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Executives

Patricia Bergeron – VP, IR & Corporate Relations

Dominic J. Pileggi – Chairman & CEO

William E. Weaver – Senior Vice President & Chief Financial Officer

Analysts

Christopher Glynn – Oppenheimer & Co

James Bank – Citigroup

Richard Kwas – Wells Fargo Securities, Llc.

Jeffrey Sprague – Vertical Research Partners

Peter Lisnic – Robert W. Baird

Jeff Beach – Stifel Nicolaus

Zahid Siddique – Gabelli & Company

Karl Ackerman – Keybanc Capital Markets

Elana Wood – BofA/Merrill Lynch

Anjali Voria – Morgan Keegan

Thomas & Betts Corporation (TNB) Q2 2011 Earnings Call Transcript July 21, 2010 11:00 AM ET

Operator

Greetings, and welcome to the Thomas & Betts Second Quarter 2011 Earnings Conference Call. (Operator Instructions) It is now my pleasure to introduce your host, Patricia Bergeron, Vice President of Investor and Corporate Relations for Thomas & Betts. Thank you, you may begin.

Patricia Bergeron

Good morning and thank you for joining the Thomas & Betts Corporation second quarter 2011 earnings conference call.

Joining me today are Dominic Pileggi, Thomas & Betts’ Chairman and Chief Executive Officer; and Bill Weaver, Senior Vice President and Chief Financial Officer. Dominic will begin our formal remarks with a review of business highlights. Then Bill will address the second quarter financial results. Following the conclusion of our formal remarks, we will take questions from the investment community.

In an effort to discuss the company’s operations and performance in a manner which provides a like-for-like comparison, our remarks include a number of non-GAAP items and measurements. These non-GAAP measures are reconciled to GAAP financial information in the attachments included with our earnings release. They should not be considered a substitute for or superior to financial measures defined by GAAP. We strongly encourage investors to consider all available information in their evaluation of Thomas & Betts Corporation.

I would also like to remind you that our comments today include forward-looking statements, which make assumptions about our operations, business, economic and political environment. These forward-looking statements are subject to risks and uncertainties, as outlined in our current Form 10-K.

I will now turn the call over to Dominic.

Dominic Pileggi

Good morning and thanks for joining us today. Thomas & Betts finished the first half of 2011 on a strong note. Market trends evolved as we expected and we delivered operating earnings at the high end of our targeted range. In case of heightened concern about the sustainability of the global economic recovery, we remain focused on executing in the marketplace and enhancing our foundation for future growth. Our fiscal discipline and market focus help us deliver organic growth across all of our key markets and geographies.

Year-over-year consolidated sales increased 13% to $566 million in the quarter. Excluding unusual items, segment earnings were a robust 18.2% of sales or $103 million. We are quite pleased with this performance given the Steel Structure segment margins which reflect the competitive pressures in transmission markets were significantly lower than prior year levels.

Earnings per share from continuing operations increased 19% to $0.80 per share at the top end of our guidance range. This excludes the puts and takes from unusual items such as ongoing facility consolidations and favorable legal settlements.

Before I begin my commentary on end market dynamics and Thomas & Betts’ segments results in the quarter I want to preface my remarks by reviewing what we believe is a fundamental driver behind our performance, our vertical market sales strategy. We’ve seen the success of our initial efforts in this regard in each of our electrical markets in the first half of 2011.

As many of you know Thomas & Betts is a very powerful resource in our predominately direct sales force and technical support organizations. Our vertical market approach allows us to better leverage these resources for maximum effectiveness. Simply put, the goal of our vertical market strategy is to go where the growth is, to find the pockets of activity with the most potential for our portfolio and to deploy resources to capture near term opportunities while building a solid foundation for continued growth. This requires in-depth intimacy with the market, its issues and trends and a close connection with the key customers and influencers.

It also requires flexibility and willingness to respond quickly and effectively as opportunities arise, but most of all it requires discipline and accountability. We saw the positive impact of this approach again in the second quarter with organic growth in all key electrical segment markets.

Electrical segment sales grew 13% in the quarter to $484 million. Segment earnings were over $95 million or nearly 20% of sales excluding facility consolidation charges. As I noted a moment ago, we delivered organic sales growth in each of our key end markets, we are especially pleased to have seen real growth in demand for our construction products given that virtually all sectors residential, non-residential public and private remain under considerable pressure.

Although it continues to drive the global recovery, the rate of growth in global industrial demand slowed in the second quarter as higher input cost, weakening demand from China and the lingering impact of supply chain disruptions in Japan weighed on manufacturers. Domestically, the Institute of Supply Management’s manufacturing index hit a 12 month low in May and while up slightly in June remained below the 12 month average.

Despite this trend, we grew our industrial product sales organically by 9% by continuing our deep dive into markets such as oil and gas, petrochemical, food and beverage, and mining sectors. Likewise, the rate of growth in North American utility markets has slowed. Overall, we saw a 4% organic growth for our utility products used to maintain and improve the reliability of the distribution grid. Although it is currently only a small piece of our business, we are pleased with the traction we have gotten in building a stronger presence in Latin America for both our utility and industrial products. Mining, oil and gas, and energy infrastructure are some of the fastest growing vertical markets in this region and this is where we are focusing our initial efforts.

Turning now to the construction markets. It is no surprise that the construction markets continue to be challenging. The decline in year-over-year new construction put in place accelerated in the second quarter with declines of 9% and 7% in April and May respectively. High unemployment, high foreclosure levels, and excess housing supply continue to weigh heavily on single family residential construction. As a result, housing stocks continue to bump along at historically low levels.

