Hubbell Inc (HUBB) 2014 Q2 法說會逐字稿

Good day, everyone, and welcome to the Hubbell Incorporated second-quarter 2014 earnings conference call. Today's conference is being recorded. I would now like to turn the conference over to Jim Farrell. Please go ahead, sir.

Good morning, everyone, and thank you for joining us. I am joined here today by our Chairman, President, and Chief Executive Officer; Dave Nord, and our Chief Financial Officer, Bill Sperry. Hubbell announced its second-quarter results for 2014 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 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.

Thanks, Jim. Good morning, everybody. Hopefully you have had a chance to see our press release and the accompanying documents and the slides. I am happy to be reporting our results for the quarter with sales up 7%, acquisitions contributing 5% of that. Quite an improvement from, you know, what we called three months ago was we were reporting on a very slow and cold start.

Demand's improved nicely in most of our markets. Non-residential, a modest improvement, still with a bias toward the renovation market. Not as strong an improvement as we would like and many expect but continued improvement and we will take it as it comes. I think the residential market, we were cautious going in, and I think that caution was well advised as we see -- we've seen some weakening in that. But we're still growing, still very well positioned. Our industrial business was mixed with our Harsh and Hazardous, a little bit better, and our High Voltage Test business still struggling a bit. And then the most positive side, the Utility spending did continue to improve from a slow start and so we feel a little better about that.

On the margin side, a nice improvement, continued improvement on the margins with a 30 basis point improvement up to 16.8%, attributable to our ongoing productivity initiatives as well as some lower facility closure cost that we incurred in the first half of last year. But a little bit of mix, unfavorable mix, that we have been talking about and we continue to face.

In the second quarter, we closed two acquisitions, annual revenue contribution of about $45 million. One is in Lighting, one small one in Power. We also closed another small deal earlier this month, really in the Harsh and Hazardous Electrical Connectors business. We have now invested nearly $150 million on six acquisitions so far this year. The deals expected to contribute a little over $90 million in revenue on an annualized basis. So all of that in the quarter contributed to diluted earnings per share of $1.51, up 10%. I am happy to have double-digit earnings growth any quarter that I can get it. We have worked very hard to get to that this quarter. We're glad that the markets have improved, and we are continuing to execute.

A couple other items of note in the second quarter. Earlier in the month of June, you may have seen an announcement that came out that in accordance with the terms of a settlement agreement relating to a lawsuit that had been out there against two existing trustees and a couple of former trustees of the Roche and Hubbell family trusts. There was a judgment entered, and that suit was by one of the beneficiaries under the trust. The settlement of that contemplated the transfer of change in trustees from the existing trustees to a third-party trust company. And that happened in the beginning of June.

The second item of note, you saw we announced earlier, released on June 30 that Scott Muse informed me that he planned to retire. Scott has been running our Lighting business for the last 12 years. He has been involved in the industry for more than 35 years. During his time in the industry and certainly his time with Hubbell, he has made major contributions to restructuring that business, reducing the cost as well as adding to the strength of the business with the acquisition of seven brands. He has been truly dedicated to the Company, to employees, and to our customers, and we will miss him as part of the team on a day-to-day basis but certainly, hope and expect that we will be able to still count on him for counsel and advice and insight into the market.

So we took the opportunity right now to expand Gary Amato's responsibilities. Gary had to this date been responsible for the Electrical Systems platform as part of the Electrical segment, and his role has expanded to include oversight of the Lighting businesses as well. I think that he will do quite well there. He has a very strong and capable team behind him within the Electrical Systems businesses. And so I think it will allow him to devote a fair amount of time as he works through the transition with Scott in oversight of the Lighting business.

So with that, let me turn it over to Bill Sperry and he can give you some more color on the quarter and year-to-date results.

Thanks, Dave, and good morning, everybody. Thank you for joining us. I'm going to use the slides that Dave referenced to guide my comments, and I will referencing those page numbers as we go along here.

