Hubbell Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
April 25, 2023

There are 11 speakers on the call.

Operator

You for standing by, and welcome to the Hubbell Incorporated First Quarter 2023 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. As a reminder, today's program is being recorded. And now I would like to introduce your host for today's program, Dan Amerado, Vice President, Investor Relations.

Operator

Please go ahead, sir.

Speaker 1

Thanks, operator. Good morning, everyone, and thank you for joining us. Earlier this morning, we issued a press release announcing our results for the Q1 of 2023. The press release and slides are posted to the Investors section of our website at hubbell.com. I'm joined today by our Chairman, President and CEO, Germin Bacher and Our Executive Vice President and CFO, Bill Sperry.

Speaker 1

Please note our comments this morning may include statements related to the expected future results of our company and are forward looking statements as defined by the Private Securities Litigation Reform Act of 1995. Therefore, please note the discussion of forward looking statements in our press release and considered incorporated by references to this call. Additionally, comments may also include non GAAP financial measures. Those measures are reconciled to the comparable GAAP measures and are included in the press release Now let me turn the call over to Gurvin.

Speaker 2

Great. Good morning and thank you for joining us to discuss Hubbell's Q1 2023 results. Hubbell is off to a strong start to the year. Our first quarter results exceeded our expectations, driven primarily by 3 factors: stronger stick rates and realization on incremental price actions Effective ramp up of recent capacity investments and improved operational productivity. We are raising our full year outlook this morning to account for this outperformance, while maintaining a balanced view of risks and opportunities as we navigate in a more uncertain second half.

Speaker 2

Our investments in capacity, Innovation and productivity are yielding strong returns and enabling us to effectively serve strong customer demand for Hubbell's Critical Infrastructure Solutions. Most notably, utilities continue to actively harden and upgrade aging infrastructure, while also investing to facilitate renewables and electrification through new interconnections and enhanced smart grid applications. We achieved double digit sales growth in the Q1 as improved production output enabled continued volume growth, while leading service levels supported continued demand strength and price realization. Operationally, we achieved over 600 basis points of adjusted operating margin expansion in the quarter, driven by favorable price cost and productivity in addition to volume growth. While utility solutions continue to perform exceptionally well in a strong market environment, we are also very pleased with the operating performance of electrical solutions, which achieved strong margin expansion in a more modest market backdrop.

Speaker 2

We're executing well in our strategy compete collectively as a unified HES operating segment, and we'll talk more about that later. Before I turn it over to Bill to give you more details on the financial performance in the quarter, I want to highlight a few recent accomplishments, which demonstrate that our strategy and the investments we are making into our business Are driving value for all our key stakeholders. 1st, Hubbell Power Systems and Boerne are proud to have been named Supplier of the Year by 2 of our largest electrical distributors in 2022 with strong demand and tight supply chains in the utility, T and D and industrial markets, Delivering on commitments to get customers the product they need when they need it, while maintaining consistent quality, reliability and service It's critically important. While the supply chain environment remains challenging, our ability to execute and our willingness to invest in production Capacity and working capital has helped strengthen our long term relationships with major customers. In our Electrical segment, we're also pleased to have been recognized with Product of the Year award by major trade publication for 2 innovative product launches, EDGE Connect screwless termination wiring devices is a product line we launched last year with Innovate on 100 year old product design, Eliminating the need for installation tools and delivering 80% labor savings for installers.

Speaker 2

Verdi's QuickShear Bolt is a new product for solar and wind markets, which eliminates the need for compression tooling and manual torque wrenches, Simplifying conductor installation and saving the contractor time in the field. These are just a couple of examples of the investments we are making into Innovation to accelerate Hubbell's organic growth profile in core markets as well as strategic growth verticals. And finally, for the 3rd consecutive year, Hubbell was named 1 of the World's Most Ethical Companies by Ethisphere, a distinction that recognizes All of our employees for their dedication and are holding our core values each and every day. One aspect of those core values is our commitment to sustainability. And as many of you will have seen, in March, we released our annual sustainability report with refreshed multiyear goals to substantially reduce greenhouse gas emissions, Water usage and hazardous waste by 2,030.

