Prepared remarks
Thank you for standing by, and welcome to the Hubbell Incorporated Second Quarter 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press *1 on your telephone. If your question has been answered and you would like to remove yourself from the queue, simply press *1 again. We ask that, in the interest of time, that you please limit yourself to one question and one follow-up. You may get back in the queue as time allows. As a reminder, today's program is being recorded. And now I would like to introduce your host for today's program, Daniel Innamorato, Vice President, Investor Relations. Please go ahead, sir.
Operator. Good morning, everyone, and thank you for joining us. Earlier this morning, we issued a press release announcing our results for the second quarter 2026. The press release and slides are posted in the Investors section of our website at hubbell.com. I am joined today by our Chairman, President and CEO, Gerben Bakker, and our CFO, Joe Capozzoli. Please note our comments this morning may include statements related to the expected future results of our company. These are forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Please note the discussion of forward-looking statements in our press release, which is considered incorporated by reference into this call. Additionally, we may also include non-GAAP financial measures. Those measures are reconciled to the comparable GAAP measures and are included in the press release and slides. Now let me turn the call over to Gerben.
Great. Thanks, Daniel. Good morning, and thank you for joining us to discuss Hubbell's second quarter 2026 results. Hubbell delivered strong financial performance, with double-digit growth in sales, adjusted operating profit, and adjusted earnings per share in the second quarter as well as year-to-date through the first half of 2026. Our strong positions in attractive end markets as well as continued execution on our strategy are demonstrated by our first half performance. As megatrends continue to accelerate, most notably in data center markets and load-growth-related investment in utility T&D markets, we are seeing continued strength in our order book, which gives us increased visibility into our second half outlook. Operationally, we are managing inflation effectively through price and productivity actions, investing in capacity expansion to serve our customers in high-growth areas, and deploying capital to further upgrade our portfolio in high-growth and margin areas within our core. We are raising our full-year 2026 guidance this morning to reflect double-digit growth in organic sales, adjusted operating profit, and adjusted earnings per share at the midpoint of our range. Turning to page 4. We are pleased to have closed on the previously announced acquisition of NSI in early June. NSI is a business we know very well and have followed for a long time. It operates in end markets with common customers, similar manufacturing processes, and a broad portfolio of critical electrical components with low cost of ownership and high cost of failure. The acquisition of NSI fits squarely within our overall strategy and enables us to double down on our attractive core while adding another high-growth, high-margin business to our portfolio. Strategically, acquiring the leading electrical fittings brand in Bridgeport Fittings fills a key product line gap in our HES segment in a high-value niche, while the Polaris brand complements our leading brand in electrical grounding and connectors. NSI's exposure in network infrastructure provides opportunity to further penetrate datacom, broadband, and data center markets. We are also confident that the acquisition of NSI will further accelerate our successful HES segment unification journey, which has resulted in market outgrowth and significant margin expansion over the last several years. Our recent sales force realignment and vertical market investment will enable enhanced cross-selling and deeper penetration into high-growth verticals, while leveraging scale and best practices across the two strong businesses will drive long-term productivity and cost savings, enhance service, and optimize capacity and manufacturing processes. Now let me turn the call over to Joe to give you some more details on the financial impact of the NSI acquisition as well as our second quarter results.