I am starting on page 3 with our summary of what was a quite solid financial performance for Hubbell. You see sales up 7%. Two comments, I think, about sales. The first is, the organic growth of 2%, while standing quite modest, is actually a nice sequential compare versus the first quarter where we really had flat organic volume. So an interesting sign of market pick up there. I think secondly, the acquisitions contributing 5%, that's really comes from seven different investments we've made over the past 12 months, and that seems like a good amount of deal activity for us. But what I particularly like is how that's spread around our portfolio. So of those seven, three are in Power Systems and two within Lighting platform and two within Electrical Systems. That's a good sign I think of our business model at work when the organic markets are modest. I think we can put some inorganic growth -- bring that to the table.

Operating margins of 16.8%, up 30 basis points. The improvement from productivity continues to be very important contributor to our margins story. We'll show you the CapEx implications of that later but we need to continue to invest to get that productivity. Dave commented that some of the less favorable product mix, which we will explore a little bit later, tamped that down just a bit. I agree with Dave's comment of 10% growth at the EPS, find attractive, demonstrating good operating leverage at $1.51 of EPS.

On page 4, we discuss our end markets. Again, I think if you look at our order pattern through the second quarter, we continue to see the pattern of volatility that we have witnessed inter-quarter, over the last year or so. For example, for us, April was reasonably strong. May, quite week, and we ended June very strong. And so interesting sign I think of where the recovery stands that, that order pattern within a quarter appears to have some variability to it.

But it's important to go through also here that the mix that's being contributed from our different end markets. You can see the two greens between the reno and relight portion of non-res as well as the residential markets. Those are contributing the growth, but not necessarily where our strongest margin parts of our portfolio are. Creating some of the product mix headwind that we have been describing. And you see that the industrial reasonably flat as well as Utility.

On page 5, we'll discuss the drivers of operating profit margin to gross and S&A. The gross margin side, you see an attractive 30 basis point improvement to over 34%. The productivity really driving that as well as the absence of facility closure costs which last year, we had included. So you get the double benefit of the lack of those costs plus the productivity that comes from those actions. And you see a little bit less favorable mix tamping that gross margin expansion down a bit. The S&A side is more about volume and acquisitions. You see about a $9 million increase there to about $149 million. That dollar increase is largely driven by the acquisitions we have been doing, but you will see a 10 basis point favorable improvement relative to percent of sales down to 17.4%. And that is where we benefit from the volume on those fixed costs.

Page 6 shows the results of those two drivers in OP, and you see nearly $144 million of operating profit, a 9% increase and 16.8% OP margin with 30 basis point increase, and the drivers of gross and S&A both contributing to that improvement.

Page 7, we go to non-OP expense and we see a couple of million of tailwind really driven by foreign exchange results, where the fact that we had some small gains this year compared to some small losses last year of the Brazil real and Canadian dollar driving that delta. See some tax headwinds of 100 basis points in the quarter to 33.4%. That's being driven by some discrete items including the fact that we had some property sale included in prior year, as well as some term to provision adjustments in our foreign entities and the lack of R&D tax credit in this year's number creating that headwind.

So on page 8, we are showing the net income of $90 million and the 10% increase, good operating leverage of that 7% sales growth. Earnings per share at a comparable level of 10% growth, as our share count was quite comparable during the period. We purchased about 100,000 shares during the quarter, which brings our year-to-date share repurchases to about 200,000 shares.

On page 9, we will switch to now breaking down into our two segments for the quarter. So we will start with our Electrical segment, delivering $612 million in sales, an 8% increase. 5 points of that 8% coming from acquisitions, the strongest organic contributors to the 3% of organic growth, continue to be the resi market within Lighting as well as commercial construction. And Dave referenced how the industrial markets were quite mixed with, for example, the High Voltage business being down whereas Harsh and Hazardous and commercial construction showing strength. So mixed results within industrial.

Operating profit, $95.5 million, a 7% increase, but you'll notice a 10 basis point decline in OP margin. And that's driven in part by the fact that the acquisitions, as they come in, are additive to OP dollars, but they subtract from the OP margin by a little bit. And we fight some of that with our productivity. And we need the volume to offset the less favorable mix as well as some of the inflation that we get.

