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Executives

Bill Sperry – Vice President, Corporate Strategy & Development

Tim Powers – Chairman, President & CEO

Dave Nord – CFO

Analysts

Bob Cornell – Barclays Capital

Christopher Glynn – Oppenheimer

Jeff Sprague – Vertical Research Partners

Steve Tusa – JP Morgan

Scott Davis – Morgan Stanley

Rich Klaas – Wells Fargo

Hubbell Inc. (HUB.B) Q3 2010 Earnings Conference Call October 21, 2010 10:00 AM ET

Operator

Good day everyone. Welcome to the Hubbell Incorporated third quarter results conference call. As a reminder, today’s call is being recorded. And now, for opening remarks, and introductions I would like to turn the call over to Bill Sperry. Please go ahead sir.

Bill Sperry

Thank you and good morning everyone. Welcome to Hubbell’s 2010 third quarter earnings call. I’m joined today by Tim Powers, our Chairman, President and CEO, Dave Nord, our Chief Financial Officer and Jim Farrell, our Director of Investor Relations.

Hubbell announced its third quarter earnings this morning and hopefully you found that press release already off of the wires, or from our website. You’ll also find presentation materials on the website that Tim and Dave will refer to on the call today.

Let me refer everyone listening to the call to the paragraph in our press release and in the materials regarding forward-looking statements. The press release and materials may contain expectations based on assumptions and Hubbell’s performance in the future, particularly regarding our earnings. We also may make some comments here today on this call or answer questions which may include forward-looking statements. All of these involve inherent assumptions with known and unknown risks and other factors that can cause our actual or future results to differ perhaps materially from what we may discuss or project today. So please note that paragraph in our release, and I’d like to consider incorporated by reference into the call this morning.

In addition, we may make reference to non-GAAP financial measures that management finds useful in evaluating performance. Those measures are reconciled to comparable GAAP measures in the appendix to the presentation material. And with that, I’d like to turn it over to Tim.

Tim Powers

Welcome everyone and thank you for joining us this morning. Dave and I will be referring to presentation materials you hopefully have found on our website. I will begin today’s call with an overview and then Dave will provide a detailed analysis of our financial performance. I will conclude by providing my perspective on the outlook for the remainder of 2010 and into 2011 as well as some closing remarks. Then we will open it up and take questions from you.

I am starting on page three of the materials. Hubbell’s performance in the third quarter was very strong. Sales growth and margin expansion drove a significant improvement in earnings per share for the quarter. I am very pleased with the results Hubbell is delivering, a sign of solid market positioning and outstanding execution.

Let’s move to a review of our end markets. Nonresidential construction is our largest market and continues to provide a headwind. Private construction is the hardest hit as the supply of building relative to demand, combined with difficult to obtain construction financing continue to drag down new starts.

Public spending has been relatively stronger as it has been aided by some stimulus activity. In addition, we continue to experience strong growth in the areas of retrofit, renovation and building controls.

We feel that the sharp contraction of residential construction since 2006 has reached bottom and will likely bump along for a few quarters as foreclosures and unemployment drag on the housing market. However, a return to more normal levels of annual construction creates a very positive multiple year picture of growth rates for our residential business.

The industrial market demonstrated real strength during the quarter. We experienced impressive growth in the lines like wiring system, where increase in the output of key manufacturing sectors require spending on Hubbell devices to keep factories running safely and efficiently.

In addition, our high voltage testing equipment line experienced a jump in shipments as demand grew from OEM customers and in emerging markets where infrastructure is being installed.

The utility story for the year is playing out as we have described to you on previous calls. The drop in electricity demand in 2009 felt by our utility customers has been replaced by growth in 2010, and so the abatement spending that was deferred, has largely come back, resulting in a growth for our power segment in the third quarter.

The large capital intensive transmission projects are still being pushed off until 2011 and beyond as rate increases are not being supported locally. The net result of our end markets was some decent organic growth, but I believe the story of the quarter continues to be our margin and the productivity efforts of our team.

We continue to make progress of lean activities, product redesign, facilities consolidation and more efficient and effective centralized services. The full range of these activities is producing impressive results as margin expanded by 180 basis points to over 17 percent.

There are a series of topics from the quarter that I would like to comment on here. First, is China, where we opened up a plant near Shanghai that is making power systems products. It is encouraging to see a multi-national team dig in and get that effort off the ground, where experience from Mexico and the U.S. was critical to a successful implementation.

