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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

Jeffrey Sprague – Vertical Research Partners

Mike Wood – Macquarie Capital

Elana Wood – BofA/Merrill Lynch

James Bank – Citigroup

Peter Lisnic (Josh) – Robert W. Baird

Richard Kwas – Wells Fargo Securities

Christopher Glynn – Oppenheimer & Co

Karl Ackerman – KeyBanc Capital Markets

Jeff Beach – Stifel Nicolaus

Brent Rakers – Morgan Keegan

Thomas & Betts Corporation (TNB) Q3 2011 Earnings Call October 20, 2011 11:00 AM ET

Operator

Greetings, and welcome to the Thomas & Betts Third Quarter 2011 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions)

As a reminder, this conference is being recorded.

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

Thank you, Diego. Good morning, and thank you for joining the Thomas & Betts Corporation third quarter 2011 earnings conference call. With 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 third quarter financial results. Following a 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.

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 thank you for joining us today. Thomas & Betts turned in a very strong performance in the third quarter. We delivered solid organic sales growth in all of our key markets; industrial, construction, and utility. Solid growth in all of our key geographies, record segment margins in our electrical segment, and earnings from operations above the high end of our guidance.

We also completed a small opportunistic and highly complementary acquisition in our HVAC segment, renegotiated our revolving credit facility with competitive rates and conditions, maintained price cost parity in the quarter, completed substantially all of the consolidation activities we initiated earlier this year in our electrical segment, and continued to refine and execute our vertical sales and marketing strategy.

Consolidated sales grew nearly 17% year-over-year. Higher volumes in the electrical and HVAC segments and increased pricing across all three segments accounted for over half of the sales growth.

Earnings per share increased 32% year-over-year to $1.03 above the high end of our guidance for the quarter. We consider this excellent performance and a testament to our ability to remain focused, execute against our strategies, and perform well financially, even in the face of sluggish economic growth, and increasing pessimism regarding the sustainability of the global recovery.

Turning now to how our businesses performed in the quarter. In our Electrical segment, sales increased 14% year-over-year to $500 million. If you recall, I spoke at length on our second quarter conference call about our belief in our strategy of delivering essential non-discretionary products and services to our targeted vertical end markets and geographies. This has proven to be advantageous in a slow growth macroeconomic environment, and was a key contributor to our performance in the quarter.

As I noted earlier, our Electrical segment delivered a record high margin at 21% of sales. This is 40 basis points better than the previous peak achieved in the third quarter of 2008, when segment sales were approximately 16% higher.

Macro market conditions in the quarter were largely unchanged from what we’ve seen all year. Growth in industrial and utility markets continues to be driven by routine maintenance and repair, where CapEx spending, rather than by capital spending, and construction activity continues to be driven more by retrofit, refurbishment, and expansion, then new vertical construction.

This makes sense when you look at the macro data. The ISM Purchasing Managers Index continues to show positive growth and capacity utilization and industrial production rates are up year-over-year. As capacity utilization and production rates increases, so does the need to maintain and repair equipment and facilities. Total construction put in place is up approximately 1% year-over-year, but remains well below historical levels.

New non-residential construction is roughly flat with last year. In housing markets, there is still no sign of a pick-up in single family dwellings, and starts were down nearly 6% year-over-year in September.

With softness in new construction, it makes sense that spending is more weighted towards refurbishing existing facilities and homes. The macro data supports what we are hearing from our customers. I spend a significant amount of time in the field, meeting with distributors and key customers. And contrary to what the endless stream of negative headline and media commentary might lead you to believe, activity levels are healthy, and overall end-market demand has held up relatively well.

In the U.S., major contractors are busy. And as part of our vertical market strategy, our direct sales force is focused on helping them understand how T&Bs innovative products and best-in-class technical support can help them lower the total cost of an electrical installation.

It is our practice to work hand-in-hand with our distributor partners to find and win their business. We’ve seen the positive impact of these efforts in our 2011 results.

In the third quarter, our industrial product sales volume grew 8%, largely driven by OpEx spending in the end markets we’ve targeted; wastewater treatment, mining, petro chemical, and food and beverage.

Likewise, utility distribution spending continues to be driven by operating rather than capital spending. A critical concern of utilities is delivering a reliable and consistent flow of power, and maintaining the distribution network is fundamental to this goal.

This helped T&B Utility distribution product sales volumes grow 5% in the third quarter. We also saw real volume growth for T&B construction products, again, in the third quarter, up 2% year-over-year.

In North America and Europe, non-residential construction continues to bounce along the bottom. Increasing skepticism regarding the sustainability of global economic growth, and continued high unemployment are creating an even more cautious approach to spending in these markets.

The improvement we’ve seen in these markets continues to be driven by higher retrofit and refurbishment activity including secular trends in efficiency. T&Bs portfolio of essential non-discretionary products is equally appropriate for new or retrofit construction. The replacement of any electrical base system, including lighting or climate control units, requires new connectors, enclosures, and other related components.

