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. 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 Inomirato. Please go ahead, sir.
Thanks, J. P. Good morning, everyone, and 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 Q3 results for 2019 this morning.
The press release and slides are posted to the Investors section of our website atwww.hubbell.com. Please note that our comments this morning may include statements related to the expected future results of our company and are forward looking statements as defined by the Private Securities Litigation Reform Act of 1995. Therefore, please note the discussion of forward looking statements in our press release and 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.
Okay. Thanks, Dan. Good morning, everybody. Thanks for joining us just to discuss our 3rd 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 3 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. And 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. And we'll talk about that in a couple of 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 Q4 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. See, we also completed the divestiture of the Hayfley high voltage test business in the quarter, and recognized a gain, that we've adjusted out, of results. I'd 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.
And 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. But we have solid visibility into continued strength in our power business in the Q4, and we're executing well on margins across the portfolio. It 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 1 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. Berndu 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 Solid State Lighting Magazine for best retrofit for the lighting design for the Duke Ellington School of Arts in Washington, D. C. It's the 4th consecutive year Hubbell Lighting's won this award. They also had 4 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. And 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. 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 at as 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. Good 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 4 of the overall results. You'll see that we generated $1,200,000,000 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. It was really driven by a very solid performance on the price cost side.
Adjusted EPS of $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. And for free cash flow, $151,000,000 generated, which has a year to date increase for the 9 month period of 16% on cash flow. So 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 in electrical areas are benefiting from that. And 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.
So utility facing area where conversions to gas have been increasing and the MRO spend to upgrade and strengthen the infrastructure continues to drive impressive growth there. As well as across transmission and distribution of electrical side. We're seeing grid hardening and projects on transmission side, including renewables. So 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. And then 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. So the good diversification across that portfolio of end markets delivered us 3% organic growth, helped by some strong pricing.
So let's how does that sales translate down into operating income? Remember 2% sales growth. Now you see here 4% OP growth to $190,000,000 of adjusted operating income, a 30 basis point margin expansion to 15 point 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, dollars 2.34 The increase in OP you see on the left being absorbed by 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 Q3 of last year. So let's take that enterprise performance and unpack it into our 2 segments, Electrical and Power. And starting on Page 7, we'll cover Electrical. You see sales of $689,000,000 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. And as that translated into operating income, you see $96,000,000 13.9 percent margin. 2 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 2, the price cost positives would have offset the lower lighting volumes to have margins be flat in Electrical for the quarter. On Page 8, we'll transition to the Power segment, which you see had a really nice performance in the quarter.
Net sales grew 5% to $515,000,000 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 $95,000,000 up 160 basis points to 18.4%.
You're seeing both strong volume and good price cost, So really attractive incremental drop through on the volumes there. Page 9, 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 and remind everyone, we had started the year with 58 manufacturing facilities and about 11,000,000 square feet. We've got 10 projects underway that will take about 500,000 of 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 2 foundries into a big 20 fourseven operation, moving out of a high cost Northeast location into Puerto Rico and another couple of regional consolidations, 1 in our harsh and hazardous business, 1 in gas distribution. So 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 Q4 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 4th 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. And of note that we think those footprint actions really help pull 2 important free cash flow levers, which is a high area of focus for us. Number 1, we're taking out fixed cost and that allows us to enhance margins and increase our income.
But 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. So we're really looking to have free cash flow outstrip our earnings growth and you'll see 16% year to date. We're trying to get to you recall last year we did $420,000,000 trying to get next year 2020 to the $500,000,000 that we promised you. So the $460,000,000 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. So operations really helping us drive free cash flow.
Also wanted to comment a little bit on the portfolio actions that Dave mentioned at the outset, starting with divestiture of Hayflee, our high voltage test equipment business based in Switzerland. As you may recall, they made large impulse generators and transformer test systems. And we found that that business was non core with what we were trying for. They had atypical project sizes, which are 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. And so we found an opportunity where we think the business was more valuable to another player. And we're going to take the proceeds from that, which were $38,000,000 redeploy that into our next acquisition, which is in the power systems arena, to business that protects substation assets with tight fitting components that are fire resistant. It's got a high margin, high growth profile. And so for balance sheet neutral, just redeploying those proceeds, We think that's a good portfolio move to make.
That acquisition has been signed, but subject to customary closing conditions. And so we're expecting either in late Q4 or early Q1 to close that. I'd say it also on the business development front, we've got a potential other acquisition that could close in the Q4. 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. So 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. Turning to Page 11. Let's talk about the end markets first on 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% to 3%. And as a result, we've tweaked down our growth expectations across a few of our electrical end markets. But 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, I think, 4% to 5%. It was 3% to 5% prior, closing in closer to the high end on better visibility.
The nonresidential still 1% to 3 percent. We talked about the softness in lighting, particularly on national accounts, but core nonres, we think, is still solid. Industrial now, 0% to 1% versus the 1% to 3% prior, and 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% to 1% versus 1% to 3% prior. Oil markets, I think most people know, haven't been recovering.
Rig count is down, and so we've seen that and we're taking that down a bit. And then residential, 0 to 1 versus 0 to 2 prior. We continue to expect modest growth, but a little more modest than prior. So if we turn the page and pull that together for our overall outlook, That market dynamic plus price, we expect sales growth of 3% to 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 Hayfley divestiture adds about 1 point on net, and 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 dollars to $8.10 based on our strong year to date results and the expectations for continued execution in the 4th quarter against what we anticipate will be somewhat softer market conditions, at least in the Electrical segment. And 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 9 months and what we see in the Q4. We feel good about our ability to continue executing on our working capital initiatives and generating good cash for shareholders. So if we turn to Page 13, we put this in a little bit of a graphical form. So we expect strong growth from core operations with some, what we call, nonfundamental headwinds from incremental R and R investment and the higher tax rate that Bill talked about.