On page 10, Power for the quarter, up 3%. When you net FX against the acquisitions, you see that organically result in flat performance. And that doesn't sound so great other than, I'll just ask you to recall in the first quarter, we were organically down 3 points. So that's actually improvement in the Utility end market, and I think you saw the fact that the retail demand for electricity had gone attractively positive earlier in the year. That seems to be waning now. The data is not perfectly up to date, but I think we benefited from some of that effect in the end market. The OP for Power, over $48 million, 12% increase and you see a very handsome 160 basis point improvement. But again, I'll call your attention to the fact that, that was really driven by the fact that we had some extra costs last year in terms of some of the consolidation, so I don't want to set up that trajectory as being an organic one. The natural rate would be a lot flatter going forward.

Cash flow on page 11. You see our cash flow is below last year by a little bit, despite the fact that we had more net income. And you also see some efficient investment in working capital compared to last year. So the difference comes both on the other line, which is a result of some estimated tax payments, as well as some lower pension liabilities driving that basically $20 million difference. And you see a little bit extra CapEx, which again, we're continuing to invest in areas like new products and productivity and are getting great returns on that capital. So a lower free cash flow number but not detracting from our annual target of trying to get cash flow to equal net income.

Now we will switch on page 12 from a look at the quarter to a look at the year-to-date results. Our snapshot at halftime has sales growth to $1.6 billion, a 5% increase, just to compare that to a 3% increase in the first quarter. So nice acceleration in comparing to an annual guide of 5% to 6%. So showing some recovery from that first quarter period. Operating profit at 15.4% year to date, a 50 basis point improvement and that compares to the annual guide of 20 to 30. You can see that we're expecting a harder time to get margins in the second half. We'll talk a little bit more about that at the end of the slide. You see the tax rate headwind and the cash flow similar to how we were describing the first half.

Page 13, year to date, total of $1.51 billion in sales, a 7% increase. The bulk of that coming from acquisitions, similar story to the second quarter where you see resi being a big contributor to the organic growth. And also our BURNDY business and industrial again, mixed with High Volt down from the first half versus Harsh and Hazardous and our general manufacturing side of industrial, both contributing. Operating profit up 9% to $164 million, 14.2% of sales, a 30 basis point improvement. Again, the volume helping us, productivity being crucial to that and the acquisitions hurting margin a little bit as we add them in their first year.

Power on page 14, showing flat year-to-date sales performance where acquisitions have contributed three. So we are still catching up on the organic side and that slower start to the year hurting that. On the performance side though, you'll see operating profit up 8%, a very healthy improvement to 18.3% margins. Productivity being very important to the success within Power. I will comment that they have been seeing a reasonably competitive pricing environment in the Utility end market and so you see an unfavorable price cost dynamic. And our BURNBY business, which faces off against Utilities also seeing some of that price pressure. So the productivity has been a powerful driver there.

Cash flow for the year to date, on page 15, very similar story to 2Q where the free cash flow is lower, despite the higher income and despite efficient working capital investment. But that same $20 million driver you see on the other line coming from those tax payments and pension liability.

Page 16, trade working capital. You see the sequential improvement from first quarter of 2014 to second quarter. We were surprised by the shortage of volume in the first quarter. So you can see we over built our inventories a little bit. You can see going back to 2013 that sequential improvement, not necessarily typical. And at the same time, the compare between 2Q 2014 and 2Q 2013 suggests we still have efficiencies to gain and we're focusing on that.

Our capital structure on page 17, you'll see the set step down in cash levels to a little bit less than $600 million, being driven by the $160 million invested in deals year to date, and still with plenty of cash to continue to invest in a pipeline that we feel is reasonably robust and our current level of activities is reasonably a good proxy for you to see how that's going. With that, Dave, I'm going to switch back to you to go to our outlook.

Okay. Great. Thanks, Bill. So you have gotten a good sense of where we have been and what we have accomplished. Let me give you a sense of where we see things going at least for the rest of this year.

