Maria Lee - VP, Corporate Strategy & IR Dave Nord - President and CEO Bill Sperry - SVP and CFO.

Christopher Glynn - Oppenheimer Steve Tusa - J.P. Morgan Rich Kwas - Wells Fargo Nigel Coe - Morgan Stanley Jeff Sprague - Vertical Research Mike Wood - Macquarie Securities.

Good morning. My name is Nicole, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Hubbell Incorporated Second Quarter Earnings Call. All lines have been placed in mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session [Operator Instructors].

Thank you. Ms. Lee, you may begin the call..

Thanks Nicole. Good morning everyone and thank you for joining us. I’m joined today by our President and Chief Executive Officer, Dave Nord and our Chief Financial Officer, Bill Sperry. Hubbell announced its second quarter results for 2015 this morning.

The press release and earnings slide materials have been posted to the investors section of our Web site 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 therefore forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995.

Therefore, please note the discussion of forward-looking statements in our press release, and consider it incorporated by reference into this call. In addition, comments may also include non-GAAP financial measures. Those measures are reconciled to the comparable GAAP measures, and are included in the press release and the earnings slide materials.

Now, let me turn the call over to Dave..

first, just a few comments on the electrical segment leadership announcement that we had in May. Soon we’ve all seen that but it’s my chance to talk about that a bit more. Two thirds of our business is in the electrical segment. And that has been and continues to be led by Gary Amato, who is the Executive VP of that segment.

But in the ongoing development of leadership for the future and to get more organizational focus on some of the businesses, we elevated three of our senior executives into Group President position; Kevin Poyck, as many of you have met over the last couple -- some of our investor meetings, taken over as a Group President of the lighting business.

And all reports, internally and externally as I travel, are very positive around the tone and energy around that business.

Rodd Ruland has taken over as the Group President of the Construction and Energy businesses, which included the businesses that he had been running since the acquisition of Burndy, and the businesses that were added to the connectors grounding and tooling business through acquisition. And he’s now taken on the Harsh & Hazardous businesses as well.

And lastly Darrin Wegman taken over as Group President of the Commercial and Industrial. Darrin, many of you might be familiar with from his days in finance as the corporate controller, more recently he was the President of the Wiring Systems and Industrial Businesses.

And so now he has taken on the additional responsibilities for the Commercial Business to Commercial Construction Business, largely under RACO, TayMac and our most recent acquisitions.

So, all-in-all, a very good transition, a very good senior team, very experience team and I'm confident that this team is going to be able to lead us well into the future successfully. The last item is just on restructuring and our related costs, obviously a lot of activity.

You recall we started the year with an expectation and guidance of investing $0.25 in those activities as the -- and that we have spent $0.24 of that so far this year $0.19 in the second quarter. And I'm pleased with the level of activity and the level of actions that are being identified, being evaluated.

But so far this year, we’ve exited seven facilities and that’s a broad cross section of manufacturing, office, distribution centers and generally smaller facilities. But that’s where some of overhead costs get hung-up in those smaller facilities.

Unfortunately, we've also had to initiate actions that are expected to impact, at this point, more than 250 positions. We never like to do that. But when the market conditions don’t support the level of employment activity, we have to deal with that.

And we’re also making progress on our back office streamlining activities to drive more efficiency and more aggressive productivity. So I think all of that, between the leadership changes and our focus on -- aggressive focus on cost and restructuring, I feel very good that we’re positioning for future profitable growth.

So, with that, let me turn it over to Bill. And he’ll take you through some of the details of the quarter and year-to-date results..

Thanks very much Dave. Good morning everybody, appreciate you joining us here. I'm going to use this slide that Maria referenced at the beginning of the call, and I’ll use the page numbers to help guide some of our discussion and some of my comments. I'm going to start on page four, which is where Dave had left-off.

And he mentioned some of the leadership changes. I think you may have met a couple of these new leaders at a variety of our investor days over the past couple of years. But, we also are intending to get a couple of them in the ordinary course to various public conferences and et cetera.

So, I hope we'll see you on the road over the next few months and you’ll get a chance to meet some of those leaders that Dave was referencing. Couple other comments may be on the restructuring that Dave mentioned. I think first-off, you're going to see mix used a lot in our discussion and the right tool to get at mix is getting the footprint right.

