Hubbell Inc

Ladies and gentlemen, thank you for standing by and welcome to third quarter 2020 results call. At this time, all participant clients are in a listen-only mode. Later, we will conduct a question and answer session. The instructions will follow at that time. If anyone should require assistance during the conference, please press star zero on your touchstone telephone. As a reminder, this conference is being recorded. I would now like to hand the conference over to Mr. Bill Sperry. Executive Vice President and CFO. You may begin.

Good morning, everybody. Thank you very much for joining us. Usually, we've got Dan Inamorato kicking off our call. And Dan and his lovely bride decided to go to labor and delivery this morning to hopefully welcome their first child. And so, we're going to be joined instead this morning by Jay Penn, Jay is in his second year with Hubble, and he's been leading FP&A for us here. And you may know his name or his voice from some prior lives he's had in IR. So Jay will get us started.

Thank you, Bill. Good morning, everyone, and thank you for joining us. Earlier this morning, we issued a press release announcing our results for the third quarter of 2020. The press release and slides are posted to the investor section of our website at Hubble.com. I'm joined today by our Chairman, Dave Nord, our CEO, Gervin Bacher, and as you just heard, our Executive Vice President and CFO, Bill Sperry. Please note that our comments this morning may include statements related to the expected future results of our company and our 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 may also include non-GAAP financial measures. Those measures are reconciled to the comparable GAAP measures and are included in the press release and slides. Now let me turn the call over to Dave.

All right, great. Thanks, Jay. And good morning, everybody. Before I turn this call over to Gervin, who's going to lead the earnings call, I want to just say a few words to close out my tenure as CEO and officially pass the baton on You saw our announcement in the third quarter of our long, bland, thorough succession process resulted in our board of directors naming Gerben as the next CEO of Hubble. Along with the rest of the board, I'm highly confident that Gerben will continue to build on a long, proven track record of success at Hubble and lead this company successfully into the future. You know, Gerben's added a tremendous amount of value for Hubble over the past 15 months in his role as chief operating officer. He's been instrumental in continuing to shape our long-term strategy while also leading our operational transformation. And you're seeing the results of those efforts come through in our recent performance. Garvin's also built a strong track record in his prior role leading our power systems business, where he delivered strong financial results for our shareholders, strong operational and service results for our customers, and really strong performance-oriented culture among the employee base. He also played a critical role in building our utility solutions platform through the acquisition of Eclair. But, you know, Gerben knows his success and Hubbell's success is really dependent on the strength of the overall team. And certainly, we've got a great team. And I have to highlight that, you know, there's some really key people. One that you all are familiar with is Bill Sperry, who's a very strong financial and strategic partner, and will continue to help guide Gerben to future success. And I know I can speak highly from my own experience in knowing how valuable that role is and how valuable Bill has been to them. But, you know, we've also been active in developing new talent, both internally and externally in our organization. At all levels, particularly in senior leadership, you recall our recent appointment of Pete loud to lead our unified electrical solution segment, as well as Alexi Bernard as chief technology officer, and Katrina Redman as chief information officer. And we also recently promoted from within Hubble a long time and very talented sales executive Terry Watson as VP of customer experience. And of course, most of you have met Susan Hooper over the last couple of years and know how much value she's added in our operational transformation. So while I'm certainly going to miss being CEO of Hubble and meeting with all of you every 90 days, I thought 61 times over the last 15 years is probably enough. But I'm proud of the leadership team we've built, and I'm confident in Gerben and the rest of the team's ability to lead Hubble into the future. So with that, let me turn it over to Gerben to talk about our strong results for the third quarter. Thanks. Gerben?

