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Hubbell Inc. (NYSE:HUB.B)

February 27, 2013 9:30 am ET

Executives

James Farrell

Timothy H. Powers - Chairman, Member of Executive Committee and Member of Finance Committee

David G. Nord - Chief Executive Officer, President, Director, Member of Executive Committee and Member of Finance Committee

William T. Tolley - Group Vice President of Power Systems

Gerben Bakker

Ken Carlson - Vice President of Sales & Marketing Services - Southern

Scott H. Muse - Group Vice President of Lighting Products

Kevin Poyck

Jim Decker

Kevin Hallinan

Gary N. Amato - Group Vice President of Electrical Systems

John Szupiany

Craig Soucy

William R. Sperry - Chief Financial Officer and Senior Vice President

Analysts

Jeffrey T. Sprague - Vertical Research Partners, LLC

Christopher Glynn - Oppenheimer & Co. Inc., Research Division

Richard M. Kwas - Wells Fargo Securities, LLC, Research Division

James Farrell

Good morning, everyone. I'm Jim Farrell, Director of Investor Relations. I'd like to welcome all of you to our Investor Day here. I appreciate everybody dodging the raindrops here. Not a great day in February, but appreciate everybody coming out. Before we continue, I'd like to refer everybody to Page 2 of the presentation, with respect to forward-looking statements. Let's consider those statements incorporated by reference into today's presentation.

Our format today is similar to years past. We're going to have a series of speakers. This year, we've added additional speakers for each of our 3 platforms, giving you an opportunity to meet some of the senior team for each platform. Hopefully, you've already met them at the meet and greet at the product displays. But if not, I encourage you to seek them out either at the break or in the wrap-up session.

So with that, we have the honor and privilege of having a special guest speaker this morning, our Chairman of the Board, Tim Powers.

Timothy H. Powers

Well, thank you, Jim, I don't feel like a special guest somehow, but good to see you all here, and these are always great days for Hubbell when we think we have the opportunity to show and demonstrate the depth of the product and the skill sets of the people in our business. And we think we have a great business model, we think our results have shown that. In 2012, we were very pleased with the outcome of that year, setting new records for sales and profits and earnings per share. So we think our model is working, we think our people are performing well, and also 2012 was the year of transition, where I stepped into the role of Chairman; and Dave Nord became CEO of the company; Bill Sperry stepped up to the CFO role; and An-Ping Hsieh -- Ping, she knows by Ping, to our new General Counsel is here today. So we're very pleased the transition of management has gone very smoothly, and I think the story you're going to hear today is very similar to the story that you would have heard from us in the last few years. It's about focus. It's about discipline. It's about generating cash flow, and then doing good things with that money as respect to growing our business and returning money to shareholders.

So with that, I'll turn the program over to Dave, and we'll continue. Thanks.

David G. Nord

All right. Good morning, everybody. Thank you for -- thanks for joining us on such a beautiful rainy day. I've been told that your reward is when you leave, it's going to be sunnier. So, as Tim mentioned, it was obviously a great year for Hubbell. We had record sales, just over $3 billion, record earnings per share of $5. Of course, in my new role, I talk less about the numbers, and Bill will go into more detail about that later.

But clearly, it was a lot going on, and let me tell you about the agenda for today. And you see, Tim wasn't on this list. He truly is a special guest. He was able to make it. We're delighted that he was here. I'm just going to give you a little bit of an overview on our strategy, but this day is really to give you all an opportunity to get to more behind our businesses and the guys who run our businesses. You see me and you see Bill and Jim Farrell quite often, but we want to take the opportunity for you to have -- to see and hear more from our team.

As you've heard in the past and met our business units presidents, and they're certainly here, but we're doing something more this year, and going at a level down for some of the key players that are deep into the business. One, I want you to have the opportunity to see who they are, hear who they are, and I think you'll take away a level of confidence in our capabilities that is our basis for confidence in the future. As well, they have even more depth of knowledge on the markets and the products, and I would encourage you to take advantage of that opportunity during the breaks and over lunch.

Bill will come back and go through some financials, and then I'll come back. The things I'm going to want to talk about today are really about performance, about our capabilities and about our future. And that really is the theme that you should be getting from today.

But clearly, on a performance measure, we've had a great run. I've started this chart in '05 simply because that's when I joined Hubbell, and so I can speak with firsthand knowledge of this period of performance. Now it's a little bit unfair because in reality, this period of performance started several years before that, when Tim took over. The chart started at much lower levels. In Tim's tenure, nearly tripled the size of the company, certainly improved the profitability of the company. And I think it really is a testimony to Tim's vision back more than 10 years ago on things like expanding in the lighting business and the acquisition of Lighting Corp. of America, our emphasis on lean, as well as our investment in SAP. All of those clearly visionary activities are what provided us the framework to perform at the level that we've had, combined with the capabilities of the people in the organization. What you see here today is not only some of the key operating folks, but all of our -- almost all of our senior management, leadership team. And that group, that group, interestingly is one of our strengths, it is our stability and experience of that group.

And so when you look around and you meet these folks, many of them have been with the company for years, none of them are in the position that they were in 5 years ago or 10 years ago. So what we do is we've developed those capabilities and expanded on those strengths, but we've also added some folks during that time frame. I joined in '05; we have a number of people. So we have a nice balance. And I think all of that really goes back to Tim's philosophy and his leadership over the last 10 years. Those of you who have followed us for that period of time can appreciate this performance. And I want to just take a minute and hopefully you'll join me in thanking Tim for all he's done over those 10 years.

Okay. So enough about what Tim's done. Now the pressure is what are you going to do? So I talk about this period of time because those of you who remember -- and some of us who want not to remember the period '05, '06, when we were in the midst of this investment, things weren't going so well. And so we needed to -- with the help of many of you, and your more than willingness to share your views on what we weren't doing right and what we might do better, we spent a lot of time thinking about how we were going to get on track. And one of the keys to that was our focus. We needed to focus on the critical few things. Tim would talked about this regularly.

And so you may recall in the '06, '07 time frame, we've focused on 3 critical elements: Price, cost and productivity. Because we had the tremendous capability to grow the business by selling more, but not necessarily making more at it. We had a very growth orientation. We had to make sure we have the balance on improving our profitability, improving our margin. I think that focus has been critical to driving the performance that we've had over this period of time. Great performance, undeniable. We finished last year with margins of 15.5%. So the question is, what do you do going forward? And that's worked well, but what do you do going forward?

So we put together a -- I brought the senior management team together back in the fall and, say, what's next? How do we keep this going? Clearly, that works, and that's really been embedded in the culture. But what do we do next? And I want to skip over some of our market stuff, because I really want to get through our strategic objectives.

We sat down as a management team and said what -- where is our value proposition and what do we have to focus on going forward, because we have unlimited opportunities to continue to grow and improve.

The first was just in defining who we are, and we really are about reliable electrical solutions. Everything we do is about -- is electrical-related. We have a reputation for reliability and quality, and most importantly, it's about solutions to our customers. Any one of our individual components or parts that we make are not always very sophisticated, but it's the combination of all those parts. The ability to deliver all those parts and be able to satisfy our customers is what drives us. But we needed to make sure that we were focusing on the critical few objectives, and so we narrowed it down into 4 areas: Serving customers, operating with discipline, growing the enterprise and developing our people.

First and foremost was our customers and, really, a reinforcement to the organization that our task each and every day was to exceed our customers' expectations. And a lot of it through innovative products and exceptional delivery, but even importantly, broadly defining our customers. This is intended to be something that all 14,000 of our employees can relate to and appreciate how they're contributing on a daily basis. Of course, not all of our employees are on the front line dealing with customers, but they have a very important role, particularly in a lot of the functions in supporting the organization's ability to satisfy that. So it really is a -- both an internal and external customer focus.

Operating with discipline clearly been a hallmark of our performance over the last 5 to 6 years, really focusing on lean. And so that's -- we've got to keep that going. But what we also have to do in what is becoming an even more dynamic, changing market from a competitive standpoint, from a technology standpoint, from a customer standpoint is move faster. So we need to implement and drive that capability to make more timely decisions, to make things happen quicker.

We need to grow our organization. We're always focused on growing the organization. We talk about being, at the core, a GDP growth business. But our objective is always to grow better than GDP, and we do that in 2 areas, in product development and new products, and you'll hear some of that today, and on acquisitions. We've certainly been successful in acquisitions. It's been a key part of our growth over the last 10 years. We've done 30-or-so acquisitions, adding about $1.5 billion of sales. And so we need to continue to do that. We're very skilled at it, but to increase the level of activity, we're increasing our resources, and you'll hear more about that during the course of today.

And certainly last but not the least is developing our people. I mean, the people in the organization are critical to the organization. And so one of the things we did with our strategic objectives that the senior management team decided this is great that we all had our own calling [ph] of the conclave and came back with these 4 strategies from on high. But if it's just us knowing about it, it's not going to be effective. So we brought together 75 of our top leaders in the organization back in the fall for an executive summit to, one, share these strategic ideals, but also to get feedback on how they need to be modified if at all and how we're going to implement it, how to be sure that we are successful in driving this into the future because these are what we've determined are going to be critical to our continued success. And so all things being done in these areas. Okay?

So I want to leave you with that, and I realize, as I said, I want to get you to getting more insights to our businesses and to the people who run those businesses. And I'll be back at the end to talk a bit about where we see the future going, okay?

With that, let me turn it over to Bill Tolley, President of our Hubbell Power Systems, and he'll do the introductions for the rest of his team. Thanks.

William T. Tolley

Good morning, everybody. I'm Bill Tolley, Platform President. I think I have seen most of you. But for those of you who I have not met or seen, I will be pleased to spend some one-on-one time with you on the breaks or at lunchtime. I am very pleased and in fact, proud to be joined today by 3 of my teammates. I'd like to introduce them both, first, on my right, Gerben Bakker. Gerben is 1 of my 3, what we call, Division Vice President. We have 12 business units, and each one of those 12 business units reports to 1 of 3 Division Vice Presidents. Gerben is 1 of those 3. 22 years with Hubbell. He actually started -- it's a really pretty good one Hubbell story, he started in Bridgeport with our Electrical Systems business, went down in Puerto Rico, spent time there, came back to South Carolina in our Aiken facility, went back down to Brazil, and I brought him back to Power Systems headquarters 3 years ago. Masters degree in engineering with an MBA, and truly a global guy. I think at last count, he speaks 4 languages or something on that order.

To his right, Ken Carlson, our Vice President of Sales and Marketing, 14 years with us after 16 years with Siemens, also a mechanical engineer with an MBA. And finally on his right, Mark Mikes, the second one of our DVPs. Our third DVP is traveling internationally today and couldn't be here. Mark has had [indiscernible] engineer.

So between the folks that you're looking at here, you've got 70 years of Hubbell service and over 100 years of electrical industry experience.

I should also mention a guy named a Kevin Moen, who's one of our Graduate Rotation Program alumni, is also here and he is in the process of demonstrating on the breaks and at lunchtime and before we started today our Hubbellville augmented reality tool. It's newly developed and going out in the marketplace as we speak.

Some background. I'm going to dwell on this slide for 3 minutes. This is more for the benefit of those of you in the audience who haven't heard a lot about Hubbell Power Systems or know a lot about what we do. We are, at our core, a components infrastructure company for primarily the electrical utility business. Most of what we sell is relatively small dollars, but don't mistake that for lack of importance. Our components are very important cogs in the wheel to create system reliability for our utility customers, as well as our telecom customers. We also play in a lot of C&I, construction and infrastructure, markets like airport, rail and Department of Transportation

We're a global company, just over $900 million of sales last year. We're a major player in the North American market, building products for ANSI product standards for our customers. We also compete in the rest of the world in a market that is 2 to 3x the size of the North American market, and those products are designed to IEC standards.

