Hubbell Inc (HUBB) 2015 Q2 法說會逐字稿

Good morning, my name is Nicole, and I'll be your conference Operator today. At this time, I would like to welcome everyone to the Hubbell Incorporated second quarter earnings call.

(Operator Instructions)

Thank you. Ms. Lee, you may begin your call.

Thanks, Nicole. 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 second quarter results for 2015 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 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, Maria. Thanks, everybody, for joining us this morning. I'm pleased to report our second quarter results, which I would characterize as solid, particularly in light of some of the market dynamics that we're facing. End market performance was mixed across all of our businesses; despite that, we had a sales increase of 2%. Organic growth was 1%, really driven by solid market demand in nonresidential as well as the residential construction markets, and some stability in utility demand. Our acquisitions contributed 3% to that top line growth, and of course, we, like many, faced currency headwinds, and FX reduced our sales by two points in the quarter.

Within specific markets our nonresidential was strong, particularly on the lighting side, with our C&I brands up double digits. Residential continued to be solid, up mid-single digits. And on the utilities side, transmission had modest growth, and we saw some really good growth in the power systems business, driven by their support in the telecom industry. Obviously, the challenges are, as we've talked about early in the year, on our Harsh & Hazardous business, serving the energy markets, but I think that's -- as we've talked about during the course of the first half, the carryover effects to the broader industrial markets have started to impact us more, and we're dealing with that.

Our operating margins of 14.5% in the quarter, that's as reported, and that includes the costs that we've recognized in the quarter for restructuring and related costs, which had a negative impact on margins of 180 basis points. Combine that with the unfavorable mix that comes from lower sales in our high-margin Harsh & Hazardous as well as, so far, industrial businesses, more than offset what was favorable price cost and productivity, as we continued to work that side of the model. So all that gave us diluted earnings per share of $1.37 on a reported basis. That's $1.56, if you exclude the restructuring related costs, and that would be up 3% from last year. So mixed end markets, and we're continuing to take the cost actions to deal with that as we can.

A couple of other points I would highlight for the quarter, and then I'll turn it over to Bill, first just a few comments on the electrical segment leadership announcement that we had in May. I assume we've all seen that, but it's my chance to talk about that a bit more. Two-thirds of our business is in the electrical segment, and that has been and continues to be led by Gary Amato, who is the Executive VP of that segment; but in the ongoing development of leadership for the future and to get more organizational focus on some of the businesses, we elevated three of our senior executives into Group President positions.

Kevin Poyck, as many of you have met over the last couple of years in some of our investor meetings, has taken over as the Group President of the lighting business, and all reports, internally and externally, as I travel, are very positive around the tone and energy around that business. Rodd Ruland has taken over as the Group President of the Construction and Energy businesses, which included the businesses that he had been running since the acquisition of Burndy, and the businesses that were added to the connectors, grounding and tooling business through acquisition, and he's now taken on the Harsh & Hazardous businesses as well.

Lastly, Darrin Wegman has taken over as Group President of Commercial and Industrial. Darrin, as many of you might be familiar with from his days in finance as the Corporate Controller, more recently he was the President of the Wiring Systems and Industrial businesses, and so now he's taken on the additional responsibilities for the Commercial business, commercial construction business, largely under RACO, TayMac, and our most recent acquisitions. So all in all a very good transition, a very good senior team, very experienced team, and I'm confident that this team is going to be able to lead us well into the future successfully.

The last item is just on restructuring and our related costs. Obviously, a lot of activity. As you recall, we started the year with an expectation and guidance of investing $0.25 in those activities as the -- and that -- we have spent $0.24 of that so far this year, $0.19 in the second quarter. And I'm pleased with the level of activity, and the level of actions that are being identified, being evaluated. But so far this year we've exited seven facilities, and that's a broad cross-section of manufacturing, office, distribution centers, and generally smaller facilities. But that's where some of the overhead costs get hung up, in those smaller facilities.

Unfortunately, we've also had to initiate actions that are expected to impact, at this point, more than 250 positions. We never like to do that. But when the market conditions don't support the level of employment activity, we have to deal with that. And we're also making progress on our back office streamlining activities, to drive more efficiency and more aggressive productivity. So I think all of that, between the leadership changes, and our aggressive focus on cost and restructuring, I feel very good that we are positioning for future profitable growth.

So with that, let me turn it over to Bill, and he'll take you through some of the details of the quarter and year-to-date results.