As I mentioned a moment ago, a high unemployment rate, active foreclosure market in excess, supply continues to slow the pace of single-family residential construction. The most active sectors in the U.S. residential market continue to be multi-family complexes in assisted living or elderly communities.

Although they currently represent a small percent of our current portfolio, we continue to make inroads in faster growing markets such as Latin America, the Middle East, and Asia. In these regions, we are focusing on the faster growing vertical markets of mining, petrochemical, and energy.

Although we are also opportunistically targeting construction activity, the Middle East is one region where we are seeing a more balanced demand for our industrial and construction products.

Before moving on to our other business segments, I’d like to comment on pricing and inventory. Our ability to maintain price cost parity on a consistent basis, has been a distinguishing feature of Thomas & Betts for some time now. While volatility and commodity markets has not made this easy, we have successfully addressed the pricing challenge with intense focus, technological capability and decisive action.

As we noted on previous calls, we have instituted three significant price increases in 2011; in January, April and July. Each increase has been commodity and product specific, and each has been proactively and efficiently executed.

Pricing management is just one aspect of the overall value proposition we offer. And we work closely with our distributors to help ensure that they also effectively manage changes in pricing. In the third quarter, price contributed nearly 3 percentage points to our electrical sales growth.

Turning to inventory in the channel, overall, there’s been little change in the status quo. Distributors are neither de-stocking nor re-stocking. They continue to closely manage their inventory, while being sensitive to the need to respond quickly to market demand. They know they can trust Thomas & Betts in our fast cycle logistics model to deliver what they need, where they need it, when they need it.

Moving on to our Steel Structure segment. We saw a healthy improvement in this business in the third quarter, with sales up nearly 17% to $67 million. As expected, the steel structure segment margin improved from the unusually low levels experienced in the first half to nearly 16% of sales in the third quarter.

The sequential improvement reflects the changing market dynamics, which we have spoken about on previous calls. Utilities and regulatory agencies are refocusing on the need to invest in modernizing and expanding the transmission grid, and as a result, the pipeline of planned projects continues to grow, and margins reflect the better balance between supply and demand.

New project awards continue to outpace previous years by a notable amount, and our multi-year backlog continues to grow. The extent of the planning and quotation activity, coupled with recent awards, reinforces our decision to expand production capacity.

We continue to expect the steel structure segment margin for the second half to be in the mid-teens as a percent of sales.

The prospect of steady long-term growth and attractive financial profile of this business hasn’t gone unnoticed. We expect 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 margin range we’ve seen historically.

Lastly, our HVAC segment delivered a very strong third quarter performance. Excluding the contribution from AmbiRad, sales increased nearly 15% year-over-year, driven by increased replacement demand for our commercial and industrial oriented products.

AmbiRad, as you may recall, is a U.K. based manufacturer 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 are sold throughout Europe, are exported to other global markets, and provide a nice compliment to T&Bs legacy product offering. AmbiRad was a logical, opportunistic tuck-in acquisition that will strengthen our HVAC business outside the U.S. We paid a very attractive price for a well-run, growing company, with well-respected brand names, healthy margins and a strong cash flow.

As expected, third quarter HVAC segment margin was negatively impacted by routine purchase accounting requirements related to AmbiRad, and came in at 8.2% of sales. For the full year, we expect margins to be in the low teens range for this business, excluding facility consolidation charges.

In summary, all of our businesses and geographies contributed to our strong third quarter performance. In challenging and uncertain markets, we continue to execute against our strategy, leveraging modest macroeconomic growth, and this solid demand for T&B industrial, construction and utility products.

Our targeted market approach coupled with selected strategic acquisitions, decisive, and well-executed pricing actions, and continued refinement of our operations to improve productivity and lower cost, allowed us to deliver operating earnings that exceeded the high-end of our guidance in the third quarter.

These same attributes and strategies will drive our growth going forward. Those of you who know T&B well, know that we have a lean, straightforward operating culture, that extends from the factory floor to the front lines. We ask our employees to work smart and to look for opportunities to help the company grow profitably in everything they do.

In the third quarter, they clearly delivered against this expectation, and I congratulate them on their efforts. As I noted earlier, we completed one small acquisition in the third quarter. We continued to evaluate a variety of additional acquisitions and opportunities, although the heightened uncertainty regarding the sustainability of the global economic recovery has dampened the enthusiasm for some sellers to complete transactions.

Turning now to our outlook for the balance of the year. There’s no escaping the fact that the potential fallout from the European debt crisis and a lack of any meaningful improvement in unemployment and construction, two traditional drivers of U.S. economic recovery, have increased market pessimum about the global recovery.

However, as many observers have noted, there also seems to be a disconnect between main street and mainstream media. As our third quarter results showed, there are pockets of activity and opportunities in all of our key markets. The challenge is finding and capitalizing on this activity.

