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Hubbell Inc. (NYSE:HUB.B)

Q2 2012 Earnings Call

July 19, 2012 10:00 am ET

Executives

Jim Farrell - Director, IR

Tim Powers - Chairman & CEO

Dave Nord - President & COO

Bill Sperry - SVP & CFO

Analysts

Christopher Glynn - Oppenheimer

Rich Kwas - Wells Fargo

Steve Tusa - JPMorgan

Jeff Sprague - Vertical Research Partners

Brent Thielman - D.A. Davidson & Company

Mike Wood - Macquarie Capital

Jeff Beach - Stifel Nicolaus

Carter Shoop - KeyBanc

Operator

Good day, everyone. Welcome to the Hubbell Incorporated second quarter 2012 earnings conference call. As a reminder, today's call is being recorded. Now for opening remarks and introductions, I would like to turn the call over to Jim Farrell. Please go ahead, sir.

Jim Farrell

Good morning everyone, and thank you for joining us. Hubbell announced the second quarter results for 2012 this morning. The press release and earning slide materials have been posted to the Investor Section of our website at www.hubbell.com. Please note that our comments this morning may include statements related to the expected future results of our company and are therefore forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995.

Therefore, please note the discussion of forward-looking statements in our press release and consider it incorporated by reference into this call. In addition, comments made here also include some non-GAAP financial measures. Those measures are reconciled to the comparable GAAP measures and are included in the press release and the earnings slide materials. Now let me turn the call over to our Chairman and CEO Tim Powers.

Tim Powers

Thanks, Jim. Welcome and thank you for joining us this morning. Before go into the specifics of the quarter, I want to bring everyone up to date on some recent organizational changes. Dave Nord who has been Chief Financial Officer since joining Hubbell in 2005, has been promoted to President and Chief Operating Officer. Dave has done an outstanding job as CFO implementing change and driving organizational focus to help support our profit margin expansion. We look forward to Dave’s leadership in his new role. Bill Sperry who has been our Vice President of Corporate Strategy and Development has been promoted to Chief Financial Officer. Bill joined Hubbell in 2008 and has been instrumental in supporting our acquisition strategy as well as providing valuable insights into our company to the investment community. I am confident that Dave and Bill will continue to provide the necessary leadership and direction to enable Hubbell to reach higher levels of performance. I wish each of them much success in their new roles.

I have just a couple of high level comments and then I will turn the discussion over to Dave on the quarter. First of all on our execution, I was very pleased that the second quarter provided our company with opportunity to provide the highest levels of service that we've seen in many, many quarters. Customer delivery performance was excellent, our plant factory performance was excellent resulting in good overall execution for the quarter as you can see in our results.

Second, on one of the markets that we participate in and that is residential. We see a bottoming and positive signs of improvement. We had higher levels of business with the national home builders, through our DIY channels and over the internet. So we feel that we’re at the bottom and beginning to start up in the residential market. And then to discuss further the macro uncertainty of the economy and our view of that and while there is great uncertainty, we remain focused on our own performance. We understand what's going on around us, but we remain committed to introduce more new products, have higher levels of capital spending and greater efforts on acquisition in 2012 than we’ve done in 2011. And with those comments, I will turn it over to Dave.

Dave Nord

Thanks Tim. Good morning everyone. Before I get into the quarter, let me just provide a little commentary on the new role. I am obviously honored and delighted to you know that Tim and the Board have the confidence to give me this responsibility. I certainly view it a bit of, I have done such a great job at helping the organization set targets that they thought it would be a good opportunity for me to go and get more involved in the operations to help deliver those targets. So, I welcome the challenge and the opportunity. I have been out in the last month and half visiting some of our locations, spending some time in the factory floor and I can tell you that, that just gives me more confidence in the capabilities in the organization, what we’ve achieved to date and what the runway is going forward. We've got a strong team. We've got great programs in place and a lot more opportunities to go. So I am really looking forward to this.

I am also really delighted that you know Bill joined us several years ago, brought him on board and he is probably been instrumental in energizing our acquisition activity, lot of focus on our strategy as well as enhancing our image and our relationship with the investment community. So all those things I think are natural fits and I think the transition here has been very seamless.

With that, let me get into a little color on the second quarter. Turning first to page 3. Sales in the quarter were up 10% and that was really based on broad-based growth. So a strong growth continues in our harsh and hazardous business, up 20%. The power business continues to perform well on all fronts, including the benefit, a little bit at the end of the quarter but certainly leading in to the third quarter. But recent storms that we’ve experienced in the Midwest and Mid-Atlantic, we did what we normally do and we’re very responsive, delivered almost three quarters of the requirements within the day, the utilities need them, which is one of our signature capabilities. So not a lot of benefit in the second quarter, but some volume benefit that will occur in the third.

