Hubbell Inc (HUBB) 2014 Q3 法說會逐字稿

Good day, and welcome to the Hubbell Incorporated third-quarter 2014 update. Today's conference is being recorded.

At this time, I would like to turn the conference over to Jim Farrell. Please go ahead, sir.

Thank you. Good morning, everyone, and thank you for joining us. I am here today with our President and Chief Executive Officer, Dave Nord, and our Chief Financial Officer, Bill Sperry.

Hubbell announced its third-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 considered incorporated by reference into this call.

In addition, comments may 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. And with that, I'll turn the call over to Dave.

Great. Thanks, Jim. Good morning, everybody.

We've got a lot to cover this morning. I'm going to spend some time providing some perspective on our performance this quarter. Bill will give you more of the details, and then I will come back and share our view on the rest of the year and some very preliminary thoughts on next year.

Overall, I would say our -- for the most part -- our performance for the Organization was good. Top-line growth was good. Good organic growth complemented with acquisitions that I think, together, relative to the market, is pretty good.

Operating margin of 15.9% on an absolute basis would also be pretty good by many standards. And that is all-in; it doesn't exclude corporate costs, it doesn't exclude one-time costs, or other non-recurring and restructuring costs.

However, it's not good enough by our standard. It's also -- it's not at the level that we experienced last year in the third quarter; and most disappointingly, it is not what we expected to do this year. And there's no one that is more disappointed than I am. When I think about how much effort -- and many of you know -- that we have put into improving margins and the reliability of our forecasting over the last eight years or so.

Most of our businesses continue to perform at the high level we expected, but that is not enough this quarter to overcome the few businesses and issues, more than typical, that we faced. It's been a challenging quarter for us. But as the fundamental strength of our businesses, and more importantly, the dedicated leaders and employees of this Company, that gives me continued confidence in the potential that we can realize in the Company.

So, let me start a little bit on the sales side. As I said, we had sales up 7%, with 4 points coming from organic growth; the other 3 coming from acquisitions. And most of our markets performed at or above expected levels.

The non-residential market saw a modest improvement, with the renovation market activity still contributing. The residential market was good, but a little lower than we expected, some of that due to a change in the national account buying pattern.

The industrial business was mixed, with the wiring device side of it -- other industrial businesses performing well. But our harsh and hazardous business was lower, and our high-voltage test equipment was down significantly. Unfortunately, those two markets, in particular, have historically provided some of our better margin opportunities. Last, and certainly not least, our utilities business, and the market improved from the slow first half. So, I think all of that is, for the most part, on the good side.

The disappointment really comes on the margin line, where we ended up with operating margin of 15.9%. Let me take a few minutes to give you my perspective on what I see as some of the key drivers to the result -- to the lower-than-expected margin. First, and most significantly, is in our lighting business. We have been talking for some time about the challenges in this business as a result of the technology shifting to LED, in particular.

Great opportunities for growth, but the increased cost of LED, and a pricing environment not recognizing, in many cases, the value of that new technology, puts a lot of pressure on margins. As I mentioned on last quarter's call, we were stepping up our cost-reduction actions to counter this price and margin pressure, and that continues.

But unfortunately, we ran into several other issues during the quarter, each, in their own way, I believe, resulting from this technology shift. Higher-than-normal costs included legal and warranty-related costs, with the impact on our margin almost 90 basis points in the quarter.

The legal cost relates to a settlement discussion on previously disclosed litigation. Cost largely attributable to one case, but I have to say it is indicative of what we are seeing is a more litigious environment, as many more market participants fight to protect their positions.

The warranty costs relate principally to a product family within one of the lighting brands that was showing some higher-than-normal failure rates in certain customer installations. This resulted in higher-than-normal costs; so, as a result, we took action to evaluate the potential exposure in total from these product sales in the market, and based on that analysis for this brand, we increased our estimated future costs in the quarter.

At the same time, we looked at our experience with other brands, and determined that the recent trends, in our experience, suggested that there was some additional exposure in those brands. This could probably be expected when you think about the introduction of new products using new technology, but our experience up until recently had not been that unusual.

And within the lighting business, we also had an unexpected slowdown in our residential fixture business, in large part due simply to the change in the stocking practice from a national account that creates some volatility, and to a lesser extent, maybe some slowdown in the new construction volume. These items within lighting, clearly the most significant impact, and the team is laser focused on all of the actions necessary to address and prevent and improve the performance around these items.

