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Hubbell Inc.  (NYSE:HUBB)
Q3 2018 Earnings Conference Call
Oct. 23, 2018, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. My name is Ella and I will be your conference operator today. At this time, I would like to welcome everyone to the Hubbell's Third Quarter 2018 Results Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator Instructions)

Thank you. Maria Lee, you may begin your conference.

Maria Ricciardone Lee -- Treasurer and Vice President, Investor Relations

Thank you Ella. Good morning everyone and thanks for joining us. I'm joined today by our Chairman, President and CEO Dave Nord; and our Senior Vice President and Chief Financial Officer, Bill Sperry. Hubbell announced its third quarter results for 2018 this morning. The press release and earnings slide materials have been posted to the Investor Section of our website at www.hubbell.com.

Please note that our comments this morning may include statements related to the expected future results of our company and are forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. 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.

David G. Nord -- Chairman, President and Chief Executive Officer

Alright. Thanks Maria. Thanks everybody for joining us today. I could just touch on a few highlights from the quarter and then let Bill get into the details. You can see from our press release it was another quarter of strong performance for us. This is like growth in sales, growth in earnings and importantly very strong cash flow generation. We think that we feel very confident about our market position and confident in our ability to deliver differentiated results for investors over the long-term.

I think, if I start on page three just a couple of the highlights within the quarter. Now first obviously as we've been saying all year our end markets are all growing are all have green arrows and really at the high end. We saw a 24% sales growth in the quarter, 5% organic, 19% acquisitions, that's obviously principally Aclara. And the end-market outlook is -- continues to be good. We did have a benefit in the quarter from tax rate under US tax reform adjustment, which had us a little lower rate than we had been running for the year. Yes that's certainly good news, if we can generate earnings from any source and particularly from lower tax rates making us more competitive.

I think our -- the key element is around our pricing actions, we've been talking about that all year. Certainly since the first quarter, and I think our pricing actions are gaining traction and they continue to gain traction. Bill will go through that a little later, but our pricing through the third quarter is little better than we actually had anticipated a quarter ago, so that's the good news.

On the flip side there's some obviously our objective is to try and address the tariffs, but also there's some inflationary pressures that we're seeing and were not unique I know in that situation particularly in areas that are attributable to a positive market growth activity specifically around wage inflation just because of labor shortages and transportation cost and that, you can't talk to anybody, I don't talk to anybody in the market who is not struggling with the shortage of drivers, the shortage of trucks to actually deliver and that's all generating higher cost and we're working to continue to try and recover those costs.

The tariff headwinds to-date are in line with our expectations. Obviously that puts pressure on our margins, because even if we recover our -- the tariff dollar-for-dollar you're not getting any more profit from that so that has some drag on our margins, which is frustrating, but if we can at least cover those cost that's the minimum objective. An important result in the quarter Aclara's performance less than nine months post acquisition, the results were accretive to our earnings and for such a significant acquisition in our -- for us and to be implementing that and having that kind of outcome is truly a highlight. And again the free cash flow very strong free cash flow, we've talked about that throughout the year and we're delivering on that focused on the core operations, as well as working capital management particularly around inventory.

Now so the result of all of that gives us the ability to raise and narrow our guidance for the year the second time we've done that. We did that after the second quarter we're doing it again. Modest increases, but at least moving up from what we predicted and forecast at the beginning of the year. Certainly different composition of that, but that's the nature of our job is to try and navigate things that come up. The good news that you have some tax benefits. We're working on pricing, we're working on -- take advantage of the strong markets. And I think all of that leads to positive results not without challenges, but we're working and we're overcoming those challenges.

So let me turn it over to Bill to go through the results in a little more detail and then I'll come back and we'll talk about the outlook a bit, so --

William R. Sperry -- Senior Vice President and Chief Financial Officer

Okay. Thanks Dave. Good morning everybody, thanks for joining. I think Dave just highlighted a nice list of items there and strong demand, managing price cost, strong cash flow and constructive capital allocation. I'm going to start on the first point there, which is strong demand. And I'm on page five of the slide, and hopefully everybody has and again a very constructive backdrop from our end markets that we're exposed to, similar to what we've had for the last couple of quarters now.

You can see the sales up 24%, but supported by very good end markets that we think were growing through the quarter in the 3% to 4% range. Starting with non-res, we see -- still seeing healthy start data and architectural billing information, so through the quarter non-res still strong. Electrical T&D, the transmission is stronger than distribution, but the distribution was facing tough comps with a lot of storm volume last year and it's still grew through that so we're viewing that T&D as very healthy -- in very healthy condition. The industrial both in light and heavy feels good to us. We've got industrial production up, ISM manufacturing index, good support there for industrial.