First on page 18, a little discussion on our outlook for the end markets themselves. And I will start up on the upper right side, the Utility side. We see that growing at flat to 1%, as a market. You will recall at the end of the first quarter, we had an outlook that was flat and we were concerned about because we weren't seeing those order rates because of the weather. I think that's moved from cautious, as you recall in May, based on the order rates, we moved it to a confident at flat. Not terribly exciting but certainly a lot better for us.

I think I would characterize this as continued improvement, but cautious about improvement. Certainly the utilities have been spending. Some of that is attributable to pent up demand. Some of it is attributable to their improved profitability that they saw in the first quarter from the meter spinning. But I think I saw some data recently that underlining electric demand has dropped back down. There is volatility there but we are cautiously optimistic that, that's going to continue to improve.

On the residential side, we started the year with about 10% growth, different from a year ago when that was viewed to be low. We said that may turn out to be high. I think we are starting to see some of those signs, particularly on the single family. We still feel good about our position, our business. But certainly, that market is a little bit softer as the year has progressed. So we are monitoring that carefully.

The non-residential market, we see up 2% to 3%. That's a little bit softer then we'd last forecasted. Recall that, that market was impacted significantly by the slow start to the year. It has started to recover but not at the rate that we would have expected in order to meet the prior expectations. That could change as the year progresses but right now, we certainly see more inquiries and more bidding but more on the smaller project business. Not yet seeing big uptick in the large project business. Then the renovation is still supporting that.

Then on the industrial side, still looking at 2% to 3% overall growth with some mixed market, the High Voltage still being down, Harsh and Hazardous business recovering. So overall, looking at growth rates of 2% to 3% for the market. How does that translate to our segments? You see on page 19, on the Power side, which is a little less than one-third of our business. You see in the sales growth. That translates into 3% sales growth. All of that arguably coming from acquisitions with the market growth being mitigated by a more challenging pricing environment and some currency exposure that we think that exists there.

The Electrical side, we see 6% to 7% growth rate on sales reported. This has the non-residential slowly improving. Residential, we still think is solid and will be double-digit for us. The industrial, low single-digit, and then acquisitions, adding 4%. So all of that translates into overall sales increase of 5% to 6%.

Turning the page, with our balanced growth on the top line and early in the year, our concern was where the top line was going to be there. Right now, we feel better about it being there. That's a good start. On the margin side, I think there is more challenge that we are going to face. Some because, as we have talked over the last three months, some of that market growth is coming from segments that are lower margin contributors on average in the portfolio.

When you look at some of the commercial construction projects, some of the commercial and the C&I Lighting. I think we have seen some real more challenging pricing environment, really across all of our businesses. Not much contributions, Bill mentioned, in the quarter. And I think that's even more probably acute within the Lighting segment with competition in that business. We also have some margin compression when you look at the Lighting business around the LED. The good news is continued improvement in the adoption rate. Continued improvement in the underlying cost. But the market not yet getting to the level of pricing commensurate with the value being delivered in those new products. So we have got to adjust accordingly.

Some of the things that we're looking at, therefore, that could impact us in the second half. We are certainly continuing to work on our productivity initiatives, but we are going to take even a more aggressive look at cost reduction actions across all of our businesses. But particularly, in the Lighting segment to make sure that we've got the cost structure consistent with where the overall market seems to be settling. So still feel good about 20 to 30 basis points. But with the work to get there, you might look at that. I think Bill will talk a little more about that.

Then the tax rate of 33%. A little disappointing because we've had some upward drift in that. We've got a lot of actions that we are working on to try to bring that back down but with a 33% assumed rate. So mid-single-digit growth, margin expansion with markets that are at least cooperating on a demand side and it's up to us to work through the margin side. So Bill, do you want to add any more to the outlook?

Yes. I think it's worth commenting a little bit on the shape, you know, of the rest of the year. I think that Dave referenced some of the pricing challenges. We've had a price cost tailwind for the first half of the year, as you all know. It is very hard to sustain that. We tend to think during the year that tends to be flat. That feels like that could create some headwinds for us.