The other factor that hurt us in the quarter is lower-than-anticipated volume into two of our higher-margin businesses we mentioned before: our high-voltage test equipment, and harsh and hazardous. Those businesses are also two of our more global businesses, and, therefore, exposed to some of the geopolitical volatility, whether it's the Russian market for our high-voltage, or oil and gas equipment, or the Middle East for oil and gas, or more recently, the impacts of the rapid decline in oil prices.

Some of these negative volume impacts would have been difficult to plan for, but we certainly could have done a better job. In the high-voltage test equipment, it turned more difficult to replace some of the project business that was canceled or deferred [in] where we did. It was at lower margins as a result of a much more competitive environment.

And in the harsh and hazardous business, the margins we were anticipating -- in hindsight, I say, were too optimistic. We did not recognize the difficulty we were likely to face, to meet or exceed the tremendous margins, if you go back to the third quarter of last year, that we experienced in that business.

Now, on the positive side, and importantly, our power systems business performing well -- had a nice recovery from the slow start of the year, both sales and margin, and we expect that to continue. You may have also seen on Tuesday our announcement regarding our 12% increase in our dividend and our new $3-million share repurchase authorization. I'm pleased that our Board approved our request, and I think these two items are further evidence of our confidence in the future earnings potential of our Company.

Now, I am sure there's other topics that I haven't addressed yet. Let me give Bill a chance to go through some of the details in the quarter, and then I'll come back for some forward looking and Q&A.

Thanks, Dave. Good morning, everybody. Thanks for joining. I'm going to use the slides that Jim referenced, and cite the page numbers as we go, to guide our discussion this morning.

So, I'm starting on page 3, which is the summary of the third quarter. Dave highlighted the sales increase of 7%, with organic providing 4%, and the balance coming from acquisitions. He described the OP margin at 15.9%, and the three primary factors driving the unfavorable comparison to last year's 18.1%, and resulting in EPS of $1.51.

On page 4, we switch to focusing on our end markets that gave us that 4% organic growth. Starting with non-residential, which is our largest end market, you see both green arrows in both new construction and reno/relight.

When you look across our businesses that are exposed to non-res, between our C&I lighting, some of our rough-in electrical boxes, some of the Burndy business, some of the wiring business, I see very favorable compares to prior years. So, good growth there in non-res.

Dave described some of the mixed results in industrial, and I would say mixed -- it's quite pronounced actually. So, our businesses that face off against general manufacturing and industrial production, which includes some of our wiring devices, as well as other industrial businesses, had very strong end-market performance. Versus harsh and hazardous, which face off against some of the mining and, more largely, oil and gas markets experienced, as Dave said, shrinkage in the quarter; and our high-volt, which was down significantly in the quarter. As you'll recall, that high-volt business sells to both international utilities, as well as to transformer OEMs.

The utility end markets showing low single-digit growth across the T&D; so, the yellow, it looks like a modest up, but as Dave was describing, positive progression sequentially from first and second quarter. And the resi business showing double-digit growth for the quarter, but below expectations. And they're selling -- that is largely a lighting business, our resi exposure. They're selling both to national builders, as well as to some of the national accounts, and I think some of the order impact from some of the buying behavior Dave mentioned will continue forward.

On page 5, we will spread the performance to the gross margin. And again, some of the factors Dave highlighted were the costs in excess of productivity, which include such costs as things like freight, where we experienced increases; some inventory charges from obsolete inventory; as well as wage inflation contributing to costs in excess of productivity. Dave commented on the mix of both harsh and hazardous, and high-volt, and he mentioned the warranty costs affecting the gross margin performance at 33.1%, down 170 basis points.

On the S&A side, that's where the legal item that Dave mentioned is included. Ex that legal, you would have seen quite comparable basis-point performance on the S&A line. So, the dollar increase is largely attributable to the acquisitions, which bring along some sales with them, and create that more flat -- on a basis-point perspective.

On page 6, we distill both that S&A and gross margin down to the OP level. You see the 15.9%, comparing unfavorably to last year's 18.1%, a 6% decline, with the gross margin, as you saw, being the larger contributor to that versus the legal cost at S&A.

On page 7, you see total other expense, which includes net interest, which is comparable between the periods; so, small difference attributable to a change in FX impact. And the tax rate was a headwind by 70 basis points at 32.9%, as a result of the R&D credit being in last year, and not in this year.