And so those seven facilities that Dave mentioned, 90% of that spending in that area has been in the lighting group, which is really trying to pull-up other margins, get their cost structure as comparative as possible.

Some of those facilities exited in places like New Jersey, California and in Illinois, it’s a larger scale and better cost facilities. And on the positions that Dave mentioned, clearly, about 60% of those are in areas of industrial facing and Harsh & Hazardous facing of businesses.

So we think we’re applying the right tools to the right areas in implementing some of the restructuring actions that Dave was describing. So let me switch to Page 5 and get on to the sales description. As you can see, 2% sales growth, where essentially the FX absorbed the organic and the net growth was really driven by our acquisitions.

We had about -- we had five different deals contributing, three of those were in the Electrical segment and two in the Power segment. I like the balance of that showing that our investing is across the Board.

I think that’s a good illustration of how our business model allows inorganic growth to help us overcome sluggish market as well as FX headwinds that are out there.

As far as the organic story, the non-res markets have been growing quite consistently throughout the year, and also consistently across the different business that we have exposure to non-res. So, the green color is a good characterization that you see there for non-res. The industrial side is where we’re facing some challenges.

Harsh & Hazardous, in particular, we’re all watching rig counts and know those are down over 50%. The spending on mines and wells is down very significantly. The nature of our Harsh & Hazardous business, just to remind everybody, it’s about 50% international, 50% domestic, about 80% up-stream and about 60-40 project versus MRO.

And that I think is very important characteristics of our business and how the market changes will impact ultimately the sales volume there, which we’ll talk about. On the utility side, we’re seeing quite flat activity from our electric utility customers and distribution transmission. And on the resi side, we still see some growth there.

I think, interestingly, we always have three contributors there between single-family, multifamily and renovation activity. And I think we’ve seen a little bit of a switch from dependence on multifamily towards single-family in terms of driving the growth there.

And secondly, amongst the single-family, an interesting trend towards some higher value units, rather than purely at the entry level. Turning to Page 6, and talking about our margins.

I am going to use a consistent convention that we adopted in the first quarter, which is to use adjusted margins and basically add-back the restructuring and related activities that Dave had described earlier in order to make the comparisons more transparent and easier to get to the operating changes for the business.

So, at the gross margin level, you see a 60 point decline year-over-year to a 33.6% level. Mix was the largest driver there. Mix actually drove more than that decline. And net favorability, between price cost and productivity, helped partially offset some of those mix impacts.

On the S&A side, you see a slight dollar tick-up, driven by the dollars involved in the three acquisitions we brought on earlier this year. But as a percentage of sales, you see an improvement there to 17.3%. 7, we drive those two gross and S&A drivers down to the operating profit level.

And you see $142.5 million of OP earned by Hubbell in the quarter, at 16.3% margin, a decline of 50 bps driven by, largely the gross and offset a little bit by the S&A that we discussed. On page eight, we talk about -- show our other expense lines being up, which is really a function of the FX losses that we experienced in the second quarter of 2015.

The payers that heard us the most here was the Swissy Canadian dollar and €3 and €4, and British pound. All-in FX hurt us about a nickel in the quarter between the three areas of translational transactional, and this non-operating area, so significantly headwind from FX for the Company in quarter.

Another implication of the mix that we were describing is some of our industrial, in particular the Harsh & Hazardous businesses is down are that 50% international component of Harsh & Hazardous causes a mix impact on geography for us driving more of our earnings back to the U.S., and drives our tax rate up.

We had a discrete item in the quarter, involving the initiation of a legal entity merger that drove some downward movement in the rate. And that 230 basis point improvement was more than driven by that discrete item.

So that geography mix would have created actually a natural run rate headwind for us in the quarter of a higher, slightly higher tax rate. Moving on to Page 9, the results of all those is the net income number here of $91 million, a 1% increase.

And the EPS, as Dave mentioned of $1.56 is up 3%, so that’s more than the net income number, the growth rate because of the fact that our share count was lower.

And between the activities we've done in the fourth quarter of last year and early this year, we have a share count of about $1.4 million fewer shares, which helped increase the earnings per share there. So, transition now to breakdown into segments. And I'm on Page 10, starting with Electrical.

