Thank you for standing by, and welcome to the Second Quarter 2020 Results Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Dan Innamorato. Thank you. Please go ahead, sir.

Thanks, operator. Good morning, everyone, and thank you for joining us. I'm joined today by our Chairman and CEO, Dave Nord; our President and Chief Operating Officer, Gerben Bakker; and our Executive Vice President and CFO, Bill Sperry. I will announce the second quarter results for 2020 this morning. The press release and slides are 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 the 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 considered 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 slides. Now let me turn the call over to Dave.

All right. Thanks, Dan, and good morning, everybody. Thanks for joining us to discuss our second quarter results. I appreciate everybody taking the time. It's certainly been an interesting 90-plus days since we were last in front of you. And I think there's a lot to cover today. So I'll start my comments on Slide 3 with a brief summary of what I think is another strong quarter of operating performance and free cash flow generation for us. We clearly saw the impact of COVID-19 on the economy, our end markets and our operations, but we continue to focus on what we can control, and we effectively navigated through a quarter of significant volume declines, down 21%, but still ended up with margin expansion and very robust free cash flow. You'll note that our free cash flow is, at this point in the year, more than halfway to our full year goal, which those of you following us, know that, that's not our typical trend. And Bill will talk more about that in a little while. Our operational transformation continues to provide benefits with attractive savings on the investments we've been making in our footprint optimization. And we continue to execute on price cost and we were proactive in managing our cost structure in the second quarter. Looking ahead, while things continue to show signs of improvement, we continue to see some uncertainty in our volume outlook for the second half, with the timing and magnitude of recovery still to be determined. But we think our utility-facing end markets will remain resilient as critical grid infrastructure needs to be upgraded and maintained. And electrical markets, while challenging, continued to improve. And overall, despite continued market volatility, we're well prepared to manage through a range of scenarios. You'll recall, we walked…

Great. Thank you, Dave, and good morning, everybody. And before I go into our second quarter results, I would like to provide a couple of additional comments on the new Electrical Solutions segment. As I transition into my role about a year ago, I spent a lot of time in the electrical businesses, obviously, coming out of the utility business. I got great insights into the strength of our brands, our leaders and the attractive markets and customers we serve. But what I also found that it was more difficult to navigate. I was spending more time on internal alignments, coordinations and realizing that a more consistent approach could better serve us and our customers driving more efficiencies. We moved over the last year to a more disciplined operating rhythm. I think we talked about that to you at the Investor Day, and we have seen incremental benefits. And certainly, that has served us tremendously well managing through this COVID pandemic, but knowing the value that we had created in the utility business, it became clear that the electrical businesses could benefit from a similar structure. I worked with Dave and the executive team over the past several months and I'm really excited that we're executing this change right now. We're going to be driving better customer experience and solutions, faster and more efficient processes and in the end, I would say, incremental growth and value. I'm confident in the addition of Pete, and Dave just gave a little bit of background, I spent quite a bit of time talking with him before we hired him. And also in our leadership and I'm very confident that we'll see a successful transition to this new reorganization. So now turning to Slide 6. And starting at the top line, we saw significant…

Good morning, everybody. I appreciate you taking time to join us and hope you're being safe. Gerben described for you our margin expansion. On Page 10, we thought it would be informative to go through a bridge because there really are an awful lot of puts and takes. And there's more to the performance here than just the volume, and there's some structural elements as well as some temporary volume-based variable cost moves. So I wanted to just untangle that and walk everybody through it. So I'm going to start on the right side of the page. You see we ended at 15.8% operating profit margin, a 30 basis point improvement over the same period last year. The two green bars to the right really represent the work that we do quarter in, quarter out, year in, year out to help work on improving our margins. The first is price cost. We're constantly evaluating where our costs are and making sure we're getting adequate price to ensure we get margin expansion from that activity. That was a nice contributor again this quarter. And to the right of that, you see the restructuring footprint optimization and you see a very healthy contribution there. The two of those combined to give us about two points of lift in margin, which, in a flat volume quarter, would have been a really significant standout contributor. Unfortunately, this quarter, you see all the volume-related things to the left, which absorbed all but 30 basis points of that benefit. I think it's worth pausing on the restructuring just for a second. You'll see that during the first half of 2020, we've invested a comparable amount to what we invest in the first half last year. But we continue to see, and we're increasingly encouraged by the…