Over 50,000 products in my platform. Think of what we make as 85% to 90% of what you see when you look up at an aerial pole or underground, which you don't see in the city, everything except the pole itself, the cable that's carrying the current and the transformer. So everything else is parts that we make.

Our products are specified, this is important. The people who we sell to and end users specify our products, so it's the supply chain groups within utilities and telecom houses, as well as the engineering groups. We sell to 100 IOUs, investor-owned utilities, as well as 3,000 munis and coops. Most of what we sell flows through utility distribution houses, people like WESCO and Graybar and HD Supply, but we also sell a portion of our product direct to utilities who are either have the size or the scale or the capability to buy from us direct.

14 factories, 9 in the United States, 3 in Mexico, 1 in Brazil, and 1 in China. We compete with large players, people like ABB, Cooper now part of Eaton, as well as many, a surprising number of limited-line or even single-line companies. The North American utility space is still quite fragmented, which may come as a surprise to all of you; and the rest of the world market is even more fragmented than North America. And last but not least, like the rest of Hubbell, we are really a family of brands that mean a great deal to our end-user customers.

So this -- many of you have seen before, this is a description of how we compete, what makes us different. It starts with the broadest product offering, brands that stand for quality and reliability over many, many years. We combine that with what we call a value-added service basket that lowers our end-user customers, total cost of ownership. Now, that's things like e-commerce, kitting, training, technical solutions, helping them standardize their product, and recently, very important, storm stock and the ability to respond quickly when the storms hit and they need product to restore power. Relationships matter a great deal in this business, having the confidence and trust of a utility or telecom customer that is paid based on their ability to provide reliable power is very important. And remember, those end users are the folks that specify our product and want to buy our product. Being part of a strong, stable parent is more important than you might think for our customers; an A credit company that's been around for 125 years. Those utility customers want to know that we're going to be around.

And finally, the most dedicated professional, people in this space is something that we hear from our customers.

Very little standardization in this marketplace, lots of SKUs, which plays to our strength. We like to say to our customers that we make SKU complexity a nonevent. We take it off their table and put in on ours. And that, combined with the ability to reduce their total cost of ownership, which is their mission, delivered consistently, consistently over many years is our advantage. That's the way we compete.

A quick slide on what's changing in the marketplace. The utility industry as a whole has a reputation for being very slow, very risk-averse, very conservative. I can tell you, having been in this business for quite a while, that the need to change and then the pace of change in the utility world is increasing quickly. There's been 90 mergers in the utility world over the last 15 years. We expect that will continue. Why? It's pure and simple, scale economics. There's a lot of risks that have to be mitigated if you're a utility executive, lots of risk that has to be diversified. And the sheer scale and magnitude of the investments that are in front of them play to larger companies.

The industry is becoming more global. Lots of utilities are going global and, indeed, their suppliers are going global as well, and we were part of that. There's lots more uncertainty and risk in the utility space these days, more regulation, more cost to comply with those regulations. Electrical demand, especially in the last 2 or 3 years, has been flat and not growing, and rate increases have been very difficult to get approved by rate commissions. So you've got the combination of high fixed cost, capital intense, flat demand growth with large investments in front of them, makes our customers very cautious this year, and we expect into next year.

You've all heard a lot about Smart Grid. Gerben is going to talk about that a little bit later. I'll just say, that the Smart Grid continues to develop, and we are ready to pounce on that opportunity as it continues to develop.

And last but not least, the growth of renewables and the old electrical infrastructure that we have in this country throughout North America tells us that there is a dramatic and large need for a rebuilt and upgraded grid, but the ability to fund that is going to put what I call a governor on the magnitude of the market growth over the next several years.

Here's our market expectations for 2013 starting with the bottom up. The North America distribution, our largest market, low single digits, about the same as 2012. Transmission/substation, mid-singles still growing as Gerben will talk about in a few minutes, but slower rate of growth than in '11 and '12. Low singles for telecom and other construction. And the rest of the world, which for us right now is mostly Asia and South America, growing in the mid-single digits, and that rolls up to a 4% to 6% sales growth target for 2013.

This is a summary of what we're focused on. Our strategy using the One Hubbell framework that Dave talked about a few minutes ago, working North to South.

First, most important for us is bread-and-butter continuous improvement of our value proposition. So that's quality service, reducing complexity and taking cost out of the chain of our customers. Ken is going to talk more about a couple of aspects of that. Second, execute our productivity plan. It's what we call something that pays the bills, allows us to reinvestment in our business and makes us -- positions us to generate superior profitability. We're also in the process of rolling out a transportation management program, which will eventually be rolled out across all of Hubbell.

Third, grow organically and through acquisitions. Gerben is going to talk about Smart Grid. He's also going to talk about transportation markets, and Mark is going to talk about international and why we're so enthusiastic about growing in the rest of the world.

And last, our R&D spend over the last 3 years is up 60%. We want to continue to grow that R&D spend and continue to recruit engineering talent. That's to broaden our package and become even more important to our customers.

Sorry for the fire hose delivery, but I'm now ready to turn the agenda over to Mr. Gerben Bakker.

Gerben Bakker

One of the areas that we've deployed our investment in has been in the transmission market. Several years ago, we recognized that transmission would grow, driven by the need to upgrade an aged infrastructure, driven by the integration of renewable energy. We've seen wind. We've seen solar, and really driven by power needs, mostly, outside of North America, a lot of international markets. The need for power is driving transmission.

As the data will show here, over the last 5 years the spend, and this is North America, on transmission has doubled. And we have benefited from this market growth, one, by being well positioned with our product portfolio. We have the largest breadth of product that serves the transmission market, and that's the preference for construction companies. And secondly, by recognizing early in the growth cycle that we needed to make investment. Investment in our production capacities to support this growth, investment in our people, technical and support, resources that are out in the field, and our customers tell us we have the best in the industry. And finally, solutions, and later on today, here in the back, you will see an illustration of our power pack. These are kits of materials delivered right through the transmission towers to help construction crews put them up without having to search for materials and getting one kit to put it up. While we've certainly been successful in this market, it's not been easy. It's a very competitive market, with quite a few players in it, and with the large scale projects that has put pressure on our margins. But their effort and focus have positioned us extremely well in this very robust and large market that we're enjoying.

So where do we see this market going? Next slide. The industry projections are quite varied. And when you throw in that these projects across multiple states, then you have state and federal influences on permitting and approval, you can quickly see how forecasting becomes quite challenging here. But as Bill said earlier, the need to invest in the grid, to upgrade the grid is unquestioned. However, the lack of growth in electricity demand, and this is specifically in the North American markets, combined with the complexity of siding and permitting, and who gets the cost and how is the benefit of that cost allocated and shared has, well, in our own estimation, limited growth going forward.

We estimate in the mid-single digit, and I think if you look at industry analysts and experts, they tend to agree with that. So it's really a spend at really record levels, but we've kind of maintained it at those levels for several years. So with our strong position in this market, with our strong breadth in this market, we are well positioned to continue to benefit from a very robust market over the next several years.

Turning to the Smart Grid. And this, again, is a very complex topic, and it covers a lot of area, from automation and control in the substation through the transmission and distribution grids, going into smart meters and even distributed energy, bringing the energy back from the home onto the grid and very broad.

The one thing that is clear on this, for Smart Grid to work, you need a strong backbone, and that serves Hubbell Power Systems well because we have a broad product offering to help strengthen the grid. So a good part of the benefit we enjoy is simply from that. But then when you look at our play in the smart segment, we're really focused on the distribution automation segment of this. And to frame it a little bit for you, these are products that have sensing devices and they detect the fault, then they have communications, 2-way communications, to indicate what the problem is and then to send an action back, and then they have actual devices to isolate the fault and then restore the energy.

Our smart devices, and you'll see some of these in the back of the room -- I'll be happy to explain those in a little more detail to you later -- have grown at an average rate of 25% a year since we introduced them a few years ago. We also have a pipeline of products in development right now, and we'll be introducing more in 2013 and 2014.

However, one of the things that we're seeing in the Smart Grid, is that some of the market right now is being driven by policy initiatives. We, however, see the market growing at the phase at which our customers can recognize the value in the return on the investment, and the products that we're developing really focus on delivering value to our customers, and we believe through that strategy that we're well positioned to enjoy the growth of the Smart Grid.

I'll turn it over to Ken to talk a little bit about the new product development.

Ken Carlson

Thank you, Gerben. Over the last few years, it was mentioned earlier that we've made a concerted effort to grow our new product activities and fill a pipeline for the electric utility marketplace. Each of our business units has a very active portion of their business and strategic plans to look at new product development as we move forward, and link those closely with our marketing activities and also our sales and account development activity.

We're targeting more so niche players in the marketplace that may not have the leverage that we can bring to the portfolio, certainly don't have the financial strength maybe to continue to support the product line and such. It could be manufacturers have a sole source position with the utility marketplace and so we're offering the utility another alternative for that product or maybe have been poor at servicing the marketplace over the last few years.

So we're really trying to fill our gaps and expand further yet our product offering as we continue to move forward.

Our new product activities include a voice of customer. Each one of our business units, on a minimal every-year basis, has a what's next event, and that includes voice of customer activity, whether that's brought in from our field sales organization, with some of the close relationships we have with us specifying community, or whether it's conference calls or at times we brought costumers in to do hands-on development work and understanding what they see is the needs in the marketplace. We also closely monitor that, utilities can be a rather difficult for product approval, so we monitor very closely our sales activity with targeted accounts to see if they're evaluating our products when we gain approval and, of course, when we hopefully secure those orders as we move forward. So a significant aspect of our business.

Turning more so to our value-added services. Bill talked about SKU complexity and total cost of ownership, and service and response. This slide shows well a very strong story for our platform over the last few years. The 93% on-time performance while that may not be stellar in some industries, certainly within the electric utility components T&D space, we're best in class, and we've improved our performance, and, certainly, it's the strongest performance that we've had over the last decade.

At that same time that we're improving performance, we're reducing lead times. So not only are we being more credible with our information and servicing the customer base, but being able to reduce the lead times. The lead times we show there on the slide are for our made-to-order, our engineered products. Certainly, our standard products will be available in 7 or 10 days, but our more engineered products. Then, those lead times also reflect across a wide breadth of products, industry best. We're either equal with our competition and better with our lead times moving forward.

What that has helped us to do in the service level requirements or performance that we've had is segment our marketplace. We do provide some service levels for utilities in the 95% to 98% range on guaranteed lead times. We've been able to secure 11 alliance relationships over the years, adding a number of them over the past couple of years, whereby the utility gives us 65% to 80% of all their T&D needs for a 3- or a 5-year time frame. And so we're being able to secure that. That's about 20% of our North American business in those alliance relationships and very important to our business moving forward.

Also, on that 93% performance in 2012, I'd be remiss if I didn't mention, we did that in regards also trying to manage through some significant storms, certainly, Superstorm Sandy that was right here in this area. But it was a record year for storms for our business in regards to volume. Sandy was the biggest storm ever, yet we're able to keep those service levels to other customers that certainly expect us to continue to ship to them. So it's a balancing act that we had as we move forward within the business. I guess, probably the easiest thing to say is when the conditions get the most difficult, when the service requirement are the most difficult, we think we shine the best.

Another value-added activity is our e-commerce initiatives. Under the EDI side of the business, electronic data interchange, certainly, we showed 65% of our volume being transacted electronically. Underlying that is 75% of those orders are what we call clean EDI. They don't require any manual intervention or anything else, they come in clean. The catalog numbers match, the pricing levels match and such, which allows that order to go right into our planning process to give delivery dates and then be filled on those orders for the customers. So overall, 50% of our orders are coming in with little or no manual intervention whatsoever.