On the flip side, the multifamily segment benefits when potential home buyers are unable or unwilling to buy homes, and as expected, multifamily construction has been the most stable residential sector in the first half of the year. Likewise, domestic non-residential construction markets again declined in the quarter and the emerging positive sentiment regarding the outlook took a hit when the Architecture Billings Index fell below 50 in April and then again in May. Yesterday’s report also came in below 50 indicating continued sluggishness in the non-resi demand.

Despite the overall weakness in construction spending and increasingly competitive environment, we delivered 1% organic growth in construction products in the second quarter. This is the positive reflection on the strength of our brands, our marketing and sales efforts, and our distributor network.

While we continue to believe that the second half will show some improvement in demand for construction products, we don’t except a meaningful rebound until sometime in 2012. In the meantime, we will continue to pursue project by project opportunities in the vertical markets in geographic regions with the greatest activity.

Before moving on to our other business segments, I would like to comment on pricing and inventory in the channel. Maintaining price cost parity is one of the biggest challenges facing manufacturers today. And as you know, historically, Thomas and Betts has been a leader in addressing this challenge. We believe that the quality of our product, our technical and sales support, our fast cycle logistics model, and our e-commerce capabilities deliver excellent value to both our distributors and end-user customers allowing us to compete effectively without using price as the primary lever.

In the second quarter, price contributed approximately two percentage points to our sales growth. In May, we announced an additional price increase to cover rising aluminum and nylon input cost. This increase ranged from 4% to 12% and went into effect this week. This followed earlier price increases in January and April that address cost increases in other key commodities.

On balance, we believe that our active management of price has enabled us to keep pace with the most significant commodity cost increases we have experienced recently. As for inventory in the channel, there has been a little change in the status quo. Distributors continue to closely manage their inventory and increased uncertainty about the sustainability of the recovery that is contributing to that cautionary approach.

We saw no meaningful pre-buy in anticipation of the July price increase and as we have noted before, tighter inventory standards may be the new normal for our industry. This trend actually favors Thomas and Betts’s unique fast cycle logistics model, which is an important component of the value proposition we bring to our distributor partners.

Turning now to our steel structure segment. We saw sales in this business increase 18% to $59 million in the quarter driven by both volume and price. As we expected, the segment margin came in significantly below the typical mid teens range for this business at 7% of sales. Current quarter margins reflect pricing dynamics from last year when industry capacity greatly exceeded demand levels.

Judging by the level of recent transmission project awards these dynamics are improving. We are seeing an accelerating pace of new project awards and our backlog is building. Increased demand levels are allowing margins to firm and improve on new projects awards leaving us conformable with our earlier guidance of stronger third and fourth quarter segment margins.

We continue to expect full year segment margins in the 11% to 13% range. We believe that we are in the early stages of what should be a long term sustainable improvement in transmission spending and we are investing in incremental capacity in our existing facilities to meet future demand. The facility expansion should be completed by early 2012 and will add approximately 10% to our manufacturing capacity.

The increasing attractiveness of this business and the prospect of steady long term growth haven’t gone unnoticed. We will continue to see greater levels of competition and capacity expansion from peer companies as well as new entrants. For at least the near term, this competitive environment will likely constrain the high end of the margin range we have seen historically.

Lastly, our HVAC segment delivered very strong second quarter performance. The segment delivered a nearly 40% increase in segment earnings on sales growth of 13%. Excluding facility consolidation charges, segment earnings were $3.2 million or 13.4% of sales. This is excellent performance in what is seasonally an off quarter for heating products.

Another highlight for the HVAC segment was our acquisition of the AmbiRad Group, privately held UK manufacture of specialty heating and ventilation products such as natural gas fired heaters used in plants, warehouses, sports facilities, and other open-air applications. AmbiRad products, which are sold throughout Europe and exported to other global markets complement T&B's own Reznor brand product offering. We think this is a terrific bolt-on for this business and we’ll expand our portfolio and strengthen our presence in Europe.

In summary, the second quarter played out largely as we expected and we are pleased with our strong performance.

In challenging and uncertain markets, we continue to execute against our strategies driving organic growth and delivering operating earnings at the high end of our guidance. We continue to refine our operations not to reduce capacity, but to better leverage our facilities, improve productivity and lower cost. We also continue to invest to expand our geographic and end market foot print, which includes looking for strategic acquisitions to complement our organic growth strategies, leverage our product portfolio, enhance our margins and help us diversify geographically.

While we continue to evaluate opportunities and are currently reviewing several acquisition candidates, the lingering uncertainty around the sustainability of the global economic recovery is resulting in a diminished pipeline of opportunities for immediate consideration. Many actionable targets are opting to wait for a clear sign of sustained market improvement before considering an exit transaction.

Turning to our outlook for the balance of the year. As I noted throughout my comments there is greater uncertainty about the pace and sustainability of the global economic recovery today than there was when we spoke to you last in April. Stubbornly high unemployment in the US remained a significant drag on North American recovery. Volatility and commodity cost and lingering supply chain issues are challenging manufacturers.

The sovereign debt crisis in Europe threaten the economic and political stability in that region and tensions in the Middle East continue to create volatility in the supply and price of oil. Not surprisingly, many economists have tempered their projection for the second half of the year to reflect these dynamics.

This more subdued outlook is largely in line with the economic assumptions underlying our original full-year guidance from February. We were cautious then and remain so today. Fundamentally, however, we maintain our view on how our markets and our performance will evolve. We continue to expect industrial demand to drive the recovery and our performance. Likewise, utility CapEx spending should remain positive, sustaining higher demand for our distribution products and leading to gradual improvement in demand for steel transmission structures.