On the oil and gas side, we certainly see both halves is positive, I think the gas for us in the quarter stronger than what we saw in oil, but the upstream CapEx for oil is still favorable, the gas dynamics strong for sure. The resi side getting a lot of attention here lately, we had strong performance in the quarter on resi. Obviously the rising rates in the stock markets used to be repricing the builders, but throughout what we saw in the quarter still constructive. So you synthesize that all together you see GDP in kind of the 3% range for the year expected and our end markets are outgrowing GDP, so quite constructive backdrop.

Starting on six, I want to switch to our profitability and we just disaggregate operating profit into two components here; the gross profit increase of 16% to $355 million, margins being dragged by price cost and we'll talk more in detail about price cost in a minute. The S&A line being more efficient down about 90 basis points to 15.7%, but the dollar's up about 15%. So we're benefiting from higher volume there, as we're getting more efficient and leveraging our scale.

On page seven, we put those together to show operating profit. You see here an increase to $174 million, 16% improvement over last year. The margin similar to what you saw on the gross down driven by price cost eventually. The earnings per share side you see a 41% increase $2.22. Got two big drivers; one is higher income; and as Dave commented lower tax rates, last year we're in the low 30s in this quarter we're just under 20. There were -- we're expecting the full year to be in the 22% range, so the quarter was particularly low and benefited from some discrete items inside the quarter.

So now we'll talk about the two segments and their performance and we'll start on page eight with electrical segment, sales up 5%, $687 million. We saw some contributors to that strong growth including the gas business, including various of our product lines that are exposed to industrial growing quite well. At the lower end of the spectrum our lighting business grew low single-digits, that was skewed by the resi piece contributing more to that and C&I.

I think the good news for lighting for us, as they continue to expand margins and that's a good sign here as we contribute to our operating income story where you see an improvement of 6% growth, $94 million and a margin expansion there of 20 basis points where the lifts coming from higher volumes more than offsets the drag still coming from price material cost and tariffs.

The power segment is on page nine, and you'll see growth in sales up to $492 million, a 66% increase. Obviously most of that coming from Aclara our recent acquisition. But it shouldn't be lost that the organic business growing at 5%, which is nice healthy spending in that area by our utility customers. And you see the transmission piece being quite strong, And again distribution growing and we're impressed to see growth, because we had some tough comps with a lot of extra storm volume last year resulting from the storms we had in Puerto Rico and Texas.

But on the performance side you see operating income growing 30% to $80 million of OP. The margins there impacted by Aclara coming on and performing in the low teens, so that as expected, it just drags down the margins versus prior year. And you see the price material cost headwind continuing to drag for power systems, but still good growth obvious therefore for power.

We wanted to talk about price material cost, we felt whole year has been a very important topic in terms of our margin performance. And so starting at EPG and then again in July during our second quarter we shared analysis discussing price cost and there were essentially two takeaways from that analysis; so the first was to show how our business model has a lag effect between when we experience inflation and how we price and recover that inflation. Different than a model or someone might use derivatives and get immediate offset we have a lag and we illustrated that lag.

The second is we showed that in the third quarter our price cost caught up to the inflation we were experiencing. And we realized on that message that we had shared with you all. So in our third quarter the price cost had matched. In that analysis, we had specifically excluded lighting and tariffs. Tariffs were too uncertain for us to predict that had been and the lighting business was different than the rest of our lines, where they were actually given a way price bill despite experiencing inflation.

So what we've down now because we kind of hit that mission, we've done now is we've included lighting and tariffs in the picture and shown that still and we did that because we think this gives you a better insight into the impact on our overall margin performance. So you can see that the third quarter still had some drag from those two effects and that we catch up in the fourth quarter. So the price story for us is across all of our businesses. Some of the questions that we get from you all are trying to net tariffs against price and inflation against price, and we're using our whole portfolio of products to battle inflation and we're thinking about it that way.

Many of our lines of business I think priced multiple times during the year, some of those increases have been very significant. For example, if you're exposed to significant amounts of steel. So this is the story that continues, we think our business model is exceeding. Dave described traction on price and you can see those blue bars continuing to accelerate through the end of this year to get us back in balance as the cost start to moderate by year-end. So that's to us an important picture driving our margins.

I want to touch on the free cash flow, as Dave highlighted as a strength on page 11. You can see in the quarter over a doubling of the free cash flow amount and for the year-to-date period an increase of over 50% to $269 million. The cash flow performance driven by higher income, but as well working capital efficiency. Most notably in the area of inventory where we've been very effective at managing those levels. I think importantly we've increased our CapEx spending during this time, so we've not been sacrificing our investing to achieve free cash flow. We've continued to invest in automation and other forms of productivity that we think are quite important.

And I was going to show you also on page 12, we've taken to showing you EBITDA. We think that we've got quite a bit of fluctuation in non-cash amortization charges as a result of our acquisition, which has also caused us to incur more interest expense and taxes are going the other way. So with all that variety we feel that showing you EBITDA just growing at a nice 16% rate is important to keep that in front of you.

But I wanted to ask Maria to comment on the balance sheet given some of those cash flow dynamics.

Maria Ricciardone Lee -- Treasurer and Vice President, Investor Relations

Sure. So I'm on the capital structure page 13. We typically show this page with two columns; current period and prior year-end. And this time you can see we added a third column from March 2018 to highlight how much activity happened during the year with respect to the Aclara acquisition and repatriation of international cash. We paid off $160 million of total debt since March 31st and now have $1.9 billion of total debt outstanding. The strong cash generation that you've just heard Bill talked about, but moving back some overseas cash has enabled this de-levering. And we expect to do more in the fourth quarter.

More broadly our capital allocation priorities remain the same investing in high-return capital projects, paying our dividends, which you may have seen our Board increased last week; buying back shares. We repurchased $20 million of stock so far in 2018 and expect to do more. And investing in acquisition to complement our portfolio. Our balance sheet supports this capital allocation strategy.

We ended the third quarter with $229 million of cash approximately 94% of which was held outside of the United States. We also had about $100 million of commercial paper outstanding. Our four tranches of long-term senior notes all have attractive rates in the low to mid-3s, and we have a $750 million credit facility that backs our commercial paper program and is fully available. So to summarize we have a strong and healthy balance sheet capable of supporting our capital deployment priorities.

With that I will hand it to Dave to talk about the outlook.

David G. Nord -- Chairman, President and Chief Executive Officer

Okay, thanks. So let's just talk a little bit about the rest of this year. First on our end markets on page 14. No changes here versus our prior outlook, you know, our markets continue to grow consistently with what we've seen all year, overall market growth of 3% to 4%. And we're running a little bit above that year-to-date, I think we'll -- it might settle back a little bit as we finish the year, but still compared to a number of prior year's leading up with a very nice finish to the year.

From an overall performance for us turning to page 15, we think that translates into for the full year sales growth of 21% to 23% range, that's a little higher than our prior sales growth internally largely on higher Aclara sales. As I mentioned earlier we're going to be raising the -- and tightening our EPS range, new midpoint of $7.25 versus $7.20 prior year. We essentially had $0.15 of tax favorability in the quarter and we're dialing the impact of List 3, which we see now as $0.10 of headwind in the fourth quarter. Obviously actively mitigating with price have increases in place escalators, they are set for January, but as Bill mentioned you've seen in the chart we've talked about it takes quarter so to work through those.

We certainly fully intend to pass along increased cost from tariffs. And we think the rest of the industry will, as well I've spent time recently with half of our top channel partners and the conversation is all around tariffs and price; and secondarily some of the other inflationary pressures that I've talked about. And the concern is always with a 10% tariffs you probably navigate that, when you start to put 25% tariffs scenario. That becomes more challenging, now at the same time we have a very aggressive actions that we're taking. Because a 25% tariffs in certain products, if you're not making money at it we're not going to sell it so you've got to recover it. And I know we're not alone in that, so I know that there's going to be a recovery of that to some degree whether the FX ultimately effects demand is a wildcard, but we are -- and the team here is aggressively focused on getting price and pushing price where we can.

I think we found situations even in to help our channel partners get some of those prices grew. In some cases it requires a joint sell to the customer particularly around the value proposition. And when we've done that we've been more successful in getting those prices realized. So and that really is the nature of our products, our service levels, the quality that really helps in getting some of that price through. But it takes effort, it's not automatic. And lastly for the -- we expect our free cash flow strength to continue and end up being greater than net income.

Page 16 is just the waterfall chart regular update. The biggest changes here as I mentioned they're on the benefit of tax with the lower third quarter tax rate and then putting in some of the headwind from tariffs in base operation column. So let's turn a little bit now to 19. And obviously it's early, we don't provide earnings guidance at this point, but certainly we start with at least our market view as of this point. Overall we see 2% to 4% versus 3% to 4% this year. Base case has slight moderation in the residential, oil and gas and industrial, that's moderation after strong growth this year. But once again we still see all end markets growing at this point. Note that Aclara is now included into the pie chart, which is why you see the electrical T&D as a bigger slice of the pie right now.

So if we turn to page, and we talk about our EPS considerations for next year. And so we don't give annual guidance until we release earnings in January, but just the broad framework of how we're looking at it. As I said end markets are going to grow solidly again may be more in the low to low single-digit range, but should provide a nice for a volume tailwind for us. Price should be revised tailwind for us next year with the actions we've already implemented and with more to come. We typically hang on to prices, as long as we can even if commodity cost fall out or turn downward. And next year shouldn't be any different whether it's on the commodity side or the tariff side, but we're pushing to get on the basis that those costs will continue.

We continue to execute on productivity initiatives, benefiting from prior restructuring actions and I know that some of you had the opportunity to meet with Susan Huppertz, our new VP of Global Operations, he got a sense of some of the things that are being put on the Board as part of our ongoing restructuring actions. So we have a lot of confidence that we're going to be driving more productivity continue to drive productivity in areas that we have yet to be able to realize.

Inflation, general cost increases, but things like labor and transportation is likely to continue in to next year. Typically we try to offset those costs with productivity. We've done a little better than that in the recent years, but it may end up being more neutral next year, but we're certainly driving to exceed the cost increases particularly if all of the tariff and other costs can't be realized on the price side. Obviously tariffs continue to be a wildcard. And on tax as Bill mentioned, we saw a one-time benefits this year in the third quarter, but we expect to normalize more in the 22% to 24% range. Obviously still some moving parts there, so we'll work through that.

So with all this said we've got a good path to our attractive growth next year. I'm not going to give a range, but we previously laid out a target of $8.50 in GAAP EPS by 2020 and we're comfortable reiterating that commitment now. Certainly a lot of work to do to get there, lot of actions to take, lot of price, lot of cost management, lot of productivity, but that's what we do, that's what we have done, that's what we're going to continue to do. And so I think 2019 results will put us solidly on the path to getting to our 2020 objectives.

So just to wrap up, we're pleased with the results, we certainly would like them, so always like them to be better. We'd rather not be having to deal with the tariff situation, making a pricing environment not much tougher. It's never easy, but hoping that a magnitude of what everyone is dealing with, we'll provide a little bit of flexibility and acceptance at least in the near-term. So confident in our ability to navigate this stuff, we've got the challenges, we will work through them. And look forward to better results going forward and welcome to questions.

So if we could open up the Q&A?

Questions and Answers:

Operator

(Operator Instructions) Our first question comes from the line of Christopher Glynn. Your line is open.

Christopher Glynn -- Oppenheimer -- Analyst

Thank you. Good morning.

David G. Nord -- Chairman, President and Chief Executive Officer

Good morning, Chris.

Christopher Glynn -- Oppenheimer -- Analyst

Hey, so you guys called out the C&I lighting price pressures again. There are broad announced price increases in the industry among the majors. How do you expect the rubber hits the road here, in terms of the side dynamic of the existing price pressures, but a much broader price increases announced seemingly in tandem and cooperation?

David G. Nord -- Chairman, President and Chief Executive Officer

Well, I think first Chris, I think I would say that the price pressures have lessened as a starting point. And I think it's starting to turn to more of a positive. We've seen some elements and certainly we've seen some benefits in pockets where we've been more disciplined as I mentioned we're not going to sell it for and we're not going to give up the margin. And we've actually been able to realize that. It's just having that discipline. And I think that's reflective of the broader industry things that you've seen in broader price increases. I think starting to stick certainly in pockets. So I hope that's a positive sign going forward, it's still early, but I think we've seen some positive signs.

Christopher Glynn -- Oppenheimer -- Analyst

Okay. And then as we look at implied fourth quarter guidance and obviously there's all your P&L line items to triangulate. But I'm kind of gathering that your column for the fourth quarter electrical margin to probably be down a little bit year-over-year. Just wondering why that might be if you have your kind of best price cost relationship of the year in the fourth quarter?

Maria Ricciardone Lee -- Treasurer and Vice President, Investor Relations

Sure yes. So I think you're right to identify that there could potentially be some pressure on the electrical margin. I think it will have less of the price material headwind. However, I think on some of the cost inflation dynamics, you know, Dave mentioned some free labor things of that nature. And we expect that to be a bit higher due to those trends. So that would be offsetting the benefit that we would get from lower price material drag.

Christopher Glynn -- Oppenheimer -- Analyst

Okay. Is freight and labor not part of the bars on slide 10?

Maria Ricciardone Lee -- Treasurer and Vice President, Investor Relations

No they're outside of it. So the bars are specifically material cost so commodities and price. And so the -- what would go into our productivity cost increases or cost inflation bucket the cost side would have the wage increases and freight in that stuff.

Christopher Glynn -- Oppenheimer -- Analyst

Okay. And then Aclara so for 2019 with your orders and your project pipeline starting to get really good support for another strong organic year. How would you characterize the incremental margin profile for Aclara? Or if it's more mix-driven how otherwise should we think about the EBIT profile bridge into year two ownership?

William R. Sperry -- Senior Vice President and Chief Financial Officer

Yes. I think what we've seen so far in our first year of ownership is the Aclara suite of smart grid products and services is in high demand. Our customers need it and we're pleased to see that there is very good growth within that. We've seen the margins improved during our ownership and I think it's again as Dave kind of said as we give guidance in January, I think will be more explicit about answering your question. But the first part of your question, I think is very important that the demand for the smart grid product is very good right now, so that should help us in '19.

Christopher Glynn -- Oppenheimer -- Analyst

Okay. Thanks, Bill.

Operator

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

Rich Kwas -- Wells Fargo Securities -- Analyst

Hi, good morning, everyone.

David G. Nord -- Chairman, President and Chief Executive Officer

Hi, Rich.

Rich Kwas -- Wells Fargo Securities -- Analyst

Can you guys just level set us on the tariffs, so is it $0.10 explicit negative impact in Q4 on a quarterly basis? And then if the rate, because assuming the rate to 0.5% January 1st, and we take some multiple of that as an impact, but then you're going to get price in Q1? So net-net there's may be still behind the curve in Q1 with the increase in the rate. I mean how do we trying to model this as we think about an impact?

Maria Ricciardone Lee -- Treasurer and Vice President, Investor Relations

Sure. Yeah the -- so we had talked about, we just back up List 1 and 2 being a net $0.05 or a nickel of headwind in each of Q3 and Q4, so that's still true. The gross number is larger than that, but we've offset it with price and other productivity in cost initiatives. So that's for that List 1 and 2. When you're adding List 3, which is what the current guide now contemplates that is where you get another dime in the fourth quarter, and that's the result of a 10% tariff. When it bumps up to 25% as of January 1, that will increase the cost for next year, so the $0.10 is up for a 10%, so will be a higher cost next year based on List 3.

You'd also obviously have the wraparound impact of List 1 and 2 that we didn't have in the first half of this year. So to your point, I think we're going after price, we're going after it now, we're putting productivity measures in place, so that will start to see the benefits. But I would expect that the compares on the tariffs get easier as we go through the year, but there will be a bit of a step up in Q1, that we are already starting to mitigate now.

Rich Kwas -- Wells Fargo Securities -- Analyst

Yeah, I mean, with the knowledge that you know what's going to go into effect on 11, so its been -- it's pretty explicit out there obviously. So it would seem like you'll be able to push their price pretty quickly, I mean, I know there's a concern around demand impact, but everybody knows about it right? So I mean within Q1 sometime during Q1 you should be able to start matching up right, is that the right way to think about it?

William R. Sperry -- Senior Vice President and Chief Financial Officer

That's the right way to think about it, there's no question. I mean it's -- I mean as the Board recognize it, it's a big number, we -- it's and so as I've been saying we can all do the academic math of 25% and what that is. Trying to get that through in pricing is that, it's a new normal for the market. And particularly when you've been coming of years of very modest low inflation 2% and all of a sudden you're coming in with big increases and even when it's relative to the material content you still end up with 10%, 15% increases in a product cost, that's not insignificant.

So it's -- we're all hopeful that at some point there's a little bit of moderation, but we all are working as if there's not going to be, because to-date it hasn't been, and we don't want to be surprised, we can always back up. But we don't want to be playing catch-up. So that's an important element, so --

Rich Kwas -- Wells Fargo Securities -- Analyst

Okay, that's fair. And then just within the segments, I mean, it would seem like electrical is more impacted. I mean, I know you have 232 on power from earlier in the year. But is there a way to think about impact on each of the segments as it relates to strictly tariffs?

William R. Sperry -- Senior Vice President and Chief Financial Officer

Yes. I think the way and you're right, I think 232, Rich had an indirect impact very heavily on power where they're using a lot of steel. As you think about List 3, I think the biggest impact on us will be on residential lighting, but there's also impacts on plugs and receptacles and some of the basic hardware parts from power systems. So that -- it'll affect other areas as well.

Rich Kwas -- Wells Fargo Securities -- Analyst

Okay. And then last one on price costs as it relates to legacy power. It still seems like you're a bit behind the curve on that? What's the latest on getting to parity within legacy power? Is that -- is the understanding with this guide at fourth quarter you get there and then by the time we get in the first quarter your price cost positive?

William R. Sperry -- Senior Vice President and Chief Financial Officer

Yes. So legacy power you're right they continue to get price, and they continue to have inflation. So the way it's progressing they're squeezing it down very impressively from being behind it. And so we're probably starting next year being able to catch up, but as we end the year they'll still just be a little bit behind.

Rich Kwas -- Wells Fargo Securities -- Analyst

Okay, thanks for the color.

Operator

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

Steve Tusa -- JPMorgan -- Analyst

Hey, guys. Good morning.

David G. Nord -- Chairman, President and Chief Executive Officer

Good morning.

Steve Tusa -- JPMorgan -- Analyst

The kind of 2020 commentary on free cash flow and kind of the guidance there, I mean is that now just much less relevant given what we've seen from these tariffs?

David G. Nord -- Chairman, President and Chief Executive Officer

Much of what you mean by less relevant? That -- it's certainly more challenging with the tariffs, I think that's still our objective to work and have a path to get there. It's certainly will be a different path than when we spoke earlier in the year pre-tariffs. So does that mean it's still in the cards? It's the question about how we're going to get there? And the one wildcard will certainly be the entire pricing environment, we're obviously not alone in that, but as I said we're working to develop other paths to offset any price shortfall that will exist; including more productivity, you know, even and changing sourcing strategies and the like. So I wouldn't say it's still relevant in our mind and in our objectives.

William R. Sperry -- Senior Vice President and Chief Financial Officer

Yes, I think Steve, it just, it comes in different waves right? So as you price to get the tariffs once that flattens out then that wraps around you get the benefit of having priced for it even though you're catching up. So it comes in, not as smoothly, I would say is how we're looking at it.

Steve Tusa -- JPMorgan -- Analyst

Got it. And then one other one. Just on kind of your visibility and your dashboard and kind of operating the business. It just seems like every time the market has or the macro has certain issues whether it was the Harsh & Hazardous stuff that came with the oil downturn or these tariffs coming through it just seems like the stock in investors are a little bit more blindsided by this stuff. And I'm not sure whether that's a communication thing or what you guys can see in your dashboard. I mean have you kind of taken any step back and kind of looked at the processes that you guys have and try and improve that? Or am I just, you know, am I just being too harsh on that front?

William R. Sperry -- Senior Vice President and Chief Financial Officer

Well I think if you're talking about, did we see the oil downturn any better than the rest of the market, I would say, I don't think we did. But I think the other stocks that were exposed to oil had the same degree of surprise. I think the way we've managed tariffs as we've been trying transparent with you about how we price for it and it takes this quarter or so to catch up. So we think that those processes are seeing that stuff. we are reacting, we reacted to the oil downturn with a big $120 million restructuring plan, and I think we feel good about some of the cost that we've taken out of that. Some of the lighting business challenges, we've used restructuring to take cost out of that and have got to the point, Steve where that business is now expanding margin and much more stabilized.

And so now tariffs, I agree with you and managing price and inflation is the new normalized, Dave was saying. And we think we're tracking that well, we're trying to communicate with you all, we've been doing that since, I think the first quarter and so hopefully the communication you guys feel is transparent enough.

David G. Nord -- Chairman, President and Chief Executive Officer

Yeah, I think and Steve I would add to that, I mean, obviously we're always looking and evaluating our own operations, as well as our communication. And certainly that's one of the things where we're continually trying to evaluate market reaction against true performance or against surprise or is there something that's not understood. And so we're constantly trying to make sure that we are being as a transparent, as we can be on the things that matter, so there's a better understanding and we minimize the surprises that can be avoided.

As Bill mentioned my crystal ball was better than anybody else's in oil and gas, and if not any better on tariffs. But yet we've put stuff out and we're very conscious of working hard to do what we say. And it's the challenge of managing the things that we say that we know. And if there's something that comes up, but surprises us. But we hope it's only because it has surprised the entire market, and not that it's unique to us, but we can always get better at that and we're constantly working on it and welcome your input on those things and --

Steve Tusa -- JPMorgan -- Analyst

Yes, I guess it's just, you know, they're coming off of the first half of this year, as well where there was some confusion around CapEx level, and the stock went down dramatically on kind of the price cost, which people weren't calibrating appropriately, so it's a little more just kind of the oil and gas related thing. But it's totally fairly fair point just the volatility for your specific portfolio and its construct. The stock just seems to be a lot more volatile than perhaps it has to be, but I'll leave it at that. Thanks for the color.

David G. Nord -- Chairman, President and Chief Executive Officer

Thanks.

Operator

Our next question comes from the line of Jeffrey Sprague. Your line is open.

Jeffrey Sprague -- Vertical Research -- Analyst

Thank you. Good morning.

David G. Nord -- Chairman, President and Chief Executive Officer

Good morning, Jeff.

Jeffrey Sprague -- Vertical Research -- Analyst

Yes, I wanted to move to kind of the productivity question. And you mentioned Susan Huppertz joining the firm. Should we expect or why shouldn't we expect kind of a greater sense of urgency to move more swiftly on some of which she's talking about? It would seem the opportunity is quite large even in a healthy market you might want to see that more rapidly. But in an environment like this where you've got some very clear headwinds, I don't know why there isn't a much more kind of rapid take on some of these kind of the footprint and other issues that you might have avail at your disposal here?

David G. Nord -- Chairman, President and Chief Executive Officer

Right, it's a fair comment and there is. And you're absolutely right. I mean it always comes back to the ability to effectively execute, to make sure that we can continue to provide the level of service to the market that they expect. As you know Jeff and you followed us for a long time that hasn't always been the case and the price of that misstep is meaningful and more long-term. So we just want to make sure that we are disciplined in those things, but there's no doubt that, that's one of the things and presumably that's what you heard in your discussions with her, that she's identifying these things, we're rallying around to make sure that we can do that sooner than later.

Jeffrey Sprague -- Vertical Research -- Analyst

And then just back to tariffs List 3 in particular. It does sound like may be the impact there is a little bit more severe than you were first thinking. I don't know that you've ever actually explicit about List 3. Perhaps there's a bigger impact than lighting there than you thought. Is there any additional color on that dime that you could provide for us?

William R. Sperry -- Senior Vice President and Chief Financial Officer

No, I just think that when we talked about the nickel impact in the third and fourth quarter, we were really only talking about List 1 and 2. So the dime is now just a quantification of that. I think importantly for the resi lighting business the industry is basically structured with similar supply chain right? So there's not competitive advantages or disadvantages in terms of costing due to tariffs. And so I think part of underlying while we're saying that we believe the industry will react the same way. But it's -- there's not new things Jeff popping up at all.

Jeffrey Sprague -- Vertical Research -- Analyst

And then just finally from me. Just on the demand picture, it's little unclear to me what you're saying about Q4. Are you expecting some measurable slowdown in some parts of your business in Q4? And where?

David G. Nord -- Chairman, President and Chief Executive Officer

No.

Jeffrey Sprague -- Vertical Research -- Analyst

No you're not?

David G. Nord -- Chairman, President and Chief Executive Officer

No measurable. I think the thing that will create a little bit of potential volatility is any order activity in advance of tariffs, or in advance of price increases for next year. We've seen some pockets of that, but that's -- we haven't seen any indications of underlying weakness in demand at this point.

Jeffrey Sprague -- Vertical Research -- Analyst

I would assume you're not going to let people take order six months in advance or something on old price when you're going to get jammed with tariffs. How you plan that?

David G. Nord -- Chairman, President and Chief Executive Officer

No. I mean that's -- we have mechanisms in place, Jeff that -- because that's a fairly common thing even with the minimal price increases that sometimes are put through on an annual basis and on blankets and on catalog. So there is gates around that. No, we're not going to allow that for sure.

Jeffrey Sprague -- Vertical Research -- Analyst

Alright. Thank you, guys.

David G. Nord -- Chairman, President and Chief Executive Officer

Okay.

Operator

Our next question comes from the line of Joseph Osha. Your line is open.

Joseph Osha -- JMP Securities -- Analyst

Thanks. Good morning, everyone. Jeff just kind of asked my question on supply chain. I did want to talk a little bit about passive components and discrete's, which have been very, very tight. And I'm curious about how that's impacting you on the Aclara business, and also on your lighting business?

William R. Sperry -- Senior Vice President and Chief Financial Officer

Yes. I think we've observed that tightness and we've been trying to manage our ordering of components and our relationships with the supply chain accordingly. So I think it -- you can see it potentially affecting lead times and whatnot Joe. But something that we're navigating.

Joseph Osha -- JMP Securities -- Analyst

Do you feel at this point that there's may be some ability to find some additional margin there if that wasn't up? Are you paying to expedite and to airfreight and so forth?

William R. Sperry -- Senior Vice President and Chief Financial Officer

Yes. I'm not sure that there is extra margin that comes from that, but as I say it's -- you're right to point out that, that's a -- there is a constraint in the supply chain there.

Joseph Osha -- JMP Securities -- Analyst

Okay, and just the final part of that question and have you seen any signs of loosening there? Or does it continue to be very, very tight? Thank you.

William R. Sperry -- Senior Vice President and Chief Financial Officer

Yes. I think it's persisting and just part of the backdrop of what we're navigating.

Joseph Osha -- JMP Securities -- Analyst

Okay. Thank you.

Operator

Our next question comes from the line of Josh Pokrzywinski. Your line is open.

Josh Pokrzywinski -- Wolfe Research -- Analyst

Hi. Good morning, guys.

David G. Nord -- Chairman, President and Chief Executive Officer

Hi, Josh.

Josh Pokrzywinski -- Wolfe Research -- Analyst

Just a question on distributor inventory, because I think we've seen evidence of both restock and destock, kind of depending on how you approach the market. And Dave what are you seeing on that front? And what is your stance of kind of where the channel is right now for kind of the typical electrical distributor?

David G. Nord -- Chairman, President and Chief Executive Officer

I think they're -- overall they're pretty balanced, I think they have been running lean. You're right they had their ups and downs, but as I've mentioned before we are monitoring closely any loading up that might be occurring at lower prices. We haven't seen any big examples of that, but that's one to -- that we're monitoring. I think we're -- there were certainly a rundown earlier in the year, I think there were some restocking midyear, I'd say from what we've seen it's pretty balanced right now.

Josh Pokrzywinski -- Wolfe Research -- Analyst

And just to be clear there's no pre-buy element in your 4Q guidance? If that were to happen that would be kind of volume upside?

David G. Nord -- Chairman, President and Chief Executive Officer

That's correct. There's nothing -- there's certainly pre-buy volume that's in there, but not meaningfully, because we will -- that where you manage that. If it did occur more than we would anticipate and I'm not expecting that, that would obviously be upside to it.

Josh Pokrzywinski -- Wolfe Research -- Analyst

Right. Understanding it might be a zero assuming the overtime. That's helpful. And then on tariffs more broadly have you been able to sized what percentage of your business that could be tariffed at some point in the future List 4 for plus that is not being tariff today? So relative to what you're seeing today what is kind of the total pie that could in the future be eligible for a tariff, if we kind of escalate this further?

William R. Sperry -- Senior Vice President and Chief Financial Officer

Yes, we've not attempted to qualify List 4 plus, Josh.

Josh Pokrzywinski -- Wolfe Research -- Analyst

I guess may be to put it and like a bigger than a bread box term, is it bigger or smaller than what you think you're currently going through today?

William R. Sperry -- Senior Vice President and Chief Financial Officer

Yes. I mean it's impossible for us to get in the minds of how policy could change going forward. I think what we feel confident in -- is our ability to manage what's put in front of us and as Steve was kind of asking to be prepared for that. So whether that's moving supply chain around and getting in into more favorable country locations, which we're doing, we're spending an awful lot of time on the price lever there's productivity lever. So we're going to relentlessly attack whatever inflation it would get. And but no we haven't tried to quantify the bigger what if that you're talking about.

Josh Pokrzywinski -- Wolfe Research -- Analyst

Got it. And just one last one for me. It seems like Aclara continues to show some upside here. Have you've talked about the record September. Is there an opportunity to may be, be a little bit stickier or enforce price a little bit more on that? It doesn't seem like quite as raw material heavier business. So obviously you're not as pass-through on that front, but just in a stronger demand environment. Is there a room to maybe offset some of the price challenges elsewhere in the portfolio at Aclara?

William R. Sperry -- Senior Vice President and Chief Financial Officer

Yes, I mean, I think you're right to point out that the demand for their smart grid products is very strong, that's a good thing. Their business tends to be built off of pipeline and kind of lumpy or longer-term contracts. And so the price lever tends to be out a little bit more rather than what you're talking about, which is offsetting next quarters' implications. So I'd say that it probably doesn't work as a price offset the way you're discussing it.

Josh Pokrzywinski -- Wolfe Research -- Analyst

Got it, that's helpful. Thank you. Thanks a lot.

William R. Sperry -- Senior Vice President and Chief Financial Officer

Yes.

David G. Nord -- Chairman, President and Chief Executive Officer

Okay. Coming up on the hour, so --

Maria Ricciardone Lee -- Treasurer and Vice President, Investor Relations

You know, so Steve, Dan and I will be available all the day. So if any follow-up questions just reach out. Thanks for joining us today.

David G. Nord -- Chairman, President and Chief Executive Officer

Appreciate the time and look forward to getting your feedback's. Thanks.

Operator

This concludes today's conference call. Thank you for your participation. You may now disconnect.

Duration: 57 minutes

Call participants:

Maria Ricciardone Lee -- Treasurer and Vice President, Investor Relations

David G. Nord -- Chairman, President and Chief Executive Officer

William R. Sperry -- Senior Vice President and Chief Financial Officer

Christopher Glynn -- Oppenheimer -- Analyst

Rich Kwas -- Wells Fargo Securities -- Analyst

Steve Tusa -- JPMorgan -- Analyst

Jeffrey Sprague -- Vertical Research -- Analyst

Joseph Osha -- JMP Securities -- Analyst

Josh Pokrzywinski -- Wolfe Research -- Analyst

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