Ladies and gentlemen, thank you for standing by, and welcome to the third quarter 2019 results call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. Dan Innamorato. Please go ahead, sir.
Thanks, JP. Good morning, everyone, thank you for joining us. I'm joined today by our Chairman and CEO, Dave Nord, and our Executive Vice President and CFO, Bill Sperry. Hubbell announced its third quarter results for 2019 this morning. The press release and slides are posted to the investor section of our website at www.hubbell.com. Please note that our comments this morning may include statements related to the expected future results of our company and are forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Please note the discussion of forward-looking statements in our press release and consider it incorporated by reference into this call. 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. Let me turn the call over to Dave.
Okay. Thanks, Dan. Good morning, everybody. Thanks for joining us to discuss our third quarter results. Hopefully, you can see from our press release this morning, another quarter of solid earnings growth and free cash flow generation for Hubbell. We continue to feel confident about our market position and our ability to deliver differentiated results for investors. I want to start my comments on page three of the presentation, some of the key takeaways for the quarter. First and key, the end markets are growing modestly overall. You could see that transmission distribution continues to stand out as driving strong growth, both top and bottom line. That's driven by our ongoing investment at our large utility customers in hardening and upgrading the grid. On the electrical side, things are a bit more mixed, with some pockets of growth offset by some softness in certain markets.
We'll talk about that in a couple slides. On the margin front, we remain effective in actively managing price cost across the portfolio, which is driving margin expansion. You'll see a 30 basis point improvement on an adjusted basis year-over-year. Free cash flow remains a critical aspect of our story, and we're tracking above prior expectations, driven by continued working capital improvement. We continue to invest restructuring dollars in our footprint optimization initiative, with more to come in the fourth quarter and into next year. Putting a lot of work organizationally into improving our operating intensity. It's paying early dividends with strong cash flow generation, and we see these efforts driving significant upside to margins over the next few years.
You see, we also completed the divestiture of the Haefely high voltage test business in the quarter and recognized a gain that we've adjusted out of results, and also reached an agreement for a bolt-on acquisition for our Power segment. We think these transactions add value for our shareholders, and we're exiting a non-core business with lower return characteristics and redeployed the capital to acquire a higher margin business in an attractive adjacency. We'll walk through the details later. Finally, our strong year-to-date results position us well to tighten our full-year earnings per share expectations. We're certainly incrementally more cautious around top-line trends, particularly the Electrical business, than we were a quarter ago. We have solid visibility into continued strength in our Power business in the fourth quarter, and we're executing well on margins across the portfolio.
Gives us confidence to tighten our full-year commitments, and we remain confident in our ability to deliver on them. Before I turn it over to Bill, let me just highlight a couple of key accomplishments as well in the quarter. First, on the Aclara front. They launched a pilot program for its synergized RF communications and controls platform with a large electric IOU customer and was also chosen for an AMI deployment with one of its largest co-op customers. This is laying critical groundwork and demonstrating proof points on the scalability of Aclara's AMI platform, as well as the synergies between Aclara and Hubbell and our unique breadth of product offerings across the distribution automation space, key elements of the strategic basis for that acquisition. Burndy released a tin-zinc plating solution for its compression terminal line, which is more environmentally friendly and safer solution with improved corrosion protection.
Lighting won a product innovation award from the Architectural SSL magazine for best retrofit for the lighting design for the Duke Ellington School of the Arts in Washington, D.C. It's the fourth consecutive year Hubbell Lighting's won this award. They also had four products included in the IES annual progress report for their innovation and unique product attributes. All good testimony to their investment in new product development. On the electrical side of commercial and industrial, they delivered their largest single order for bridge controls ever in August. Industrial controls division has become a safe and reliable supplier of choice to replace the U.S.'s aging lift bridge population. Organizationally, we have different changes during the course of the year. Most recently, we had a leadership change in lighting as a previous leader has taken on a new opportunity outside Hubbell.
We named Jim Farrell as the acting Group President of Hubbell Lighting. Many of you know Jim from his experience in investor relations. He's got over 15 years experience at Hubbell, and he's been at Lighting, you'll recall, as the VP of Finance for several years and has been instrumental in a lot of the activity there in improving their performance. We're excited to have Jim continue to executing on our strategy and wish him well in this new role. With that, let me turn it over to Bill.
Thanks very much, Dave. Morning, everybody. Appreciate you joining us. I know it's a busy morning. Like Dave, I'm going to use the slides to govern some of my comments. I'm going to start on page four, the overall results. You'll see that we generated $1.2 billion of sales in the quarter, 2% growth. Considering the divestiture that Dave mentioned, organic growth was up 3%. Operating margins expanded 30 basis points to 15.8%. That was absorbing some extra investment in footprint restructuring, was really driven by a very solid performance on the price cost side. Adjusted EPS $2.34. As Dave mentioned, the reported results have the gain on sale, which we've adjusted out to help facilitate your ongoing comparisons of operating results. For free cash flow, $151 million generated, which has a year-to-date increase for the nine-month period of 16% on cash flow.
Let's look at sales and disaggregate that into how each of our end markets is contributing to our 3% organic story. You can see some bifurcation on the page with some strong areas and some other areas of softness. Let's start with the strength. Starting with non-res new construction, we continue to see low single-digit performance there. Our commercial construction and rough electrical areas are benefiting from that. As Dave mentioned, the utility-facing markets are really the most noteworthy. I'm including gas in there. As you all recall, we're in the distribution components business there. A utility-facing area where conversions to gas have been increasing and the MRO spends upgrade and strengthen the infrastructure continues to drive impressive growth there. As well as across transmission and distribution of the electrical side, we're seeing grid hardening and projects on transmission side, including renewables.
Very favorable trends in utility. On the softer side, upstream oil continues to be an area of softness. In our lighting business there, relight national account area has experienced softness. Those are proving to be discretionary projects, more nice to have, and we've seen some deferral of that spending. Heavy industrial, where we have quite a bit of exposure into the steel industry, for example, where in sympathy with steel prices, we're seeing some spending by the producers coming down there. The good diversification across that portfolio of end markets delivered us 3% organic growth, helped by some strong pricing. How does that sales translate down into operating income? Remember, 2% sales growth. You see here 4% OP growth to $190 million of adjusted operating income, a 30 basis point margin expansion to 15.8%.
That's absorbing the extra investment in footprint restructuring, driven by the price cost management, which has been very constructive really all year. On the earnings per diluted share, $2.34. The increase in OP, you see on the left, being absorbed by a higher tax rate. That tax rate is quite in line with our expectations this year, around 23% on an adjusted ETR rate. Last year happened to be sub 20%, I'd say unnaturally low, as we had some favorable true-ups for tax reform in the third quarter of last year. Let's take that enterprise performance and unpack it into our two segments, electrical and power. Starting on page seven, we'll cover electrical. You see sales of $689 million, roughly comparable to last year. Considering the divestiture, organic growth of +1%.
Some of the strong areas, gas, as we mentioned, non-res construction, both the connector side and commercial construction products benefiting from that. You see industrial and the national account side of lighting being weaker. As that translated into operating income, you see $96 million, 13.9% margin. Two decisions we made in the quarter, one to invest in the footprint restructuring, the other, the divestiture drove down those margins. Had we not done those two, the price cost positives would have offset the lower lighting volumes to have margins be flat in electrical for the quarter. On page eight, we'll transition to the power segment, which you see had a really nice performance in the quarter. Net sales grew 5% to $515 million. That's essentially all our legacy Hubbell Power Systems products, which grew high single digits. Aclara had flat contribution on the sales line.
They've got some natural lumpiness as they live off of large project orders, and as some roll off, the new ones roll on in different time periods. We've got a very nice pipeline of projects in front of Aclara, and their growth for the year is going to be solid in the mid-single digits despite a flat quarter. The operating income for Power segment, you see $95 million, up 160 basis points to 18.4%. You're seeing both strong volume and good price cost. Really attractive incremental drop-through on the volumes there. On page nine, we wanted to give you an update on our operations, starting with the footprint work that we're doing, that we've spent a lot of time talking to you all about. Just to level set, remind everyone, we had started the year with 58 manufacturing facilities and about 11 million square feet.
We've got 10 projects underway that will take about half a million square feet out this year. Those projects are all going well. We think we've got some good ones right now. In one case, we're consolidating two foundries into a big 24/7 operation, moving out of a high-cost Northeast location into Puerto Rico, and another couple regional consolidations, one in our harsh and hazardous business, one in gas distribution. Those projects are all proceeding, and we're happy with them. We've been talking to you about $0.40 of spending in this year to improve our margins next year.
As we enter the fourth quarter here, it turns out some of our cost estimates were a little bit conservative, and some of those costs are coming in a little bit under budget, and we're going to reinvest that into incremental productivity actions in the fourth quarter, and help deal with some of the electrical volume softness Dave was talking about. We've indicated sales per square foot at the bottom of the page and the target of improving that by 20%. We've improved 20% from 2017 to 2019, so we want to keep that momentum going as we go from 2018 to 2020. Of note, that we think those footprint actions really helpful to important free cash flow levers, which is a high area of focus for us. Number one, we're taking out fixed costs, and that allows us to enhance margins and increase our income.
Secondly, the fewer facilities and more efficient operations are allowing us to reduce inventory days, and with less working capital, that's also helping us drive free cash flow. We're really looking to have free cash flow outstrip our earnings growth. You'll see 16% year-to-date. We're trying to get to, you recall last year we did $420 million, trying to get next year, 2020, to the $500 million that we promised you. The $460 million would be about halfway, which would be about 105% conversion rate on adjusted net income, and we think we've got a path to get there. Operations really helping us drive free cash flow. Wanted to comment a little bit on the portfolio actions that David Nord mentioned at the outset. Starting with the divestiture of Haefely, our high voltage test equipment business based in Switzerland.
As you may recall, they made large impulse generators and transformer test systems. We found that that business was non-core with what we were trying for. They had atypical project sizes, which were large systems, different than the rest of the company. The drivers of the business tended to be electrification in developing economies as well as transformer technology changes. We found it to be a cyclical business and had been in a trough for an extended period of time. We found an opportunity where we think the business was more valuable to another player. We're going to take the proceeds from that, which were $38 million, redeploy that into our next acquisition, which is in the power systems arena. It's a business that protects substation assets with tight-fitting components that are fire resistant. It's got a high margin, high growth profile.
For balance sheet neutral, just redeploying those proceeds, we think that's a good portfolio move to make. That acquisition's been signed, but subject to customary closing conditions. We're expecting either in late fourth quarter or early first quarter to close that. I'd say also on the business development front, we've got a potential other acquisition that could close in the fourth quarter. Those are often hard to predict, but wanted to just highlight that we're reinvesting in acquisitions as our balance sheet is very supportive of that. With that, I want to hand it back to Dave to talk about outlook for markets and outlook for the rest of the year.
Okay. Thanks, Bill. Turn to page 11. Let's talk about the end markets first, on the outlook. As we've talked about this morning, we're seeing some mixed end market trends and some puts and takes across the portfolio. On net, I think end markets are trending a bit below our prior expectations at closer to 2% versus 2%-3%. As a result, we've tweaked down our growth expectations across a few of our electrical end markets. Again, we're once again seeing stronger growth in the full year in transmission and distribution. Going around, starting clockwise, the electrical transmission distribution is now, we think 4%-5%. It was 3%-5% prior, closing in closer to the high end on better visibility. The non-residential is still 1%-3%.
We talked about the softness in lighting, particularly on national accounts, but core non-res, we think, is still solid. Industrial now 0%-1% versus 1%-3% prior. That's driven by softening mostly on the heavy industrial side, steel, and heavy industries. The light is still holding okay. Oil and gas now 0%-1% versus 1%-3% prior. Oil markets, I think most people know, haven't been recovering. Rig count's down, and so we've seen that, and we're taking that down a bit. Residential, 0%-1% versus 0%-2% prior. We continue to expect modest growth, but a little more modest than prior. If we turn the page and pull that together for our overall outlook. That market dynamic plus price, we expect sales growth of 3%-3.5% for the full year.