In construction markets, we continue to expect relatively modest growth year-over-year, with minimal growth in residential and limited activity in non-residential construction.

Leveraging our vertical market sales strategy, we expect full-year electrical segment sales to increase in the low double-digit range, driven by industrial and utility products demand as well as tailwinds from pricing currency. Careful price management and improved manufacturing leverage created by our consolidation activities and other capital investments should help us deliver a full-year electrical segment margin of over 20% excluding consolidation charges.

Our Steel Structure segment should begin to see a gradual ramp-up in sales and improving margin beginning in the third quarter. Based on what we see today, we now expect full-year sales to increase in the high single to low double-digit range and the full year segment margin to be between 11% and 13%.

We are also increasing or guidance for HVAC segment sales to reflect the AmbiRad acquisition. Sales should increase in the high teens to low 20% range for the full year. We expect the HVAC segment to deliver a full-year operating margin in the low-teens range, slightly less than our previous guidance, as a result of the impact of purchase accounting.

All in, we now expect consolidated sales to grow in the low double-digit range. We have not changed our guidance for consolidated segment margins in the high teens.

As we noted in our press release, we have narrowed our range for operating earnings by bringing up the bottom end. We now expect to deliver earnings between $3.20 and $3.35 per share for the full year.

Although we feel very good about our performance in the first half and are confident about our continued ability to execute in the remainder of 2011, macroeconomic conditions remain the most significant factor that could impact our ability to deliver against our guidance. The greatest risk to achieving our outlook is a double-dip recession in any of our major geographic markets. We don’t believe there is a high likelihood that this will happen, but we continue to closely monitor the evolving eurozone sovereign debt crisis and political instability in the Middle East among others.

Likewise, the biggest upside potential would be an acceleration in the recovery of global construction markets. We do not, however, see any near-term catalyst that would drive such a rebound. Despite the uncertainty surrounding the current economic environment we remain focused on the strategies and initiatives which will drive our long term performance including expanding and enhancing our vertical market sales initiative to drive profitable growth and become an indispensable partner for key end-user customers.

Continuously refining our operations to increase productivity and offset rising cost, leveraging our broad product portfolio across geographies and industries to drive less cyclical and more balanced growth. Using our unique fast cycle centralized logistics model and technological platforms to help our distributors reduce cost and manage their business more effectively and aligning our organizational capacity to support our initiatives and help us deliver strong and sustainable global growth.

These strategies and initiatives are supported by a global employee base committed to being the best and helping Thomas & Betts solidify its position as branded choice to our end-user customers and supplier of choice to our distributor partners. I thank you for your interest in Thomas & Betts. I will now turn the call over Will Weaver.

William Weaver

Thank you Dominic and good morning. As Dominic noted, solid performances in our electrical and HVAC segments drove our financial performance this quarter to the high end of our guidance range despite some lingering weakness in our Steel Structures business. Let's take a moment and look at the specifics of our financial performance in the second quarter.

On a consolidated basis, sales increased over 13% compared to last year. This breaks down approximately as follows: six points of volume, three points of positive foreign currency, two points from the annualization of our 2010 acquisition of cable management group and two points of positive price.

In our global electrical segment, sales increased nearly 13% year-over-year and this breaks down as follows: Four points volume, three points from our acquisition of cable management group, four points of positive foreign currency and two points of positive price.

In our Steel Structure segment, sales increased over 18% as follows: 11 points of positive volume and 7 points of positive price. Finally, in our HVAC segment sales increased 13% year-over-year with ten points of positive volume and three points of positive foreign currency.

Turning from the segments back to our consolidated results. As a percent of sales, gross profit was 30.5% in the second quarter excluding facility consolidation charges. This is a 110 basis point decline from the prior year and primarily reflects the deterioration in steel structures’ gross margins due to the highly competitive transmission environment.

When comparing Thomas and Betts to our peers, it is important to remember that our steel structure segment, which was 10% of sales in the second quarter, has a significant dilutive impact on consolidated gross margin of approximately 230 basis points. As noted, the facility consolidations announced in fourth quarter of last year are nearing completion and the majority of the charges are now behind us. There will be some remaining costs that will trail into the third and fourth quarters, but these costs may not be material enough to warrant calling out as an adjustment to operating earnings.

Selling, general and administrative expense declined by approximately 330 basis points to 17.5% of sales, principally due to net favorable legal settlements in the quarter. Excluding the impact of unusual items, SG&A as a percent of sales declined 140 basis points to 18.3% of sales reflecting solid leverage of our fixed cost base.

Net interest expense was $8 million in the second quarter down from $8.9 million in the prior year. Lower average debt outstanding is the major reason for the decline. The effect of tax rate was 30% in the quarter in line with the prior year rate and our guidance.

Net earnings for the second quarter of 2011 were $42.5 million or $0.80 per diluted share excluding the after tax impact of consolidation charges and legal settlements. This represents a year-over-year improvement in earnings per share of over 19%.

Let me turn briefly to free cash flow in the balance sheet. Through the end of the first half free cash flow is considerably behind last year’s run rate largely due to higher CapEx spending, increases in cash income taxes, and elevated working capital levels. Relative to CapEx, we currently anticipate full year CapEx spending in the range of $60 million to $65 million, which includes the capacity expansion in our steel structures business.

Increased cash income taxes reflects the tax payment associated with the fourth quarter divestiture of our communications products business as well as advance payments for disputed issues raised in a routine tax audit.

Working capital at the end of the quarter is elevated due to a significant advance purchase of plate steel related to a steel structures project expected to be delivered in the third quarter, and the inventory is also elevated due to a plant build to ensure we can maintain superior service levels as we complete the previously discussed facility consolidations.