We believe that Thomas & Betts has done a very respectable job in this regard. And also, we remain cautious in our look forward. We also remain confident in our ability to manage effectively in challenging times. Coupled with our strong third quarter results, this makes us opportunistic about the finished 2011.

Looking forward, we continue to expect industrial demand to drive the global recovery. Likewise, industrial MRO spending will continue to drive our performance. Utility, OpEx and CapEx spending should remain positive, sustaining higher demand for our distribution products and steel transmission structures.

While demand for new construction will remain challenged, we expect to capitalize on opportunities in the global retrofit and refurbishment market, to drive growth for our portfolio of essential nondiscretionary electrical products.

Leveraging our vertical market sales strategy and maintaining our focus on continuous improvement, we expect full year electrical segment sales to increase in the low double-digit range with all markets contributing to the growth. We also expect pricing and favorable foreign currency to contribute to the sales growth. Our ability to maintain price cost parity and the benefit of consolidation activities should help us deliver a full year electrical segment margin of over 20% excluding facility consolidation charges.

The ramp-up we’ve begun to experience in our steel structure segment should continue in the fourth quarter. For the full year, we expect sales to increase in the low teens and the segment margin to be between 11 and 13%. Including the AmbiRad acquisition, full year HVAC segment sales should increase in the low mid 20%. Full year HVAC operating margins should be in the low teens range, excluding facility consolidation charges and taking in to account the impact of purchasing accounting for AmbiRad.

All in, we expect low double-digit consolidated sales growth for the full year, and the consolidated segment margin to be in the high teens.

As we noted in our press release, we have increased our guidance for full year operating earnings to $3.40 to $3.45 per-share to reflect our strong third quarter performance. This compares to our previous guidance of $3.20 and $3.35 per-share.

The greatest risk to achieving our outlook is the significant macroeconomic turndown in any of our key geographies. We don’t foresee this happening by year-end, but we remain ready to act defensively if need be.

In the meantime, we remain focused on our vertical market strategies that drive pull-through sales at distribution; our focus on continuous improvement and tight expense management, our cross-market initiatives to leverage our broad product portfolio and drive less cyclical and more balanced growth.

Our focus on using our unique, fast cycle, centralized logistic model and technological resources to help our distributor partners reduce transaction cost and improve their working capital. And our initiative to invest in and align our organizational capacity to help us deliver strong and sustainable growth.

These strategies and initiatives support our end-goal of being the brand of choice to our end-user customers and supply a choice to our distributor partners.

I thank you for your interest in Thomas & Betts. I would now like to turn the call over to Bill Weaver.

Bill Weaver

Thank you, Dominic, and good morning. As Dominic noted, solid operating performance in each of our business segments, coupled with a reduction in our annual effective tax rate, drove our financial performance this quarter beyond the high-end of our guidance range.

Let’s take a moment and look at the specifics of our financial performance in the third quarter. On a consolidated basis, sales increased over 16% compared to last year, driven by a balance mix of organic volume growth, improved price, acquisitions, and favorable foreign currency.

In our global electrical segment, sales increased 14% year-over-year. Electrical sales breakdown approximately as follows, 5 points of volume, 3 points of positive price, 2 points from the annualization of our 2010 acquisition of Cable Management Group, and 4 points of positive foreign currency.

In our steel structure segment, sales increased nearly 17% largely due to pass through of increases in the cost of plate steel.

Finally, in our HVAC segment, sales increased 69% largely due to the current quarter acquisition of the AmbiRad Group, which contributed over 50 points of the increase. Excluding the impact of AmbiRad, HVAC segment sales increased nearly 15% as follows, 11 points of positive volume, 3 points of positive foreign currency, and 1 point of positive price.

Turning from the segments back to our consolidated results. As a percent of sales, gross profit was 31.7% in the third quarter. This was a 40 basis point decline from the prior year period, and primarily reflects the deterioration in steel structures, gross margins, due to the competitive transmission market, and the impact of purchases accounting, inventory step up for the AmbiRad acquisition.

It is also important to note that our success in recovering increased raw material cost through increased pricing makes prior comparisons of percentage margin challenging. Higher year-over-year revenues due to commodity related price increases approximated $22 million in the quarter, with little or no corresponding increase in dollar gross profit.

This creates a margin percentage headwind of over 100 basis points, and effectively mask improvements in gross margin attributable to a favorable mix and volume related operating leverage in our electrical segment.

Selling, general and administrative expense declined by approximately 50 basis points to 18.3% of sales, reflecting solid leverage of our fixed cost base. This quarters SG&A includes an elevated level of corporate cost related to additional provisioning for environment remediation. The incremental provision was not significant enough to call out as a discrete adjustment of operating earnings.

Net interest expense was $8.5 million in the quarter, down from $9 million in the prior year. Lower average debt outstanding is the major reason for the decline. The effective tax rate was 26.6% in the quarter, below our previous annual guidance level of 30%. Substantially all of the reduction is attributable to our normal process of refining the estimated global distribution of our annual pretax earnings.