Page 8: We show the net income, result of that OP decline, and the tax headwinds having a 7% decline, and a comparable move at the EPS line of $1.51. The share count was about 59.4 million shares, which was reflective of some share repurchases in the quarter, but not enough to move that percentage.

We'll now switch to breaking that performance amongst our two segments for the quarter. So, we will start with electrical on page 9. In the third quarter, you see, again, Dave's comment of strong sales performance of 7% to $642 million of net sales, where your acquisitions were adding 3% and the organic business growing at 4%.

You saw what was driving that, as we've referred, the non-res was reasonably strong across several of our brands, the resi business growing at double digits, which was a strong contributor, and then, as we have mentioned, the mix -- extreme mix of industrial, where harsh and hazardous, and high-volt, were dragging down.

On the performance side, you see a concentrated impact of the drivers that Dave was describing all being essentially in the electrical segment. So, you see a 14.4% OP margin comparing to last year's 17.5%. And you see the drivers that Dave has already discussed, both the legal and warranty contributing to about 130 basis points of that decline, the costs that we mentioned over productivity, and the mix effect.

For power, we see a 6% growth to $254 million of sales. You saw contributing to that 6% sales growth, acquisitions driving about 4%, and organic really driving to about 3%. And again, to just remind you of the sequential on that organic, we had minus 3% in the first quarter, flat in the second, and there's now growth in the third. So, good, sequential progress and improvement for power.

And on the performance side, you see a 7% growth in operating profit to $50 million, or 19.8% OP margin. You are getting incremental drop through on the new sales. Some of the price challenges are more acutely felt by our power segment, and clearly they are in a price-competitive environment that goes along with some of that low organic growth.

Switching to cash flow for the quarter, on page 11, you'll see a net increase in cash flow, despite higher CapEx. We continue to feel that CapEx is important to new product development, as well as productivity, cost efficiency spending that we're doing.

And you'll see slightly larger, higher D&A levels as a result of some of the acquisitions we have been doing. But you see more efficient working capital as our payables more than finance the investment we required in inventory and receivables. And slightly better other as a result of timing on some tax payments.

And so, now on page 12, switching from, thus far, what has been a quarterly review, to looking at the year-to-date period or the nine months, and you see sales growth of 6%, with relatively flat EPS at $4.10. That 6% sales growth was essentially absorbed by the lower OP margins, that were driven largely by our third-quarter lower margins, as well as the higher tax rate. And that 6% sales growth is essentially 2 points of organic growth, and the balance coming from our acquisition investment.

Page 13: I'll now break down the year-to-date period to the electrical segment to 7% sales growth, and 4 percentage points of that coming from acquisitions. The story is not terribly different at electrical. Higher res has been double digits for this year-to-date period. The non-res has been aided by the reno, as we've discussed throughout the year, and those brands that we've already described as being -- facing off against non-res have grown well. And that mixed industrial comment still holds for this year-to-date period, where harsh and hazardous has been quite flat for the year, but high-volt has actually had quite a negative compare year over year for the year-to-date period.

So, at the operating profit line, you see $256 million of OP, 14.3% driven, again, by some of the factors we have been citing. The costs in excess of productivity, the business and product mix that we have mentioned, the legal and warranty that we have mentioned -- just spreading those impacts now over the three quarters rather than the one; it's really the same dollars being spread.

Page 14 shows the power results for the year-to-date period -- 3% sales growth, all being driven by acquisitions. We described how the organic market has picked up, but has essentially been flat for the year-to-date period.

At the OP level, you actually see very strong incrementals that are distorted, I think, by the facility closure that we did last year. So, not in the quarter, but in the year-to-date period, we experienced easier compares because of the absence of those closure costs and some of the productivity that came with that. But strong performance at 18.8% OP margin for our power systems business.

Year-to-date cash flow is a similar story to the quarter, where we have got an improved level of cash flow despite some higher CapEx, which is being driven by more efficiencies at the working-capital level; same story there, where payables are the driver.

And the trade working capital -- you see a reasonably comparable level of trade working capital as a percentage of sales. The acquisitions distort that a little bit, showing a slight uptick in working capital versus the third quarter of 2013. Because you get the balance sheet impact without getting the full period of sales.

Our capital structure: On page17, you'll see $654 million of cash, lower than last year, which is reflective of the fact that we have invested $164 million in acquisitions year to date. And then a comparable -- the two bond issues outstanding, no change there. And similar debt to cap of 23%, so continues to be a flexible balance sheet, poised for investment.