While higher CapEx and cash income taxes will have an impact on annual free cash flow we expect overall working capital levels to diminish to more normal levels by year end. We anticipate free cash flow for 2011 to approximate after tax earnings.

We ended the quarter was $460 million of cash and cash equivalents. Debt at the end of the quarter was approximately $574 million or 26.3% of total capitalization. We have no material debt obligations due until the fourth quarter of 2012 and have availability under our existing credit agreements of over $445 million. We are in the process of negotiating a replacement for our primary revolving credit facility and we will have more specific information to share on our third quarter conference call.

Finally, on July 1st we acquired the AmbiRad Group, a U.K. based manufacturer of specialty HVAC products. The £18 million or approximately $30 million purchase price was paid from available cash resources. We expect the acquisition to add approximately $20 million in sales to the second half of 2011.

AmbiRad should be earnings neutral to a slight drag for the reminder of the year. Much like our existing HVAC business, AmbiRad is predominately a heaters business and is seasonally strong in the first and fourth quarters and weaker in the second and third quarters.

Including estimated purchase accounting adjustments, we expect the acquisition to be a drag of $0.02 to $0.03 per share in the third quarter or the recovery of slightly less than that in the fourth quarter. We expect AmbiRad to contribute between $0.03 and $0.04 per share to 2012 earnings.

Finally, let me comment on our full year 2011 and third quarter guidance. As Dominic noted, the degree of uncertainty around the pays of global economic recovery and geopolitical stability has increased steadily through the first half of 2011.

While we remain cautious around market demand levels over the near-term we believe our overall economic assumptions for 2011 are still sound. Consequently, we are holding the upper end of our EPS guidance range flat at $3.35 per share and given the strength of our results through the first half raising the lower end of our guidance to $3.20 per share on an operating basis.

Relative to third quarter, we expect operating earnings in the range of $0.90 to $0.95 per diluted share. This includes the expected drag from the acquisition of AmbiRad and assumes a rebound in segment margins in our steel structures business in the low to mid teens range.

Thank you for your continued interest in Thomas & Betts, and I’ll turn the call back to Patricia.

Patricia Bergeron

This call is the property of Thomas and Betts Corporation. Any redistribution, retransmission and rebroadcast of this call in any form without the expressed written consent of Thomas and Betts Corporation is strictly prohibited. A telephone replay of today’s call will be available through 12 o’clock midnight on Thursday July 28, 2011. The number to access the replay is area code 201-612-7415, account number 9517 and the conference ID number is 374824.

In addition, a recorded web cast is available on our corporate website, www.tnb.com. Thank you. We will now open the call up for questions from investors.

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question and answer session. (Operator instructions) One moment please we'll go for questions.

Our first question comes from Christopher Glynn with Oppenheimer. Please state your question.

Christopher Glynn – Oppenheimer & Co

Just a question on the electrical margins, down a little sequentially, usually get a little back into the second quarter, I’m just wondering is there a timing issue with the FIFO accounting or is that maybe you referred to as some higher competitive pressures in the construction products.

William Weaver

Chris, I don’t think FIFO is a contributor here. I will tell you though I frankly could not be more thrilled with electrical margins in the second quarter. Let me tell you why.

First of all, they are very much in line with expectation, may be slightly better than I anticipated. If you remember back to our first-quarter conference call, we told you we expected drop-throughs to decline a bit in Q2, which we ended up being very much in line with. Part of that was the shift in mix. So, if you noticed, we called out 1% increase in construction, which sound somewhat light but compared on a year-over-year basis, it is really nice performance.

So, couple of things happening there. One is the mix shift had a bit of an impact, and likewise, if you think about getting two points of price on the top line, which only offsets cost, so I think we did achieve price-cost parity in the quarter. For an average 20% segment margin that actually translates to a compression of about 40 basis points on margin. So all things being equal, I am very, very happy.

If you think about where we are for the year, our guidance continues to be 20% or better segment margins on electrical for the year that’s going to translate to an incremental margin drop-through of high 20s, maybe 30%, so I am pretty happy.

Christopher Glynn – Oppenheimer & Co

Understood. Thanks for that helpful color, Bill.

William Weaver

You bet.

Operator

Thank you. Our next question comes from Deane Dray with Citigroup. Please state your question.

James Bank – Citigroup

Hi, good morning, James filling in for Deane. Bill, if I could just stay on the electrical incremental, yeah, that was certainly well telegraphed in the first quarter, we expected low 20% range. But I guess as we kind of look at the mix coming from construction, potentially getting better and certainly not getting worse as we step into some of these markets, including non-resi and a potential rebound next year, how do you expect to get that high 20s, low 30% incremental that you just mentioned?

William Weaver

James, I think what you’re going to see is, first of all, I think Dominic’s comments did a pretty good job of expressing what we’re seeing in the market. I mean, listen, there is no question that there is a higher level of price competition on the construction piece of our business, and so that is fundamentally a byproduct of relatively light demand.

As we move into 2012, which our outlook at this point would say that there should be some improvement in the overall construction portion of our mix, we expect that pricing will firm there, and likewise, you’ll begin to see some of the manufacturing leverage in those facilities that produce construction products.

James Bank – Citigroup

But did I hear you correctly in saying that you expect high 20s to low 30 incremental in the back half?

William Weaver

That commentary was for the entire year. So what we expect for the year would be incremental overall of high 20s, maybe crack and 30%.

James Bank – Citigroup

Okay, very helpful. If you could go to AmbiRad, I was just wondering if you could give us a bit more color on its profitability, expected growth rates, maybe the geographic sales mix synergies?