Year-to-date our effective tax rate is 28.7%. As global operating results firm up in the fourth quarter, the annual effective tax rate could decline a bit further. Net earnings for the third quarter of 2011 were $54.3 million or $1.03 per operating per diluted share. This represents a year-over-year improvement in operating earnings per-share of over 32%.

Let me spend a moment on free cash flow, the balance sheet and our new revolving credit facility. As anticipated, free cash flow returned to more normal levels during the third quarter. Free cash flow was over $67 million in the quarter, compared to slightly under 59 million last year.

Year-to-date free cash flow remains behind last year’s run rate, largely due to higher CapEx spending, increases in cash, income taxes associated with last year divestiture of the communications products business, and elevated working capital levels.

Relative to CapEx, we currently anticipate full year CapEx spending in the range of 55 to $60 million, down from our earlier guidance of 60 to $65 million. The reduction reflects refinements in the expected timing of equipment availability and not due to any changes in committed CapEx projects.

Working capital declined to 17.9% of sales from the elevated levels noted in the second quarter. This level is in line with, but still slightly higher than last year’s level of 17.6%. 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 continue to expect that free cash flow for 2011 will approximate after tax earnings.

We ended the quarter with $465 million of cash and cash equivalence. The most significant uses of free cash flow during the quarter were the acquisition of the AmbiRad Group and stock repurchases.

On July 1, we acquired the AmbiRad Group for approximately 18 million pounds, or approximately $30 million, using available cash resources. Additionally, we repurchased 500,000 shares late in the quarter for approximately $21 million or just over $42 per-share.

Outstanding debt at the end of the quarter was approximately $575 million or 26.2% of total capitalization.

As I discussed on our July conference call, we completed the negotiation of a new primary revolving line of credit during the quarter. Our new unsecured syndicated credit facility, gives us a borrowing capacity of $500 million at a sliding interest rate scale based on our public credit rating. Based on our current credit rating of BBB, direct borrowing cost would approximate 1 point over LIBOR. Maximum leverage ratio and minimum interest coverage ratios remain compatible with our old facility.

The new facility has a 5-year term and maturism of third quarter of 2016. Our old facility has been frozen to new draws, and the $325 million of borrowings under it will remain outstanding until either repayment, refinancing, or final facility maturity in the fourth quarter of 2012.

Finally, let me comment on our full-year 2011 and fourth quarter guidance. While the overall market tone and mixed macroeconomic indicators warrant caution in any forward outlook, the largely OpEx driven demand for our products has remained steady, and either in line with or slightly above our initial 2011 guidance.

Based upon the relative strength of demand levels in third quarter, we have raised our full-year EPS guidance range to $3.40 to $3.45 per diluted share on an operating basis. The implied guidance therefor for fourth quarter is $0.86 to $0.91 per-share. Our guidance assumes the typical seasonal slowdown in the electrical segment, partially offset by the seasonal high in our HVAC segment.

We expect steel structures to have a strong finish to the year with a sequential improvement in sales. And as delivered in third quarter, segment margins in the mid-teens level.

As a reminder, our annual equity compensation awards, our current fourth quarter, at our corporate cost and SG&A levels will reflect sequential quarter increases associated with accelerated expense recognition for retirement eligible recipients.

Thank you for your continued interest in Thomas & Betts. And I’ll turn the call back to Tricia.

Patricia Bergeron

This call is the property of Thomas and Betts Corporation. Any redistribution, retransmission or 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 October 27, 2011. The number to access the replay is 201-612-7415. The account number 9517 and the conference call ID number is 379081.

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

(Operator instructions). Our first question comes from Jeffrey Sprague with Vertical Research. Please state your questions.

Jeffrey Sprague – Vertical Research Partners

Thank you. Good morning, everyone.

Dominic Pileggi

Good morning, Jeff.

Jeffrey Sprague – Vertical Research Partners

Good morning. I was wondering if you could comment a little bit more on price. Obviously, you’ve had some success as you’ve seen a little bit of release on the [inaudible] starting to creep in to the discussion, is there any pushback on price? What do you think about price as we move into the fourth quarter and into next year?

Dominic Pileggi

Yeah, Jeff, as you can imagine, you know, in the industrial side and utility sides of the business, you know, where things are more application specific and there’s not as much capacity versus the demand for those products, there’s less pushback than you would expect to see in a slow construction market where there is a lot of capacity, you know more capacity than there is demand. So I would say that, you know, you saw a little bit of, you know, a little more difficulty in price in the construction market, but you know, you’ve heard us say before, you know, we’ll lose [inaudible] here and there, but we’ll never lose a market. And you know, we’ve worked according.

But I think generally, distributors have been able to pass the price increase on and people understand why the price increases are being made.

Jeffrey Sprague – Vertical Research Partners

And could you elaborate a little bit more on what you’re seeing in transmission activity? Obviously, the story has been kind of materializing over the course of the year. It looks like it is following through largely as you expected, but some – given the long lead times, can you give us some sense on how you see the early part of next year, project visibility and the like?