Second is Europe. I just got back from a trip with Gary Amato who runs our electrical system business. The operations are oriented to harsh and hazardous applications, so the quality is very high and the specifications demanding. Those facilities are outstanding, and our products are well positioned to thrive as they serve the energy and heavy industrial markets with attractive margins.

The third area of dimension in LED. We continue to operate at a pace to double that business each year. We are spending a lot of time with national accounts on outdoor applications where we think this is the sweet spot for early adoption. Examples include parking lots and outdoor lighting. Hubbell’s products are winning acceptance in those competitive processes, and we stand poised to lead the new technology forward.

Of great importance to us is that most of this work is retrofit, so it represents an incremental opportunity to our traditional construction business. With that, let me turn it over to Dave, and he will give a more detailed picture of our results.

Dave Nord

All right. Thanks Tim. Good morning everybody. Let me give you a little more color on the financial impacts of some of the things that Tim’s just talked about.

I’m going to start on page four of our presentation, talking about our Q3 sales. First off, reporting $685 million of sales. That’s up $91 million from the third quarter of last year. 15 percent growth, nine points of that growth coming from the addition of Burndy. Recall that Burndy was acquired and closed just at the beginning of the fourth quarter, so this is the last quarter that we’ll have that comparison discussion.

As well, strong industrial and utility growth, so the core growth underneath the 15 was six points. On the gross margin side, very good performance on gross margin, reporting 34.3 percent, up 180 basis points from the third quarter of last year.

A lot of thing contributing to that, most significantly it’d be ongoing productivity gains from the cost reduction actions we’ve taken last year as well as the long term investments that we’ve been making. As Burndy is a positive contributor in the quarter, running at, as you recall, we’ve talked in the past that Burndy runs at a higher gross margin, as I’ll mention later.

They have a higher selling cost element to drive that, but that was a positive contributor, as well as a higher mix of our industrial products both in wiring device as well as our high voltage product lines.

All that served to more than offset what is still increased commodity cost headwind that cost us a little over a point just on commodity cost with some, but fairly minimal, price implication benefit, or certainly not enough to offset that.

Turning to page five, selling and administrative expense of $117.6 million, up 16% largely consistent with our growth and volume. A little bit of a – just a tenth of a point uptick as a percent of sales. So we held it fairly constant although within there as I mentioned, is the impact of Burndy which runs at a higher rate, and that actually cost us close to half a point on the rate. So the underlying benefit that we’re seeing from the cost reduction actions last year are embedded within that 17.2 percent.

So all that leads to operating profit of $117.6 million, margin of 17.2 percent, up 180 basis points. And again, largely due to the productivity benefit, the contribution from Burndy, good industrial mix in our products, more than offsetting what is the commodity cost headwind that we still face as many do.

Turning to page six, net interest expense of $7.8 million, fairly constant with last year due to comparable borrowing levels. As you know, we’ve got about $500 million of long term debt outstanding. It’s running at an average coupon rate of just over six percent.

Our tax rate, talk a little bit more about that. For the quarter our tax rate was 34.3 percent. That’s up 280 basis points from last year. A couple of things driving that; first, as you know, we’ve been tracking for the year to a rate of about 32.5 so it’s up even against that.

A big driver is that we concluded in the third quarter an audit of our Federal tax returns for years ‘06 and ‘07, and the result of that was an agreement for some additional cost that we have to incur, and that resulted in a $2.2 million incremental expense within the third quarter.

As well, on a year over year basis, we’re still not benefiting from the R&D tax credit that we had last year; hoping that it will get passed in the fourth quarter, but not you know, making any predictions on that. So absent the tax audit conclusion, still running at our 32.5 rate or thereabouts.

Turning to page seven, net income then, all of that driving to net income of $71.3 million, up 24 percent due to our higher sales, our higher operating income, offset somewhat by our higher tax rate. That leads to earnings per diluted share of $1.18, up 17 percent. As I mentioned, you’ve got $0.04 of tax cost. That was unplanned, so absent that, you’d be at 21 percent.

We also have the impact of more shares outstanding. As you recall we had a share issuance in the fourth quarter of ‘09 for three million shares so that creates some dilution, but certainly for the quarter, that was more than offset by the contribution from Burndy for which the equity offering was largely based off of.

Let me get to the segment results now in the quarter. First on page eight, the Electrical segment results. Sales of $490.6 million, up $76 million or 18 percent from last year. Obviously Burndy providing a big contribution there at 13 percent, but absent Burndy, still up five percent, and I think as Tim mentioned, we’ve got strength in a number of areas. Industrial products continue to show strength, strong high voltage and test equipment, more than offsetting the nonresidential weakness.