And I think, within that 10% growth we also had the benefit of acquisitions, the acquisitions that we’ve done through the first quarter and then you’ll note that we had an acquisition early in the second quarter, company's name TayMac. It was a $42 million acquisition. It’s a business that makes non-metallic enclosures, weather-proof enclosures that was a nice add and a fold into our Raco business. The pipeline is very active. There is a lot of similar type properties that we are evaluating and I would expect that we will have more activity hopefully closing in third or fourth quarter of this year.

On the profitability side, our margins for the quarter were 16%. It is more than a full point improvement from a year ago. Now a lot of that is coming from the favorable price commodity cost benefit. You will recall last year we were still facing sort of very severe headwind from the commodity cost before we got our prices in, but as the year progressed it improved and I think this is of the peak quarter of that turnaround. So a big benefit there. All of that leading to our diluted earnings per share in the quarter of $1.29, up 21%. And I think all of that is consistent really with our own expectations for the quarter and the first half of the year.

You know we thought the shape of the year, sales increases and margin improvement and we've talked about it, it was going to be really biased towards the front end, the more challenging comps in the second half and we will talk about the outlook later. We've had some commodity tailwind, a little more than we expected and to date pricing has held, but that is always the challenge and we are cautious going forward. You know we view some of that benefit to continue to focus on those things that will continue to drive growth and margin improvement going forward and continue to make those investments. So with that, let me turn it over to Bill and he can take you through some of the details of the quarter.

Bill Sperry

Thanks very much, Dave. I am starting on page 4 of the materials. So looking at the sales for the second quarter, Dave gave you a sense of the broad-based nature of it and I'll just comment on the end markets here in sort of descending order of size to non-res being the biggest and we continue to see the trends we've been experiencing where the public side, new construction continuing to be soft. We are seeing some strength in private, but the renovation really, the market really helping us net grow there. On the industrial side we do have some mixed performance where high voltage test equipment is proving to be soft, but certainly the energy markets in our harsh and hazardous business that serves those markets doing very well.

Utility is strong across both transmission and distribution and maybe something we've been waiting quite a while for here, signs that the resi market starting to allow us to see some very decent growth. We are still getting most of our lift from the multi-family side, but we are also starting to see some positive signs from the single-family side.

So flipping over to gross margin. We have seen a 100 basis points improvement to 33.4%, a great piece of that coming from price cost dynamic that Dave described and at the selling and administrative level, we are also getting some pick up in margin primarily bits from the volume providing some leverage there. So on page six, we are on operating profit, 120 basis points pick up as Dave described. Essentially a point coming from the price cost dynamic, but we are certainly encouraged to see contributions from both the gross margin and SME line items there. So the total other expense, very small dollars there but some lower effects losses included this year and the tax rate running slightly higher than last year at 32.8% but we do not have the R&D tax credit included there so as you see we are targeting the year to be around 32.5% so we are kind of inline with what we are expecting there.

So at the net income line we are at $77.5 million, an increase of 19%, really the result of what we've described the drivers of operating profit and we did a little bit there at the EPS line, $1.29 as being highlighted but increase to 21% where we picked up a little bit from having our average share count about a million shares lower during the quarter than the previous year.

So let's switch over now to talking about the segments and let's start with electrical, received $536 million of sales an increase of 8% with acquisitions adding 3% so really 5% coming organically. We described the industrial markets being mixed with Harsh and hazardous doing very well and high voltage showing show softness.

We described the resi strength and how well we are doing non-resi wise given some of the renovation spending that we are seeing particularly getting experienced by our lighting business.

Dave talked about the acquisitions; it has been for over the past few quarters, we are happy to have made those investments. You can see they become meaningful to the segment here in terms of driving growth and we are eager to do more as Dave highlighted.

On the [TLP] line here which got 120 basis point improvement in electrical segment, and again we are getting a price cost tail win here which is helpful as well as leveraged from its tail so good performance here in electrical. And switching to Power on page 10 also very strong performance 15% sales growth coming in at $242 million and we are seeing that above 10% growth rates in both our transmission market as well as our distribution market.

You will all remember distribution is a larger piece of our business but the transmission spending has been a big contributor to these very attractive growth rates. And you see 90 basis points OP profit improvement 17.9% very attractive levels and good direction, so good quarter from Power.