Speaker 2

These new goals supersede our initial 2025 goals, which we achieved ahead of schedule. Sustainability is a core component of our business strategy, not just in our own manufacturing and operations, But through the impact of our products and making critical infrastructure safer, more reliable and more efficient, We continue to accelerate our investments in areas like T and D infrastructure, renewables, utility automation, electric vehicles and broadband communications, each of which offer attractive growth opportunities for our shareholders, while enabling Hubbell to further its mission to energize and electrify our economy and our communities Now let me turn it over to Bill to give you some more details on our performance.

Speaker 3

Thank you, Gerb, and good morning, everybody. Appreciate your interest in Hubbell. I wanted to start by reminding us when we were together in January Talking about our full year outlook, we established a couple of important components of a framework of that outlook. First is that we were confident in our end markets that they would outgrow GDP, function of some of the key electrification megatrends. We were confident that we were well positioned in those end markets with Brands and solutions and people processing technology to continue to satisfy and service the customer.

Speaker 3

We felt that our pricing, which is in response to a couple of year impact of some inflation, Had us set up well for 2023 with a couple of points of wraparound. And we also stated that Our visibility to the first half was better than the second half. And so it's important for us to get off To a good start, and we were trying to be explicit that we had a front half loaded outlook As a result of that second half uncertainty and as Gerben had said, my comments, I'm starting on Page 5 of the materials. We exceeded our expectations significantly in the quarter. You see sales of 1,290,000,000,000, 11% growth, was the 6th consecutive quarter, Double digit growth in sales for us, I think pretty good indication of solid demand out there.

Speaker 3

Right now that demand is notably skewed towards the utility side of our business versus the electrical and We'll talk a little bit more about that as we impact the results. OP margin of 20.7%, That 20% level, kind of a milestone achievement for us And really driven by some of the price cost drivers that and productivity that Gerben had mentioned. Earnings up 70 percent to $3.61 nearly $1.50 almost of new earnings generated versus the prior year period. And cash flow, this is typically a seasonal low for us At the very beginning, Q1, but a nice amount of cash being generated because of the income that we generated. So on Page 6, let's drill down a layer into that strong performance.

Speaker 3

Starting in the upper left with sales, the 11% growth is comprised High single digit price increase and low single digit volume increase, the volume Varied by segment where it was quite flat in electrical and very strong growth in utility. The OP on the upper right, you see an increase to $267,000,000 of OP, 66% increase over the prior year, and again at that 20% benchmark level. Earnings per share grew just a little bit more than the operating profit driven obviously by that profit, but also Taxes were just slightly lower this period. And on the net interest Expense line, we have our interest costs in the form of our bonds are fixed Versus the cash we have earns variable rates and with rates rising, we earn more income, so Reduce the net interest expense. So you got a little bit favorability below the line and inside of earnings.

Speaker 3

And The cash flow there, you can see the compare to last year. Right above it, you see the amount of income becoming more cash flow. And quite important for us to have the cash to leave us in a position where we're poised To support our investment, we are keen to continue to increase CapEx. We think there's excellent growth opportunities for us on the utility side and continues to be good productivity opportunity on the electrical side, as well as to have more capital to support investing in acquisitions. And we'll talk about A couple of the acquisitions we've done and how they're doing since we've brought them on.

Speaker 3

Let's unpack those results By segment and you'll see different profile here as we go through. Utility right now is the engine Driving the Hubbell Enterprise, we find ourselves with a very constructive set of market dynamics, Coupled with a really excellent positioning and a best in class leading franchise that we've constructed Over the decades here, with components, communications And controls really from the backbone to the edge, and a really, really strong franchise that's performing Really well in these market conditions. So starting with sales, the 20% growth in sales The $782,000,000 is comprised roughly half from price increase And half from volume gains. The volume was skewed more towards the transmission and Distribution component side versus the comms and control side, we feel that the CapEx that we've been investing to add capacity has allowed us to grow sequentially and year over year. And that's been really helpful.

