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Hubbell Incorporated (NYSE:HUB.B)

Q4 2012 Earnings Call

January 24, 2013, 10:00 a.m. ET

Executives

Jim Farrell - Director, IR

Tim Powers - Chairman & CEO

Dave Nord - President & COO

Bill Sperry - SVP & CFO

Analysts

Christopher Glynn – Oppenheimer

Rich Kwas – Wells Fargo Securities

Nicole DeBlase - Morgan Stanley

Drew Pearson – JP Morgan

Mike Wood - Macquarie Capital

Brent Gilman – D.A. Davidson

Noelle Dilts - Stifel Nicolaus

Operator

Operator

Good day, everyone, and welcome to the Hubbell Incorporated fourth quarter 2012 earnings conference call. Today’s conference is being recorded. (Operator Instructions)

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

Jim Farrell – Director IR

Good morning, everyone, and thank you for joining us. I'm joined today by our Chairman of the Board, Tim Powers, our President and Chief Executive Officer, Dave Nord, and our Chief Financial Officer, Bill Sperry.

Hubbell announced its' fourth quarter results for 2012 this morning. The press release and earnings slide materials have been posted to the investor section of our website at www.hubbell.com.

Please note that our comments this morning may include statements related to the expected future results of our company and are therefore forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Therefore, please note the discussion of forward-looking statements in our press release in considering incorporated by reference into this call.

In addition, comments made here also include some non-GAAP financial measures. Those measures have been reconciled to comparable GAAP measures and are included in the press release in the earnings slide materials.

And now with that, let me turn the call over to Tim.

Tim Powers – Chairman, CEO

Thank you, Jim.

I'd like to frame a little bit the year of 2012. I think it represents in a little bit of an economy that got softer as the year ended, very strong and improving performance of Hubbell overall.

While December was slightly below what we anticipated and therefore our top line in the fourth quarter was a few points lower than we thought, overall the year was an excellent year. And as you can see in the fourth quarter, our cash flow got us to equal to net income just as we have done for many years.

Also, we concluded an acquisition in January and the pace of those acquisitions has quickened in the recent past. And we're pleased with the steady progress we've made over the last few years and committed to continue that improved performance into the future.

And with that, I'll turn it over to Dave for his comments.

Dave Nord

Okay, great, thanks, Tim. Good morning, everybody.

Let me just give you some perspective, my perspective on certainly the fourth quarter and the year. And I agree with Tim. It's a very good performance for the year, although it's a year that I can say I'm happy it's behind us because we saw a tremendous amount of volatility that we were able to successfully navigate, but would rather have a little less volatility.

I've been asked how I would characterize the year and I say it's a good year. It was a really good year. It started as a great year you'll recall. We had a very strong start. But we knew things would slow, or at least we expected they would slow in the second half and that turned out to be the case with a lot of ups and downs along the way. But we're very pleased that we were able to navigate that and actually improve our margins more than we had anticipated.

The fourth quarter was particularly challenging with a lot of volatility. We expected things to slow, but certainly not to the depth that we experienced principally in the month of December. And there's a lot of contributing factors to that; some of it based on experience, some of it based on conversations, some of it's just anecdotal. But we've said in the past that the fourth quarter is always a little challenging to predict because of the volatility that can exist in the channel and buying behaviors. And so we experienced some of that.

We also experienced, certainly, some disruption in markets caused by super storm Sandy. On the one hand, a very positive contributor to power in sales to support those efforts. But at the same time, the magnitude of that work took away some of the activity from other utility-related businesses and so it wasn’t all incremental. I think we also saw in the utility space some of the early spending because of the warm weather in the year exhausted some of the budgets earlier on and so we had much slower spending on order rates in the month of December. And so a lot of factors that go into that, but the good news from my perspective is it clearly was a unique phenomenon in the month of December because as we look at our activity through the first several weeks of January, the orders have snapped back from what were down double digits to up double digits. And so clearly indicative of what we suspected, which was a unique phenomenon.

I spent a lot of time over the last week or two out in the market with our channel partners, some of our customers and they've pretty much confirmed what we experienced, and to a large extent, what we're expecting for this year. And we'll talk about this year, 2013's work a little later.

A couple of other highlights that we saw, we spoke on the last call about an acquisition that we did in power systems, Trinetics, in October, so early in the quarter. And then during the quarter, we were working on a number of other transactions. And most recently, we closed on an acquisition for our electrical segment, Continental Industries, an additional grounding business, purchased price, just around $38 million, just slightly above equal to one-time sales. So a nice addition to that portfolio and we expect it will be a good contributor just like Burndy.