Dominic Pileggi

Sure. When we look at the transmission market, of course, we’re talking about the – the towers, our monopoles. And you know the market’s playing out pretty much like we have been saying it would be. We see that, you know, projects are now being released, capacity if becoming a little more scarce. So we look forward to, you know, being very optimistic, not only from a volume point of view, but also from a margin point of view based on those two things.

So we look forward to, you know the rest of 2011 and we would expect 2012 to follow suit.

Jeffrey Sprague – Vertical Research Partners

And was there any discernable impact in your facility distribution business from Hurricaine Irene or other storms in the quarter and do you expect any in the fourth quarter?

Dominic Pileggi

I would say no to both of those questions.

Jeffrey Sprague – Vertical Research Partners

Okay. All right. I’ll pass it on. Thank, guys.

Dominic Pileggi

Thank you, Jeff.

William E. Weaver

Thank you, Jeff.

Operator

Our next question comes from Mike Wood with Macquarie Capital. Please state your question.

Mike Wood – Macquarie Capital

Hi, Dominic and Bill.

Dominic Pileggi

Hi, Mike.

Mike Wood – Macquarie Capital

You know, given the strong relationship that you have with your distribution partners, can you provide some color on inventory levels in general? And would the sales growth, which is a bit more moderator implied in your fourth quarter guidance, does that include destocking or would you expect to see distributors destock at slower growth rates?

Dominic Pileggi

Okay, first of all, I’ll answer – as I said in my formal remarks, we haven’t really seen any indication of destocking or restocking. We think distributors are, you know, maintaining the inventory that they need to maintain to – for the service levels, you know, to maintain strong service levels. And I think that plays very well for Thomas & Betts and our fast-cycle logistics model.

Regarding, you know, ‘12, I think as Bill mentioned in his remarks, other than normal seasonality, we don’t really see any change in the fourth quarter versus the third quarter from a demand point of view.

Mike Wood – Macquarie Capital

Okay, and with the three price increases that you announced this year, is there any tailwind left from, you know, the previously announced increases coming through, flowing through to you?

Dominic Pileggi

I'm not sure I understand what you’re asking, but…

Mike Wood – Macquarie Capital

In terms of the lag that it takes to implement those price increases, essentially, are they fully implemented at this point?

Dominic Pileggi

Yep. One of the things that, again, we mentioned in our prepared remarks is our technological capabilities to get these price increases out very, very quickly and you know, implement them very efficiently. So all of them are in full swing and have been received very well. You know, and ultimately, the market will determine when they have to be adjusted either upward or downward.

Mike Wood – Macquarie Capital

Okay, thank you.

Operator

Our next question come from Elana Wood with Bank of America. Please state your question.

Elana Wood – BofA/Merrill Lynch

Good morning, everyone.

Dominic Pileggi

Hi, Elana.

Elana Wood – BofA/Merrill Lynch

I was wondering if you could comment on what you’re seeing in Europe? I know you’re exposure is not that big relative to other companies, but I’m just curious. And also, how is PMA performing?

Dominic Pileggi

Okay, I’m going to answer your second question first. PMA is performing just fantastically, doing very, very well. And now, how Europe is performing overall, again, as we mentioned in our remarks, I think you know, there’s some concern there based on the economic situation that’s there in Europe, but there’s still an active market for the retrofitting and the refurbishment and expansions, although we’re not seeing a lot of new construction. And there’s also, you know, good activity in the infrastructure areas that we pointed out.

Elana Wood – BofA/Merrill Lynch

Okay. And then I just wanted to ask you about the trend over the quarter, through the quarter. A few companies have suggested that July and August trends were a little bit soft, but then September was significantly better. Did you experience that as well?

Dominic Pileggi

Actually, no. I’d say ours were relatively smooth throughout the quarter.

Elana Wood – BofA/Merrill Lynch

Okay. And then I just have a question about pension. We’re getting towards the end of the year, I guess, how should we think about it given interest rates have come down so much this year? I know your 10-K provides some earnings sensitivity around changes in the discount rate, but I was just wondering if there were many – maybe some other factors that we should be thinking about, I mean, about pension next year?

Dominic Pileggi

Well, I think, you know, Elana, I think in terms of dialing in around pension next year, I think you’re going to see elevated pension costs. Two factors will drive it. One would be, in all likelihood, there is going to be a decline in discount rates, which will have an impact. And I suspect for those people that have relatively, you know, large equity compositions in their asset mix, they’ll probably have diminished asset balances for earnings purposes. We don’t yet know what the impact is for us, but I think pension expense would be a little bit of a head wind next year.

Elana Wood – BofA/Merrill Lynch

Okay. And one more last question about currency. What do you think the translation benefit might be this year if rates kind of stay where they are right now?