The mix side, I think could be felt particularly acutely in Q3. We have both High Volt, as well as some of the fact that the commercial construction businesses of ours can be a little bit lower margin amongst our portfolio against a pretty sweet mix of business we had last Q3. Just to remind everybody that last year's Q3 was 100 basis point improvement upon the prior year, and that creates a pretty tough compare to try to continue to expand on. So the 20 to 30 basis point guide suggests, from where we are at halftime, essentially a flat second half on margin. I would say, meeting our Q3 margins of last year, that should be pretty tough to do. So I think the shape of the second half of the year feels a little bit influenced by some of those factors, which I just wanted to add.

I think that would conclude our prepared remarks and happy to turn it over to you all for some Q&A.

(Operator Instructions)

Christopher Glynn with Oppenheimer.

Thanks. Good morning. Hi, Dave.

A question on lighting, talking about aligning some of the cost structure there. I think one of your competitors sort of adding structural cost with the growth opportunities from the technology changes in the industry. Can you talk about, you know, what the trade-offs are there?

Yes, no. I mean, part of the challenge is balancing where you need to add structure cost, where you need to make the investment, particularly when you look at product innovation LED, engineering, and that capability. So that's going to continue, and that's a necessary, but it's not necessarily complementary to improving margins.

So you've got to then look at the other side of the equation, which is where your cost structure, and particularly your fixed cost structure, and there's a lot of that at our facilities. We've done a lot, but there is certainly a lot more opportunity for productivity initiatives to be addressed more aggressively with some incremental investment that might be necessary. I think, Chris, the example, you have seen the benefit of that on the power side where we have had improved margins, significant contribution from productivity initiatives from investments that have been made over the last several years that we are starting to realize.

So I give Gerben credit for continuing to deliver. But some of that was in investments that were made when he was the divisional president and Bill Tolley was running the business.

So we have examples internally where we make the investment sometimes when you can afford it and sometimes when you need to. And I think in the lighting business because of the dynamic that exists in that market and the change, you know, we are taking a more aggressive look at things that we might just need to do in the shorter term for the benefit of the longer term.

Thanks. That's helpful.

And on the price, so we are seeing a little pressure at power systems. Is that a stable pressure or something that you think could accelerate?

I think, Chris, it feels between those two, I would describe it as stable. I think it's existed there, and you know, it alters between when on a big project, you have to get competitive. And that alternates between then more blanket and [stockage] flow and whether you have to be competitive there. I would say it feels like a competitive industry right now where price, you know, I think the utilities are facing a reasonable amount of challenges in their own business and they are looking for as cost competitive of a product as they can get.

Okay. So it sounds to me like it might be a little bit more mixed between project and stock than comparable price declines. Is that fair?

I'd describe it as competitive, I'd say and that you need to show up for the quality product at a good price every day.

Okay. Thank you.

Richard Kwas with Wells Fargo Securities.

Good morning, everyone.

I just wanted to drill down a little deeper on the lighting. When you look at LEDs, are the LED margins still comparable to traditional lighting margins at this point?

Yes. I would say that for us, historically, they had been, Rich. And I think this -- some of the most recent adoption has been in product areas that are taking what were traditional linear fluorescent products and transitioning those into newer technologies.

I think that's where Dave's comment about industry needs to focus hard on getting the full value of that product price into it, as opposed to merely trying to match the price of the legacy technology. So, I think it's a function of some of the more recent adoption has been in that kind of product area that has made the compares more challenging.

And is that more of just a competitive strategy by other players out there in your view?

I think that's where the market is in those product lines.

Okay.

I think, Rich, you know, out at LIGHTFAIR, if you walked around LIGHTFAIR, you could see why there is so much excitement around the industry. A lot of new products. But you also -- it's clear that while there's a few of us in the room who have very strong positions, as evidenced by simply the floor space and some great product, there's almost an unlimited number of new entrants who are trying to take advantage of the changing technology, as an opportunity.

I think that has created, you know, more competitive pressure then we've normally seen. So it's not -- I can't attribute it to any one player. It's more of a broad market dynamic that, you know, we're going to work our way through.

Okay. And then on M&A, so the frequencies picked up. The size per deal there is still within the range of what you typically do. How would you characterize landscape among the other larger players out there with how they're competing for deals, particularly, as you look to potentially move up scale in size?