Thank you, Gerben, and good morning, everyone. From a financial standpoint, we anticipate NSI to be accretive to both the Electrical Solutions segment and total Hubbell growth and margin profile. We expect the acquisition to add adjusted earnings accretion of approximately $0.20 in 2026 and approximately $0.80 in 2027. Looking further ahead, we are targeting attractive revenue and cost synergies over the next three years, including 2% to 3% in sales synergies from increased channel and vertical market penetration as well as approximately 3% to 5% in cost synergies from leveraging the combined scale of our respective operations, supply chains, IT systems, and back-office capabilities. The $3 billion purchase price was financed with a combination of a term loan, a bond offering, and commercial paper. Our pro forma leverage moves to approximately 2.9x net debt to EBITDA following the acquisition. As we continue to generate strong free cash flow in the second half of 2026 and beyond, we intend to continue aggressively investing in high-return CapEx to drive further growth and productivity while also returning cash to shareholders through dividend growth and modest share repurchases. We also intend to pay down significant portions of debt and deleverage our balance sheet over the next 24 to 30 months, which will drive strong adjusted EPS accretion in 2027 and position our strong balance sheet for further accretive M&A investment over the next several years. Moving to the second quarter results on Slide 5. Hubbell's second quarter financial performance was strong, with double-digit growth across sales, adjusted operating profit, and adjusted earnings per diluted share. Net sales of $1.712 billion in the second quarter of 2026 increased by 15% as compared to the prior year. Organic growth of 10% was driven by 6% organic growth in Utility Solutions and 18% organic growth in Electrical Solutions. This was an acceleration relative to our prior quarters driven primarily by strong performance in electric distribution and data center markets, supported by capacity expansion and investments in incremental price realization. Acquisitions contributed 5 points to growth in the second quarter, driven primarily by DMC Power and a partial month of contribution from NSI—both high-growth and high-margin businesses which are off to strong starts and integrating nicely within our Utility Solutions and Electrical Solutions segments. From an operational standpoint, Hubbell generated $409 million of adjusted operating profit in the second quarter, representing 13% growth versus the prior year, with adjusted operating margins of 23.9% representing modest contraction relative to a strong comparison in the prior year. Growth in adjusted operating profit was primarily driven by strong volume growth in high-margin areas, as well as the impact of acquisitions. While cost inflation continues to increase, our pricing and productivity actions are keeping pace, and we are confident in our ability to continue to manage this equation throughout the second half of 2026, just as we have demonstrated very successfully over the past several years. We also continue to invest in our business throughout the second quarter to expand capacity in high-growth areas and generate future productivity. Adjusted earnings per diluted share were $5.52 in the second quarter, representing a 12% increase versus the prior year, driven primarily by adjusted operating profit growth. Below the line, higher interest expense associated with the recent borrowings for the NSI acquisition were largely offset by a lower year-over-year tax rate and a lower share count as a result of share repurchase investments made in the first half of 2026. While second quarter free cash flow of $213 million was down relative to the prior year on working capital and the timing of acquisition costs, first half year-to-date free cash flow of $259 million was up 12% year-over-year. On a full-year basis, we are on track to deliver approximately 90% conversion of free cash flow to adjusted net income, which absorbs the impact of increased capital expenditures and acquisition costs. Turning to page 6 to review our performance by segment. Utility Solutions delivered another strong quarter with double-digit growth in sales and adjusted operating profit. Utility Solutions generated net sales in the second quarter of $1.026 billion, which represented growth of 10% versus the prior year and includes organic growth of 6% and acquisitions that contributed 4%. Our larger, higher-margin grid infrastructure business grew 7% organically in the second quarter, driven by strong double-digit growth in distribution markets. Transmission and substation growth was solid in the second quarter, and we continue to expect double-digit growth on a full-year basis in these markets as large projects ramp up in the second half and capacity investments come online. In grid automation, we were pleased to return to year-over-year growth in the second quarter as anticipated, with continued strong growth in Protection and Controls, most notably in our substation switching products, while meters and AMI revenue grew sequentially and delivered strong orders that position us for continued recovery in the second half of 2026 and into 2027. As Gerben highlighted in his opening remarks, orders were strong in the first half. While we are not typically a backlog-driven business, our first half book-to-bill ratio of approximately 1.2x for Utility Solutions is strong and provides high visibility into our second half outlook where we expect organic growth to improve modestly relative to first-half performance. This demand is broad based across T&D markets, but with particular strength in orders and quoting activity for transmission and substation projects driven by load growth and data center build-outs. We continue to believe utility T&D markets are in the early stages of a multiyear investment cycle and we are investing proactively in additional capacity to serve the long-term needs of our customers. Operationally, the Utility Solutions segment delivered $263 million of adjusted operating profit in the second quarter, representing 10% adjusted operating profit growth versus the prior year, with adjusted operating margins up slightly year-over-year on a difficult prior year comparison. Operating profit growth was primarily driven by strong volume growth and acquisitions, while we continued to drive price and productivity actions to mitigate increased cost inflation. Moving to Page 7, Electrical Solutions