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Edited Transcript of HUBB earnings conference call or presentation 5-Feb-19 3:00pm GMT

Q4 2018 Hubbell Inc Earnings Call

SHELTON Feb 8, 2019 (Thomson StreetEvents) -- Edited Transcript of Hubbell Inc earnings conference call or presentation Tuesday, February 5, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David G. Nord

Hubbell Incorporated - Chairman, President & CEO

* Maria Ricciardone Lee

Hubbell Incorporated - Treasurer and VP of Corporate Strategy & IR

* William R. Sperry

Hubbell Incorporated - Senior VP & CFO

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Conference Call Participants

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* Charles Stephen Tusa

JP Morgan Chase & Co, Research Division - MD

* Christopher D. Glynn

Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst

* Hilary Elizabeth Cauley

JMP Securities LLC, Research Division - Associate

* Jeffrey Todd Sprague

Vertical Research Partners, LLC - Founder and Managing Partner

* Joshua Charles Pokrzywinski

Morgan Stanley, Research Division - Equity Analyst

* Nigel Edward Coe

Wolfe Research, LLC - MD & Senior Research Analyst

* Richard Michael Kwas

Wells Fargo Securities, LLC, Research Division - MD & Senior Equity Research Analyst

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Presentation

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Operator [1]

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Good morning. My name is Samantha, and I will be your conference operator today. At this time, I would like to welcome everyone to the fourth quarter 2018 results conference call. (Operator Instructions)

Thank you. I would now like to turn the call over to Maria Lee. Please go ahead.

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Maria Ricciardone Lee, Hubbell Incorporated - Treasurer and VP of Corporate Strategy & IR [2]

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Thanks, Samantha. Good morning, everyone, and thanks for joining us. I'm joined today by our Chairman, President and Chief Executive Officer, Dave Nord; and our Senior Vice President and Chief Financial Officer, Bill Sperry. Hubbell announced its fourth quarter and full year results for 2018 this morning. The press release and earnings slide materials have been posted to the Investors 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 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 the earnings slide materials.

Before I hand the call to Dave, I'd like to thank Steve Beers for his many contribution to Hubbell Investor Relations over the last 3 years. Steve will be moving on at Hubbell to be CFO of our Commercial and Industrial group. Going forward, Dan Innamorato will be the primary IR contact for Hubbell and lead all day-to-day IR activity. Congratulations to both Steve and Dan, and best wishes for continued success in your new roles.

Now let me turn the call over to Dave.

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David G. Nord, Hubbell Incorporated - Chairman, President & CEO [3]

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Okay. Thanks, Maria, and thanks, everybody, for joining us. I guess I'll have to second my -- the appreciation for Steve Beers for all of his efforts, and we're really looking forward to his contribution in an operating world, taking with him his 3 years of investor insights gained in dealing with the investor population. And I think we found that to be a really good perspective to bring to the operating world. So good luck to you, Steve.

We're going to talk a bit about our results for the fourth quarter and the full year as well as our outlook for 2019. I certainly see from our press release this morning is another quarter of strong earnings growth, and particularly, free cash flow generation for Hubbell. It certainly demonstrates our confidence in our market position and our ability to deliver differentiated results for our investors over the short and long term.

I'm going to start on Page 3 of the materials. We can follow through there. First, on the fourth quarter, some of the key takeaways. Obviously, another strong quarter of end-market growth. All markets up again in the quarter across the board, and particularly, some major end markets: core industrial, outside-plant communication, gas distribution, and most particularly, positive towards Lighting. It's real stronger than anticipated, particularly on the residential side. And we expect this end-market growth overall to continue into 2019.

Our pricing actions have gained traction and acceptance in the market. Our price realization was up nicely on a sequential basis from the third quarter as we continue to implement increases in the face of our increasing cost headwinds. Bill will take you through some of the details in just a minute. And even the Lighting pricing was slightly positive, which I think is the first time since sometime in 2014. So we're really pleased to see that. We certainly are confident in our ability to realize price in our businesses. Our intent will focus on recovering all cost increases, including the -- recovering some of the headwinds we experienced in 2018.

Just like in prior cycles, we expect this price/cost dynamic to flip in our favor once the inflationary dynamics settle. But in the near term, there's still some uncertainty, particularly around tariffs. We'll talk more about that in a little bit. But we are certainly focused on fully offsetting all incremental headwinds with price in 2019, and we've seen some good traction as we exit the year and even as we start 2019.

Aclara, again, performed well in the quarter and our integration remains on track. Revenues continue to be stronger than we initially expected, primarily driven by stronger meter demand. And we see solid visibility to continued growth from a large backlog and project pipeline, not just in meters, but also on AMI.

Our free cash flow was certainly a highlight for the quarter and the full year. Our organization has been really focused on working capital, which you know, our working capital metrics have not been at the level that they should be and we'd like them to be and we know they can be. And so we've been working very diligently on that, particularly around inventory reduction, and that's paying off. And we continue to deploy capital as expected, maintaining healthy levels of CapEx and an attractive dividend while continuing to pay down debt. And we are again back in the market to repurchase our stock in the fourth quarter.