Thanks very much, Dave. Good morning, everybody, appreciate you joining us here. I'm going to use the slides that Maria referenced at the beginning of the call, and I'll use the page numbers to help guide some of our discussion and some of my comments.

I'm going to start on page 4, which is where Dave had left off. He mentioned some of the leadership changes. I think you may have met a couple of these new leaders at a variety of our investor days over the past couple of years, but we also are intending to get a couple of them, in the ordinary course, to various public conferences, et cetera. So I hope we'll see you on the road over the next few months, and you'll get a chance to meet some of those leaders that Dave is referencing.

A couple of other comments, maybe, on the restructuring that Dave mentioned. I think, first off, you're going to see mix used a lot in our discussion, and the right tool to get at mix is getting the footprint right. And so those seven facilities that Dave mentioned, 90% of that spending in that area has been in the lighting group, which is really trying to pull up their margins, get their cost structure as competitive as possible. Some of those facilities have exited in places like New Jersey, California, and Illinois to larger-scale and better-cost facilities. And on the positions that Dave mentioned, clearly about 60% of those are in areas of industrial-facing and Harsh & Hazardous-facing of businesses. So we think we're applying the right tools to the right areas in implementing some of the restructuring actions that Dave was describing.

Let me switch to page 5 and get on to the sales description. As you can see, 2% sales growth, where essentially, the FX absorbed the organic, and the net growth was really driven by our acquisitions. We had about -- we had five different deals contributing. Three of those were in the electrical segment, and two in the power segment. I like the balance of that, showing that our investing is across the board. I think that's a good illustration of how our business model allows inorganic growth to help us overcome sluggish markets, as well as FX headwinds that are out there. As far as the organic story, the nonres markets have been growing quite consistently throughout the year, and also consistently across the different businesses that we have exposure to nonres, so the green color is a good characterization that you see there for nonres.

The industrial side is where we are facing some challenges. Harsh & Hazardous, in particular, we are all watching rig counts, and know those are down over 50%. The spending on mines and wells is down very significantly. The nature of our Harsh & Hazardous business, just to remind everybody, is about 50% international, 50% domestic, about 80% upstream, and about 60/40 project versus MRO, and that I think are very important characteristics of our business and how the market changes will impact ultimately the sales volume there, which we'll talk about.

On the utility side, we're seeing quite flat activity from our electric utility customers in distribution and transmission, and on the [regi] side, we still see some growth there. I think, interestingly, we always have three contributors there between single family, multi-family and renovation activity, and I think we've seen a little bit of a switch from dependence on multi-family toward single family, in terms of driving the growth there. And secondly, amongst the single family, an interesting trend toward some higher-value units, rather than purely at the entry level.

Turning to page 6, in talking about our margins, I'm going to use a consistent convention that we adopted in the first quarter, which is to use adjusted margins, and basically add back the restructuring and related activities that Dave had described earlier, in order to make the comparisons more transparent and easier to get to the operating changes for the business. So, at the gross margin level, you see a 60 point decline year over year, to a 33.6% level. Mix was the largest driver there. Mix actually drove more than that decline, and net favorability between price costs and productivity, helped to partially offset some of those mix impacts.

On the S&A side, you see a slight dollar tick up, driven by the dollars involved in the three acquisitions we brought on earlier this year. But as a percentage of sales, you see an improvement there, to 17.3%.

So page 7, we drive those two growths in S&A drivers down to the operating profit level, and you see $142.5 million of OP earned by Hubbell in the quarter, a 16.3% margin, decline of 50 bps, driven by largely the gross, and offset a little bit by the S&A we discussed.

On page 8, we talk about -- show our other expense line being up, which is really a function of the FX losses that we experienced in the second quarter of 2015. The pairs that hurt us the most here were the [Swiss] Canadian dollar, and three and four were euros and British pounds. All in, FX hurt us about $0.05 in the quarter, between the three areas of translational, transactional, and this nonoperating area. So a significant headwind from FX for the Company in the quarter.

Another implication of the mix that we were describing as some of our industrial, in particular the Harsh & Hazardous businesses is down hard, that 50% international component of Harsh & Hazardous causes a mix impact on geography for us, driving more of our earnings back to the US, and drives our tax rate up. We had a discrete item in the quarter, involving the initiation of a legal entity merger that drove some downward movement in the rate, and that 230 basis point improvement was more than driven by that discrete item. So that geography mix would have created, actually, a natural run rate headwind for us in the quarter of a slightly higher tax rate.

