Thank you for standing by, and welcome to the 2nd Quarter 2020 Results Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Dan Enamirato. 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 Bacher and our Executive Vice President and CFO, Bill Sperry. Hubbell announced its 2nd quarter results for 2020 this morning. The press release and slides are posted to the Investors section of our website at www.hubble.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 Q2 results. 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, what I think is another strong quarter of operating performance and free cash flow generation for us. We clearly saw the impact of COVID-nineteen 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. We continue to execute on price cost, and we were proactive in managing our cost structure in the Q2.
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, continue to improve. And overall, despite continued market volatility, we're well prepared to manage through a range of scenarios. You'll recall we walked you through our recession playbook last quarter and talked about how we've historically performed well through past downturns, given the less cyclical nature of our utility business and our ability to execute on margins and free cash flow. You saw evidence of that in the second quarter, and we feel well positioned for the second half.
Turning to Slide 4, I think it's important to look back on our approach to navigating through COVID-nineteen and revisit the commitments we made to our employees, our customers and our shareholders. We successfully implemented a rigorous set of protocols to keep our employees safe while we continue to provide our customers with the essential products they needed to operate critical infrastructure safely, reliably and efficiently. And I can say even from my own experience being in our offices since the beginning of June, I think our protocols, I feel very safe and I think our employees should feel very safe when they come back into the office. We did experience disruption in our supply chains in the Q2 as expected, but all of our facilities are currently operational and we're able to continue providing customers with the same level of quality and reliability they've come to expect from Hubbell over decades long relationships. Importantly, we're also committed to proactive actions to manage our cost structure as Hubbell employees across the enterprise made sacrifices, recall, in reduced compensation and other cost reductions.
Finally, we committed to preserving our strong liquidity position and after another strong free cash flow quarter, we believe we're well positioned with approximately $500,000,000 in cash sitting on our balance sheet at quarter end. While we laid out our 2nd quarter financial framework, we believe that a decremental margin in line with our gross margins at around 30% would have reflected solid performance, and we did significantly better delivering decrementals of only 14% in the quarter. Looking ahead, while the impact of COVID-nineteen is significant, we believe there is still a long way to go before this pandemic is behind us. We're proud of our employees for the way they've adapted to a new environment. Some people say normal environment, but the new normal, but this is far from normal.
It really is just a different environment that we're working through. And we're doing that while still delivering strong execution and performance. We're going to continue to take steps to effectively mitigate the near term impacts of the pandemic while preserving long term value for Hubbell and our shareholders. Before I turn it over to Gurban to talk about in more detail the segment results and our financial performance, want to give some additional color on the press release from last night announcing a change to our operating structure and the consolidation of our 3 operating groups within our Electrical segment into a Unified Electrical Solutions segment. Over the last year, Gerben and I have been working closely and as he's got more insight into the rest of the businesses, he's identified opportunities for us to continue to streamline and address our organizational structure.
And we agree that there's significant opportunity in better optimizing our scale across our electrical offerings to develop integrated solutions for our customers. The formation of a unified Electrical Solutions segment will benefit our channel partners and customers through increased ease of doing business as well as improved innovation and development of integrated solutions. It's also going to generate a more streamlined organizational structure, which we expect to generate productivity benefits. Certainly, in evaluating our portfolio, we believe this operating best positions us to fulfill our purpose as a company, which is to enable our customers to operate critical infrastructure safely, reliably and efficiently. We're uniquely positioned to solve these problems as the only company with leading positions across the energy infrastructure, including behind the meter, in front of the meter and at the edge of the grid.
You recall that on Page 5, a slide that we showed at our Investor Day back in March, gives us the unique opportunity to leverage our installed base to generate insights from the transmission and distribution of energy, the consumption of energy and the ability to collect, analyze and control energy data. Similarly to our integrated operating structure in our Utility Solutions segment, which we described at our Investor Day back in early March, The next phase in our evolution, we believe, is in the Unified Electrical Solutions segment. It's going to allow us to more effectively target attractive new market segments and develop differentiated offerings for our customers with increased speed as the markets evolve at a faster pace through this pandemic environment. Importantly, we've identified and named a leader who we think is uniquely capable of delivering on that vision in Peter Lau. Peter has extensive leadership experience and a strong track record across other multi industry companies, particularly in the commercial building space, and we're confident he's the right person to help lead this business into the future.
With that, I'll turn it over to Gurban to walk you through some more details, and then Bill will walk you through some of our working capital, cash flow and margin analysis. Gurban?
Great. Thank you, Dave, and good morning, everybody. And before I go into our Q2 results, I would like to provide a couple of additional comments on the new Electrical Solutions segment. As I transitioned 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, coordination 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 economic headwinds as a result of COVID-nineteen, which caused decline across a number of our end markets. So demand in the utility facing market was more resilient as were our residential markets. We also experienced supply chain disruptions as a result of regulatory closures primarily in Mexico and impacting our utility business And I'll talk a little bit about that when we get to the segment review. This was effectively navigated and resolved within the quarter as expected.
Despite the volume challenges, we achieved operating margin expansion in the 2nd quarter through strong execution. Our investment in footprint optimization are continuing to pay off with attractive and sustainable savings. We also continue to realize the benefits of positive price cost across the portfolio. And while we faced operational disruptions and inefficiencies as a result of COVID, this was more than offset with the cost management. We took proactive compensation actions that Dave highlighted earlier.
We realized lower operating costs and Bill will talk about that in a later margin bridge that he'll cover. And finally, we realized another quarter of strong free cash flow as we continue to execute our working capital initiative. We'll walk you through our liquidity position in detail later, but obviously very encouraging to see our Q2 and year to date performance here, which supports our liquidity position as we continue to manage through this period of uncertainty. Turning to Page 7, you basically see what I just talked about in graphical format. Again, you see the sharp decline in sales, but offsetting that is margin improvement of 300 basis points with strong execution and you also see the significant growth in free cash flow.
Now turning to Page 8 and provide some additional comments into each of the segments. Electrical sales declined 26% in the 2nd quarter with really broad based weakness across most of our end markets. We did see some pockets of relative strengths, the residential market, particularly in the e com and retail channels as well as certain light industrial verticals. However, we didn't see much differentiation across the rest of our electrical end markets, which saw similar levels of decline throughout the quarter. And then we also had to manage through the supply chain disruption, primarily in our lighting business with the factories located in Mexico.
And this affected both the electrical as well as the power businesses, particularly 2 main facilities in the Maquiladores, but both were resolved within the quarter. When looking sequentially, we saw May being our weakest month from an order and shipment perspective, while June started to show some stabilization and sequential improvement and we've continued to see that in and through July. Turning to operating profits, we faced headwinds from lower volumes as well as operational inefficiencies as a result of COVID-nineteen. These include absorption and productivity challenges, appreciation pay that we put in place for our factory workers and operating expenses particularly related to cleaning protocols, protective equipment and Dave talked earlier about feeling safe coming into the office. I think our employees would say they feel safe coming into all of our facilities and factories.
But there was a cost obviously related to those. However, we delivered strong margin performance with decrementals below 20%. We took proactive actions to reduce compensation in the 2nd quarter and we also benefited from broader cost management across the enterprise and Bill will cover this later in his slides. Price cost was a positive tailwind for us as we hung on to the carryover benefit of prior year pricing action, while commodities were modestly favorable for us. And as I mentioned earlier, we continue to realize the benefits of our investment in restructuring actions and we see plenty of runway here for sustainable savings over a multiyear period as we continue our operational transformation.
Turning to Page 9 and the Utility Solutions business, we saw sales decline of 13% in the 2nd quarter. Power system sales were down mid single digit, but this was all due to the supply chain disruption in our Mexico facility, which we talked to you about in April. We were able to restart and ramp up that facility again within the quarter as expected. Demand for the T and D components was resilient as retail customers continue to invest to modernize the grid as well as the ongoing investments in renewable generation which is supporting strong transmission project activity for us. This market, I would say, isn't immune to the macro and typically lags our electrical businesses by a couple of quarters.
But I'd also tell you that we're exiting the 2nd quarter with a good backlog and optimistic that we can grow this business in the 3rd quarter. Aclara sales were down 25% as this business was significantly impacted by the projects and installation delays as a result of COVID-nineteen regulatory restriction. And this limited really access for us into home and commercial buildings. Demand for smart grid solutions remains solid, but with social distancing measured and government mandated lockdown, it's been very difficult for us to access the properties to complete installations. OP for this segment was down modestly, while margins were up significantly expanding 170 basis points and driving strong decrementals.