We're also announcing that we're increasing our investment in restructuring and the footprint optimization. We'll walk you through the details of the plan later, but we view this as an important step in our journey to further improving our operational capabilities and delivering incremental value to shareholders as we focus on operating the company more efficiently.

Finally, we're initiating our 2019 guidance on an adjusted basis, excluding all intangible amortization, not just related to Aclara. Our 2018 framework excluded only the Aclara-related intangible amortization and acquisition costs, and we've heard your feedback for a more simplified structure. We think our new adjusted EPS framework more closely reflects the fundamental operations and cash flow-generating capabilities of our businesses, and importantly, we believe we're guiding you to a high-quality adjusted number, which continues to include restructuring, even at elevated levels.

There's a couple of other accomplishments in the quarter that I always like to highlight. Certainly, on the Construction and Energy side and Lighting, one of our key distributors gives 4 awards every year on excellent service, and we actually received 2 of those 4, which is quite a testament to the capabilities when you can do that and take home half of the awards from a key distributor and a key national distributor.

On the Commercial and Industrial side, Wiring launched an intelligent [light] product. An improved version of their very popular product now allows wireless monitoring of 6 key attributes. RACO's Grand Slam Box won New Product of the Year at Electrical Construction & Maintenance Magazine.

And at Power Systems, we continue to invest, particularly on the Aclara side, where they launched ZoneScan, an enhanced version of an acoustic leak-detection system, a key solution to help managing water loss. And I think from an innovation standpoint, we're going to work more through the integration, combining the utility automation business with the Aclara business to really focus and accelerate the development of our electric utility offering through distribution and substation automation, in particular.

And so with that, just some highlights. Certainly, a very strong quarter and a good finish to the year and setting up nicely for 2019.

But I'm going to let Bill take you through some of the details, and then I'll come back and provide some insights and guidance. Bill?

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William R. Sperry, Hubbell Incorporated - Senior VP & CFO [4]

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Yes, thanks very much, Dave. Appreciate you all joining us here. A pleasure to be with you guys. Dave walked you through Pages 3 and 4 with his comments. Now let's start on Page 5, which deals with our sales and end markets from fourth quarter of 2018. And you'll see a pattern here that's been consistent for the last couple of quarters, namely, strong sales growth driven by demands really across the full range of the end markets that we are exposed to.

So you see sales up 25% to $1.1 billion. The largest driver of that 25% was acquisitions and investments, our smart grid space through Aclara. But the organic of 5% is still strong. I think noteworthy, you see 2 points of price in that 5%. We'll talk through a little bit the price/cost dynamic as we go through our results this morning.

I think noteworthy in the end markets, if you start at industrial, strong demand across both light and heavy that we experienced in fourth quarter. In oil and gas, our gas business, which is really upstream in its exposure, really saw continued -- very strong spending there. On the oil side, you see we transitioned through a yellow arrow. That's our Harsh & Hazardous business. It's really upstream exposure. And in sympathy with the oil prices moderating down into the high 40s, we saw a little bit slower growth there on the Harsh & Hazardous oil side.

Utility, electrical transmission and distribution, we experienced stronger distribution and transmission. I think that's quite a healthy dynamic. Smart grid and grid hardening are continuing to be driving spending there. In residential, it's our smallest end market exposure. It's certainly worth calling out. The growth that we've seen, driven by single-family more than multi-family, but we also feel there's been -- our largest contributor here is our residential lighting product set. And we feel there's been likely some pull forward in the spending as some of those buyers appear to be getting their material before tariffs and impact of price increases they may be expecting in the first quarter.

Page 6. We talk about here our operating income and our earnings per share. Starting with OP, you'll see 8% growth to $144 million. Margins were down about 190 basis points, with price/cost drag being the largest contributor for that. Dave mentioned that in his comments. But if you really disaggregate that throughout the year, we experienced accelerating material inflation through each sequential quarter of the year, larger cost inflation in each quarter than the previous one.

We hold price in response to that. And our price in each quarter that we realized also accelerated sequentially, and the gap between price and cost narrowed each quarter. So that's an important setup to how we'll guide you for 2019 and how we'd see things. I think importantly, for us, we ended the fourth quarter with pulling about 2 points of price realization, which is about where we need for next year. So I think that's setting up well as we exit '18, even though there has been a challenge on our margins for the year.

Earnings per share, up 15% at $1.72. Higher income and lower taxes really helped pushing that forward, partially offset from interest expense as we took on some debt [attributed] to the Aclara acquisition. And Dave mentioned, we did repurchase some shares through a small contribution from a lower share count.