Moving on to page 9, the results of all those is the net income number here of $91 million, a 1% increase, and the EPS that Dave mentioned of $1.56 is up 3%. So that's more than the net income number, the growth rate, because of the fact that our share count was lower. And between the activities we've done in the fourth quarter of last year and early this year, we had a share count of about 1.4 million fewer shares, which helped increase the earnings per share there.

So transition now to break down into the segments. And I'm on page 10, starting with Electrical. So you see, quite flat sales for us in second quarter in Electrical with $615 million of sales. Quite flat organic, and the acquisition growth of 2% was absorbed by the FX headwinds. Three deals within the electrical segment were contributing to that inorganic growth rate of 2%. And the flat organic is slightly misleading, in the sense that we had some businesses up very strong and some down quite strong. On the down side we had Harsh & Hazardous down approximately 20% in the quarter, and our industrial-facing businesses down towards double digits as well, versus, on the positive side, our core C&I lighting brands grew double digits and our commercial construction that Dave had described. Darren leading for us up double digits as well.

So the flat organic is really a result of big up and big downs, netting to flat. And that helps drive our operating performance down 130 basis points, you see the 14.3% there. The mix headwinds from the very strong margins we enjoy in Harsh & Hazardous and Industrial businesses compared to the softer margins in C&I lighting and commercial construction helped drive a significant headwind coming from mix.

Price cost productivity was unfavorable, all in net. We had some good productivity there, but we had to invest a little bit of price in the segment and that caused the net of those to be some slight headwinds. So challenging, challenging quarter for electrical segment given the dynamics in Industrial and Harsh & Hazardous.

On page 12, switching to the Power segment, you see very strong performance by our Power team in the quarter. You see much more balance between organic growth and acquired growth. 6% up, all in to $259 million of sales, and you'll see, on the performance side, a very strong margin performance at 21.1%. And very nice incrementals being earned there. You had favorable price, you had favorable materials, and you had strong productivity, overcoming cost inflation. The fact that you had both price and materials favorable, I think, makes some of that improvement level and incrementals very difficult to sustain, but still, a very strong performance for the Power team in the quarter.

On page 12, we switch to free cash flow for the quarter, where we had some good generation. We had more efficient working capital in Q2. The investment that we required in inventory was, essentially, financed by payables, and we did better in receivables. On the other side, we had some timing differences and you see CapEx was higher in the second quarter, but that's due to the productivity investing that we did, which has great returns. And again, largely driven by the lighting group's footprint realignment -- was the big driver of that CapEx and great returns on that spending.

Now I'm going to switch, as I get to page 13, to the year-to-date halftime results for Hubbell. And you'll see sales there of $1,000,684,000. A 4% increase. That's comprised of organic 2% growth being offset by 2% FX headwinds. So the net of 4% is all driven by acquisitions.

You see the adjusted OP margins at 15%, an attractive level, 40 basis points lower than prior year. Again at the tax rate level, you see it lower than prior year, because of the discrete item we talked about in Q2. But naturally, it would have been higher than last year without that item based on the geography mix. And at halftime we've reported now $2.68 adjusted EPS per share, an increase of 3%.

So breaking down to the segments, page 14, we've got the Electrical segment. And you see that the trends that we experienced in the first half are quite similar to what we described in the second quarter. You have FX headwinds absorbing the organic growth. So the net growth of 3% of sales is all driven by acquisitions. And we have the similar spread of strong performing businesses in Commercial Construction, and core C&I lighting, both double digits for the first half versus Harsh & Hazardous down about 16% in the first half and the Industrial businesses combined down mid single digits. So the same mix weakness that's coming out of those dynamics drove 120 basis point margin decline to $154 million, 13% of sales. And again, similar dynamics on price cost productivity for the first half of the second quarter.

The Power segment, also similar to its second quarter, had balance between its organic and acquired growth. Adding up, with a little bit of FX headwind, to 7% net growth, $499 million of sales and performance again very strong incrementals, 130 basis point increase to 19.6% for first half OP margins. Favorable price, favorable materials again, so similar dynamics on price cost productivity. The acquisitions, as they typically do for us, have a slight drag in year one, when we have them.

Year to date cash flow on page 16, again, you see the D&A number up, thanks to the acquisitions in CapEx we've been doing. Again the more efficient working capital. The other, you see, we made a pension funding in the first quarter, and the CapEx is larger, thanks to the productivity investing that we're doing.