And with that, I was going to turn it back to Dave to talk about outlook.

Okay. Thanks, Bill. So, what does this all mean for the rest of the year? I guess, first on the top line, we are expecting our top line to finish the year up 5% to 6%, although we are currently tracking more toward the low end of that range. But as most of you who have been following us for some time, the fourth quarter has a higher level of volatility in the sales result than you would expect for -- particularly with a couple of months to go.

There's a number of dynamics that occur that makes it -- what make it so difficult to have a level of precision that we would like in that outlook. Things like channel buyer habits, based on their own inventory stocking/destocking. You don't know until really the month of December.

As well in the project business, there's always the potential of project pushouts. So, more volatility in there than we would like, but we think we've got a good perspective right now.

From a margin perspective, some of the things we have discussed that impacted us in the third quarter, quite honestly, continue into the fourth quarter. The mix issue that we see, the impact from high-voltage, and the harsh and hazardous -- it continues into the fourth quarter, for sure.

Costs in excess of price -- the pricing environment -- we saw some tougher pricing in the third quarter, and we don't expect that to change, certainly in the fourth quarter. So, we are focused more on the cost side of the equation. The combination of those two is about 60 basis points.

And then, the variability on volume comes in that higher-margin project for international business. So, that can be a swing in margin, but right now we are navigating to how we think that things will play.

And then, of course, we've got costs associated with some of these cost-reduction actions that we referred to, and we currently think that will be $5 million to $6 million of cost in the quarter. I think we will still see some higher-than-normal cost in that full year from the warranty and related costs. Certainly, going forward, we would expect that to come back down. It would not be at the same level because we are not expecting the product specific and brand specific, but that is still going to impact us for this year.

And then, a tax rate staying at approximately 33%. There is no assumption of R&D reenactment or any other year-end adjustments contemplated in that guidance, okay?

So, let me turn now to next year. Certainly, we would love to, and I'm sure you would love us to, give you a lot more clarity into next year. But we have got our challenges just navigating through the rest of this year. And we would not typically be providing that guidance because it is too early.

But I do want to just give some perspective of how we are seeing things right now. I think if you look at the third-party forecast of all of our end markets, they are, at worst, flat to slight growth to mid-single digits to high-single digits. All in all, it could provide 3% to 4% of growth, and that is what we are looking at and we're planning for. Of course, there is always the market uncertainty, and so we plan for things to be lower.

That growth from a margin standpoint -- we would certainly expect that higher organic volume is going to give us some incremental margins. But that growth will also come likely, particularly if we look at the biggest portion of our portfolio, and that is in the non-residential market. But that would be at margins that are not quite at the level of some of our really high-margin performing businesses that could have slower growth to flat growth.

And then we have more cost actions. I mean, we are taking actions this year, but we have more on the board for next year. And I am expecting that those cost actions in total will exceed the amount that we did this year. So, we will have some incremental. But as is our practice, when we ultimately provide guidance, it will be with all things considered and all things in.

So, I would like to tell you more. We are working diligently through our planning process. Contemplating all of the things that we have had painful learnings in the third quarter, and we're working through in the fourth quarter. And we will be working on and improving next year. We'll give you a lot more detail on that in January on the call. Okay?

With that, I'm sure you have lots of questions. So, let me turn it back to Jim, and if you want to moderate Q&A?

All right, Don. Let's open up the Q&A session here, please.

Thank you.

(Operator instructions)

Christopher Glynn, Oppenheimer.

Good morning.

Good morning, Chris.

Good morning, Dave. On the high voltage test, Dave, I wonder if you could put some description on what would you view as a normal year, characterize this year's deviation from that, and any reason to think it does not have a normal year next year?

That is a very interesting question, Chris. I mean, one of the challenges in that business is that there is no normal. What we have found is that it is either really good or it is not really good by our standard.

When it is great, when it's roaring, great margins, you love it. When things slow down, it is one of those high capital-intensive apparatus type businesses that have a high breakeven point. So the decrementals, when things slow, are much more painful than the incrementals on the upside.

So I think next year we think it will be a little bit better. But I'm very cautious about that. And certainly a little bit better in profitability. But you'll understand if I am unduly cautious on that business, based on what we have experienced this year.

Yes, I understand that there is no normal in a sense. Is there maybe a normal in the typical duration that this business can go away for at times?

Yes, I would say, Chris, the cycle times can last few years when it is going down and along the bottom. It has proved to be for us, since the 2008 period, a very countercyclical business.

So, for example, in 2009, when the rest of our industrial businesses weren't doing so well, that was actually doing strong. And, as Dave said, its incrementals were good at the time and so it was providing an offset. In this part of the cycle, it is providing a drag to what is otherwise a healthy industrial business.

So it doesn't go -- I think the nature of your question, it doesn't bounce back in a year and go down a year. The cycle time is slower than that

Got you, thanks. And then on the restructuring, you mentioned $5 million $6 million in the fourth quarter and then 2015 all in being a little larger for Hubbell than this year.

Just wondering if there was any restructuring here in the third quarter? And what the total amount for Hubbell for the year might be?

Yes, so we had a very small amount in the third quarter, it was in the lighting business with a distribution center. But not a material cost, Chris. And ultimately, the level of expense that Dave was describing, and that we were anticipating in the fourth quarter is a bad compare fourth quarter to fourth quarter.

But year over year and the full year, it is actually comparable some of the level that we spent closing a facility that had come along with a power systems acquisition that we had made a couple of years ago in the prior year. So it is at a comparable level to last year. But just it is unique in the fourth quarter versus last year, it was in the first half, spread between the first two quarters last year.

Okay. And then in the earlier press release, you mentioned some obsolete inventory charges I didn't hear that term mentioned today. Was that swept under some other bucket?

Yes, that is in the unfavorable price and costs.

Got you. Okay, thank you.

Thanks, Chris.

Richard Kwas, Wells Fargo.

Hello, good morning, everyone.

Hello, Rich.

I just wanted to follow up on the margin impact here with the legal and warranty costs. So, that was about 100 basis points.

The rest of the year-over-year decrease,120, how is that split between the price issues, as well as the mix? Is it equally split, or how do we think about that for the quarter?

The other part of the 200, felt it year over year.

Yes. So, Rich, for the quarter, the impact of the other two items that we had noted were actually comparably sized between the unfavorable mix and the cost in excess of productivity.

Okay. And then to follow up on the previous question, the obsolescence is in that cost in excess of price or whatever?

It is, Rich. The complication is is when we did the pre-announce, we were talking about E&L relative to our July outlook, so it is higher than we thought from July. But when you do the year over year, it is not at a level that is worth just calling out as a separate line item.

Okay.

But it is one of the drivers. I think the three big contributors to those costs are wage inflation, some freight costs, and the inventory, Rich.

And is the inventory, is that going to continue to be an impact going forward? Or is this kind of a one time in nature?

The way it works -- I think it is going to impact the second half of the year, Rich. But going forward, not be at recurring levels.

Rich, let's talk about that inventory as just an example of the process that we are going through here. I mean, when those things come up, certainly you would expect that and we are all over it from a root cause analysis, and figuring out what is driving whatever higher than normal costs are, even if they may not be significant enough to spike out an inventory, warranty.

But inventory, an as example, not surprising that you get a little more inventory obsolescence as your introducing new products. And the challenge is making sure that you're not introducing the new products before you have liquidated the old ones sufficiently. And I think that is what has started to build up with the more rapid penetration of LED than was anticipated.

So we have been working to get that more in balance as part of a new product launch plan to be sure that your manager inventories in advance of that. Because it is much more difficult to manage those after the fact.

So we have still got a little bit of that that will probably flow through, I would expect, until those processes get changed. But I would expect those processes to be much more deliberate and more proactive as we go into next year. Make sense?

Yes, that's helpful, but is there a dollar amount that we can attach to that? Meaning that as we move forward over the course of the next year, that that should not be reoccurring?

I mean, I know you didn't split it out, but it would be helpful to get an understanding of that piece at least, or the range of that piece?

I'd say it's $2 million, Rich.

Okay, all right. And then just on the lighting business, so the warranty issues, I understand the legal costs, but the warranty issues of the inventory obsolescence, how should investors think about your positioning at this point?

You had the largest North American player report a few weeks ago, had very strong numbers, strong topline, they indicated that price mix was, while it was down a little bit, it was mainly more because of mix, not price. And so, how should investors think about how your positioning?

How do you feel about your R&D spend, and is there going to be another slug of R&D that is going to have to be required to get this business performing at a very strong margin level? I know the business as a whole, lighting is a lower margin, but just trying to understand how you feel about the business and your conviction on where you are right now?

