Hubbell Inc Q3 FY2020 Earnings Call

Ladies and gentlemen, thank you for standing by, and welcome to the Third Quarter 2020 Results Call. At this time, all participants' lines are in a listen-only mode. Later we will conduct a question and answer session, instructions will follow at that time. As a reminder, this conference is being recorded. I would now like to hand the conference over to Mr. Bill Sperry, Executive Vice President and CFO. You may begin.

Good morning, everybody. Thank you very much for joining us. Usually, we have Dan Innamorato kicking off our call. Dan and his lovely bride decided to go to labor and delivery this morning to hopefully welcome their first child. So we are going to be joined instead this morning by Jason Pan. Jason is in his second year with Hubbell and he has been leading SPNA for us here and you may know his name or his voice from some prior roles he has had in Investor Relations, so Jay will get us started.

Thank you, Bill. Good morning, everyone. Thank you for joining us. Earlier this morning, we issued a press release announcing our results for the third quarter 2020. The press release slides are posted in the investor section of our website at hubbell.com. I’m joined today by our chairman, Dave Nord; our CEO; Gerben Bakker; and as you just heard, our Executive Vice President and CFO, Bill Sperry. Please note that our comments this morning may include statements related to the expected future results of our Company and our Forward-Looking Statements as defined by the Private Securities Litigation Reform Act of 1995. Therefore, please note the discussion of forward-looking statements in our press release and consider it incorporated by reference into this call. In addition, comments may also include non-GAAP financial measures. Those measures are reconciled to the comparable GAAP measures and are included in the press release and slide. Now let me turn the call over to Dave.

Alright. Great. Thanks, Jay, and good morning, everybody. Before I turn this call over to Gerben who is going to lead the earnings call, I want to just say a few words to close out my tenure as CEO and officially pass the baton on. You saw our announcement in the third quarter of our long planned succession process resulting in our Board of Directors naming Gerben as the next CEO of Hubbell. Along with the rest of the Board, I’m highly confident that Gerben will continue to build on a long proven track record of success at Hubbell and lead this company successfully into the future. Gerben has added a tremendous amount of value for Hubbell over the past 15 months in his role as Chief Operating Officer. He has been instrumental in continuing to shape our long-term strategy while also leading our operational transformation. You are seeing the results of those efforts come through in our recent performance. Gerben has also built a strong track record in his prior role, leading our power systems business, where he delivered strong financial results for our shareholders, strong operational and service results for our customers, and really strong performance-oriented culture among the employee base. He also played a critical role in building our utility solutions platform through the acquisition of Aclara. But Gerben knows his success, and Hubbell’s success, is really dependent on the strength of the overall team and certainly we have got a great team. I have to highlight that there are some really key people, one that you all are familiar with is Bill Sperry, who is a very strong financial and strategic partner and will continue to help guide Gerben to future success. I know I could speak highly from my own experience and knowing how valuable that role is and how valuable Bill has been in that. But we have also been active in developing new talent, both internally and externally in our organization at all levels, particularly senior leadership. You will recall our recent appointment of Pete Lau to lead our Unified Electrical Solutions Segment, as well as Alexies Bernard as Chief Technology Officer; and Katrina Redmond as Chief Information Officer. We also recently promoted from within Hubbell a long time very talented Sales Executive, Terry Watson, as the VP of Customer Experience. Of course, most of you have met Susan Huppertz over the last couple of years and know how much value she has added to our operational transformation. While I’m certainly going to miss being CEO of Hubbell and meeting with all of you every 90 days, I thought 61 times over the last 15 years is probably enough, but I’m proud of the leadership team we have built and I’m confident in Gerben and the rest of the team’s ability to lead Hubbell into the future. So with that, let me turn it over to Gerben to talk about our strong results for the third quarter. Thank you.