From a business standpoint, we look at our Wiring products business with volume up about 14 percent from the third quarter of last year. Our Electrical products up 10 percent largely from the industrial and high voltage products, and then lighting down three percent, largely from a C&I perspective or commercial/industrial down four percent, certainly much better performance than we were anticipating as we went into the year, but still a negative implication.

More importantly, on the operating profit, operating profit of $83.9 million, up 63 percent with a nearly five point margin improvement to 17.2 percent. Contributors to that, first is the higher volume providing the incremental that you would expect from higher volume as well as the productivity gains that we’re getting from the various initiatives from cost reduction actions to plant closures to product redesign.

Burndy contribution, a positive contributor in the quarter and the higher industrial mix. So all in all, very good results in the Electrical segment.

On the Power side, good volume growth in the quarter, up eight percent from a year ago, you know, tracking very much as we expected. You recall we started the year slow, but we expected the full year to show growth and we started to see that in the third quarter and expect that to continue into the fourth, with improved spending on distribution products, although the larger transmission products are a little bit slower, and being pushed out.

On the performance side though, more challenges despite the volume growth with operating of $33.7 million, down 15 percent and margins down 480 basis points. A lot of that due to first and foremost, our increase in commodity cost which historically has hit the power business most significantly because of the high steel and other metals content. That was almost three points of a detriment.

We’ve got higher selling and administrative costs, some of that attributable to some of the investments that we’re making in new products as well as new facilities. Tim mentioned our facility opening up in China, so you’ve got some incremental costs associated with that.

The good news is there still is productivity that we’re continuing to drive, and that’s obviously been our story all along. And I think you’ve got an element of some mix there. Despite the higher volume, the storm season has been a little weaker than normal, and than expected, and that generally results in sales of products with higher margin as well as some of the shifts in some of the distribution products from year to year can be to lower from higher volume business.

So otherwise, what we’re very pleased with certainly is the good growth in the market and the recovery in the market. Clearly challenges on the commodity side, and I think that’s going to require us to be even more disciplined and likely more aggressive in pricing going forward as we look into next year.

Q3 cash flow, cash flow from operations of $82.9 million. Free cash flow after CapEx $71.4 million, equal to net income for the quarter, a little bit less than we would have liked and certainly expected, some of that due specifically to collections on receivables that rolled from the last couple days of September into the first couple days of October. So it’s not something that we’re worried about operationally, other than the timing between quarter end and into the fourth quarter.

So turning now to the year to date, just trying to put the third quarter in perspective. That means we’re reporting sales of up eight percent compared to the first nine months of 2009 with Burndy contributing nine percent of the growth. So the underlying business through the first nine months down, but all of that coming in the first half with recovery starting to be reflected as we’re in the second half of the year.

The industrial market has been an area of strength. Utility spending has improved throughout the year and expect that to continue. And the nonresidential has been weak, but partially offset as we’ve said in the past, with the renovations, relight, controls and energy efficiency as well as the public spending that has offset some of the weakness in the private sector.

Margin improvement of 240 basis points driven by productivity. Obviously keep in perspective, that’s 240 basis points year to date. We had 180 basis points in the third quarter so the biggest contributor of that was in the first half where the compares were much easier against the challenges we saw in the first half of 2009.

They get more difficult as the year progresses and I think we’ll see that even into the fourth quarter as we look at our normal calendarization.

We’re also dealing with throughout the year, unfavorable price commodity cost impact. We expected the pricing environment to be difficult. Despite that, we put through many price increases throughout the year and realized some of them, but certainly no enough to offset what has been a more challenging commodity cost environment and so we continue to focus on that and will work to get back to our normal standard of parity between price and cost, not likely until sometime next year. And Burndy’s performing well, so all good contributors.

Our year to date results, as I said sales up 8%. We’re really wanting to, the one thing to focus on is the tax rate. We saw the tax rate of 33.2 year-to-date is up 170 basis points and you can think about that very simply as two contributors, half due to this conclusion of a tax audit and the other half year-over-year due to the absence of R&D.

So the underlying run rate that we are experiencing is consistent with what we’ve expected throughout the year, about 32.5%. If by chance the R&D Tax Credit Legislation gets approved in the fourth quarter, that rate would change but we’ll wait and see what happens and then recognize it accordingly. From a segment standpoint year-to-date, we’ve got the electrical segment with sales up 12%. Again Burndy adding more than that of 13%, underlying businesses though with wiring up 12% year-to-date, electrical products up just over 1% offset by the weakness in the lighting business particularly the C&I business again more 10% down year-to-date. Most of that in the first half, the magnitudes of the decline diminishing as the year is progressing.