All right. Great. Thanks, Bill. So turn to Page 13, and I'll give you just some of our insights to the extent or the way we're looking at some of our end markets. You start at the upper right on the pie there, the electrical transmission and distribution markets, certainly been resilient for T&D components. Particularly on the transmission side, has continued investment in renewable. Renewable generations, creating the need for transmission projects. But T&D is not immune to some macro near term, but all of the secular drivers around grid hardening, aging infrastructure certainly remain intact and support our continued multiyear runway for solid growth. Moving down to the Utility, comms and meters. Obviously, as Gerben talked about some headwinds near-term from restrictions on installations, which require our access to homes and buildings other than in emergency situations. Longer term, Utilities continue to demand smart grid technology that modernize the grid. So I think there's plenty of opportunity there. On the gas distribution side, gas utilities continue to replace their aging infrastructure, but replacing components in the system that carry gas from main to meter can be limited in some cases near-term because of that same access issue in homes and buildings. On the oil side, markets continue to be weak there with limited activity off an early low base. Obviously, that's a good margin business for us, but fortunately, it's a smaller proportion of our business. So I think we can navigate through that. The residential side, as Gerben mentioned, some bright spots in the second quarter. We've seen some very strong results on the housing front, and we've experienced some of that on the e-commerce and retail side. On the industrial, we continue to see weakness in the heavy with some pockets of resilience in the light…

[Operator Instructions] Our first question comes from Jeffrey Sprague. Your line is open.

First, just on the supply disruption on the top line, the 5 to 6 points, I'm sure, on the Electrical side, it was probably centered on lighting. But the question is really, would that have impacted both segments equally? So you lost 5 to 6 points on the top line in both?

Yes. Roughly, it was made-to-order products inside of lighting, so it couldn't be serviced out of the inventory, Jeff. And for the for the power business, also made-to-order product. So - and affecting both segments, as you said.

And just on the order front, do you see - I mean the orders still sound like you're somewhat suppressed, Bill, there's not a kind of a refill catch-up element or maybe there is, and it's just - there's other pressures that kind of mask that?

Yes. I think as Dave said, the shape that we've seen was in April that deteriorated in May and some improvement since then. So - and that's carried into July month-to-date, but it's obviously something we're watching closely daily. And - but that - where orders are now in July, it's really the basis for how we've guided the second half.

And then for Gerben. Gerben, since you spearheaded this kind of reevaluation of the electrical structure and how the assets are performing, what do you think is the biggest opportunity? Is it just kind of a raw cost-out opportunity around inefficiencies? It does sound like you're suggesting there's some cross-sell that's been left on the table. And I guess, to make it a further multi-part question, was there kind of a further evaluation of how lighting fits in the puzzle as part of this exercise?