Great. Thank you, Dave, for the kind words, and I just want to add how honored I am to take this new position at Hubbell. Good morning, everybody. I have seen firsthand that what makes this company special are our talented people, our reliable products, and our long-term relationships with our customers. I look forward to building on the success that we have achieved under your leadership, Dave, and I’m confident that we have a bright future ahead. Moving to the third quarter, I’m going to start my comments on Slide 3 with a brief summary of another strong quarter of operating performance and free cash flow generation for Hubbell. We achieved high single-digit growth in our power systems business in the quarter. Secular grid modernization trends continue to drive the need for utilities to invest in critical grid infrastructure. We continue to differentiate ourselves in the space with our unique utility solutions platform, as well as our reliability and service. We anticipate end markets to remain supportive of growth. As expected, electrical markets remained soft in the quarter. We saw steady sequential improvement relative to the second quarter, but most end markets continue to see year-over-year declines, with a notable exception in our residential lighting business, which grew double-digits in the quarter, strengthened by e-commerce and retail channels. Our operational transformation continues to pay dividends with structural savings from the investments we are making in footprint optimization, and we continue to execute on price cost while benefiting from proactive cost control as well as more temporary lower operating expenses. We continue to generate strong levels of free cash flow with almost 30% growth year-to-date. This cash flow allows us to pursue a balanced capital allocation strategy and generate attractive returns for shareholders. In fact, we closed on a couple of bolt-on deals in October following the quarter close, high-margin businesses in attractive markets. We will talk a little more about them later in this release. Looking ahead, we are raising our guidance for the full-year based on strong performance in the third quarter and our higher levels of visibility through year end, particularly in our utility markets and the execution of costs. Let’s turn to Page 4 to highlight our results for the quarter. You can see organic sales declined 8% with demand for utility TND components in our power systems business remaining strong as our utility customers continue to invest to upgrade, modernize, and harden the grid. Outside of the power systems, we continue to experience project delays at Aclara and generally soft economic activity across most electrical end markets driven by the COVID-19 pandemic. Demand did improve sequentially in the quarter. Despite the volume declines, and similar to the strong operating execution we have demonstrated throughout 2020, we achieved another quarter of operating margin expansion. Our investment in footprint optimizations continues to pay off with attractive structural savings. We realized positive price cost across the portfolio and we continue to manage our costs across Hubbell as well as benefit from the more temporary lower operating expenses. From an operational perspective, we are managing through the challenges of the pandemic effectively. As an essential manufacturer, our factories are open and operational. While we experienced some supply chain disruption in the second quarter, these have been resolved, and we operated much more effectively in the third quarter. Our focus remains on protecting the health and safety of our employees while continuing to serve the customers with the products they need to operate critical infrastructure. Finally, you see another quarter of strong free cash flow generation. This cash flow not only supports our strong liquidity position but also gives us the opportunity to reinvest in the business and deploy capital to our shareholders. Bill will provide some more color on that later. With that, let me turn it over to Bill to walk you through our results for the quarter in more detail, and I will come back later to provide some insights on our outlook.

Thanks, Gerben. Welcome here to your next 61 quarters and good morning, everybody. I’m starting on Page 5 of the slides, you hopefully sound. You see the sales contraction of 8% that Gerben had highlighted. The good news for us is that it represents a sequential growth from the second quarter of about 17%, which was really good to see both a pickup in demand and also the smoothing out of supply chain disruptions that we experienced in Q2. Our operating profit is down 5% but up 60 basis points. I think managing to that 10% detrimental ballpark is a very successful execution by the operating team. You see the earnings per share only $0.4, less than last year at $2.30, despite 8% lower profit growth, but below the operating profit line, we had a little bit of favorability in non-operating as we had lower interest expense and paid off some debt. We also had some favorable tax, as our effective tax rate was about 22.3% in the quarter, comparing favorably to 23% last year, largely on some provisions returning favorability as some of the tax regulations got finalized and clarified. Also, I think, importantly, on the cash flow, you see the quarterly amount 10% below last year at 135 million. But the yellow box to the right indicates a 29% improvement year-to-date. We typically over the last five years have shown on average that the second half of the year generates about 70% of the free cash flow. So, typically, it is back-end loaded versus this year, which is turning out to be much more balanced, closer to 50/50. The year-to-date numbers reflect that we are well ahead of last year, largely because we are offsetting the lower profit with better working capital management. We will unpack now the performance into our two segments and we will start on Page 6 with electrical. You can see the challenging demand environments that we are operating in 3Q as electrical sales are down 14% to 591 million. That sales decline was quite broad-based. The heavy industrial markets were the hardest hit, but most of the balance of our electrical markets were off in the mid-teens range. The one exception was residential, largely the lighting product, where we saw double-digit growth driven by renovations while people were at home. I also wanted to point out the note on our net M&A being neutral, with a small amount of portfolio management happening during the year. You will recall in the third quarter of last year, we sold the Swiss-based high voltage test equipment business called Haefely and we bought CPI, a connector business fitting in with the BURNDY brands. Those two sales that we sold versus we acquired offset each other, but we acquired at much higher margins. So that is a net gain through buying and selling within the portfolio. You see on the operating profit side, a 20% decline to $76 million or 12.9% OP margins, about a one point decline, which was driven by the decrementals of the lower volumes, and partially offset by effective price cost management as well as footprint rationalization. Page 7, we will switch to a really strong performance turned in by the Utility Solutions segment, revealing the strength of our franchise, strong brands, strong relationships with customers, a large installed base, high-quality components, and being essential to helping our customers power people’s lives. It is important to disaggregate the segment between our legacy Power Systems and Aclara. Aclara was down 16%, behaving more like some of our electrical businesses, really a function of lumpiness as most of their demand is on large contracts and installations, and the rolling on and off can get a little lumpy. They also had significant access problems as we got closer to customers' homes, which prevented us from putting in some of the product. However, when you take the long view on Aclara, for the couple of years we have owned it, it has seen nice mid-single-digit growth. We expect that to continue into the future. The star of the quarter for us was the Power Systems business, which saw a 9% increase, driven mainly by three factors: secular market growth, storms, and entering the quarter with an elevated backlog. The secular market growth that Gerben referred to focused on distribution on that last mile, grid hardening spending on components, and renewable spending that are required to transmit longer distances to deliver electricity to customers. The storms in the quarter added between three to four points. That really helped sales in operating profit during the quarter and reinforces the value proposition within our Utility franchise, namely, offering our quality solutions at critical times to our customers. It was a really successful quarter for Power Systems. The Utility Solutions operating profit grew 11% to $105 million, breaching 20% OP margins in the quarter, expanding by a couple of points. This favorable outcome results from strong execution on price cost, good productivity, and you see the effect of mix with Power Systems outgrowing Aclara, contributing positively to margin expansion. I wanted to show you a margin bridge year-over-year for the third quarter, as I think it is instructive, not just on this quarter, but how we are thinking about managing the income statement as we go forward. The picture starts at 15.8% in the third quarter of last year. Then you see the negative impact of volume declines, the decremental effect there, which has to be overcome in order to expand margins by 60 basis points. Next, you see cost benefits, which are naturally variable expenses that have proven to be tailwinds in the COVID environment, such as travel and entertainment, medical, and supplies. There has been a natural partial offset between these variable expenses and the volume declines. Next, you see price cost, which is something we closely manage year in and year out, and this quarter we saw favorability. This was helped by the fact that with volumes down we had commodity prices down. Sequentially, as volumes pick up, we will naturally expect inflation in those commodity areas, so as we move into next year, we will have to focus on price to manage that price cost equation. The restructuring and related footprint optimization work is vital to our equity story moving forward, and we anticipate continuing to have this kind of contribution from restructuring. So, this is a helpful picture of how we got the margins to expand and how that can relate to our future performance. Let’s switch to free cash flow on Page 9. You will see that there is a 29% improvement year-over-year to $404 million, improving the balance sheet and getting our net debt-to-cap ratio down to about 34%, which is very healthy to support investing. This cash flow performance is largely replacing reduced income with lower working capital needs. The largest contributor to working capital management is inventory, but receivables have also been managed down. We worked very hard, as we saw the conditions of the pandemic rolling through, starting in March and April, to constrain inventories. We continued to service our customers but managed that line item closely, and it has really helped support the free cash flow, which, in turn, helps support our capital deployment strategy. I mentioned during earnings that we paid down a little bit of debt, and we had lower interest expense, which was the term loan we used to acquire Aclara. We have also, as Gerben described, closed on two acquisitions in October post-close of the quarter. One was a small product line inside of Power Systems, a very high-margin product line that we are happy to add. The second is called Excel Tex, which makes antennas and enclosures for wireless applications, improving connectivity and performance of wireless networks. One common application is to improve cellular reception inside buildings through distributed antenna systems. We have a chance to acquire exposure to this high-growth, high-margin business that fits within the Electrical business. In addition to acquisitions and debt repayment, we announced last week an increase in our annual dividend by about 8%, and we also reauthorized a share repurchase program at $300 million. Certainly, I’m happy to have that authority for repurchases, but that doesn’t mean you should model in $300 million over the course of the next year. We will still be focusing capital deployment towards acquisitions, but it is good to have that authority to make investments in our own stock. Page 10 shows a look at our end markets and how they have performed during the course of the year and how they are leaning as we go forward. I’m starting at 5 o’clock on the pie at gas distribution. Similar to Aclara’s business, we have seen demand there, but a lot of our activity is near the house and even in the basement. Having restricted access has prevented that business from growing. The explosion-proof devices we sell into upstream oil continue to be weak off of a low base. On the industrial side, we distinguish a bit between the heavier side where applications would be inside of steel mills or componentry designed to assist locomotive production as examples. It has been quite soft, but we see a little more resilience on the lighter side of the industrial space. The residential market is clear area of strength for the year. As people have spent much more time at home, renovations are driving stronger demand for products, particularly residential lighting. Conversely, non-residential market continues to face contraction, and we keep a cautious near-term outlook as we end the year. However, in the Utility space, demand remains solid on the transmission and distribution components. I see four drivers that are really helping us. First is aged infrastructure that requires modernization and upgrades is a significant secular need. Second is the shift towards renewables, which drives demand for the transmission of energy where it is needed most. Third are the ongoing environmental impacts, resulting in increased demand for utilities to harden their infrastructure. Finally, we recognize the importance of automation, delivering substantial savings to utilities as they manage their grids. This growth is supported strongly even through the pandemic environment. With that discussion of our end markets, I will hand it back to Gerben.

Great. Thanks, Bill. I would like to make a couple more comments on what Bill just stated, and this is something that I’m very excited and optimistic about. That is the continued strength in our Utility-facing markets, driven by the secular grid modernization growth. As the economy continues its transition away from fossil fuels and more things get plugged into the electrical grid, it creates the need for new solutions behind-the-meter, at the meter, or at the grid edge, and in front of the meter. We have discussed this in our Investor Day. As a leader in energy infrastructure, we are uniquely positioned to solve these problems for our customers. This includes protecting the electrical critical infrastructure, enabling the transition to renewable energy, building a more efficient and connected grid, and increasing the energy efficiency of buildings and homes. We can achieve this through our products and solutions, but we are also committed to fulfilling our sustainability initiatives. We have set multiyear targets to reduce our water consumption and greenhouse gas emissions, and we have refreshed our sustainability website with new details on the initiatives we are undertaking and expanded disclosures around their operation. I encourage you to visit our website and look forward to providing you with additional updates on our efforts as we move forward. Now let me turn to Page 11 for an update on our outlook. While the macroeconomic situation remains uncertain, we are confident in the level of execution we have demonstrated over the past several quarters. With increased visibility through year-end, continued strength in our Power Systems business, an improving market, and the execution of cost, we are raising our 2020 adjusted earnings per share guidance from a range of 7.0 to 7.25, up to 7.45 to 7.60. From a volume standpoint, we expect the fourth quarter to continue to show improvements. We expect a similar theme to our third quarter, with Electrical year-over-year volume declines moderating and our Utility markets holding up more resiliently. Within Utility, we anticipate Power Systems will achieve another quarter of year-over-year growth, while declines at Aclara are expected to continue, moderating as projects get restarted. On margins, we continue to benefit from restructuring savings of about $25 million. Price cost has been favorable throughout 2020, but these benefits should continue into the future. We also expect a return of some operating expenses that have run below normal levels throughout the pandemic, though we will actively manage this trade-off relative to improving volumes. Finally, as previously disclosed, we had a discrete benefit in the fourth quarter of 2019 related to tariff exclusions, and this will create some distortion in this year’s fourth quarter margin comparison. On cash, we expect to deliver approximately $550 million for the full year, representing double-digit growth from 2019, despite the declines in revenue and earnings. Let me also provide some comments as we look ahead into 2021. We will provide guidance when we release our fourth-quarter results, but we are in the middle of our planning process right now and we anticipate a year of modest market growth in 2021. We expect our Utility-facing end markets to remain solid while our Electrical market should also continue to show steady improvements into 2021. On margins, there will be a lot of factors at play, but on net, we are planning for modest margin expansion, as our operational transformation actions continue to provide tailwinds. To summarize, we are very pleased with Hubbell’s performance and execution in the third quarter, delivering margin expansion, strong cash generation, and essentially flat year-over-year earnings per share in what remains a challenging environment. We are raising our guidance for the balance of the year, and we remain confident in our ability to deliver differentiated performance for our shareholders over the near and long term. This concludes our prepared remarks for the quarter, and maybe we can ask the operator to open the line for questions.

Thank you. Your first question comes from the line of Jeff Sprague from Vertical Research. Your line is now open.

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

Alright. Thanks, Jeff.

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

Right. Good morning, Jeff. I think caution is very much what we are seeing with our customers. There are really two phases of activity. One is resuming projects that were put on hold. There is enormous pressure on Utility companies to resume since they have fixed costs that they incur when deploying these projects. They cannot eliminate those costs when they come to a stop like this. So certainly, Utility customers feel pressured to restart those, and we are doing that right now, I would say, pretty successfully. However, we are doing it with many precautions to ensure we don’t infect our own people and the people that will be working in the homes. The second area is, if you are a utility and you haven’t started the project yet, there is a tendency to wait because, once you get started, you have a lot of costs that you have to incur, and you want to be sure that the project does not get interrupted after a month. That is where we are seeing a little bit of projects continuing to move to the right. The positive is that we are continuing to see the projects, we are quoting on projects, and our backlog remains strong. Therefore, we believe that this is a shift to the right rather than a slowing of demand, so we expect the fourth quarter to improve, and we see 2021 improving further.

And separate and unrelated, could you just speak to channel inventories? We heard from Schneider that there has been a rebuild going on across their channels. Obviously, they are much broader and globally diverse, etc. But what is going on with the channel? Maybe as part of that, you noted kind of the price cost will start to narrow. But are you out with or planning to be out with pricing as you look into the new calendar year? Thanks.

Yes, Jeff. I think we saw some destocking happening in the channel during the second quarter. I am not sure we have solid evidence that everything has been restocked. As Gerben and I have been meeting with our customers, there is a general cautiousness, and they are satisfied with their inventories being lower and placing demands on us to make sure we can deliver things on time, especially in vendor-managed inventory situations. I don’t think we have seen a big restock yet that has offset the destocking that happened. I think everyone is kind of waiting to see how volumes unfold. Yes, on the pricing side, sequentially, there is a good point that copper has bounced, but steel and aluminum are coming. We felt very successful during the tariff period, working with our customers on pricing. I think this will be a new phase where we have to actively manage that. Pricing discussions take several weeks of conversations and planning with customers.

Thank you. I will pass it on.

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

Good morning. Congrats to Gerben, and congrats to Dave as well.

Thanks, Steve.

Thank you.

On the cash flow for next year, is this year a good base for growth? Or are there certain things that are kind of unsustainable in a down revenue environment, a volatile revenue environment here?

Yes, I think it is a difficult level to grow from. 2019’s level is much more the right pace to use for comparisons. One factor that contributes is that we have had some tailwinds from the CARES Act, allowing payroll taxes to be deferred. That will transition from a tailwind to a headwind next year. Additionally, as we ramp volume back up, the need to invest in working capital, namely inventory, will increase. There is an incumbent responsibility on us to manage those days closely, but I don’t think this year’s level sets a strong baseline for future growth.

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

Yes, I think Gerben mentioned the distortion in the fourth quarter from some of the tariff exemptions that kind of came through, which were lumpy. The storms that occurred in Q3 are generally unpredicted. We can never know how much of that will repeat. There are typical puts and takes, but the continued work on footprint realignment should provide tailwinds into 2021.

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

Thanks, good morning. Also again, congratulations, David, congrats again on your retirement.

Thanks, Nigel.

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

Yes. Let’s break that down, Nigel. Price cost this quarter was favorable. The order of magnitude is reasonable, with the two effects of price increases and favorable commodity prices. This is an unusual arrangement, though, as we move forward. Therefore, on pricing, your timing point is critical, so it is good to discuss increases at year-end when blanket agreements are finalized. As we learned during the tariff period, we developed a strategy for managing conversations with our customers, and I think we will apply that learning moving forward. Regarding freight, it is typical for us not to get reimbursed for freight unless it is related to high-demand or storm business that a customer might pay for expedited service. We deal primarily in regular freight, but we also saw increased use of expedited freight as we worked diligently to meet customer demands during this period.

I think the outlook for Power Systems in 2021 looks robust. Nevertheless, we don’t have unique insights into how the Stimulus Bill might affect our business. It will be interesting to see how that progresses in the coming weeks. Importantly, we believe that our business is well-positioned for growth, as secular trends in renewables and grid modernization will continue to thrive.

Great. Thank you.

Our next question comes from the line of Deepa Raghavan from Wells Fargo Securities.

Hi, good morning. First off, Dave, good luck, and thanks for your leadership. Official congratulations to Gerben looking forward. Two questions. One for Gerben, one for Bill. Gerben, can you talk about trends in the quarter, July, August, September? And generally, talk through how October has shaped up so far, but also touch upon if any verticals disappointed you based on what you were expecting 90 days ago? I have a follow-up for Bill.

Yes. We have certainly seen strengthening through that period, and that is one of the reasons we narrowed our guidance range with more visibility and increased it. Some markets have been stronger than others; however, we have seen nice rebounds in the light industrial markets. The non-residential sector continues to give us cause for concern, but I wouldn’t say any have surprised or disappointed us in the quarter. Overall, we have definitely seen improvement in outlook, so I expect the fourth quarter to follow suit.

Got it, thanks. Bill, given all the cost actions taken this year, should we expect some of your typical annual restructuring of $0.20 worth? Should that be lower next year? Or do you think you would continue that so you can offset some of the temporary costs that could potentially come back next year?

Yes. I think, Deepa, it is a good question. Our expectation was that there could be some tapering in our restructuring spending starting next year. So, ideally, it would go from $0.40 down to $0.30. However, what we have seen is that we are trying to keep on track to spend the $0.40 this year. Some of the actual footprint work was hard to do with limited resources through furloughs. Many of those dollars were shifted towards good planned headcount realignment, which has significant payoffs. Hence, I anticipate our restructuring spending to be flatter next year rather than tapering off.

So maintain as in $0.40, similar to this year or $0.20 which is your normalized level, or $0.30 which you said in May?

I’m saying $0.30 or $0.40, which is what we are trying to do this year, yes; and maintain that next year rather than taper back.

Okay. Got it. Thank you so much.

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

Good morning, everyone. First, I want to echo some of the congratulations to both Dave and Gerben. I appreciate it. A couple of questions for me. Not to put too fine a point on it, but I think the earlier comment on expecting some margin expansion next year. If I can just get one additional slice, is that as a function of operating leverage? Or is that margin expansion in a vacuum, kind of before the impact of growth?

No, the growth will be an important part of that, Josh. That is why I wanted to show you the margin slide; even though it is only for the quarter, I believe it is constructive. The way we get to margin expansion involves the red bar moving downward, while the green bar showing cost benefits increases. Those cost benefits are made possible through investments made into the transformation of our operations. Thus, I believe both factors will play a role in expanding margins moving forward.

Got it. And then, as a follow-up on the lighting segment. Can you remind us what the market penetration looks like for LED today? Additionally, regarding past actions and incentives, could you share if there are advantages or disadvantages for Hubbell relative to peers post-election outcomes?

I believe we are at a very high level of LED penetration now, around 85% to 90%. In terms of our supply chain structure, I don’t see significant advantages or disadvantages compared to peers regarding tariffs or trade policy. A broader push toward energy-efficient buildings or clean buildings would benefit the industry. Still, I don’t believe it will create a competitive advantage for any one player.

The LED penetration level is deep, but I believe the growth for this market rests in lighting controls. It is crucial to enhance the effectiveness of LED lighting in commercial buildings through better control systems.

I appreciate that color. Thanks for that.

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

Thanks, good morning everyone and happy 61st, Dave.

Thanks, Chris.

So, regarding your non-residential exposure, how are you thinking about the mix of new construction versus maintenance and rental? In a downturn, the demand for indoor space might face sustained pressure, but perhaps the rental maintenance segment has some tactical tailwinds. What’s your take on that for non-res markets?

If you take our non-res exposure, you can kind of split it in half. Half is from lighting and commercial C&I lighting products, while the other half comprises wiring and some connector-type products. Lighting has shifted more than 50/50 toward the rental space, driven by large operators as they can rapidly adjust their spending programs. Conversely, many of our industrial products still emphasize new construction, but we also recognize the potential in these markets for rental opportunities.

Thank you. I had a follow-up regarding Aclara. You suggested a potential for nice growth next year despite this year being a rough transition. Are we looking at a situation where you could see substantial growth once projects are restarted, and that could help offset the weaker first quarter comp?

Yes, I think that is plausible. Once we can get installers into the buildings, we should see a return to more growth. The need for smart meters and communications devices, as well as the grid, monitoring products Aclara sells, are in high demand. So we will share clearer guidance on that during our next call.

Indeed, we are seeing those projects shift to the right. Whether there are risks of labor availability, the utility companies are closely evaluating their smart grid investments. Thus, it remains a favorable outlook for Aclara in 2021.

Thank you all for joining us. If you have any burning questions, feel free to reach out to Jay and me for follow-up. It may take us a day or two to respond, but we appreciate your understanding.

Thank you, everyone, for joining us on the call today. That will conclude today’s call. Thank you, operator.

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