Now I think some of the other things that we navigated through in the fourth quarter, we talked about Sandy. And Sandy, while it was positive for parts of our business, it certainly put a damper on activity in other parts of the markets. We were fortunate none of our employees were directly impacted, but if you live anywhere near the coast, you know that the impact was significant and it doesn’t get reported as much now, but there's a lot of activity that has to occur to bring all of that back, which actually could bode well for us in '13.

I think the other thing I would note, and this is more of a Hubbell issue, is you're all familiar with the tragedy that occurred in Newtown, and you may be aware that we have a facility, a manufacturing facility there, which has over 250 people. We also have a number of executives and employees. We were fortunate that none of our employees had a direct impact. But clearly, you didn’t have to go far to have an impact because of the magnitude of the impact of the community. And so we've spent a lot of time with all our folks in Connecticut making sure that we're providing support to that group. So that was two big events outside of the norm for us that we worked through in the fourth quarter.

And lastly, one of the things that on very positive note, we had a summit of our top 75 leaders in the organization back in November to really start to think, to work through what is it that we're going to do to make sure that we keep the success going forward. We know we focused over the last five years clearly on price cost productivity, making sure that we're focusing on margin and we're going to continue to do that. But there's other elements that we're going to focus on and I'll share more details on that when we meet at the end of February.

So all and all, a good year, a good finish. And we're looking forward to going forward.

So with that, let me turn it over to Bill to give you a little more details on the fourth quarter.

Bill Sperry – SVP, CFO

Thanks, Dave. Good morning, everybody.

I'm going to be referring to the slides that Jim referred to that you hopefully found on our website and I'll be using the page numbers to help guide our discussion this morning.

I'm on page three. And given all the volatility that Dave referred to in the fourth quarter, I think we're pleased that we turned in performance that was consistent with the guidance that we gave you on our third quarter call. Net sales, up 2% with the markets being essentially neutral and acquisitions providing the volume. Operating margins up 14.7% and a dividend increase in December.

On page four, let's dig in a little bit to the sales growth and some of the granularity of the markets here. You can see a lot of mixed signals here, arrows going in the opposite direction. Non-residential area, our biggest market, we still are struggling with new construction spending being down slightly. But there were some very bright spots, particularly the relight area, which continued to have double-digit growth and a very bright LED story where our lighting platform had over 20% adoption rate in the quarter from this new technology.

On the industrial side, again a lot of mixed signals. We had the energy markets, which really drive our harsh and hazardous business being up double digits versus the census date on manufacturing production showing a fairly flat quarter and a high voltage test equipment business being down quite sharply in the fourth quarter. We'll talk about some of the mixed effects that that drove when we get to some of the segment information.

Overall, the utility business was flat for us. And while transmission was up a little bit, Dave commented on Sandy and there was thoughts I think that that would be incremental volume and it turned out to be actual required to stay flat. And I think what we saw on the utility side was the fact that all the crews and linemen that came to the Northeast to do the repair work, that entailed a certain degree of cannibalization of the spending. And Dave mentioned the second effect, which was, I think, part of warm weather that we had last winter pulled forward quite a bit of the utility spending and so we saw a very front-end loaded spending year on the utility side that was as expected level wise, just front-end loaded.

And the fourth market of residential again double-digit growth for us on the housing sides. So we're starting to feel a lot better than that recovery is kicking in pretty nicely.

So all of that added up to quite a neutral market picture and the 2% growth coming from acquisitions. I'll give you a little bit of color. Dave described our newest deal of Continental, but that was closed in January. The deals contributing incrementally to the fourth quarter of '12, there were five different investments. One, a fire pump business, another, an industrial control business a weatherproof and closure business, a harsh and hazardous business. Those four, all in electrical segment and rounding out important SKU breadths across the platform. And then Dave did mention Trinetics Utility business that provides capacitor switches that helps improve the power quality in the distribution grid. So a lot of interesting acquisition activity contributing to that 2% growth and Tim commented our focus there and our desire to continue doing that.

Page five, you see impressive growth at the gross margin line, 130 basis points, really driven by price and commodity cost adding about a point of that 130. On the S&A side, you saw a 10% increase in the spending there driven by pension benefit costs and also a gain in the prior year that made for an unfavorable comparison.