So let's transition to talk now about our 2 reporting segments, Electrical and Power. And in Page 7, we'll start with the Electrical segment. You'll see growth at 5% on the sales side, $667 million in the quarter. All of that growth being organic. No acquisitions in Electrical segment in 2018. Two points of price embedded in that 5%, so you're going to have an important number as you think about entering 2019. The lines of business that really contributed most impressively to the growth included residential lighting, our heavy industrial businesses and gas, our lead growers within Electrical.

On the OP side, you see margins were down 130 basis points, driven by price material dynamic that we discussed. And on the cost side, we continued to have the opportunity to take some extra cost actions in the fourth quarter and a slightly increased investment in R&D on the IoT side. Dave made mention of some products coming out that have some of that new technology. So we think those are both important investments to drive our future margin.

Usually give some commentary on the Lighting business on this page as well. The Lighting business grew in the mid-single digits for the quarter. And as Dave commented, they pulled price, which is certainly well-consigned, allowing them to expand margins.

Page 8, we've got the Power segment results. You'll see the sales up 69% to $478 million in the fourth quarter, our Smart Grid acquisition really driving most of that; but the organic growth of 4% is still noteworthy to me. If you guys will recall, last year, there was an impressive storm-aided quarter at the end of the year, and so this year, we're able to lap that with 4% growth. I think it still shows strength in spending within our utility customers. There was some weather again this year, and those storms really helped us underscore our value proposition with our electric utility. It's where -- when they need us most and their grid is -- they have some performance challenge driven by weather, and we're standing there with the right products at the right price at the right time at great quality to help them get their customers turn their lights back on. So good top line performance.

On the operating income side, you see a 28% growth to $70 million. Margin decline, again, similar to what we've seen since we've taken on Aclara. And Aclara performs in a team of OPs that drags down the numbers a little bit. And the price/cost drag, despite 2 points of price being pulled by the Power team as well, still some drag in their phase.

So Page 9, I'll switch to free cash flow. And you see a very strong performance for Hubbell on the cash flow front in 2018, both in the fourth quarter as well as in the full year. Attractive levels at 117% of net income equates to about 95% of income when adjusted for acquisition and amortization on a more cash-based EPS system.

I think that the -- when you look down at the full year, you see 41% growth to $400 million -- a little bit over $420 million. The drivers clearly start with higher earnings, but importantly, also, better working capital management, and really notably, inside of that really driven by inventory management. And it's also worth -- Dave had mentioned in his comments, we did not achieve this by skimping out on CapEx. We continue to invest in CapEx, which we think is really important to drive our automation and productivity initiatives as we go forward.

I think it's worth pausing on the inventory point because there's some important considerations that come along with that, and it starts with whether or not those inventory improvements are sustainable. I think if all we were doing was getting a onetime pop and had to give it back, it wouldn't be very constructive. But we see runway in front of us to be able to improve our inventory days over the next 2 years, and so we feel we've got a chance to be sustainably improving there. I think the second important consideration area is whether or not you'll sacrifice some service levels to your customer. And I think, very importantly, we are able to maintain a very strong service level tiers, not from -- we didn't sacrifice to our customers.

I think there's also interesting consideration from -- implies that we didn't crank our factories. We didn't max out on absorption, and that has some OP implications. But ultimately, that's just -- to get more efficient on the OP side, we've got excess capacity that we're -- we see the opportunity to continue to take out some footprint and excess capacity. Maria's going to talk a little bit about accelerated restructuring plans that this helped underscore for us as we go forward.

So Page 10. I'll pull the lens back to look at the full year of 2018. And I think you can see it some good things happening for Hubbell here. We see that we've got 22% growth in sales, which really has both attractive end markets contributing to it as well as complementary investing in inorganic growth that we did. On the earnings side, you'd see both operating profit up impressively as well as earnings per share, up 29%. And the free cash flow increased, which we just talked about. So in a snapshot, we like showing the growth in our enterprise there in Page 10.

I was going to ask Maria to talk about the balance sheet.

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Maria Ricciardone Lee, Hubbell Incorporated - Treasurer and VP of Corporate Strategy & IR [5]

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Sure. Thanks, Bill. So I'm on Page 11 of the slides. Our balance sheet remains strong. We added a middle column here for Q1 because we closed the Aclara acquisition in February. We can see the increase in debt resulting from the transaction as well as the reduction of commercial paper and term loan since then.

We ended 2018 with $189 million of cash, of which approximately 90% was held outside of United States. U.S. Tax Reform enabled us to repatriate a significant portion of our international cash in 2018. We used the cash brought back from overseas, in addition to internally generated cash, to pay down CP and the term loan as well as pay our dividends on the CapEx and buy back shares.

As a result, we've now paid down more than 1/3 of the cost to the Aclara transaction since February, and our net debt-to-cap ended 2018 at 43%. Our leverage in terms of gross debt-to-EBITDA is down from more than 3x at the time of the acquisition on a pro forma basis to about 2.5x now, slightly better than we planned. We feel confident in our ability to continue to manage our leverage, given our strong cash performance and that our balance sheet can support our [long-term] strategy on purchasing both [bonds] and acquisition.