results were also strong in the quarter. On the top line, Electrical Solutions generated net sales of $686 million, which represented growth of 25% versus the prior year. Organic growth of 18% was driven by strength in data center, light industrial, and nonresidential markets. Data center sales were up approximately 65% in the quarter as capacity additions, new product introductions, and content gains drove outgrowth in a strong underlying market. Our vertical market strategy and sales force alignment initiatives continue to drive commercial success in the data center markets and other high-growth areas of our Electrical Solutions portfolio. The acquisition of NSI contributed $35 million of sales for the partial month of June, representing approximately seven points of sales growth at accretive adjusted operating margins, in line with our expectations. Our integration efforts are off to a strong start, and early order activity has been favorable and customer response has been positive. As Gerben noted earlier, NSI is a strong strategic fit within our Electrical Solutions portfolio, and we are confident that this business will drive near-term and long-term value creation for our shareholders. Operationally, the Electrical Solutions segment delivered $146 million of adjusted operating profit in the second quarter, representing 18% growth versus the prior year. Strong volume growth, strong price and productivity realization, and attractive profit contributions from NSI were partially offset by higher cost inflation and increased year-over-year restructuring and related investments within the quarter. Adjusted operating margins of 21.2% were down 130 basis points versus a difficult comparison in the prior year, largely driven by the net margin impact of price-cost productivity as well as approximately 60 basis points of higher restructuring investment. However, we have continued to take pricing and productivity actions throughout the second quarter, and we are confident that the Electrical Solutions segment will return to adjusted operating margin expansion in the second half of 2026. Turning to Page 8 to discuss our full-year outlook. We are raising our 2026 outlook for sales growth, adjusted operating profit growth, adjusted operating margin, and adjusted earnings per share. On sales, we are raising our growth outlook from +8% to 11% to +16% to 18%, reflecting an additional five points of acquisition contribution from NSI as well as an increased organic growth outlook from +6% to 9% to +9% to 11%. We are raising our Utility Solutions organic growth outlook to +7% to 9%, largely reflecting strong visibility in T&D as a result of first-half orders, and we are raising our Electrical Solutions organic growth outlook to +12% to 14%, driven by our increased expectations for data center growth of approximately 50% for the full year, as well as stronger nonresidential and light industrial markets. Our organic growth raise is primarily driven by stronger volumes along with modest incremental price realization relative to our prior outlook in both segments to offset increased inflation. Operationally, we anticipate adjusted operating margins of 23.1% to 23.4%, representing 40 to 70 basis points of year-over-year expansion. This outlook includes margin accretion from NSI, accelerated investments in service and capacity expansion to support customer needs in high-growth areas of our portfolio, and increased full-year restructuring investment. Additionally, we anticipate an improvement in price-cost productivity relative to our prior outlook, driven by an anticipated net benefit of $20 million in the fourth quarter, largely as a result of IEPA refunds net of potential customer considerations and a slight increase in underlying tariff costs from recent changes to the Section 301 tariff framework. Below the line, increased net interest expense of $170 million is driven by borrowings for the NSI acquisition. We expect a full-year adjusted tax rate of 22.0% to 22.5%, though we anticipate a higher tax rate of approximately 24% in the third quarter driven by timing of discrete items. We are raising our full-year outlook for adjusted earnings per share from a range of $19.30 to $19.85 to a range of $20.25 to $20.55, which represents an increase of approximately 4% at the midpoint and a range of 11% to 13% growth year-over-year. We anticipate approximately 90% free cash flow conversion on adjusted net income in 2026, which reflects the impact of increased year-over-year spending on capital expenditures and NSI acquisition costs. Finally, I will highlight that our full-year outlook reflects approximately 20% adjusted operating profit growth at the midpoint of our range, reflecting highly attractive underlying operating performance. Now let me turn the call back over to Gerben to provide some concluding remarks.
Great. Thanks, Joe. We are confident in our ability to execute over the second half to deliver on a strong 2026 financial outlook. In the near term, we are focused on driving outgrowth in our attractive end markets through product and service differentiation, executing on investments to support customer needs, and continuing to effectively manage price and productivity in an inflationary environment. Longer term, we continue to believe that our utility and electrical end markets are in the early stages of a highly attractive multiyear investment cycle, and we look forward to sharing more details with you on our long-term strategy and outlook at our next investor day, which we plan to hold at our Utility Solutions training center in Centralia, Missouri on March 4, 2027. With that, let me turn the call over to the operator.
Questions and answers
And we ask that you please limit yourself to one question and one follow-up. Our first question comes from the line of Jeffrey Sprague from Vertical Research. Your question, please. Jeffrey Sprague, your line is open.
Sorry about that. Looks like I was muted. Good morning, everyone.
Hi, Jeffrey.
Gerben, can we just dial a little bit more into the machinations, type of infrastructure? The strength in distribution, I thought, was notable. So kind of wondering there if there is some kind of inventory restock after the destock you have gone through for a while. And then on the transmission and substation side, it sounds like it was not particularly strong on the top line in the quarter, but obviously you have all these orders. Was there some sort of timing benefit that impacted that part of the business in Q2 that is fortifying your fuel in the second half?
Yeah, Jeffrey. Thanks for the question. Certainly, strong order rates — we mentioned a book-to-bill of roughly 1.2x in the quarter — were pretty broad-based across our business, both from grid infrastructure as well as grid automation. Within grid infrastructure, it was broad between distribution and transmission. So with distribution up double digits, transmission and substation were also growing nicely in the quarter and we expect acceleration in the second half. That comes through the visibility we have with orders and backlog. The pipeline and quoting activity continues to accelerate. When we look ahead at the multiyear cycle, we see strong momentum supported by data center and utility CapEx, and our position in these markets is leading with a significant installed base and reputation. On transmission and substation specifically, which you pointed out, we were up high single digits in the first half and we expect to be up double digits in the second half. There is nothing unusual beyond some project timing when projects shift quarter to quarter, which can create some noise. Based on what we are seeing in the market, our quote activity, orders and backlog, we feel really good about the increased guidance we are giving for the second half.
Right. And the size of the guide obviously conveys the confidence. Is there anything, though, like the kind of variance around that in terms of supply chain, your own capacity additions or project timing that creates a variable outcome in the second half in your opinion? Also, on the implicit margin expansion in the back half that is part of the guide here, would you level load that across the quarters or is it a little more backloaded? I guess you got the tariff refund in Q3, so maybe it is front loaded Q3 to Q4. A little color there would be helpful.
I would say nothing notable on the supply chain. We are continuing to add capacity across the business, particularly in our substation part of the business where we are adding capacity. This is embedded in our guidance and supported by the orders and backlog. So we are confident growth will accelerate in the second half. Regarding margin expansion, Joe can add color, but we do expect some timing dynamics given the IEPA tariff refunds you referenced.
Yes. You put your finger on it there, Jeffrey. We are anticipating the margin improvement to be a little more loaded in the back half given the timing of those IEPA tariff refunds and how they roll through. But we are really confident in that back-half margin expansion playing out.
Great. Thanks. I will leave it there.
And our next question comes from the line of Christopher Snyder from Morgan Stanley. Your question please.
Thank you. You guys talked about, in utility specifically, the first half book-to-bill of 1.2 gives you guys pretty good visibility into the back half. Are you guys starting to build any sort of visibility into 2027, or is it still too early to see that in the order book and backlog? If you cannot see it yet, how have customer conversations trended for 2027? Does it feel like you guys could sustain something at the higher end or even above the organic target?
Christopher, we are seeing orders starting to be booked into 2027, particularly on the transmission and substation side. Utilities are planning further out for load-growth and higher voltage systems, and that is showing up in bookings. Based on what we are seeing in the order book, conversations with customers, and the broader market dynamics — data center build-outs and the need to add load plus ongoing system hardening — we feel good about the outlook into 2027.
I appreciate that. And maybe a follow-up on price. I remember you pushed through price in April. Can you talk about realization of that action? Has there been pushback in the channel? Should we expect more price action into the back half given inflationary pressure?
Sure. Good morning, Christopher. On the price equation, we pushed price through in April and expected about one point of price from that action, raising our full-year price expectation to about three points. Since then, we've experienced a bit more inflation and implemented additional pricing in July. Our expectation for that recent price increase is roughly another half a point in the back half of the year. So think about it as three to four points for the full year.
I appreciate that. Thank you.
And our next question comes from the line of Chad Dillard from Bernstein. Your question please.
Hey, good morning, guys. Just a question on your expansion. Can you give us more color? What verticals are you expanding? How do you think about the revenue unlock? And when do you think that will be completed?
Good morning, Chad. The capacity expansion story is an important part of our growth initiatives as we service strengthening demand. Our CapEx investment this year is anticipated to be roughly $175 million to $190 million, up from $155 million last year. Much of that spend is focused on adding capacity and productivity initiatives, with a significant emphasis on capacity. Over the last couple of years, we continue to bring new capacity online, and each quarter as that capacity is turned on, we absorb new revenues. It's hard to precisely translate that to a quarter-by-quarter number, but on a go-forward basis, think about bringing on roughly $25 million of new capacity-ish. It's not always linear, but we will continue to progress through the back half of 2026 and into 2027.
Gotcha. That is super helpful. Secondly, it sounds like you are seeing a larger slug of projects flowing through. How does your win rate on those larger projects compare versus the corporate average? And can you talk about your modular approach and how that helps you win?
Starting with the modular trend, it's broad across our business and the market, driven by labor availability and a preference for factory-built solutions for quality control. For example, in our data center and PCX businesses, we do power skids, and in substation we build control houses in a factory environment and then plug-and-play them into the system. On a SKU level, DMC Power is a good example of a connector where crimping in the field replaces a traditional welded field connection, requiring less skilled labor and enabling quicker installation. We see numerous opportunities to bundle SKUs or provide integrated component solutions across our broad portfolio. Regarding large projects, project quotes in transmission and substation have about doubled over the last couple of years, driven by higher voltage projects and longer-term utility planning. Our win rate on those projects is similar to historical levels, but there are more of those opportunities now, given the pipeline growth.
Thank you. And our next question comes from the line of Tommy Moll from Stephens. Your question please.
Morning and thank you for taking my questions. Gerben, I wanted to start with recent trends in distribution. Great to see you up double digits this quarter, but that is clearly above the trend line for that business. What more can you tell us about what is driving that strength, and what are you embedding for your assumption in the second half there?
Distribution is off to a good start and reflects strong underlying markets as well as some destocking recovery that occurred over the last couple of years. Comps remain somewhat easy to lap versus last year. There is strong investment in transmission and substation markets, but underlying distribution markets remain very strong due to the age of infrastructure and the need to harden and improve resilience. That investment is embedded in utility CapEx budgets. We believe the underlying market remains strong and expect distribution to continue to be attractive into the second half and into 2027, with longer-term mid-single-digit-plus growth.
Thank you for that context, Gerben. I also wanted to ask about recent trends in meters and AMI. You mentioned a steady improvement and some orders suggesting continued growth in the second half and into next year, which is a different tone than we've heard recently. Any gaps you can fill in would be appreciated.
A little context here: grid automation had declined for several quarters, largely led by the Aclara business. Last quarter we said grid automation would return to slight growth in the second quarter, and that happened. Book-to-bill in grid automation was above 1.0, which gives us confidence for continued growth into the second half. Specifically for Aclara, we see improvement in project flow, particularly in the muni and co-op spaces. We refocused investments last year towards those areas and right-sized the business, and we are starting to see that pay off through small and medium projects and international projects that set us up for growth in the second half and into 2027.
Thank you. And our next question comes from the line of Christopher Glynn from Oppenheimer. Your question please.
Hey. On the accelerated data center growth, you talked about impact of capacity adds, new products, as well as content. I want to drill into the content component. Is that a change in allocations you are getting for certain product categories, or really an expansion of the scope of your design wins?
I would call it more of the same. We continue to add capacity on core product lines that go into data centers. An important piece is our short-cycle data center support business: if we have inventory available in the right place at the right time, customers pull it quickly. We've been aggressive in investing in shelf inventory to support the vertical market strategy, which puts us in a favorable position to win business.
I'd add that as data centers evolve to higher capacity, we are adapting products accordingly. There's meaningful new product development — for example, our new pin and sleeve devices at higher amperages — that contributes to content gains.
Thanks. Then on seasonality at Electrical: even if you strip out NSI, it was up about 15% sequentially. Was June particularly strong, and in particular is the nonres acceleration normalizing on project releases? I think project releases were gummed up, but now tariffs and different factors have normalized the baseline.
There was nothing unusually pronounced about June relative to the rest of the quarter; we saw solid growth over the course of the quarter in Electrical. We have continued growth visibility, although the business remains short-cycle with a lot of book-and-bill dynamics. We have good momentum in nonres and data center and light industrial, and nonres has been starting to click up over the last few quarters. We saw signs of an uptick in Q4, continued in Q1, and gained momentum thereafter, though we remain cautious about extrapolating acceleration beyond current trends.
Thank you. And our next question comes from the line of Nigel Coe from Wolfe. Your question, please.
Good morning, everyone. I wanted to try and unpack the 40 basis points increase in operating margin for the full year. My math gets about 30 basis points from tariff, and I'm guessing about 40 basis points from NSI. Could you clarify that? How is core price-cost-productivity trending from your initial view? You talked about price increases in the back half. How is that all playing out together?
Nigel, you're right on the roughly 30 basis points from net tariff and about 40 basis points from NSI. The remainder is operational volume growth coming primarily from the Electrical side — nonres, light industrial, and data center — which is partially offset by higher levels of investment that we are making back into supporting growth. That incremental investment partially offsets the volume benefit and is part of the equation.