So you see quite flat sales for us in second quarter in Electrical with $615 million of sales, quite flat organic in the acquisition growth of 2% was absorbed by the FX headwind. Three deals within the Electrical segment were contributing to that inorganic growth rate of 2%.

And the flat organic is slightly misleading in the sense that we had some businesses up very strong and some down quite strong. On the downside, we had Harsh & Hazardous down approximately 20% in the quarter.

And our industrial facing businesses down towards double-digits is well, versus on the positive side, our course C&I lighting brands grew double-digits and our commercial construction, that Dave had described, Darrin leading for us, up double-digits as well. So, the flat organic is really a result of big ups and big downs netting to flat.

And that helps drive our operating performance down a 130 basis points to see the 14.3% there. The mix headwinds from the very strong margins we enjoy in the Harsh & Hazardous and the Industrial Businesses compared to the softer margins in C&I lighting and Commercial Construction, help drive a significant headwind coming from mix.

Price cost productivity was unfavorable all-in net. We had some good productivity there but we had to invest a little bit of price in this segment, and that caused the net of those to be some slight headwinds. So, a challenging quarter for Electrical segment, given the dynamics in industrial and Harsh & Hazardous.

On Page 12, switching to the Power segment. You see very strong performance by our Power team in the quarter. You see much more balance between organic growth and acquired growth, 6% up all-in to $259 million of sales. And you'll see, on the performance side, a very strong margin performance at 21.1%, and very nice incrementals being earned there.

You had favorable price. You had favorable materials. And you had strong productivity overcoming cost inflation. The fact that you had, both price and materials favorable, I think make some of that improvement level and incrementals very difficult to sustain, but still very strong performance for the Power team in the quarter.

On Page 12 we switch to free cash flow for the quarter, where we had some good generation. We had more efficient working capital in Q2. The investment that we required in inventory was essentially financed by payables, and we did better in receivables. On the other side, we had some timing differences.

And you see CapEx was higher in the second quarter but that’s due to the productivity investing that we did, which has great returns. And again, largely driven by the lighting group’s footprint realignment was a big driver of that CapEx and great returns on that spending.

Now, I'm going to switch, as I get to Page 13, to the year-to-date half-time results for Hubbell. And you see sales there of $1.684 billion, a 4% increase. That’s comprised of organic 2% growth, being offset by 2% FX headwinds. So the net of four is all driven by acquisitions.

You see the adjusted OP margins at 15%, an attractive level, 40 basis points lower than prior year. And again at the tax rate level, you see it lower than prior year because of the discrete item we talked about in Q2. But it naturally would have been higher than last year without that item based on the geography mix.

And at half time we've reported now $2.68 adjusted EPS per share, an increase of 3%. So breaking down for the segments, Page 14, we’ve got the Electrical segment. And you see that the trends that we experienced in the first half are quite similar to what we described in the second quarter. You have FX headwinds absorbing the organic growth.

So the net growth of 3% of sales is all driven by acquisitions. And we have this similar spread of strong performing businesses in Commercial Construction and core C&I Lighting, both double digits for the first half versus Harsh & Hazardous down about 16% in the first half, and the industrial businesses combined down mid single digits.

So, the same mix weakness coming out of those dynamics drove a 120 basis point margin decline to $154 million and 13% of sales. And again, similar dynamics on price cost productivity for the first half of the second quarter. The Power segment, also similar to second quarter had balanced between its organic and acquired growth.

Adding up little bit of FX headwind to 7% net growth, $499 million of sales. And the performance again very strong increments, 130 basis point increase to 19.6% for first half OP margins. Favorable price, favorable materials again, so similar dynamics on price cost productivity.

The acquisitions, as they typically do for us, have a slight drag in year-one when we have it. Year-to-date cash flow on Page 16. Again you see the D&A number up. Thanks to the acquisitions and CapEx we’ve been doing, again, the more efficient working capital. The other you see, we made a pension funding in the first quarter.

And the CapEx is larger, thanks to the productivity investing that we’re doing. So our capital structure on Page 17. You’ll see compared to year-end balance sheet, we’ve got approximately $200 million less cash than we closed the year with.

