going to be pretty flat. But on the industrial side, do you see some benefits from high-volt parts and parts in hazardous and some of the higher-margin product lines picking up and being a little bit of a tailwind to mix next year on industrial?

Certainly those are positive contributors on the margin side. So we would expect those to be some tailwind. The flip side to that -- of course at this point, we're always trying to make sure that we're looking at things in a balanced way. The competitive environment in some of our markets, specifically on the utility side, has become more price competitive. So even flat to slightly up has some potential margin pressure that, as the market leader, we are certainly not going to contribute to. But we've got to be able to react accordingly.

So we're a little cautious on that but you're absolutely right. We are happy that a couple of the markets that are better contributors are picking up because we've navigated through a particularly like a high-voltage. So I think there is potential. We are certainly going to work toward that if the pricing environment is supported.

I also think, Rich, you're pointing out within industrial some of the strong areas. There's also a mix as non-res starts to outgrow the other segments, which we anticipate over the medium to longer term, we actually get some mixed headwinds in that. So as Dave said, it tends to balance it out.

Okay. All right.

And then last question on lighting -- you did the LED penetration. What are the numbers between residential/nonresidential for the quarter in terms of growth?

Resi was up 17%. Very strong, Rich. And the C&I side was up mid to high single digits. So really driven from the reno side. So the -- Dave talked about the LED adoption rate. The year-to-date period we're at about 25%, as Dave said. We ended the quarter at 30% so that growth trend really continues to be there -- that adoption rate continues. It doesn't look like it's tapering off at all.

Okay. All right. I'll pass it on. Thanks so much.

Drew Pearson, JPMorgan.

Just want to drill back into price costs a little bit. On both for the quarter and then for the year as you see it, what's the magnitude of the price cost benefit, both for 3Q and then full-year guidance?

Yes. So the cost for 3Q were tail winds. They were helpful. Price was -- is much more challenging. So and for the year, we are anticipating -- if you add -- sometimes we use shorthand, Drew, of price costs to include four different variables. We talk about price -- two components of costs, one being material, the other being inflation like wages and healthcare and that against productivity.

If you look at all four of those variables for 2013 the full-year, we've had very helpful tailwind from those. So that's part of what's been driving a good margin story for us. And what -- as we look forward to 2014, as we start to compare the incrementals year-to-year, it's hard to have that tailwind keep repeating itself and it tends to come back into balance. And that's one of the factors we're -- that's driving our margin both this year and next.

Okay. That's helpful.

And magnitude, is that like more than a point of benefit or is it below that?

We tend not to want to maybe pull it out that specific maybe, Drew.

Understood.

Switching gears -- just on the lighting side -- maybe the competitive environment, both with your traditional competitors like Acuity and then maybe some of the stuff that Korea is doing in the space -- maybe just an update on what you've been seeing over the last several quarters and your outlook and observations there?

I think that the lighting space is growing very attractively for us. It's, as you say, there's some newer competitors that some of them are targeted towards national accounts. Some of them have a targeted narrow skew approach. Some of them are bringing a price aggressiveness approach. I think from the way Hubbell continues to approach the market, we're trying to be a broad-based lighting fixture competitor. We like to have national presence and be able to offer full skew breadth, whether it's through a large box retailer on the resi side or whether it's to a homebuilder on the resi side or whether it's C&I projects of wide variety from airports to parking lots to office buildings.

And so I think that the dynamics for the way we're approaching the market continue to be consistent over that last couple quarter period that you're asking about where innovation, LED adoption, continues to be critical. We are making a lot of investments in that area. Dave highlighted some of the awards for innovation that we're winning. I think it's important to keep coming up with new product, which we're doing. And the C&I side -- you have to be good at the reno side to be successful right now over the last few quarters. And we've bought a company a couple years ago that's very focused on the reno channel through [esco's] and lighting services companies. That helps us out. And I think one of the changes is Dave mentioned a lot time with customers. I think the distributors are getting very sophisticated as to how they are selling retrofit and reno. And so us continuing to serve our distributors is positive in terms of continuing to compete the same way. So as much as there's a lot of change, I think the market dynamic for us are continuing in ways that allow Hubbell and our competitive positioning to thrive.