Dominic Pileggi

As we mentioned, AmbiRad is a UK private specialty HVAC business. We believe that combined with the Reznor brand, and as I mentioned in my comments they sell in the UK but also in the other European countries, we think that we can grow that business a little bit and we think it’ll have come good upside potential and we describe that as just a really terrific bolt-on to our business, both from a sales point of view and a margin point of view.

William Weaver

Yeah, just a little more financial color James, this business does about – on the trailing 12 basis it did about $40 million in sales, mid-teens EBITDA. If you look at the relative purchase price, we paid about 4.5 times EBITDA for AmbiRab, it's a very attractive purchase price. It has late-cycle exposure, so much similar to our exciting HVAC business. So, we think we bought this business at an attractive price. It’s a great complementary product line, good brands and nice incremental late-cycle exposure.

James Bank – Citigroup

Very helpful. The only thing I would add though is that this is a bit of a reversal and sort of a long-standing perception that HVAC is the non-core to sort of your overall business given 6%, 5% to 6% of the sales, I mean this potentially changes that perception?

Dominic Pileggi

No, not really. We have always said it’s a small part of our business, but it's always been a very good, strong part of our business and we’ve been very consistent saying that we would continue if we saw good bolt-ons to that business that we would take advantage of those opportunities, and this is just a perfect example of that. Just a good solid bolt-on to a good business. It doesn’t change the strategic position of the company one way or the other.

James Bank – Citigroup

Great. That’s all I have for now. Thank you.

Dominic Pileggi

Thank you.

Operator

Next we have Rich Kwas from Wells Fargo Securities. Please state your question.

Richard Kwas – Wells Fargo Securities, Llc.

Hi, good morning all.

Dominic Pileggi

Good morning, Rich.

Richard Kwas – Wells Fargo Securities, Llc.

Dominic or Bill, could you give some color on how the quarter progressed when you look at your key end markets industrial, non-residential, residential, how did normal seasonality play out, any difference versus expectations?

Dominic Pileggi

Well, I do not think there was any difference versus expectation in the seasonality or how the markets played out. As we said, I think things played out very much likely thought they would. The one thing I would point out is the booking rate was a little bumpier than you might like to see it, where you would have a good booking day and maybe the next day not as good as opposed to being a linear progression. That would be the only thing unique, but I think that reflects what’s going on in the world. And I think it also reflects the distributors caution to build inventory. I think this is the – distributors when they get something going they like to place an order and – so they are very cautious in building inventory, which as we said plays well to us. So, everything played out pretty much likely thought and hope they would.

Richard Kwas – Wells Fargo Securities, Llc.

Okay, and then on the non-resi piece you mentioned ABI kind of weakening here over the last few months. It's a pretty big end market for you. I mean any revised thoughts on how you think the next several quarters play out and your relative positioning there. Some other companies are getting some benefits from energy efficiency in the non-residential end markets or it sounds like construction projects are up a little bit for you in the quarter. How do you feel particularly as you move in the next year?

Dominic Pileggi

I feel pretty good. I think that we have great position in the market. I think that we talk about our vertical sales and marketing approach and that’s exactly what positions us to take advantage of where that activity is. So I feel pretty good about our position whether it is from our product point of view, whether it is even our strategy and our distribution network. I think we are very well covered there and I look very optimistically that we will get at least our fair share and hopefully better than our fair share as these markets rebound.

Richard Kwas – Wells Fargo Securities, Llc.

Okay. And then Bill just to clarify for price cost, do we think of this as a net positive for the second half of the year with all the price increases flowing through and implemented or is it still going to be neutral for the second half?

William Weaver

No, I think it is going to be neutral for the second half Rich. Our expectation around commodity cost is that we – maybe they will follow a little bit of the parabola sort of curve that they did last year when they sort of peaked midyear and began to come down. So, our expectation for the second half is that they will either be flat, maybe slightly down, but I think that’s going to translate to just offset with no real lift.

Richard Kwas – Wells Fargo Securities, Llc.

Okay. Thank you.

Operator

Thank you. Our next question comes from Jeffrey Sprague with Vertical Research, please state your question.

Jeffrey Sprague – Vertical Research Partners

Thanks. Good morning everyone.

Dominic Pileggi

Richard Kwas – Wells Fargo Securities, Llc.

Just a couple of quick things. Dominic, can you just bifurcate a little bit the difference you are seeing in kind of the outlook for spending and T versus D so you see things…

Dominic Pileggi

Transmission versus distribution.

William Weaver

I’m sorry, did you say the transmission spending?

Richard Kwas – Wells Fargo Securities, Llc.

Yeah, the kind of the difference you are seeing in transmission spending versus distribution spending and what type of projects you are seeing having the uptick in T.

Dominic Pileggi

Okay. I would tell you that when you look at our distribution spending, and we saw that relatively healthy and that’s based mostly on the maintenance and repair not as much on construction. Obviously when the construction market does rebound we are extremely well positioned with our particular product line is very nicely aligned with the construction market. When you look at the transmission projects, I think that’s more to fill the demand of what’s going on and to expand – upgrade the transmission projects. And as we said, we are starting to see now some of these projects be released that have been pent up and we have been talking about, and hopefully that continues. We are building backlog very nicely, prices are firming very nicely, we are adding capacity. So I think that is very positive and obviously not connected to the construction market like the distribution projects are.

Richard Kwas – Wells Fargo Securities, Llc.

How quickly do you think you are going to fill those existing capacity that you are adding and it sounded like there might be a little lack of discipline that is creeping into the market here with.