Yes. So let me start with your first part, Jeff. The - I was indeed highly involved in this. And I would say the primary motivation for this actually wasn't cost, but more the efficiency of running this business and how we could better serve our customers, a, in just servicing them, which a lot of times, we would go to the same customer to different brands rather than taking a more holistic approach and go into the customer representing all of Hubbell. We see cross-selling, absolutely. And we saw some of these benefits already when we put in play, and we talked about this, our VP of Strategic accounts are our very largest accounts, we put people in place that represent all of Hubbell. But there's still a lot of customers beyond the 10 largest. And that's really where the opportunity lies. So our primary driver for this was really to service the customers and to drive incremental future growth. Of course, there is an efficiency related to this as well that we can benefit from. I would also say we're absolutely looking to reinvest part of those efficiency back in our business. And if you look what we're trying to achieve from a technology perspective and innovation perspective and what we want to accomplish with digital commerce going forward, those things are absolutely needed, but they also require investments in the business. So we see this as an opportunity to fund some of those efforts as well. And your second question was regarding lighting. We see for lighting absolute opportunity to fold in. With this Electrical segment as well, we see benefits. I mean if you just, again, look at - we sell lighting in two out of the three groups today. And certainly, I think lighting can help the others as well with those products. There's again common customers there. We're structuring this segment very similar to what we've done in the Power business, with market-focused or product-focused groups underneath so that you still have a level of intimacy with your customers because the one thing that I always feared when I ran the power business that as I got larger and larger, that would I eventually become slower and lose touch with our customers. And so there's a structure in place that - where we would retain pieces of the business. And I see lighting folding in under that. So we'd always look at our portfolios. I'd say our focus right now is to improve the performance of our lighting business.

Our next question comes from Steve Tusa of JPMorgan. Your line is open.

Can you just maybe talk about where you stand as we kind of turn the corner into next year, assuming some degree of recovery, what you have from a kind of temporary or structural cost perspective? And then is the cash this year? Would you plan to be able to grow that cash next year, that $500 million-plus base? Or is there kind of similar to this temporary cost dynamics, some temporary working capital benefits that kind of flip back the other way?

Well, I would say, Steve, a couple of things. One, you're right, there are some temporary costs things that are contributing to this year. But as we've mentioned, as those - some have come back, the salary adjustments that we've specifically limited to the second quarter because of the severity of the second quarter. Those come back, but offsetting that with ongoing productivity, things that we have been focused on continually around our staffing levels, making sure that we're driving a level of productivity. I think some of that will be a function of how the markets recover and at what level. And we certainly don't have any visibility into next year, but one of the things we're prepared for is to continue to take whatever actions are necessary to rightsize our cost structure around that. So that's the cost side. And, Bill, maybe you want to comment on the cash side?

Yes, Steve, I think that you're right that as sales growth comes back, we're going to need to invest in inventory and receivables to support that. But I do think the restructuring work that we're doing and getting our footprint and square footage down is going to help us be better at inventory management and I still think there are opportunities for us to improve in days across our system. And as we benchmark ourselves, it appears evident that we do have opportunities. So I think you're right that there's naturally going to be a requirement to invest a little working capital in that growth, but we will work hard to offset that by being more efficient now in days.

Right. But I mean, that $500 million we should think about that as kind of a base?

Yes.

Performance, not like some onetime, like benefit - I do just want to kind of make sure that I understand kind of all the moving parts? I think that's all.

Yes. I think you understand it right. So we achieved that in '19. We'd do better than $500 million in '20. And I agree, there's some working capital tailwind in that. But we should be better than that still in '21. Absolutely, you're looking at '19 base - we're improving on that 2019 base. Yes.

Right. Makes that kind of sense. Good execution in - on the margin. Congrats.

Our next question comes from Deepa Raghavan of Wells Fargo Securities. Your line is open.

Dave, is your view of nonres slightly more optimistic in the context of what some of the peers have noted? You especially called out improvement in activity level. Can you please expand on that and perhaps even offer your views if you think nonres - your nonres business at least can grow next year or even bottom out next year? And I have a follow-up.

Yes. Deepa, I'm not sure that you may interpret my tone versus the substance of what's underneath it. I don't - and some of it, and I've said internally, to our team, the one thing that's in this new environment is you declare victory when things are down 18% versus an expected 20%, like, wow, that's success. So improvement is relative. We still think that there is work to be done, particularly, as I said, some of the things that we've seen have been as a result of projects getting restarted or completed, not new projects, I think the question is going to be what happens. And I think we would all agree that the uncertainty is around new projects, what new projects might occur. The one area that I've talked to a couple of people on, particularly in the commercial space that's interesting, they refer to, they have a reference to what had been a vertical move has now become a horizontal move. Meaning, and others might describe it as the deurbanization of America with everybody moving out of the cities. You've seen that in residential real estate market. Well, if that's a long-term trend and it happens meaningfully, there needs to be some investment in those communities around nonresidential construction, whether it's retail, whether it's hospitals, that's still a big uncertainty to see how that dynamic plays out. But I don't know that I would say that I'm more optimistic than the market.