So our capital structure, on page 17, you'll see, compared to year-end balance sheet, we have got approximately $200 million less cash than we closed the year with. And just to remind everybody, approximately $125 million invested in acquisitions, about $75 million returned in the form of share repurchases to our owners. About $65 million paid out in dividend and increased CapEx. You see a lot of both investing and return of capital driving those cash balances down. But balance sheet's still obviously well positioned to invest aggressively as we go forward here.

So that concludes my comments on the quarter and the first half, and I'll ask Dave to share his thoughts on outlook with everybody.

Okay. Thanks Bill. I'm on page 18. First let's talk about our view of the end markets for the rest of the year. I think there's a lot of consistency. To what we saw as we reported after the first quarter. But with a few changes. I think you know, starting with the Utility side, that's going to continue, we think, to show slight growth with the Telecommunications side, helping to support that.

The residential market, we think is going to be a little bit lighter than we thought three months ago. I think that's consistent with some of the third-party forecasts that we've seen, although they haven't come down all that much. But remember that we were probably on the high end of where some of them started. And so you know, I think that's certainly there are signs of activity that will bode well for next year, when you look at permits, but certainly not going to impact our volume in the second half of this year to any great degree.

The nonresidential market continues to be solid, maintaining our outlook that at 5% to 6%, although to be clear, there's certainly a lot of diversity in that market. As Bill reported our Commercial Construction business up double digits and the commercial side of nonresidential, very strong. You know on some of the industrial side, institutional, little weaker. And so, but on balance that 5% to 6% is still very solid.

The industrial side is where we've seen most of the weakness throughout the year. You recall we started the year with an assumption of that being up 3% to 5%. We saw some early weakness, and indicated that would be down 2% to 4%, and even subsequent to that, we saw even more weakness, and so our outlook now is more in the 0% to 2%. And I think, even there, it's -- there is diversity in that market, so it's not a case of every part of that market. In fact, some are very solid. You look at the auto activity, and that industrial space is still very solid. Beside that is more impacted than you see it, and as market participants who are manufacturing the related products that support the oil and gas industry. Whether it's pumps, valves, flow goods, that's where there is a lot more weakness and where we're selling into those manufacturing industrial sectors, that's what we're seeing. So that's why we're at the 0% to 2% in Industrial. And then Harsh & Hazardous seems to, at least at this point, have stabilized for us to maintain our 20% to 25%.

You recall that we were out early at 15% to 20%, and then quickly saw that that wasn't adequate and moved it to 20% to 25%. Back in May, I think I spoke to some of you, spoke at some conferences, and we were concerned because we were seeing some of the order rates even drifting worse. I think that's stabilized and that certainly has been a positive for the second quarter. But at the same time, it certainly is not positive for the rest of the year. And that all was, that stabilization, we believe, what could be attributable to oil recovery to the $60 level, as it drifts back down to the $50 that creates some uncertainty, and so we're just going to monitor that very closely. So when you put that all together, you know we think that the end markets, as we serve them, are going to be flat in the aggregate.

Turning the page to how that impacts our segments, I think on the Power business, which is about 1/3 of our business, we still believe they will be up in the 5% to 6% range, with acquisitions contributing about 4%, currency being a point drag, and the rest coming from organic growth. The big impact on our outlook is on the electrical segment, where we previously were thinking that would be in the 6% to 7%, now we are at 2% to 3%. And a couple of things, obviously, the continued growth in the construction market helps that. Harsh & Hazardous certainly being consistently and predictably down at least 20% to 25%, it's a combination of the lower Industrial, and the acquisitions being a little bit lighter, as some of the acquisitions that we anticipated that were in the pipeline either didn't come through or have pushed to the right. So overall, we see the overall sales increase of 3% to 4%. Okay?

Let's turn the page to how that comes together in our overall outlook on page 20. So we've got our net sales up 3% to 4%, with acquisitions up and end markets flat. More importantly, our earnings guidance per diluted share on a reported basis is now anticipated to be $4.95 to $5.15. That includes an increase in our restructuring and related costs from what had previously been our guidance of $0.25 to $0.45. So that gives us adjusted earnings per diluted share of $5.40 to $5.60. From that restructuring, we're expecting incremental savings, this year. And certainly more next year.