Understood. Does the tariff benefit land disproportionately within Electrical versus Utility? And looking beyond Q3 into Q4, do you think Electrical will be back to margin growth in Q4?
We would split the tariff roughly half and half between Electrical and Utility, and it's concentrated in the third quarter. We do see Electrical margins returning to expansion in the back half, both in Q3 and Q4. Q3 will see the surge with the IEPA refund dynamic, and we are anticipating continued margin expansion year-over-year in Q4 for Electrical.
If you deduct out the tariff in Q3, would Electrical still be in expansion?
That's a bit difficult to reconcile live, Nigel. We can take that offline and walk through the math in more detail. There are a number of moving pieces including price and restructuring investments.
Thank you. And our next question comes from the line of Alexander Virgo from Evercore ISI. Your question, please.
Thanks very much. Wonder if I could dig into the book-to-bill a bit more. A 1.2x book-to-bill implies about $2.4 billion in the first half. I assume not all of it is expected to be delivered in the second half. Could you expand on duration and changing dynamics in customer projects, and how much is expected to roll into the end of the year and into 2027?
Thanks, Alexander. We are a short-cycle business, so a portion of the book-to-bill will be seen in the second half, which supports our increased organic growth guidance. We are also seeing bookings into 2027, especially for longer-cycle product lines like transmission and substation. That gives us added confidence on the multiyear investment cycle thesis and sets up attractive performance into 2027.
Thanks. Follow-up on the roughly 60 basis points of headwinds from restructuring in HES year-over-year: is that something to think about for the second half as well, or is it more one-off due to NSI acquisition and integration costs?
Not really related to NSI. That is part of our ongoing Electrical segment transformation program. We are anticipating approximately $20 million of restructuring-related charges in the full year, with roughly half or slightly more spent in the first half. A portion of that investment is in the back half as well, so the guidance assumes continued restructuring investment to position the segment for efficiency and margin expansion in 2027 and beyond.
And our next question comes from the line of Steve Tusa from JPMorgan. Your question please.
Hey, good morning. Last quarter you provided commentary on the high-voltage transmission opportunity, the $1.5 billion over 10 years. Any update on these projects? Some of these projects should be starting around now in the second half of the year?
Indeed. The opportunity is broad-based and tied to where load growth and data centers are building. Our first 765kV wins will start shipping in 2027. We are also seeing 500-550kV applications for interconnects that we are shipping this year and in the second half. The pipeline activity is strong; we are quoting roughly twice the volume compared to a couple of years ago, much of it driven by higher-kV projects. We have a leading installed base, deep relationships, innovation capability, and testing labs to support these higher-voltage projects. If you think about the $1.5 billion opportunity over 10 years and our likely win rate, it equates to roughly a point of additional growth over the next several years for our business.
Just a follow-up on the growth outlook for this year: in Grid Infrastructure you said it was expected to be up double digits. The comp gets harder in Q4; is there any reason revenues in this business cannot be up in Q4 given the momentum in book-to-bill, or is there seasonality that will limit growth from Q3 to Q4?
Grid infrastructure is pacing roughly double digits for the year and we anticipate that momentum to continue. You are right the comp is tougher in Q4, but the momentum remains and that pacing is how we would think about the back half, including the fourth quarter.
And our next question comes from the line of Brett Linzey from Mizuho. Your question please.
Hey, good morning. My question is on price-cost-productivity. The net $20 million improvement in Q3 sounds like that is a refund. What is implied for Q4 in terms of refund impact, if any? And is there any structural benefit from recent changes to the Section 301 tariff framework embedded in the guide or potentially incremental?
The $20 million benefit included in the guide is anticipated to be realized in the third quarter. If any additional amounts spill into other quarters, we will update and be transparent. Regarding Section 301 and tariff framework changes, there have been minor changes over the course of this year with some small pluses and minuses; nothing of transformative magnitude embedded in the guide beyond what we've discussed. On free cash flow conversion, over the next 12 to 24 months we expect elevated levels of CapEx as we invest to support growth. Historically we converted at roughly 100% of adjusted net income with CapEx under 2% of sales. We're pacing at about 2.5% to 3% of sales now, which will naturally temper conversion and is why we expect conversion around 90% over the next couple of years as we invest in capacity. Working capital dynamics tied to growth also affect conversion, though to a smaller extent.
Alright. Thanks. Best of luck.
This does conclude the question-and-answer session of today's program. I would like to hand the program back to Daniel Innamorato for any further remarks.
Great. Thanks, everyone, for joining us. We will be here all day for calls. Thank you.
Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.