Similar to our Electrical segment, the lower volume and COVID inefficiency were offset by cost management and positive price cost. We also benefited in this segment from positive mix in the quarter and really two sources here. First is the Power Systems as a higher margin business held up stronger than Aclara as I talked about. And secondly within Aclara, the lower margin installation business was the one most affected by the regulatory delays and project impacts. So let me now turn it over to Bill on Slide 10.
Bill?
Good morning, everybody. I appreciate you taking time to join us and hope you're being safe. Gurbin 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 percent operating profit margin, a 30 basis point improvement over the same period last year. The 2 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 2 of those combined to give us about 2 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, absorbed all the 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 twenty twenty, we've invested a comparable amount to what we invested in the first half last year. But we continue to see and we're increasingly encouraged by the savings that are coming out of these projects. We now are experiencing a run rate. We estimate to get about $25,000,000 of savings running through 2020. And you'll recall last year, we invested about $37,000,000 So our payback there, very attractive and very nice returns.
So,
if you go to
the left of the page, you'll start to see the impacts of volume. The first red bar there is the markets we experienced, as Gurvin described, a 15% decline in demand. And as you lose the profit from that volume, it drags margins down. The next bar, we think we lost an additional 5% to 6% of sales with the supply chain disruption that Gurvin mentioned in Mexico. We lost similarly the margin from those sales.
But also there are costs in there of absorption from temporary closures and furloughed factories. There's appreciation pay. There's emergency paid leave and there's extra PPE expenditures, all of that contributing a drag. But the next green bar is really the business model's variable response to that lower volume. We took salaries down.
We imposed furloughs that reduced compensation expense. T and E spending way down as no one was getting on airplanes, medical down as people were delaying their visits to doctors and we spent less money on supplies. So, you see the very natural variable response of the business model, but I think the real story of the margin bridge is the two points that we got through price costs as well as restructuring investing that we've done. Page 11, we've put the 2 quarters together here and shown you the first half. The 2 quarters are remarkably different, pre COVID quarter and a COVID quarter.
But I still thought it was instructive to put them together and show you where we are on a summary basis at halftime. So you see our net sales down double digits to just over 2,000,000,000 dollars The utility business doing better than the electrical in terms of sales growth and within utility, the power system actually growing in the first half. The margins on operating profit are comparable. And so you see a profit decline in line with the sales level of decline. And the resulting earnings per share of that of $3.51 Dave is going to walk you through our guidance in just a minute.
And as the utility business is giving us some strength and the confidence to give you the guidance, you'll see that we've achieved about half the earnings we anticipate here at halftime. Similarly, with cash flow, and I'll go in to cash flow as we turn more deeply as we turn to Page 12. So you see we generated in the first half just under $270,000,000 of free cash flow, 66% increase over the comparable period last year. And despite having a lower contribution of income, because of the sales decline, we had a lower demand and requirement on working capital investments. So, I think we managed quite well the inventory side.
We recognized very early in March that we were headed to a volume decline quarter and that affected how we looked at raw material purchases. And so, inventories were very well managed in a source of cash in the quarter. Additionally, receivables, our collection experience has been quite positive. We think the industry is behaving quite responsibly. Vendors are paying and customers are paying us.
And so that's all managed to the point of allowing us to get to a point, as Dave highlighted, that's greater than half of our target of $500,000,000 of free cash flow for the year. And we typically have some seasonality in the Q4 that allows us to have a large collection. So we're feeling quite good about the cash flow. And the right side of the page and a look at liquidity helps describe why that's so important to us. So you see there the cash build up to $485,000,000 You see our debt levels.
We typically rely for our short term and floating rate debt. We typically rely on the commercial paper market. That market for a moment dried up on us in the quarter. And so, we relied on our banking relationships. We borrowed from our revolver $100,000,000 tranche and then a second of $125,000,000 I'm happy to say the CP market has come back in a very liquid and responsive way And we have paid back the banks and are back to our more normal arrangement of funding ourselves in the short term in the CP market.
So we feel very comfortable with our credit stats. You'll see the net debt to capital improving in the first half of the year to 32%. Our debt to EBITDA on an adjusted debt basis net debt basis being less than 2 times. And so we feel like that's doing a good job of supporting our capital allocation ambitions, which is worth ticking through quickly. So on the dividend side, we continue to be focused on a payout ratio in that 40% to 50% of net income.
So as we can grow our income, we'd like to keep growing dividends. On capital expenditure side, in the second quarter, with an abundance of caution, we tamped down our CapEx a little bit. But for the second half of the year, and you'll recall last year, we were at about $100,000,000 of CapEx. So we think the second half will return to about a $50,000,000 run rate. We're very happy with the projects and the returns that we get on those capital projects in terms of productivity.
Share repurchasing, we still are authorized to be in the market and continually look to be opportunistic there. And on the acquisition side, we see the pipeline starting to fill up. So we're happy that the balance sheet has repaired itself. As we look back last year to the acquisitions we did, we invested about $70,000,000 in 3 different deals. It's interesting to see those deals are performing and contributing more than the sales in OP than we originally estimated and modeled to justify their valuation.
So they're performing very well through the pandemic and provides good underlying support for our acquisition thesis that there are opportunities out there to add to our brands and continue to invest. The 2 most significant contributors from last year, one is on the power side and the other on the Berndee on the connectors and grounding side. So they're in markets that are doing well and performing well. So we're looking forward to in the second half getting a few typical hubble size acquisitions And with that, I'll turn it back to Dave to talk about outlook and guidance from here.
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 distribution markets, certainly been resilient for T and D components, particularly on the transmission side, continued investment in renewable generations, creating the need for transmission projects. But T and 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 Gurban talked about, some headwinds near term from restrictions on installations, which require access to homes and buildings other than in emergency situations. Longer term, utilities continue to demand smart grid technology to 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 Gurban mentioned, some bright spots in the Q2.
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 industrial. Second half trends will obviously be dependent on timing and shape of the economic recovery. And of course, last is the nonresidential markets continue to follow broader economy on a lag. And while we've seen some projects get completed, some that were put on hold as things were shut down, we're certainly cautious on the near term outlook there, but the level of activity seems to be positive, okay?
I mean, what does all that mean? Well, let's turn to Page 14, and we can talk about our outlook and the framework. We reported our Q1 results in April. We withdrew our annual guidance. There was so much uncertainty around the COVID situation.
But as we've navigated the Q2 with our strong execution and at least what now looks like to be some stabilization in volumes even though they're down as well as some of the supply chain dynamics. We thought it would be helpful to not only walk you through our framework for expectations, but how we're managing through this and also give you our best thinking on how that rolls up into an annual earnings per share range. Certainly, on the macroeconomics environment, it remains volatile, and these expectations come with the obvious caveats. There's a higher level of uncertainty around them. But as of now, we see ourselves being able to deliver in the range of 7 dollars to $7.25 in EPS on an adjusted basis.
We look talked about our markets on the prior page, continue to expect pressure in electrical end markets for the balance of the second half. We are seeing stabilization in orders with sequential improvement from May to June and into July, with certainly no tangible signs that might support a V shaped recovery, but at least there's improvement. Orders so far in July are down about 15%, and our base case is that the balance of 3rd quarter looks somewhat similar to what we've seen on the order front. Certainly, opportunity to if things continue to improve, but we're going to plan conservatively right now. On the utility solutions side, we exited the 2nd quarter with a strong backlog position in our power systems business, continuing to see the resilience in the T and D demand, particularly transmission, gives us confidence that we can see some modest growth here in the Q3.
Aclara is a little more dependent on when some of their projects can get fully ramped back up. We continue to see delays in certain projects as we've talked about. And though these are moderating, our base case assumes we'll probably see low double digit declines here in the 3rd quarter. Overall, our Q3 base case is down about 10%. On the margin front, our facilities are all currently operational.
We certainly have learned a lot and are continuing to navigate through pockets of challenge, whether it be an individual who tests positive that may require a 24 hour, 72 hour or in worst case, a 14 hour quarantine. And so there's pockets. We've been able to manage that into specific for the most part, specific cells or departments. And so we've navigated that. But we continue to expect some productivity challenges as we manage through it.
And we expect the inefficiencies we experienced in the second quarter to improve in the second half. We certainly see sustainable savings from the restructuring actions we've taken and expect the full year savings of $25,000,000 which is above the $20,000,000 we were targeting as of last quarter as we've taken some additional actions in the second quarter. We also expect price cost to remain positive in the second half, although at a more modest level than the first half as we you know, we're going to lap some of our prior year price compares. The compensation reductions that Bill and Gervin referred to that we took in the second quarter, obviously won't repeat in the second half. We've committed to take those off and get back to normal.
We also expect some of the operating costs, which we think were at unnaturally low levels in the second quarter, to return. However, we do have control over some of these costs, and we've taken some actions to properly manage based on our order patterns and volume level. The net of all these moving parts is we expect our decremental margins to tick back up into the 25% to 30% range in the second half, still below our gross margin levels. And on the cash front, we're actively managing our CapEx, but with a strong liquidity position, as Bill referred, Having seen the benefit of our recent investments in productivity, we continue to invest in things like automation within our factories to drive future productivity. In terms of working capital, continue to manage our inventories down prudently.
Obviously, one of the things we've learned in the supply chain challenges is to make sure some of the critical components we might have to have some additional inventory, but we're contemplating that in our working capital management. So the net of all of that is expect free cash flow for 2020 to be at the $500,000,000 or better that we generated in 2019. So all in all, I think we're all very pleased. I have to tell you, when you think about where we were 90 days ago, we were just heading into the storm. We had been through most of April, but the worst was yet to come, as we found out in May.
It's a daily challenge to slog your way through it, but I couldn't be more proud of how the organization, the leadership team, all the way down to the factory floor has really navigated that. And I think that's what gives us confidence that despite the volatile markets, we're going to find our way and fight our way through to perform at the levels and execute at the levels that we are expecting. So with that, let me turn it over to the operator, open it up to Q and
Our first question comes from Jeff Isbagu. Your line is open.
Thank you. Good day, everyone.
Hi, Jeff.
Hope you're all well. Couple of things. 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 inventory, Jeff, and for the power business also made to order products, so and affecting those segments, as you said.
And just on the order front, do you see I mean, the orders still sound like they're somewhat suppressed, Bill. There's not a kind of a refill catch up element? Or maybe there is, but 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. And that's carried into July month to date, but it's obviously something we're watching closely daily. And but that's where our orders are now in July is really the basis for how we've guided the second half. Great.
And then for Gurbin, Gurbin, 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 multipart 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. Good morning. I was indeed highly involved in this. And I would say the primary 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 going to the customer representing all of Hubbell.
We see cross selling absolutely and we saw some of these benefits already when we put in place and we talked about this. Our VP of Strategic Accounts of our very largest account, 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 2 out of the 3 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, 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.
Great. Thank you. Good luck.
Our next question comes from Steve Dussa of JPMorgan. Your line is open.
Hey, guys. Good morning.
Good morning.
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 $500,000,000 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 cost things that are contributing to this year. But as we've mentioned, as those some have come back, the salary adjustments that we specifically limited to the Q2 because of the severity of the Q2, 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 market recovers 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 right size our cost structure around that.
So that's the cost side. 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 in days.
Right. But I mean that $500,000,000 we should think about that as kind of a base?
Yes.
A performance, not like some one time benefit I just want to kind of make sure that I understand
kind of all the moving parts. Yes.
I think you understand it right. So we achieved that in 2019. We do better than $500,000,000 in 2020 and I agree there's some working capital tailwind in that. But we should be better than that still in 'twenty one. Absolutely, you are looking at a sustainable growth.
Yes. It's a sustainable
growth. We are improving upon that 2019 base, yes.
Right. Makes a ton of sense. Thanks, guys. Good execution on the margin. Congrats.
Great. Thanks.
Operator?
Our next question comes from Deepa Rajaavan of Wells Fargo Securities. Your line is open. Hi, good morning all.
Good morning.
Hey, good morning, Deepa.
Dave, your view of non res appears 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 your non res business at least can grow next year or even bottom up 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 non residential 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.
Got it. My follow-up is, Amit, as you've managed 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've discovered any new areas of opportunity where you could consider organic or inorganic growth opportunities going forward? That will be helpful. Thank you.
I'd have to say that all our businesses are resilient, at least our people addressing 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 Gurban 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, in terms of future growth opportunities, I might 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 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. And 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 it's 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 Gurban is talking about is looking to take advantage of that unique positioning that we see.
Got it. One question for Gerben, if I may. Gerben, as you've been working through reorganization, did you end up finding 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 called 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 levels. So I'd say we'll continue to see that going forward. I do believe that these businesses and what 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 no, but I would expect as we have seen over the last couple of years, continue 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 Hubbell, these $30,000,000 to $50,000,000 privately owned businesses, a lot of those owners through COVID are really reevaluating their continued interest and to run those businesses and then we become more attractive an acquirer for. So I'd say that that's pretty active for us right now to add to the portfolio on the other side.
Thanks for that. Great color and great quarter. Thank you.
Thanks.
There are no
further questions. Please continue.
All right. If 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.