I think the other part of our guidance adjustment, and the more frustrating part, from my standpoint, is that the markets have been weaker in some areas than we anticipated. As I said, we think we did a pretty good job on the Harsh & Hazardous early on. But what has impacted us more is the secondary impacts in both the Industrial sector, supporting the oil and gas business, and as well, pockets of the nonresidential construction in those geographic areas that were heavily dependent on oil and gas. We've talked about that before. You think about Texas, Oklahoma, South Dakota, you know, we have -- we had a big concentration of product sales into those general economic markets that are feeling the broader impacts of lower oil and gas. So we're dealing with that.

And that's going to cost us $0.20, and so that's the bad news from my standpoint. The good news is the attention, the energy, the action that is going in that team, particularly the operating leadership, is focused on, taking the actions to make sure that we're doing all we can to mitigate those costs in the near term and continue to set ourselves up for future profitable growth. So not what I like to do, but I'm certainly pleased that we're taking the actions to address what are market conditions that we just have to deal with.

I think we continue to expect to have free cash flow, good free cash flow generation, that we will continue to deploy on acquisitions, and share repurchase, and we are anticipating share repurchase through the rest of the year at $150 million, which would be about double what we've done so far this year. And of course that's subject to market conditions. We could always do more. But we expect to do at least that level before the end of the year. So, all that -- given you a lot. Let me stop there and open it up to questions.

(Operator Instructions)

Christopher Glynn from Oppenheimer.

Good morning. Wondered, Dave, if you could elaborate on your comment that you had to invest in price at the Electrical segment and, maybe specifically within Harsh and Hazardous, what is the pricing dynamic? And, any other areas of -- where price is getting kind of interesting?

Well, pricing is always interesting. I would say, overall, pricing was negative. There's certainly some pockets, that you know, we are happy that there's a little bit of either price opportunity or price stabilization. To date we haven't seen any major price pressure. But, you know, that's one of the risks as we look ahead. But I think the industry, to date, in just about all of our markets, has been relatively disciplined.

Okay.

One thing to add on that Chris. For Harsh and Hazardous specifically, I think we're seeing more pressure in pricing on the project side versus the MRO side.

Okay. And what is the range of your lead times on the project side?

It depends on the project. But you know, generally, 6 to12 months. Some are longer. And so that's a little bit of what is providing some support through the rest of the year. So, similar to a phenomenon we had several years ago on the utilities side, where you had transmission projects, a lot of strong growth in order rates, but then didn't translate into projects initiating, so project releases, so it creates a lot more volatility in the reported results. And that is one of the challenges as we look forward. And I would say that, that's something that we are monitoring very closely to assess what the implication of that could be in 2016. Obviously I'm not getting into 2016 outlooks, but that's one area that we thought we were ahead of it in January of this year and we want to make sure we are ahead of it even before January of next year. Okay?

Yes. And, any way to characterize the magnitude of pressure on what's winning project bids right now?

There really isn't a way to size that because there is a lot of variability, depending on markets -- where there's activity, where there's high demand, where there's competition. So it's not -- there is no simple way to do that.

Okay. And then, I haven't heard anyone call out telecom strength in recent memory. Are you just kind of trading some markets there?

Yes. I think that you'll recall, Chris, we did a couple of acquisitions a few years ago and we call it our Power segment and we refer to them as utilities. 90% of our revenues come from electric utilities. But there is 10% coming from other utilities like telecom. The enclosures that we make that hold some of the electronics and connectors are very common between phone companies, fiber buildout, and electric utilities. And so some of that infrastructure spend has been very favorable. So it's a small piece of the business, but they have had a good growth rate, good order pattern, good product line, based on some of the acquisitions we've been doing for those guys there.

Cool. Thanks, everybody.

Thanks Chris.

Steve Tusa, JPMorgan.

Good morning.

Good morning, Steve.

Did you guys talk -- mention nonres institutional not being very strong? I'm not sure if I caught that. And I know that, Bill, earlier this year you were talking about a broadening out of the nonres recovery and certainly that's been a big highlight of this earnings season in an otherwise pretty poor environment. So, maybe if you could just walk through the verticals and let us know if you've seen anything that has changed in nonres?

No, I think if you start, Steve, with where we are exposed, right? We have nonres exposure in our commercial and industrial lighting business and we also have it in our commercial construction area that makes the RACO boxes that Dave was describing. And I think that, if you broke it down, our first verticals cut is between public and private. And on the public side, we've seen a very nice stabilization over the last couple of years. I wouldn't call it exciting growth, but it has stabilized, maybe growing just slightly. And I think some of the strength we are seeing vertically there, Steve, is from the transport side. And on the private side, I would say the two -- where it is growing much stronger, I would say we've seen the best pockets coming from commercial and office as well.