Dominic Pileggi

I’m sorry, translation benefits for…

Elana Wood – BofA/Merrill Lynch

Translation benefit to EPS as opposed to the top line?

Dominic Pileggi

Oh, for…

Elana Wood – BofA/Merrill Lynch

Currency, yes.

Dominic Pileggi

For 2011?

Elana Wood – BofA/Merrill Lynch

Yes.

Dominic Pileggi

Oh, interesting question. I haven’t done the math on it. I couldn’t tell you. But if I, you know, if we looked at it for the year, I imagine the currency has probably been up 2 ½, 3% over last year. It’s probably not unreasonable to assume that that’s been about the impact on EBIT and our international operations.

Elana Wood – BofA/Merrill Lynch

Okay. Thank you very much.

Dominic Pileggi

You bet.

Operator

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

James Bank – Citigroup

Hi, James, filling in for Deane.

Dominic Pileggi

Hello, James. How are you doing?

James Bank – Citigroup

Hi. I was just wondering if could ask you to elaborate on the electrical incrementals, which improved from Q2, but I was just wondering, is that an element of maybe the construction market, which is lower margin for you, not improving as well as you might have anticipated or is it because of the facility consolidation and some other things that you have going on there? I was wondering if you could just elaborate on those for me.

William Weaver

You know, sure, James. The, you know, I’ve got to say, all in, we were very pleased with incrementals in the quarter, 25% in the electrical business. You know the biggest piece of that is, you know, I think we – if you go back and look at last quarter, we do call out the impact of facility consolidations so you can see what that looks like on a neutralized basis. But we still improved on second quarter results and third quarter. I think it’s mainly a function of one mix because as you heard in Dominic’s remarks, the biggest piece of the growth in our end markets does come from industrial where we do have the highest margin product. And two, you’re beginning to see some of the run rate benefits from facility consolidations that we’ve done over the last 18 months.

James Bank – Citigroup

Okay, great. That’s all, thank you. And on the steel structures, the pricing, was that all of the 15% in the quarter? I didn’t hear the break between volume and pricing for steel structures.

William Weaver

Yeah, the 17% increase in steel structure, James, was substantially all increased price. So volume’s pretty comparable year over year.

James Bank – Citigroup

Okay. And so we can assume that backlog is still priced appropriately?

William Weaver

Yes, certainly it is from our standpoint. We’ve continued to get good project awards in the quarter and the backlog continues to build and the rate, as we can determine it, inherited backlog substantiates that mid-teens level that we’ve got guided to.

James Bank – Citigroup

Okay. Terrific. That is all I have. Thank you.

William Weaver

Thank you.

Operator

Our next question comes from Peter Lisnic with Robert W. Baird. Please state your question.

Peter Lisnic (Josh) – Robert W. Baird

Hi, good morning. This is Josh filling in for Peter. As you look across your end markets kind of going into 2012, is modest growth in all three basically the right way to think about it? I assume construction is a little and the other two grow at a slower pace. Is that how you’re thinking about it?

William Weaver

I think that’s very fair, yep.

Peter Lisnic (Josh) – Robert W. Baird

Okay. And then as we look at the electrical margin, obviously very impressive and you’re over 20%. As we look forward, and assuming your end markets grow and maybe construction eventually comes back stronger, how sustainable is that 20% level going forward?

William Weaver

Well, I think the – I think the 20% level is very sustainable and if you think about where incrementals were this quarter, 25% in the electrical segment, I think there’s more headroom on top of that in terms of OP leverage once you get some volume running through facilities that are producing primarily construction product. So you know, add a little incremental volume with mid-20s drop throughs and I think you can see results north of 20% for the electrical segment.

Peter Lisnic (Josh) – Robert W. Baird

Okay. And then last question, on CapEx, it seems that you are ramping significantly into the fourth quarter. Did you defer some projects from the 3Q into 4Q or – and then how easy would it be for you to ramp CapEx that much sequentially?

William Weaver

You know, CapEx is not really a function, at least the sequential look at it, not really a function of altering the timing of projects. What you’re really seeing with the fourth quarter ramp is the steel structure’s capacity expansion coming – really getting into full swing. And then just finishing up some of those things we had initiated earlier in the year. But plenty of bandwidth from a management standpoint to see that those get put in place correctly.

Peter Lisnic (Josh) – Robert W. Baird

Okay, great. Thank you for your time, and great quarter.

William Weaver

Thank you.

Operator

Our next question comes from Richard Kwas with Wells Fargo Securities.

Richard Kwas – Wells Fargo Securities

Hi, everyone. How are you?

William Weaver

Hi, Rich.

Richard Kwas – Wells Fargo Securities

Bill, on incremental margin, the 25%, should we think, just following up on that last comment, should we think of that as kind of the run rate going forward? I know you talked about mid-20s to 30% for electrical, but based on what you just said, it seems like you’re going to need some better volume performance to get that 30% level. Is that fair or should – am I interpreting that wrong?