Talking about cash flow, obviously we are starting with a nice pick up in net income. At the working capital line, we essentially kept our days in line and we will talk about working capital little bit more in a minute. But certainly to support 10% sales growth we have got a little bit of investment there on working capital and on the other side we have got some we have made a pension contribution in the second quarter that we hadn’t last year and there were some deferred taxes that changed that.

So we are holding to our annual target of trying to achieve one time net income with our cash flow and obviously this is a net one times and we are little bit below last year but we feel good but structurally we are on pace to be able to meet that full year target.

So summary of the quarter we feel its very, very solid, 10% sales growth, 120 basis points on margin and 21% EPS. So let's switch for the year-to-date period. Also very solid period, 10% sales growth, 130 basis points at the [OP] margin line, and 24% increased EPS.

So, a very solid results here at half time. Let's take a look at the segments on page 13, starting with electrical, similar drivers to what we saw in the second quarter. Harsh and hazardous being strong, high voltage being softer, but great demand for resi and good non-res performance given some of the benefits we saw on the private side but also in renovation spending.

OP up 70 basis points at 13.9% and again about a point coming there from price clauses and good tailwind coming in behind us there. At the Power segment, year-to-date, very strong 14% price given us about two but very good organic performance in the transmission and distribution side, trends that we’ve been showing you for quite some time.

And at this point, Dave will talk more about the outlook but some of this Power performance we’re going to start now to run up against some tougher compares in the second half where we really started to see the transmission spending pick up very dramatically last year.

But sticking with Power year-to-date, 230 basis point improvements at 17.6%, a very solid performance from Power. Cash flow in the year-to-date period similar to the second quarter we feel reasonably inline with our working capital days from receivables, inventory and payable perspective.

The other line being driven by the pension and deferred taxes we discussed. CapEx just to remind you last year we had investment in a building in Basel, Switzerland for about $13 million that drove up the CapEx last year and I think both Tim and Dave alluded to our desire to suspend CapEx and keep investing in the company and that expect shows an increase in investment there.

Here we are talking on page 16 focusing on trade working capital. We are happy to be under that 18% level and second quarter of 2012 are looking very much inline with second quarter of 2011 and it continues to be an area of focus never doing enough on inventories, payables and receivables and we are going to keep working on those but those levels seem to be reasonably good in terms of helping us drive cash flow.

Switching to our balance sheets, we are in very, very good shape here. $545 million of cash essentially in a zero net debt position. So we feel very well positioned to make the kind of investments both of the capital nature and in an acquisition nature to continue to grow the company. So again, we feel very strong second quarter performance very strong year-to-date performance and I am going to turn it back to Dave to provide our outlook for the rest of the year to you.

Dave Nord

Let me first talk about our view of the end markets and our four key end markets on page 18. And I will start up on the upper right in utility. That market we see for the year growing 6% to 8%, that's about a point improvement from our last communicated look.

I think a lot of that's driven by continued strength on the transmission side in particular. The residential side as you've heard Jim and Bill talk about, I think there's clearly indications of a recovery that's in place. We are still cautious about the pace of that recovery.

Certainly housing starts continue to increase, settlement is improving but keep in mind that its all relative, even builder settlement is up to 45 which is still less than the middle ground of 50 so but certainly a dramatic improvement from the low-to-mid teens levels that they were fueling for a long time and we hear that from our customers as well. So that market we think for this year would be up 10% to 15% for us which is up dramatically from the 5% to 7% but not as big a contributor because its unfortunately still a small part of our business but actually bodes very well for one element of the growth prospects going forward.

The non-residential market as well 2% to 4% growth that's also up a little bit from what we last forecast, a big part of that being a continued strength in the relight, retrofit and energy efficiency. So the one market that we see some softness in is on the industrial side at 3% to 5%, and that's down a point from our last look, you know there are a number of businesses driving that the industrial production sector.

Bill talked about our high voltage business that you will recall in last year we thought was going to be down and it’s surprised us and turned out okay. This year we thought it’s going to be down and in fact it is going to be down, although we are feeling a little bit better because the order book is starting to fill and now this is a project business, a longer lead time and so that’s more opportunities for going into next year in ’13.

So all about as the end market growth of 4% to 6% which is up a point from what we last thought. How's that play down into our segment sales growth along the Power side, we are still holding at the 7% to 9% really led by the transmission projects spend that’s continuing to be strong although the second half compares on the sales side are more difficult.

You will recall last year in the second half we had a lot of releases on projects and so it creates a lot more volatility in this business but the order book here continues to build, you can get some early releases but they are impossible to predict and so we don’t anticipate early releases until they come.

