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Executives

Dominic Pileggi - CEO

Analysts

Anix Vyas - Gabelli & Company

Thomas & Betts (TNB) Gabelli & Company Best Ideas Conference December 14, 2011 9:30 AM ET

Anix Vyas - Gabelli & Company

Good morning. My name is Anix Vyas. I'm an analyst in our Industrials teams. I've been with the company about a year and a half, almost two years. It's my pleasure this morning to introduce our next representative from Thomas & Betts, Dominic Pileggi, Chairman and CEO, and also William Weaver, CFO of the company is here with him.

Thomas & Betts has about 52 million shares outstanding. Priced at $52.15 for a market cap of about $2.7 billion, net debt of $109 million. Thomas & Betts has an (ex parte) value of about $2.8 billion. We like Thomas & Betts primarily because its products are critical to the green movement. The company operates under three segments. Electrical, where it manufactures connectors and other components for the electrical, utility and communication applications. Steel Structures, where the company has a leading position. And HVAC.

We believe the company is positioned very well to grow and its end markets – as its end markets recover. With that, let's just jump right into our conversation.

Dominic Pileggi

Okay. Thank you very much. Can you hear me okay? Okay. Thank you. Good morning. I'd like to thank Mario for inviting us to your conference and I'm going to cover two topics today. And then I'll do that in hopefully just five minutes or so.

Number one I'd like to just reflect on 2011 and then just take a preliminary outlook for 2012. If we look at the environment in 2011, I mean obviously it was a pretty challenging environment with the eurozone crisis or the political unrest internationally. The political paralysis that we're seeing domestically. Not to mention some natural disasters that we had to cope with. And 2011 – it may close with even greater uncertainty than we saw throughout the year. And we did see strong emerging markets, which drove some significant commodity inflation. Other than that, it was a pretty calm and boring year, if you look at it that way.

So now, I'm going to cover our three segments. Our Electrical segment, which is over 80% of our business, our core business, I'm going to cover that first. Again, here, Thomas & Betts we continued to focus on our customers and on our distributors driving what we call the two pistons of our business. That's brand of choice and supplier of choice. And just to outline that in a second, brand of choice is all the strategies we have wrapped around the product and the end user that creates the demand for our products and drives our industry-leading brands. Supplier of choice is all the services and value we bring to the distributor network, which basically lowers their transaction cost and increases their working capital requirements.

We focused on the fastest as we said actually at this conference last year, that we were going to focus on the faster growing verticals and we tactically redeployed our sales forces into where we thought the action was. And that was primarily things like petrochemical, mining, food and beverage, things like that. And water treatment facilities.

We offer a very valuable value proposition and good execution that drove strong organic growth. Our Electrical segment had organic growth of 8% through the first nine months and I think that was very good. I think we had outstanding price management throughout the year. We implemented three successful price increases in the first nine months of the year and we believe that we achieved good price cost parity there. So we were obviously a successful price leader in our space.

Our margins expanded by 80 basis points despite the commodity cost headwinds. And we had record segment margins in our Electrical business through the first nine months of 20.3% for that period. And again, OpEx driven demand leaves us very well positioned for late cycle when CapEx spending starts to come about.

I'm going to turn to our Steel Structure business. This is where we manufacture highly engineered transmission monopoles for the electrical grid, primarily in North American business. Again, we've seen – happy to report we saw significant shifts in the utility CapEx by us. So we saw a lot of new project awards and we believe we've gotten at least or more than our fair share of those project awards. We are adding capacity to this business to address this market expansion. And after trough and segment earnings in the first half, the second half where we saw this business turn into more of a buyers – sellers market than a buyers market, we saw solid earnings that rebounded in the third quarter.

I think we did a really good job. I think we played our hand very well managing the project quotes to avoid filling our plants with a backlog of long tail, low margin projects. And we expect 2011 to end in the low teens with an increase in sales and a second half margin in the mid-teens. So we're very happy with the way that business is going. We have and expanding backlog, which should benefit 2012 and we're looking as I mentioned, mid-teen growth.

In our HVAC segment, we're expecting top line growth here in the mid-20% with solid organic growth and we did make a very attractive bolt-on acquisition and solid margins in that business.