We go onto the next page, footprint consolidation. As you know, acquisition has been a key component to Hubbell's growth and have added to our breadth of offerings to our customers. These acquisitions typically come with an existing footprint, allowing us the opportunity to increase efficiencies through scale and focus.

As most of you know, Susan Huppertz joined Hubbell about a year ago as Vice President of Global Operations. She's conducted a comprehensive review of our operation and has added tools, processes and talent that complement our existing operational capabilities. As a result, we have the opportunity to accelerate impressive actions to streamline our operations. These actions are a continuation of the cost-reduction efforts we began in 2014.

Since 2014, we've exited 29 facilities, invested about $100 million in restructuring actions and achieved annual run-rate savings of approximately $60 million. This investment was made largely to combat the industrial downturn and price pressure in Lighting market.

Looking ahead, our planned actions in 2019 and 2020 are proactive in nature and are more focused on footprint and reach more broadly across the Hubbell portfolio. We plan to take out more than 1 million square feet over the next 2 years and invest approximately $60 million with an anticipated run-rate savings of about $30 million per year on average of a 2- to 3-year payback. We expect these actions to deliver a 20% improvement in sales per square foot by 2020. We anticipate benefits from further development of centers of excellence, regional sourcing and automation.

With that, I will hand it off to Dave to talk about the outlook.

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David G. Nord, Hubbell Incorporated - Chairman, President & CEO [6]

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All right, thanks, Maria. I'm going to go to Page 13. First, talk about our outlook for end markets. We showed an early preview of this in October, and we certainly still feel good about our prospects for 2019. Although if you go back to -- our outlook in October, we've trimmed the high end of our expectations from 2% to 4% to 2% to 3%, as we look at some of our businesses may be having a little bit more slowdown than we originally had expected. Although it is still early, the good news is that across the board, it's all positive.

I think starting in the upper-right hand side, our biggest part of the pie is the Electrical T&D, which obviously now included Aclara, and it's the biggest piece of our pie. We expect Aclara to grow mid-single digits next year, off tough comps this year; and the legacy T&D to grow most single digits with continued solid end-market demand, but some moderation off of tougher comps. Residential of 0% to 2%, down from 2% to 4%. I think there's a lot of early indicators of some weakness in that market, and so we're being a little bit cautious on that. Although, as we said, we saw good demand in the fourth quarter and the early part of this year. So that remains to be seen. On the nonres side, we expect it to be up low single digits with steady growth, 1% to 3%, same as in the past. The industrial side, up low to mid-single digits, with some moderation into some tougher comps of 2% to 4%. And oil and gas, we expect the gas piece to be up high single digits and oil to be up low single digit, giving us an overall growth of 3% to 5%. So in the aggregate, put all that together, you end up with 2% to 3% in total.

So turning the page to the outlook. This will translate into our overall sales growth of approximately 4% to 6%. That includes a 1 point wrap-around contribution from Aclara and the benefit of price to offset the commodity and tariff increases. We're initiating our guidance and our adjusted EPS guidance at $7.80 to $8.20, and as we mentioned, that excludes all of the intangible amortization, both the Aclara and the legacy acquisition amortization. But it does include -- we're absorbing the $0.40 of restructuring and related investment. And the free cash flow continues to be -- the outlook continues to be strong, conversion at 95% of that adjusted net income value.

Turning to the Page 15, putting this all together. I mean, we've historically given you a little bit of a waterfall and insight into our guidance. First, as discussed we're adding back the legacy amortization to our 2018 adjusted to get that on a comparable 2019 basis. We set up some nice tailwinds from our core volume growth as well as the savings from our previously implemented cost actions, and of course, the price increases. We also have a slight tailwind for a month of Aclara contribution, but we note that Aclara's results are typically weighted toward the last month of each quarter. So when we pick up January sales, we get lower margin contribution from that 1 carry-over month. So we don't get the profit pickup from that.

On price/cost, we certainly expect some more headwind from commodity costs based on the 2018 exit rates. And tariffs are still something that we are dealing with, but we've got price increases in place, some of which already contemplate List 3 going for 25%; and the rest, signal to the market that if that does in fact occur, that we will have more immediate price increases associated with that.

You recall that we do not index our pricing, so it's not a real-time. There tends to be a lag. But under the circumstances, with the magnitude of what would be List 3 we will expect to put those in almost immediately and certainly short in back lag period as we go in Q2.

We've got some other costs that we would be dealing with, some other items. Obviously, we're doubling our restructuring, so that's another $0.20. And then a little bit of tax headwind. As you recall, we had a little bit lower-than-expected and normal tax rate in 2018 because of a few discrete items. So our guidance contemplates the tax rate in the 23% to 24% range.

So when you go through all of that and do the math and cut through it, we're very pleased with this. We think this is a really good performance to -- that we're going to achieve because it represents, really, mid- to high-single-digit growth in our core legacy business when you cut through that.