More importantly on the performance, operating profit up 68% year-to-date at a $185 million with productivity the biggest contributor to that margin improvement, lower – Burndy contributing some on a year-to-date basis not as much as in the quarter. And lower restructuring costs, some of the costs actions that we took last year certainly in the first half, the absence of those is a positive. As well as the positive mix of industrial products in particular.

On the power segment page 14, year-to-date sales flat or actually down 1% year-to-date and that’s what the weakness in the first half, but we’re seeing the higher spending on distribution products as the year progresses. Our backlog has built somewhat with the transmission projects delayed and lower storm volume year-to-date year-over-year costing us about a point in volume year-over-year.

On the operating profit, down 13% at $91.7 million just over two points largely due to the pricing, commodity costs. You’ll recall that last year we had some very strong positive price costs. So we expected some of that to turn around this year. And we’ve just based with the higher commodity costs that we’re working through to get recovery. But all of that being managed against the continuing focused on productivity gains.

And then year-to-date cash flow, year-to-date cash flow of – free cash flow of $142.2 million. That’s after $33.8 million of CapEx more of our normal run rate targeting to a $45 million to $55 million capital expenditure. Lot of emphasis on working capital. We’ve had some build in our receivables, a lot of it. And if I turn the page and really talk to working capital, you see that we’ve had the on page 16, you see that continued increase although you’ll note if you look back to the third quarter of last year that there is a normal seasonality to our business, a very predictable seasonality to our business. And we see that first and foremost in cash flow right here as we have the normal build of receivables from the strong volume performance in the construction season in the third quarter as well as some of the inventory.

A lot of that comes back in the fourth quarter. You’ll recall last year’s fourth quarter I think had free cash flow order of magnitude $90 million. So we typically have very strong cash flow performance. I think that’s actually offset by what, it is also weaker operating performance, our normal categorization our third quarter is always our strongest quarter. And its followed, if you go back and look at the last five years, our volumes are off. On average over the last five years a mid to high single-digit range and there is a significant margin decline sequentially. Partially due to that volume decline as well as a lot of yearend timing issues that occur, fewer shipping days, some compensation cost that can only get recognized in the fourth quarter.

So very normal dynamics that we’ve seen in the past and we clearly expect to see again on both working capital and operating profit.

Turning to page 17, our capital structure continues to strengthen with our increase in cash flow generation. Our debt to capital moving to 26% from 28% at the end of the year and our net debt to cap down to 6%, although keep in mind that that’s reflective of all of our cash balances, some of which is we’ve talked about in the past are not readily available or on a cost effective basis because they’re offshore.

And well we continue to look at additional investment opportunities. And we focus generally in an order of use of our cash flow on dividends maintaining and when appropriate increasing our dividends, investing first in our business from a CapEx standpoint and new products and productivity and efficiency, acquisitions, a key element of our growth strategy in the past and going into the future and lastly share repurchases if the market and is opportune. And lastly, if there is nothing else that if we think that there is no better use of that cash. In this market, we clearly believe that the best use of our investments are in the first three and we’re very actively and aggressively looking at the acquisition pipeline.

So, with that I’ll turn it back to Tim to provide some perspective on the rest of this year and next year.

Tim Powers

Thanks Dave. Let’s turn to page 18 in our outlook for the remainder of 2010. We expect organic sales to be roughly comparable to last year, but an increase of 7% when including Burndy. This would include the level of seasonality we typically experienced in the fourth quarter of the year mainly where lower volumes resulting the impact of cold weather on construction activity, accounted with fewer days and distributors were considering yearend incentives in inventory levels as they close out the year.

The full year expectation for margins would be a 180 basis point improvement over the prior year and free cash flow is expected to be roughly equal to net income which would imply the seasonal liquidation of working capital during the fourth quarter. Let’s turn to page 19 in our preliminary outlook for 2011.

We will provide more detail for you at the end of our year at the call in January, but our directional expectation is that three of our four markets will be growing and this just provide us with modest growth overall for the company. Hubbell is providing its value to customers each and every day. We are providing a broad array of high quality and excellent brands with high service levels. We are focused on leading out our operations to retain a competitive cost position in the industry.

Cash flow generated from the business allows us to return an attractive dividends to our shareholders as well as to make investments in growing the company both organically and through acquisition. And we manage our leverage and liquidity position conservatively to best position us for the future. Thank you for your attention. And now we would be happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) We’ll go first to Bob Cornell with Barclays Capital. Please go ahead sir.