Vendor managed inventory, that's where a vendor, such as ourselves, is managing the customer's inventory. In some regards, placing orders on ourselves to fulfill commitments that we've made on certain service level requirements. We kind of put our toe in the water in regards to VMI in 2009, really learned about it in 2010. And you can see it's taken off from there. We've got a great story to tell to our customer base. We expect that 2013 will show a continued same trajectory on our performance there. With all those customers -- we have 50 customers on board doing about $50 million today -- we've been able to reduce their inventory, improve their turns and enhance their service levels that we provide to them, so a real story for us.

Last but not least, under the industry data warehouse. That's the support of an AED, National Association of Electrical Distributors, that's looking to establish a industry-wide repository, if you will, for information on products, whether that's minimum order quantities, standard pack quantities, dimensional information, voltage ratings and such like that, we've strongly supported that initiative, giving them information on some 23,000 SKUs. But more importantly, we're trying to find ways to be able to convey information to a new buying customer base, new specifying customer base, with the aging population and such.

Unknown Executive

Thanks, Ken. So that's based on the chart, our rest of world sales have doubled since 2009. While we're very pleased with that, we also recognize we're just scratching the surface. If -- from our estimate of the outside North American market, it's 2 to 3x the size, and that's on a conservative basis. More people, more geography, and not only are they bigger, they're growing faster. Take places like South America and China, it's 3 to 5x the growth and energy consumption per capita than we see here in North America. But even without that growth, it's still a huge opportunity for us. When you butt up $140 million in sales against an $8 billion to $10 billion market, we have a long -- a great opportunity for us to grow.

Although the opportunity is tremendous, it's not without challenges. As mentioned earlier by Bill, most of our products are designed around the North American ANSI standard, while many places around the world have IEC standards and local requirements that we have to adapt our products to make. We also need to allocate more resources through the rest of the world growth. The good news is we're addressing both. We are adding resources on the technical side. A number of engineers have been put in place to pursue new product designs, new product development. We're making good use of the R&D facility in India, ramping up our use of that facility to, again, accelerate our new product.

From a sales perspective, we've tripled the number of salespeople, more feet on the street, over the past few years. And we've added dedicated resources into our business units, 7 to be exact. And those positions that we refer to are called International Business Development Managers. So these are people that wake up every day, and their purpose is to think outside of North America and not get caught up into all the business and activity going on here.

We're also pursuing localization either through partnerships, greenfield startups and, hopefully, some acquisitions along the way. There's an active pipeline there. The good news about acquisitions, they will further accelerate our development, our advancement, we get products right out of the gate, we get additional resources that we can put to use and, of course, the relationships that are all-important to move business in that country.

Now that you've heard from each of the panel members, I'd like to do kind of a high-level summary of telling this where we see ourselves in 2015 by summarizing some of the major initiatives.

Before I look forward, though, I'd like to take a moment or 2 to look back because 2012 was an excellent year for HPS, 7% top line growth and a very healthy drop-through to the OP. Some of that was helped by some favorable price costs, but a lot of it was just our performance and our ability to take share.

We had a great service achievement in 2012, as Ken alluded to. And again, I want to call your attention to our trademark in our industry is our storm response. As Ken said, Sandy is the single biggest storm event in our history, and we did so -- serve that well without any impact on the rest of our customers.

2013 and '14 are really a continuation of what's already begun in 2012, that investment in the technical resource and sales personnel. And really, the focus being new product development, not just in the North -- not just in rest of the world, but in North America and not just in electric utility. Hubbell Power Systems sales are about 17% in other markets, C&I, telecom and water. We're making similar investments there so we can pursue a higher penetration in those markets.

And really, 2015 is where we see things really starting to gain momentum for us. All the activities that we're doing today and the resources we're adding really should be paying off at that time, not only have more markets that we'll be penetrating, more countries that we'll be participating in, with broader product offerings and resources to go after it.

With that, I'll turn it over to Bill for the last slide.

William T. Tolley

Great, thank you. I want to leave time for questions, So I'll just leave it right there. We think we're really nicely positioned in some pretty attractive markets. Infrastructure requirements in this part of the world are going to grow. The rest of the world is going to grow even faster. We've got a compelling value proposition and ample room to grow.

David G. Nord

All right. Thank you, guys. I want to open up -- we've got time for some few questions. And I get the privilege of being emcee. So Jim Farrell has got a microphone, so he'll -- all right, Mr. Sprague?

Question-and-Answer Session

Jeffrey T. Sprague - Vertical Research Partners, LLC

Just going back to the storm impact that you mentioned, how far out of the box were you relative to history on storm, all in? I mean, Sandy was the driver. But just help us think about payback, if you will, in '13 if you return to some normalcy.

David G. Nord

That's probably a good question for Ken as our -- the sales guys love to talk about the storm response.

Ken Carlson

Certainly, Sandy was the biggest storm ever. Sandy would represent our biggest year ever just in and of itself. There were other storms earlier in the year, some of those names escape right at this point in time. But our storm response or our store volume was probably about -- was just about double our average. It was bigger than Katrina year, which was a strong year. But our average is probably in the $10 million range per storm, if you want to call an average. It's hard to call averages anymore.

William T. Tolley

If I could just jump in, here's the thing to remember about storms in this business and for most utility suppliers. In a good year to a light year for storm activity, it might swing this platform's top line by 1 point or 2, that's not really the story. The story about storms is how businesses react to the requirements of utilities when their power is out. And you build years of goodwill by being able to respond appropriately and timely to get the power restored quickly. And that's one of the things we're proudest of. So it's not so much a top line, short-term, quarter-by-quarter opportunity for profit as it is goodwill building to build market share over core times.

David G. Nord

I think the other thing, Jeff, to keep in mind, we've talked about is, Sandy was such an intense, so significant and so intense in a short period of time, that there was an element of taking away resources from other activities in the industry. So it wasn't -- we would have loved it to have been incremental to normal business, but some of it took away from it.

Jeffrey T. Sprague - Vertical Research Partners, LLC

Just a longer-term question. The challenges of no electricity demand, I think, are pretty well understood by the folks in this room. The FERC back in November, though, did put in, for lack of a better term, bonus ROEs on projects that relieve congestion and better interconnects to Power-Gen and that sort of thing. Do you actually see any of that kind of pulling through? Do you view that as incremental demand for your business?

Ken Carlson

I'm not sure we view it as an incremental. The prognosis for the industry, as Gerben talked about on transmission, is pretty strong. It's certainly at a record level, probably to flatten out over the next couple of years moving forward and such. I think it will help legitimize some of those or allow some of the utilities or also just the investors to move forward with some of those projects, be able to financially justify them and make sure that prognosis or that forecast really does come true for the opportunity.

David G. Nord

We got time for one more question because we want to, to be respectful of your time, keep things up. So if you didn't get to ask a question, it's Farrell's fault for not giving you the microphone. But these guys are going to be available, and I would really encourage you to spend time catching up with them on the break.

Jeffrey T. Sprague - Vertical Research Partners, LLC

With so much room left to penetrate rest of world, I mean, I would imagine the pipeline for acquisitions is fairly large, so what's sort of keeping you measured with growing that rest of world business more rapidly?

David G. Nord

Gerben?

Gerben Bakker

Yes. I've spent several years of my career in Brazil, so I certainly appreciate some of the opportunities that are available in South America but it's not just South America for us. We're very active in Asia. We have our own factory, and it's an active part of all of our jobs here to look for acquisition. It's hard to tell you exactly when and how many of those will happen. One thing that I can tell you, our activity on international is as large, if not larger in our focus than it is in North America. So certainly, there's opportunities in North America. We see more opportunities in international. To give you an exact number of how much that will represent in growth, I can tell you that it's very active on our focused items to pursue.

David G. Nord

One of our -- one of the limiting factors, I think, that you were referring to is really within -- if you think about what this group has said about the value proposition and what our overall reaching philosophy is on reliable electrical solution, and, really, the reliable solution can't be underestimated. It's really critical that we're able to do what we say on a timely basis. So we've had a long-held philosophy that we won't do anything where we're dabbling because there's too much reputational risk. If we're going to do it, we're going to do it, we're going to make an investment, we're going to commit to it. So that can tend to have us to be a little more cautious and a little slower, but no less committed to the opportunities. So with that, I want to excuse these guys, so we can move on to the next group. And as I said, they'll be around certainly and I would encourage back by the product displays.

David G. Nord

Next up is the Lighting platform, and while these guys are setting up, I'm sure you're going to have a lot of interest -- the lighting industry, as you know, has been a very dynamic and very changing industry over the last several years. And I think Scott and his team will be able to give you some really good insights on what those opportunities are. So with that, Scott?

Scott H. Muse

Thank you, Dave. It's a real pressure to have the opportunity to talk to you today. With me, I've got 2 of my team members: Kevin Poyck, who is Vice President Brand Manager for Columbia, Alera and the P2 brands; and then, Jim Decker, who's Vice President Brand Manager for Progress Lighting and Prescolite; and Kurt Versen. And I'll let them tell you a little bit about themselves when they come up. So if I talk about the business overall, what I would want you to know is we serve about an $8 billion market. We have almost a 10% share of that market, and what we bring to that market is a package of 24 premium brands. And those brands, that package really gives us the opportunity to participate in just about every area of lighting, about 93% of the applications.

So with that, we have this very long-term history with these brands, which includes brands like Columbia, Progress and Hubbell that have been around for over 100 years. So this gives us significant brand awareness and brand preference in the national market. So if we look at our roadmap, we really are striving to be #1 in specification brands, as well as continue our position as #1 in residential brands. And by this, we see these as some of the most profitable segments of the lighting business.

We have 4 integral strategies to achieve this objective, and it begins with target market penetration, which really means we're focused on those markets that offer us the greatest opportunities for growth. The second is new product technology development, which means that we strive to lead in new product innovation, in lighting. We're looking at continuous cost reduction, which really means we're trying to eliminate the waste in our business. And finally, superior customer support, which means we're striving to be the easiest lighting company with which to do business with.

So if you look at these key vertical markets that we're targeted at, it's hospital; health care; schools and education; industrials; the federal government; I might add that we are 1 of the only 2 suppliers to the General Services Administration, that's actually certified; and then finally, homebuilding. So if you look at these target markets, they really have a lot of things that you might say are in common. They're all looking to reduce their use of energy, to reduce their operating expense, as well as to reduce their maintenance expense. But there's other things that are important to them as well, safety and security.

And finally, sustainability has become much more in focus. So as we look at our value proposition with the new technology, these products have actually increased what we can provide in meeting the requirements to the demands of these target markets.

So if we shift to the new technology specifically, what we've been focused on is we've developed a center of excellence, which is a makeup of scientists and engineers that are trying to develop the new technology in modular, scalable designs or solutions so that we can apply these to all areas of the lighting business. And specifically, a critical success factor is reliability testing. And by this, the legacy products had a historical warranty of a 1-year period; the new technology, by most companies, are offering a 5-year period. This is significant in terms of change. Therefore, we actually test all of our products for the longer-term 5-year period to confirm their reliability to exceed those expectations.

In addition, we've been involving this supply chain to become more vertically integrated. And as a result of that, our value proposition continues to increase because the cost price continues to come down.

And finally, we look to be a complete solutions provider. And by this, what I mean is we want to provide solid state solutions for all lighting applications and the controls for those lighting applications.

So how are we doing at those? And I would begin by saying, we started launching these products in 2007. And over the 6-year period of time, by 2012, our adoption rate was 17% of total sales.

In the fourth quarter of 2012, we were at 21% adoption rate. So we feel we're well trending towards our projection to exceed 30% of our sales from the new technology products by 2015.

If we look to our actual supply chain and how this has changed, it really begins with the act the legacy products really came from other sources that provided lamps, ballasts and sockets where we and other manufacturers basically produced the optics and the fixtures.