Okay. And, as far as exiting the quarter and what you guys saw, how did things kind of trend through the quarter? It seems like things were generally kind of in line with the caution that you gave in May, but maybe just a little bit on the sequencing of the quarter.

Yes, I think you are right. What we saw in the quarter was -- in the middle of the quarter, we were communicating -- at that time seeing some things that were concerning, and if continued, would have been -- would have made for a much more difficult quarter. I think some of that started to recover, particularly on the Harsh and Hazardous businesses, so that was a positive that, that gives us. Had the mid-quarter trends continued, I think we might be looking at 25% to 30% versus 20% to 25%.

Got it.

So that is the piece there. I think an important note is, the thing that is the most challenging -- and somewhat unique, I would say, and against our normal seasonality -- is that our -- we are not anticipating the strength in the third quarter that you would typically see in the construction season. So it ends up being -- that's what we are dealing with, as we are looking at our revised guidance in the second half. A big part of that impacts the third quarter, certainly relative to what we would normally see.

Why are you guiding that way?

Excuse me?

Why are you guiding that way? Why is it? Why is it so poor relative to seasonal -- normal seasonality?

Because, particularly, that's where we are seeing the pockets of impact against what we have -- what we anticipated.

Got it.

And what we've historically seen around -- particularly around the industrial side.

Got it. I see. That makes sense. And one last quick one. Any -- I mean, you stepped up the restructuring this year. Are you pulling some forward from next year? Or do we think about kind of -- does that go down to a more sustainable run rate? Is this kind of a big, two-year program that you are going to run through? How do we think about restructuring in 2016?

I think this is -- the simplest way to think about restructuring in 2016 is there will be more. At this point, I would say, it should be -- it's likely to be about half. But it could be more of what we have this year. So if we do 45%, you know, we should be assuming 20% to 25% next year. Just because of -- I've got a lot of projects that have been put on the list for consideration, which is the good news.

Yes.

But they require a lot of evaluation and, importantly, an assessment of our ability to effectively execute that. So that's one of the dynamics. In fact, I could see some of those, potentially, sliding into the latter part of this year, because we -- the organization is very focused on aggressively taking these actions. But only if we can execute them effectively. And they have good returns.

Got it. Thanks a lot.

I think, Steve, you are shaping it properly, which is, a big effort this year, a large but smaller effort next, and then, should be starting to, toward 2017, get into the repeatable annual level of activity.

Great. Thanks a lot, guys.

Rich Kwas from Wells Fargo.

Hi, good morning. Just a follow-up sort of on Steve's question around restructuring. So, with oil and gas -- it was $60, now it's $50 -- is the business -- when you look at your oil- and gas-facing areas, is it sized for $50-a-barrel oil going forward? Or is there -- would there need to be more restructuring above and beyond this to try to get back to the margin levels that you were enjoying before?

I think there is more restructuring to do. That's why the list continues to expand. I think, particularly, one of the issues around the oil and gas, in particular, Rich, is -- and we were dealing with this late last year when you had it, a precipitous drop to $40 -- what's the long-term view of that? Then it recovers to $60, and now $50. Still a lot of question around does oil ever recover to $60, $70, or better? How long does that take?

And I think the longer that outlook seems to be, the more actions we have to take to get the core cost structure down. You have to be careful that you don't take it too far down if there is going to be a recovery, because you've got to be able to respond. So that is a little bit of what we are doing. So some of the things that are on the list, for evaluation, fall into that category. If oil stays at $50 -- and we think it's going to stay there or go lower -- for an extended period of time, there are more actions that we're going to take in that business. Okay?

So is that part of the 20% incremental for next year potentially? Or is that just a separate bucket?

No, that's part of the 20% now. And if we don't need to take it, I'm sure there will be other projects that get teed up, particularly when we look at our facilities.

Okay. So would you characterize the business as being sized for $60-plus oil, at this point, still? When you look at your --?

Yes. Yes. I think that's -- it's pretty close to sized to that. I mean, I think there's still some areas, but generally that's right.

Okay. And then, just on the residential side, so is this -- you've seen good, new construction activity lately, existing home sales coming in better. So, you were more positive on it earlier in the year, now you've scaled it back. So is this timing? Or are you seeing something more specific for the market?

Yes, I think it's specific to the market. Where we had seen multi-family activity really being the engine on the train, and we still really like the single-family dynamics, which is kind of what you are describing, it's just that, that multi-family is providing a little bit less, as far as we see it. Our homebuilder clients are still positive and so, to us, this is still a very good market area, a very good opportunity that we are excited about. We are just kind of refining numbers in pretty small increment here.

And then, Bill, on -- when you look at the -- you made reference -- I think either you or Dave made reference regarding the lighting business and trying to get the margins up. So, where are you in the process? You said the vast majority of the restructuring is around lighting. So, how do we think about incrementals as it relates to commercial C&I lighting and the other commercial businesses going forward? When do you -- it's always been discussed that kind of it is a below corporate average incremental margin. Where do we think about start -- when you start potentially could be getting to kind of the corporate average incremental margin for that part of the business?

Yes. I think the lighting team is doing a really great job. They're doing a great job growing at what I think is better than the market and they are attacking this cost structure question. So I think the -- what Dave outlined there as kind of a two-year increase in effort, I would think, by the end of that period -- because the lighting guys, from a footprint perspective, are really doing a lot of the heavy lifting there -- I think by the end of 2017, you are going to find they are going to have a lower cost structure that I think will be visible in the margins, Rich.

Okay. But, progressively, does it start to get better in 2016?

I mean, it's getting better already, yes.

Okay. All right. Thanks. I'll pass it on. Appreciate it.

Nigel Coe from Morgan Stanley.

Thanks. Good morning, guys. I thought I was going to be the only one asking questions on restructuring, but I guess not. So, obviously, you know, the tilt is more a bit more heavy on the facilities than we expected. You know, seven is a big number. But I think, at EPG, you mentioned that maybe there was 90 or so facilities across the whole footprint? So I'm wondering, what do you see as the ultimate goal for facility production over the next three or four years?

We don't have a specific target on that, Nigel, but your recollection about roughly 90 is a good number. And I would say that you have to look at that. And we look at it in terms of at least something like 20%. So, 15 to 20 facilities over the next -- certainly over the next three to four years. Again, keep in mind that, as I said, some of these facilities are relatively small. Some of them have come through acquisitions, and it just takes time to get those under our belt to understand what they're doing and then consolidate them. I think where we can start to get some momentum is as we close some of these facilities and move them into the larger facilities -- or larger, more efficient -- I think the organization is starting to recognize that operating an efficient facility gives you -- the reward is that you get to get more business, which makes you even more efficient and more productive, because you get more volume in there. So I think there's sensing a little bit of a race to demonstrate how efficient you could be, so then you become a receiving facility instead of an exiting facility.

Seems like you are a little bit reluctant to commit to a payback dollar number. But if you think about, obviously, quick payback on head counts versus longer payback on facilities, overall, should we think about a sort of a two-year payback on the expense?

Yes, I mean, I don't think you are detecting reluctance. I think the $0.10 this year and the $0.30 next year is $0.40 on $0.50. And that's, yes, that's a little bit -- that's less than a two-year payback.

Okay.

You're right to differentiate between the building investing is a little bit slower, and the people payback is quite a bit faster.

Right. Right. So I missed those payback numbers, that's helpful. And then, you know you mentioned mix. And I think you -- it seems like mix might be in the zone of about 100 BPs for the total Corporation. I'm assuming the bulk of that is within, obviously, Electrical. Is that the right way to think about it? And, as we go through the back half of the year, does the mix impact of more construction, less industrial Harsh and Hazardous, does that get worse? Or have we seen the peak impact of mix?

Yes, I think, A, your math is quite good Nigel; B, I think you're thinking about it exactly the right way. I think as we -- we would love mix you know, to be the fourth or fifth thing that explains our performance. And, in a typical growth world where commercial were, quote, outgrowing Harsh and Hazardous and industrial, it would end up being quite a small number. But when you have double-digit growth in one and double-digit decline in the other, it is creating that order of magnitude that you described.

So, I think what's important to get mix back into the background is, number one, have the Harsh and Hazardous and industrial markets return to more normal growth levels. And then, number two, as we were saying -- as you were getting at -- all this building takedown and cost take-out to get the commercial businesses more profitable. And I think the combination of those two we are hoping makes mix a small driver a couple of years from now.

Okay. Thanks, Bill. And then, finally on inventories. Inventories look a little bit heavy, given the end-market dynamics. Is that a fair comment? And are you looking to take that inventory as we go through the back half?