And just to remind everybody, approximately $125 million invested in acquisitions, about $75 million returned in the form of share repurchases to our owners, about $65 million paid-out and dividend and increased CapEx. So you see a lot of, both investing and return of capital, driving those cash balances down.

But balance sheet is still obviously well positioned to invest aggressively as we go forward here. So that concludes my comments on the quarter and the first half. And I’ll ask Dave to share his thoughts on outlook with everybody..

Okay, thanks Bill. I am on Page 18 first. Let's talk about our view of the end markets for the year. I think there is a lot of consistency to what we saw in -- as we reported after the first quarter but with a few changes.

I think starting with the utility side, that’s going to continue, we think to show slight growth with the telecommunication side, helping to support that. The residential market, we think it's going to be a little bit lighter than we thought three months ago.

I think that’s consistent with some the third-party forecast that we’ve seen, although they haven't come down all that much. But remember that we were probably on the high end of where some of those started.

And I think that, certainly there’s signs of activity that will bode well for next year when you look at permits, but certainly not going to impact our volume in the second half of this year to any great degree.

The non-residential market continues to be solid, maintaining our outlook down at 5% to 6% although, to be clear, there is certainly a lot of diversity in that market. As Bill reported in our commercial construction business up double digits, and so in the commercial side of the non-residential, very strong.

On some of the industrial side; institutional, little weaker and so -- but on balance, that 5% to 6% is still very solid. The industrial side is where we’ve seen most of the weakness throughout the year. Recall, we started the year with an assumption of that being up 3% to 5%. We saw some early weakness and indicated that could be down 2% to 4%.

And even subsequent to that, we saw even more weakness. And so our outlook now is more in the 0% to 2%. And I think even there, there is diversity in that market, so it's not a case of every part of that market. In fact, some are very solid. You look at the auto activity and that industrial space is still very solid.

Besides that, there is more impacted than you see it and market participates who are manufacturing the related products that support the oil and gas industry, whether it's pumps and wells flow goods, that’s where there's a lot more weakness and where we’re selling into those manufacturing industrial sectors that’s what we are seeing.

So that’s where we at the zero to two in industrial. And then Harsh and Hazardous seems to, at least at this point, have stabilized for us to maintain our 20% to 25%. Recall that we were out early at 15% to 20% and then quickly saw that that was inadequate and moved it 20% to 25% back in May. I think I spoke to some of you, spoke in some conferences.

And we are concerned because are seeing some of the order rates even drifting worse. I think that’s stabilized and that certainly has been a positive for the second quarter. But at the same time, it’s certainly not positive for the rest of the year and that all with stabilization we believe could be attributable to oil recovery to the $60 level.

As it drifts back down to the $50 that creates some uncertainty. And so we're just going to monitor that very closely. So, when you put that altogether, we think that the end markets as we serve them are going to be flat in aggregate.

Turning the page fifth to the how that impacts our statements I think on the power business, which is about a third of our business. We still believe that they will be up in the 5% to 6% range with acquisitions contributing about 4%; currency be in a point drag; and the rest coming from organic growth.

The big impact on our outlook is on the electrical segment where we previously were thinking that would be in the 6% to 7%; now we're at 2% to 3% and a couple of things. Obviously the continued growth in a construction market helps that; Harsh and Hazardous has certainly been consistently and predictably down at least 20% to 25%.

It’s a combination of the lower industrial and the acquisitions being a little bit lighter as some of the acquisitions that we anticipated that were in the pipeline either didn’t come through or have pushed to the right. So overall, we see the overall sales increase of 3% to 4%.

So turn the page to how that comes together in our overall outlook on page 20. So, we've got our net sales up 3 to 4 with acquisitions up and end market flat.

More importantly, our earnings guidance for diluted share on a reported basis is now anticipated to be $4.95 to $5.15 that includes of increase in our restructuring and related costs from what had previously been our guidance of $0.25 to $0.45. So that gives us adjusted earnings per diluted share of $5.40 to $5.60.

From that restructuring, we're expecting incremental savings this year and certainly more next year. I think the other part of our guidance adjustment and a more frustrating part from my standpoint is that the markets have been weaker in some areas than we anticipated.