Dominic Pileggi

Yeah. As far as the capacity goes I think we are in very good shape and the capacity with that coming up in 2012 and the existing capacity we have. So, I don’t think capacity is at all an issue for us, and we have a pretty good history of adding capacity ahead of the curve when we needed in that modular fashion. I do think you are seeing, everybody is writing and talking about it and it's attracted a lot of new entrants in new capacity from peers into the market as we called out in our prepared remarks, and obviously that kind of muddies up pricing as these – as particularly the new entrants come in and try to buy some market share. Over the long term, I don’t think that will be as much as an issue as capacity comes back and performance becomes more of a factor, the experienced companies like ourselves I think will be okay. But in the meantime I think that’s the normal reaction you get to an exploding market and people that have excess capacity kind of rush to it.

Richard Kwas – Wells Fargo Securities, Llc.

Can you give us some sense, and I know it is premature to talk too much about 12 but this is a long cycle business. I mean can you give us some sense based on order and proposal activity? What kind of industry growth, there are Thomas and Betts type growth you see in that business?

Dominic Pileggi

Sure. Obviously based on everything we have been saying and what we are experiencing now, we feel pretty good about 2012. I mean we are optimistic about what we see and how we will perform in 2012. If I were to put a number on it at this time, you can imagine it is a little bit difficult to do. But I would say we should see growth in the low to mid teens, and if things go better there is a little upside to that. But I think conservatively we should be in the mid – low to mid teens from the growth point of view.

Richard Kwas – Wells Fargo Securities, Llc.

Thank you very much.

Operator

Thank you. Your next question comes from Peter Lisnic with Robert W. Baird. Please state your question.

Peter Lisnic – Robert W. Baird

Good morning everyone.

Dominic Pileggi

Good morning Peter.

Peter Lisnic – Robert W. Baird

I guess just a quick question on the guidance. Bill, I think you mentioned $0.02 or $0.03 of purchase accounting for AmbiRad and maybe a little bit less than at the fourth quarter. That’s I assume included in the revised guidance?

William Weaver

It is on the guidance page. And let me clarify to just make sure that everybody gets it. There will be $0.02 to $0.03 of drag in Q3 and that is primarily from just the impact of inventory step up, and then you’ll see because fourth quarter should be AmbiRad’s best quarter, you will see a rebound of about that same amount, maybe a bit less in Q4. So, it should be relatively earnings neutral for the second half, but a bit of a drag on Q3 and a bit of a positive to Q4. So net-net though AmbiRad is included in and is not a call out from our 90% to 95% guidance range for Q3.

Peter Lisnic – Robert W. Baird

Okay, but the actual purchase accounting is in that number as well.

William Weaver

It is.

Peter Lisnic – Robert W. Baird

Yeah. Okay. All right. Perfect. Then on the steel structure side with the capacity expansion, are you incurring any sort of costs here in the back half of the year or in the 2012 that could be called out as material and kind of crimping the margin a bit?

Dominic Pileggi

Pete, I do not think they are going to be significant enough to call out. Most of the capacity expansion is going to be capital equipments, so it is going to be capitalized. There will be some period costs, but I don’t think they are going to weigh on guidance.

Peter Lisnic – Robert W. Baird

Okay, perfect. And then last question on electrical. In the margins there, I realize that you were thrilled with the margins. I was just wondering if you could give us a little bit of color commentary on the individual segments or the businesses industrial utility and construction what you're seeing and whether there is any pressures in any of those three that are above or below what you thought and kind of what the dynamics are.

Dominic Pileggi

I think as we laid out, it's just playing out almost exactly like we thought it would with the macro economic backdrop, and is very close to what we said and expected in our February comments. We think industrial would kind of be the power engine to as we go forward in the recovery, and we see that as relatively good. We think utility CapEx spending will be positive and a little bit of rebound in the construction market.

Peter Lisnic – Robert W. Baird

And that would be on the demand side. What I’m wondering about is actually the margin side in the context of – you are generally pleased with the margin on the second quarter overall.

Dominic Pileggi

Yeah, I think from the margin side, we're seeing about what we expected. As Bill mentioned we would like to leverage some of the construction plans. As volume comes in we would expect that to get a little bit better. But in the short term we would expect the margins in construction business to be the ones that would be under the most pressure for just the simple supply and demand situation. And you've heard us say before, and I'll repeat it again that we would – we'll lose a sale but we won’t lose the market and I think the second quarter was a good example where we stepped in to protect our share and make sure that we didn’t lose the market, and I like our position in construction. As I said our product offering I think we just have an outstanding sales coverage and sales capability, and our distributor channel is perfectly in line with what we're doing. So, I’m very optimistic that we'll hit the numbers both on the top and bottom line that we'd like to see.

Peter Lisnic – Robert W. Baird

Okay. That is perfect. Thank you for the details.

Operator

(Operator Instructions) Our next question comes from Jeff Beach with Stifel Nicolaus. Please state your question.

Jeff Beach – Stifel Nicolaus

Yes, good morning. Ken, do you quantify or give a rough idea, the growth in Europe versus North America. And then highlight a couple of your business in Europe and the competitive environment and a little bit at least qualify or give some color around the growth of some of those businesses.

Dominic Pileggi

Okay. I think I’m going to take a shot that’s a pretty complicated question Jeff. But, I would say overall I think Thomas & Betts in Europe is doing a little better than Europe is doing as a whole, and we're happy to say that. I mean we've made some outstanding acquisitions in that market particularly in the industrial market that help us there. There is a lot of unrest in Europe right now and a lot of concern about what’s happening in their construction market. But, as we’ve talked to you about in the past, we’ve taken some riffle shots at particular markets in Europe and the Middle East that are really working out well for us and complemented very well by our acquisitions. So, it’s kind of like, if I can make silly analogy, I think the car we’re riding on is outstanding, the road we’re ride on is a little bumpy. So, I feel very good about our position there, but I’m little worried about Europe itself.