So I think we've just a few closing remarks. Clearly, we achieved strong growth, both in sales, earnings, free cash flow in 2018. And keep in mind, that was while we successfully integrated the largest acquisition in Hubbell's history, 3x larger than the next largest company, and so that was certainly quite an accomplishment; at the same time, dealing with inflationary pressures, including tariffs. But we've exited the year with positive momentum and committed to offsetting the material cost inflation in 2019. We're obviously taking aggressive and decisive actions today to position us to outperform our pricing initiatives, our innovation initiatives as well as our productivity and cost takeout efforts, give us confidence we can get ahead of anticipated challenges while remaining committed to producing quality products and reliable service and deploying our capital effectively.

So with that, let me turn it over to the operator and open it up for the Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Jeffrey Sprague with Vertical Research Partners.

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Jeffrey Todd Sprague, Vertical Research Partners, LLC - Founder and Managing Partner [2]

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I have to see the step-up on the restructuring, good luck with that. And maybe just a little more color on that, Dave, if we could. It sounds as if there's not a lot of head count that would come out with this footprint consolidation. Is that the case? And if so, why?

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David G. Nord, Hubbell Incorporated - Chairman, President & CEO [3]

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Well, I think it's early on that, Jeff. Certainly, we're working through plants, around the facilities, and we still need to produce the product. But I think that once we get further into it, our experience would suggest that there will be staffing efficiencies that come from it as well. So I think there will be more, but it's still early, particularly in some of the more complicated transactions. Okay?

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Jeffrey Todd Sprague, Vertical Research Partners, LLC - Founder and Managing Partner [4]

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Yes. And then from a cash flow standpoint, bill obviously spoke to inventory. This should unlock some inventory tied up in your footprint. I'm wondering if you can give us some early view on how much cash could be released from these efforts and what the cash restructuring costs are to kind of hit this initial new wave of things you're sharing with us today.

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William R. Sperry, Hubbell Incorporated - Senior VP & CFO [5]

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Yes, so there's -- we do think that there's inventory benefits, Jeff, as we consolidate footprint, not just from just better practices but having larger and more scaled facilities. So I do think that's going to be a benefit. There will be some capital involved, to your question on cash, but that's all contained in the guidance. So you met Susan at your conference in fall, and she's put together and rallied the team around, we think, a plan that's very achievable. It's got, as Dave was indicating, a slightly different nature, where we are -- there's more cooperation across different lines of business, more centers of excellence and those kinds of concepts to help drive it.

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Jeffrey Todd Sprague, Vertical Research Partners, LLC - Founder and Managing Partner [6]

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And then just on the tariff kind of headwinds and what you're dealing with there. I think going back to our discussion on the Q3 call, right, if we hit List 3 at 25%, plus the Q4 incremental on the carryover effect from List 1 and 2, it's kind of upwards of $1 of headwinds that you were looking at. Is -- you may have taken some actions in your supply chain to counteract that, but was that the right order of magnitude?

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David G. Nord, Hubbell Incorporated - Chairman, President & CEO [7]

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I think it's a little bit less than that, Jeff. And so that's why we talked about getting at least 2 points of price. I mean, that sort of gives you the order of magnitude that we're looking to cover, both in tariffs and some of the other cost headwinds in that range.

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Jeffrey Todd Sprague, Vertical Research Partners, LLC - Founder and Managing Partner [8]

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So 2 points gets you the price cost parity, essentially?

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David G. Nord, Hubbell Incorporated - Chairman, President & CEO [9]

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Yes.

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Operator [10]

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Your next question comes from the line of Steve Tusa with JPMorgan.

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Charles Stephen Tusa, JP Morgan Chase & Co, Research Division - MD [11]

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Just on this footprint thing, did this at all kind of -- I understand kind of the annual run-rate savings, but my guess is that there's a pretty substantial amount of this that's structural. Did this at all kind of tweak up what you would expect during kind of incremental core leverage to be over time? Let's say, you're at your gross margin rate. I mean, can this help tweak that up maybe a few basis points here, over time, on a sustainable basis?

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David G. Nord, Hubbell Incorporated - Chairman, President & CEO [12]

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Definitely. I mean, that's really where the benefit would be coming from. Particularly, if you look at some of our metrics on the S&A side, we tend to be at or above peer average. So we've obviously performed very well there. So the benefit from this is more on the operating side and getting that benefit on the gross margin fees.

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Charles Stephen Tusa, JP Morgan Chase & Co, Research Division - MD [13]

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Okay. And then when it comes to free cash flow, obviously, a strong finish to the year. And you've been pretty explicit about your guide. It still is a bit of a hurdle to get to that $475 million number you guys put out there last year. Is that something we should maybe a little bit of update on, kind of where you stand on getting to that number?

