Hubbell Inc (HUBB) 2015 Q3 法說會逐字稿

Good morning. My name is Tracy and I will be your conference operator today. At this time, I would like to welcome everyone to the Hubbell Incorporated third-quarter earnings results conference call.

As a reminder, today's conference call is being recorded. (Operator Instructions). After the speakers' comments, there will be a question-and-answer session. (Operator Instructions).

Thank you. Miss Maria Lee, you may begin your conference.

Thanks, Tracy. Good morning, everyone, and thank you for joining us. I'm joined today by our President and Chief Executive Officer, Dave Nord, and our Chief Financial Officer, Bill Sperry.

Hubbell announced its third-quarter results for 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.

We also call your attention to the other legends in the presentation which note, among other things, that this presentation is not an offer to sell or a solicitation of an offer to buy any securities, or a solicitation of any vote or approval.

Now, let me turn the call over to Dave.

Okay. Thanks, Maria. Welcome, everybody. Thanks for joining us today.

As you can see, our story has gotten a little more complicated, so let me just try to simplify it as much as I can and really focus on a few highlights and what's the take-away today.

Certainly challenging markets that we faced, but despite that, our performance in the third quarter was better than we expected. As we look at it, it's probably $0.03 or $0.04 better than we were anticipating. We've got near-term market headwinds that we're facing, but we are taking the actions around those market headwinds, aggressive actions, which we're starting to see some of the benefits on, and we'll see more benefits going forward.

Recall, during the quarter we launched a proposal for a reclassification and simplification of our capital structure, and we've announced a plan for a more aggressive capital deployment around share repurchase and ongoing acquisitions as that part of our strategy continues.

You know, the market, as I say, has been mixed and some even very uncertain. The good news is nonres leading indicators suggest continued growth, but even within the quarter, there were some shaky data points in August when ABI bounced back low and came back -- recently has come back. The Dodge data is up, so that's a positive. The housing market is continuing to show growth, and homebuilder confidence you saw is at a 10-year high. It doesn't necessarily mean that the volume of activity is at a 10-year high, because I think there are certainly some constraints in that market around labor in particular.

The utility market performing as expected, and the industrial trends that continue to be a challenge and suggest continued -- suggest weakening beyond the oil market's volatility.

You know, our business mirrors that macro environment. I've spent a lot of time over the last quarter in the market with customers, and I hear it a lot. It's the same things that we were facing, a lot of softness, certainly in the month of August, like we experienced. I think the consensus view is it felt like the world took the month of August off on vacation, and that was very concerning to us. But fortunately, while that continued into the early part of September, we certainly saw that begin to recover as the month of September progressed.

Many of you had the opportunity to meet the heads of our lighting and power businesses at investor conferences, and hopefully appreciated you get to hear from them directly the trends that they are seeing in the business, including LED penetration opportunities at lighting, and the telecom fiber buildout that's fueling some of the growth in our power systems business.

You know, I've recently spent some time at a training program for the power systems group, and it's great to see what has historically been a very strong commitment to the organization, but it really was even more apparent that the level of energy and focus and really creativity that's coming out of that team is helping to drive their success.

So, you know, against all of this backdrop, we're reporting our third-quarter results. And despite the markets that we can't control, we are focused on what we can control. We're taking the actions on both the costs and investing in the business.

So, you see -- and I'll start on Page 4 of the slides -- we're reporting sales of $877 million. That's up 2%, acquisitions being a contributor. Sales are down 2%, but acquisitions contributing 2% percent of growth offset by a currency headwind of 2 points, and then the result of the organic decline of 2 points. Now, I think that's a simplistic view of the organic decline. Certainly, we think there's an element of that resulting from destocking in the channel. It's difficult to quantify precisely, but it certainly would be -- we think it's somewhere in the range of at least 1 point or 2. And then I think it's the first quarter that we've seen price headwind; that took about 0.5 point off. So, absent those, I think the core volume, all-in, is flat to slightly up. And that's around our mixed markets. That's what we've been dealing with. Some of the markets are good, some not so good. So, the nonres and res, residential, has been solid. The core C&I brands lighting up double digits and the residential business up mid-single digits. Obviously harsh and hazardous continued to be weak with the broader industrial markets continuing to slow.

And power systems' performance was impacted by, on the positive side, continued growth in telecom offset by some of the weakness in transmission because of project delays. So that's the top line.

Our operating margin of -- reported of 14.9%, importantly, includes the impact of restructuring, which is about 140 basis points. So, on an adjusted basis, we reported operating margin up 40 basis points despite the lower volume, a lot of that attributable to the material cost favorability despite some of the price headwinds.

But we do have unfavorable currency and some of the acquisitions in the early stages have certainly come online, and they are a drag to margin. So all of that giving us diluted earnings per share of $1.27. Obviously, if you exclude the restructuring as well as the costs that we incurred in the quarter associated with the reclassification, those are $0.13 each. We get to $1.53 on an adjusted basis. Obviously, that one item around the re-class is a new item. It's a cost associated that had been incurred to date around our proposed reclassification. And we'll talk more about the impact of that on the rest of the year.

Turn the page to Page 5, some of the highlights. We continue to invest in the business. We acquired a natural-gas flow-valve manufacturer in our construction and energy group. We closed in September; a nice complement to some of the existing product offerings in that energy sector. We're also continuing to invest in operational efficiencies, including preparing for the expansion of manufacturing capabilities in lower-cost areas.

And then, I've been walking a lot of the plant floors lately, and one of the things that I've been impressed with is -- two things: one is seeing the benefit of the lean journey that we've been on and a lot of the operating efficiencies that that has been driving; and more importantly, seeing that there's even more opportunities from the continuation of that as well as our investments in restructuring.

Examples have been where we've taken that lean capability, reduced the utilized footprint and made room for that facility -- for a particular facility to absorb some of the operations from the facilities that we're closing.

We've also been investing in new products, whether it's in our commercial construction business, an innovative product that incorporates fittings into the metal box, making it for a simpler product, more economical for installation. And we're expanding on the lighting side our LED product offerings into more complex applications, providing a lot more growth opportunity in that business.

On the restructuring side, a big part of the activity that we've been working very diligently on this year, in the quarter, we spent just under $12 million, $0.13 of earnings per share, bringing our year-to-date total to $0.37.

We continue to exit facilities, bringing our total to eight for the year. And importantly, what's not exited to but certainly initiated in the third quarter was the announced closing of one of the larger facilities in the lighting platform in Southern California where we're going to move that capability down the road into a low-cost operation that's a very highly efficient operation of ours south of the border.

We continue to align our staffing levels with the weak market conditions in those businesses that have challenging markets, and we'll continue to make progress on our back-office streamlining.

And lastly but certainly not least, we announced a share reclassification in the third quarter. The re-class is progressing as expected. We filed an updated S-4 yesterday in response to SEC comments not substantially different from our prior filings but addresses a tax question they had and additional disclosures that they were requiring.

The schedule is on track with expectations. It currently contemplates working toward a tentative record date of November 6, and so the timeline remains consistent. Shareholder vote expected late this year or early next year.

So before I turn it over to Bill, let me just add that, earlier this week, we announced a 13% increase in our dividend. Now, this reflects a 12% compound annual growth rate in our dividend over the last five years.

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

Thanks, Dave. Good morning, everybody. Thanks for joining us, especially Mets fans who might have been up a little late celebrating last night.

I'm on Page 6, talking about sales, which Dave gave a good overview of. You can see, at $877 million, it was a decline of 2%. As Dave said, the FX offset the acquisitions, and the organic was down a couple of points, absorbing about 0.5 point of price headwind in there, which was borne most concentratedly in the electrical segment.

Just a word about the acquisitions, since they provided to the 2% of lift. We had five different acquisitions contributing to that sales growth that have been acquired from November of last year through September of this year. And they are spread around the different segments. And so I like how the business model is working, where you're getting good nonorganic growth from that capital deployment.

Page 7, we talk about gross margin and S&A. I want to just highlight it for everybody the word "adjusted" that we're using in front of these measures going forward. We've got both restructuring and related costs as well as expenses associated with our reclassification that have been taken out in order to make sure we give you the best look into the core operations and how they are performing on a comparable basis.

So, our adjusted gross margin was up 90 basis points year-over-year to 34%. You see the favorable impact of material prices being really the big driver there. For us, in order of importance, that's steel, copper and aluminum all helping to contribute to that tailwind. We also had productivity in excess of the cost increases, and those helped us overcome the lower volume and the mix associated with the strength in the nonres side as opposed to the weakness on the industrial side that we mentioned.

On the S&A side, you see a 60-basis-point back-up there to 17.7% of sales. The couple of dollars of cost increase was really driven by our acquisitions. And the decline in the sales denominator obviously helps bump up that percentage, but does highlight our need to make sure, as we absorb our acquisitions, we focus on cost management right away.

On Page 8, we talk about adjusted operating profit of $143 million. You see an improvement to 16.3% of sales, 40 basis points better than last year. And again, this is now just derived from essentially that gross margin improvement helped by the materials and productivity overcoming the acquisitions adding to the S&A costs.

Page 9, we cover nonoperating expense, which is essentially for us interest expense. Since we've got comparable levels of debt, you see quite a comparable level of non-op expense.

On the tax rate, you'll see the 33% for the year. And again, I'll note the word "adjusted" there. We had the re-class expenses of about $7 million that we report in our non-op line. Those are non-deductible for tax purposes, and so those would drive the effective tax rate up a couple of points higher with those on a reported basis.

Page 10, you see net income at $89 million, down about 1% from last year. The shares, adjusted earnings per share up 1% to $1.53 per share, driven by the lower share account. We had about 1.5 million fewer shares in this quarter's count resulting from the share repurchase activity that we did largely in the fourth quarter of last year and the first quarter of this year.

We're going to switch now to the segments on Page 11, and we'll start with the third quarter for the electrical segment. You see sales of $618 million, down 4%. The electrical segment is really seeing the pronounced mixed end market that Dave was highlighting. You see the fact that organic volume was down. FX was also down, and the acquisitions provided a partial lift there. You really have the tale of both tapes here where, on the plus side, you've got resi and nonres nonresidential markets doing quite well, the resi side being in the mid-single digits up. The nonres, we're seeing our commercial construction business up mid-single digits. And our lighting business had some of the core C&I lighting brands up about double digits, while they had some of their national account and spec brands drag that performance for the whole down a little bit below those levels, as those had some lumpiness and some project push-outs in them.

But on the down side, harsh and hazardous down about 27% for the quarter, in line with our expectations. I'll just remind everybody of the construct of our harsh and hazardous business, where it's about 50% domestic/international, 50/50, it's about 80/20 upstream versus downstream, and it's about 60/40 project versus MRO. And I think those characteristics are quite important in dictating how well you can navigate the oil end market here. So, a significant decline, but as expected.

The industrial business is also showing some softness. In particular, we're seeing differentiation between what we would call heavy industrial, which is down mid-single digits, versus the light industrial, which is faring quite a bit better. So really mixed markets there for the electrical segment resulting in a net down organic.

On the performance side, you see the maintenance of 14.4% operating profit margins on an adjusted basis, with OP at $89 million. That's basically the result of lower volume and mix dragging that down with the favorable impact of better prices -- sorry, better material costs and productivity being in excess of costs helping to overcome some of those volume declines.

The power segment on Page 12 you'll see had a very nice quarter, 2% growth to $260 million of sales. The acquisition side of the power business really helping out, contributing 4 points to that growth, FX providing a 2-point offset there for our power business. That's influenced significantly by the reais in Brazil.

And the organic business being flat, that's a little bit of a deceleration for the organic power business. We've seen growth in the first two quarters, and it's really the result, we think, of some deferrals on the transmission side. And the bright spot for power has been the growth in the telecom, where we've seen some of our enclosure businesses do quite well in fiber-to-the-home, the buildout of the last mile of that part of the network.

On the performance side, we see a 100 basis-point pick up to 20.8% of OP as a percentage of sales. Again, the material costs helping out our power segment and their productivity program also kicking in.

Our cash flow for Q3 was about one times net income. Unfortunately, that income was lower than last year. You also saw working capital usage this year driven in large part by some investments we had in inventories as we tried to keep up our service levels. And on the other line, you see some headwind on the cash-flow side coming from the timing of taxes paid and deferred taxes. In CapEx, you see that slight pickup, which is supporting all the restructuring and productivity initiatives that Dave was highlighting.

So, I'll switch now on Page 14 to the year-to-date results. You'll see a 2-point pickup in sales to $2.6 billion. Acquisitions were contributing 3% there, FX and offset of 2%, and organic markets providing 1% of lift. You see, at the OP line, a 20-basis point decline to 15.4% of OP. And at the adjusted EPS line, you see a 3% improvement to $4.21.

The segments year-to-date have stories that are very consistent with the quarter, so I don't want to just overplay all of the themes. But the electrical segment, the 1% growth, that $1.8 billion of sales, but again, the mixed-market theme is the same where we had strengths in nonres and res, and weakness in harsh and hazardous and industrial. So, for the year-to-date period, that harsh and hazardous business was down 20%, and the industrial was slowing a bit at minus 1% as compared to the nonres businesses, which were growing in mid to high single digits and resi in mid-single digits. So, a mixed story, again, the same as Q3.

At the operating profit line, you see $243 million generated, 13.5% OP margin, a decline of 80 basis points resulting largely from the mix headwind that that differential and end market causes for us, as well as some of the FX impact on the transactional side.

Year-to-date, again, the power story is very good. You see 6% growth, $758 million of sales, acquisitions continuing to contribute at 4 points. The organic through the first nine months at 3%. That fiber story in telecom helping, as well as a little bit on the T&D side.

At the operating-profit level, you see 20% margins earned in the first nine months, a 120-basis point increase from last year, helped significantly by the material cost benefit as well as leveraging the higher volumes.

Cash flow year-to-date, $141 million of free cash flow. Again, the same story, lower income, slightly better working capital usage you see there. And on the other, we had both deferred tax differential and pension funding that we had in this year that we didn't have last year.

The higher CapEx is significant, again supporting the productivity initiatives that we've talked about and significantly -- Dave mentioned the movement of that facility from Southern California into Tijuana was a big part of the increase of that CapEx.

Capital structure, our net debt to cap going from a minus 4% net cash position to a 4% debt to cap. The $220 million decline you see there in cash, largely driven by our acquisition and share repurchase activity during the first nine months of the year.

So, with that, I'm going to switch it back to Dave to go through our discussion of outlook and a quick preview of next year.

All right. Thanks, Bill.

So, I'm on Page 19, if you're following along. First, let me talk about how we see the rest of the year finishing out. What I'd like to say, with nine months in the books, it should be pretty easy to predict.

The fourth quarter is historically one of the more challenging just because of some of the dynamics that go on naturally in the buying channels, buying behaviors, order patterns, and so it does make for a real challenge in forecasting some of our short-cycle businesses. That said, we think the year is going to finish with a sales increase of 1%. That would be, with acquisitions to date, done to date, contributing 3 points of growth, and currency being a 2-point headwind. So, the end market is essentially flat, up 1 point.

On the earnings per share side, we're tightening our range to $4.95 to $5.05, just taking $0.10 off the top and $0.05 off the midpoint. Now, this includes $0.45 of restructuring-related costs that we've incurred. We'll have another $0.08 to $0.10 in the fourth quarter. It doesn't exclude -- so that guidance does exclude the costs associated with the share-reclassification. A couple of reasons for that. One, it's clearly not an operational cost by any definition, whereas the restructuring and related has investments with future economic benefits that we can calculate.

Secondly, it's uncertain. It's uncertain as to amount, and it's uncertain as to its conclusion while we're working toward that plan. There is not a guarantee. If in fact we do close as we would hope this year, we think those costs -- we estimate those costs currently at $0.35 per share, of which we had $0.13 in the third quarter.

One of the things to note in those costs is the per-share impact of it is fairly significant, because our current view of those costs is that we unfortunately don't get a tax shield on it, as these are considered more capital costs. But we're working on that as well. Okay? And then our free cash flow we're still targeting to be at 90% of net income.

Let me turn now to 2016. Obviously, it's too early for specific guidance. We'll provide more detail, as we typically do, in January, but just a little sense of how we're looking at things preliminarily, an early preview. I think, for the most part, most of our markets, end markets, we continue to see them to be up next year, continued improvement, and similar trends to what we've seen this year, but maybe with a little more moderation across all markets.

The end markets are certainly mixed, but overall I think they'll probably be up modestly 1% to 2%. Certainly, the structuring-related, both nonres and res, continue to be positive, and we see those in the 5% to 7% growth next year. The utility market we think will still be up a positive next year, up 1% to 2%. The industrial we think will be flat to may be up 2 points, certainly with a heavy industrial side of the equation down but with light industrial still showing some positive growth. Obviously, that's something we're going to follow very closely as the year finishes to make sure that still is valid.

And then the harsh and hazardous business we think is going to continue to be down next year, but certainly at a more modest level than we've been dealing with this year. Currently sizing that at around 10% down. Okay? So, some modest end-market growth in the aggregate.

Acquisitions certainly will remain a key part of our growth strategy. I think this year, as I talked about and Bill talked about, we've put up 3 points of growth from acquisitions. I'll tell you that's lower than we had anticipated and that we typically would like to see. Some of that has to do with the volatility of deals and the timing of the deals. We would normally like to see, on an ongoing basis, closer to twice that level. I think, based on the level of activity that is going on in the market, I think we are certainly more likely to see that next year than this year. But as with all our deals, they are not final until we sign and close. But there's a lot certainly in the pipeline.

Our operating margin, certainly there's a lot of good stuff that we're going to be building off of, first the benefit of our restructuring investments. We continue to see that delivering about $0.30 of incremental profit next year. Of course, we're going to have to reinvest some of that in ongoing costs, as we've talked about. Currently, we're looking at that being possibly in the range of $0.25 to $0.35.

You know, the good news there is that we've gotten a lot of attention, a lot of focus, a lot of energy in the organization in identifying actions that need to occur to either respond to market weakness but, more importantly, take actions to set ourselves up for a more competitive cost structure that will really support some of our growth objectives certainly in key markets.

Share repurchases, as we've talked about, $250 million anticipated next year. But all of the positives can't be left without -- if I could draw the line there, it would be great, but certainly there are some other things that we have to -- that we're going to be dealing with. One is increased investments. We're certainly around potential investments to support growth initiatives and new products, still being evaluated, still being sized, may be able to be contemplated within our normal operations. That's our first objective.

The unfavorable mix, we certainly have faced a lot of that this year. We don't expect to see that level next year but I think there's still a little bit still to come, and we've got to work through that.

Pension expense, some headwind there. We won't know until the end of the year, but if you snapped a line today, the lower asset returns offset favorability from a higher discount rate, so that would be a little bit of headwind that we'd face.

And then acquisitions, at least on the margin side, certainly deliver profit dollars but not necessarily would be dilutive to the margins. So we'll provide more detail as we report in January, for sure, but we're continuing to position our cost structure for the long-term sustainable earnings growth.

The one thing that I would say as we are rounding the turn to finish this year, that it's clearer than it has ever been to me in that our one-Hubbell strategy and our focus on our four key objectives is really evident in everything that we're doing, and is really helping to drive our performance, whether it's our focus on our customer -- and we see that in the recognition that we are getting from many of our customers as a key supplier, an excellent supplier, their best supplier -- the operating discipline that we have around our cost structure, our lean activities, our back-office operations, our focus on growth., the energy and effort that's gone into acquisitions, which will at some point start to deliver some real growth activity.

And then our focus on talent, we've done a lot this year on organization changes and leadership, and I think that's setting us up for all things that give me great confidence that the investments (technical difficulty) questions, but in case you do, we'll open it up for a few.

(Operator Instructions). Rich Kwas with Wells Fargo.

I wanted to -- on the harsh and hazardous, where do you -- Dave, where do you think your cost structure is at this point, and how do we think about that as it relates to the price of oil today? Are you right-sized for this sort of price environment, or does the restructuring contemplated for next year include another adjustment to get that to an appropriate demand level?

Rich, I'd say we are closer to right-sized. I think, from a staffing perspective, I think we're much closer. I think the thing that we're still evaluating is on our fixed cost structure, particularly around facilities. I've talked about it in the past. You know, that's a more sensitive and critical decision, because you've got to make sure that you are really planning for the future growth that will occur in this business. But that's the one side.

I wouldn't tell you that there's a bias that that's likely to occur, but that's something that could happen as we continue to evaluate, and depending on where the market ultimately settles out. Okay?

So, is the assumption that the price of oil goes back up and it's -- I think you said you're right -- you were $60 oil last quarter. Is that closer to $50 now, or how are you guys thinking about it over the next couple of years?

We've been working toward sizing ourselves toward $50 to $55. We still have a little more work to do there, but I wouldn't say that there's a big investment to get to that size. Okay?

Okay, all right. And then on the transmission piece, you've seen some warnings from other companies; you've cited delays. How do you feel about the growth for next year? You are calling utility up 1% to 2% in this landscape. What's the comfort level around that, I should say confidence level around that, given some of the comments coming from others here recently?

Yes, Rich, you know, our project list that we're quoting and working with our utility customers on shows us that, despite some of this push-out that we've seen recently, that we should expect to see some growth. So our team has some confidence that we'll have some tea growth next year.

Okay. And then finally, on the nonres piece, so to starts the data view reference weak during the quarter. We just got ABI that would seem to be a little bit better of a forward indicator of that bounce-back in September. Dave, you cited that September got better, but how do you, broadly speaking, but how do you look at the starts data and the context of ABI at this point? You're assuming decent growth again next year, but what are the risks to that either way?