Great. Thank you, Dave, for the kind words. And I just want to add how honored I am to take this new position at Hubble. Good morning, everybody. You know, I've seen firsthand that what makes this company special are talented people, are reliable products, and are long-term relationships with our customers. I look forward to building on the success that we've achieved under your leadership, Dave. I'm confident that we have a bright future ahead. Moving to the third quarter, I'm going to start my comments on slide three with a brief summary of another strong quarter of operating performance and free cash flow generation for Hubbell. We achieved high single-digit growth in our power systems business in the quarter as secular grid modernization trends continue to drive the need for utilities to invest in critical grid infrastructure. We continue to differentiate ourselves in this space with our unique utility solutions platform, as well as our reliability and service, and we anticipate T&D markets to remain supportive of growth. As expected, electrical markets remain soft in the quarter. We saw steady sequential improvement relative to the second quarter, but most end markets continue to see year-over-year decline, with a notable exception in our residential lighting business, which grew double digits in the quarter, which strengthened e-commerce and retail channels. Our operational transformation continues to pay dividends with structural savings on the investments we're making in footprint optimization, and we continue to execute on price costs while benefiting from proactive cost control, as well as more temporary lower operating expenses. We continue to generate strong levels of free cash flow with almost 30% growth year to date. And this cash flow allows us to pursue a balanced capital allocation strategy and generate attractive returns for shareholders. In fact, we closed on a couple of bolt-on deals in October following the quarter close. High margin businesses in attractive markets. And we'll talk a little bit more about them later in the release here. Looking ahead. We're raising our guidance for the full year based on strong performance in the third quarter and our higher levels of visibility through year end, particularly in our utility markets and our execution on cost. Let's turn to page four to highlight our results for the quarter. You can see organic sales declined 8%, with demand for utility T&D components in our power systems business remaining strong. as our utility customers continue to invest to upgrade, modernize, and harden the grid. Outside of the power systems, we continue to experience project delays at Eclera and generally soft economic activity across most electrical end markets, driven by the COVID-19 pandemic, though demand did improve sequentially in the quarter. Despite the volume declines, and similar to the strong operating execution we've demonstrated throughout 2020, we achieved another quarter of operating margin expansion. Our investment in footprint optimization continued to pay off with attractive and structural savings. We realized positive price costs across the portfolio, and we continue to manage our costs across Hubbell, as well as benefit from the more temporary lower operating expenses. From an operational perspective, we are managing through the challenges of the pandemic effectively. As an essential manufacturer, Our factories are open and operational. And while we experienced some supply chain disruption in the second quarter, these have been resolved and we operated much more effectively in the third quarter. Our focus remains on protecting the health and safety of our employees while continuing to serve the customers with the products they need to operate critical infrastructure. Finally, you see another quarter of strong free cash flow generation. This cash flow not only supports our strong liquidity position, but also gives us opportunity to reinvest in the business and deploy capital to our shareholders. And Bill will give some more color on that later. With that, let me turn it over to Bill to walk you through our results for the quarter in more detail, and I will come back later to provide some insights on our outlook.

Thanks, Gurb, and welcome. Here's to your next 61 quarters. And good morning, everybody. I'm starting on page five of the slides you hopefully found, and you see the sales contraction of 8% that Gervin had highlighted. But the good news for us is that represents a sequential growth from the second quarter of about 17%, which was really good to see, both a pickup in demand and also the smoothing out of supply chain disruptions that we experienced in Q2. Operating profit down 5%, but up 60 basis points. I think managing to that 10% decremental ballpark, very successful execution by the operating team. You see the earnings per share, only 4 cents less than last year at $2.30, despite 8% lower profit growth. Below the OP line, We had a little bit of favorability in non-op as we had lower interest expense and we paid off some debt. We also had some favorable tax as our effective tax rate was about 22.3% in the quarter, comparing favorable to 23% last year, largely on some provision to return favorability as some of the tax regs got finalized and clarified. Also, I think importantly on the cash flow, You see the quarterly amount 10% below last year at $135 million, but the yellow box to the right indicating a 29% improvement year-to-date. We typically, over our last five years, we've shown on average to have the second half of the year generate about 70% of the free cash flow. So very back-end-moded versus this year. much more balanced and even much closer to 50-50. And so the year-to-date numbers is well ahead of last year, largely as we're offsetting the lower profit with better working capital management. And we'll talk a little bit more about that a couple pages from now. We'll unpack now the performance into our two segments, and we'll start on page six with electrical. You can see the challenging demand environment that we're operating in in 3Q as electrical sales are down 14% to 591 million. That sales decline was quite broad-based. The heavy industrial markets were the hardest hit, but most of the balance of our electrical markets were off there in the mid-teens range. The one exception was residential, largely the lighting product, but where they saw double-digit growth driven by strengths in people doing more renovation spending while they're at home. I also wanted to point out, you'll see the point on a net M&A neutral, some small amount of portfolio management happening during the year. And you'll recall in the third quarter, Of last year, we sold the Swiss-based high-voltage test equipment business called Haefeli, and we bought CPI, a connector business, fitting in with the Burnley brand. Those two, the sales that we sold versus we acquired offset each other, but we acquired at much higher margins. And so that's a net gain through buying and selling within the portfolio. You see on the operating profit side a 20% decline to 76 million or 12.9% OP margins, about a one-point decline, which is really driven by the decrementals of the lower volumes and partially offset by effective price-cost management as well as footprint rationalizations. Page seven, we'll switch to see the really strong performance turned in by the utility solution segment, really revealing the strength of our franchise, strong brands, strong relationships with customers, large installed base, high quality components, and being essential to helping our customers, powering people's lives. It's important to disaggregate the segment between our legacy power systems, and Clara. Now, you see that Clara was down 16%, behaving more like some of our electrical businesses. Really, a function of lumpiness, as most of their demand is on large contracts and installations, and the rolling on and rolling off can get a little lumpy. They also had significant access problems as when you get closer to people's homes, we were prevented from putting in some of the product there. So when you pull your lens back on the Clara, though, for the couple of years we've owned it, it's been in a nice mid-single-digit growth, and we're anticipating that into the future. But the star of the quarter for us was the power systems business, up 9%, really three drivers to that. One was secular market growth. The other was storms. And the third was entering the quarter with an elevated backlog. I think the secular market growth Durbin referred to really seeing on the distribution side that last mile, grid hardening, spending on components, and transition aided by renewable spending that are required to transmit the longer distances to get the electricity to the customers. The storms in the quarter added between three, four points. That really does help sales and OP in the quarter, but I'd argue more importantly really reinforces the value proposition that we've got in our utility franchise, namely offering those quality solutions at really, really critical time to our customers to allow them to get their, the lights turned back on and get their revenues re-engaged. So, really successful quarter for power systems. And as a result, the utility solutions operating profit grew 11% to $105 million and breached 20% OP margins in the quarter, expanding by a couple of points, and that's really a function of very strong execution on price-cost, good productivity, but also you see the effect of mix. So power outgrowing Eclaire is mix-friendly, and inside of Eclaire, the piece, the lower margin end of the portfolio, which is the installation side, is where there's some access restrictions, and so The combination is to help the positive contributor to margin expansion. I wanted to show you a margin bridge year over year for the third quarter because I think it's instructive not just on this quarter but how we're thinking about managing the income statement as we go forward. So you see that the picture starts at 15.8% the third quarter last year. Then you see the negative impact of the volume declines, the decremental effect there that has to be overcome in order to expand margins, 60 basis points. I'm going to read the green bars kind of right to left and start with cost benefits. So that's naturally variable expenses that are proven to be tailwinds in the COVID environment, things like T&E, medical, and supplies. And there's a natural partial offset there between the volume and those variable expenses. Next, you see price-cost, which is something that we focus very closely on managing year in and year out. You see favorability in this quarter. That was helped by the fact that with volumes down, you had commodity prices down. But as sequentially we see volumes pick up, we naturally will expect inflation in those commodity areas, which means as we get into next year, we're going to have to be focused on getting price and manage that price-cost equation. And, you know, the restructuring and related footprint optimization work, you can see how important that is to our equity story going forward, and we anticipate continuing to have this kind of contribution from restructuring and why we've had a multi-year program that we'll keep investing in and keep getting very favorable paybacks on. So hopefully that's a helpful picture of how we got the margins to expand and how that can relate to the future as we go forward. Switch to pre-cash flow on page nine. We'll see that 29% improvement year over year to $404 million. really improving the balance sheet, getting our net debt to cap ratio down to about 34% range. So very healthy to support investing. This cash flow performance is essentially replacing reduced income with lower working capital needs. The largest contributor to the working capital management is inventory, but receivables has also been a source. So We worked very hard as we saw the conditions of the pandemic rolling through starting in March and April to constrain inventories. We've continued to service our customers but manage that line item closely and it's really helped support the free cash flow, which in turn helps support our capital deployment strategy. And I mentioned during earnings we paid back a little bit of debt and we had lower interest expense. So that was the term loan that we used to acquire Eclaire. So that's entirely paid off now. We also have, as Durbin described, closed on two acquisitions in October post-close of the quarter. One was a small product line. inside of power systems. Very high margin product line that we're happy to add. And the second, which you see detailed here, is called Exceltex, which makes antennas and enclosures that work inside of the wireless world and are creating better connectivity, and better performance of wireless networks. So common application is to improve cellular reception inside of a building through distributed antenna systems that you maybe have all heard about. So this is a chance for us to acquire exposure to high-growth, very high-margin business that fits inside of the electrical business. Besides acquisitions and debt payback, We also, I hope, saw last week an increase in our annual dividend by about 8%. And we also reauthorized share repurchase program at $300 million. Certainly, I'm happy to have that authority to do that. Probably not for you to model in $300 over the course of the next year or so. but I think we'll still be tilting our capital deployment toward acquisitions, but good to have that authority, of course, to make those investments in our own stock. Page 10, we've got a look at our end markets and how they've performed during the course of the year and maybe how they're leaning as we go forward. I'm going to start at 5 o'clock on the tie at gas distribution. And similar to some of the Clara business, we've seen demand there, but a lot of our activity is near the house and even in the basement. And so having restricted access has prevented that business from growing. The explosion-proof devices we sell into upstream oil, continuing to be weak off of a low base. On the industrial side, we distinguish a little bit between the heavier side where applications would be inside of steel mills or componentry to assist in locomotive production as examples. We've seen that be quite soft, a little more resilient on the lighter side of the industrial space. Resi, a clear area of strength for the year. I think as people have spent much more time in their homes than they are used to, I've seen them doing quite a bit of reno spending and making that home space more enjoyable to live in. So our resi lighting, for example, has seen much stronger orders both in big box retail as well as through e-commerce channels. And non-res, we continue to see contraction in put-in-place spending. and have a cautious near-term outlook as we end the year. But going around past noon to the utility space, you see demand really remaining solid on the transmission and distribution components. And I really think there are four drivers that are really helping us. We've got an aged infrastructure that really requires modernization and upgrade. That's proving to be secular here, that need. The leaning towards renewables is causing demand for transmission on where that wind or solar is being harvested needs to be transmitted the miles to get to where the users are. I think as well the environmental impacts have been quite profound on the grid, whether that's hurricane, or an ice storm or a fire, depending on where you're located, it seems we're all exposed in some way to these environmental impacts, and that's placing an increased demand on utilities, hardening their infrastructure to be able to interact in the environment more successfully. And the fourth driver I'd cite is in automation, which is really important and leads to major savings to utilities as they maintain and repair their grids. It allows for collection of data and communication of data that can become very important in efficiently running networks. And that's everything from meter reading to reclosers that are clearing faults to maintenance and fault detection products. And so I think we've seen those prove to be secular growth drivers that are powering through the pandemic environment. So with that discussion of our end markets, I was going to hand it back to Gervin.