To the R&D question, I am not sure that there is, from where I see, a need for big uptick in our R&D. Certainly, there's areas that, and our assessment of the market, that we could redirect our attention to differently. I think we are doing a lot of good things, we have a lot of good new products, good market receptance of those products. I think, obviously, the area that we need to do a better job in our R&D is the design, manufacture ability, the sourcing of the products to make sure that they are more reliable, so we don't have those product cost issues after launch.

So, it is hard to say that it would be hard for me to say that there isn't some market impact, at least in some areas for some of the product issues. But I don't see a big uptick in our R&D spending. I think more focused on the right R&D spending is more likely.

And I think, Rich, more broadly on positioning, I think we had 6% growth in the quarter. That feels to us like market. I think with the resi business growing at double digits, that sounds very strong.

I think our LED adoption rate is strong. And we recently just won a Supplier of the Year award from one of our important customers, which says something to me as feedback from the market that speaks to your question of positioning.

And so, I think the spending is less R&D driven, as you Dave where just discussing. But from a profitability perspective, the spending is going to be in productivity areas. And I do think that we are going to be doing a decent bit of that, too, which is not really the positioning of the business but more it's cost structure.

Okay. And that 6%, is that just C&I, Bill, or is that overall lighting?

That's overall.

Okay. So C&I was lower than that then for the quarter?

No, sorry. Yes, it was C&I, but the resi was about 10% and the blended was 8%. Jim, is that right?

So, we were up double digits overall, so the C&I was 6% ex the deals.

Inclusive of an acquisition was what was -- yes.

Okay. Organic C&I.

Organic C&I, yes.

Okay, all right. And then, just the last one quick on the harsh and hazardous high-volt. What percentage of that business is international for you? Or those two businesses, whether they're combined or if you can separate them, however you want to do it?

Yes, they're both considerably international. We talked with you all, Rich, about a 17% international base of our sales, which I know is not necessarily large compared to some of our other players in the space.

The contributors to that international business include power, as well as we have Canadian and Mexican businesses that are selling broad amounts of our North American design products. And so, the balance of that international is really focused in these two businesses, which is a high percentage of both of them.

Okay. All righty, thanks, I will pass it on.

Okay, thanks.

Nigel Coe, Morgan Stanley.

Thanks, good morning.

Good morning.

Yes. So, let's see, what has come across pretty clear here is that you are as frustrated, as we all are with the performance. Just given all the balls you've got up in the air here with harsh and hazardous, high-voltage test, your restructuring quite aggressively, and I'm sure there's a lot more going on behind the scenes than that.

Should we expect a pause in deal flow while you solve these issues? With a bit more of an accent towards return in capital? And I saw the dividend increase, obviously, and the share repurchase. So should we also expect a pause in deal flow?

That is one of the things that I love about the question that you have is that it either validates that we're thinking about the right things, or, in some cases, gives us a new things to think about. That is one that I think about a lot, Nigel. Particularly, the notion that is that contributing to some of our issues or taking us away from focusing on the issues.

And my answer to that would be it could be, I can't say that there is absolutely no impact that we can do everything every day. At the same time, I think that is a part of our culture and process that we have built the capability around that, for the most part, is not a distraction. And in fact, it really is a part of the fabric of the operation.

That said, we're certainly conscious of making sure that we are fixing before we are adding in those businesses that need fixing. But a lot of the adds are in businesses that are doing quite well. And the last thing I want to do is constrain businesses that are doing quite well from doing even better, because they're not impacted by all the other businesses.

So, I think that you will see a little bit of, for example, will you see a deal in lighting in the near future? I think it is safe to say no, okay?

Will you see a deal in the power business? All right, I think it is safe to say that it's likely, we would hope so.

The volume of deals is somewhat opportunistic, but we have always been conscious of what is balancing that level of activity and the risk of distraction, if you will. So, there is still more out there, but we are conscious of that. Okay?

Okay, that's helpful, David. And the issues, we have seen a lot of consolidation in US low voltage, some big players coming in, maybe be Eaton, Emerson's taking control of Appleton. Are some of the issues really a function of a more competitive environment here? And, obviously, pricing has become more challenging. But is this a bit more structural than perhaps we realize?

There is no doubt it's a more competitive environment. I'm not sure that it's structural. Some of it, I suspect, is. But that's not -- we are not seeing that yet, and in any direct evidence, there will be a pocket, as an example, in a market or a product offering or a competitor.

But that, quite frankly, that has been true as long as I have been with Hubbell. It depends.

But I think more of the competitive environment is because, A, there's some markets that have been slower, and so everyone has the same desire to maintain and grow. That has made it more competitive, particularly around a pricing environment, as well as in some of our businesses.

Obviously, we have good margins. We focus on the space that has good margins and there continues to be new entrants in the spaces, or current participants that are looking to expand in that area. So, it is just more broadly competitive environment, I would say, than simply a structural contributor. Okay?

Okay. Very good there. Good luck.

Thanks.

Jeff Sprague, Vertical Research Partners.

Thank you. Good morning.

Hello, Jeff.

Hey, good morning. Just picking up on that, is price in low-voltage positive or negative, ex lighting?

Yes, You know, Jeff, on a year-over-year basis, it is really reasonably quite flat.

Okay.

I think what's different is our expectations where we'd be able to pull a little bit.

Yes.

So we had benign expectations, but it's been harder to even get that modest expectation.

Right.

And then price and power is running negative, right? Has been, still is. Can you size that?

Yes, again it is small. It contributes to the way that we explain the marginal lock, but it's very, very small difference. But still, it is negative in power.

Yes, on lighting, I'm still a little --

I would say it is better to call it flat, frankly, than down is how small it is.

Okay. On lighting, the obsolescence, I was still a bit unsure. Are you talking about obsolescence on now obsolete earlier generation LED stuff?

Or obsolescence in legacy, true legacy legacy products? Because you are mixing away more quickly that you thought?

Largely legacy products, Jeff, for exactly what you pointed out. We're mixing away a lot of that at a more rapid pace than we were contemplating. And that's much harder inventory to liquidate after the fact.

And then on harsh and hazardous, so you're going to accomplish, you're quite clear about international exposures. Would you relate that to any particular vertical? Is it upstream oil and gas? Is it mining? What other kind of complexions could you put on that?

Yes, Jeff, our exposures are both of those, but the mining is much smaller. So it is much more significant in the upstream oil and gas. And so, the impact of a price of a barrel of oil really impacts the spending there.

And the projects, the projects are lumpy anyway, and then you get a mix in more attractive projects last year versus this. So you getting kind of both volume and business mix at the same time.

Yes, I mean, we are all obviously out here worried about oil and gas CapEx falling, given what has happened recently. But this sharp drop off is really in the quarter, in the commodity prices, right?

It wouldn't seem like that would show up in your business that quickly. Is there something else going on there specific to your projects?

It seems surprisingly abrupt, right? If this was happening two quarters from now, I would totally get it. The fact that it happened now seems a little surprising.

Yes, again, I think the volume that is impacted immediately isn't terribly dramatic because there is a mix effect, too. But there have been projects, for example, in Eastern Europe and that part of the world, for example, where bids have been favored because in Russia to Chinese bidders, some of that project spending is getting switched.

Some of that is happening. Again, it is not big, but it is enough with the decrementals to cause us some pain.

Okay. And then just one last one for me. Just on the failure issues on LED, sorry if you talked about that, I was kind of in and out for a second there.

But was there a supplier switch going on? Was that an existing supplier that had a problem? Or really what's a little more detail around what happened there?

Yes. As you would expect in most of those situations, Jeff, there is a number of causes when you get into it. There's some component product issues from suppliers, and there's a learning that goes on as to who is a reliable quality supplier and whose isn't.

And we have learned that and we are transitioning to the suppliers that have proven to be most reliable in quality, so that there is an element of quality supplier quality. There is also an element of manufacturing design. And without getting into the details, but things like, an example is the color of the wire being misunderstood in the manufacturing process and so it being done incorrectly.

So no life safety issue caused by it, but a life-cycle issue created by it, so premature failure. So things, once you get into it, you immediately figure these things out and then the key is to extend all of those learnings to the rest of the population. And so, that is the good news we take from that painful learning.

I'm sorry, I'm going to sneak one more in and then I'm really done. On share repurchase, should we expect you to jump on that pretty quickly and aggressively? Point taken on the deals where you don't want to shut it off, feed the performing businesses, but you do, obviously, have a lot of liquidity now in a stock that's taken a hit here, and a lot of stuff to focus on internally?

Yes, I guess I would characterize it this way, Jeff, we did not seek that authorization simply to replace one that was expiring. So that is an area that we expect to complement our capital deployment on dividends and acquisitions with share repurchase.

Okay. Thank you.

Okay.

Steve Tusa, JPMorgan.

Hey, good morning.

Good morning, Steve.