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David G. Nord, Hubbell Incorporated - Chairman, President & CEO [14]

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Well, since I'm the one that put it out there, Steve, I'll tell you that I certainly, after a $421 million year, feel a lot better about that. Obviously, there's things that we have to deal with over the next 2 years, but I think that's certainly still well within sight.

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Charles Stephen Tusa, JP Morgan Chase & Co, Research Division - MD [15]

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Okay. And then one last quick one, just on kind of the pipeline of M&A. I would assume you're deleveraging here a little bit in the near term, but is -- any kind of loosening up on that front?

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William R. Sperry, Hubbell Incorporated - Senior VP & CFO [16]

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Yes, Steve. I think that Maria's discussion of the balance sheet was good to show that it feels to us like we could afford to do acquisitions. Our experience is you can't kind of shut them off, and so we've been actively pursuing things during the year. But it does feel now like there's -- things getting closer. And you never know stuff that cannot come to fruition, but I do expect we'll be doing deals again in '19 as opposed to the last 10 months of '18 where we really didn't.

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Operator [17]

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Your next question comes from the line of Christopher Glynn with Oppenheimer.

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Christopher D. Glynn, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [18]

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Dave, on the dollar of amortization that's being adjusted now, obviously, we have the Aclara baseline. But on the new basis, curious how much of that is in Electrical because I think you'll be talking about margins on a pre-amortization basis.

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Maria Ricciardone Lee, Hubbell Incorporated - Treasurer and VP of Corporate Strategy & IR [19]

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About equal across Electrical and Power.

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Christopher D. Glynn, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [20]

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Okay. And yes, just on Power, wanted to talk about market share trends there. Dave went into some detail -- or maybe it was Bill, about the performance on the comparison, and that struck me, too. So I'm just wondering about overall share trends there and if your core T&D outlook might not necessarily reflect your prowess in the marketplace.

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William R. Sperry, Hubbell Incorporated - Senior VP & CFO [21]

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Yes, I think that the -- our experience with spending tends to be in the GDP kind of range. The bulk of our sales are MRO in nature here, Chris. And so now that replacement of material [of ours] it's in the grid and in the infrastructure. We would say GDP or better is actually strong. I think the fact that distribution has been strong as this year ended is a good sign. I think the transition project can be easier to be delayed and pushed out to the right. So the market deal is actually very healthy from where we sit, and I think that the fact that some of the Smart Grid products are outgrowing the base. But share, no, I don't think we're anticipating on gaining lots of shares as we see things. I do think the -- I commented on the storms just because I do feel like for large utilities who have to face disruptive events from weather, I do think our value proposition, that Hubbell ends up being able to provide 90% of their products that they need to get the lights turned back on and they can deal with us, and that we're committed to getting trucks in the field and get people's lights back on is -- there's opportunities there. But I don't think it's a share gain kind of environment.

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David G. Nord, Hubbell Incorporated - Chairman, President & CEO [22]

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I'm sure, Chris, that the -- our Power Systems guys would really appreciate your characterizing their prowess. I think they do a fine job. Some of the things that you have to keep in mind is there -- certainly, in 2018, there was a good project that's going to be on the transmission side. And that can be a little lumpy, so not as much as anticipated in 2019, maybe a little more normal. And obviously, on the Aclara side, they had some really strong performance that makes it tough for comps. So it's not an indication of share loss or weakness. It's more attributable to tougher compares coming off a strong year.

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Christopher D. Glynn, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [23]

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Okay. And if I could get one more. I just wanted to kind of level set the outlook for seasonality for the year. If we take $8 midpoint of adjusted guidance, we know that you're starting the year with little more challenging price/cost tail and then that turns your way more and more as you go through the year. So in terms of kind of earnings distribution and margins versus normal seasonality, what nuance or insight could you offer as we kind of build out the linearity for 2019?

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David G. Nord, Hubbell Incorporated - Chairman, President & CEO [24]

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Yes, I think -- look, Chris, I think you highlighted one, which is price/cost, which is going to continue to accelerate favorably throughout the year. So that's -- got a second half. And I think as we're looking at our restructuring program, it's a little bit more front-end loaded to the first half, at least. So a more -- first more of second quarter. At least that's our current thinking on that. So I think of that is likely to influence the -- against a historical seasonal pattern.

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Operator [25]

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Your next question comes from the line of Josh Pokrzywinski with Morgan Stanley.

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Joshua Charles Pokrzywinski, Morgan Stanley, Research Division - Equity Analyst [26]

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Can you just remind us, of the 2 points of price that you're expecting in 2019, how much of that is already out there in the marketplace versus what is incremental versus maybe what is kind of dependent on 25% for List 3 tariffs?

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William R. Sperry, Hubbell Incorporated - Senior VP & CFO [27]

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Yes, so Josh, if you think about how the year unfolded for us, the first half had in a ballpark of a 0.5 point of price embedded in it, ended the fourth quarter, with 2 points of price. So the way Chris was just doing that is the same way we think of it, right? So you've got a -- you get the 2 points that you're launching from, but you got to lap that 0.5 point and then it gets -- it's harder. So you got to keep pulling. And as Dave was highlighting, the -- for List 3 tariffs, we've already notified customers of those price increases to come. So that's how it -- that's how '18 rolled out. And then you got a big lump basically in March of how it would get implemented here in '19.