As I said, we think we did a pretty good job on the Harsh and Hazardous early on, but what has impacted us more is the secondary impacts in both the industrial sector, supporting the oil and gas business and as well pockets of non-residential construction in those geographic areas that were heavily dependent on oil and gas.

We’ve talked about that before, think about Texas, Oklahoma, South Dakota, we had a big concentration of product sales into those general economic markets that are feeling the broader impact of the lower oil and gas. So, we're dealing with that and that’s going to cost us $0.20.

And so that’s the bad news from my standpoint, the good news is the attention, the energy, the action that is going in that the team, particularly the operating leadership is focused on taking the actions to make sure that we’re doing all we can to mitigate those costs in the near-term and continue to set ourselves up for future profitable growth.

So, not what I like to do but I'm certainly pleased that we’re taking the actions to address what our market conditions that we just have to deal with. I think we continue to expect to have free cash flow, good free cash flow generation that we'll continue to deploy on acquisitions and share repurchase.

And we are anticipating share repurchase through the rest of the year at $150 million which will be about double what we've done so far this year and of course that subjects to market conditions; we could always do more but we expect to do at least that level before the end of the year. So, all that, given you a lot.

Let me stop there and open it up to questions..

[Operator Instructions]. You're first question comes from the line of Christopher Glynn from Oppenheimer. Your line is open..

Just wondered Dave, if you could elaborate on your comment that you had to invest in price at the electrical segment and may be specifically within Harsh and Hazardous, what is the pricing dynamic and any other areas of -- where price is getting kind of interesting?.

Pricing is always interesting. I would say, overall pricing was negative. There is certainly some pockets that we are happy that there is a little bit of either price opportunity or price stabilization. To-date, we haven't seen any major price pressure.

But that’s one of the risks as we look ahead but I think the industry to-date in just about all of our market has been relatively disciplined. .

Okay..

Just one thing I want to add on that Chris, just for Harsh and Hazardous specifically. I think we are seeing more pressure on pricing on the project side versus the MRO side..

And what's the range of your lead times on the project side?.

It depends on the project but generally 6 to 12 months, some are longer and so that’s a little bit of what is providing some support through the rest of the year.

So, the issue will be -- and similar to phenomenon we had several years ago on the utility side where you had transmission projects, a lot of strong growth in order rate, but then didn't translate into projects initiating, so project releases, so it creates a lot more volatility in the reported results.

That’s one of the challenges as we look forward and I would say that’s something that we are monitoring very closely to assess what the implication of that could be in 2016.

Obviously, I’m not getting into 2016 outlooks but that’s one area that we felt we were ahead of it in January this year and we want to make sure that we are head of it even before January of next year.

Okay?.

Yes.

And any way to characterize the magnitude of pressure on what's wining project bids right now?.

There really isn't a way to size that because there is a lot of variability depending on markets where there is activity, where there is high demand, where there is competition. So it's not-- there is no simple way to do that..

And then I haven't heard anyone to call out telecom strength in a recent memory.

Are you just kind of penetrating some markets there?.

Yes, I think that you’ll recall Chris, we did a couple of acquisitions a few years ago. And recall that our power segment and we refer to them as utilities, 90% of our revenues come from electric utilities but there is 10% coming from other utilities like telecom.

The enclosures that we make that hold some electronics and connectors are very common between phone companies, fiber build out and electric utilities. And so some of that infrastructures spend has been very favorable.

So, it’s a small piece of the business but they’ve had a good growth rate, good order pattern and good product line based on some of the acquisitions we’ve been doing for those guys there..

Your next question comes from line of Steve Tusa from J.P. Morgan. Your line is open..

Hi, good morning. Did you guys talk -- mentioned non-res institutional not being very strong? I am not sure if I caught that. And I know that Bill earlier this year you were talking about broadening out of the non-res recovery and certainly that’s been a big highlight of this earnings season in otherwise pretty poor environment.

So maybe you could just walk through the verticals and let us know if you’ve seen anything that is changed to non-res?.

I think if you start Steve with where we are exposed, right? We have non-res exposure in our commercial and industrial lighting business and we also have it in our commercial construction area that makes the RACO [ph] boxes that Dave was describing. And I think that if you broke it down, our first verticals cut is between public and private.