Page six, at the operating profit line, you see very flattish LP dollars, a decline of 10 basis points at the margin line. Again, the drivers; gross margin, up 130, S&A, 140 for a net of 10 and we'll talk about some of the mix considerations when we get to the segments on how LP was driven.

I'm on page seven, other expense, up about half a million. The tax rate was significant in the fourth quarter giving us 220 basis points of tailwind, some adjustments made in the fourth quarter as well as offset a little bit by the fact that we did not have R&D this year. And we'll talk as we get to the full year as Dave gives the outlook of the impact that R&D will have next year.

Page eight, net income, you see up 3%, which is really a flattish OP contribution and helpful tax rates. The share count between fourth quarter last year and this year was quite consistent, so similar 3% rise in earnings per share.

Let's push now down into the segments and try to add a little granularity to the picture. I'm on page nine. And again, at the markets, you see were neutral with the acquisitions providing the incremental growth. The industrial side, you had a sharply down high-voltage business, but on the other hand, harsh and hazardous being up very strong. On the non-res side, we had the new construction side weaker, but the relight being strong. Resi was a good story particularly for our lighting business and then the acquisitions.

So at the operating profit margin line, you see 130 basis point decline in the quarter and that's where the high voltage test equipment product mix, where you can really see that. They had pretty steep declines. They are high margin contributors so the loss of that volume is seen pretty pronouncedly in the quarter. And the other contributor being that the deal volume itself coming in still takes a couple of quarters to burn off some of the acquisition accounting and so they tend not to be additive to margins early. And so you see that mix effect in the quarter for electrical.

On the power side for the quarter, similar profile to electrical where the markets were neutral and the acquisitions drove the growth. I think we've talked about the storms and how they were needed to stay flat rather than be incremental. And at the operating profit line, you see the significant increase in OP up to 18.4% driven by productivity in price being in excess of the cost increases. And I think you really see some of the dynamics of the power segment business here. It's a high margin business. It's driven in part by very efficient S&A model and therefore, COGs tend to be a more significant part of the sales. And so it's quite sensitive to price cost dynamics. And I think over the last several years, we've given you some pretty lumpy quarters. But when we get to the year here, I think we'll be able to show you we're at high teens levels, which is where we thought this business should be on a steady state basis.

On page 11, cash flow, a couple items to comment on. First is the change in working capital. In the fourth quarter of last year, we had two tax payments made, both the third and fourth quarter payment versus just the fourth this year; that drove the entire difference in working capital. And at the other line, that difference was driven by the timing of our pension plan funding, both years, we contributed $20 million. But in 2011, we put that all in the fourth quarter, 2012, we spread it across the first three quarters in an effort to get more return out of that contribution. So that drives the difference in the other.

It's also worth commenting, the CapEx line and we'll talk about it also at the full year level, but very important for us to continue to keep investing that capital and maintaining our productivity initiatives to offset inflation. So watching the CapEx grow is encouraging for us.

Let's switch now on page 12 to the full year. And again, this performance is consistent with where we got it everyone on our third quarter call, namely 6% growth with 70 basis points of margin expansion. I think if you went back through the progression of the year, probably we thought volume could have gotten a little better when we were towards the halfway point of the year but the margins exceeded our expectation and so we got to where we expected I think at the net income line. So I agree with Dave's characterization, a very good year.

Page 13, we'll push down to the electrical segments of the full year. See 6% sales growth. Similar mixed dynamics; high voltage being down but the harsh and hazardous, higher energy markets being up. Resi strong, not just in fourth quarter, but for the full year and the renovation and re-light dynamic aiding the non-res softness.

OP margins, up by 30 basis points to 14.4%, price cost really being the big driver overcoming some of the unfavorable product mix from high voltage being down.

On the power side, you see 7% growth for the full year. And again, I think that does a good job of illustrating the shape of the year. We were up on the mid-teen area at the halfway point. And so you saw that the bulk of that spending was really pulled into the front half of the year. We saw distribution spending up towards the mid-single digits this year. Transmission spending up even stronger than that. So good solid year for power. And again you see at the operating profit line to 18.1%, 180 basis point improvement, price cost and productivity really helping drive that. On the productivity, I think power has been in an area where we have been spending our capital and do see the productivity benefits here. And again as I said, that 18.1% performance, very consistent with the high-teens expectations I think we've been driving your attention to.

For the full-year cash flow, we generated $300 million of free cash flow. First and foremost, that hits our target of one times net income. Secondly, I’ll draw your attention to the CapEx line. That $55 million last year included $13 million that we invested in a building, so I more consider that to be comparable $42 million, so good-solid increase in the amount of capital we’re putting into our productivity initiatives and should be a good positive as we go forward.

I think on the working capital line you see an increase in usage that is perhaps a little bit larger than our sales increase would suggest. Some of that’s driven by the acquisition activity, but I would also say there is a healthy retention rate now in the business in a place like Power Systems where you’ve got storm demand and a big part of our value proposition is serving those utilities with inventory on had to get their customers up and running as quickly as possible. And so there’s a fight between inventory and a need to keep working capital. as efficient as possible.

On page 16, we like to show the trade working capital progression over the past six quarters. And I think you see the typical seasonal decline between the third and fourth quarter. We're a little bit higher than last year. But we've been liking to stay below that 18% target level. So we feel good about that at the trade working capital level.

On the balance sheet on page 17, 26% debt-to-capital ratio. And as you can see, plenty of liquidity to support the investing that we hope to be doing over the next few years.

So with that, I'm going to turn it back to Dave to give you more of a forward-looking outlook.

Dave Nord – President, CEO

Okay, thanks, Bill.

Let's turn to this year in 2013 and how we see this as we sit here today.

I'm on page 18. I think the good news of the starting point is that we see all of our end-markets overall growing generally with modest growth, although some very bring spots. And just going around the horn, the utility business, the end markets, we see growing 2% to 4% with modest maintenance and repair growth on the distribution side. And continued high level of activity on the transmission side. But the year-over-year growth rate is not at the same level because we've had such tremendous growth there.

The residential business, certainly up 10%. And I would say that there's based on reports that continue to come out, more likely upside on that 10%. But having navigated through the environment that we have over the last few years, we err on the side of caution. But we'll expect to drive that better.

Non-residential, there's still some remaining challenges on the non-residential construction if you're new construction side at least early on. I think we agree with most third party reports that indicate that the second half will be up. And I think there's even some indications now. I think the ABI is still holding above 50. I think there was a report from McGraw Hill recently that showed contract awards in December spiked alive. We like that by six to twelve months, so that could be further evidence of a better recovery in the second half.

And on the industrial side, flat to up slightly, 2%. Certainly still positive results on the factory utilization and on the energy sector. But one of the things that continues to challenge us is on our high voltage test equipment. We have thought that would be down. It ended up the downturn came later. And the recovery seems to be coming later although we see signs of that bottoming by the middle of this year and starting to recover in the second half.

So overall, modest growth in all of our markets.

We turn to how that plays out for our segments on the power side, which is just under 30% of our business. We think the sales growth there will be 4% to 6%. Two points of that coming from the acquisition activity that we did last year.

And on the electrical side, 3% to 5% growth with the slower recovery on non-residential, but with a good residential market and industrial mix. So we think that 3% to 5% right now, it is a good starting point.

We see 2013 being the complete opposite of 2012 where 2012 started strong and finished weak. And we were cautious then because we thought it might finish weak. But it was hard to really call that when things were so good in the first half. I think we have the inverse of that where we're cautious about the opportunities this year because we're more biased towards the second half of the year. Although early indications say that the first half could be a little bit better. But as I've said and you've heard me say many times, I can't draw a conclusion based on one or two months of activity, let alone two or three weeks. But certainly, the signs if they continue would be positive.

On the margin side, we're still working on improving our margins. We're expecting our margins to increase approximately 40 basis points. One of the things that we're dealing with in our ongoing efforts is the acquisitions certainly in the near term are not accretive to those margins. They have potential. Our strategy is to buy businesses that we think we could get to at or above. But they're rarely at or above at acquisition. So that puts a little bit of pressure on.

We are assuming that pricing is going to offset any commodity cost increases in the year. I think we were successful. And as Bill talked about, successful in 2102 in holding price and having some positive impact from price. I think the environment this year will be a little bit more challenging there. But at the same time, I think we're well positioned with ongoing productivity actions and hopefully some more moderating of other inflationary cost pressures that we dealt with in 2013.

And our free cash flow, expected to equal net income, which will give us ongoing opportunities for redeployment of our capital in returns to shareholders particularly on our dividends. As well as investing in the business and we have a lot of projects on the board for improving our productivity as well as our acquisitions.