So if you look at that on a consolidated basis, in 2011, we're expecting the top line to increase in the low double-digit range and our earnings to increase in the mid-20% range. So all in all, 2011 was a very good year for Thomas & Betts.

I'm just going to just touch on a couple of things for our preliminary outlook for 2012. Obviously, uncertainty still clouds our forward view. Again the eurozone issues and the domestic politics. But the environment suggests opportunities for growth, likely a little slower than we saw in 2011. OpEx spending will still remain the key driver for the demand in our business. We see few catalysts today of any CapEx-driven expansion. But we expect to grow in each of our end markets, whether that’s industrial, construction and utility and we'll probably see more balanced growth in 2011 where industrial and utility were significantly stronger than construction.

We'll continue to aggressively pursue that vision of brand of choice and supplier of choice. And we'll continue to focus on those fast growing vertical markets. So we expect T&B to have organic sales growth in the mid single-digit range and earnings growth in the mid-teens percent range. And we'll continue to pursue our strategy of acquisition-driven growth and we're hopeful that – for a more favorable M&A environment in 2012. I will tell you that we have a pretty active pipeline right now so we're quite pleased with that. And we'll follow our discipline around those acquisitions as we always say, measure twice cut once. I think we have a good history of our acquisitions and the integration of those acquisitions. And we have a very strong balance sheet and cash generation position. It positions us very, very well.

So again, I think we're extremely well positioned for the late cycle CapEx spending, which really unleashes our operating model. So with that, we'll open it up to any questions that you might have.

Question-and-Answer Session

Anix Vyas - Gabelli & Company

Sure. Well thank you for that wonderful overview. Appreciate it, Dom. I guess before we start I just wanted to let folks know, we have folks with microphones. So if there are any questions as we go along, please just jump in.

I guess it makes sense for us, why don't we just start off with high level and just remind the folks here how important the products that you have are to the green building kind of movement in the U.S.

Dominic Pileggi

That’s a great question. You'll always hear us say that our products are not only asked for by name, but they're non-discretionary products that have to be used whether you're building something or maintaining something. And each of our products has either number one or number two brand choice, which is why I think we've done so well when you don't even have CapEx or not a lot of CapEx spending. Our products are still needed in renovation. So our construction numbers were actually much, much better last year when construction was down 15% or so arguably we were only down 3%. And year-to-date we're actually in a positive range because of our products being used even in a renovation of a hotel or a building like this or a casino.

If you move things around in a plant or even if you're just putting lighting in a building, as people are upgrading their lighting. You see what's going on with LED lighting and energy efficient lighting. So even though we don't sell lighting, when you move that light or replace that light it's our connectors, our fittings, our boxes, things like that.

Anix Vyas - Gabelli & Company

Great. And so I guess when we look at the Electrical products segment, you talked a little bit about kind of some of the near-term things that you guys have been experiencing but maybe some longer term expectations for that segment in terms of growth and margins.

Dominic Pileggi

Sure. When we look out at the longer term for our Electrical segment, we look at – and very excited, very positive for a couple of reasons. Number one, because of the brand position we have particularly in North America our market position is very, very strong. Our ability to use our predominantly direct selling sales force to move where the activity is, whichever vertical is active. And I did run through some of those. Currently we're looking at water treatment, petrochemical, food and beverage, mining, things like that. But also, although it's a small part of our business admittedly, we're having very, very nice growth. Very, very pleased with places like South and Latin America, the Middle East and parts of Asia where we've put some – we've invested in some infrastructure and it's paying very good results. And we're getting very good results.

So when we look out at the future, we're looking at capitalizing on the strong market position we have in North America, growth in those emerging markets with those essential non-discretionary products that fit in there perfectly. A good acquisition pipeline and just a tremendous well balanced distribution model. So the stars are lined up very well.

Anix Vyas - Gabelli & Company

You mentioned acquisitions in your presentation and you just mentioned it again, recently a competitor paid about 11.5 times for a connectors business. So just wanted to use that as a kind of jump-off point to maybe talk a little bit more about the pipeline. You guys historically have been pretty active in making pretty good deals.

Dominic Pileggi

I think we've made – and Bill could probably give you the exact number, 17 or 18 acquisitions since 2007. So we've been pretty acquisitive.