Speaker 3

I think besides helping us grow, it's helped us manage service levels And the feedback we keep getting from customers is that service level is beating that of the competition. And I think Those service levels in turn are reinforcing our value proposition and helping us support a pricing environment as well as we believe leading to some share gains on the volume side. On the Communications and Controls, you see 4% growth there. You'll recall that through much of last year, that was bumping along flat. And so we may We're starting to see a little bit of thawing in the supply of chips, allowing those meters to get Built and installed, and we're looking forward to more of that as we go forward.

Speaker 3

On the operating profit side, 87% growth to $191,000,000 You see almost $90,000,000 of new profit generated by the segment, just a really impressive Financial performance for them. You have lots of things going right. You have price and material being positive. On the pricing side, that's A multi quarter trend that you all have seen on the material side Actually, a little bit new to see that there was actually some tailwind that came from materials As opposed to we had been facing inflation all of last year on that side. So Both of those contributing tailwinds, which as you see pushed up margins impressively.

Speaker 3

The volume that we enjoyed Drop through at attractive incrementals that helps push the margin up. And we've been talking to you about The impact of disrupted supply chains on impairing our productivity last year and we're seeing some A return to normalcy in some of those dimensions where that productivity is starting to come back and be positive. So A lot of drivers really helping lift the margin and propel the results of the Utility segment. We thought it would be helpful on Page 8 to maybe give a multiyear view How the demand pattern has looked, and we've shared with you here a picture of the backlog. And what you can see is starting really at the beginning of 2021, a very significant and sustained increase In the backlog on the utility side of distribution and transmission components It's obviously driven by the fact that the demand exceeded our ability to be able to make and ship A like amount of material.

Speaker 3

And one of the reasons we wanted to show you the page is we feel That level of demand is not the norm and would not be sustainable level over the long time. Essentially, I think we see the order pattern was responding to longer lead times and the fact that we were in an increase price environment, both of those phenomena, I think, cause people to put their orders in earlier than they otherwise might. And that's evidenced and supported by the fact that there's quite a bit of content in this backlog that's dated longer than 90 days. And so what we expect is that as we start to get the supply chain normalized, get our lead times normalized And bring those factors down, we think we'll be enabling our customers To get their orders put in with the anticipation they'll get the material much faster. And so our anticipation is that the order rate can come down and we'll be reducing this backlog To get it back into balance and what we feel over the medium and long term is a mid single digit sustainable Book and bill order and ship rate.

Speaker 3

And so we really wanted to show you this page. It's part of What gives us the conviction to raise our guidance that Ervin mentioned at the top, we think this momentum, You start to create visibility through the better part of this year. And so it gave us the confidence That we could give you that increase in guidance. On Page 9, We switched to the Electrical segment and you'll see very strong profit performance, an increase of 30% To 15% margins, dollars 76,000,000 of OP on flat sales. That flat sales includes an acquisition of PCX, which just to remind you was A very intentional increase in our exposure to the data center states.

Speaker 3

That business is based down in Raleigh and Gurban and I and some of our partners had the opportunity to go visit the team last week in Raleigh and It's great to see them flying the Hubbell flag at their facility and see how excited they are to be part of the Hubbell family And the greater resources that we have, which they believe is going to enable them, to be a more capable competitor. So Welcome those folks to our family. The counter is that the organic part of electrical was down a little bit. We saw softness in residential at the double digit level. We had strength in our industrial markets and notably some of the verticals we've been calling out in renewables and Data Center and Telecom.

Speaker 3

And I think one way in a time like this Besides the compare to prior year is to also look at the sequential trend in demand and sales And typical seasonality for us is to have the 4th quarter lead to A slight decline in the Q1 of a couple of points that would be typical seasonal progression. And the fact that it's flat This year is a favorable compare to that typical season and leads us to believe that demand is in fairly healthy shape there. But I think more impressive for us on the electrical side was the margin performance and similar to utility, Very good price material performance, same improved productivity where the plants are becoming more Efficient after dealing with some of the inefficiencies forced on them by the pandemic. We also thought on Page 10, it would be worthwhile to show you How we're building around some of these identified verticals. And you'll remember at Investor Day and Gurvin mentioned in his comments We're trying to compete collectively in the Electrical segment.