So in closing, I think we all start to think about and talk about next year, 2020, and we're certainly committed to continue 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 multiyear period. As far as markets, we continue we see continued runway in our T and 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 are 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.
And we're confident in our ability to deliver differentiated results regardless of the macroeconomic, while continuing to position the company for long term success. So with that, let me open it up to questions.
Your first question comes from the line of Christopher Glynn of Oppenheimer. Your line is now open.
Thank you. Good morning.
Good morning, Chris.
Hey, I was just wondering a little bit more on the power fundamentals. You mentioned grid hardening and modernization. From a couple of other perspectives, wondering how much runway you're seeing with respect to maybe utility CapEx fundamentally shifting from power gen to T and D? And also besides that, is California starting to come into play prospectively?
Well, I think on the first part, I mean, I think that the shift from Power Gen to C and D has been a contributing factor and we expect that dynamic to continue. And that all is part of modernization, grid hardening, smarten the grid. On the second, on California, certainly there's been increased investment, increased intention 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. And so 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 and D from PowerGen that's contributed.
Okay?
Okay. And then on your acquisition pipeline, just wondering if that's skewing more power or electrical?
Yes, we're seeing opportunities, Chris, in both. If you looked backwards, we've had a skew towards power over the last 5 years or so. But 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 Deepar Raghavan of Wells Fargo. Your line is now open.
Hey, good morning all. Couple of questions for me. First one, did you benefit from storm activity this quarter? If they ask, 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. I mean, it's more of a normal level of storm activity that we saw. So nothing that was positive year over year. On the Aclara side, I think it was a little less than we expected, but remember that last year we had some very significant growth, high double digit, high 20% plus in some of the periods. And so 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. So but there's a whole lot of order activity that we expect to be coming online certainly in the next several quarters.
Got it. 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 would 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 SignifAI would have to be addressed by them. They're the ones doing 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 suggest that in some places bigger isn't always better unless executed well. So 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. So but it's always we're always paying attention to what's going on from a competitive situation. So hopefully that answers the first question. The second question around the timeline, there's no timeline that I can commit to. I mean, we evaluate candidates, internal candidates as well as Jim's in position and we expect he's going to be doing a great job.
So I don't think we're going to miss a beat as we're going through this process. Okay?
All right. Thank you. Good luck, Jim. Thanks.
Thanks.
Your next question comes from the line of Josh Pokrzywinski of Morgan Stanley. Your line is now open.
So Josh, we can't hear you if you're, 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.
Good morning, guys. This is Michael in for Nigel. Segments? Just looking at normal seasonality, it seems like a bigger drop off than usual. I'm just kind of wanted to know what your thinking is that's driving that?
Yes. I think one of the pieces is the pricing and how that layered in over last year. And as we get to Q4, we're anniversarying some of those increases. And so you kind of lose the lift that comes from that. And then on the lighting side, we are anticipating some of that.
We were down mid single digits in the Q3. So we're anticipating some of that continuing into the 4th and then strength in the rest of electrical and certainly as Dave was saying continued strength in the power side.
Got you. That's very helpful. And then 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?
Yes. No, I think we've got 2 concepts, right, a backlog, which is even nearer term and then a pipeline. And 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 some 2020 volumes coming in. So there does it is lumpy by its nature of kind of large customers putting in large orders. And so you do if your question is, is there visibility to that, there is.
And we feel confident about the forward look there.
Okay. It makes sense. And if I have time for one more, just speaking of the kind of sell in to sell out, what are you guys hearing from channel inventory levels from your customers and the inventory drawdown from end of
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, but we're not expecting that to have a significant impact, although you'll find some, at least we have found some distributors who still have some inventory to work off. But 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 Bergner of G. U. Research. Your line is now open.
Good morning, Gabe. Good morning, Bill.
Good morning.
First off, I want to ask about Power margins. They remained very strong in the quarter. I guess they're 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?
Yes, I think it was 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 Q4 get harder. That probably is offset by maybe easier raw material comps.
And then 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. And 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 up, 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?
Yes. So the tax is the same as we've thought. The restructuring is the same as we thought. And we are absorbing the lost OP of our divestiture, yes.
And is that like $0.05 or something in the order of that?
Yes, that's a good ballpark.
Great. Thanks for taking my questions.
Okay. Your next question comes from the line of Steve Tusa of JPMorgan. Your line is now open.
Hey, guys. Good morning.
Good morning, Steve.
Just on the free cash, I know you guys kind of reaffirm 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 at all? Because 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?
No, I think what you missed is that we feel good about this year. And you're right, we are but 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. But that remains to be seen, well, a better insight into that with another quarter behind us when we close out this year and see exactly how this year closes out. But 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. And to Dave's point, the way we're modeling next year, we're seeing a continued step down and improvement in inventory days. So 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.
Thanks, Steve.
We have a follow-up question from Christopher Glynn of Oppenheimer.
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. But 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. So our objective overall is to 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 G. Research. 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 and 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?
Because that would seem to be a little bit better than your end market view even if we maybe ex out the lighting piece.
Yes, your math is good. And I think when we consider the end markets, we're incorporating some of the lighting into that. So 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. There's been Dave made reference at the top to some new products that have done well, some new introductions.
But I'm not sure I'd note any great share shift.
Okay. Thanks.
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.