Jeff Beach – Stifel Nicolaus

Thank you.

William Weaver

Jeff, just follow-on upon that one; you asked about any highlights on businesses. I’ll tell you a couple of them I would highlight where the two acquisitions we did last year in Europe, PMA and CMG. They are doing very well, contributing as we expected and getting good connectivity to some of the emerging market growth rate.

Dominic Pileggi

And our focus on the oil and gas and petrochemical, and even the food and beverage in Europe is also doing quite well.

Jeff Beach – Stifel Nicolaus

All right. Thank you.

Operator

Our next question comes from Zahid Siddique with Gabelli & Company. Please state your question.

Zahid Siddique – Gabelli & Company

Hi, good morning.

Dominic Pileggi

Hi, Zahid.

Zahid Siddique – Gabelli & Company

How are you guys?

Dominic Pileggi

Good.

Zahid Siddique - Gabelli & Company

A couple of questions. The first one is on share buyback. I know last year you bought back roughly 1.5 million shares for $66 million -- $65-66 million, but we have not seen any buybacks this year; and my question was, is that because of the economic reasons or for legal reasons?

Dominic Pileggi

There weren’t any legal reasons, but I would tell you that we’ve always said consistently that our preference would be to use the cash for acquisitions and we continue to evaluate acquisitions. We do have authorization for 2.5 million shares and we do have a good history as you mentioned of acquiring share when we don’t have opportunity to put that cash to work for growth. I think you should expect to see the same things out of us in the future. So, our preference would be to put it together for acquisitions. If we can’t find acquisitions, we know that we have to return that cash to our shareholders in some form.

Zahid Siddique – Gabelli & Company

Sure. And how long would you look for acquisition? You mentioned there aren’t a lot of acquisitions, so when could we expect a share buyback?

William Weaver

I think it’s hard to put timing around it, Zahid. I mean, if we look at it this way, last year we got a little bit ahead of the creep from stock options, bought in little more. We haven’t bought in as much this year. I think the stock is still very attractively priced. But as Dominic pointed out, I think we are just – we want to hold that liquidity for I guess the possibility of an acquisition, but we are not going to let the share count get too far ahead of us.

Zahid Siddique – Gabelli & Company

Okay, great. And as a follow-up on the acquisition aspect, the industry is still very fragmented. Looking out three, four years, what’s your view of the industry? How do you see the industry evolving and what’s your role going to be within that framework.

Dominic Pileggi

I think it should play out as it’s been playing out. I think that companies like ours will continue to acquire some of the – whether they are smaller companies or geographically bound companies that it can’t – maybe not expand. So I think our role would be continue to behave exactly as we’ve been behaving, and I think consolidation will be a normal evolutionary trend in this business.

Zahid Siddique – Gabelli & Company

Sure. The last question I have is on China and Japan. You mentioned the industrial demand was slowing because of China and Japan as being couple of reasons. How big is China and how big is Japan for your products?

Dominic Pileggi

They’re relatively small portions of our sales.

Zahid Siddique – Gabelli & Company

That would mean what, less than 5%?

William Weaver

Less than 5% is probably right.

Zahid Siddique – Gabelli & Company

Great. Thank you so much.

Dominic Pileggi

Thank you, Zahid.

Operator

Thank you. Our next question comes from Anthony Kure with Keybanc Capital Markets. Please state your question.

Karl Ackerman – Keybanc Capital Markets

Good morning gentlemen. This is Karl Ackerman filling in for Tony. You mentioned that your European acquisition to-date have been performing relatively well. I was just wondering if you can provide an update on the progress you are making in the US distribution channel from those acquisitions?

Dominic Pileggi

From the European acquisitions? As we said, that’s going to take a little while before you see any impact into the US channel and those things. I wouldn’t expect that you’ll see anything meaningful through the balance of this year. As we continue to work on the specification of those products with the end users, then you naturally the distributor is bringing those products in as necessary. So, there is still a little bit of work to do there, but we’re on the ground doing that right now and I think you’d have to stay tuned for that.

Karl Ackerman – Keybanc Capital Markets

Okay, great. And if you could just describe what you’re seeing from a demand perspective, maybe in the first part of July you mentioned that you’ve seen maybe somewhat of a slowdown kind of in the quarter; just wondering if maybe you’ve seen an improvement to-date.

Dominic Pileggi

Well, I wouldn’t use the word slowdown as much as I use the word caution. As I mentioned, I think distributors don’t what to build inventory. I don’t think they’re confident that they know what’s going on out there to build excess inventory. So, particularly in the construction world you are seeing more project by project activity that you have to react to which explains some of that bumpiness that you see in quarter input. But I think it's been pretty smooth in industrial and the utility businesses.

Karl Ackerman – Keybanc Capital Markets

Okay. Just one last question if I could. I was wondering if you can provide assumptions for the full year intellectual as it relates to volume and price.

William Weaver

Breakdown in electrical, our guidance in electrical is low double digits on the top line. My guess at this point is that acquisitions probably contributes about three points. That amount, price and currency collectively are three to four points and so the remainder, which I would call probably up to 6% or maybe about two times weighted average GDP where we have businesses would be organic growth.

Karl Ackerman – Keybanc Capital Markets

Great. Thank you.

Operator

Our next question comes from Elana Wood with Bank of America/Merrill Lynch. Please state your question.

Elana Wood – BofA/Merrill Lynch

Good morning everybody. Just wondering following up on the last question. Can you deconstruct your guidance for total company in terms of volume, price, currency, and acquisitions?