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Joshua Charles Pokrzywinski, Morgan Stanley, Research Division - Equity Analyst [28]

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I guess behind that, though, if List 3 doesn't ultimately go through at 25% and you already have some price in the marketplace, the incremental ask is not terribly large, relative to what you're having to chase in 2018?

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William R. Sperry, Hubbell Incorporated - Senior VP & CFO [29]

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Yes, that's right.

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David G. Nord, Hubbell Incorporated - Chairman, President & CEO [30]

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That's right.

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Joshua Charles Pokrzywinski, Morgan Stanley, Research Division - Equity Analyst [31]

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Got it. And then I noted, over time, you try to get back to price/cost neutrality. There's always a bit of a lag. Do you have a sense, on a dollar basis or a margin basis, what is kind of left out there in aggregate over the past, call it, 12 months? And how we should think about the timing on getting back to neutrality, if now is different or it takes a bit longer or if tariff somehow changed that structural dynamic?

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David G. Nord, Hubbell Incorporated - Chairman, President & CEO [32]

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I mean, I would say, Josh, that we're probably -- exiting last year, we're probably behind maybe 70 basis points. And I think, based on the trends, it will take until the early part of 2020, potentially, to get to neutrality over that time frame. And I think you're referring to our historical, look at it over a 2-year period, to where it would be positive. So we think as this year progresses, we'll turn positive and then continue into 2020. So -- okay, does that help?

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Joshua Charles Pokrzywinski, Morgan Stanley, Research Division - Equity Analyst [33]

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Yes. That's helpful, yes.

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Operator [34]

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Your next question comes from the line of Nigel Coe with Wolfe Research.

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Nigel Edward Coe, Wolfe Research, LLC - MD & Senior Research Analyst [35]

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Just want to go back to the footprint consolidation. Just -- because I want to confirm, there wouldn't be much, if any, of your payback in 2019, just given the long-tail nature of this kind of action? And then if you just maybe confirm or deny that. And then last time we did some footprint work, there was a little bit of friction on the execution side. What lessons have been learned? And how can we be confident that execution will be better in '19, '20 versus back in '15, '16?

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David G. Nord, Hubbell Incorporated - Chairman, President & CEO [36]

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Well, certainly, you're right there. We've had our share of friction in past transaction, but I think we've gotten better over time as we've learned some hard lessons and as we have applied those lessons. I think one of the key is, for us, has been to put the right expertise into the planning as well as the execution. And I think one of the things that Maria mentioned that Susan has done is work to -- with the existing operating organization to hone skills and enhance skills and resources. So we think the combination of experience and incremental resources and a collective attention to the success of these certainly reduces the risk dramatically. There's always some level of execution risk, but we really think that the things that we've done will really minimize that to a great degree.

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William R. Sperry, Hubbell Incorporated - Senior VP & CFO [37]

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Yes. I think, Nigel, if you look at one of our most recent Lighting facility closures, which is one of the more -- one of the larger plants we've closed, I think that went -- and which is one of our most recent, went really the smoothest. I think the preparation Dave described, particularly getting the receiving plants to have really well-documented processes was really important. I think discontinuing kind of the really high-variety, very low-volume items helps a lot, too. And then you open by just -- I would confirm that your assumption of the savings kicking in, in '20 and beyond as we start in the year.

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Nigel Edward Coe, Wolfe Research, LLC - MD & Senior Research Analyst [38]

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Okay, and then going back to cash flow. I mean, for me, the real highlight of this year was the improvement in cash conversion. Hence, I think, Bill, you called out inventory turns improving, and there's still ways to go there. Maybe just touch on, aside from larger facilities providing efficiencies, what else is driving the improvement in inventory at a time when demand is improving? And then I think you're running about 10 points higher on inventory turns versus maybe 10 years ago. Is that the sort of the line of sight you have on improvements? Or how should we quantify the kind of potential to driving inventory out of the system?

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William R. Sperry, Hubbell Incorporated - Senior VP & CFO [39]

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Yes, I mean, if you start with your last part of your question, we benchmarked across -- with competitors and peers. And then as you suggest, we've also benchmarked internally what were some of our best turning times. And I think that those are -- both give good guideposts as to what kind of targets we have to get better. I think contributing to the terms is everything from larger facilities, focusing on optimizing our SKU breadth. I think we talked with you guys a lot about having the order of magnitude of north of 350,000 SKUs and focusing on the better runners can be helpful, what kind of relationship with vendors, a design that can be more modular. There's really a lot of contributors to it. No silver bullets, I wouldn't say. I think it's sit-ups and push-ups. And that's an exercise regime that we are very focused on continuing. And we are confident we still have room to improve.