Yes, I think, when we look at the way the public and private sectors are spending money, Rich, you know the strength of the private sector is obviously really helping to drive the nonres. The public is positive. Places like education on the public side are showing some decent signs of strength, I think. And as we look across our businesses, nonres really affects both our C&I side of our lighting business as well as some of the commercial construction side of the rest of our electrical business.

We see some decent expectations for next year, and so that's how we're planning.

Thanks, Bill. And just one quick one on restructuring, the $0.25 to $0.35 contemplated for next year, what type of environment do you have to take another significant chunk of restructuring going out above and beyond that? I know you do -- you typically have done restructuring every year. It's been fairly modest up until the last year or so. But in what type of environment would you have to really scale that up again, or above and beyond what you're contemplating?

Basically I'm trying to get where your cost structure you feel -- your comfort where your cost structure is, where you're headed, look out a year from now.

Rich, I would say to have a big step up in that would have to really be a broad-based recession somewhat similar to what we saw in 2008-2009. There's a lot that we are just trying to do in the normal course, I mean certainly staffing levels, if volumes fall down. On the fixed-cost structure there's certainly a lot more if I could do everything overnight, there's a lot of things that we would do. But we're not going to do those, one, because they are not critical; two, because we can't afford them; and three, importantly, we wouldn't be able to execute them effectively. So we're doing that over the normal course and we have been. So I would look more at the $0.25 up to $0.35 first and foremost. It doesn't go to $0.0 in 2017; it goes to something less. So if you take $0.25 to $0.35 and you put another, say, $0.15 to $0.25, you look at it on that kind of basis, but the more we do next year, the more benefit we get the year after, just like we've seen this year. So I think there could be -- you know, that's why we've kind of moved it up from what we original thought might be $0.20 to $0.25, now it could be in $0.25 to $0.35 just because we're identifying more opportunities to adjust our cost structure not just for market weakness but also to make sure that, in some areas, we are -- we have a cost structure that makes us more market-competitive.

All right. That's helpful. Appreciate it. Dave and Bill.

Nigel Coe at Morgan Stanley.

I just wanted to -- I mean, first of all, I appreciate all of the color in the slides. And I forget the look at 2016, you're obviously recognizing it's a primary view. Just in terms of coming into 2016 expectations, how did you derive that? Was that more top-down, or did you triangulate with customers and your leaders?

Mostly, it's mostly top-down at this point, looking at some of the market indicators that we would typically rely on but not just taking what those market indicators and trying to apply what has been our historical experience. You know, that's sort of the process we take on an early look.

Then were going through a process over the next -- it's part of the difference between our preliminary look and where we ultimately end up in January, between now and then. We're working very closely with our leaders, as well as with our customers, and doing a much deeper dive to validate whether that is true or not. Obviously, with a concern that we don't want to be too optimistic. On the other hand, we want to make sure we're not being too conservative and missing market opportunity. So it really works on both sides. And you talk to our management team and they would tell you that that's exactly the conversation we have on both ends of the spectrum.

And I spend a lot of time talking to customers over the next several months just to see how they are seeing things as sort of my independent check of what's happening in the business. As well, to be honest, we also listen to the investment community, both you, your colleagues, and, importantly, our owners, who have some other insights into what's happening. And we welcome that input, because that is a very important element of what comes into play here. So between now and then, there's a lot of discussion that comes up, and welcome you guys all input.

Okay. I mean, it doesn't look unreasonable for what it's worth, but the 5% to 7% for nonresi is going to be a bit of a debate, this -- as you would be aware, there's a debate about the extent to which the industrial weakness is bleeding into the sort of general activity. And just in terms of your daily and weekly trends through the quarter and into October, have you seen any evidence of that happening, that your nonresi is starting to get impacted?

Well, I think we saw some weakness start in the third quarter, in August and September, so we are -- some of that, as I said, we attribute to inventory management and de-stocking, so we're trying to determine whether -- how much of that might be underlying market demand. But it certainly has some weakness right now, not broadly in nonres construction. Commercial construction is still very solid. But that is an area that understandably is a big part of our portfolio, so we're spending a lot of time. And that's where I think there is debate because there's still some views that it will be even better. I'm not sure that we -- we generally don't follow those views. We are more concerned about whether things are worse and making sure that we're anticipating and reacting accordingly. (multiple speakers). Go ahead.