Distribution is up on higher maintenance so I think that sort of market where we have seen clearly a change in the shape of the year. We talked earlier in the year about that the weather impacts and some of the projects and work being done because of the warmer weather and I think what we are hearing from some customers they are spent at a higher level for the budget and they will typically be at this point, so we are little more cautious over the summer, so the less of a peak in our construction cycle in the summer so I think that’s also going to have a little bit of an impact on the year-over-year.

And then the price benefit being offset by the unfavorable foreign currency. On the electrical side, 6% to 8% growth with the construction market slowly recovering, the energy industry is still strong although certainly with volatility as you tracked a significant volatility in oil prices and then acquisitions adding to 2 points. So overall, 6% to 8% sales increase.

So that gives us turning to page 20, that 6% to 8%, acquisitions giving us 2 points of that growth and those are just for the closed deals, the deals that are closed so far this year, certainly if we close any other deals it could add to that 2% but as we’re in late July, unless very closed pretty soon, the contribution this year won’t be significant, but certainly again it adds to what we are looking at in 2013.

We do have more foreign currency headwind than we had originally thought and I think that’s more offsetting the price increase that we expected. So we had within our sales guidance a point of price and I think that’s being offset by the foreign currency headwind that we will experience and I expect for the rest of the year. So in essence, our core volume growth assumptions overall are up a point from what we last thought.

On the margin side, you know we’re still expecting to increase our margins at least 50 basis points, and our target is 50 basis points. Certainly, there is opportunities that come from price cost capability if that holds as well as the incremental margins. But I think there is also things that what we’ve talked about some of the cost headwinds. They are in excess of our productivity gains, the pension costs, healthcare costs and as well some of the things that I mentioned, you know, we were looking at things that we need to do this year in anticipation of continued growth and margin expansion and particularly, some of the markets slow more than expected we want to be ready for that.

And again, the other thing to keep in mind is that the second half compares a much more challenging, one, because of the volatility on that’s created from a strong sales level on the utility side in the transmission market, but also for some of the other things that occurred in the second half last year and particularly if you will recall that we had some gains from some facility sales, in particular you recall we sold some of the excess land that’s associated with our corporate headquarters, so all-in-all that was about $4 million in the second half that we expected would be.

Free cash flow, we’re still on target to deliver free cash flow equal to net income and also that we’re maintaining our 32.5% tax rate; so strong first half and certainly on track to deliver record earnings per share for this year.

So with that let me turn it back to Jim and we’ll open it up to questions.

Jim Farrell

Okay, thanks Dave. Why don’t we take this time to take any questions you may have.

Question-and-Answer Session

Operator

(Operator Instructions) We will first go to the side of Christopher Glynn with Oppenheimer. Your line is now open.

Christopher Glynn - Oppenheimer

Just looking at guidance of at least 50 basis points from just kind of 50, and directionally positive and reading it maybe just a little bit outside a bit, still imply that flatter second half year-over-year on the margin, you did explained that, but just curious what may drive some sources of upside naturally year-over-year improvement in the second half of March in spite the tough comps?

Dave Nord

Well Chris certainly if we exceed our volume as options that would be one and some of the headwind for example if some of these transmission projects have some earlier relations those would come once and good to incremental margins. There is always a mix element because within our businesses we have some pretty high margin businesses that are necessarily forecast to be strong.

So if the mix of those businesses turned out to be a little bit better you could have some of that; I think if we were able to, certainly if we were able to hold the price and commodity cost you know stay down, it could be somewhere but we’re feeling that there is going to be lot more pressure on the price going forward, particularly in one business in particular which we’ve always had the biggest challenges on the lighting business.

A lot of activity in the lighting business, a lot of dynamics occurring there as that business transitions into LED and some more entrants start to come in and be able for some of the pricing enrollments, so I think there is a lot of factors that go into there; we are certainly not satisfied in stopping it; a lot of pieces to occur, a lot of volatilities that can have some.

Christopher Glynn - Oppenheimer

And then as far as mix goes the residential lighting, I am curious is the incrementals there kind of favorable to the relevant to the overall mix?

Tim Powers

The margins on residential are coming up from slightly below the average to approaching the average and you know it’s a very profitable business for us once that reaches its on the levels of activity; so we are encouraged that you know that as our business continues to improve that it will get back to where it is, which is one of our margin leaders in the company.

Christopher Glynn - Oppenheimer

And then just last one Tim, what was all the technology change in lighting and Dave alluded to that, is there a way to think about your content per square foot or if we think of the same type of project now as versus five years ago, is that project worth one point something times what it used to be?

Tim Powers

Yes, certainly when we sell an LED light we produce the driver and we produce the source of light not counting the LED chip, but the board and all the other components that go into it are manufactured by us and those sales are approaching now 15% of our total and so its moving at a very high rate again and we are pleased with that.

But our value contribution is higher than it was in the previous technology where we would buy a lamp and buy a ballast from the outside. So it is better and additionally there are more systems or retrofits that are beginning to include controls and dimming than ever before because certainly the best energy efficiency story is when you can turn the light off and these controls are developing and wireless controls are developing to advance that story.

Operator

And we will next go to the site of Rich Kwas with Wells Fargo. Please go ahead.

Rich Kwas - Wells Fargo

Bill, or Dave or even Tim, could you comment about harsh and hazardous, you've seen strong growth there; you've seen oil come down a bit here, although it’s rebounding lately, natural gas is pretty low as well in terms of pricing; are you seeing any signs that activity on harsh and hazardous side could be pulling back at all?

Bill Sperry

You know Rich, I think looking at total rate count has proved to be an interesting indicator for harsh and hazardous and as gas prices have tanked, the number of rigs doing that work was decreasing, but the oil rig count was increasing kind of offsetting that and just very recently those numbers have flattened a little bit. So I think you are right to point out that there is a little bit of risk inherent in that in the short-term I would say, long-term we are pretty bullish on the energy infrastructure spending theme and we like our positioning in the sector, but you are right that energy prices being higher kind of help enable people to make more investment which is good for us.

Rich Kwas - Wells Fargo

And then is that when you adjusted your end market outlook for industrial, was that a big part of that adjustment or is that kind of broader based?

Bill Sperry

Well, I would say it’s all of the above right, so certainly our outlook for high voltage test equipment which Dave mentioned is part of that, but as you know really half of our industrial exposure is related to general manufacturing industries and so we tend to look for example at the auto picture which you obviously are very familiar with and that tends to be a reasonable bellwether for us in terms of general manufacturing and that picture has some bounce around, the number of cars; is at a reasonable level to induce some spending. But that picture overall when you blend all that stuff together including harsh and hazardous caused us essentially to take about a point out of our outlook for that.

Rich Kwas - Wells Fargo

And then on the transmission CapEx side, could you provide us any color on the makeup of that for your business specifically meaning how much of that is kind of alternative energy sources, how much of that is just kind of maintenance or changeover in terms of new transmission line from expansion regionally. What’s kind of the solo win sort of mix of that and how should we think about the makeup of that business?

Tim Powers

This moves around substantially from quarter-to-quarter and we have seen peaks and valleys of the alternate energy. Just lately it’s been less of added more of the traditional, but we are pleased with our overall market share, the level of market activity and the entire market sector has been good. I think Dave alluded to some of the difficulty we have with predicting it. Normally you can win an order about this time of the year, early in the third quarter, then it will take four to six months for the utility then to begin to release shipments against that. Last year we had an unexpected event where several of those jobs were released almost with immediately replacing the order and gave us large incremental revenues in the third quarter and the fourth quarter last year. We’re still winning about the same percentage of market share, but we’re not in a position yet to see whether there is going to be any early releases. So, we're back to what I would describe as a more normal pattern, but I would say that we’re looking at more traditional transmission lines at this time. While there is always the new sources of energy, this is a little bit more skewed to the traditional stuff.

Operator

And we will next go to the side of Steve Tusa with JPMorgan. Your line is now open.

Steve Tusa - JPMorgan

Did weather at all play, any of the recent storm activities or just harsh weather in general play any role in the distribution side or the power side?

Dave Nord

Steve, not within the second quarter, although I think you will see some of that in the third quarter. I think our latest estimate was the storm impact was about $4 million to date, but the majority of that was in July.

Steve Tusa - JPMorgan

Okay, so that’s like not really, I mean, you’re obviously not planning for that kind of stuff in your guidance, right or is that, that’s already kind of booked as business just, would you say?

Dave Nord

Well, it’s now in our guidance since we know that there. I mean we normally plan for normal storm activity over a 20-year period and the one thing that's occurred as long as I have been here is that we have always been wrong because it's always been either a lot higher or a lot lower, but that is the best we can do and I think in fact the second quarter had very limited storm-related activity against what we have historically experienced until this last storm. but again it all happened on the 29th or 30th of June, so a lot that will hold into the first couple days of July.

Bill Sperry

I would say generally too in a second level, the hot whether you know is good for utilities right. I think we have been talking about how retail electricity demand had been a little bit sluggish and start of the year as may be the warm winter weather and so now a hot summer that helps them I think on the revenue side which is net good for us to get to support some of the spending we are looking for. So they have kind of a general impact on them as well.

Steve Tusa - JPMorgan

And just to be kind of the pay side of your US short-cycle industrial businesses, June and July type of what's that in like there?

Tim Powers

Well I would say that those things related to markets are doing well, like automotive is doing quite well. We supply some equipment into locomotives, which is doing well. The slower part is the products we sell into the steel industry as steel prices have declined. So it's a little bit mix picture, the big systems and high voltage test equipment which are one [league] items that slowed because capital spending has been reduced by some of the global players. So you know it's kind of a mixed picture and you could almost look at end industry, so that the end industry is doing well, than our products are selling through well.

Steve Tusa - JPMorgan

Right and then one last question from the end market perspective on the non-resi side. Obviously the ABI has been reasonably weak, employment is really not held up, do you see any chance that non-resi activity is actually down in 2013?

Tim Powers

Down in 2013?

Steve Tusa - JPMorgan

Yeah.

Tim Powers

That's a very good question, that's not how we are viewing it. Right now we are viewing a bottoming of let's say put in place, but where we are getting the business, good business right now is certainly the retrofit area, both replacing fluorescent and LEDs going in to replace traditional incandescent sources of light.

Steve Tusa - JPMorgan

Got you and then one last quick question just on balance sheet strategy. You know you guys are obviously have a great position on the balance sheet, I mean is there any thought you know whether it’s a accelerated buyback or a special dividend, more acquisitions you know maybe just update on the capital allocation priorities.

Tim Powers

Steve, we are continually evaluating our capital allocation, but at this point we see it as continuing at what we have historically done with our focus on investing in the business on CapEx, on paying our dividend and continually increasing it as conditions warrant, share repurchase to the extent of dilution and through equity rewards and there hasn’t been much of that and acquisitions if the pipeline is active and likely and we see the acquisition pipeline being very robust. Obviously that’s no guarantee of closing, but certainly there is a lot of opportunities and that’s really our priority if that market opportunity exists. If it does and then we would tend to look more at other alternatives.

Operator

We will now go to the side of Jeff Sprague with Vertical Research Partners. Your line is now open.

Jeff Sprague - Vertical Research Partners

Thanks. Good morning, a lot of ground covered. I guess may be on your new product initiatives, are you seeing any traction yet that’s notable particularly on the power side. I was thinking about the switchgear product line, you have been working on it. I don’t know if that’s in the market, if there is anything else that’s going on in the portfolio that might be driving outgrowth versus kind of overall market trends?

Tim Powers

I would say we have a couple of categories of new product introductions. One is taking traditional products and making them smarter with a feedback loop. So the distribution, automation in the public utilities is something that they are spending money on and working toward, to improve the feedback loop in distribution line so they can deal better with outages and get restored service better. So we are producing things like cutouts and traditional items that are more automated with feedback loops than we have ever had before.

We have a number of products where we are expanding the product line into areas that we haven’t had that are have been covered by competitors, so we have been in that space, we’ve been whittling away at those gaps as well as buying companies to fill them and we’re coming out with a couple I think of significant products probably next year, which are more for power lines to provide more utility feedback as to real time and what's going on in the environment. So there is a lot of development in several categories, we have a very high attention to that right now across all of our businesses and we can go on and talk almost business by business. So what we’re doing but there is a lot coming through the pipeline right now.

Jeff Sprague - Vertical Research Partners

And just thinking about kind of the general landscape, are you seeing any competitive opening around the edges for any distraction just or whatever Thomas & Betts and Cooper, you know they get through this phase of digesting by bigger players?

Tim Powers

I would say, it’s too early to see any disturbances in any of these kinds of activities; it's looked upon very calmly by distributors. You know, it’s just too early for us to really have any comment about what's going on there. So there is no appearance of any unusual activity.

Jeff Sprague - Vertical Research Partners

And you hired anyone, you know, a level or two down that you didn’t see on the outside looking in from Thomas & Betts or Cooper in the last three to six months?

Tim Powers

Nothing out of the ordinary.

Jeff Sprague - Vertical Research Partners

And then just finally I was just wondering on product costs. You know, obviously you won't get some pressure on prices, costs that’s coming down did that price cost gap narrow, you think, in Q3 or you have, you know, another quarter or so where it’s stable or may be even wider before price starts to catch up?