With the emerging technologies for the solid-state products, we only need to outsource the chip. Now we only deal with Tier 1 suppliers, and I can tell you the chip is being very rapidly commoditized. So we have the ability to now produce our own printed circuit boards, design and develop our own LED power supplies, our thermal management systems, light engine assembly and the light fixture assembly. So we've become much more vertically integrated at a much more value or content and, therefore, we have the ability to control our own destiny in the future in a greater way.

Another reference point for you is in regards to the IES Progress Report. Now this is the Illuminating Engineering Society's communications to the industry each year what are the greatest advancements in the science and art of lighting. And for the fifth year in a row, Hubbell Lighting was recognized with more products than any other lighting manufacturer. This year, 20 products of different categories were recognized. So we've actually achieved over 64 awards in the last 24 months. So a great reference point.

At this point, I'm going to ask Kevin to come up and talk to you about our retrofit/relight business. Kevin?

Kevin Poyck

So I'm going on my eighth year now with Hubbell Lighting. And when you think about that relative to the years of experience that you heard from -- or you will hear from everyone else in the lighting industry in general, I'm kind of a newbie. But I spent 10 years in the automotive industry and another 3 years in the appliance industry and it is really amazing that each of those industries along the way, while I was there, controls technology, electronics, transformed in those markets. And we're at a very exciting time with lighting, in that now we're seeing the same thing happened with LED.

So with that, speaking specifically about the relight/retrofit market, I don't give a presentation where the first question doesn't come up is the, so how big is the market, how do you size the market? And if you look at the graph there, this is really how we look at it. There were 2.7 million commercial buildings built in the U.S. before 1980. And just under 20% of those have been upgraded with some sort of energy-efficient lighting at this point. So that leaves us with over 80%, or 2.2 million buildings, as our relight/retrofit opportunity. So that's a big number. It's the number I certainly get excited about, but what's even more exciting is that we have the most energy-efficient technology at our disposal now than we've ever had. When you think about solid-state lighting and energy-efficient fluorescent lighting controls, we're able to save 30% to 80% of energy over the traditional technologies. Couple that with long lives of these products, 50,000, 60,000, 70,000 hours, and you've got a significant maintenance savings. You've got utility rebate, local states and federal, up to $200 a fixture, up to $70 a sensor, and EPAC tax incentives of $0.60 a square foot. So when you couple all of that together, we've got return on investment now for relight/retrofit projects of anywhere from 1 to 3 years, and that's only going to improve. As the price we pay for energy goes up and the cost of technology continues to come down, those ROIs are going to get better as we move into the future.

So considering that significant opportunity, our strategy has really been to surround the market from as many different channels as we possibly can. We purchased a company that Scott referred to, P2, Precision-Paragon. It was part of our Varon acquisition in 2008. And they go to market through Energy Service Company.

Now these ESCOs are really responsible for working with end-owner users and operators, and they manage energy upgrade projects really from beginning to end. So they'll do the energy audit, they'll contract the laborer, and then they source the lighting and controls solutions from companies like Precision and Paragon.

We've got our major national accounts, these are longstanding relationships we have with companies you would recognize in the areas like the quick-serve market and grocery store chains and home improvement centers, and we know these folks very well. In many cases, actually, Hubbell lighting products were installed when the building was originally constructed, and now we're replacing Hubbell lighting products with new and improved Hubbell lighting products. It doesn't get any better than that. And when we know them -- we know their applications well, we know the performance requirements and the aesthetics requirements, so we can proactively provide to them the most energy-efficient, customized solution that they could possibly get.

And really, the third channel I want to talk about is our traditional channel, electrical distribution. This channel has been a little slower to take hold into the relight/retrofit business, because traditionally they've been focused on new construction. But that's starting change. I would tell you, the major projects that I've been involved with over the last 12 to 18 months, whether it's upgrading a school or an office building or a medical building or a warehouse, the major projects through this channel have been relight/retrofit versus new construction. And the electrical distribution network recognizes the opportunity that's out there. They're actually putting together dedicated teams now that are focused on energy upgrades and 100% on relight/retrofit.

So really, the third leg of the stool is our product solutions. At Hubbell Lighting, we have a full line of indoor, outdoor, industrial, parking garage product offering to meet the relight/retrofit marketplace. In addition to that, we have lighting controls solutions, daylight and occupancy sensors, nanocontrol sensors, and really, the latest and greatest in controls technology, wireless controls. You see our wiHUBB solution there of full wireless lighting controls system. So there really isn't a relight/retrofit application out there you would find that we wouldn't have a product to serve.

And then finally, we're going to be launching here at the pilot in 2013 a financing program. For our customers who are maybe struggling with that decision to invest the capital upfront, they'll be able to take advantage of this opportunity to leverage the program. And the idea here is that their month-to-month energy savings would pay for the financing of the program.

So really 3 key takeaways when you think about relight/retrofit when you walk away from here today. Number 1, the market opportunity is significant. Number 2, our strategy is to surround the channel from as many channels as possible, and we want to maximize our market penetration. And number 3, is that we have a comprehensive set of product solutions that position us extremely well to take advantage of this significant opportunity moving forward.

So with that, I am going to introduce Jim Decker, and he's going to talk to you about the residential market.

Jim Decker

All right. Well, in 2006, when the single-family housing market peaked out at 1.8 million single-family units, more than half of our business came from builders. And so as the market went down, it was obvious that we really had to look at channel diversification in order to maintain OP. So if you look at the chart on the right, you can see a very different picture. We've enhanced our position with lighting showrooms. We've retrained our sales force to be able to pursue more of the light commercial business. And we really established a strong position in the Internet channel.

So now the story I'm going to be able to share with you today is one of a diversified market channel coverage, with now the tailwind of a stronger single-family housing market coming in.

Let's talk about the new construction market for a minute. One of the other things we did during the downturn was gain market share with single-family builders. We now have 7 of the top 10 under contract with progress. We have over 470 builders in total, making up the regional and local agreement.

On the multi-family side, we see a lot of strength here coming into 2013, with very high occupancy rates in the large and small markets. And it's also being driven demographically. All of the Echo Boomers that have graduated from college are going into apartments. And really, we're predicting that this will continue to be a strong market through 2014.

On the light commercial side, that's another area where we're seeing some tailwind, particularly if you look at assisted living and hospitality projects. So those are 2 types of projects that use residentially oriented types of products in light commercial applications. So they're good markets for progress.

We talk about the remodel market. This is another area where a lot of the work that we did during the downturn to diversify the business is now going to pay off as the economy gets a little stronger. And talking first about the Internet, it's a push-pull strategy.

On the push side, we've really had a laser focus on the major players on the Internet that are making a difference in selling lighting. So then on the pull side, we've been driving our search engine optimization, but also from the social media side, not just shotgunning Facebook and Twitter, but we're really doing a rifle shot on the websites that consumers are using for home improvement, things like House and Pinterest. We're finding much more traction there in terms of results from our efforts.

In the home center channel, we're still a core vendor for Home Depot. We're on all the Home Depot stores across the United States. They lean on us very heavily for not only that day-to-day off-the-shelf business, but we're also their primary source for in-store special order, as well as if you go on homedepot.com, you'll see that Progress Lighting is also their primary source there for special order.

And in the core lighting showroom channel, over the past 3 years, we put a lot of effort into becoming Ferguson's #1 lighting source. We're the only lighting vendor that's in all of their distribution centers. If you're not familiar with Ferguson, they are really the only large-scale lighting showroom chain in the United States. They have over 200 locations that have lighting, as well as bath and plumbing products. So it's a good combination, not just relying on somebody to come in and buy lighting. They could also get a hit on somebody that was looking to upgrade their bathroom.

And then finally on the merchandising services. This is something that we do to leverage our premium brands, Thomasville Lighting being a license that we have with Thomasville Furniture for lighting, and then of course our core products brand.

So finally, some really exciting news on the LED product front. LED in the residential channel has not been achieving as quick of a foothold on the commercial side because of the price point. We've got some exciting new products that are going to be introduced in Q3 of this year that are going to be of substantially lower costs. There would be a nice, warm, even light distribution, fully dimmable with a standard dimmer. And they won't be able to beat this scalable module approach. It's something that, for example, like an outdoor lantern, it might only be 3 watts and would be equivalent to what would be a typically a 40-watt A lamp, if you would threw in your outdoor lantern. And then on the top side of that, we'll have some that are about 11 watts that would be equivalent to a 150-watt A lamp output.

So some really exciting stuff for us on the product side. This scalable approach will be enclosed in the ceiling fixtures, recessed downlights -- so we do have a sample, one in the back. We'd be more happy to show you -- as well as wall sconces and outdoor lanterns.

So our primary markets for these products will be multi-family, California for Title 24, which requires energy efficiency, and any applications that require Energy Star products.

So good strong story for progress in new construction, with some tailwind there. Retrofit market for channel expansion and then also with some exciting new products coming in later on this year.

I'll turn it back over to Scott.

Scott H. Muse

Thanks, Jim. So if we look at the 4 primary strategic objectives consistent with the One Hubbell, in serving the customers, we're focused on things like improving our presale and post-sale capabilities. In the area of operating with discipline, here, we're continuously trying to reduce our cost in things like our sourcing initiatives, and as well as our productivity savings through our Lean Six Sigma programs.

In the area of sales force optimization, we're looking here to upgrade our manufacturing rep sales organization and new technology penetration, its speed and traction of those new product launches.

In the area of the development of people we're looking to increase our bench strength here.

If we look at the talent management efforts overall, we have a target pipeline, looking at gap positions like the future of engineering and creating that pipeline for those roles. We've got a very successful college internship program, which is the basis for our college recruitment program. And we have a high retention rate of those college recruits.

In the area of training and development, we have formalized training programs for all of our high potential people, with a development plan specifically for those folks as well as a mentoring program. So this is complemented by our annual talent review that we conduct along with succession planning for the entire enterprise.

So if we look at our timeline, I would tell you, looking back at the past, we've been focused on significant change management, consolidation of things like moving to a shared services business model, consolidating plants, distribution centers and offices, at the same time, consolidation of our IT systems.

So we have significantly reduced our cost of doing business, which increases our ability to compete in the future. If we look to 2013, we feel as though that all of our markets look to continue to improve, we feel we are well-positioned to take advantage of that. The challenges are areas like representation with the churn of manufacturers' reps in the marketplace due to the industry consolidation and also keeping pace with the new technology given the fact we provide to all lighting fixture applications.

If we look to 2015, for that longer term, we see our markets continuing to improve and we believe that we're well positioned to take share through our leading innovation, as well as we look to acquire gap-filling companies that will strengthen our lighting package.

So in summary, I would tell you, we expect to remain a leading industry player, we're focused on being #1 in the specification brands and continuing our position as #1 in residential brands. We're a market-driven organization looking to increase our penetration in our target markets, lead an innovation; superior customer support and continuous cost reduction. And we're focused at the greatest opportunities for growth, which is really relighting/retrofitting the markets that we serve, the rebound of the residential market and using the new technology like solid-state lighting and lighting controls. With that, I'll turn it back to Dave.

David G. Nord

All right. Thanks, Scott. There's no doubt, in listening to these guys, that this is a very exciting time in the lighting industry. And I know I speak for Scott that he was the most excited when I suggested that we'd bring some of the folks along because, as you recall, he got overwhelmed by the questions. So he's happy to have some other guys come and field some of the questions. So with that, let me open it up. We will get some mics, Jim, Howard. Who do we got, Chris?

Christopher Glynn - Oppenheimer & Co. Inc., Research Division

Scott, as you look at LED, it's come a long way in terms of spend of sales, going up 30% plus, I don't think anyone does that. What's the range of outcomes that could have on the lighting margin? What's still dynamic about how that's evolving the margin mix? And what's kind of a done deal, we don't worry about that anymore?