Bob Cornell – Barclays Capital

Yes, obviously you paint a very good picture but I wanted to focus on some of the opportunity I say, I mean you talked about the non-res still being on the week side but again maybe give some color in terms of inquire rates, quotation rates, pipeline types of visibility out down the road, Tim.

Tim Powers

I would say that the year on non-residential construction has turned out to be certainly lower than the previous year but not as bad as we anticipated it would be. And I would say that the comparisons are steadily moving in a favorable – more favorable direction. We would expect some modest that is sort of mid-single-digit declines next year but then there is favorable trends as we pointed out with retrofit and lighting controls and certain areas of growth. So less that is the kind of the story of non-res.

Bob Cornell – Barclays Capital

Well I guess, in that view for ‘011, would there be a point where you see the even though the number is down for the year, would you expect the numbers to track positive given the way that the comps are tracking at some point, second half of next year?

Tim Powers

It could possibly be that case Bob. But I think we’ll have a lot more clarity as we get through the fourth quarter better view of that. But the trend is improving.

Bob Cornell – Barclays Capital

Right. I guess here the other question is on transmission, the part that’s lagging, I mean you talked about those projects being deferred by how long, by how much. When do you see those comps turning positive as well?

Tim Powers

I would say that we’re back in a very active cycle in the moment in quotation of these projects which means they have been delayed, some of them a year up to 18 months, while we’re encouraged by what we see at this time. And we’re hopeful that some of these could come back for 2011.

Bob Cornell – Barclays Capital

And you kept mentioning the price, cost issue as you and Dave went through the presentation, but I mean last year you had very favorable tailwind at this point and so we’re comping normally almost with regard to price and cost, I mean how about just color on the go-forward in terms of the ability to get price to cover cost?

Tim Powers

As this period of lower economic activity stretches out, it’s not easy to recover it what I would say we are determined to do that. And when you put to price increases in place to be able to do that and the negative balance of price, cost is improving as we get to the end of the year. And I would say there is probably some further price increases that are appropriate based on what’s happening to metals. Copper in particular is one.

Bob Cornell – Barclays Capital

Okay, thanks. I’ll turn over to the queue. Thank you.

Tim Powers

Sure.

Operator

We’ll go next to Christopher Glynn with Oppenheimer. Your line is open sir.

Christopher Glynn – Oppenheimer

Thanks. Yes, just going back to the mid-single-digits decline for the non-res next year. Tim is that the market commentary or is that rolling in your favorable trends with some of the areas of lighting?

Tim Powers

That’s a market commentary. We would expect to do little better than when you include the areas of growth that are growing say at 20% or our comments on LED doubling would be modifiers for that trend.

Christopher Glynn – Oppenheimer

Okay, and the other commentary on the productivity, I know that versus last year there certainly been a year’s worth of productivity initiatives but just sequentially we saw something like 70% conversion of the revenues. And on the sequential dynamics, we have the HV test and the Burndy, I mean how significant where those?

Tim Powers

I would say we had across the board improvement in the electrical segment. The wiring device business was significantly better. The lighting business performed quite well in the phase of a very difficult market. And of course, the harsh and hazardous and test equipment business also performed well. So they were just about every piece of the electrical segment contributed to the upward trend here.

Christopher Glynn – Oppenheimer

Okay, and HV test I think it’s a little bit more of a backlog oriented business for you. Can you talk about the visibility into the continued improvement there?

Tim Powers

Yes, I would say certainly the margins are terrific and we shipped a couple of very large orders to emerging market parts. Incoming orders were not quite as high as what’s being shipped but still looking like quite a good year coming up for 2011, not quite as good as 2010.

Christopher Glynn – Oppenheimer

Okay, great. Thanks a lot.

Operator

And we’ll go next to Jeff Sprague with Vertical Research Partners. Your line is open sir.

Jeff Sprague – Vertical Research Partners

Thanks, good morning.

Tim Powers

Good morning.

Dave Nord

Good morning.

Jeff Sprague – Vertical Research Partners

Just a couple of more things on T&D if you could elaborate a little bit more, I had to jump off the call mid-way. So I’m sorry if it’s a little bit repetitive. But I got the comment on T stuff sliding to the right and I guess no surprise there. But could you give a little more completion Tim on what’s happening on the D side, where you’re seeing some pickup. Is it stock products, is it storm related and any particular products your geography is standing out?

Tim Powers

Well it’s certainly not storm related because the weather has really been quite good and really hasn’t been much in the way of storm business up to this point. But it’s a return of the large utilities to spending what they need to, to keep lines maintained as opposed to what happened last year when they were very surprised by the downturn in electrical consumption and put the brakes on spending. So what I would describe as a bounce back to the normal level of spending. It’s not a high level of spending, but it’s better than it was. And its – our products are more – our sales are more distribution oriented just because of this sliding of utility spending on the transmission side.

And particularly substations, it’s an area that’s been weak on a year-over-year comparison. And that is an indication of the putting the brakes on even the intermediate pieces of spending, not the big, high voltage lines but the improvement on the grid overall. So I would expect some of that to bounce back up as we get into 2011.

Jeff Sprague – Vertical Research Partners

What do you think about the state of inventory at the utility level itself and their yards and the like?

Tim Powers

I would say that it is not high. I would say they’re buying what they need and managing their cash flow very intently. I would say that even in utility distribution, we do not have an excess inventory out there either. I think what we’ve suffered through in the back half of 2009 was really a draining of the channel from the end customer and the distributor in the phase of that downturn in spending. And I think that they’ve been quite tight fisted both participants in the market in terms of restocking their inventory positions.

Jeff Sprague – Vertical Research Partners

And this notion of substation still being neglected but perhaps picking up, is that just a very logical sounding theory which it does sound logical or is there in fact some early order indications or other activity that suggest maybe that’s starting to happen?

Tim Powers

It’s my view that it has to improve because the level to which it fell isn’t one that’s off a normal maintenance, you know I mean it’s down below sort of the average for long time. And I don’t think that this spending has been at sustainable rate to keep the grid in normal repair.

Jeff Sprague – Vertical Research Partners

Okay. And I’m sorry if this was addressed earlier, but just on lighting. Could you provide some color on the success of price in the channel, distributor’s willingness to kind of accept and try to pass on and what the give and take is there?

Tim Powers

I think distributors are always willing to try to pass on price as it is to their benefit. But as you know in the lighting business this is more of a job business in the commercial industrial product lines and the pricing on jobs because of the low number of them are pretty tough. So it’s in this area of commercial construction including what would be part of our vehicle brands where pricing pressure is the most intense that we see. But not any different than at this time in the cycle, your volume is scarce and the competitive battle over the jobs is at the normal level.

Jeff Sprague – Vertical Research Partners

Okay, thank you very much.

Tim Powers

Sure.

Operator

And our next question comes from Steve Tusa with JP Morgan. Please go ahead sir.

Steve Tusa – JP Morgan

Hi good morning.

Tim Powers

Good morning.

Dave Nord

Good morning.

Steve Tusa – JP Morgan

On the non-res construction side, you mentioned there is a bit of bifurcation between the renovation, relight controls. What percentage of your business is the stuff that’s going pretty well and what percentage is still kind of stuck here in the buildings?

Dave Nord

Well we don’t really give those percentages but I can give you sort of the order of magnitude. The vast majority of the market for most of us in the electrical business is new construction and that is where the amount of square footage being put in place is down substantially.

What is the new opportunity? And that’s certainly a much smaller part of the business who’s on the retrofit, relight, and controls, but it’s growing at quite a fast pace. So we haven’t really been specific in public about what those two relationships are. But I would say the vast majority is the part of the business that’s still going downwards.

Tim Powers

Steve we have mentioned in the past that we’ve got businesses that are actually very focused in those areas, so we do have pretty good visibility to at least from our own business what’s happening there, and those are clearly operating in the double-digits high teen 20% range in the current quarter, and we’re seeing an acceleration of the activity there. So that’s all consistent with what we expect as to be a mitigating factor again. But still weak core new construction and nonres.

Steve Tusa – JP Morgan

And in the vast majority of the activity there, is that stimulus related? And is there a concern that kind of runs its course over the next few quarters and peters out?

Tim Powers

I would say stimulus isn’t exactly the word I would use. There is some stimulus money being spent on government buildings to improve their energy efficiency which is badly needed. But there is just some tax credits and things provided by public utilities that I don’t really think are going to go away that are adding incrementally to the return. But he returns are fairly compelling for relighting buildings and just on their own.

So I really wouldn’t expect this to slow down anytime soon. I would expect if anything as the adoption of the new lighting technology and controls becomes better understood, that this would continue to grow at even a faster rate.

Steve Tusa – JP Morgan

Right. And then just looking out to next year from a price cost perspective, if the year were kind of – if we just carried the current pricing you put through today assuming raw materials go nowhere for the next several months, you kind of end the year at a certain level, what would be the net impact of price increases you already have in place and then the raw material costs that you’re facing? I guess my question is basically you maybe a little bit squeezed for the next couple of quarters, but there is price help on the way, and I’m just curious as to how much of that is eaten through by just carrying the current rate of commodity, inflation over to next year?

Tim Powers

Well, if I were that good on predicting the commodities to be anywhere near tamed they have been very volatile, I would expect with the economic policies in the United States and our need to keep interest rates low and the dollar weakening that commodities will rise, and the battle to keep our prices up would be a continuing one into 2011, and we’re expecting that, and we expect to be able to succeed and get back what we need to from the marketplace. But I would say it’s anything but a calm picture moving forward. But it’s the same battle we’ve contended with continuously, so it’s just part of our normal operating procedure.

Steve Tusa – JP Morgan

And is there any incremental productivity for next year?

Tim Powers

We would expect incremental productivity next year. We see quite a wide opportunity yet to continue to improve our business. We were speaking about product redesign, better procurements in a shared services environment, plant relocations, product relocations, just the wide variety of activities we continue to work on as a company, and we would expect productivity to continue to improve in the 2011 and beyond into 2012.

Steve Tusa – JP Morgan

Okay. And then one last question, sorry, sorry just one more here. On the revenue with outlook for next year, you used the term modest increase and then earlier in the Q&A you talked about modest as being mid-single digit. When I look at your revenue comps this year, there you just basically had your first quarter of meaningful growth here in the third quarter, so it doesn’t appear to me that all year you’ve been benefiting from significant uptick in demand. So why wouldn’t that comp be better next year? It seems to me that you’re not exactly facing the toughest level of activities in 2010. There hasn’t really been that much snap back in your business, especially relative to others, who I’m sure are going to guide somewhere in kind of a mind single range. I mean is this conservatism or maybe you could just talk directionally about what modest growth means next year?

Tim Powers

Well, I would say that from the way we’ve been describing our four markets, we would expect three of those markets to improve somewhere in the range you talked about. But, if you remember our largest market, which is nonresidential construction, is expected to fall. So when you blend these markets together, you get something below 5% as our next year’s expected revenue. And also we’re a quarter away yet, so we would like another opportunity to talk about the precision of this view. But we expect certainly our revenues to increase year-over-year.

Steve Tusa – JP Morgan

Perfect and I do appreciate – a lot of companies aren’t really talking about ‘11 yet, so I appreciate the heads up on that early, thanks.

Tim Powers

Sure.

Operator

(Operator Instructions). We’ll go next to Scott Davis with Morgan Stanley. Please go ahead.

Scott Davis – Morgan Stanley

Good morning, guys.

Dave Nord

Good morning.

Tim Powers

Good morning, Scott.

Scott Davis – Morgan Stanley

A couple of things that haven’t been covered; one, just on free cash flow generation, which is, as you said timely issues, that’ll be great for year. Can you talk about M&A pipeline, what you do if you think out into 2011 and you’re generating all this cash? I mean it doesn’t make a lot of sense to pay down your debt at these types of interest rates. But are there other brundies [ph] out there or are there other kind of bolt – smaller bolt-on acquisitions or what can we expect out of your guys in the next 12 months in that area?

Tim Powers

We are always looking for opportunities to add to our portfolio. Brundies don’t come along all the time, but certainly bolt-ons are pretty much we’re looking at a series of those all the time, and then it’s a question of value and price. But certainly we would expect to deploy some of our cash on acquisitions into 2011. That’s our goal, that’s our objective, that’s what we try to do on a continuous basis. That is the best use of our money except or perhaps reinvesting in our own company with CapEx and productivity improvements.

Scott Davis – Morgan Stanley

Okay, it makes sense. Now I want to dig in a little bit to customer inventories. I mean when you think in terms of past cycles, one of the catalyst for customers to take inventory on is obviously a rising commodity price environment whether you’re getting hit with a price increase every quarter, every couple of quarters, but we haven’t seen that yet. So what do you see as far as patterns and your customer behavior and inventories, is there something different this time or has this just not happened yet?

Tim Powers

No, I would say that certainly distributors increase their inventories as their volume increases. And if you would take the whole electrical industry and say it’s at a some small single digit growth, then inventories were probably risen by 4%, 5%. But because of the slow nature of the recovery in the construction business, there is no real pressing need for them to run out and increase their inventories in a short time. They’re making gradual adjustments as they need to, because the nature of the recovery has been slow, so I would expect that to continue. I don’t expect distributors or end customers to increase their inventories. The one exception to that is some of our industrial OEMs whose business has picked up more than 10% then you would see distributors stocking those specific inventories in proportion to the increase in demand.