William Weaver

Well, I think there’s an element of truth to it, Rich. I think, you know, I’m looking for incrementals next year, and again, this is, you know, without the benefit of having gone fully through our budgeting process, but I don’t think it’s unreasonable to think of incrementals for electrical next year as somewhere between, you know, the 25 and 30% level. Mix is going to be the biggest driver there. And you know, I think our expectation, again, at this point is still going to be that industrial will be the biggest contributor to growth in 2012. So that will be favorable to mix.

My only comment around OP leverage is there is still an untapped, a nice amount of untapped OP leverage in our facilities that are doing primarily construction products because they are currently running at the lowest level of capacity utilization today.

Richard Kwas – Wells Fargo Securities

So when does – when that gets better, does the volume trump the mix headwind as construction ramps up?

William Weaver

It will for a short period of time, but once you really get into the late cycle and CapEx spending begins to drive construction products, you’ll pretty quickly see, it will even out between the depressed mix value and the incremental operating leverage. And then you’ll begin to see a little bit of headwind in terms of increasing absolute margins. But 25% for the foreseeable future or a bit better, I still think is very much within our power to deliver.

Richard Kwas – Wells Fargo Securities

Okay, great. That’s helpful. And then Dominic, your comment on the transmission side, you know, you mentioned that the markets become a little more competitive. How do you think that’s going to play out? How long does that – how does that impact pricing? I know you’ve gone through a period of time where pricing was, you know, pretty volital and there was a lot of competition. Things are getting better there, but you know, how long do you think this competition factor really – does it impact 2012 at all, or do you see it having less impact relative to what you’ve seen this year?

Dominic Pileggi

Yeah, I would say, when you see the new entrants come in and you see what’s been going on in this market, you know, and how it’s played out in the first half of the year, particularly, you know, there were a lot of smaller projects where some of the new entrants can participate, and we actually, you know, really managed – I think we managed that very well. My hat’s off to that group in making sure we didn’t fill our plants up with the lower, you know, lower-margin, longer-duration projects. So you know, we knew what was coming and we waited it out. So I think in the – that’s why we mentioned in the short time, we think some of these new entrants that don’t have some of the full capability for engineering, design, logistic capability, testing, things like that, would be able to play in the larger, more complex projects that are out there.

And now, it remains to be seen if over time they can grow into those if any of them can. So in the short run, we see it more – we saw it more. But as we go into 2012, and I can only talk about Thomas & Betts, our focus on the larger, more-complex project, we feel pretty good about our ability to maintain those margins.

Richard Kwas – Wells Fargo Securities

Okay, great. That’s helpful. Thanks so much.

Operator

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

Christopher Glynn – Oppenheimer & Co.

Thanks. Good morning.

William Weaver

Good morning, Chris.

Christopher Glynn – Oppenheimer & Co.

Just – a lot of good things going on there. One emerging risk seems to be the public construction. If we looked at the non-res construction put in place, a little over half of it is public. I assume your construction markets mirror that, but are you starting to see any changes in that side of the construction market?

Dominic Pileggi

Not today, Chris, we haven’t.

Christopher Glynn – Oppenheimer & Co.

Okay. And just a comment on the acquisition pipeline, how it looks here and if you consider your cash balance elevated currently?

William Weaver

Do we consider our cash balance elevated? I don’t know if you can ever had too much cash, Chris. But I think that we’re very well positioned to take advantage of opportunities that come along, both with our cash balance and our credit capability. I think we’re looking at, you know, you asked about our, you know, the pipeline, I think there’s lots of good things to look at and obviously, a lot of people, I don’t know how many of those are immediately actionable based on, you know, just the people not wanting to sell and they think they’re not at peak valuation. But I think all in all, it’s – I feel pretty good about it and hopefully we can use some of that cash to make some of the value-based acquisitions like we have been able to make in the past.

Christopher Glynn – Oppenheimer & Co.

Okay, thank you.

Operator

Our next question comes from Anthony Kyra with KeyBanc Capital Markets. Please state your question.

Karl Ackerman – KeyBanc Capital Markets

Good morning, everyone. This is Karl Ackerman filling in for Tony. I just had a few brief housekeeping items. Just going back to kind of the order rates during the quarter, you know, I think you had mentioned that they were pretty smooth throughout. I’m just wondering how the first few weeks of October may have trended since September?

William Weaver

Fine, it’s going well.

Karl Ackerman – KeyBanc Capital Markets

So do you seem the same thing – I guess they’re on par with the September level, would that be fair?

William Weaver

That would be fair. I’d say, yes.

Karl Ackerman – KeyBanc Capital Markets

Okay. And then, again, on you know, looking at fourth quarter implied guidance, you know, does it maybe suggest a slight step down in operating margin. You talked about kind of the puts and takes in there, but is part of that related to maybe a bit more of maybe some pricing concession in the fourth quarter? I think you had talked about, or excuse me, a competitor talked about this morning, having a lower-than-anticipated price realization. I’m just wondering, you know, if you’re having to give back any price given the fall off in commodities as of late?