Bill Sperry

We’re not expecting it to get wider, but as we have been cautious in our guidance about margin, you have rapidly fluctuating commodities. For instance, oil has been down as well as like $82 or $81 and then in a week or so, it’s back up to $89. So we have lots of moving parts on that but generally speaking, we would expect price to diminish slowly and hopefully commodities to hold and give us a positive spread but probably at a decreasing rate.

Operator

We will now go to the side of Brent Thielman with D.A. Davidson. Your line is now open.

Brent Thielman - D.A. Davidson & Company

Just a quick question on the Power segment. Obviously, domestic transmission market has been robust, but you’ve seen similar strength on the international front and then as you talk about the acquisition pipeline either for this year, sort of beyond. Does that include some more expansion in that area?

Bill Sperry

Let's discuss the international part of our business. It's mixed. So, in our Power business, we have a business in Brazil. We have some decent business in Brazil. It's not always as high as previous years. So it’s a little spotty there. We have some very good markets going on but I would say, all-in-all, it’s been better than 2011, whether it remain so with all the year turmoil in Europe and other places really the question of the second half. So we are just as cautious about those macro events as we can be and still keep our heads down and keep going. As far as acquisitions are concerned we have a variety of potential that includes some in the space of Power.

Brent Thielman - D.A. Davidson & Company

Okay, fair enough and the high voltage test business I think you obviously mentioned that we are starting to fit so any sense so to what markets are driving that rebound and then I was just curious historically what is being kind of the cancellation rate in that order book?

Tim Powers

We haven’t really seen we see very few cancellations and so what typically occurs is sometimes they try to delay in order and you know to give them more perhaps a corporation will try to move it out of the current year so the expenditures in the next year but there is advance payments and progress payments that go with this and it doesn’t make it so easy to cancel the order without penalty. And the goods quite lumpy so that if fall behind a large order it could move your deliveries out more than a few weeks. So we have a great market position in that business and I think we are the standard of most transformer and cable manufactures in the world there.

Operator

We will now go to side of Mike Wood with Macquarie Capital. Your line is now open.

Mike Wood - Macquarie Capital

You mentioned the utility companies are spending above budget so far this year. Can you give some sense just the severity of that and have you yet seen the utility companies actually start to spend below what their budget is.

Bill Sperry

I mean, its really tough to quantify that, some of that information is just anecdotal from some of our customers, but its not at all surprising because we sort of expected that, they have an annual budget in fact they have the ability to spend earlier in the year just means its coming out of the latter part of the year and I think what also added to some of the volatility, uncertainty was the good news is it was warmer at the beginning of the year and therefore you could just see some of the construction work, the bad news is it was warmer at the beginning of the year so the meters weren’t turning, they weren’t generating the revenue so that caused them to be a little bit cautious.

I think the last couple of months of record heat, I think they are (inaudible) because the meters are spinning as Bill mentioned that's generating some revenue so that we think that's likely to at least for those who are holding back because of revenue concerns, they might start to release and those who were holding back because they were running up against the budget. I think that's just going to be a matter of the timing of the full year budget opportunities. So I think there's accommodation of some of the things that might have happened in the second half but it maybe we are hoping that it's offset by those things that will as a result of the normal weather.

Mike Wood - Macquarie Capital

Great and within lighting are you able to get the growth rates for the relighting or retrofit piece and the residential lighting component to the builders?

Bill Sperry

Those are the areas of highest growth within the lighting sector but relight and the residential, yes.

Operator

We will now go to the site of Jeff Beach with Stifel Nicolaus. Your line is now open.

Jeff Beach - Stifel Nicolaus

I was going to ask about this strong growth in distribution. You've already cited at least a part of it being very hot weather; but looking out into the third quarter with orders, is there a pickup or acceleration of spending going on or is do you not have enough information to tell?

Tim Powers

We are not expecting there Jeff other than around storms and emergency repairs to be really a change in the spending pattern. I think we are more on the side of this goes hand in hand with revenue generation and they have been running a little behind and now they are getting caught up. So there could be a little bit more but this isn't a year of extra strong growth on the distribution side, it’s more in line with lower levels of spending increases and where we are experiencing better results have been on the transmission side so far.

Dave Nord

Jeff, not surprisingly that we saw this phenomenon in the Northeast last year that the storms between the hurricane and the winter storm and the market then becomes a lot more in tune to reliability of the grid and the infrastructure needs. You are hearing a lot about already from the Midwest and the Mid-Atlantic storms; you know the challenge is to the utilities.