Scott Davis – Morgan Stanley

Okay that makes sense. Can we talk a little bit about tax planning and a couple of things to note. One, clearly you’re about 80%, I don’t know 84%, 85% US versus most of – the rest of our coverage group is more global, so it’s a little bit easier to do tax planning. What can you do given that we maybe in a somewhat rising in a corporate tax environment for the next several years. I mean does this argue to get a little bit more global and scales you could take advantage of some tax planning strategies that your peers have or is there any other things that you can do domestically to make sure that you don’t get kind of run over by government policy?

Tim Powers

We are always working to try to minimize or pay only those taxes that we’re required to. But if you look at our strategy for the entire business, it’s really to build on the economic power that we have in America and Canada. And really we feel that growing our business and strengthening the North American business has a more positive impact than perhaps some incremental increases in taxes. And I do think that the government is aware that the taxes on US businesses are the highest there are in the western world and that’s something over time needs to be done about that. So we’ll have to see what that looks like when we get a new Congress in and a new attitude towards this as to whether domestic taxes rise or not.

Scott Davis – Morgan Stanley

Sure. Last question guys on LED. I know it’s still small, but very, very fast growing piece of your business. If you look at [inaudible] numbers slowed down or their core organic growth numbers slowed down quite a bit this quarter, was there any slowdown or pause that you’ve seen in LED or is it still kind of 50% type growth rate.

Tim Powers

It is growing at a fast pace. We don’t see any decline in that. We’ve tried to point out that since LED is a very directional lighting, meaning you aim it rather than you give up a general light. Its best applications are used outdoors which really plays well in the Hubbell’s lighting strength. We are the number one outdoor lighting company in the United States with our parking lot and area lighting. And so as LED expands it should benefit us disproportionately.

Operator

We’ll go next to Rich Klaas with Wells Fargo. Please go ahead, sir.

Rich Klaas – Wells Fargo

Hi, good morning.

Dave Nord

Good morning, Rich.

Tim Powers

Good morning.

Rich Klaas – Wells Fargo

I had a question on power margins. This year, 2010, you had a little bit less favorable mix in power. It’s gotten better since the first half of the year. Tim or Dave, how do you think about next year in terms of mix in power?

Tim Powers

We would expect power margins to slowly improve over time. We’ve run into a lot of cost price headwind. Hopefully we’ll get some of that back as we get into next year. But you’re also comparing it to 2009, which was really a moment that we see very seldom where commodity cost fell at such a rapid rate that our prices were falling, but nowhere near that rate. So we had a great third quarter last year and we wouldn’t really – we would expect those margins to be right around where they are or a little bit about that over the course of the future, so in the 15% to 20% in that area.

Rich Klaas – Wells Fargo

Okay. But are you seeing anything in terms of projects that make it more – potentially make it more favorable as you look out a little longer term?

Tim Powers

No, I wouldn’t say there is a trend that would, you could expect steadily rising margins. A lot has to do with sometimes the nature of a large project or if there is a mix a little bit towards more towards substation, you might – that might help. But I would say we’re not trying to describe this as anything, but a very healthy business that’s performing well and it’s earning a very decent return, and it should benefit from the trends in the utility sector as it is the number one supplier in its category.

Rich Klaas – Wells Fargo

Okay. That’s helpful. And then, Tim, I know you’re longer term outlook has been 15% operating margin. You’ve done a phenomenal job growing operating margin this year. It seems like you’re ahead of expectations in terms of achieving that goal. How should we think about given the productivity, given what you’ve done so far this year, the potentially that you could get to that sooner rather than later?

Tim Powers

We have the potential to get to that. We can see it from here. The question is, before we say we can achieve, that really has more to do with cost price headwinds and those kinds of things. So we’ll have a little bit more to say about that when we get to December and we have a clear look at 2010.

Rich Klaas – Wells Fargo

Okay, great. And then, just lastly housekeeping item, Dave, in terms of lighting, did you say overall lighting was down 10% year-to-date or was that just commercial lighting in terms of volume?

Dave Nord

That was commercial.

Rich Klaas – Wells Fargo

That was commercial. Okay, great.

Dave Nord

Yes.

Rich Klaas – Wells Fargo

Thanks so much.

Dave Nord

Okay.

Operator

And with no other questions in queue at this time, I’d like to turn the conference back over to our presenters for any additional or closing remarks.

Bill Sperry

Thanks Laura. Thanks everyone for joining this morning. Obviously Jim and I are around to take any follow-up questions, clarification, et cetera. I know everybody is busy, so thanks for joining us.

Operator

And again, that concludes today conference call. Thank you for your participation.

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