And then the tax rate that we're assuming is 31.5%, that has the benefit of the R&D tax legislation that reinstated R&D. But actually, last year's benefit also gets recognized this year. So that's in the 31.5%.

So we're anticipating another strong year this year. Although we have been and we continue to be conservative and cautious in our estimates. I neglected to mention the one other event in the fourth quarter, which was the announcement of the transition. And so when it comes to establishing our outlook for 2013, Tim has reminded me and our board has reminded me and I'm sure you all will remind me that it's on me. So I'm going to try to be a little cautious until we have better visibilities.

So looking ahead, we'll provide some more detail for sure at the end of February on our outlook. We'll have another six weeks of activity. So we'll have a better feel for how the year is starting and maybe other insights to the rest of the year.

And the other thing that I would offer is as I've been going around spending time in our operations, I've had the opportunity to work even closer with a lot of our management team. We have some very talented managers and leaders in our organization. I'm going to take the opportunity at the investor meeting at the end of February to start to introduce you all to some of those folks and I'm going to try to do that continually over the next several years.

With that, let me turn it back over to Jim and we can field some questions.

Question-and-Answer Session

Operator

(Operator instructions). Your first question will come from Christopher Glynn with Oppenheimer.

Christopher Glynn – Oppenheimer

Thanks, good morning. Just on the orders – sounding pretty good in January, is both segments participating in that?

Dave Nord – President, CEO

Yes, Chris, that’s really – it’s really broad based other than the high voltage and some of the industrial sector, but really all of our businesses are up in January so far. But again, that’s, you know, three weeks into the year, so a little cautious, but I like the trend so far.

Christopher Glynn – Oppenheimer

Great, and would you characterize that – would some of the cautions stem from maybe characterizing part of that as just exhaling after kind of project referrals in December?

Dave Nord – President, CEO

Yes, certainly – I mean, that is – the magnitude of the weakness, you know, in the last couple weeks, we had the situation before with I think some of the things are unique, there’s a lot of uncertainty we’ve talked about around the election and fiscal cliff, and I think that had an impact, and I’ve heard that from customers on buying habits, but it’s difficult to quantify any of the things individually, but collectively it was very concerning. So, just being a little bit cautious coming out, but I – there’s early indicators that it should be a positive year.

Christopher Glynn – Oppenheimer

Okay, and sticking with the tough to quantify, when we look at Sandy, were you trying to say that was really a net neutral, that if you had a 6% help from, you know, the East Coast there, that that was probably the draw from the rest of the distribution business?

Dave Nord – President, CEO

I don’t know that I would – I mean, certainly on the report of results it’s net neutral, I’m not sure that in absolute terms it was net neutral because there are some incremental volume that comes from that, but I think it was offset by what was exhausted budget, and the other to some extent – I was with a group with utility executives with both invest their own, and some of the contractor support guys a couple of weeks after Sandy, I can tell you their entire focus was on managing their activities to support the efforts in New York and New Jersey – I mean, absolutely 100%. So, I think a lot of resources got redirected for a period of time, and I don’t think all of that can get caught back up in a quarter – certainly not on the parts side – I mean, on the, you know, labor side, they might have had a lot more incremental. On the parts side, you know, they weren’t doing other stuff for us. So, I think – but that’s where it’s difficult to quantify what the net impact is. Yes?

Christopher Glynn – Oppenheimer

Got it, and then just on lighting, you mentioned 20% adoption in LED – was that – is that the mix of your lighting business now? That’s LED?

Bill Sperry – SVP, CFO

Chris, for the year, it was 17%, for the quarter it was 20.

Christopher Glynn – Oppenheimer

Okay, and in the florescent side of retrofit, is that still active, or is kind of the relighting where most of the LED cannibalization is?

Dave Nord – President, CEO

No, it is still in part of the relight and retrofit, they’re still energy efficiency and application because there is a cost element there.

Christopher Glynn – Oppenheimer

Got it, okay, thank you.

Operator

And moving on, next we’ll hear from Rich Kwas with Wells Fargo Security.

Rich Kwas - Wells Fargo Security

Hi, good morning everyone.

Dave Nord – President, CEO

Good morning, Rich.

Rich Kwas - Wells Fargo Security

Question on distributions, so, down in the quarter – Dave or Bill, have you seen any of the benefit from the housing starts activities, because I know through third quarter you really hadn’t seen anything, and I imagine in fourth quarter you didn’t see much either, but what’s within – what’s kind of baked into the outlook for power from that piece of the business for ’13?