Okay, and just one more. You mentioned pricing, 50 bps headwinds during the quarter. Was that mainly confined to harsh and hazardous and LED? And I think you mentioned that price costs are still a benefit. Does that flip over until 2016 planning? Do those price costs become a negative over the next 12 months?

Yes, it does. It was largely in the electrical segment, the electrical businesses. It's still positive overall because of the lower commodity costs and material costs while we're still maintaining some price in some areas, so that's been a positive. But we expect that to roll over. It already has started, and we'll see that continue into next year. And that's one of the additional headwinds that we've got to size and manage against with some of our cost actions.

Okay. Thanks, David.

Christopher Glynn at Oppenheimer.

Good morning. So, on the single class, I'm just wondering how that plays into the scope of deals that you might contemplate, if that's opening up how you kind of view and process the pipeline and potential pipeline for acquisitions.

Is your question about capacity or size?

Well, yes, in the sense that, maybe with the single class, that shares become more of a currency option than historically.

I mean, certainly that would be a consideration, although we continue to view our M&A activity around our core businesses and our typical bolt-ons with larger, you know? And we've talked about continually larger being in the $300 million to $600 million range. I don't think those would qualify as ones where our shares would be a worthwhile currency in that sized transaction. Certainly, if there were bigger opportunities, that would obviously be a consideration. I won't say it's never on the table, but there's even fewer of those transactions than there are as we go up the scale.

Okay. And then oil and gas, as you look at orders, backlog and revenue run rates, I'm just wondering if you think that market is finding a bottom. I think that the down 10% for next year suggests that maybe it is on a sequential basis and the first half could absorb that down 10% to be comparable with what you're seeing in the second half. But maybe if you could talk about that specifically.

It might be even a little more pronounced in the first quarter, Chris, rather than the first half, Where we hadn't seen the kind of declines yet in the first quarter that we have experienced in the next two quarters of this year, mostly because of some of the project stickiness that just kind of carried over.

So, I think the toughest comp for us next year is Q1, but I don't disagree with your characterization of kind of a sequential -- you know, we've talked about our expectation of the U, and I think we're starting to feel sequentially we're getting towards that U, and that's how we see it.

Cool. Thanks.

Steve Tusa at JPMorgan.

So, just some good details on -- helpful on 2016. So I guess the savings basically offset the restructuring to a degree, so you've got that kind of $0.45 cost tailwind coming in next year. I guess share repos, I don't know, depending on when you do it, maybe $0.20 to $0.25 of benefit. Increased benefits, I get mix.

I get -- on the pension, I mean I think you guys had as high as maybe a $0.10 up to $0.15 headwind in 2012 or something. You know, the pension headwind, is it really that material for you guys? Is it more than $0.05 for you guys, if you just snap the line today?

Yes, it's too early to know what it will ultimately be, but given some of the asset returns relative to depending on what happens to rates, you've got both variables that are a little bit hard to predict. If you snapped it today, it would not be as much as what you said.

Okay, so like $0.05 or something?

Yes, let's say that ball park.

Okay. And you're saying the acquisitions are diluted next year?

The margins.

Yes, that's just the OP percent, not (multiple speakers) --

Not to dollars.

Okay, so they are still contributory to the overall EPS number, absolute EPS number?

Yes.

(multiple speakers) the operating margin drivers, yes. (multiple speakers)

Right, right. So there's not a lot of, like, real headwinds here other than maybe like -- I mean, are you most nervous about kind of price/cost, and obviously the growth variable? But it seems like you've got a lot of stuff to get you there are easily to double-digit -- you know, pretty solid, strong, double-digit earnings growth next year, you know, north of 15% if you are looking at the growth you're expecting. That's just the math on it. Is there something else that you're really worried about out there, other than just maybe the deflation dynamic?

Just don't forget about mix, Steve, right? So, as long as nonres and res markets are outgrowing utility and industrial, that will create a mix headwind that we have to overcome.

Will you still, in that environment, on core volume, be able to convert at a reasonable level? Or will it be negative conversion? I mean, how bad is that mix? If you grow 2%? You know what I mean? Can you still convert that into operating profit growth at 2% in that kind of mixed environment? I would think you would be able to do that, right?

Again, I want to be careful not to go to doing the 2016 math with you, but I do like talking about the drivers, just so we are understanding them. And I do think you're thinking about mix the right way in that as the growth rate differentials moderate and some of the restructuring that we've been doing helps close some of the gap on some of the margin differentials. But the fact is there still is sizable margin differential on those businesses, and so that creates a headwind that we have to manage. And that's just on the list is all I'm saying.