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Operator [40]

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Your next question comes from the line of Rich Kwas with Wells Fargo Securities.

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Richard Michael Kwas, Wells Fargo Securities, LLC, Research Division - MD & Senior Equity Research Analyst [41]

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So just with regards to the restructuring, how do we think about the 15% margin target on a GAAP basis by 2020? I assume, obviously, this is a pretty big step-up in the restructuring. So just any framework in terms of an update?

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David G. Nord, Hubbell Incorporated - Chairman, President & CEO [42]

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I would say that, that's still something that we are working towards. I mean, it's not -- we've been there before. And certainly, if not from restructuring benefits in 2019, 2020, some of the price/cost benefits would certainly be contributing factors to that. So it's not out of the question. It's certainly a goal that we have, whether it's by 2020 or 2021 when we get the full benefit of some of the restructuring, but that is absolutely in the cards as far as we see it.

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Richard Michael Kwas, Wells Fargo Securities, LLC, Research Division - MD & Senior Equity Research Analyst [43]

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Okay. And then, Bill, in terms of the guidance constructs, with regards to the operations improvement, is it about a 25% incremental margin you're factoring in on organic sales between price and volume in '19?

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William R. Sperry, Hubbell Incorporated - Senior VP & CFO [44]

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Yes, it tends -- historically, it tends to be in that range and so that's consistent with how it's been.

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Richard Michael Kwas, Wells Fargo Securities, LLC, Research Division - MD & Senior Equity Research Analyst [45]

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And did I catch that right, you have some of the big costs out of 25% tariff already included?

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William R. Sperry, Hubbell Incorporated - Senior VP & CFO [46]

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Yes, we're guiding on the basis that, that happens on March 1, yes.

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Richard Michael Kwas, Wells Fargo Securities, LLC, Research Division - MD & Senior Equity Research Analyst [47]

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Okay. So you've got that. So if it doesn't go there, I mean, you wouldn't get the price, but theoretically, it could be a little bit of a tailwind as we go through the year because you have it already in there?

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William R. Sperry, Hubbell Incorporated - Senior VP & CFO [48]

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That's correct.

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Richard Michael Kwas, Wells Fargo Securities, LLC, Research Division - MD & Senior Equity Research Analyst [49]

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Yes, okay. And then last one for me, just on Lighting. So with the price being positive, how do you delineate between the stock and flow short-cycle stuff and then the C&I project stuff? I assume there has been some repricing or some discussions about having to reprice some of the stuff that was in backlog?

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David G. Nord, Hubbell Incorporated - Chairman, President & CEO [50]

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I don't think so, Rich. We -- I mean, one of the things that interestingly we found as we exit the year in meeting with customers, and particularly, the channel partners, was how important it was to actually get in front of the price issues and not be trailing, particularly because of one of the things you highlight, which is the problem that you have in the market is where you're trying to push a price to a contractor that's already bid on a deal. So the more that you could get ahead of it. So that's why in some cases, we have built in pricing, either actual or certainly forecast, to try and get ahead of those. But on the backlog, it's why you want to make sure that there's a lag. I'd say that's why there's a lag in our realization, because you're still working through some of the backlog at lower prices.

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Richard Michael Kwas, Wells Fargo Securities, LLC, Research Division - MD & Senior Equity Research Analyst [51]

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Okay, that makes sense. Just a real quick one. Just -- I know you talked about the construct in terms of restructuring spend, and then how price cost is going to flow through. If we think about the first quarter here, are you expecting to be up earnings-wise year-over-year?

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William R. Sperry, Hubbell Incorporated - Senior VP & CFO [52]

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Yes, I think we would, Rich.

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Operator [53]

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Your next question comes from the line of Joe Osha with JMP Securities.

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Hilary Elizabeth Cauley, JMP Securities LLC, Research Division - Associate [54]

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This is actually Hilary on for Joe Osha. I just had one quick question for you guys. And I was just wondering if you could kind of speak to where you're seeing lead times coming in and if we might see those come down as we go through the year.

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William R. Sperry, Hubbell Incorporated - Senior VP & CFO [55]

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Yes. I think it's too broader questions for us to answer across $4.5 billion enterprise. But there are places, for example, in natural gas where the lead times are decently long just with demand being so high. I think some of the electronics elements in the supply chain had lengthened a little bit. But those are not proving to be challenging obstacles. The market is adjusting those in normal course.

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Operator [56]

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There are no further questions at this time. I would now like to turn the call back over to Maria for any additional or closing remarks.

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Maria Ricciardone Lee, Hubbell Incorporated - Treasurer and VP of Corporate Strategy & IR [57]

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Thanks, everybody, for joining us today, and this concludes today's call. And Dan and I will be available all day and the rest of the week with any follow-up questions. So thanks, again, for joining.

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Operator [58]

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This does conclude today's conference call. You may now disconnect your lines.