Drew, let me give you a quick summary of how we see it.

In my travels, it's clear that lighting's a great place to be because of what's clearly the market demand that's out there. Everybody wants to be in lighting. Of course as a result, because everybody wants to be in lighting, it's become a much more competitive environment. But that's one that we feel particularly good about -- our position. Because at the end of the day, you're still -- you're outselling product that your selling has a longer lifecycle. It helps to be someone who's been in the business long enough to be able to demonstrate that they've been around long enough to support that longer product lifecycle. Has a broad enough product offering to support a complete solution, not just a one-off product.

So there's a whole lot of stuff going on with new entrants with one-off products. And so that's creating a lot of activity. But the good news is the underlying demand is certainly positive. And we're just going to navigate some of those competitive pressures.

Okay. That's great. Appreciate the color.

(Operator Instructions)

Nigel Coe, Morgan Stanley.

It's Mike sitting in for Nigel.

I was wondering if you could give a little bit of color -- I know you talked about a little in your prepared remarks on M&A. Just what you're seeing in the space, what your backlog looks like and I think you mentioned a couple deals here. What areas are you focused on in terms of the M&A?

I'll let Bill cover that one since I ask him that question all the time. (laughter)

Thanks, Mike. (laughter)

So the pipeline continues to thrive. We continue to see lots of good opportunities. For us, it continues -- the challenge continues to be to find the fit that works with our strategy, our product suite, our distribution network. And we're having a lot of luck finding things that seem to fit right now. It feels like the competitiveness on that pipeline is up a little bit. I know that we've gotten a lot of questions over the last couple of quarters as to our price is too high, our valuation's creeping away from us. And I'd say that we feel pretty excited about the values that we continue to see. But I do think that it feels a little bit like competitiveness is up in terms of others looking maybe at the same thing as we are.

But I think Dave really highlighted how we've got things, which is we've got a balance sheet that's poised to make investments and we've got an increased number of resources internally and we've made investments in the processes to be more effective, both at finding and integrating our acquisitions. I think Dave made some reference to the fact that our last two are getting integrated very well. I'm glad that that starts to become sort of a ho-hum message. That's kind of what's expected and I think that's going that way. So we continue to be very optimistic about what's out there and our ability to close them and integrate them well.

You asked about if there's specific areas. And I think the thing that encourages me the most is that there are not specific areas. They're all areas. We're seeing situations across our entire portfolio. We get lots of calls and lots of questions from private equity firms on what we want to sell. Probably get 10 calls a week from somebody who wants to buy, somebody wants to sell. And I think it's good affirmation that we don't have anything for sale. We like the stuff that we have. We like our positioning. In fact, we're trying to consolidate and improve the positioning of those.

So it's an active process. It's an active market. And I'd say we're optimistic about our ability to keep this level. So if you see us with a model of trying to maybe double the organic growth with acquired growth, that's a model that the level of activity out there would support. And I think we put pressure on ourselves to keep doing more. And I think the hard part -- Dave made an interesting -- in saying that we're hoping to get another one or two closed by year-end. He commented that those are typical Hubbell-sized deals. I think what's very hard for us to comment for you all is when would something of more significant size come along? The frequency of those is much lower. So I'd say our pipeline is very typical of Hubbell sizes, which is that $25 million to $50 million company that we've run across that's for sale.

That's great color. Thanks.

Jeff Sprague, Vertical Research.

It's actually Ryan sitting in for Jeff.

Wondering if we could just talk a little bit more about the underlying demand, particularly in the utility business, particularly with a focus in distribution. I think we all understand what's going on in the transmission side but the distribution side seems to be at odds with strong resi environment. Can you just talk a little bit more about what's going on there?