My follow-up is, as you've manage through COVID at Hubbell, did you end up finding that some of your businesses were more resilient than you might have thought and perhaps not so much? And if you can also talk to any - if you discovered any new areas of opportunity where you could consider organic or inorganic growth opportunities going forward? That will be helpful.

Well, I'd have to say that all our businesses are resilient, at least our people addressing the - some of the really volatile markets, they've been very resilient. I don't know that there's any particular market or business that I would point to that has been surprisingly weak. At best, they've either been as expected or maybe slightly better. Other than some of the implications, as Gerben talked about, when you think about the Utility business and where it requires you to get into a home, that's not something that we can control, and that's something that's unique to this environment. So what's otherwise a resilient business deals with some other implication. I mean this terms of future growth opportunities, and I look to Bill or Gerben to comment on that because there's a lot of areas that I know they're working on.

I think, Deepa, we continue to see good opportunity in utility markets. We continue to think that, that infrastructure that requires upgrading and strengthening. We continue to believe that making the grid smarter is going to allow utilities to run those power grids more efficiently and more safely. I think the - so it's kind of reinforced this last 90 days, has reinforced the essential nature of what we do there. I also think that inside of buildings, you see different pockets, distribution or retail has been an interesting bright spot as people have been forced to live at home or be at home more frequently than they're used to. And so they're kind of investing in their homes. As Dave said, does that have a longer tail to it as people's behavior changes, I think, will be interesting? On the commercial side, data centers and the role of data and information are playing in all of our lives, we think is going to continue to drive opportunity for us to connect, and we continue to think that we have a unique positioning across the utility grids of electrical gas and water and how that crosses through the meter into buildings and how that gets used and so we feel really good about that. And I think some of the org design that Gerben is talking about is looking to take advantage of that unique positioning that we see.

One question for Gerben, if I may? Gerben, as you've been working through this reorganization, did you end up finding there were - if there were any businesses that did not fit with this overall Hubbell portfolio?

I'd say the short answer to that is no. But that said, we absolutely have a focus in our business on evaluating our portfolio. One of the big things, and we've actually gotten great success out of that, is what we call it, our SKU rationalization or optimization evaluation. And what we literally do is we put it in 4 quadrants of how they contribute to growth and how they contribute to margin contribution. And then the focus is on those that don't contribute well to either, to either move them up or rationalize them out. So we've seen actually a trimming of our SKU portfolio. And we're doing that on a SKU on a product line and even at different level. So I'd say we'll continue to see that going forward. I do believe that these businesses and the key is that they have common customers that they have common markets. And if you look at the pie chart that we have, we have some diversification, but we're still pretty focused on a few attractive end-markets. So I'd say the short answer probably is no, but I would expect, as we have seen over the last couple of years, continued trimming where it doesn't make sense and additions as well. And that's the other thing I would say that in a market like this, and Bill talked about the second half perhaps seeing some more activity in deals, and I would say a lot of these deals, especially the size that fit Hubble, these $30 million to $50 million privately owned businesses, a lot of those owners through COVID are really reevaluating their continued interest to run those businesses and then we become more attractive as an acquirer for so. So I'd say that that's pretty active for us right now to add to the portfolio on the other side.

[Operator Instructions] There are no further questions, please continue.

All right. If there are no other questions, that will conclude today's call. I'll be around all day for follow-ups, and thanks for joining us. Bye, everyone.

Thank you very much.

Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect.