Hubbell Incorporated (HUBB) Q3 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Third Quarter 2020 Results Call. At this time, all participants lines are in a listen-only mode. Later we will conduct a question and answer session, instructions will follow at that time. [Operator Instructions] 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 have got Dan Innamorato 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 are going to be joined instead this morning by Jay pan. Jason is second year with Hubbell. And he has been leading SPNA for us here and you may know his name or his voice from his some prior lives he has 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 2020.The press release slides are posted in investor section of our website at hubbell.com. I’m joined today by our chairman Dave Nord, our CEO; Gerben Bakker 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 slide. Now let me turn the call over Dave.

Alright. Great. Thanks Jay and good morning everybody. Before I turn this call over to Gerben who is 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 planned thorough succession process resulted in our Board of Directors naming Gerben as the next CEO of Hubbell, 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 Hubbell and lead this company successfully into the future. Gerben has added a tremendous amount of value for Hubbell over the past 15-months in his role as Chief Operating Officer. He has been instrumental in continuing to shape our long-term strategy while also leading our operational transformation. And you are seeing the results of those efforts come through in our recent performance. Gerben has 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 a Aclara. But Gerben knows his success and Hubbell’s success is really dependent on the strength of the overall team and certainly we have got a great team. And I have to highlight that there is some really key people, one that you all are familiar with is Bill Sperry, who is very strong financial and strategic partner and will continue to help guide Gerben to future success. And I know, I could speak highly from my own experience and knowing how valuable that role is and how valuable Bill has been to that. But we have also been active in developing new talent, both internally and externally in our organization at all levels particularly senior leadership, you will recall our recent appointment of Pete Lau to lead our Unified Electrical Solution Segment, as well as Alexies Bernard as Chief Technology Officer; and Katrina Redmond as Chief Information Officer. And we also recently promoted from within Hubbell a long time at very talented Sales Executive Terry Watson, as the VP of Customer Experience. And of course, most of you have met Susan Huppertz over the last couple of years and know how much value she has added in our operational transformation. So while I’m certainly going to miss being CEO of Hubbell 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 have built and I’m confident in Gerben and the rest of the team’s ability to lead Hubbell 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 Hubbell. Good morning, everybody. I have seen firsthand that what makes this company special our talented people, our reliable products and our long-term relationships with our customers. I look forward to building on the success that we have achieved under your leadership days and I’m confident that we have a bright future ahead. Moving to the third quarter, I’m going to start my comments on Slide 3 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. A secular grid modernization trends continue to drive the need for utilities to invest in critical grid infrastructure. We continue to differentiate ourselves in the space with our unique utility solutions platform, as well as our reliability and service. And we anticipate end 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 declines 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 are making in footprint optimization and we continue to execute on price cost while benefiting from proactive cost control as well as more temporary lower operating expenses. We continues 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 bolts on deals in October following the quarter close, high margin businesses and attractive markets. And we will talk a little bit more about them later in the release here. Looking ahead, we are 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 of costs. Let’s turn to Page 4, to highlight our results for the quarter. You can see organic sales declined 8% with demand for utility TND 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 Aclara and generally soft economic activity across most electrical end markets driven by the COVID-19 pandemic. So demand did improved sequentially in the quarter. Despite the volume declines, and similar to the strong operating execution we have demonstrated throughout 2020, we achieved another quarter of operating margin expansion. Our investment in footprint optimizations continue to pay off with attractive structural savings. We realized positive price cost across the portfolio and we continue to manage our cost 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, Gerben. Welcome here to your next 61 quarters and good morning, everybody. I’m starting on Page 5 of the slides, you hopefully sound. And you see the sales contraction of 8% and Gerben 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%, detrimental ballpark, very successful execution by the operating team. You see the earnings per share only $0.4, less than last year at $2.30, despite 8% lower profit growth, but below the OP line, we had a little bit of favorability and non-OP as we had lower interest expense and 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 provisions 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 the last five-years, we have shown on average that the second half of the year generate about 70% of the free cash flow. So very back end loaded versus this year, a much more balanced and even much closer to 50/50. And so the year-to-date numbers as well ahead of last year, largely as we are offsetting the lower profit with better working capital management. And we will talk a little bit more about that a couple pages from now. We will unpack now the performance into our two segments and we will start on Page 6 with electrical. You can see the challenging demand environments that we are operating 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 and in the mid-teens range. The one exception was residential, largely the lighting product but where they saw double-digit growth driven by strengthen people doing more renovation spending while they are at home. I also wanted to point out you see the point on our net M&A neutral, some small amount of portfolio management happening during the year. And you will recall in the third quarter of last year, we sold the Swiss based high voltage test equipment business called a Haefely and we bought CPI a connector business fitting in with the BURNDY brands. Those two sales that we sold versus we acquired offset each other, but we acquired at much higher margins. And so that is 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 was really driven by the decrementals of the lower volumes and partially offset by effective price cost management as well as footprint rationalization. Page 7, we will switch to see a really strong performance turned in by the Utility Solutions 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 is important to disaggregate the segment between our legacy Power Systems and Aclara. Now you see that Aclara 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 post people’s homes, and we were prevented from putting in some of the product there. So when you put your lens back on Aclara, though, for the couple of years, we have owned it, it has been in a nice mid single-digit growth. So and we are 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 Gerben referred to really seeing on the distribution side that last mile, grid hardening spending on components and 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 in OP in the quarter, but I would argue more importantly really reinforces the value proposition that we have got in our Utility franchise, namely, offering those quality solutions at really, really critical time to our customers to allow them to get there. The lights turn back on and get their revenues reengaged. 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 is really a function of very strong execution on price cost, good productivity, but also you see the effect of mix. So power outgrowing Aclara is mix friendly. And inside of Aclara, the lower margin end of the portfolio, which is the insulation side is where there has some access restrictions. And so the combination is to help be a positive contributor to margin expansion. I wanted to show you a margin bridge year-over-year for the third quarter because I think it is instructive, not just on this quarter, but how we are thinking about managing the income statement as we go forward. So you will see that the picture starts at 15.8% in 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 is naturally variable expenses that are proven to be tailwinds in the COVID environment, things like T&E, medical and supplies. And that there has 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 sequentially, we see volumes pick up, we naturally will expect inflation in those commodity areas, which means as we get into next year, we are going to have to be focused on getting price to manage that price cost equation. And 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 have had a multiyear program that we will keep investing in and keep getting favorable paybacks on. So that is 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 free cash flow on Page 9. We will 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 sourced. So we worked very hard, as we saw the conditions of the pandemic rolling through, starting in March and April to constrain inventories. We have continued to service our customers, but manage that line item closely, and it is 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 Aclara. So that is entirely paid off now. We also have as Gerben described, closed on two acquisitions in October post close of the quarter. One was a small product line inside of Power Systems, a very high-margin product line that we are happy to add. And the second, which you see detailed here is called Excel Tex, 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 there has a chance for us to acquire exposure to high growth, very high-margin business that fits inside of the Electrical business. Sites 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 will 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 have got a look at our end markets and how they have performed during the course of the year and maybe how they are leaning as we go forward. I’m going to start at 5 o’clock on the pie at gas distribution. And similar to some of the Aclara business, we have seen demand there, but a lot of our activity is near the house and even in the basement. And so having restricted access that is 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 and locomotive production as examples. We have seen that be so quite soft, a little more resilience on the lighter side of the industrial space. Resi is clear area of strength for the year. I think as people have spent much more time in their homes than they are used to seeing them doing quite a bit of rental 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 and 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 have got an aged infrastructure that really requires modernization and upgrade. That is 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 trend knitted to miles to get to where the users are. I think as well, the environmental impacts have been quite profound on the grid, whether that is hurricane or an ice storm or a fire, depending on where you are located, it seems we are all exposed in some way to these environmental impacts, and that is placing an increased demand on utilities, hardening their infrastructure to be able to interact in the environment more successfully. And the fourth driver is in automation, which is really important 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 is everything from meter reading to reclosers that are clearing faults to maintenance and fault detection products. And so I think we have 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 Gerben.

Great. Thanks, Bill. And I would 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 have talked about this in our Investor Day. As a leader across the energy infrastructure, published 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 are also committed to doing this as part of a manufacturer to our sustainability initiatives. We have set multiyear targets to reduce our water consumption and greenhouse gas emission, and we also refresh our sustainability website with new details on the initiatives we are undertaking and the expanded disclosures around their 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 are confident in the level of execution we have 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 cost, we are raising our 2020 adjusted earnings per share guidance from a range of 7.0 to 7.25 up to 7.45 to 7.60. 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 declines at Aclara 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 pay going forward. We also expect the return of some operating expenses, which have run below normal levels throughout the pandemic, but we will continue to actively manage this trade-off 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 of 2019, despite the declines in revenue and earnings. Let me also provide some comments as we look ahead into 2020. We will provide guidance when we release our fourth quarter results. But we are in the middle of our planning process right now, and we are anticipating a year of modest market growth in 2021. We expect our Utility facing end markets to remain solid, while our Electrical market should continue to show steady improvements into 2021. On margins, there will be a lot of puts and takes. But on net, we are planning for a year of modest margin expansion with our operational transformation actions continue to provide tailwinds. 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. [Operator Instructions] Your first question comes from the line of Jeff Sprague from Vertical Research. Your line is now open.

Thank you good day everyone. Dave, enjoy the retirement. Hopefully, we will see you around in Connecticut here and there.

Alright. Thanks, Jeff.

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

Right. Good morning, Jeff, and yes, it is - I think you used to work caution. And that is still very much what we are seeing with our customers. If you think there has 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 has a lot of fixed cost 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 are doing that right now. I would say we are doing it pretty successfully. But with a lot of precautions to make sure that, that certainly we don’t infect our own people and the people that will go into the homes. The second area is, if your Utility and you haven’t started the project yet, there is a tendency to not start for that same reason, right. Once you get started, there has a lot of costs that you are deploying and you want to make sure that you don’t get interrupted a month later. So that is where we are seeing a little bit of projects continuing to move to the right. The positive is that we are continuing to see the projects. We are 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 demand slowing. So as a result, we do see the fourth quarter improving, and we see 21% improving further.

And separate unrelated, could you just speak to channel inventories? We heard from Schneider that there has a rebuild going on across their channels. Obviously, they are much broader and globally diverse, et cetera. But what is going on with the channel? And maybe as part of that, 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.

Yes, 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 has been restocked. So as Gerben and I have been meeting with our customers, I think there has a general cautiousness, and I think they are happy to have some of their inventories lower, and they are happy to put demands on us to make sure we can deliver things on time, especially in vendor-managed inventory situation. So I don’t think we have seen a big restock yet that has offset the destocking that happened. I think everyone is kind of playing to see how volumes unfold. And yes, on the pricing side, sequentially, certainly, I think copper kind of bounced first, Jeff, right, but steel aluminum coming. 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 are 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 has a process on that underway across various parts of the company.

Thank you. I will pass it on.

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

Good morning. Congrats to Gerben, 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?

Yes. I think, Steve, there is two things. I think it is a difficult level to grow from. And so I think 2019’s level is much more the way to think of the right pace. So one of the factors that contribute to that is the fact that we have had some tailwind from the CARES Act and how payroll taxes were able to be deferred. So that switches next year from a tailwind to a headwind. And the balance is the relationship between as we ramp volume back up, the requirement to invest in working capital, most notably in inventory. And so the incumbent upon us to kind of manage those days -. But I don’t think of this year’s level as a good point to grow on. I think we will be growing off relative 2019 level.

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

Yes. I think Gerben mentioned the distortion in the fourth quarter from some of the tariff exemptions that kind of were lumpy as they came through there. The storms that happened in Q3, it is 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.

Maybe after that on the opposite side of that is our continued work on the footprint realignment and that should data provide tailwind for us into 2021.

Right. Okay. Thanks guys.

Your next question comes from the line of Nigel Coe from Wolfe Research. Your line is now open.

Thanks good morning. Also again congratulations, David, congratulations and enjoy retirement. I think we are all quite jealous about that.

Thanks, Nigel.

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

Yes. So let’s talk about - you had a couple of pieces to that, Nigel. So price cost in the quarter was favorable. The order of magnitude is reasonable. You had kind of the two effects of we were getting price plus commodities were a tailwind, that is kind of a what happens, but it is an unusual arrangement. So that will be moderating, 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 is good to be able to have that come up at the end of the year, because a lot of - and particularly, a lot of the Power Systems is done on blankets, and that happens around this time of year. So you are reliant on doing that. I think, certainly, as tariffs rolled 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 that you have to ask and I think we had a very be experience managing through that tariff. So I think we will apply all that learning. And note to your freight points, we typically do not get reimbursed for freight. Unless there are occasions inside of some storm business, for example, that would be rush than maybe a customer would pay. But typically, we do. And so it is interesting coming out of some of the disruptions, Nigel, of the second quarter, I think we found ourselves in the third quarter doing more expedited freight, having kind of inefficient mode usage. So maybe a little more in LTL rather than truckload, a little too much parcel, a little too much express because we are kind of coming out of the disruptive quarter and looking to keep customers service at adequate levels. So I think that as within freight, I think we are looking to kind of re-get that mode shift back to favorable mixes that will come out of a more normal supply chain smoothly running supply chain.

Okay. Bill, that is great color. And then my follow-on would be that, obviously, the outlook for Power Systems in 2021 beyond looks pretty good. Are you getting in from D.C. on what a stimulus bill might look like and how that might benefit your smart grade investments and specifically how it benefits Hubbell? Any color there?

Yes. I don’t know that we do have any unique insights to how Stimulus Bill might specifically effect. I think it will be interesting to see how the next week goes. And what we have policy wise rolling down at all of us.

Yes. Maybe just would add to that, Nigel, that independent perhaps a policy. There is definitely investment in these areas. And I would say almost neutral of what party is in charge. But we believe this business is really well positioned with secular growth trends in renewals with the upgrade and modernization of the grid so we are very optimistic about this area over the next few years, independent of policy.

Great. Thank you.

Our 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 through 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.

Yes. We have 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 the industrial market, specifically the light industrial markets. We have 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 have surprised or disappointed us in the quarter, but perhaps to a smaller magnitude, the granularity of how we look. But overall, we have definitely seen improvement. And the reason why not only the comments for the fourth quarter and the full-year, but early view for 2021. And I will just stay with that. There has still a lot of uncertainty in the next three months for us. We are really engaged with our teams, with our customers to fully understand what 2021 could bring. But at this point, we see slight growth for 2021.

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 would continue it, so you can offset some of the temporary costs that potentially could come back next year?

Yes. I think, Deepa, it is a good question. And since everyone’s congratulated everybody, but me, I feel like the here the way that is. But I think the cost actions, 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, our expectation was that there could be some tapering in our restructuring spending starting next year. So maybe going from $0.40 down to $0.30 maybe. And I think what we have seen is the spending this year, we are trying to keep on track to spend the $0.40. Some of the actual footprint work was hard to do with people on furloughs. You don’t have the resources in to get the work done. And in some of the dollars were shifted towards good fashion headcount realignment, which has really quick payoff. 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 will do that in January. But I anticipate our restructuring spending to be more flat next year. Because I think there has some projects for this year that we won’t get a chance to finish, and we are going to want to do them anyway because they have really nice returns. And so I think our spending, we 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 in May. I’m sorry, which one is it?

Yes, I’m saying 30 million or $0.40, which is what we are trying to do this year, yes, and maintain that next year. rather than taper back 2020, yes.

Okay. Got it. Thank you so much.

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

Ho good morning all. Let me just first echo some of the congratulations out there for Dave and Gerben. And then Bill, I don’t want you to feel left out. So really appreciate it. A couple of questions for me, not to put too fine a point on it, but I think the earlier comment on expecting some margin expansion next year. 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?

Yes. No, the growth will be an important part of that, Josh. So that is why I wanted to show you that margin slide, even though it is only for the quarter, I think it is constructive. So I think the way we get to margin expansion is the red bar on volume decremental slips to green. Some of those cost benefits, T&E and furloughs and temporary actions, stuff like that, that will flip back to Red, but net of those two should be okay, and that leaves you to manage price cost, which was, I think, two of the questioners we are getting at, and we agree how important that topic is as we are at the point of watching materials here. And as well as Gerben was highlighting, just getting that restructuring benefits of continued projects this year. So I think that picture is how we accomplish it. But getting volume is a good important part of the story or at least eliminating the red of the negative one.

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 on the legislative and the incentives, what you think the penetration looks like on LED today? And to the extent that we have seen past actions like ARA, I think it was like a decade ago, is there anything in there on by American that would necessarily advantage Hubbell relative to peers if you were to see kind of the similar kind of shell for climate or energy efficiency based incentives on with a given election outcome?

Yes. I think to the first point on penetration, I think we are at a very high level now. We are sort of, I think, in that 85-ish percent range of 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 has really much advantage or disadvantaged to anybody vis-à-vis tariffs or any trade policy or by American type. I think we would all benefit if there has a push towards more energy-efficient buildings and more clean buildings and people spending more on components to make the space as we live and work in 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.

Maybe just a comment on add to that. While the LED penetration certainly is deep, I think an area of growth for this market is lighting controls. And it is hard to make the LED lives that are now in buildings and structures more efficient and more effective. So that is certainly an area that we are seeing the growth on our own basis.

I appreciate that color. Thanks for that.

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

Thanks, good morning everyone and happy 61st Dave.

Thanks, Chris.

So 59, but I will be more careful.

You were there for the first one. So that is great.

I had a question on your non-res exposure. How are you thinking about the mix of new construction versus maintenance and rental and operating in a downturn, the demand for indoor space, new construction might see some sustained pressure, but maybe the rental maintenance has some tactical tailwinds coming in? I’m just thinking of the range of outcomes, maybe you are contemplating for non-res markets?

Yes, Chris, I think if you took our non-res exposure, you can kind of cut it in half. And half of it is lighting, commercial C&I lighting product, and the other half is wiring and some connector-type products. So I think if you were to start with lighting, they have really gone more than 50/50 to the rental side, and there really are some interesting national count drivers of large operators of real estate, think of quick source restaurants or big-box retailers, and they can turn on and off large programs of and that can kind of uncouple, I think, from some of the non-res data. So there has opportunity in some of that or that to switch on, say, specifically in lighting. On the others, C&I products, I think that skews less and more new construction. And at the same time, I think there has still an emphasis on how we sell the product within four, trying to find those rental opportunities and make sure you are getting your share or more than your share of that work either by getting to specifiers, right, being a part of getting specked in rather than just waiting to be plucked off the shelf.

And I had a follow-up on Aclara. Maybe you are at 80 million, 90 million this year. But prior to COVID, I think you were expecting 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 very nice growth next year, is that a scenario that is reasonable?

I would say it is a possible scenario. I think we will be able to, and we give you our outlook in on our next call, we will be more explicit about what we see there. I think what you are describing is possible.

And maybe just one other comment to add to that is, clearly, we are seeing the projects move to the right. There is a constraint in labor availability to put all this in. So I agree, like, Bill, there is definitely growth into next year. And there has a desire by utilities to continue to invest in this area. Limiting factor is how quickly can they put these systems on.

Great. Thanks a lot.

Your next question comes from the line of Chris Snyder from UBS. Your line is now open.

Thanks for the time guys. So my first question, just following up on the comments just previously around Aclara. So you guys said you see this as kind of a mid-single-digit secular growth business. Kind of by my math, it is running down double-digits this year. If you could kind of unpack that maybe like 15-ish percent or higher disconnect 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?

Yes. I’m describing our couple of years of ownership, where we had some big up years, right? And so that is combining with this year to get us to mid-singles. And so I think that when you can get the installers into near buildings, I think you are 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 Aclara sells are in quite high demand. And as we are seeing on the component side, our business utilities where it is in the infrastructure and backbone, and they don’t have access issues, they are actually willing to spend to upgrade. So I think that is taken us to 11 o’clock. And Dan usually comes on at this time and says, please call me and follow-up, and Dan will won’t be around. So I’m hoping you can wait a day or two for Dan. If there has 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 and 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.

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.