William Weaver

The answer to that is no.

Karl Ackerman – KeyBanc Capital Markets

Okay. All right, well, I appreciate it. Thank you.

William Weaver

Thank you.

Operator

Thank you. Our next question comes from Jeff Beach with Stifel Nicolaus. Please state your question.

Jeff Beach – Stifel Nicolaus

Good morning, Dominic and Bill. Good quarter.

William Weaver

Hi, Jeff. Thank you.

Jeff Beach – Stifel Nicolaus

A couple of quick questions. First, could you quantify the purchase accounting impact on HVAC this quarter?

William Weaver

Yeah, Jeff, I think the step up in inventory that went back through cost of sales on AmbiRad was about $1 million.

Jeff Beach – Stifel Nicolaus

Okay, great. Second question, as the new transmission capacity come on stream, is it on stream already?

William Weaver

No. Not yet. The – a fair amount of the capital spending, Jeff, will get done in fourth quarter as we put some of that in place, but we’re really looking for it to be actionable and operating in the second half of next year.

Jeff Beach – Stifel Nicolaus

Wow. Okay. And – wow, that seems like a long time to bring that capacity on, but that’s all right.

William Weaver

We have ample capacity for the orders we have. So not to worry.

Jeff Beach – Stifel Nicolaus

Okay. So that takes care of that question. And then the last thing, I think you said on previous conference calls, I think the last one, last quarter, that a lot of the HVAC growth has come from, you know, maintenance, repair, maybe the same OpEx that I hear through everything else. Is that what the primary driver still is?

William Weaver

Well, I think replacement, you know, as much as maintenance and repair, as people replace units. So you know, I guess as opposed to units being put in new construction, these are units that are replaced in existing locations.

Jeff Beach – Stifel Nicolaus

All right, that’s it. Thank you.

Operator

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

Brent Rakers – Morgan Keegan

Good morning. I’m going to take a shot at trying to clarify the tax rate guidance. What was the outlook again for Q4 and maybe more long-term outlook there?

William Weaver

First, good morning, Brent. You know, here’s my thought. I think year to date, Brent, we were 28.7 for effective tax rate. I think, you know, by the time we get everything trued up in the fourth quarter, I think you’re likely to – or could see some decline in that. If I were going to give you a number, I would tell you it would probably be somewhere between 28 and 29% for the year. So that would be a little bit below the typical 30% guidance rate in the fourth quarter.

Brent Rakers – Morgan Keegan

And Bill, you think 30% probably – I know it’s very preliminary, but for next year, 30% is probably a better number for the year there?

William Weaver

No, I think when all is said and done, Brent, we’ve used 30% as our guidance rate for the last two years and both years it’s proven to be lower than that. I think we will start next year’s guidance at something down below that, 29 or 28.5, something in that level.

Brent Rakers – Morgan Keegan

Great. Thank you. That’s very helpful. And I know earlier in the call, you talked – you certainly alluded to Europe. Could you maybe give us a better sense of growth trends this quarter in US or in North America as compared with Europe?

William Weaver

You know, growth trends relatively speaking, Brent, you know, in terms of Europe, Europe volumes were up year over year, which we felt very good about. Not as much as we experienced in our North American business, which as you would expect, was the predominate driver. Very happy though with traction that we’ve gotten in our emerging markets, particularly Middle East and getting some decent traction in Asia and Latin America.

Brent Rakers – Morgan Keegan

Okay. And then just, last question, and then again, I think you’ve talked a little bit about this as well. But within the non-res construction environment, you hear a lot of, I think certain of your peers will talk about some of these long cycle energy projects, oil and gas, power, could you maybe compare and contrast kind of what many people perceive as non-res construction, whether it be office or commercial buildings versus kind of the industrial power, oil and gas side of that business?

Dominic Pileggi

Well, we consider industrial – commercial construction more things like office buildings, hotels, casinos, things like that and we would consider a water treatment facility as the industrial construction. Is that your question?

Brent Rakers – Morgan Keegan

Yes. I think that is, Dominic, and I think you did – you gave a number, I believe, was it a 2% increase?

Dominic Pileggi

Yes. That was for construction product, volume demand year over year of 2%, Brent.

Brent Rakers – Morgan Keegan

And was that – does that include the industrial construction portion of that, Dominic?

Dominic Pileggi

No, that would be more of our commercial construction.

Brent Rakers – Morgan Keegan

Okay. Great. Okay, that’s great clarity. Thanks a lot, guys.

Dominic Pileggi

Thank you.

William Weaver

Thanks, Brent.

Operator

Thank you. Ladies and gentlemen, we have come to the end of the hour. I’ll now turn the conference back to management for closing remarks. Thank you.

Patricia Bergeron

Thank you and good day.

Operator

This concludes today’s conference. All parties may now disconnect. Have a great day.

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