Bill Sperry – SVP, CFO

Yes, you know, Rich, we haven’t seen much effect, and the majority of the distribution side of our utility business has a – is really driven off of maintenance and repair which for us has sort of a GDP kind of like feel, so when Dave was walking through that piece of the pie, you know, the D is driven in large part by the maintenance, but I think you’re suggesting that single family housing will need hook ups, and we agree with that.

Rich Kwas - Wells Fargo Security

Okay, but it sounds like you don’t have that much factored in for the ’13 outlook from the contribution.

Bill Sperry – SVP, CFO

I would say not much, but you’re directional point we agree with.

Rich Kwas - Wells Fargo Security

Okay, okay, and then on the high volt stuff, you know, that – I know earlier in the year you said the orders were down, but then they may be looking to stabilize some time later in ’12, which really didn’t happen – what’s your sense for right now what you’re seeing in terms of activity projects that have been pushed out? Are you seeing any loosening on that front?

Bill Sperry – SVP, CFO

Yes, I think that you are right to say that we hoped that the bottom would be ’12, and now it feels like the bottom is ’13, and you know, the compares for them get easier, but the last three quarters of the year versus the first, for example, but you know, this larger capital, intensive kind of spending I think was the most sensitive across all of our business portfolio, and these decisions seem to be deferred the most. So, we’re hoping that we sort of sludge through ’13 and bottom in this business, and that, but we are still very – our outlook in the medium terms is for a very positive growth rate for the business.

Rich Kwas - Wells Fargo Security

All right, okay, and then this last one for me on a lighting piece, so this year, non-res, you know, very slight growth expectations, and once you get into kind of a good run rate in terms of non-residential construction spending, that obviously helps the lighting business. What’s kind of the out growth that you would expect apart from just the [inaudible] up turn from non-residential with relighting activity, and what have you seen over the last couple of years, because clearly the lighting business has held in a lot better versus the spending numbers – just trying to get a sense for what the relight activity in terms of additional benefit could occur once we get into the turn upward in the non-residential side?

Bill Sperry – SVP, CFO

Yes, I think what we’re hoping, Rich, is that relight trend is actually independent of the new construction cycle. So, our sense is that we’re still in the reasonably early innings of the relight trend, so the fact that we’ve been doing double digits there, you know, we’re hoping that that can continue even if new constructions starts to feel some rebound, we hope that it doesn’t rob, you know, away from the relay trend at all.

Rich Kwas – Wells Fargo Securities

Okay. Thank you.

Part 2

Operator

(Operator Instructions). Your next question will come from Nicole DeBlase of Morgan Stanley.

Nicole DeBlase - Morgan Stanley

Yeah, good morning, guys.

Dave Nord – President, COO

Good morning.

Nicole DeBlase - Morgan Stanley

I want to start with free cash flow allocation. I noticed when you guys were talking about it you spoke about M&A, you spoke about the dividend, but you did not mention share repurchase. Can you talk a little bit about the potential for a pickup in share repurchase activity in 2013?

Bill Sperry – SVP, CFO

I think, Nicole, it’s a good question. You know, we continually are evaluating the best uses of our cash. I think, you know, our paradigm continues to go down the waterfall where CapEx to us is kind of the first priority. We really think that we’re getting excellent returns from a productivity perspective on the capital that we’re putting out there. Our dividend to us is kind of the second order. We’d like to be a responsible increaser of that as our net income structurally increases. We’re hoping to provide that to our shareholders in terms of kind of a steadily increasing return from there. And acquisitions and share repurchases then come next, in that order.

So I think depending on how robust the pipeline is versus not will dictate the degree to which share repurchase versus acquisitions, you know, happen. But we’ve got to look at both of those levers, I think, as we’re moving forward here.

Nicole DeBlase - Morgan Stanley

Okay, got it. And since you brought it up, can you just comment on the M&A pipeline, how that looks right now?

Bill Sperry – SVP, CFO

Yeah, if you ask me to comment on it, it’s never robust enough. I know you’re laughing, but it’s – yeah, we’re very busy, Tim and Dave both commented on kind of last – we’ve got seven deals over really the last 15 months or so. That’s a nice pace. I hope that we can continue doing that pace, but also it would be great if we could add maybe some larger things. The pace, those last seven have been the very typical, you know, smaller sized, Hubbell tuck-in kind of sized deals. You know, we’ve got - as we commented on our balance sheet page, we’ve got the liquidity to support some good investing there.