As we talked about in the prior slide, this embeds this modest end market growth, but we expect to continue to achieve solid traction on price. The wraparound of Aclara and the impact of the Haefely divestiture adds about a point on net. Then we think that foreign exchange will be a headwind of a little less than a point. We're tightening our full-year adjusted EPS expectations to $7.95 to $8.10 based on our strong year-to-date results and the expectations for continued execution in the fourth quarter against what we anticipate will be somewhat softer market conditions, at least in the electrical segment. We're raising our expectations for full-year free cash flow conversion to more than 100% of adjusted net income based on our results through nine months and what we see in the fourth quarter.
We feel good about our ability to continue executing on our working capital initiatives and generating good cash for shareholders. If we turn to page 13, we put this in a little bit of a graphical form. We expect strong growth from core operations with some, we'll call, non-fundamental headwinds from incremental R&R investment, and the higher tax rate that Bill talked about. In closing, I think we all start to think about and talk about next year, 2020, and we're certainly committed to continuing to execute on the fundamental drivers within our control. We continue to actively and effectively manage price cost, and we'll start to reap some of the cost-saving benefits from the restructuring actions we've taken this year. We expect to invest another $0.40 in restructuring spend next year, and continue delivering significant cost savings and margin improvement over a multi-year period.
As far as markets, we see continued runway in our T&D markets with all the fundamental drivers around grid hardening and modernization still intact, maybe though at a potentially more moderating growth and as we have more some difficult comps, but still certainly continuing to grow. On the electrical side, things a little more uncertain with some puts and takes across the end markets, but we remain focused on executing, again, on the fundamental drivers within our control. We're confident in our ability to deliver differentiated results regardless of the macroeconomic, while continuing to position the company for long-term success. With that, let me open it up to questions.
Yes, sir. As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound key. Again, that is star one for questions. Your first question comes from the line of Christopher Glynn of Oppenheimer. Your line is now open.
Thank you. Good morning.
Morning, Chris.
Hey, was just wondering a little bit more on the power fundamentals. You mentioned grid hardening and modernization. From a couple other perspectives, wondering how much runway you're seeing with respect to maybe utility CapEx fundamentally shifting from power gen to T&D. Also besides that, is California starting to come into play prospectively?
Well, I think on the first part, I think the shift from power gen to T&D has been a contributing factor, and we expect that dynamic to continue. That all is part of modernization, grid hardening, smartening the grid. On the second, on California, certainly there's been increased investment, increased attention to the need to focus on more reliability of the grid throughout California, certainly in the northern parts, and we're seeing some of the implications of that right now with the need to shut down power to protect. We expect that to continue, although that's only been part of the story for us. I think it's the broader shift into T&D from power gen that's contributed. Okay?
Okay. Then on your acquisition pipeline, I am just wondering if that is skewing more power or electrical.
Yeah, we're seeing opportunities, Chris, in both. If you looked backwards, we've had a skew towards power over the last five years or so. As we look forward, we're seeing opportunities in both segments.
Okay. Thank you, Bill.
Okay, thanks.
Your next question comes from the line of Deepa Raghavan of Wells Fargo. Your line is now open.
Hey, good morning, all.
Hey.
A couple questions for me. Hey.
Yeah.
First one, did you benefit from storm activity this quarter? If yes, can you quantify that for us? I was also thinking on Aclara coming in flat, is that something what you'd expected, or was that slightly below what you're expecting?
Well, first on the storms, there was no meaningful incremental impact. It's more of a normal level of storm activity that we saw. Nothing that was positive year-over-year. On the Aclara side, I think it was a little less than we expected, remember that last year we had some very significant growth, high double-digit, 20%+ in some of the periods, the comps got a little tougher this year. I think there's also some projects that have pushed out a little bit to the right. There's a whole lot of order activity that we expect to be coming online certainly in the next several quarters.