Great. Thanks, Bill. And, you know, I'd like to make perhaps a couple more comments on what Bill just stated. And this is really something that I'm very excited and optimistic about, and that is the continued strength in our utility-facing markets, driven by the secular grid modernization growth. As the economy continues its transition away from fossil fuels, and more things get plugged into the electrical grid, this creates the need for new solutions behind the meter, at the meter, or at the grid edge, and in front of the meter. And we've talked about this in our investor day. As a leader across the energy infrastructure, Hubble is uniquely positioned to solve these problems for our customers. things like protecting the electrical critical infrastructure, enabling the transition to renewable energy, building a more efficient and connected grid, and increasing the energy efficiency of buildings and homes. And we can do this through our products and solutions, but we're also committed to doing this as part of the manufacturer for sustainability initiatives. We set multi-year targets to reduce our water consumption and greenhouse gas emission, And we also refresh our sustainability website with new details on the initiative we're undertaking and the expanded disclosures around our operation. I encourage you to visit our website and look forward to providing you some additional updates on our efforts as we go forward. Now, let me turn to page 11 for an update on our outlook. While the macroeconomic situation remains uncertain, we're confident in the level of execution we've demonstrated over the past several quarters. With increased visibility through the year end, continued strength in our power systems business, improving market, as well as the execution of costs, we are raising our 2020 adjusted earnings per share guidance from a range of seven to 725, up to 745 to 760. From a volume standpoint, we expect the fourth quarter to continue to show improvements. We expect a similar theme as we saw in the third quarter, with electrical year-over-year volume declines moderating, and our utility markets holding up more resilient. Within utility, we expect power systems to achieve another quarter of year-over-year growth, while the decline to the Clara are expected to continue, but at moderating levels as projects get restarted. On margins, We continue to be bolstered by restructuring savings of about $25 million. Price-cost has been a positive throughout 2020, but these benefits should start to fade going forward. We also expect the return of some operating expenses, which have run below normal levels throughout the pandemic, but will continue to actively manage this tradeoff relative to improving volumes. And finally, as previously disclosed, we had a discrete benefit in the fourth quarter of 2019 related to tariff exclusions, and this will create some distortion in this year's fourth quarter margin compare. On cash, we expect to deliver approximately 550 million for the full year, representing double-digit growth over 2019, despite the declines in revenue and range. Let me also provide some comments as we look ahead into 2020. We'll provide guidance when we release our fourth quarter results. but we're in the middle of our planning process right now, and we're anticipating a year of modest market growth in 21. We expect our utility-facing end markets to remain solid, while our electrical markets should continue to show steady improvements into 21. On margins, there will be a lot of puts and takes, but on net, we're planning for a year of modest margin expansion with our operational transformation action to continue to provide tailwind. To summarize, we are very pleased with Hubbell's performance and execution in the third quarter, delivering margin expansion, strong cash generation, and essentially flat year-over-year earnings per share in what remains a challenging environment. We are raising our guidance for the balance of the year, and we remain confident in our ability to deliver differentiated performance for our shareholders over the near and long term. This concludes our prepared remarks for the quarter, and maybe we can ask the operator to operate the line now for questions.