Dominic Pileggi

Full year guidance?

Elana Wood – BofA/Merrill Lynch

Exactly. So they are up double digits for total company.

Dominic Pileggi

Yeah. Elana you always ask the hard question. So, congratulations on that. Actually I’m as we do this, summing through my notes.

Elana Wood – BofA/Merrill Lynch

Or maybe would it be easier just to bridge your previous guidance, your previous top line guidance, we have mid to high single digits, different guidance.

Dominic Pileggi

I’m sorry I do I have got it here. So, here is sort of the outlook as I have got it for consolidated. So consolidated guidance is now low double digit. Between AmbiRad and the electrical acquisitions annualizing from last year, that is probably four points. I think between price and currency you are probably looking at four points, and then I think from an organic growth standpoint, you are really talking about the remainder. So it's probably not to be redundant but about four points.

Elana Wood – BofA/Merrill Lynch

Four points. Okay. Then, a question on your corporate expense line in the second quarter, it seemed kind of light even after a dusting for the legal settlement. Is there any reason why corporate expense is coming down why your sales are expanding? I mean is that a number that we should view just kind of as a new normal or was there something small in the quarter that you didn’t call out that was helping the number?

Dominic Pileggi

There is – to your point Elana, there is nothing we called out. And so, there is nothing I would specifically highlight to you other than corporate expense tends to be the least stable of all the elements because you’ve got legal charges running through there, you’ve got professional service fees, all the things that tend to have less predictable patterns to them. So there is no one item. I think our guidance – I think I told everybody at the end of Q1 to think about corporate in the context of maybe a 11.5, 12 million a quarter and that’s still good guidance.

Elana Wood – BofA/Merrill Lynch

Okay. I just had two more questions. The steel structures business in the quarter, how much of it would you say is tied to large projects versus relatively small projects? I’m just trying to get a sense of what we could expect in terms of the complexion of the future projects.

Dominic Pileggi

Yeah. Large is an interesting term, but I would say there are bigger projects than some of the smaller projects we have been seeing. As things firm up the projects are getting larger. So, the activity we see now is more from larger projects.

Elana Wood – BofA/Merrill Lynch

Okay. And then just lastly, HVAC had such a strong quarter. I was surprised that you could above 10% given the environment. What is a functionality, is it new products or I am just kind of scratching my head.

Dominic Pileggi

Well, I think it's a combination of things. Some of it is new products that you heard us talk about. A lot of it is pent up demand and maintenance and replacement of equipment. I would say that would probably be the largest portion of it. Because obviously we haven’t seen the rebounding construction. So I think people postponing some of the purchases are now having to do more maintenance. So, maintenance and repairs is a big part of that Elana.

Elana Wood – BofA/Merrill Lynch

Okay. In sort of a normal year, how much of your HVAC sales could be tied to new construction versus renovation and the retrofit.

Dominic Pileggi

I would say it's probably – maybe a little more than half.

William Weaver

Well, I think the candid answer is Elana, it's going to be very cycle dependent. If you are deep in the late cycle, it is going to be far more new construction than it's going to be CapEx being very big, sort of mid-cyclish now it is mainly CapEx and replacement.

Elana Wood – BofA/Merrill Lynch

Okay, but sort of in a normalized basis on average it's kind of 50-50 or?

Dominic Pileggi

Yeah. 50-50 or maybe a little more than 50-50 on new construction.

William Weaver

Yeah, remove the cycle, 50-50.

Elana Wood – BofA/Merrill Lynch

Okay. I think I am good. Thank you.

Operator

Our next question comes from Brent Rakers with Morgan Keegan. Please state your question.

Anjali Voria – Morgan Keegan

Good morning. I think Anjali Voria for Brent this morning. I think Elana asked all of my questions. I guess if I could follow up a little bit with the steel structures. You mentioned that now you are seeing a lot of larger projects. Do you derive a lot of repeat business from this or is this something that’s going to carry forward? How should we think about in terms of mix, any color you could give on steel structures especially going into next year.

Dominic Pileggi

Well, some of these projects that we are working on now will be delivered over time. It take a while to deliver – the bigger the project the longer it takes to install it obviously. So some of these things should have some repeat business over quarters and some may be even over a year. So, I think that is the kind of mix we will see. Obviously when you get a larger project, you could be more – you get better visibility in the short term. We have always said about this business. You get better long term visibility than you do short term visibility. So, I think that booking these larger projects give you a little better visibility, so I think that makes things a bit more stable.

Anjali Voria – Morgan Keegan

Okay, great. And also not to beat around the bush or anything, but if you can may be perhaps shed some light on the construction side of the electrical segment, specifically what you are seeing in terms of – filled by great geography or by different end markets within that area.

Dominic Pileggi

Okay. Well the activity as I think we pointed out a little bit we are not seeing much in residential right now regardless of the geography. And you are seeing some activity is an institutional construction such as hospitals, some schools, things like that. And then in some infrastructure construction and things like water treatment facilities, things like that, but the commercial and non-resi is still challenging.

Anjali Voria – Morgan Keegan

Okay, thank you.. Just one last question. Can you perhaps shed some light on your HVAC acquisition? How much – like what percentage derived from the UK versus the rest of your versus rest of the world?

William Weaver

Well, I don’t know the exact number, but it’s predominantly UK

Anjali Voria – Morgan Keegan

Okay. All right. Thank you very much.

Dominic Pileggi

Thank you.

Operator

Ladies and gentlemen there are no further questions at this time. I will now turn the conference back over to management for closing remarks.

Patricia Bergeron

Thank you for joining us, good bye.

Operator

Thank you. This concludes today’s conference, all parties may now disconnect.

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