Sure. That's probably the only place that I would say the demand is arguably at odds with resi growth. But I think some of that, as we've said earlier, is because there was build-out of existing developments. So there wasn't a lot of new investment. We have seen some benefit in our business on some new developments but nowhere near the level that would be consistent with the resi growth itself. Certainly we think that would be an element of growth opportunity next year that would offset the otherwise conservative and cautious expectations on demand on distribution.

As I said earlier, we know there needs to be spending there, the problem is, particularly with the IOUs, they're under some tremendous pressure on rates, on returns, on capital structure, on source of fuel. You add the dynamic of substitution of renewables, they're -- what we hear from that part of the market is much more caution in the near-term until things start to settle out. So I hope that helps.

You know, Ryan, with distribution, I think we may have -- we tend to describe the majority of our distribution is maintenance and repair, not construction. And we tended to count on that maintenance and repair to be a steady year-in and year-out kind of increase in spending. I think what we witnessed is the shock of 2008 caused 2009 to be a low spending year. And as Dave described some of the pressures, I think this year is too. So what we've maybe described as steady has a little more volatility in it. And that's what we're facing. But I think your view is right, that that construction side that comes from resi should be able to help bolster some of the distribution spending going forward.

Okay. Great. Thanks.

And then maybe a similar question on the non-res side -- just trying to really get your feel for what you're seeing in that market, maybe in the near-term, as we start to look out to 2014.

I think in non-res, again, we split it out between public and private. And the public side continues to drag us down. The over-stimulation back in 2009 and 2010 is creating -- that was unsustainable and creating a little bit of a hangover there. But on the private side, Ryan, and particularly in public some of the institutional side showing some of the more soft softness, whether that's education and some of those areas that were strong before. But on the private side we are starting to see growth. And that's, to me, good news. When you look at some of the leading indicators like [ABI], you start to look at square footage and contracts, our put-in-place spend will lag the start of a new building.

And so we continue to wait for that spending to pick up. We get a lot of questions when Jim's on the road about -- is non-res today or tomorrow or next week? I think we're all sort of waiting for it and it continues to not look like that hockey stick is right upon us. If you look at some of the third-party forecasts -- I'm sure you look at some of the same work that we do. Over the last six months, the outlook for next year's non-res put-in-place spending on buildings has softened a little bit. So that hockey stick was presumed to be I think in full-bore by next year. I think it's just going to be a little more modest as we recover.

Okay. Thank you very much.

(Operator Instructions)

Mike Wood, Macquarie.

In addition to the third-party trends you're just talking about non-res and some of the leading indicators, do you get any direct feedback there in that segment from your customers or distributors in terms of backlog or projects being deferred? Particularly around the government shutdown and any sense in terms of when that log jam might break?

Mike, I would say we certainly have no ability to predict what impact all that nonsense had on contracts and timing of when they might get restarted. We wouldn't really have any insight into that, I'm sorry to say.

Got it.

Just on the lighting side, you've mentioned healthcare strength in the reno and some product innovation. I'm curious if you can give some color in terms of how narrow or broad that LED adoption is, whether it's moved beyond like those early adopters and if there's an established trend in office or retail or other verticals?

Yes, it may be hard for me to comment on verticals but I would say the adoption is very broad across Hubbell's lighting brands, which I take as a pretty good sign that it's kind of seeping out there. I think that you're right to point out that certain applications lend themselves. I think areas like parking lots, airports -- they seem to be adapting to LEDs at a very high level. A refrigerated application seems to be adopting to LED at a high level.

I'd say on the resi side, it's still slow. Slow to come around because the prices are still high and the paybacks are a little slower given that your lights that are on at home for only a couple hours a day. So I think it's -- I don't know if it's so much by vertical as it is by application maybe. And it's starting to get, I'd describe, as pretty broad-based.

Great. Thank you.

Gentlemen, with that, there are no other questions in queue at this time.

Okay. Thanks, Debbie.

This concludes today's call. Certainly I'm available in case anyone has any follow-up questions. And, once again, thank you all for joining us this morning.

Ladies and gentlemen, thank you for your participation. This does conclude today's conference. Have a great rest of your day.