Nicole DeBlase - Morgan Stanley

Okay, got it. And then if I could just squeeze one more in. If you could parse out the 40 basis points of operating margin expansion that you guys expect in 2013, it sounds to me like the bulk of that’s coming from volume leverage and productivity rather than price cost. But if you could just talk about the puts and takes, that would be helpful.

Dave Nord – President, COO

I think you’ve got it exactly right.

Nicole DeBlase - Morgan Stanley

Thank you.

Dave Nord – President, COO

We need volume – we need the volume to get there, yep.

Operator

And from JP Morgan, we’ll go to Drew Pearson.

Drew Pearson – JP Morgan

Hi, good morning.

Dave Nord – President, COO

Good morning, Drew.

Drew Pearson – JP Morgan

So just at a very basic level, I just want to make sure I understand the revenue guidance. I think you’re guiding to basically two to four on the end market growth. Presumably, there’s a little bit of positive prices, maybe 50 bps, perhaps you can comment on that. And when I add that up, I get, you know, in organic growth, that’s probably a little north of 3 at the midpoint whereas if I’m reading your revenue guidance correctly, it looks like you’re doing 1 to 3 organic embedded in that 3 to 5. So just maybe check my math and just talk about relating the end market, where you see your organic revenue.

Bill Sperry – SVP, CFO

Yeah, no, I think that’s right, Drew. We’re looking at, right now, 1 to 3 of organic with 2 for acquisitions, and those are closed acquisitions, we’re not contemplating any, you know, volume increases that would come from additional acquisitions but certainly that would be additive. And I think that is, you know, acknowledge that, you know, we hope that turns out to be a conservative estimate, the 1 to 3.

Drew Pearson – JP Morgan

Okay, that’s helpful. And then just…

Dave Nord – President, COO

[Inaudible] that price cost is a very benign environment for ’13 based on our expectations.

Drew Pearson – JP Morgan

Okay, that’s helpful. And then just back to the balance sheet, I mean, have you, you know, your remainder in net cash position, obviously you want to prioritize the cash reported as you talked about, but as you think about sort of a longer-term target, I mean, is a net cash position in the longer term a sustainable target as you sort of continue at the current pace of [inaudible] deals? At what point do you consider moving to maybe a more sustainable long-term capital structure?

Tim Powers – Chairman, CEO

Well, I think, Drew, that it’s – it would be fair to describe our objectives as having a conservative balance sheet. We like to be able to have liquidity on hand to support our investments and we’ve enjoyed a nice conservative balance sheet that has served us well in times of cyclicality. And so I would expect – I don’t know that I’m going to define that for you in terms of debt to capital or net to cash or whatever, but I think you should expect from Hubbell a conservative balance sheet.

Drew Pearson – JP Morgan

All right. Thanks very much.

Operator

From Macquarie, we’ll go to Mike Wood.

Mike Wood - Macquarie Capital

Hi. Your organic growth forecast does look conservative, but I was curious about the power outlook specifically. Most utility companies that do give CapEx guidance has forecasted declining capital spending for 2013, so can you elaborate for that segment whether your performance is based on exposure to OpEx versus CapEx or a particular high-growth area that you have exposure to or content or price?

Bill Sperry – SVP, CFO

Mike, I think your first point is the one I’d remind you of how much of our power revenues are really driven off of maintenance and repair, which come out of the operating line, not the capital line.

Mike Wood - Macquarie Capital

Okay, got it. And the high-voltage test equipment, you mentioned some order activity in January for that business specifically. I understand that there’s a fairly long lead time. Are you seeing any type of activity early on that would give you some encouragement for back half of the year acceleration or into 2014?

Dave Nord – President, COO

No, what we’ve seen actually is not what you said, but rather that the first quarter of ’11 was actually the strongest year for them. So our compares are actually the most challenging. And I think what dad was saying is, we think that will be bottoming by the middle of the year. So you’re right that the lead times are long. There’s certainly lots of activity in quoting that they see, but a lot of that has been pushed out and delayed and deferred. So that part is hard for us to pin down for you, but you’re right to say it’s long lead time visibility that we’ve got through the half year suggests that it’s going to be challenging compares to last year.

Tim Powers – Chairman, CEO

Yes, Mike, it’s really the level of activity around project discussion and project bidding that gives an indication that things will start to bottom, it’s just the timing of when those start to get, you know, converted into orders and they really step up.