Scott H. Muse

I would tell you that our experience so far is that as the cost comes down, the price comes down. So, so far, we've been able to maintain our margin consistent with our legacy products. So based on what we've experienced so far in the last 6 years, we expect that to continue to be the case.

Christopher Glynn - Oppenheimer & Co. Inc., Research Division

Okay. And in terms of overall profit dollars, how does that impact the overall business over time?

Scott H. Muse

Well, we certainly see those prices leveling down to where they're more on an equalized basis with the legacy technology. So up to this point, it's still a small percentage of the overall sales, at 17%. So we are replacing those legacy products. It's not incremental. And the margins that we're earning on those would be consistent in trying to provide a value proposition with what we've earned on those legacy products. So it really hasn't had a significant impact in contributing greatly to the contribution margin.

David G. Nord

But I think, Chris, the other think to keep in mind, in Scott's chart about the more vertical integration is important because now we are in a position where we're controlling more. It's not simply what's the cost of these different components in a cost plus, but we're more integrated in developing the solutions and then in price the solution orientation more than just a simple commodity product. Okay?

Unknown Analyst

Could the leaders of the Residential and the Lighting business speak to the relative portion of their business within Hubbell Lighting, that in the relative profitability? And second, where do they see the leverage in their margins as over the next couple of years, particularly in residential, which has had its issues since the Progress Lighting market contracted. So is there a significant leverage opportunity? And can I have another question?

David G. Nord

Okay. Well, I mean, a couple of things first. As you know, we talk about our Lighting business as a proportion of our -- particularly our residential business is part of our overall business has become a much smaller percentage just because as we know, the housing market down 70% due to things that Jim talked about from a expanding our market penetration has helped us not have 70% decline in that business. That has actually set us up quite well going forward. And that has historically also been a good margin business but one that, not surprisingly, suffers when you have that kind of decline. So a lot of upside potential on the residential side. The rest of the Lighting business, it varies. But as Scott talked about, we have a focus on being #1 in specification brands, and the specification business has a higher-margin potential. So the challenge is continuing to grow and maintain that as we grow the segment. But I'll let Jim add to that from the potential on the business itself.

James Farrell

What I would add is that from a agreement standpoint with the builders, agreements that we've written over the past 3 years, as you can imagine, when the market is going down, the level of competition goes up. And so the agreements that we've written in the last few years have been more expensive than they were before. We've got constant wage pressure in China on labor rates, 15% over the past 3 years. And we've already heard that the -- post-Chinese New Year, Southern China, the minimum labor rates are going up 20%. The exchange rate pressure is another thing that we're faced with. And over 250 competitors in our space. So definitely, there is upside in terms of drop-through, but we do still have some cost headwind that we're dealing with.

David G. Nord

I think Kevin has an interesting perspective because in addition to the relight/retrofit, he's also responsible for our fluorescent business. Kevin?

Kevin Hallinan

Exactly. And a similar kind of story. The price of the technology comes down, we are running just as fast as we can to improve productivity because the price of the marketplace for the end products to be successful is coming down just as fast. And Scott mentioned that in order for the volumes to really to take off in LED, they have -- the price has to approach what the legacy technology was.

Unknown Analyst

[indiscernible] My second question has to do with the competitive landscape in the Lighting market. In the last 2 years, 2 of Hubbell's domestic competitors have been acquired by much larger companies. And then there's Philips, which has been acquiring actively lighting companies. How do you -- what's your perception of how the competition is evolving? Has Thomas & Betts -- and, of course, it's too early to tell with the Cooper and Eaton, does there seem -- do you think there's going to be a more or less of a focus of these companies on the lighting market? Are you seeing an influx of managers fleeing those businesses?

David G. Nord

I mean, from my standpoint, I think we're very well positioned, Martin. I think less on the acquisition consolidation and more on the technological change that's going on in the industry. But maybe, Scott, you want to speak to what you're saying?

Scott H. Muse

Sure. I think that in this case, we haven't seen a lot of change as a result of either of those companies having been acquired as far as their lighting business. And at this point, I can't give you further insight as to what they might do differently as far as the future. They're both very good competitors and I'm sure they'll continue to be such. As far as the overall industry, there's a lot of new entries into the industry with people that are bringing themselves into the market because of the new technology, and so we see a lot more smaller competitors. But our primary competitors are still the main 3 people that we've always faced historically, and that's where we know that we have to battle for the share on an everyday basis.

David G. Nord

Okay. I think we're going to stop here, and just give you guys a chance to refresh, coffee and ask any questions, hopefully. I encourage you to see the product display. To keep with schedule, we wanted to keep this to 10 minutes. We'll start back up in exactly 10 minutes. So hopefully, you can be back in your seats. Thanks.

[Break]

David G. Nord

Let's see if we can regroup here and get going. 15 seconds to find a seat. All right. We're settled enough. Let's get going to our next section. I want to introduce, who will talk about Electrical Systems, Gary Amato, who's had his sphere of influence expand continually over my tenure and to a level of performance commensurate with that expansion. So I look forward to having Gary give you a little more insights on the Electrical Systems segment and some of his key players. Gary?

Gary N. Amato

So I have 2 colleagues with me today, Craig Soucy, who heads up our Acquisitions group, Vice President for the Platform; and John Szupiany, who heads up our Wiring Device Systems Marketing group.

We're in a $12 billion market. Last year, our sales were $1.4 billion. We exceeded both the numbers that we talked to you about last year, our targets and our goals. If you look at the chart, like all the rest of Hubbell, we're a brand name, and you'll see there are some new names in each segment.

In the Connectors, Grounding & Tooling segment, where BURNDY is the anchor brand, we added Continental Industries at the end of the first quarter. In the Commercial Construction segment, we added TayMac. In the Harsh & Hazardous segment, we added Vantage. And in the Industrial Electrical segment, we added Cableform and Metron.

So I think we've talked in the past, and Craig Soucy will talk about this more, that we have a real focus on acquisitions. We want to do more. We staffed up to do it, and we want to build out each one of our groups to do this.

Like everyone else at Hubbell, we aligned our strategic objectives with the 4 company strategic objectives. And what this really is, not that we didn't have any of these objectives before, it's really about breaking down silos, silos within our platform, silos within the other platforms, and learning to work together more so that we can leverage the whole company. So I'll try and give you some examples of that as we go through our presentation.

In terms of serving our customer, we're going to spend a lot of time on new products. Operating with discipline, we mentioned already, we met our sales goals last year, and certainly, we were at and above the company's goal of 50 basis points of margin improvement. So with the growth, we also got the margin growth we were looking for also.

Acquisitions, Craig will talk about that and what we're doing to do that faster. And finally we'll talk a little bit about developing our people.

In terms of serving our customers, we thought this would be a good example. The brochure on the right is some of the BURNDY products. And these are grounding products. And we don't talk so much about grounding but it's a big deal in industry to ground. So when they drain the reflecting pool to redo it and relit it, there was probably about a $400,000, $500,000 order for grounding products. And so we've tried to grow out each part of our segment.

So if you look at the bottom, there's several new product areas. The one that's mentioned, exothermic, is another type of grounding. It's very popular. And so we wanted to get in that business. And we targeted Continental Industries and were able to pull off that acquisition.

Again, BURNDY's been a great acquisition for us, and we continue to grow that business out. And the exciting thing for us is now that we have BURNDY's in acquisition, we have acquisitions doing acquisitions. So that whole effect just multiplies our efforts to grow faster.

In terms of investment for new products and things in the Harsh & Hazardous area, which continues to be a key focus, we've talked before, we have solution centers and demo rooms in Houston, Texas and Reading, PA. Now we're opening up one in Dubai. In fact, we just had a large contingent of people coming back from Dubai.

We're spending a lot of money on worldwide certification. So Asia [ph], cost for Russia, for whatever, wherever we go, certifications are a big part of our business, and we're very much international in this business.

I'll talk a little bit about new technologies that we're in. And finally, here again, to build out this business, we bought Vantage explosion proof connectors, which are on display in the back, in December. And these connectors are explosion-proof, and with all the new regulations going on in light of the Gulf disaster, there's increased scrutiny to make sure that you really have the right kind of connectors on these rigs and applications.

So as we said in new products, we're also in the LED business, just like my colleague Scott is. The real point of this slide is if you look at the generation of the LED, better light output, lower cost relative to non-LED solution. And we have a robust line and we have a continuous product improvement development.

Now we use some of the products that Scott makes. Some of his drivers and this vertical integration, we share that. We share lenses, we share ballasts. We're also not just concentrating on oil and gas, but we also do vapor dust ignition, which goes into grain elevators and food processing, so we're addressing that market.

And finally in the lower left, that's a picture of our Australian subsidiary, where we've introduced LED lighting into mining -- underground mining. So a number of variations in a continuous investment in LED.

Last year, if you were here, we talked about our worldwide explosion-proof control station. I'd like to call this how we developed this product, which will be introduced for sale at the Offshore Technology Conference next month. I'd like to use the term we use called "effectuation." Rather than going southbound to bottom, we try and look at our resources and capabilities and then we try and look at the possibility. And we actually designed this product in Scotland one day over dinner by saying what are our capabilities? What could we do with those? And we said, by using all of our different divisions, we could build this station. And so we had our wiring device people do part of the design; our Chinese operations did part. So we really like to take and say, what's our capabilities and what can we do with those capabilities to produce new products and results?

We've also become a leader in Voice over IP technology for Harsh & Hazardous. We're one of the leaders there. So you'll find these phones on rigs and refineries. And we also do plant-wide systems for emergency notification. And we have quite a bit of development for new communication standards and better man-machine interface with those products.

As mentioned the Vantage acquisition. Not only does this give us another leg up and more bandwidth in our Harsh & Hazardous offering, but nuclear power plants are a big user of this too. And with the retrofits going on there, we see a very bright future for this.

On the Industrial business, you may be familiar, we bought a #1 brand, Metron and Cableform. Medtron is fire pump controllers. You mentioned Sandy. We enjoyed a significant amount of business and increase because the basements were flooded in New York, and these fire pump controllers have to be replaced.

And Cableform, we're focusing in on sales into places like Mexico and, again, Saudi Arabia with our technology.

Finally, we're in the high-voltage business, as some of you know. Some of that business is dependent on high-voltage transformers and cable. That's kind of in the bottom of this cycle. But thanks to investments that we made a couple of years ago, we've expanded our product line and breadth, so we believe we've come through the bottom of the cycle and we're headed back up, at least our order rates tend to support that.

One of the big things we're doing is we've developed new products for distribution. Transformer testing. This is all in line with the Department of Energy goals to get more efficient transformers, a few percentage more efficiency in your full-mounted of transformers that my colleague Bill Tolley connects to, makes a big difference in the energy usage. So we have a complete system that's accredited by the Swiss Certification Standard that automatically tests the transformers in production and provides you with the test report. They're about $1 million a copy, and we booked 3 or 4 of them. And we have active quotes out for 50 or 60 of them. So it's an exciting new product even there.

And now I would like to turn it over to my colleague, John Szupiany, who's going to talk about the founding brand of Hubbell over 125 years ago, our wiring systems.

John Szupiany

Thanks, Gary. It's an honor to have the opportunity to talk about the Hubbell Wiring Device brand, [indiscernible] brand and original brands of Hubbell Wiring Systems.