Speaker 3

And at Investor Day, we shared some of the benefits of Transitioning from a 3 vertical silo segment to a single segment, We think there's efficiency gains, but also importantly effectiveness gains. This is an example of the ability to be more effective. So we organize around the renewable, in this example, the renewable vertical. And again to remind you, so this is solar and wind applications. We're not making solar panels.

Speaker 3

We're not making wind turbines. Our approach is around the balance of system of components that those applications require And those balances systems can come from different business units across our electrical segment. So The trick is to get the sales force to be very effective at cross selling, to get the marketing team Focused on helping to solve customer problems, to get the capital flowing toward New product development that can come out of that improved voice of customer that the newly organized sales force can get. And Gurman mentioned a couple of these products, but good examples of us being able to serve a vertical more capably When we compete collectively as an electrical segment, we thought it noteworthy to show you that in just 3 years at the bottom, we've been able to Double our performance in the vertical to about $100,000,000 of exposure and We anticipate similar amount of growth as we move forward. I think also think of this As a model of other verticals that we're intending to become more vertically oriented around, including data centers, Telecom and electric vehicles, all of which were using similar techniques to become better and more effective.

Speaker 3

So how does this performance and all that we're doing, how does it compare So what we said when we were together in January and where does it take us as we look out. And to us, important for us to Where do we see improvement? Where do we see things the same and what is still uncertain? And on the improvement side, It clearly starts with the pricing actions. So actions that we were contemplating at the end of the year And implemented in the New Year, had stick rates far above historical averages and far above our expectations.

Speaker 3

I think it's an example of the channel really endorsing and embracing These pricing actions and that created a big improvement. Additionally, you recall our CapEx We've gone from about $100,000,000 to the ballpark of $130,000,000 last year. We're anticipating taking it up to $160,000,000 this year. Those Big improvements in CapEx are paying off in our ability to ship more volume. And certainly, the productivity That was impaired a little bit last year by our labor being not available on a consistent basis, materials Not being available on a consistent basis and transportation likewise, not being available on a consistent basis made it very difficult To plan and execute inside our plants, and we're seeing those conditions improve, and we're seeing as a result, Productivity Improvement.

Speaker 3

So

Speaker 2

all of

Speaker 3

that is causing us to raise our sales and margin outlook. What's the same is utility Demand and the market strength, we see continuing. We showed you evidence of that order pattern in the backlog page. The electrical markets continue to trend and as we said, having a favorable compare sequentially to the 4th quarter, We think is a good sign of demand. And we still believe that we have A significant part of the portfolio is going to show resistance to consumer led Recession effects that includes both utility side transition and distribution Components, but it also includes elements on the electrical side where both industrial and some of those verticals inside renewable telecom and data centers.

Speaker 3

We expect to grow through any macro. But on the uncertain side on the right, we still have uncertainty in the second half. We think we see good momentum to the Q2, which gives us some confidence. We still are working through Channel inventory levels and making sure that what our customers have on the shelves is aligned with what they know they can move and Making sure they have the confidence to keep putting orders in with us that sell through. I think the non res end markets, whether they're impacted by any macro uncertainty, again, We don't see signs of that yet, but we read the papers just like you all And no, there are concerns out there.

Speaker 3

So that's causing us to have some conservatism as we think about the second half. In other words, our Guidance that Gurban is about to talk through is not the Q1 seasonally extrapolated through the year. It involves Good momentum into the second and then some caution around the second half. So I'll turn it to Gervin to

Speaker 2

Great. Thanks, Bill, for those additional insights on our results. Hubbell is raising our 2023 outlook to an adjusted earnings per share range of $13 to 13.50 representing approximately 25% adjusted earnings growth at the midpoint. This outlook now assumes 8% to 10% total sales growth and 7% to 9% organic growth for the full year, consisting of Approximately equal contributions from price realization and volume growth. We continue to expect full year free cash flow conversion of 90% to 95 This updated outlook incorporates a continuation of strong fundamental performance from the Q1, while also maintaining a balanced view of risk and opportunities.