Anix Vyas - Gabelli & Company

So I guess just wanted to see kind of what the pipeline is looking like now. This year you haven't been as active. And kind of maybe just other areas where you're really just focusing on.

Dominic Pileggi

Let's comment on this year first. I don't think anyone's been as active. I think that's more a reflection of the M&A market than it is Thomas & Betts. We stand really, willing and able but it's just an interesting time for the seller around their evaluations and things like that. But if we look at our pipeline, we're seeing various types of companies in various geographies. We've also shown our ability to acquire in other parts of the world other than just the U.S. or Canada and quite successfully.

So I think we'll continue to look at that. Our criteria is we look for good companies. We don't look – we're not trying to find fixer uppers. We look at number one or number two brand, something that goes to our customers that we can pull through using that tremendous infrastructure we have, our best cycle logistics model to leverage up our internal distribution capabilities. And we're pretty pleased with what we're looking at right now. Various sized companies, various geographies. And I think historically, again Bill could correct me if I'm wrong, but we've been paying in the 8%, 8.5% range on average. Our last one was I think we paid 4.6% for just an opportunistic bolt on for our HVAC business.

Anix Vyas - Gabelli & Company

Okay. I just wanted to scan the room. There's a question over here.

Unidentified Participant

How do you see in 2012, how do you see the commodity price headwinds, number one. And number two, is how aggressively will you approach price. You got some price increases this year. Can you be aggressive on price next year too do you think?

Dominic Pileggi

Okay. The question is what we see in 2012 from commodity headwinds and second part of the question is how aggressive would we be. I'm going to answer the second one first. We'll be aggressive as we've always been. We lead in price where we are as I mentioned. We had three very successful price increases and feel very confident not only last year but over – since we started to see volatility in commodities, we've been able to maintain price/cost parity. And some of our peers and competitors just haven't been able to keep up. They're a little late to the game there.

So I think you can expect us to continue to be aggressive on price. And I think because of that value proposition that we bring and because of the products that we have, I'm confident we'll be able to be successful in that manner. As far as seeing the headwinds, right now things are pretty stable. And I would remind you for us the commodity – the most important commodity or biggest commodity we buy is steel. And steel right now is relatively calm. And hopefully it stays that way. But if it doesn’t we'll react very quickly and I believe with our normal success rate.

Unidentified Participant

Dom, go back – you made – historically what did you do in water and what are you looking at in the segments of water. Can you clarify that?

Dominic Pileggi

In water treatment?

Unidentified Participant

Yeah.

Dominic Pileggi

Yeah. Water treatment is – people talk a lot, Mario, about the transmission grid and the state of the transmission grid in the United States or even North America. And I would challenge you to take a look at the water treatment grid or water treatment, it's in worse shape than the transmission grid. So it's a very, very active vertical. It's also an active vertical when you go into some of the emerging countries as they put water treatment in for the first time.

We have a very nice product offering that goes into a water treatment facility. Everywhere from an Ocal product, which is a corrosive resistant conduit to our water, to our liquid tight fittings to our fastening. So we have a – we bring a broad and essential product into that. So that was one of the things we recognized and we redeployed – that was one of the beauties of having a direct selling sales force. We took them off the slow construction market and moved them into those fast moving verticals and water treatment has just been a tremendous market for us.

Unidentified Participant

So you're talking about dealing with the shale and the infrastructure needed for shale and fracking.

Dominic Pileggi

I'm sorry?

Unidentified Participant

The shale and the fracking play, how big are you in that area? Is this part of the old Lamson & Sessions business?

Dominic Pileggi

No. No. This would be – there is a couple Lamson & Session enclosures that go in there. But it's primarily the traditional Thomas & Betts industrial and construction products. So it's a good-sized segment.

Unidentified Participant

Now we can fill in the details. On a building like this, 100,000 square foot, go green, switch to LED or something, how much money do you get for a building like this? Can you quantify that?

Dominic Pileggi

For this building, we're looking at –

Unidentified Participant

Not this building but any building.

Dominic Pileggi

We're looking at a project now that’s going on that we have very good position in and there'll be about probably, could be $20 million to $25 million worth of our project in a building.

Unidentified Participant

Yeah. But how many square foot is that building so we have a metric. Like if you had (self) to a 787 you're going to get X dollars –

Dominic Pileggi

Could be a building – it'd be a building like this and we would bring some product in. If you looked at it like a bell curve, Mario, when they start the building we bring some of our products in to power up the building. Some of our utility or Elastimold type products. Then most of ours go into the rough-in part of the building, when you're wiring the building. At about the same time it's either wallboard or right before the wallboard and things like that went in.

So that would be boxes, fittings, connectors, all of that. And then at the end of the building it's the other end of the bell curve where you put in emergency lighting where they finish out the building. So a building about this size, it could be –

Unidentified Participant

Without (inaudible), what's your margins on renovations versus new construction? Materially higher?

Dominic Pileggi

The margins on renovations would be a little bit higher. And just to anticipate your next question if you looked at the margins in our business, if you looked at utility as being kind of the mean. Industrial would be the higher margin business and construction would be on the lower side of that.

Anix Vyas - Gabelli & Company

Great. Well maybe we can spend some time talking about the Steel Structure segment.

Dominic Pileggi

Everybody likes to talk about the Steel Structure.

Anix Vyas - Gabelli & Company

So if you follow some of the competitors, you obviously have a leading position in that business. We've been hearing some things about how the market seems to be loosen up. Maybe you can just give us some updates on kind of what you're hearing in that business and maybe give us some kind of thoughts on longer-term expectations.

Dominic Pileggi

Sure. The Steel Structure business, again I just want to remind everyone which portion of that business we're in, okay. And what our strategy is in that business. We focus on the steel monopole. Highly engineered, large, complex application, which has lots of barriers to entry because you have to have good engineering. You have to have good logistics. We're the only company – we have the only testing facility in North America where the utility could actually test their pole under stress. So we're not in light duty poles. We're not in traffic poles. We're not in telephone poles. Cellular towers. Things like that.

So you know what the niche is and so our niche is obviously we believe the most profitable niche in that business. And I think we've played our hand very, very well in that business because of lots of reasons, not related to underlying demand. But more I'll call them sociopolitical environmental reasons that grid has not been – the large projects haven't been put into play. And our vision in that business, our long-term vision is very, very good because of the intimacy you have with the utility companies.

So we knew that the projects were coming. The larger more complex problems and we kept our power dry and we kept enough business going into our plants to keep our plants busy. We did take some of the smaller, less complicated projects. But we did see some competitors, particularly new entrants that were very excited about this white-hot market and they came in, were very price aggressive. And loaded their plants with low, I'll call it low margin, more simple projects.

And when the projects started to be awarded, big projects, we were able to go out there, offer the capacity offer the services that the utilities need and very happy to report, you saw what we said. The second half we're looking for very good margin. We're very optimistic about this business in 2012. We're booking now business into 2013 and even 2014. And so we like the long-term outlook for this business.

Anix Vyas - Gabelli & Company

Great. And again, any other questions. When you look at the business, the portfolio that you have, some folks would say, your Electrical product segment is a very large piece of the business. You said 80%. How core are the other businesses? I mean obviously Steel Structures, we just talked about it, it's doing well. It's likely to do much better longer term, but some of the other businesses, the HVAC business for example is challenged. How do you think about the portfolio?

Dominic Pileggi

Let's start with the obvious one when you talk about core, HVAC. Okay? It's a great little business. Okay. It's very well managed. You can see the results of that business are very good. It's a good cash generator. Takes up very little management time. It's in, again, like Steel Structures, our strategy in both of those businesses is to keep them in the most profitable niche that they live in. We're not looking to grow for growth sake there. You're not going to see us go into residential business. So it's a nice little business.

If we had to or if we had some significant use for the cash, I believe it would be a pretty easy business to monetize and put the cash to use. But in absence of that, it's just a nice business to have. Obviously not poor. Steel Structures is very similar but it is a utility where we do sell a lot of utility in our Electrical business in the distribution and power gen part of the business. So there is a little bit of an association there. So that one kind of is kind of got a foot in each canoe if you will.

Anix Vyas - Gabelli & Company

You talked a little bit about kind of whether you need cash or not. Balance sheet is in great shape. Some investors would maybe argue that you could probably take on some leverage at these historic low rates and do some interesting things like repurchase more shares and things like that. How would you respond to something like that?