And on the public side, we’ve seen a very nice stabilization over the last couple years. I wouldn't call it exciting growth but it has stabilized, may be growing just slightly. And I think some of the strength we’re seeing vertically there, Steve, is from the transport side.

And on the private side, I would say the two -- where it is growing much stronger, I would say we’ve seen the best pockets coming from commercial and office as well..

And as far as exiting the quarter and what you guys saw, how do things kind of trend through the quarter, it seems like things were generally kind of in line with kind of the caution that you gave in May, but maybe just a little bit on the sequencing of the quarter..

Yes. I think right, what we saw in the quarter was in the middle of the quarter, we were communicating at that time, seeing some things that were concerning that have continued would have been -- would have made for a much more difficult quarter.

I think some of that started to recover particularly on the Harsh and Hazardous businesses, so that was a positive and that give us. Had the mid quarter trends continued, I think we might be looking at 25 to 30 versus 20 to 25. So that’s the feature.

I think important note is the thing that is most challenging and somewhat unique I would say against our normal seasonality is that our -- we're not anticipating the strength in the third quarter that you would typically see in a construction season.

So, it ends up being -- and that’s what we're dealing with as we're looking at our revised guidance in the second half. Big part of that impacts the third quarter certainly relative to what we would normally see..

Why are you guiding that way? Why is it so poor relative to normal seasonality?.

Because particularly that’s where we are seeing the pockets of impact against what we have anticipated and what we've historically seen around, particularly around the industrial side..

You stepped up the restructuring this year.

Are you pulling some forward from next year or do we think that kind of -- does that go down a more sustainable run rate; is this kind of a big two-year program that you're going to run through; how do we think about restructuring in ‘16?.

I think this is -- simplest way to think about restructuring in ‘16 is they'll be more. At this point I would say it should be -- it's likely to be about half but it could be more of what we have this year.

So, if we do 45, we should be assuming 20 to 25 next year just because of I have got lot of projects that have been put on the list for acceleration which is the good news but they require a lot of evaluation and importantly an assessment of our ability to effectively execute that. So that’s one of the dynamics.

I could see some of those potentially sliding into the latter part of this year because the organization is very focused on aggressively taking these actions, but only if we can execute them effectively and they have good returns..

I think Steve, you are shaping in properly which is a big effort this year, a large but smaller effort next and then should be starting to towards ‘17 get in to the repeatable annual level of activity..

Your next question comes from the line of Rich Kwas from Wells Fargo. Your line is open..

The follow-up on Steve’s question around restructuring.

So with oil and gas was $60 now it’s $50; is the business -- when you look at your oil and gas facing areas, is it size for $50 in oil, $50 barrel oil going afford or is there -- would there need to be more restructuring above and beyond to try to get back to the margin levels that you were enjoying before?.

I think here is more restructuring to do that’s why the list continues to expand. I think particularly one of the issues around the oil and gas in particular Rich is we were dealing with this late last year when you had a precipitous drop to 40; what's the long-term view of that and recovers to 60 and now 50.

Still a lot of question around does oil have recovered to 60, 70 or better, how long does that take.? And I think the longer that outlook seems to be, the more actions we have to take to get the core cost structure down. I’ve to be careful that you don't take it too far down if there’s going to be recovery because you’ve got to be able to respond.

So that’s a little bit of what we're doing. So some of the things that are on the list before evaluation fall into that category. If oil stays at $50 and we think it’s going to stay there or go lower for an extended period of time, there are more actions that we're going to take in that business..

So is that part of the 20 incremental for next year potentially or is that just the separate bucket?.

No that’s part of the 20 now. And if we don’t to take it, I'm sure there will be other projects that get teed clear up particularly when we look at our facilities..

So would you characterize the businesses being sized for $60 plus oil at this point still when you look at your….

Yes, I think that. It's pretty close to size of that. I mean I think there is still some areas but generally that’s right..

And then just on a residential side. So, is this -- you’ve seen good new construction activity lately, existing home sales coming in better, so you were more positive on it earlier in the year and now you scale it back.

So, is this timing or are you seeing something more specific to the market?.

I think it’s specific to the market where we had seen multifamily activity really being the engine on the train. And we still really like the single family dynamics which is kind of what you are describing. It is just that that multifamily is providing a little bit less as far as we see it. Our home builder clients are still positive.

And so, to us, this still looks a very good market area, very good opportunity that we are excited about. We’re just kind of refining numbers in pretty small increment here..

And then just Bill, on -- when you look at the -- you make reference I think either you or Dave made reference regarding the lighting business and trying to get the margins up. So, where are you in the process? You said the vast majority of the restructuring is around lighting.

So, how do we think about incremental as it relates commercial, C&I lighting and the other commercial businesses going forward? When do you -- it's always been discussed that kind of it's a below corporate average incremental margin but where do we think about when you start potentially could we get into kind of the corporate average incremental margin for that part of the business?.

Yes, I think the lighting team is doing a really great job. They’re doing a great job growing at what I think is better than the market and they are attacking this cost structure question.

So, I think what Dave outlined there as kind of a two-year increase in efforts, I would think by the end of that period because the lighting guys from a footprint perspective are really doing a lot of the heavy lifting there, I think by the end of ‘17 you are going to find they’re going to have a lower cost structure that I think will be visible in the margins, Rich..

But progressively, does it start to get better in ‘16?.

I mean it’s getting better already. Yes..

Your next question comes from the line of Nigel Coe from Morgan Stanley. Your line is open..

I thought I was going to be only one asking question on restructuring but I guess. So obviously the total [ph] is a bit more heavy on the facilities than we expected, seven is a big number. But I think you mentioned that may be there was 90 or so facilities across the overall footprint.

I am wondering what you see as the ultimate goal for the production over the next three or four years?.

We don’t a specific target on that Nigel but your recollection about roughly 90 is a good number. And I would say that you have to look at that and we look at it in terms of at least something like 20%, so 15 to 20 facilities over the next -- certainly over the next three to four years.

Again, keep in mind that as I had said, some of these facilities are relatively small; some of them have come through acquisitions and it takes time to get those under our belt to understand what they are doing in an consolidate them.

I think where we can start to get some momentum is as we close some of these facilities and move them into the larger facilities or large or more efficient, I think the organization is starting to recognize that operating an efficient facility gives you -- the reward is that you get to get more business which makes you even more efficient and more productive because you get more volume in there.

So I think there is -- I’m sensing a little bit of a race to demonstrate how efficient we could be, so then you become a receiving facility and kind of an existing facility, so..

It seems like you are little bit reluctant to commit to pay back dollar number, but if you think about obviously quick pay back on headcounts versus longer payback on facilities, overall should we think about sort of a two-year payback on the expense?.

Yes. I mean I don’t think you are detecting reluctant. I think the $0.10 this year and $0.30 next year is $0.40 on 50 and that’s little bit -- that’s less than two-year payback..

Okay..

Your right to differentiate between the building investing is a little bit slower and people pay back is quite a bit faster..

So I missed those payback numbers; that’s helpful. And then you mentioned mix and I think -- it seems like mix might be in the zone of about 100 bps for the total corporation. And I am assuming that the bulk of that’s within obviously electrical.

Is that the right way to think about it? And as we go to the back of the year, does the mix impact of more construction, less industrial Harsh and Hazardous, does that get worse or have we seen the peak impacts of mix?.

Yes, I think A, your math is quite good Nigel; B, I think you are thinking about it exactly the right way. I think as we -- we would love mix to be the fourth or fifth thing that explains our performance. And in a typical growth world where commercial were “outgrowing” Harsh and Hazardous and industrial, it would end up being quite a small number.

But when you have double digit growth in one and double digit decline in the other, it’s creating that order of magnitude that you described. So I think what's important to get mix back into the background is number one, have the Harsh and Hazardous and industrial markets return to more normal growth levels.

And then number two, as we were saying, as you were getting at all this building take out and cost take out to get the commercial businesses more profitable. And I think the combination of those two we’re hoping makes a small driver couple years from now..

And then finally on inventories.

Inventories look a little bit heavy, given the end market dynamics, is that a fair comment? And you are looking to take the inventories as we go for the back off?.

Yes, I think our days are up a little bit but I think we are being and trying to be thoughtful about where we are investing in inventories. So for example, there is areas of lighting where service and quick service, quick turnaround and quick filling of an order becomes important way to get volume.