It would be difficult for us to comment on other people's pipelines. I would say that our activity feels reasonably robust, Rich. And I think you are right to characterize the sizes as what we would call average or typical to what Hubbell has been doing. I think this last $160 million, we invested at around 8 times.

So I'd also say it's been at typical valuations that we're used to. But certainly between strategics and private equity buyers, there's certainly a lot of interest out there. And we are trying our best to get out there and build relationships with sellers and make some of those transactions happen.

Okay. So incrementally, the bigger sort of deals are still, it sounds like, a little more of a challenge for you to compete on?

I would just say they are less frequent in our conversations, and I think you'd be right to suggest that as you got bigger, the multiples, you'd have to expect the multiples would probably tick up in sympathy with that size, which I would expect would be right, Rich.

Okay. And then just last one for me. With the McGraw-Hill data that was out in the second quarter for non-res suggested a pretty nice uptick in starts. And Dave, you talked about smaller projects driving the charge here -- leading the charge here. And large projects, still somewhat tepid. What do you make of the macro data out there in terms of starts activity? I know, if you can provide any color around your comments on smaller projects versus larger projects, and what you are seeing, in terms of conversion -- potential conversion of larger projects as we move through the next 6 to 12 months.

Well, I think that there is still caution out there when you're looking at the big projects. There's funding considerations for sure, but there's also underlying demand. You can look at some of the commercial office space in certain markets, and how that's being absorbed or not absorbed.

And so, I think that's where some of the caution is and slow recovery on the larger projects. The smaller ones are, you know, they're a lot easier to execute, and execute -- get completed in a timely fashion while the market is still strong.

So I think that's where -- my view is that's where all the bias is to it -- to the smaller projects. But we're keeping at it and would expect that we're going to see more activity. We don't disagree with a lot of the leading indicators would suggest that there's an improvement that's coming. We all know, though, that's been the story for the last couple of years, and it keeps sliding to the right, and we just are in a wait and see and ready to go.

Okay. All right. Thank you.

Nigel Coe with Morgan Stanley.

Good morning. It's Drew on for Nigel. I just wanted to ask about the month-over-month cadence. You mentioned how things played out from the beginning of 2Q to the end of the quarter. What kind of trends are you seeing so far in July?

Yes. I think, through -- we finished June with 10% growth in orders, which is pretty strong, especially after a disappointing May. And July, I would say, has started off reasonably okay. I would describe it as having an easy compare for us, but between the backlog that we built in 2Q and the order pattern that we are seeing late June and into July, I think that's really the backbone and buttressing Dave's comments about how we are feeling from a confidence perspective on some of the volume assumptions.

Okay. Thanks. And then, I don't want to press too hard, but I just wanted to dive a little bit into the fiduciary settlement for the trustees. Has there been any change or more activity on your end, just as far as conversations with the corporate trustee or the beneficiaries themselves? Or do you have any sense for whether or not you think this could be a potential operational impact to either the business or the outlook or even the A class shares?

Drew, as I mentioned, it was a transfer as a result of a legal settlement. We approach all of our shareholders, you know, as I have talked about in the past, we pride ourselves on our transparency with our shareholders. We are available to answer any questions.

We try to keep ourselves in the market to make sure that we're sharing our perspective on our strategic direction and our execution against that. I think that the market has generally welcomed that. But we don't -- at the same time, we don't talk about what individual conversations exist with shareholders, to the extent they do.

All right. Understood. Thanks.

Noelle Dilts with Stifel.

First, I just wanted to dig into the utility market a bit more, hoping you could talk a little bit about what you're seeing in distribution versus transmission, and even the international markets. And our work actually suggests that we could see an improvement in large project spending in next year, 2015, in the US. Curious if that's consistent with your expectations.

Yes, Noelle, specific to the quarter, we characterize T&D as flat. I'd say the T portion of that was down. I would also say that that was more timing-related. I think what our folks are seeing is affirming of the second half on the T side. And as you look out into 2015, I would agree with the thesis that transmission spending will remain sort of at these high levels, but that will translate to modest growth.