Speaker 2

It also enables us to accelerate our investment levels To support high return capacity, footprint and innovation projects over the balance of 2023, We believe this balanced view should enable us to achieve our outlook in a range of macroeconomic scenarios. Not only is this updated outlook well ahead of our expectations coming into 2023, but it also puts us on the path to achieve our 2025 targets, which we laid out for you during Investor Day last summer, 2 years ahead of schedule, all while accelerating investments back into our And without substantial benefit from capital allocations. I'm proud of our employees for the results that they are driving for our customers and shareholders, and we remain committed to delivering differentiated results over the near and long term. With that, let me turn it over to Q and A.

Operator

And our first question comes from the line of Jeffrey Sprague from Vertical Research. Your question please.

Speaker 4

Hey, thank you. Good morning, everyone. Good morning, Jeff.

Speaker 2

Good morning, Jeff. Good morning.

Speaker 4

Hey, just a couple of things. First, just on Utility. Is your remark about mid single digit kind of the continuation of this new hire base? Or Do you foresee a timeframe, pick a year, maybe next year where revenues actually have to sag a bit to kind of normalize things?

Speaker 3

I mean, we're anticipating it's off of the new base, Jeff, but it's certainly something where We'll continue to be watching that graph we shared with you, comparing orders to shipments. But there does appear To be adequate backlog to in order to continue to grow off that base level.

Speaker 4

And then just on electrical margins, are we beginning to see also some of the kind of restructuring and plant realignment Coming to bear here in these margins or is it just really more kind of a very favorable price cost dynamics? And maybe

Speaker 3

I would say, Jeff, it's more of the latter and the form I. E. More of the price cost And productivity that I would call being driven by the normalizing of operations inside the plants. I think that some of the efficiency that we'll get through Integrating into a single segment is actually still in front of us.

Speaker 4

And I'll leave the utility question to someone else. Gurvin, lighting. This would seem like an ideal time To execute an exit of lighting while you're just crushing it in utility, I just wonder your thoughts on that, how The business is, is there kind of a way to at least make it less important, even less so important than it's been recently? Yes.

Speaker 2

A lot of thoughts in that one. And let me just maybe give a couple of comments on it. First, maybe just set the Perspective on that business, it's single digits revenue Part of our business, so quite small. It operates at the lower end of our Margins and margins expectation, it's been particularly challenged the last year plus When container rates, which this business depends heavily on, escalated 3, 4, 5x. The good news is, while volumes are down and the markets Clearly and resi are down.

Speaker 2

The business is recovering quite well with Costs coming back in line. But all that said, we take the responsibility to look at our portfolio Quite seriously. You saw that we executed the C and I lighting business. I would say that in our portfolio was much more of a challenge in what our strategy was going forward. But we're active on this, Jeff, not just in The example that you may give of a resi lighting, but other product lines skew action.

Speaker 2

And as a matter of fact, part of what drove The electrical margin slightly better. This quarter was a conscious decision to exit some low margin business Switch that partially to higher, so it had a net revenue hit by the net margin accretion. So I don't ever take these kind of considerations off the table. We talked about some of the areas that it Does help us with particularly with our digital strategy. But if this business is more valuable to somebody else, we would certainly consider in our options.

Speaker 5

Great. Thanks.

Speaker 4

Much appreciated.

Operator

Thank you. One moment for our next question. And our next question comes from the line of Steve Tusa from JPMorgan, your question please.

Speaker 6

Hi, guys. Good morning.

Speaker 3

Good morning, Steve. Good morning. Can Can

Speaker 6

you just maybe give us an update on some of the absolute numbers embedded in the bridge for the year price cost and productivity or Anything else that on the quarter maybe just this quarter, just absolutes?