Got it. Thanks. My follow-up is on lighting. Can you provide us your general thoughts on Cooper Lighting sale to Signify and what this perhaps could mean to lighting assets such as yours? If you can help us parse some of the competitive merits or demerits, that'll be helpful. Secondarily, how are you thinking about your timeline to fill in the lighting vacancy? Thank you.
Well, I think the merits and pros and cons of Cooper Signify would have to be addressed by them. They're the ones doing it. As we look at, from my history in the market, I think there's been a lot of churn throughout my 14 years, and it's not clear that all of it has resulted in the positive impacts that are intended. It's a tricky industry. I think there's dynamic that sometimes suggests that in some places, bigger isn't always better unless executed well. With any large transaction like that, I put that in the category of large, I think it's all about the execution. We feel very good about our position, our position in the market, our position with our technology and product development. We're always paying attention to what's going on from a competitive situation. Hopefully that answers the first question.
The second question around the timeline, there's no timeline that I can commit to. We evaluate candidates, internal candidates, as well as Jim's in position, and we expect he's gonna be doing a great job, so I don't think we're gonna miss a beat as we're going through this process. Okay?
All right. Thank you. Good luck, Jim. Thanks.
Thanks.
Again, that is a star one for questions. Your next question comes from the line of Josh Pokrzywinski of Morgan Stanley. Your line is now open.
Hey, Josh. Not.
Josh, we can't hear you. You may be on mute.
We'll just take the next question, operator.
Understood, sir. Your next question comes from the line of Nigel Coe of Wolfe Research. Your line is now open.
Morning, guys. This is Michael-
Morning, Nigel.
in for Nigel.
Yeah.
Hey. Just touching up on the implied 4Q guidance, could you talk about some of the moving pieces inside the segments? Just looking at normal seasonality, it seems like a bigger drop-off than usual. I just kind of want to know what your thinking is that's driving that.
I think one of the pieces is the pricing and how that layered in over last year. As we get to fourth quarter, we're anniversarying some of those increases, and so you kind of lose the lift that comes from that. On the lighting side, we are anticipating some of that. We were down mid-single digits in the third quarter, so we're anticipating some of that continuing into the fourth. Strength in the rest of electrical, and certainly, as Dave was saying, continued strength in the power side.
Got you. That's very helpful. On Aclara, just looking at the backlog, does that provide more clarity and visibility into 2020? Or were customers hesitant to spend in the quarter and that got pushed out to the right?
Yeah, no, I think, we've got two concepts, right? A backlog, which is even nearer term, and then a pipeline. We're finding there's even a little bit of gray in between those as part of the pipeline starts to become very close to backlog, and that's where we start to see that some 2020 volume's coming in. It is lumpy by its nature of kind of large customers putting in large orders. If your question is there visibility to that? There is, and we feel confident about the forward look there.
Okay. Makes sense. If I have time for one more, just speaking of the kind of sell into sellout, what are you guys hearing from channel inventory levels from your customers and the inventory drawdown from customers that we saw earlier this year? Is your perspective that that's mostly over? Do you expect it to continue into the end of the year?
I would say that the meaningful amount of it is over. I think there are certain customers that we've heard are still working off some of their inventory. We're not expecting that to have a significant impact. You'll find some, at least we have found some distributors who still have some inventory to work off. The vast majority, I think, have gotten to the level that they want to be at.
Makes sense. I'll leave it there. Thanks for the help, guys.
Your next question comes from the line of Justin Burgener of [GU Research] . Your line is now open.
Good morning, Dave. Good morning, Bill.
Morning.
First off, I want to ask about power margins. They remained very strong in the quarter. I guess they were even up a little sequentially. How sustainable is that? I know you have seasonality and some timing of price cost, but did that sort of exceed your expectations and what can we expect going forward?
Yeah, I think it did not exceed our expectations. We had both volume at the legacy power systems products, which those dropped through with attractive incrementals. We also had price-cost favorability. Continuing that price-cost favorability, I think, is the essence of your question where that will start to flatten out some of the pricing comps, for example, in the fourth quarter get harder. That probably is offset by maybe easier raw material comps. How that plays into next year, we're sort of hoping we can hold on to some of that benefit, but hard to have the same, as you noted, sequential quarter-over-quarter kind of walk. I think the other driver ultimately of power margins will be from within Aclara, and as the previous question, talking about some of that project pipeline and the more AMI kind of richness that can come through.
Dave highlighted in his opening comments some of the AMI advancements on some piloting within IOUs as well as some larger deployments inside of the co-op world start to suggest as that margin richness comes, that would help power margins as well.
Great. One clarification question, if I may. In terms of your revised guidance, are you absorbing some additional headwinds in terms of either tax restructuring or divestiture?
Yeah. The tax is the same as we thought. The restructuring is the same as we thought, and we are absorbing the lost OP of our divestiture, yes.
Is that like $0.05 or something in the order of that?
Yeah, that's a good ballpark.
Great. Thanks for taking my questions.
Okay.
Sure.
The next question comes from the line of Steve Tusa of JPMorgan. Your line is now open.
Hey, guys. Good morning.
Morning, Steve.
Just on the free cash, I know you guys kind of reaffirmed the long-term targets, but it seems like you guys are obviously doing pretty well against that. I missed the beginning of the call, so I'm not sure if you kind of clarified. Is there anything kind of unusual in the base this year that kind of reverses it all? It just seems like you're really kind of close to the long-term targets, even though you're not quite there yet from a timing perspective.
I think what you missed is that we feel good about this year, and you're right, we are. We've been focused on trying to get ahead on those long-term targets. I wouldn't say I'm ready to advance those long-term targets, but if we can continue to do what we've been doing, we certainly think there should be upside to those targets as well. That remains to be seen. We'll have a better insight into that with another quarter behind us when we close out this year and see exactly how this year closes out. Certainly, the things that we've been doing that are driving the focus that we've had on it, I think, are leading us to where we want to be.
Any major influences yet from the supply chain initiatives that you guys have been talking about? Or is it kind of too early to see the fruits of that labor?
No, I think you've seen, Steve, you've seen our inventory days improve, which I think is a direct result of that. To Dave's point, the way we're modeling next year, we're seeing a continued step-down and improvement in inventory days. I think that feels like it has legs to it to help drive, as you've mentioned, the long-term target.
Right. Okay, great. Thanks a lot.
All right.
Thanks, Dave.
Again, that is star one for question. You have a follow-up question from Christopher Glynn of Oppenheimer. Your line is now open.
Thanks. Taking the follow-up. Just wanted to go back to the kind of preliminary 2020 comments. Dave, did you suggest that both segments are positioned for some positive margin trends next year over 2019? Granted, if the economy doesn't fall off a cliff.
Well, certainly the easier one to say there's got to be positive is on electrical, just because of some of the challenges there, particularly on Lighting. I think Power can continue to power through it. They're at high levels, but certainly we see the opportunity for those to continue to grow. Our objective overall is with our focus on margin as well as growth and cash generation, that we're going to continue to improve on those.
Thanks again.
Okay.
We have a follow-up question from Justin Bergner of Gabelli Funds. Your line is now open.
Great. Thanks again. If I do the math on the lighting down mid-single digit, that would suggest, I guess, that the commercial, industrial, and construction energy sort of combined were up 3% organic. Am I sort of in the right ballpark there, and are you actually doing better than your end markets? That would seem to be a little bit better than your end market view, even if we maybe X out the lighting piece.
Your math is good, I think when we consider the end markets, we're incorporating some of the lighting into that. It feels like our products and brands are doing just fine. I'm not sure that I would say there's a ton of share gain or outperformance. Dave made reference at the top to some new products that have done well, some new introductions. I'm not sure I'd note any great share shift.
Okay, thanks.
Again, that is star one for questions. No further questions at this time, presenters. Please continue.
Thanks, operator. Thank you for joining us today, and I'll be around all day for follow-ups if anybody needs us. Thanks.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.