Thank you. Ladies and gentlemen, if you have a question at this time, please press the star and then the number one on your touchtone telephone. Again, that is star one. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Your first question comes to the line of Jeff Sprigg from Vertical Research. Your line is now open.

Thank you. Good day, everyone. Dave, enjoy the retirement. Hopefully we'll see you around Connecticut here and there.

All right. Thanks, Jeff.

Yeah. All the best. I wonder if we could talk about Clara a little bit more, Irvin. So your view that some of the project delays are starting to wane now. How do we get confidence in that, actually, if, you know, kind of COVID is still raging and, you know, it would seem we still have kind of these access issues? So are your customers, you know, taking other precautionary actions or something that would allow them to move forward? Just a little additional color on, you know, how you expect this to play out, you know, into Q4 and then maybe what the setup is for Clara into 2021, given, you know, the comps that you're going to have here.

Right. Good morning, Jeff. Yeah, I think you used the word caution, and that's still very much what we're seeing with our customers. If you think there's really two phases of activity again, one is resuming projects that were put on hold, and there is enormous pressure on utility companies to resume. There's a lot of fixed costs that they have. when they deploy these projects. And when you come to a stop like this, you don't eliminate all those costs. So certainly utility customers that are in the middle of deployment feel the pressure to restart those. So we're doing that right now. I would say we're doing it pretty successfully, but with a lot of precautions to make sure that, you know, certainly we don't infect our own people and the people that we go into the homes with. A second area is if you're a utility and you haven't started the project yet, there's a tendency to not start for that same reason, right? Once you get started, there's a lot of cost that you're deploying, and you want to make sure that you don't get interrupted a month later. So that's where we're seeing a little bit of projects continuing to move to the right. The positive is that we're continuing to see the projects. We're continuing to quote on projects. Our backlog continues to be strong. So we believe that this is a move to the right as opposed to demands slowing. So as a result, we do see the fourth quarter improving and we see 21 improving further.

And separate unrelated, could you speak to channel inventories? You know, we heard from Schneider that there was a, you know, rebuild going on across their channels. Obviously, they're much broader and globally diverse, et cetera. But what is going on with the channel? And maybe as part of that, you know, you noted kind of the price cost will start to narrow. But are you out with or plan to be out with kind of pricing as you look into the new calendar year?

Thanks. Yeah, Jeff, I think we did see – during the second quarter, some destocking happening in the channel. And I'm not sure we have lots of evidence that everything's been restocked. So as Gerber and I have been meeting with our customers, I think there's a general cautiousness. And I think they're happy to have some of their inventories lower. And they're happy to put demands on us to make sure we can deliver things, you know, on time. especially in vendor-managed inventory situations. So I don't think we've seen a big restock yet that has offset the destocking that happened. I think everyone's kind of playing to see how volumes unfold. And, yes, on the pricing side, you know, sequentially, certainly I think copper kind of bounced first, Jeff, right, but steel and aluminum coming in. And so I think we felt very successful through, for example, the tariff period, working with our customers on price. And I think this will be a new phase where we have to get it. And you're right that that doesn't happen in a week. That takes usually several weeks of conversation and planning. and working with customers to get that figured out. So there's a process on that underway across various parts of the company.

Great. Thanks a lot. I'll pass the baton.

Your next question comes from the line of Steve Tessa from J.P. Morgan. The line is now open. Good morning.

Good morning, Steve. Good morning, Steve. Congrats to Gergen, and congrats to Dave as well.

Thanks, Steve.

Thank you. So just on the cash flow for next year, is this year a good base for growth, or are there certain things that are kind of unsustainable in a down revenue environment, a volatile revenue environment here?

Yeah, I think, Steve, the two things that I think it's a difficult level to grow from. And so I think 19's level is much more the way to think of the right pace. So one of the factors that contributes to that is the fact that we've had some tailwinds from the CARES Act and how payroll taxes were able to be deferred. So that switches next year from tailwind to a headwind. And the balance is the relationship between as you ramp volume back up, the requirement to invest in important capital, most notably in inventory. And so it's incumbent upon us to kind of manage those days. But it's I don't think of this year's level as a good point to growth, and I think we'll be growing off of chart of the 19th.