A common theme throughout the day that you've heard is new products and acquisitions. And another theme that I'd like to add to the menu is cross-selling and the cross development of products. So there's plenty of time in the Wiring Device cycle, plenty of opportunity for new products. One is we're looking at a multiyear strategy on our cable management delivery systems that expands our served markets. During 2012, we started the plant, expanded the wire [ph] basket. Also we're offering new series of our Fire-Rated Poke-Through. We'll continue over the next few years with, let's say, significant number of new products geared around the Fire-Rated Poke-Through. It has also 4 block segments that give users what we call increased capacity, flexibility for power data, audio-video connectivity, which is really key when we blend that with our very attractive modern decor. So those are going to grow specifications business.

A really positive development that I see unfolding in our industry is what I call the next-generation device life cycle. We have -- our USB is probably the most significant, exciting, innovated that our industry has seen in a long time, in the device industry. And basically, what it does is it combines the power of a traditional receptacle with the USB ports charging tablets, smartphones and computers. We have it on display in the back. I welcome you back to take a look at it, check it out. We believe it's a best-in-class product. The reason we believe that is that it has 3.0 AMP charging capacity. What does that do? It charges 2 iPads simultaneously. And it also has fast charging capabilities that pretty much mirror [indiscernible] a traditional power receptacle.

So just about everybody that we show the product to has very high, strong interest in it for personal use and also business application, ideal solutions for the hospitality, [indiscernible] Retail and residential markets.

Another new development a little further out is ground fault UL [indiscernible] diagnostic capabilities for ground fault receptacles. So these are just 2 examples of what I call next-generation devices that we see providing opportunity for price appreciation and also a shortened replacement cycle. Cross-selling of products is a big deal within Wiring Systems, and we have active projects with our RACO, KILLARK, Quazite [ph] and BURNDY's teams to develop cross-sell products. I'll talk a little more on the next slide. But a good example is [indiscernible] taking a grounding and bonding [ph] solution into the data center market for the equipment room.

So we're increasing our investment in new product solutions in the Wiring Device platform.

RACO has some very strong momentum as a result of the TayMac acquisition. TayMac provided RACO with one of the industry's leading weather-proofed enclosure offerings. And a key thing there is the TayMac brand by itself, as a standalone brand, it's underpenetrated in the electrical distribution channel. So given the resources that Hubbell RACO could provide TayMac, we're able to effectively penetrate electrical distribution.

So after closing the deal, we completed a significant number of conversion as a result of that, and that's the key focus of our efforts at RACO for 2013. Another initiative that we started several years ago is with a big-box retailer, leveraging the relationships and also expertise that RACO has to sell a broader solutions set into the retail big-box retail channels. So some of the success that RACO's had recently, plugs and connectors, TayMac weatherproof enclosures, grounding and bonding solutions, and also residential floor boxes and light commercial floor boxes. So if you stop by, you can also see that back on display in the back. So there's additional opportunities to cross-market, to cross-sell those additional products into the retail chains and additional chain also. RACO is capitalizing on these growth opportunities through TayMac and also cross-selling opportunities. BURNDY's continues to increased its value to our channel partners and end-users. It has probably one of the most expensive offerings of connectors, grounding and cooling systems in the industry. It has new products and acquisitions. A good example of an acquisition sitting in for BURNDY and expanding its presence is Wiley, more in the solar grounding and bonding space through Wiley's patented bonding system that basically bonds solo panels to racking equipment. And really, the key with Wiley is under leverage, similar to the TayMac story. BURNDY provides the resources and capabilities to greatly expand its penetration.

Gary had mentioned about Continental and exothermic surrounding, another key focus area for BURNDY in product development. And one of the keys that separates BURNDY from competition is its cornerstone philosophy of one integrated system, from having the sizing connectors, tools and also a quick visual inspection system. So it has some very innovative cutting tools geared for the utility linemen that it will be promoting in 2013 that features single-hand operations, ergonomics, long life, ability to cut and glide instead of conductor type through a set of blades. So BURNDY has numerous opportunities through the acquisition to offer new products and [indiscernible]. I'll turn it over to Craig Soucy.

Craig Soucy

Good morning. My name is Craig Soucy. My role within electrical systems is to work with corporate business development, area model, our General Manager in our entire electrical systems team to find, close and integrate acquisitions. And I think that collaborative effort has really been a large part of the key to our success.

By way of a timeline, this effort started about 18 months ago as we are winding up the acquisition and operation activity for BURNDY with the area model and we continued on acquisition related role and set forth to start building an acquisition team and start dedicating resources, specifically to acquisitions. With the specific goal of increasing our capacity to do more acquisitions faster without compromising what I would call a Hubbell's long tradition of doing solid deals. The original idea in the charge remains is doing multiple acquisitions concurrently, position electrical systems to do $100 million of acquisitions per year, excluding what we now call BURNDY class acquisitions. This is not to say as a leadership team we are not willing or able to do large acquisition, just that those properties are pretty difficult to influence the timing and if we focus the right resources and look at the enough property, we're convinced that we can continue over a long period of time to substantially grow the enterprise.

More recently, with the successful integration of TayMac into RACO, we've recently added a TayMac controller to my team. He's an experienced individual with substantial deal experience. So, it's a nice example of where an acquisition is helping to increase our capability to do more deals.

My next point is around some of the tools that we developed to increase our capability. We developed through the last 18 months, a 54-page acquisition playbook that really covers all the activity around implementing and integrating an acquisition. It covers everything from day 1, welcome to Hubbell meeting through the first full year. So our focus really has been -- and how we've been successful, is winning the first 60 days. So our strategy really has been assurance, smooth transition to Hubbell, stay focused on servicing our customer and making sure we're hitting our numbers. Another important element is our ability to implement SAP quickly and efficiently. As an example, again, going back to TayMac, we integrated TayMac into RACO and had them up and running SAP in less than 8 months.

So how is it working? Over the last 5 quarters, we closed 6 acquisitions, which you heard about from Gary and John, and we have a full and active pipeline going forward.

On this slide, I'll talk about 1 plus 1 and can be more than 2. As we screen properties, really one of our key elements is where can we find an opportunity to make a one-and-one deal more than 2. And I think BURNDY and TayMac are both excellent examples of it. BURNDY was, and is the #1 brand. It's a great business, strong position in EV, really best-in-class processes.

For the Hubbell, we were able to provide them with additional support in big box retail and get BURNDY a position in the big red book. BURNDY helping Hubbell. A nice example is BURNDY India. Shared service facility in India, very capable and experienced, this actually now helping us profile acquisition candidates. So it's really been a great help to the other Hubbell businesses, and Gary will talk more about that in a moment.

This slide is what I call acquisitions doing acquisitions. You heard a lot about Wiley and Continental. Just a few more words. Wiley, we acquired in October 2011. It was the first acquisition for the Hubbell family, obviously #1 brand in solar grounding, a great acquisition that exceeded our growth and margin expectations by any measure. Most recently, Continental, the leader in exothermic grounding, best-in-class service levels, with one-day turnaround and so starting. The take away here is we've got full acquisition pipeline and as we go forward, we look to continue to build out. We're now calling our Hubbell grounding connectors into one group.

Unknown Executive

[indiscernible] 1 item is BURNDY India. We expect to have 200 people here. We've obviously made a significant investment in it. We should have 200 people this year, and, of course, the cost per person dropped because of the infrastructure. This is a good case where this started off as our group, but it eventually will become a shared service for the whole company. It all backs that one Hubbell idea of integrating with everybody else. So in summary here, 2012 was another good year for us. We have a good track record of achievements, and we are poised to do, we believe, $100 million here in acquisitions. We have cross strategies going. For example, we're building an addition to our China factory for, again, our [indiscernible] lighting and we want to put in our SAP business system faster. We see continued growth. We do see all of our cycles coming together very positively in '14 and '15, like we have before. And we've got a great team of long-term people, and, again, our big goal is to eliminate silos within our own group and with Hubbell. Now, with that, I will turn it back to Dave.

David G. Nord

Okay. Thanks, guys. Certainly, Gary's got the, not only the largest, but, obviously, the most diverse business to manage. So we just got a very small sample of the guys on his team. I think the element of the acquisition activity and things that we'll be going and the learning from BURNDY and others is most pronounced in some of the things that Craig has been involved in and the new product development that John's talking about is really important. So with that, let me open it up to questions for Gary or John or Craig.

Unknown Analyst

A question on the high voltage business, David. You said that you started to see improvement in orders not business replay. When will that turn into improvement in revenues?

Gary N. Amato

It was probably a 6 to 9 months lag in orders. So orders we get into Q1, we can ship in Q3, Q4. As we get into Q2, it will slide into 2014.

David G. Nord

Yes, that's one of the challenges we have in most of our businesses is the lack of visibility, a lot of short cycle. That's one that happens to be the longest cycle. Now that said, so that means like when you get to April or May, if you don't have the order, and you don't like what the year looks like, it is what it is. And that's what we deal with. The counter is that's the one business that we'll start to talk about '14 earlier. Right, Gary?

Gary N. Amato

Exactly.

Unknown Analyst

Yes, on the platforms timeline slide, in 2014 and '15, there's a common positive cycle peak late '13 and then accelerates '14, '15. Can you amplify on that and explain that?

Gary N. Amato

Yes. We'd already mentioned that we're seeing the high voltage system recover. And while we're seeing the orders pick up this year, we're really expecting the shipments to pick up substantially next year, similar to the first question. The industrial businesses some of the ones related to this deal have the lower results, but we see that now, with the better economy, picking up. And then finally the Harsh and Hazardous business came off a record year last year, but we now see that the major rigs, where we booked at a lot of business, are in the engineering pipeline, and we expect those to be released at the end of this year, again, through 2014, 2015. So in a lot of our businesses, we are looking out 18 months to 24 months based on when we get the order.

David G. Nord

I think Bill Sperry will get into a little more of the market forecast as well. Any other questions? Chris?

Christopher Glynn - Oppenheimer & Co. Inc., Research Division

A couple of years ago, you started to talk about China, now a little bit more India. It seems a little more focused. Brazil has been in some contraction. What's the appeal or timeline for investing in bricks-and-mortar in terms of the [indiscernible]?

David G. Nord

To be honest, the appeal to investing in bricks-and-mortar was never high. We've got plenty. We've got 57 manufacturing sites and 23 warehouse distribution sites. And on a going-forward basis, I would argue that, that's probably too many. The flip side is and what we like and where we get a lot of questions on from you all is do we have the capacity as the market continues. So we like keeping it available to have that capacity. But that's not to say that there aren't opportunities for investment that will -- where it makes sense. And I think you've seen that in those areas. India was one where the back-office operations really expanding on what started with BURNDY. And that will continue to expand. Latin America, particularly, South America, Brazil, has always been a market, and you heard Gerben talk earlier today from his own firsthand experience. So there will be those opportunities, but, as I said earlier, there will be where we can make a commitment and where we can have a significant presence when we do that. Okay?

Unknown Executive

All right. Well, let's give these guys a break, and turn to the next presenter who, hopefully for this group, needs no introduction. If you don't know Bill Sperry, come see me later because I would be curious as to why not. Bill's our Chief Financial Officer.

William R. Sperry

Okay, thanks. I won't ask for a show of hands of who I haven't met yet on that introduction. But I am very pleased to be up here today. This kind of signifies a little transition in the program. You get a lot of me, you get a lot of Dave. But for me, the power of a day like today is to see those 3 platforms. I hope you got a good take away of the strength of their quality brands, how well positioned they are, how their markets are poised to grow. But most importantly, I hope you got a little chance to get a flavor of the quality of the team. I know our format here, we've been kind of trying to keep everything nice and compact, so the Q&A maybe has been little shorter than you'd like. So I do just want to make sure that you everybody takes advantage as we convene for lunch afterwards to get a chance to say hi to some of those folks that you maybe haven't met them before, and really get a -- you'll get a really good flavor of who Hubbell is and what our leadership is all about. And speaking for myself, very proud to be wearing the same jerseys as these guys, and I think we're poised to do great things. So and as you go back there, please do notice kind of some of the product displays. There's a really interesting Hubbellville power product cutaway, almost a virtual-reality thing back there. There's a lot more, I hope, that you get out of the things than just slides and there's a lot more that goes into it than just the slides. So I did want to take a second to thank James Farrell and [indiscernible] Lancaster for untold billions of details that go into pulling today off and making it sort of successful for all of us and bribing you with all those nice bags that I hope you like.