Unfortunately just like we've seen, so there could be opportunities going forward more in the ’13 and ’14 timeframe, but similarly what we've seen in the Northeast a lot of that spending is around not our products but really around [tree clearing] and other investments like that. But certainly, I think it always, these events always brings more attention to the reliability of the grid and I think there will be more emphasis and we think that certainly bodes well for the future.

Jeff Beach - Stifel Nicolaus

Two other questions on the power segment; one, can you estimate how much faster you think you are growing than your transmission and distribution markets combined; in other words taking market share and then when do you with the high growth that’s been going on for a long time when do you think you would start to run up against capacity restraints?

Tim Powers

With respect to market share, it’s about in precise measurement right, but I would tell you that our delivery performance from our business unit and its lead times have never been better. So we have a very good market share; we are performing extremely well, we’ve had lots of the right things in stock when storms came along and Dave alluded to probably two-thirds of the business shift within 24 hours and over 90% within 48 hours. So it’s just we are hitting on cylinders there, but it’s aren’t for us to predict exactly what change there is in market share over any interim period of time maybe I look back for something at the end of this year we might be able to say a little bit more about that.

Jeff Beach - Stifel Nicolaus

And capacity or capacity issues?

Tim Powers

Capacity for us is when we are bumping up against something like that it’s usually adding the machine it’s not really the footprint. So we are making, you can see in our capital expenditures we are investing in casting and molding and metal cutting and things like that to modernize and increase our ability to convert to products within our existing facility. So we’re not running into that kind of CapEx look forward that we would say we need to expand our footprint.

Operator

We will now go to the site of Carter Shoop with KeyBanc. Your line is open.

Carter Shoop - KeyBanc

Thank you. Congratulations on a good quarter guys. First question on the lighting sector, can we talk in a little more detail and maybe quantify some of the pricing pressure that you’re seeing over the past several months as we turn this in more to LEDs?

And as a follow up question on the LED transition, can you talk about how this transition is impacting the way you guys account for inventory obsolescence in lighting and some of the incandescent and fluorescent fixtures, end of the life maybe a little bit faster than some people are expecting and LED products tend to have much shorter shelf life I guess than traditional fixtures?

Tim Powers

Let me take that inventory obsolescence discussion first. More than two-thirds of the business in lighting is [mix order]; but we really don’t have lots of inventory seeing around to support incandescent product lines, and so our exposure to the change of mix in that is quite low. So we would be buying ballasts and lamps for the traditional sources of light and the older products, more on a make to order basis with very small amounts of inventory in working process.

So it’s an easier transition than you might think on the C&I side. Not that there isn’t inventory face-out challenges that are larger than in a traditional way, but it’s not as much inventory in finish goods and lighting as there are in some of our other businesses. So we don’t really think that’s a big problem and what was the other part of the question?

Carter Shoop - KeyBanc

The transition to LEDs and how that’s impacting the pricing environments in lighting; how are your new competitors come in and may be turn it on -- can you quantify that a little bit?

Tim Powers

Yeah really we are coming down a price curve that reflects the lower cost of the components going into LED lighting so we have shown that before where light output is rising and cost of chips and other components are declining adding to the value proposition for customers, lowering prices, but our margins as a percent of total sales have remained fairly constant. It’s more of a challenge on that side of building a batch of product and then using it up and then building a different model that’s more attractive, more light output. So it’s more like computer, circuit boards, more like that kind of business than our traditional business has been.

As far as price pressure in the market, it has more to do with the weakness in new construction and therefore the level of competition that exist for fewer jobs and I would say that’s just a generalized market condition that you would expect as you are nearing a rapid trough of recession in the non-residential construction; I think its not specific to the introduction of new technologies.

Carter Shoop - KeyBanc

A follow-up question on the transmission side, when we start to think about 2013 with Latin America slowing down a little bit and in the US and some of the wind and solar projects slowing down. How should investors start to think about transmission growth in ’13 to the industry, it’s kind of flattish a good way to think about it or maybe a few points down, a few points up?

Tim Powers

I would still think we are looking at a growing market, despite the general economic conditions in the short run, but some of these projects are years and years in the making and if you get the green light with all the hassle that there is through each approval and the length of construction that the time that there is almost all of these are going to go forward. It has more impact on years further out I believe; if there is a continuing economic slowdown it might affect I think years out farther than ’13.

Operator

And today that finishes your questions.

Jim Farrell

We are up at the 11 o'clock so thanks everyone for joining us. Bill Sperry and I are certainly available for the rest of the day should anyone have any follow-up questions. So thank you again.

Operator

This does conclude today's program. You may disconnect at any time.

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