Dominic Pileggi

I'd respond by I think we – I would start first of all by saying our bias is to use our cash to grow the company and that’s what we've been doing, although we've had a pretty balanced use of our cash. We've used some of our cash. We've been a pretty aggressive share repurchaser. We've managed our debt very well and we continue to invest in the business. So I don't think you'll see a change in our philosophy there.

So I think the best use of our cash and particularly for our shareholders is to take that cash and put it to use in these value-based acquisitions.

Anix Vyas - Gabelli & Company

Any other questions our there? I guess one of the last questions that maybe I'll ask is you talked a little bit about the cash just now. But in terms of prioritizing longer term, over the next few years what do you forecast you guys are going to generate (inaudible) the cash. M&A.

Dominic Pileggi

We do think that's a good thing.

Anix Vyas - Gabelli & Company

Absolutely. Absolutely. But in terms of priorities for M&A, share repurchases –

Dominic Pileggi

I'd say M&A is the priority. Then the real issue is what if we can't find a use for that cash in the M&A, we obviously understand and we're keenly aware that that cash belongs to our shareholder and has to get returned to the shareholder in some form. Whether that's through share repurchases or we used to pay a dividend so we're not philosophically opposed to a dividend. But I think that really would hinge on the fact if we couldn't find the use for the cash with acquisition. But again I think our acquisition pipeline is active and healthy with good acquisitions that can add value. So that would be our preference.

Unidentified Participant

Let me hitchhike on that (inaudible). Go through the last deal. You paid like 8x EBITDA for it. How did you – what'd you do two years afterwards?

Dominic Pileggi

Our last deal, Mario –

Unidentified Participant

Pick one and pick one of the last two. Obviously the ugly duckling or the shining knight. Whichever one you want. Talk to us about what you paid for it and how'd you integrate it.

Dominic Pileggi

Yeah. If you look at the two last – I'm going to take the HVAC one out. That's one we paid (4.6) for and that was just one of those offers you can't refuse. It was someone that was retiring and just a perfect fit so we just took advantage of that. But if you look in our Electrical business, we made two. Our last two acquisitions before that were European acquisitions. A company called PMA out of Zurich, Switzerland and a company called CMG out of the Midlands in the U.K.

PMA was the leader, the number one share leader in conduit protection products. Big, big position in rail, in transportation and rail. CMG was the number one provider of industrial fitting protection. So when we look at – cable protection rather – so there we bought number one and number two, Mario, so that really helped us in Europe. Very profitable business. Higher than our normal margins, which – aggregate margins, which is very (plus). And we believe those technologies are exportable.

So we're now using our sales force in the Middle East to bring those to those vertical markets because they're great industrial products. And also bringing them into the North America. Now it's a very early stage of the trend change in North America as things move from steel to nylon, different types of plastic. So I think if you look at our position, those two acquisitions, Thomas & Betts now is solidly the number one provider of industrial fittings around the world.

So they were key acquisitions for us. I just wish they were five times bigger. That would be the only thing and we paid, as I mentioned, about 8x, Bill? Is that right for both of them? We have a question in the back?

Unidentified Participant

Dominic, you came into 2011 with levels of profitability that most of your competitor envied and in a very difficult environment you improved them again. Looking forward if demand improves where – how much more do you have in ability to improve those margins or in a flat slow environment, can you still improve margins from this level over the next –

Dominic Pileggi

I believe we can improve margins with some volume. That’s why I wanted to make sure I made that statement in my prepared remarks in that right now we're really being driven by OpEx spending. Okay? And that’s as Mario pointed out, renovations, maintenance. There really hasn't been much vertical construction, whether it's in industrial or the commercial world. So when that CapEx – that’s why I think we're going to continue to grow, get more than our fair share, even in the OpEx world. But when the CapEx or later cycle kicks in, I think that's going to be, really trip that lever in a positive way to positively affect our business model.

And I would expect to see some significant drop through to the bottom line. So I think there's upward potential based on how the markets behave.

Unidentified Participant

Thank you.

Anix Vyas - Gabelli & Company

Well, Dominic, we're out of time.

Dominic Pileggi

Okay. Thank you very much.

Anix Vyas - Gabelli & Company

Thank you very much.

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