Okay. That makes sense. And then just lastly on some of these deals and, you know, kind of carryover, any other kind of carryover puts and takes in the next year? I know you guys just talked about price-cost of it, but any other moving parts next year just that may be more mechanical for the view?

Yeah, I think Gervin mentioned the distortion in the fourth quarter from some of the tariff exemptions that kind of were lumpy as they came through there. You know, the storms that happen in Q3, it's always storm season. This happened to be an active year. Hard to know how much of that repeats. But kind of typical puts and takes, I would say, Steve.

Yeah, and I'd say maybe to add to that on the opposite side of that is our continued work on the footprint realignment, and that should provide some tailwinds for us in 2021. Right.

Right. Okay.

Thanks, guys. Your next question comes from the line of Nigel Cole from Wolf Research. Your line is now open.

Thanks. Good morning. Also, again, congratulations, David. Congratulations and enjoy retirement. I think we're all quite jealous about that. Thanks, Michael. You've definitely done your tour of duty there. So I want to go back to price-cost because I'm not sure if the margin bridge is to scale, but it looks like it's certainly well north of the point of price-cost benefit this quarter. So maybe just comment on that. And then, you know, as we go into 2021, it feels like steel and aluminum inflation is kind of hitting at the right time in that, at the end of the year, beginning of the new year, when you normally put through some pricing increases. So do you think you can be more proactive on the pricing discussions than you have been, or rather than you were in, say, 2018? And then on freight, you know, it's part of the same discussion. Do you normally surcharge freight to your distributors, just because obviously freight rates are, you know, running quite hot right now?

Yeah, so let's talk about, you had a couple pieces to that, Nigel. So price costs in the quarter, was favorable, your order of magnitude is reasonable. You had kind of the two effects of we were getting price plus commodities were a tailwind, which that's kind of a, it happens, but it's an unusual arrangement. So that will be moderating, you know, obviously as we move forward. I think your point on steel and aluminum is exactly right. And I totally agree with your timing point that it's good to be able to have that come up at the end of the year because a lot of, and particularly a lot of power systems is done on blankets and that happens around this time of year. So you're aligned on doing that. I think certainly as tariffs increase, you know, roiled us in 2018. We learned a lot about how to have the pricing conversations with our customers. We learned how to share that information, make sure they understood where we were coming from. And importantly, we learned to ask. And, you know, that you have to ask. And I think we had a favorable experience managing through that tariff. So, I think we'll apply all that learning. And note to your freight point, we typically do not get reimbursed for freight unless there are occasions inside of some storm business, for example, that would be rushed that maybe a customer would pay. But typically, we do. And so, it was interesting coming out of some of the disruptions, Nigel, of the second quarter. I think we found ourselves in the third quarter, you know, doing more expedited freight, having kind of inefficient mode usage, so maybe a little more LTL rather than truckload, a little too much parcel, a little too much express, because we're kind of coming out of a disrupted quarter and looking to keep customers service at adequate levels. So I think that as within freight, we're looking to kind of re get that mode shift back to favorable mixes that'll come out of, you know, more normal supply chain, smoothly running supply chain.

Okay. Well, that's great. Great color. And then my follow on would be that, you know, obviously the outlook for power systems in 21 and beyond looks, looks, looks pretty good. Um, Are you getting anything from, you know, DC on what a stimulus bill might look like and how that might benefit, you know, smart grid investments and, you know, specifically how it benefits Hubble? Any kind of that?

Yeah, I don't know that we do have any, you know, unique insights to how a stimulus bill might specifically affect. I think it'll be interesting to see how the next week goes and, you know, what we have policy-wise rolling down in all of this.

Yeah, maybe just would add to that, that independent perhaps of policy, there's definitely investment in these areas, and I would say almost neutral of what party is in charge, but You know, we believe that business is really well positioned with secular growth trends in, you know, renewables with the upgrade and modernization of the grid. So we're very optimistic about this area over the next few years, independent of policy.

Great.

Thank you. Your next question comes from the line of Deepa Raghavan from Wells Fargo Security.

Hi, good morning. First off, Dave, good luck, and thanks for your leadership. Official congratulations to Gerben. Looking forward. Two questions, one for Gerben, one for Bill. Gerben, can you talk to trends in the quarter, July, August, September, and generally talk to how October has shaped up so far, but also touch upon if any verticals disappointed you based on what you were expecting 90 days ago, and then I have a follow-up for Bill.

Yeah, we've certainly seen through that period strengthening, and I think that was one of the reasons why we narrowed our guidance range with more visibility, and we increased our guidance. So, I would say some markets have been stronger than others in that. I think, you know, the industrial markets, specifically the light industrial markets, we've seen some pretty nice rebounds over that period. The one that we continue to be most concerned about, even though we have seen sequential improvement as well, is on the non-RES side. So I don't know that I would say that any has surprised or disappointed us in the quarter, but perhaps to a smaller magnitude that the granularity of how we look at it. But overall, we've definitely seen improvement and the reason why not only the comments for the fourth quarter and the full year, but our view, our early view for 2021. And I'll just, you know, stay with that. There's still a lot of uncertainty and, you know, the next three months, For us, we're really engaged with our teams, with our customers, to fully understand what 21 could bring. But at this point, we see slight growth for 21.

Got it. Thanks. Bill, given all the cost actions taken this year, should we expect some of your typical annual restructuring of $0.20 worth? Should that be lower next year, or do you think you'd continue it so you can offset some of the temporary costs that potentially could come back next year?

Yeah, I think, Deepa, it's a good question. And since everyone's congratulated everybody but me, I feel like the booby prize winner here. That's the way that it is. But I think the cost actions, you know, if you go back to our investor day, which feels, Deepa, like a lifetime ago when we were together in New York in the first week of March – you know, our expectation was that there could be some tapering in our restructuring spending, you know, starting next year. So maybe going from 40 cents down, you know, to 30 cents maybe. And I think what we've seen is the spending this year, you know, we're trying to keep on track to spend the 40 cents. Some of the actual footprint work is hard to do with people on furloughs. You don't have the resources to get the work done. And some of the dollars were shifted towards good old-fashioned headcount realignment, which has really quick payoffs. So rather than having that tapering that I think we talked about in March, I would anticipate, and we don't have our operating plan to present to you all yet. We'll do that in January. But I'd anticipate our restructuring spending to be more flat next year because I think there's some projects from this year that we won't get a chance to finish. And we're going to want to do them anyway because they have really nice returns. And so I think our spending will kind of probably maintain that, I would think, next year.

Maintain as in $0.40 similar to this year or $0.20, which is your normalized level, or $0.30, which you said? Sorry, which one is it?

Yeah, I'm saying $30 million or $0.40, which is what we're trying to do this year, yeah, and maintain that next year. Got it. Rather than taper back to $20 or $30, yeah.

Okay, got it. Thanks so much.

Your next question comes from the line of Josh Pokerwinski from Morgan Stanley. Your line is now open.

Hi. Good morning, all.

Morning, Josh.

Let me just first echo some of the congratulations out there for Dave and Gervin and then Bill. I don't want you to feel left out. I really appreciate it. Appreciate it, Josh. Yeah. A couple questions for me, not to put too fine a point on it, but I think, you know, the earlier comment on expecting some margin expansion next year, you know, maybe if I can just get one additional slice on, is that as a function of operating leverage or is that margin expansion in a vacuum kind of before the impact of growth?

Yeah, no, the growth will be an important part of that, Josh. So that's why I wanted to show you that that margin slide, even though it's only for the quarter, I think it's instructive. So I think the way we get to margin expansion is the red bar on volume incremental, you know, flips to green. Some of those cost benefits, T&E and furloughs and temporary actions, stuff like that, that'll flip back to red, but the net of those two, you know, should be okay. And that leaves you to manage price costs, which was, I think, two of the questions we're getting at, and we agree how important that topic is as we're at the point of watching materials re-inflate here. And as well, as Irving was highlighting, just getting that restructuring benefits of continued projects this year. So I think that picture is how we accomplish it. getting volume is a good important part of the story, or at least eliminating the red of the negative. Got it.

And then just to follow up on, I think, Nigel's earlier question on lighting, maybe broadening a little bit, can you just remind us, kind of regardless of anything that happens, you know, on the legislative fund or any incentives. What do you think the penetration looks like on LED today? And to the extent that we've, you know, we've seen past actions like ARA, I think it was like a decade ago. Is there anything in there on Buy American that would necessarily, you know, advantage Hubble relative to peers if you were to see kind of a similar trend? you know, kind of shell for, you know, for climate or energy efficiency-based, you know, incentives on, you know, would it give an election outcome?