Mike Wood - Macquarie Capital

Okay, thank you.

Operator

From D.A. Davidson, we’ll go to Brent Gilman.

Brent Gilman – D.A. Davidson

Hi, good morning. Just a question on the outlook for the 1 to 3% growth for new non-residential that you’re looking for. Are you assuming any new construction or is that essentially all relight retrofit?

Dave Nord – President, COO

No, there’s some new construction in there and they – in the second half.

Brent Gilman – D.A. Davidson

Okay. And then just one more on the power guidance, the 2 to 4% organic, I mean, obviously that implies some uptick here from the growth you experienced in the second half, and I just wanted to get a little bit more feel for that to give some confidence there that you’ll be above that second half run rate. And is that due in part, I guess, to some of the unusual events like Sandy here in the second half?

Bill Sperry – SVP, CFO

Yeah, I think what – I would, you know, we had 7% growth for the full year in power and I think the shape of the year was a little bit unusually pulled forward, it wasn’t smoothly spent during the four quarters. So as Dave was commenting using weeks, months or quarter can be a little misleading. But when we stretch out those dynamics across the full year and we understand the essential nature of the maintenance and repair work that we do with our utility partners in maintaining the quality of the networks gives us confidence that that maintenance and repair work needs to be done. It’s harder on the transmission side where you see large spiky-lumpy projects. I think Dave gave you a very good flavor around those as to the fact that the spending really picked up through ’11. It continued to grow in ’12 and our outlook is for a high level of spending but it gets harder for us to show you lots of incremental growth on that because the level is so high.

Brent Gilman – D.A. Davidson

Okay. Thank you.

Operator

And from Stifel Nicolaus, we’ll go to Noelle Dilts.

Noelle Dilts - Stifel Nicolaus

First, I just want to touch on a few additional questions on the power side of the business and I’m just going to ask first if you can quantify your growth expectations for the transmission business in ’13. And then second, can you discuss what you’re seeing in the international piece of the business and your expectations for ’13?

Tim Powers – Chairman, CEO

Yes, I think our outlook in ’13 for transmission would be in low-single digits, Noelle. And I think that the international piece of our power business, which has reasonable exposure to Brazil and to a lesser degree, locally in China we actually have some more favorable views of that international potential versus a more challenging ’12.

Noelle Dilts - Stifel Nicolaus

Okay, great. And then you know, the pricing impact was obviously positive in the quarter. Was there any beneficial impact from Sandy on pricing? And then secondly, can you just comment on if you’re seeing more of the price benefit on the transmission side or the distribution side?

Tim Powers – Chairman, CEO

The impact of Sandy is not so much on pricing, it’s actually just the mix of the products, the nature of those products. We do not raise prices on products, you know, in a crisis, we actually deliver – the standard price of those products generally have a higher margin so you do get a larger benefit there.

Noelle Dilts - Stifel Nicolaus

Right, okay, perfect. And then can you just update us on your pension expense expectations for 2013 versus 2012?

Bill Sperry – SVP, CFO

Yeah, I think that in general, we hope to – we’ve had some decent headwind in ’12 from pension and we hope to be able to reverse that a little bit next year.

Noelle Dilts - Stifel Nicolaus

Okay. And then the last question. You know, you’ve said in the past that you’re LED margins are pretty consistent with your traditional product margins, but can you just give us some thoughts on how you’re looking at LED margins for ’13, if there’s some room for expansion of input costs to go down? Just your thoughts there.

Tim Powers – Chairman, CEO

You know, I think we would give you the consistent story that we have, which is as the components, the LED components themselves become cheaper to us, we would expect to be passing that through to our customers in order to continue to drive the adoption rate. So like I said, for the year, we hit 17%, the quarter was at 20%, so you can see that continued trend upward and we’d like to help facilitate that change. And as a result of that, our expectation is that that transition is margin neutral on a SKU by SKU basis.

Noelle Dilts - Stifel Nicolaus

Great. Thanks so much.

Operator

(Operator Instructions). And it does appear all questions have been addressed.

Tim Powers – Chairman, CEO

Great, okay. That concludes today’s call. Thank you, everyone, for joining us today; certainly feel free to call us if you have any follow-up questions. I’d be happy to take those today. Thanks again.

Operator

Ladies and gentlemen, that does conclude today’s presentation. We do thank everyone for your participation.

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