On the distribution side, you heard Dave and Bill talk about how we saw a rebound coming off of the weakness of Q1. As the meters were spinning, we saw electricity demand increase and we did see a pickup in spending into the second quarter. But the big question is, is what does that look like going forward, given electricity demands? An unknown, so.

On balance, I think we're more comfortable with the zero to one and we think that sort of suggests a little improvement, second half versus first.

Okay. And then, anything notable going on in international?

International is mixed. I mean, we have a fairly sizable business in Brazil that has had some hard times. They are seeing a little bit on the T side. Not as much on the distribution side. But we're certainly looking to expand in other geographies. So on balance, I'd call it flat to slightly up.

Okay. My second question is really, just looking out at this Gulfstream petrochem opportunity and some of the industrial spending we think could happen over the next few years, just curious to know your thoughts on capitalizing on that opportunity. It sounds like things are getting pushed to the right a bit. I don't know if that's what you're seeing. I'm curious to your comments there.

I'm sorry, Noelle. The question was around petrochem opportunity?

Gulf Coast CapEx, if we do see this huge build out cycle happening down in the Gulf Coast. If you're seeing some opportunity there, how you think you can -- if you're doing anything to capitalize on that opportunity. On the harsh and hazardous side.

Yes, so the harsh and hazardous business faces off there. One of our acquisitions this year is right in the middle of what you're describing. It's obviously a trend that we like. We feel we are well-positioned for and we think worthy of investment. Yes. We agree with your view.

Okay. Thanks.

(Operator Instructions)

Mike Wood with Macquarie.

Thank you. Congratulations. Can you give us some more color around your second half margin commentary, just to better quantify for us, the impact of price cost versus productivity in the second half? Or if you could give us the first half benefit from price cost, given that you said you expect the full year to be flat.

Mike, I was just giving some color and texture around the fact that we had some contributions from price cost productivity in the first half. And as we have talked with you and everyone we are always assuming over the course of the year, that that stays neutral.

And so I am suggesting that could be headwind in the second half, and then I was just trying to call your attention specifically to 3Q. Look how sweet the combination of mix and price cost was in Q3 last year that drove a 100 basis point run up in those margins. And if you looked on a two-year improvement basis, it's hard to lap 100 and do better than that given some of those dynamics. I was just trying to give a little bit of that flavor.

Okay, great. And just in terms of follow-up, you have had some recent organizational changes, naming the chief growth officer as Bill Tolley to help facilitate some larger deals. I'm just curious if you can comment in terms of your either progress or frustration there in terms of getting some larger deals closed and if your pipeline at all has changed since you have last updated us at the analyst day.

Mike, I think that Bill has been in that role for about six months now. I tell you that he's been very active, very proactive. And there's a lot of farming that's involved in that and really, a long way from harvesting anything.

But I think he certainly is opening up some possibilities in some of the dialogues and conversations. As I've said earlier this year, I would expect that that pipeline of possibilities, as we move through the year, to increase. That's off of a low base of zero to one, so maybe there's two or three as the year progresses. But the more opportunities we have, the more possibilities and likelihood of closing one. So I think that's all been very positive. We'll see. We'll see.

Thank you.

Christopher Glynn with Oppenheimer.

Yes. Just was wondering if inventory purchase accounting in the quarter was worth calling out the impact.

I would include that in our commentary, Chris, that acquisitions were hurting OP margin. And that includes some of the acquisition counting that rights up inventories. That tends to burn off after a quarter or two. But it does in that first year of us owning it, they're not really cranking at full margin yet.

That's pretty consistent across a portfolio of our activity. You can see how long initially they can drag margins down But they can become contributors in year two and three. And that pattern is typical and we continue to experience that.

All right. Thanks.

We have no further questions. I will now turn the call back over to our speakers for any additional or closing remarks.

Okay. This concludes today's call. I am certainly available in case anyone has any follow-up questions. Once again, thank you all for taking the time to join us this morning.

This does conclude today's conference. We do thank you all for joining us.