Yeah, I think to the first point on penetration, I think we're at a very high level now. You know, we're sort of, I think, in that 85-ish percent range of, you know, LED is sort of the new norm now, I would say. And in terms of... How our supply chain is organized versus other lighting manufacturers, I don't think there's really much advantage or disadvantage to anybody vis-a-vis tariffs or any trade policy or buy American type. I think we would all benefit if there's a push towards more energy efficient buildings and more clean buildings, you know, and people spending more on components to make the spaces we live and work in, you know, cleaner and more efficient. I think that would just lead to more component sales and retrofit work. But I don't think any competitive advantage or disadvantage based on supply chain structure.

Yeah, maybe just a comment on that. While the LED penetration certainly is deep, I think an area of growth for this market is lighting controls, and it's how to make the LED lights that are now in buildings and structures more efficient and more effective. So that's certainly an area that we're seeing the growth in in our own business.

Understood. Appreciate the talk. Thanks, guys.

Your next question comes from the line of Christopher Glenn from Oppenheimer. Your line is now open.

Thanks. Good morning, everyone, and happy 61st day. I know it's 59, but I'll be more careful. You were there for the first one, so that's great. I had a question on your non-res exposure. How are you thinking about the mix of new construction versus maintenance and reno? And, you know, operating in a downturn, the demand for indoor space, new construction might see some sustained pressure, but maybe the reno maintenance has some, you know, tactical tailwinds coming in. Just speaking of the range of outcomes, maybe you're contemplating for non-res markets. Yeah, Chris, I think if you took our non-REV exposure, you can kind of cut it in half, and half of it is lighting, commercial CNI lighting product, and the other half is wiring and some connector-type products. So I think if you were to start with lighting, they've really gone – more than 50-50 to the reno side and there really are some interesting national account drivers of large owner operators of real estate think of quick service restaurants or big box retailers and they can turn on and off large programs of reno and that can kind of you know, uncouple, I think, from some of the non-red data. So there's opportunity in some of that to switch on, I'd say, specifically in lighting. On the other CNI products, I think that skews less, you know, and more in construction. And at the same time, that's, I think there's, still an emphasis on how we sell the product, looking for, trying to find those rental opportunities and make sure you're getting your share or more than your share, you know, of that work, either by getting to specifiers, right, and being part of getting spec'd in rather than just waiting to be plucked off the shelf. Thanks, Bill. And I had a follow-up on it, Clara. You had a you know, maybe you're off 80, 90 million this year, but prior to COVID, I think you were expecting, you know, some growth after the tough first quarter comp and backlogs hanging in there. Maybe utilities adapt a little with COVID on off quarter to quarter. I mean, could that kind of unleash and kind of put up, you know, very, very nice growth next year? Is that a scenario that's reasonable? I'd say it's a possible scenario. I think we'll, be able to, when we give you our outlook on our next call, we'll be more explicit about what we see there. I think what you're describing is possible.

Yeah, and maybe just one other comment to add to that is clearly we're seeing the projects move to the right. There is a constraint in labor availability to put all this in. So, you know, I agree, like Bill, there is definitely growth. into next year. There's a desire by utilities to continue to invest in this area, limiting factories. How quickly can they put these systems up? Great. Thanks a lot.

Your next question comes from the line of Chris Snyder from UBS. Your lines are open.

Hey, thanks for the time, guys. So my first question, just following up on the comments just previously around Eclara. So you guys said you see this as kind of a mid-single-digit secular growth business. And, you know, kind of by my math, it's running down double digits this year. So, you know, if you could kind of unpack that maybe like 15-ish percent or higher disconnect, you know, in terms of what we should expect next year, how much of that do you think has really been pushed to the right and how much of that is maybe – kind of lost or will come on maybe some year post-2021?

Yeah, I'm describing our couple years of ownership where we had some big up years, right? And so that's combining with this year to get us to mid-singles. And so I think that when you can get the installers into and near buildings, I think you're going to see that return to that level of growth. I absolutely think in our conversation with our customers that the role of smart meters and communication devices and grid monitoring products that Eclair sells are in quite high demand. And as we're seeing on the component side, you know, of our business, the utilities where it's in the infrastructure and backbone and They don't have access issues. They're actually willing to spend to upgrade. So I think that's taken us to 11 o'clock. And, you know, Dan usually comes on at this time and says, please call me and follow up, and Dan won't be around. So I'm hoping you can wait a day or two for Dan. If there's something burning that you need to follow up on, Jay and I will figure out how to get back to you. It just may not be as responsive in cycle time, but appreciate your understanding there.

Well, thank you, everyone, for joining us on the call today. That will conclude today's call. Thank you, Operator.

Thanks, gentlemen. This concludes today's conference call. Thank you for participating in NSConnect.