Okay, so all old news that I want to go through just fast. Make sure you all know about '12. But we had a really nice year: $3 billion of sales, 6% growth, 15.5% OP margin, a 70 basis point increase. We hit our free cash flow goal. We liked pulling the dividend lever twice last year, and I'll talk more about cash deployment and more dividends to fit in that later. And you've heard a lot of our emphasis on deals as we closed before. What I like about '12, as the CFO, is how easy the numbers are. $3 billion of sales, 15.5% OP, $5 EPS. That's nice and round, easy to remember for all of us.

If you cut it down to the segments, I do think it's worth just seeing how much balance the portfolio has, and I hope you got a little bit of a sense of that as the 3 teams talked through it. But on the Electrical side, seeing 6% sales growth, pretty attractive levels. I think Gary just gave a good little texture just there of how the industrial markets have a little bit of a mix between the Harsh and Hazardous, which are driving -- being pulled by the higher-energy markets, where high voltage side had really a soft year. But you've heard from Jim Decker too how resi has been going. And the OP performance, attractively higher, 8% growth there, so some positive leverage. It would have, frankly, done better had there not been some of that product mix from high voltage that we've been talking about.

The Power segment similarly did well, 7% growth, very attractive. Bill and his team approaching $1 billion platform, which is a nice place to be, and you see very impressive margin expansion there, that 18.1%. He's done a very nice job of leveraging sales, but also I think it should be pointed out how well they managed the price-cost equation and when to trade off price per volume and optimize that equation.

Cash flow for us, again, a successful year. We set up as a target at the beginning of the year to hit net income, which we achieved. You'll see a typical amount of usage in working capital. We really need to invest there in order to generate sales. I think the CapEx line is worth pausing on. In 2011, we had a $13 million building that we invested in, which is a little bit unusual. So we actually see that CapEx as increasing year-over-year, and even though that is a, obviously, a contra cash flow item, I think critical for us to continue to be investing both in productivity and new products, which you've been hearing a lot about today.

I want to spend most of my time focused with you on how we are looking at capital deployment and we're in the enviable position of having this question loom pretty large for us.

We separated what I'd call investing into the business into the top 2 bars, the capital expenditures and the acquisitions, from what we returned to shareholders in the form of dividends and share repurchases. The balance in '12 was about 40-60, if you do the math there.

[Audio Gap]

shareholders. And I think what we're trying to convey for you in our future slide is that we're expecting that to come more in balance. We're expecting specifically to be doing more on the acquisition front, which will make that green bar grow a little bit and balance a little more 50-50 between the investment and the return to shareholders.

Let me talk through how we see them going forward. So CapEx for us, 2% of sales allows us to maintain our plant, it allows us to invest in productivity and allows us to invest in new product development. So that's a pretty good guide for you of what we need to do. And so that orange bar is pretty small in the total. Jumping down to dividends, we are liking that 30% to 50% payout ratio range. We'd like to be positioning that for you all as an opportunity for us to be increasing that payout over time, having the absolute dollars to dividend be a growth part of your return considerations. And share repurchases, we tend to try to offset option issuance and prevent any dilution creep that might come in, but where you see the most pronounced difference is within the green bars, in acquisitions. And you've heard a little bit from each of the 3 platforms, the emphasis there. I think Craig Soucy on Gary's platform gave you the most color of how we're investing and how we're really looking to do more. You heard Craig's tying up for about half of that, and electronic systems is about half the size of the company. It gives you a sense of how shared across the company that is. And I'll talk about acquisitions in a little more detail looking backward, to give you a flavor, I hope, of how we see it going forward. So we've given a few of our last 7 deals, which essentially spanned 5 quarters. Gary did the best job of describing you how the electrical systems deals were really around all of the pockets of his different lines of business. And Trinetics, Bill talked a little bit about in the Power Systems. So, we saw some good balance there between our segments and we get questioned a lot if there are specific places we think we'll be putting our investment dollars going forward. And the answer is, on this page, which is no. We'll be opportunistic across the whole portfolio and make those acquisition.

Giving you a sense of some size here, this group of 7 represents $160 million in value, $130 million in sales. So about a 1.2x sales valuation and these that as a group were acquired in the low 7s of EBITDA multiple. I think those give a pretty reasonable guide to kind of how the tuck-in acquisition market plays for us. And I think I'd like to dive kind of 1 step deeper just to illustrate how we add value. So I think you heard Craig talking about them, but let me just sort of illuminate a couple of ways.

So the first is we will often -- in a few of these, we didn't buy any bricks-and-mortar -- the brick-and-mortar question came up. We're just buying PP&E, moving it into our existing footprint. And so being very, very efficient at making those brands perform financially better and absorbing more of our overhead. Another way you heard John Szupiany talk a little bit about some of the power of bringing channel strength to some of these brands. Maybe one brand has been overemphasized in the large-box channel, and they haven't had the clout and size push through electrical distribution. All of a sudden, Hubbell can add quite a bit of value in that way.

Now, the third value creation lever is really simple. We put them on our steel purchasing contract. We put them on our less-than-truckload freight transportation contract and we end up saving them a lot of money. I think we have sometimes some fun with these CEOs as we acquire them. "Well, there's no way you can buy. We've negotiated really hard for this stuff" and then they get a little embarrassed when they see how much better you can do with just some scale, which is really all it is.

And I think the fourth value driver, which is harder for you all to see, is the fact that we've been acquiring talent. And so some of the people that we've -- who have would run businesses that we acquired now have bigger jobs within Hubbell. They're responsibilities have expanded. That's good news for us. And you heard Craig talk about using some talent through big deals with us to go do more deals. That's the ways in which we're adding value off of this stage, and is proving to be -- I think, by looking backward, I'm trying to illustrate what we expect to happen going forward, nice tuck-in sized deals where we can pay reasonable price to find very good fit but just do more of it.

Okay. Switch to the outlook a little bit here. We did our January call with you all, and we described a situation of kind of gliding to the finish line with a weak December. And I thought it was important to bring you forward the order patterns we've seen year-to-date so far. And I think the good news, from our perspective is, the anomaly in the equation appears to be the softness in December. That did not create a newer, softer environment. So the order patterns that we've seen have really caused us to affirm our guidance and outlook for the year, and the underpinning appear to us to be pretty solid. But there's a couple of important takeaways I want to provide you from this slide.

One is the seasonality of the first quarter. You can see a lot of yellow on the page. And I would say one of the words that I hear from this room when I get called is conservative. Others have said sandbag, but not that often. And I would just sort of point out we described the back-end loaded year and you got a pretty good look at order patterns in the first 2 months of the quarter, and it just happens to be a seasonally soft quarter for us. And we might have dropped that point last year. The warm weather that we had last year maybe made us forget that a little bit because we had a little bit less seasonality. And the facts are that for the first quarter of our year at the EPS line, let alone at the sales line, which these orders indicate, historically, we typically get a little bit less than 1/5 of our EPS contribution coming from the first quarter. So that's the typical seasonality for us. And I think another point I just want to draw everybody's attention to is that industrial line, and Gary was just talking about it, so I'm glad the question came up. But you see sort of a flattish, yellowish industrial order pattern and part of that is being dragged down by the high voltage being negative. And again, he described a soft year in '12. When you quarter-ize it, the first quarter was the strongest. The compares are actually the hardest. And so I'm hoping very soon to stop talking so much about high voltage, and, as the question was asked, have it kind of return to its normal growth rate for really the last half of '13 and into '14 and ‘15.

Okay. I think the other comment I'd put on the first quarter, Dave described the 57 manufacturing facilities and we've kind of described for you a desire on our part to be thinking about consolidating maybe 1 to 3 a year. And it tends to be -- the first quarter tends to be a good -- you want to do those projects early in the year to get off to a start and allow, essentially, allow the productivity effect to kick in for the full year. So when you do that kind of investing, too, that can create lumpiness in the quarter.

So let's now transition from the quarter looking out into the year. This is end market growth that we're expecting. And let me just start with resi: 10%. I think you are hearing from Jim Decker and others that we're very pleased that, that finally kicked in. I think I saw inventory of existing homes is at a 13-year low. That certainly helped drive the single-family construction, which really, for us, drives resi. And that's very good news for the fact that it will help grow Jim's resi lighting business, which happens to be attractive margin part of our lighting portfolio. But it's also very good news in that it tends to be an early market indicator for our non-res. And so we've got a non-res of 1% to 3%. What that consists of is a negative single-digit public market expectation, where a private and renovation will be strong enough to overcome that to grow, and we anticipate that growth to be back-end loaded. Again, that resi being strong last year, an 18-month lag would suggest that we maybe have slightly better strength in the second half of the year in resi.

I think you heard Gary go through industrial in terms of the general manufacturing. You're seeing decent growth. I think you've heard him describe the Harsh and Hazardous business and how some of that rig count data is flattening out a little bit right at the moment. And the Harsh -- and the high-voltage test equipment having an outlook for a negative year. So it gives you a pretty modest industrial outlook. And, again, Bill's team talked through the utility piece better than I will. Transmission, they went through the different growth rates there expected to grow, high level of spending, but were really dominated by distribution and that's coming in, essentially, GDP kind of growth.

That cuts to the segments. You've seen 4 to 6 for power, 3 to 5 for electrical, this gets to 3 to 5 overall. And I think I just wanted to highlight how we continue to -- Dave put up a nice 6-year chart, 7-year chart showing margin working its way up, and Dave asked the question of himself, where do we go from here. And I just wanted to illustrate, for us, we think we're getting to the 40 basis points in margin expansion specifically through leveraging volume. So if we can have price and productivity offset some of the cost increases of both commodities and other inflation, the acquisitions can tend to be in their first year on the books, they're not always contributing to margins. So for us -- and it came up, Dave mentioned, the leverage we get out of those 57 sites, and really leveraging the fixed cost of that, so that, that -- I think if you did the math on all this, you can see kind of mid-20s incrementals on the volume to get up to the 40 bps that the others are in balance. That's the math that I know you guys are doing.

So I'll just hand it back to Dave, but essentially be affirming our outlook and the orders how they stand year-to-date make us feel good about this. We see 3% to 5% sales growth, we'll get better in the second half. We see 40 basis points of OP margin expansion, get up to 15.9. We think we can have free cash flow equal our net income, which implicit if you're growing in that is more efficient use of the working capital. And you see the tax rate there. So we're very pleased to be on track to deliver that outlook and we thought it was good to add some updates to that for you today. And I'm going to hand it back to Dave, and happy to take questions after that.

David G. Nord

Actually, before we conclude, I want to ask the President to come back up and we'll have a little -- do the opportunity, one last shot at them, at the Q&A, as well as Bill, if there's anybody who might have some follow up on Bill. And then I'll have some concluding comments. Try to get us wrapped up by noon to keep us on schedule. So all right. Jim, you've got a question. Rich?

Richard M. Kwas - Wells Fargo Securities, LLC, Research Division

Dave, on the order comment, so I think it at double-digit growth in January. Could you provide some more color, is that inconsistent so far in February or is that kind of more modest type growth, in your commentary?