Yes, I think our days are up a little bit, but I think we're being, and trying to be, thoughtful about where we are investing in inventory. So, for example, there is areas of lighting, where service, and quick service, quick turnaround, and quick filling of an order becomes an important way to get volume. And so, we want to make sure that we are capturing that double-digit growth and supporting that business with an increased level of inventory.

Okay. That's helpful. Thanks, guys.

Jeff Sprague from Vertical Research.

Good morning. One more quick clarification on restructuring. So, your prior comment on 2016 and Q1 was that the 2016 benefits would exceed the 2015 costs. I'm not sure what you were expecting to actually get in 2015, from the 2015 actions. But, it looks like maybe the payback on this next $0.20 of work you are doing is lower or longer?

Yes, sure.

Yes, can you just clarify that?

Yes. So the initial -- the first bulk of projects were returning about $0.25 of savings on $0.25.

Yes.

And now we are up to $0.40, right on the $0.45. So that, that next batch of $20 million had a slightly less but still very attractive pay off. And, as Dave is describing, I think you guys are doing a good job of asking around how to size what will happen in 2016. And I think the position Dave and I feel that we're very fortunate to be in, is Dave's oversubscribed to his $0.45 this year, and something like $0.20, $0.25 next year. So Dave's in the position of getting to pick and choose between projects rather than how would we -- is there a project to do. So that payback, I'm guessing, will continue to be very attractive. But probably be -- continue to get a little bit slower than that first $0.25 on $0.25.

Okay, makes sense. And then, just on lighting, can you give us just a little bit more overall color? I think you said core C&I was up double digits, how did the resi business do? Where is the LED penetration? Just kind of the internal stabilization of the business. You are doing a lot of restructuring there, but did you get everything normalized relative to the hiccup last year?

Yes. I would say definitely in terms of your first question about where the growth is around the business, I would say resi is in kind of the mid-single-digit level. Some of the national accounts business and specialized areas are not doing as well. But the combined growth still very attractive. And certainly the warranty expense experience is right in line with where we have expected it. So, we are very happy that the lighting guys are doing such a nice job of growing. But I think they do have the challenge of doing some cost -- some heavy lifting on their cost structure, which they are going after pretty aggressively.

I think, Jeff, just a comment. Obviously I said that the lighting business is doing quite well and, one of the things that I'm spending a lot of time on with the lighting group, as well as the other new leaders, is trying to make sure that it's clear, then, we have a culture that the bad news flows up and that we are not too optimistic and then subject to more surprise. So, if there's problems, Bill and I are spending a lot of time with the operating team to make sure that we are getting them focused on if there is a problem, the sooner we know about it, the sooner we can deal with it, the sooner we can communicate it. That is really important because that was one of the things we identified, certainly in the past, that there were some things that just didn't bubble up on a timely basis to be dealt with on a timely basis.

Makes sense. And how about the LED penetration in the quarter?

Yes. So, over 50% and that feels like it's come a long way in just a few years. But still, the adoption rate continues to increase, Jeff.

Great. Thank you, guys.

Nicole, I think we'll take our last question.

Mike Wood from Macquarie Securities.

Hi, thanks for taking my question. First, quickly on industrial, I think you said you were down mid-single-digits year to date and looking for just slight growth or flat for the full year. I'm just curious, is that largely easier comps in the second half? Or, if you could just provide more color on what you are expecting sequentially?

Yes. I think it's largely that, Mike.

Okay, got it. Then, I really like to see that you were restructuring to keep up with that worsening industrial backdrop, which every company is experiencing. I am just wondering, on the other item that you can control -- your balance sheet utilization -- you have just over $100 million of net debt. Can you just give more color on your patience there about deploying capital and what's preventing you from being more aggressive with the buybacks?

Yes. So as you saw on our cash balances, we've put about $200 million net of our balances to work. And, as we look forward, you heard Dave commit to more share repurchasing, which we think is a great use of our cash. But I would say that our M&A pipeline continues to be an area of focus. We had a couple of deals in the first half. We got off to a great start by closing three deals in January, and we had a couple that I thought were very high likelies in the first half that ended up going away. And that was disappointing.

But the pipeline, going forward, is extremely active. And so, I think we would love to put that cash in the balance sheet, Mike, as you're describing to use on the acquisitions as well. I just don't want to, I mean, we mentioned the share repurchases, and I think we are committed to that. But I didn't want to lose sight of the fact that there is acquisitions out there, that we would hope to do in the second half, as well.

Great. Thank you.

All right, great. Thank you. This concludes today's call. I will be available all day for questions, and thanks again for joining us this morning.