Yes, okay. I think that's totally understandable. And then sorry, I didn't quite get the answer on the nonresi stuff. You kind of said that you were encouraged, but then it was kind of weaker in August and September. I think you referenced some Dodge data. Obviously the starts is weak. maybe if you could just to clarify. Are you guys as bullish, more bullish or less bullish on nonres than when we last talked in July?

I would say we are less bullish.

Okay, got it. Thank you very much.

Jeff Sprague at Vertical Research.

Thank you. Good morning, gents. Can we just spend a little bit more time on price/cost? So, your comments about it going negative next year, does that -- I mean, just give us a little bit of color on both sides of the equation, I guess. I would assume you're looking for some more price erosion, but are there some cost headwinds that are creeping in and working against you there, too, maybe on steel, particularly?

Yes, I think, Jeff, the basic trajectory during 2015 has been a decline in some of those core commodities that we buy. Steel, you're right; copper, you're right; aluminum, you're right. And the way that our pricing mechanisms work, there tends to be a lag of a quarter or two in terms -- and so as commodity prices come down and our inputs go down, that actually tends to create some margin favorability, because the price that would come down in sympathy to that just lags that by a little bit.

So I think what we're describing is an inflection point. As those prices start to firm, they don't even need to rise, they just need to firm. And exactly as you said, the price continues kind of downward for another quarter or two, and so then that flips and becomes a headwind. And it gets more dramatic if commodities actually inflect upward, and then you start to create a more significant headwind.

So we'll have to see what the outlook for those key commodities are, but you're right to be focusing on steel for us. That's a big one.

Well, how much of your pricing is actually mechanically tied to cost as opposed to your customers just expecting price relief as cost comes down? And I ask that in the spirit of we're hearing in the channel that -- and maybe it's wishful thinking -- but people are trying to raise price right now. What's going on there and what's your view on that?

Yes, we have a mix of those things. Some of the pricing is tied to input deflators, but mostly it's negotiated, which everybody knows the cost of metals and stuff.

Right.

We're all sharing the same information.

Right. Should we assume that your 2015 results reflect $0.10 or $0.15 of restructuring savings from the $0.45 that you're doing this year, and therefore that plus (multiple speakers) --.

I would say the bottom end of your range, not the top.

Right. And should we expect to get some fraction of that $0.25 to $0.35 in new spending in 2016, as a benefit in 2016? A half? A third? Or is there any way to think about that?

Yes, if we can get the projects in, in the first half, I think you'd maybe start to see some of the benefit in the second. So a little bit depends on the sequencing and timing of how we get things implemented.

And just on buyback, given that you're forced out of the market by the share collapse, if the deals are not kind of ready in your sights there when we get into -- when we get on the other side of that, should we expect that you'd move quite actively on the repurchase as quickly as you possibly can?

Yes, I think you should expect that, Jeff.

And then just one last one here I guess. Could you just maybe even reiterate, because I'm not sure I got it all, but the color on lighting in the quarter? And then I don't think you said anything about LED penetration specifically. But how did the individual pieces of lighting move around, and where is the LED number now?

Yes, so LED penetration is well up over 50% overall. The penetration when you focus on C&I is in the 60s%. At resi, it's sliding, and kind of in the early stages of adoption, I would say.

Okay, thank you.

Mike Wood at Macquarie Group.

Just a question in terms of more color on your industrial outlook. That appears to be the biggest kind of trend change with what you're experiencing in recent activity. I'm wondering if you could just give some more commentary in terms of your outlook there for the light industrial, heavy industrial, and perhaps if you're seeing the same issues as the last quarter when you highlighted some of the regional weakness in the oil and gas regions of the country.

Yes, I think, Mike, our outlook is reasonably cautious around industrial flat to 2%. And we're trying to indicate for you that we see some differential between some of the heavier sides of that industrial where we see some risk and the lighter side of that industrial where there may be a little bit of opportunity.

And in terms of HVT, I haven't heard you comment on that. Are you seeing any activity in that market, or is that grouped in with the heavy industrial?

Yes, we are still kind of troughed, at the trough of that cycle. So it's -- we haven't commented because it hadn't added a big delta either way for us.

Great. Thank you.

At this time, I turn the call back over to Maria Lee.

This concludes today's call. Steve and I will be available following the call for questions. And thanks again for joining us. I know it's a busy morning, so we want to make sure you can get on your other calls as well. Thank you.

This concludes today's conference call. You may now disconnect.