David G. Nord

Yes, no. I think -- and that's a good question. Remember what we talked about at the third, fourth week of January was how bad or how weak the quarters were activity at the end of the year, specifically in December. And that tends to happen from time to time, it wasn't -- you're never quite sure if it's buying behavior or other external factors and whether that's a trend. So we were pleased that there was good growth in January. And that also can happen. That's usually the evidence that it was more buying behavior at the end of the year. So they kind of balanced out over a 2-month period. And I think that's what Bill was referring to. Through February what we're seeing is order patterns that are consistent with our expectations for the year, which would imply that February is more modest, it's not the double-digit. Double-digit in the first part of the year was really a recovery. Some of that's restocking or just an order pattern. But I don't know if anybody else wants to comment on that.

Richard M. Kwas - Wells Fargo Securities, LLC, Research Division

Okay. And then just a quick follow-up. On the M&A, so, Bill, a couple of years ago at this event, you talked about essentially doing a $1 billion transaction. And that obviously hasn't happened. But when you look at what's happened over the last couple of years, it seems like M&A picked up at the late stage. Was that more a function of kind of a ramp or a slower ramp in M&A activity, whether it's a large deal or just a number of deals. Was that more related to the dynamics in the market or where the research it seems to indicate and based on the commentary today that maybe the resources were in place to get these deals done. So if you could just provide some color on where you are now.

William R. Sperry

[indiscernible] I think that when we had talked about the $1 billion was in response to the question of how much powder do you have? I don't think it was ever our intention to do a $1 billion deal, but we have the capacity to do it. I think you're right that over the last 4 years, we have added significantly to the resources dedicated to looking at opportunities. Not only with dedicated resources like Craig Soucy's but in terms of carving out 10% or 15% of each of these guys calendars got to be dedicated to '13 [indiscernible] acquisition. So I think there certainly hasn't been a $1 billion one to do that we passed on. And it will be interesting to see going forward how it goes. But Dave referred to our last 12 years, we've done 32 deals and 2 of those have been slightly larger, i.e., BURNDY's at 355 [indiscernible] and being bigger than that acquired and the rest of them, is 30 of them tend to be small [indiscernible]. The activity at any point in time and to do that smaller thing and we'll just have to be something bigger becomes actionable, I think you've got so management team, a Board, we'd be happy to do that. One of the lessons we've learned from BURNDY is doing the bigger deals is actually easier in many ways. So we would certainly look forward to that opportunity if something of that size becomes actionable, but we're a little beholden to what's out there.

Unknown Executive

Give the guys in the back a chance.

Unknown Analyst

Lots of companies talk about trying to have a systems sale when they go out to their client. From what I have gathered, what you're seeing today is you really have more of a collection of allied components, or cross-sold series of components. Am I right in that assumption? And can you sort of, if I'm off, can you sort of straighten me out as to what your approach is?

David G. Nord

No, I think that's absolutely right. I would turn to Bill or Gary or both to comment on that, because they deal with that on a daily basis.

Gary N. Amato

To your comment on systems. I think our view is that we're an electrical solution. So sometimes, if the products maybe don't get installed to the system, that's obvious. But they just bundled together to the panel on the same project and more compelling, it might be on DMI or SAP interface. So we do a bit more than just products. And we do in businesses that is high voltage and industrial where we do sell complete system, but that's a smaller part of our business.

David G. Nord

Bill, I think you've commented on that earlier as well.

William R. Sperry

Yes, in the utility space, my remarks earlier really focused on the fact that we sell a broad family of products combined with a service offering that makes it more than just setting a bunch of widgets. And that very much appeals to utilities, whether they're electrical utilities or [indiscernible] utilities because they don't like complexity. And as I said, earlier, if you combined aggressive products, quality brands, delivered over a long period of time consistently with a, not unique, but different kind of family of value-added services that not all the competitors have, certainly, the small guys don't have, that is a point of differentiation. And it's the reason why the utilities look to us primarily when they're looking for components. But you're absolutely right that Hubbell is a components company. But the value of Hubbell is all of those components spread over different markets, different channels put together.

David G. Nord

One of our views is with the breadth of our product offering is that having a systems solution can lock you into fewer opportunities where as our breadth of products and not being tied to a specific system really gives you the opportunity to participate in a variety of systems that might be being offered. So we're sort of a component provider to whatever the system solution might be. So we think it gives us a lot more flexibility.

Unknown Executive

One more point, the theme throughout all of Hubbell businesses is complexity management, complexity reduction. When you're selling as many product SKUs as we do, one of the things that appeals to the end user is the cost of taking that complexity off their mind and taking care of it for them. So that's part of our e-commerce strategy and a better managed inventory strategy, and all the things that go into that value-added service bucket.

Unknown Executive

I would just like to add to the lighting side, I would want you to know that we approach it -- when I talk about this lighting package with all of these brands, we approach it as a single source or a one-stop shop approach. So that, whether you want to talk residential, commercial, industrial, we really can do all of the fixtures for most applications, including the lighting controls. So that's a big of our value proposition as a lighting provider versus your niche point a company [indiscernible].

David G. Nord

Jeff [ph]?

Unknown Analyst

Yes, just back to the acquisitions. I mean, what you laid out is pretty clear, I guess, but what isn't entirely clear though is your confidence level of actually hitting that in the year. It sounds like the pipeline is active. You've got the resources in place. As someone said, [indiscernible] smaller deals. But, really, I guess my first question is just how do you feel about maybe being in that kind of the mid-point of that M&A part [indiscernible] in 2013?

David G. Nord

I mean, my confidence level increases every day. Right, Bill?

William R. Sperry

Yes.

David G. Nord

Only because of the continued focus and the additional emphasis that we put on internally. You're right, picked up with that we didn't do a lot for a while, a lot of that was driven by a focus on BURNDY, to make sure that BURNDY was integrated very successfully. But from that, there was a lot of learnings and getting back into, back into the game, if you will. And I think what you heard from Craig Soucy as an example from Gary is investing the resources to make that happen. It's not a coincidence where we invested the resources in advance, put the attention, put the focus on, but that, that's where a lot of the activity has come from. And I think if you ask Scott and if you ask Bill, they're going to say they see that and they're doing the same thing. And so every day that goes by, we're increasing our increasing our capabilities and our focus. So, can I guarantee you that this year? Not today, but a month from now or 2 months from now, I'll be even more confident. So we absolutely are driving for that, and we think there's tremendous potential. There's a lot of discussion, always been discussion, as you know, about the consolidation of the industry. So we agree. The industry is still very fragmented. There's a lot of opportunity for consolidating, and we continue to focus on being a consolidator in that industry.

Unknown Analyst

And I think most people would agree, too. If you can buy a couple of a 7x EBITDA and you're not even really buying the company, you're buying the product line that's a win-win. But at some point do you think about if the deals aren't there and we have to toggle more aggressively share repurchases, maybe it's not a 2013 question if you're looking for the answer, but if you remain in the kind of the small, if you will, on M&A activity, perhaps you'll see a change in thought process.

David G. Nord

That certainly is always a consideration, Jeff, and I think -- but it's a measured again 7x EBIT versus 8x EBITDA, so you modify your threshold, depending on what the right answer is for shareholder return, because that's what we're focused on at the end of the day. So it's never off the table. It's just part of the consideration. But certainly, with our track record on acquisitions, we very much focus on that. It's just a question of how we get more activity, energy and results, okay? Chris, we've got one more -- time for one more.

Christopher Glynn - Oppenheimer & Co. Inc., Research Division

Keeping on the M&A theme, my own impression of the last couple of years is that your sense of what you've communicated or whatever it is, objectives on the actionability of current class fields seems a little tight at times or a little recessed at times. I'm wondering if that's accurate and what's really behind that? Did people suddenly get greedy when a deal gets close or...

William R. Sperry

I think maybe we need to be more consistent with either our tone or our word choice because I wouldn't say that we've really waivered, but I recognize it's an important issue for you guys and maybe if we say it in a different way, it comes across that there is something more actionable. Obviously, if there's something we were on the eve of doing, we couldn't indicate that. So I'm speaking just generally about an appetite, a skill set to do it, financial resources to do it that if larger stuff comes along, we could. But it would be -- it's important to emphasize that the typical pipeline that John, Craig and all of us are working on tends to be predominated by typical small stuff. Yet, they're those large deals out there [indiscernible] and we'll dialogue, we'll look at them, probability is [indiscernible].

David G. Nord

Okay. Great. All right. Thanks, guys. I want to stay up here, we'll just wrap it up. Just a couple of closing comments. I said early on, we're going to talk about a few things. We're going to talk about performance. I think their performance over the last 7 or 10 years, whatever period you want to use, it's clearly, I think you've all been pleased certainly the most recent 5 or 6 years. But as many of you probably heard me say, and I'm sure the guys sitting at the table hear me say regularly is the award for great performance is higher expectations. Or as some of you have told me, don't screw it up. So we understand that, and once you've experienced a good performance, you don't want to experience anything else. But I think what it's done in that period of time has also reinforced and hopefully you got that sense today of just some examples of the capabilities, because that performance doesn't come by accident. It comes from the efforts of some very capable people, from leadership, to management, to the people on the shop floor, all of that is what drives this, and we clearly have a focus on that kind of performance. I think I just used the word that has just become natural and that's about focus. So our success over the last 5 or 6 years has been a result of our focus on the critical few elements, not always popular, not always the things that you all may want us to be involved in, but it's the ones that we know our business, we know what's right, we welcome the input, but we need to maintain our focus. Because as you've heard from everybody today, our potential is unlimited and our danger is that we try and capture it all and don't capture any of those. So focus and the key element of our focus is around our 4 key strategic objectives, as well as operating more as one Hubbell. You heard a little bit from Gary on some of the sharing of opportunities. His platform is probably the best example. The diversity of products that they've had to do things than a more combined basis, a more collaborative basis, and that has just expanded to the rest of the organization. So that's what you're going to see more of going forward, and you'll hear more about these 4 strategic objectives and how we're organizing the organization going forward.

And lastly, all of that leads to where those take us and what is our potential? And I think it's important, we look at just these 3 key elements just to put it in perspective. Obviously, we're pleased that last year was a record year of $3 billion of sales. Over the next 5 years, we certainly expect to be at least $4 billion, just through market growth and the market potential. You heard Bill and his team talk about the global opportunities that they see building on their strong platform. You've heard Scott and his team talked about the potential from a technology standpoint. And you heard Gary's team talk about product development, market, but even the acquisition, I mean, he's got the -- his group has got the track record most recently, that they've got the fever now on, we can do a lot more, there's a lot more potential and the confidence to do that. So all that combined clearly leads us to at least a $4 billion. I say at least because, as Bill talked about, if you do the math on that range of acquisition, if you do that over 5-year period, you'd be at something higher than that. But, as you know, we like to be a little bit conservative and cautious in our expectations.

On the margin side, still continuing to focus on margins. We think we can, clearly, over this time get to 17% or better. That's a little bit lower annual rate than we've seen over the last few years, but it's not -- we've been doing and committing to 0.5 point a year. You see this year, a little less than that, and some of that is the indication of what we deal with, with acquisitions. So our acquisitions desire -- and our expectation is to acquire businesses that meet our margin profile and will be accretive to margins over time, but not initially. So initially, there's always some drag, so that could be part of the drag there. But otherwise, still a lot of opportunity on the productivity and activities within the organization.

And lastly, all of that drive into our earnings. A simple measure of performance. And certainly, we expect that we would be delivering 10% or better earnings per share growth on an annual basis over this time horizon. So clearly everybody has, as I say, the organization is very energized based on our performance over the last 5 to 6 years. And very optimistic about the opportunities going forward that the market is going to present for us. But we're never satisfied with just what the market is offered as we want to do better than the market. And that's our commitment going forward. We'll see how it goes, and I look forward to seeing you all a year from now and reporting on how that's going in a very positive way.

So I appreciate the time, and we welcome you and, again, visit our products display. I will be around for any additional questions. Okay? Thank you very much.

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