And so, we want to make sure that we are capturing that double-digit growth and supporting that business with an increased level of inventory..

Your next question from the line of Jeff Sprague from Vertical Research. Your line is open..

Just one more quick clarification on restructuring. So your prior comment on ‘16 and in Q1 was that the ‘16 benefits would exceed the 2015 costs. I am not sure what you were expecting to actually get in ‘15 from the ‘15 action.

But it looks like may be the payback on the next $0.20 of work you are doing is lower or longer? Yes, can you just clarify that?.

Yes. So, the initial, first bulk of projects were returning about 25 of savings on 25..

Yes..

And now we are up to 40, right on 45. So that next batch of 20 million had a slightly lesser but still very attractive pay off. And as Dave is describing, I think you guys are doing a good job of asking around how to size what will happen in ‘16.

And I think the position Dave and I feel that we are very fortunate to be in, is Dave's over subscribed to his 45 this year and something like 20 to 25 next year.

So, Dave is in a position of getting the pick and choose between projects rather than how would we, is there a project to do? So that payback, I am guessing will continue to be very attractive but probably be -- continue to get a little bit slower than that first 25 on 25..

And just on lighting, can you give us just a little bit more overall color? I think you said core C&I was up double-digit, how did the resi business do? Where is the LED penetration? And just kind of the internal stabilization of the business, you’re doing a lot of restructuring there but you go everything kind of normalized relative to hiccup last year?.

Yes, I would say defiantly in terms of your first question about where the growth is around the business, I’d say resi is in kind of a mid-single digit level. Some of the national accounts businesses and specialized areas are not doing as well but the combined growth still very attractive.

And certainly the warranty expense experience is right in line with where we have expected it. So we are very happy that the lighting guys are doing such a nice job of growing in but I think they do have the challenge of doing some cost, some heavy lifting on their cost structure which they’re going after pretty aggressively..

I think Jeff, just a comment, obviously I said the lighting business is doing quite well. And one of the things that I was spending lot of time on with the lighting group as well as the other, the leaders, it’s trying to make sure that it’s clear than -- we have a culture that the bad news flows up.

And that we are not too optimistic and then subject to more surprise. So if there is problems, we spend -- Bill and I are spending a lot time with the operating team to make sure that we are getting them focused on. If there is a problem, the sooner we know about it, the sooner we can deal with it, the sooner we communicate it.

And so that's really important because I think that was one of the things we identified certainly in the past that there was something that just didn't follow up on a timely basis to be dealt with on a timely basis..

Makes sense, and how about the LED penetration in the quarter?.

Yes, so over of 50% and that feels like it’s come a long way in just a few years but still the adoption rate continues, Jeff..

Nicole, I think we will take our last question..

Your next question comes from the line of Mike Wood from Macquarie Securities. Your line is open..

First, quickly on industrial, I think you said you were down mid-single-digit year-to-date and looking for just slight growth or flat for the full year.

I was just curious is that largely easier comps in the second half or if you could just provide more color on what you are expecting sequentially?.

Yes, I think it's largely that Mike..

And then I really love to see that you [indiscernible] keep up with that worsening industrial backdrop which every company experiencing. I am just wanted the other item that you can control your balance sheet utilization, I think you just have over $100 million of net debt.

Can you just give more color on your patience there about the about capital and what's preventing you from being more aggressive with the buybacks?.

As you saw on our cash balances, we have put about $200 net of our balances to work. And as we look forward, you heard Dave commit to more share repurchasing which we think is a great use of our cash but I would say that our M&A pipeline continues to be an area of focus.

We had a couple of deals in the first half -- we got off to a great start by closing three deals in January. And we had a couple that I thought were very high likelies in the first half that ended up going away and that was disappointing but the pipeline going forward is extremely active.

And so I think we would love to put that cash in the balance sheet Mike as you’re describing to use on the acquisitions as well.

I just don't want to -- I mean we mentioned the share repurchases and I think we are committed to that but I didn't want to lose site of the fact that there is acquisitions out there, that we would hope to do in second half as well..

Great thank you. This concludes today's call. I’ll be available all day for questions and thanks again for joining us this morning..

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