Just on the non-resi front, you are generally pretty cautious. Can you just talk about what you are seeing in the verticals between the institutional and the private stuff?

Yes, I think, Steve, the private, we do see a nice pickup. When you think about how we are exposed there, we have got general C&I lighting, we've got a brand called Raco that makes the commercial construction and rough-in electrical, parts of Burndy and parts of Wiring Device face off there. And pretty consistently, those guys have been, all of those brands have been experiencing a reasonable growth.

So, to us, that is kind of reflective, not specifically of any vertical within there, but more to the health of the spending, which maybe hasn't had any kind of hockey stick, obviously. But from where we sit, a reasonably good pickup in some spending there, broadly speaking.

Okay. And then I know this is probably tough for you to answer, but there is obviously a lot of noise. I mean, you publicly cancelled out of a conference late in the month of September.

There was some news around the trust. Any comments you can provide? I mean, was the cancellation from the conference really around what was going on with the businesses?

And what you came out with several weeks later as far as the miss on the quarter? Maybe you could just, I'm not sure what you can say, but if there's any color you can provide that would be helpful?

That may speak for Bill and this is something that we talk about a lot. And we debate a lot. One of the challenges, as you know, we try to be very proactive in our investor communications and being out there, and sometimes we sign up for more than we can actually deliver on.

And the things that are particularly difficult, and we are always cautious about signing up because of the time commitment, are those things that are, particularly the West Coast ones, because it is such a time commitment that there is risk that some scheduling conflicts up that, if it was in New York, it's a different story.

I mean, we can always squeeze in a few hours. But when you have got something on the West Coast, it is tough to schedule around that and sometimes you just have to pull out because of scheduling issues. So that is really what that is about.

Okay, so this is all you're saying --

It's not there's going to be a little more -- Go ahead.

Right. So you're saying this is all kind of like coincidental what happened here with all of the news and then the preannouncement?

The preannouncement was when we had information that we felt that needed to be put into the market.

Okay.

And yes, Steve, I would say the timing of the Reuters article describing some news on the trust was not controlled by us in anyway. So your word to describe that is coincidental, I would say is correct.

Okay, sorry, I just had to ask just because it has been obviously a big question for us, and I think it would be helpful for you to just get on the record publicly with a bit more color. So, sorry to be a pain, but just wanted to ask.

No. I have to say, Steve, we certainly are taking that into account in our planning next year. And being very conscious about our availability, so we have a much higher likelihood of being able to avoid scheduling conflicts for November.

Well, I tell you what, skipping a couple of days in Southern California for a Board meeting, kudos to Bill for being dedicated to the business. (laughter) Thanks.

Okay, all right.

Mike Wood, Macquarie.

Hello. First on the lighting side, you'd mentioned a change in buying pattern at retail. Should we take that to imply there are some destocking in the quarter? And also in lighting, how are you thinking about benchmarking your margins or cost basis versus your competitors?

Yes, Mike, I think your interpretation of destocking is right. I think Dave was describing some national accounts, which get very lumpy. And year over year, quarter over quarter there, as they stock or destock you can get big swings.

And so, I think your characterization there is right. And I think for your benchmarking point, there is one pure play public company that we can use to benchmark. Of the other couple of large peers of legacy players in the space are divisions of other companies, so harder for us to use as benchmarks.

Okay. How should we think about the payback on the restructuring? Is it sort of a one to one or two to one? Just to frame that for us would be helpful?

Yes, I think that it will take a couple of quarters for the benefits to kick in. And so, we are hoping to see some of the benefits in the second half of next year.

I think what is more important than that, as Dave was describing, an increase in more actions. And so, as those get planned and implemented, we will quantify both the costs and benefits for you.

But ideally, you are getting something like a one-year payback, but depending on timing, you may see that in the next calendar year. But we will help you with that as those plans get implemented, Mike.

Thanks. And then just finally, can I ask how you are thinking about the repurchase in terms of looking at A or B shares? Is it simply a matter of price, or are there other factors to consider?

Yes, no, I think we would evaluate all the factors necessary, I think.

Okay, thanks.

Okay.

That concludes today's question-and-answer session. Mr. Farrell, at this time I would like to turn the conference back to you for any additional remarks.

Okay, thank you again, everyone, for joining us this morning. Certainly, if there are follow-up questions, feel free to call me throughout the day.

I'm available for any follow up you may have. If not, we will talk to you in January. Thanks very much.

This concludes today's conference. Thank you for your participation.