Speaker 3

Well, let's so let's start maybe with Your first half, which was thinking about the bridge to the year, we had started in January thinking that There would be about 2 points of wraparound price. That's obviously improved. And as Gurban said, about Half of our new sales guide is price. So that's a step up From a couple to more in the single digit of absolute. And then I think That's a pretty big thing as long as it's been interesting watching The cost curves, where we basically we follow steel the most closely, Steve, and Copper and aluminum has behaved a little bit like it where you saw a peaking back in the fall of 2021 and then A troughing at the end of 2022 and then a kind of reinflating now in the New Year.

Speaker 3

And That's kind of coming through now finally as actual tailwind, but it's possible Ultimately, that could as we're seeing inflation, that could kind of inflect a little bit. So it's easy for us to isolate price A little harder to nail down price cost because of that cost dynamic. But I think that's the biggest Absolute peace that's in there.

Speaker 6

So like I thought before we had like a negative $90,000,000 of costs or something like that. I don't know If that was a number you guys put out there or not. But so are you saying that that's like basically price cost or the cost side of that is now like Just basically modestly positive for the year?

Speaker 3

It's we've got it positive in Q1. The way we're looking at it, we're anticipating a reasonably flat and benign Contribution from the cost. So it makes the price a little more Drop through rather than being absorbed. Now you still have Other inflation, obviously, in nonmaterial places like wages and things like that. But the material And pricing equation has really improved quite a bit.

Speaker 6

Your understatements are legendary at this stage, A little more, I think it's a little more than a little more. But the last question just on the electrical volumes, Were they down like high singles year over year on the quarter? And I guess that's obviously not all resi. What else would have been down to drag that down or maybe it was all resi?

Speaker 3

No, resi, yes, your calculations is right. Resi at double digits and being the percentage of the segment that it is Represents a couple of points plus of that, but that still leaves others. And so there was Spots inside the commercial business, Steve, where we started to reduce our lead times And we started to see our customers managing their inventory and kind of that Sort of relates to, I think, Jeff's first question, right, where as the customer gets their inventory normalized, Is there a period where you see maybe an under ordering of a couple of weeks that affects things? And I think That's what we saw in some of our commercial businesses.

Speaker 7

Yes, makes sense. Okay, thanks.

Operator

Thank you. One moment for our next question. And our next question comes from the line of Tommy Moll from Stephens. Your question please.

Speaker 5

Good morning and thanks for taking my questions.

Speaker 2

Good morning, Tommy.

Speaker 5

I wanted to start On your revised revenue outlook, so up several 100 basis points from when we spoke last quarter. If we look at it by segment, Last quarter, the call on the utility side was for mid singles plus for the year and on the electrical side, low singles, both on an organic basis. You well exceeded that on the utility side and came in light on the electrical side at least for the Q1. So could you just Refresh us on what the full year framework is like on either side of your business?

Speaker 3

Yes. We've been quite careful to not reparse this framework into The two segments, but between them, we're thinking, their volumes can be mid singles. And I think that'll be Obviously, skewed towards utility being the heavy contributor there.

Speaker 7

Okay.

Speaker 5

May get a similar answer here, but I'll try anyway. Just specifically for your non res exposure in electrical, If volumes there were down in the Q1, it sounds like there's incrementally more caution in the second half of this year. So my assumption would be that your base case is for the volumes there to trend pretty consistently negative through the year. But if you could just comment there and also just anything that's changed versus last quarter?

Speaker 3

Yes. We're not I'd say let me just restate a couple of things. One is I don't think we are Increasingly cautious on the second half. I don't think we have that. Secondly, I think that One of the interesting elements of seeing the electrical contract a little bit in Q1 It is a function of the fact that they grew quite dramatically in the Q1 of 2022 And their sequential ramp up from the Q4, which as I said typically comes down was up significantly last year.

Speaker 3

So we have this Really hard compare, Tommy. And so to answer your question, to me, you start to get a little more reliant on Quential analysis and the fact that we were flat from 4Q to 1Q suggests to me some favorability. But as the compare won't be as hard as we go forward. So, I think that's I think that informs sort of our outlook, but I wouldn't say we've increased our caution in the second half.

Speaker 2

And maybe adding to that a little bit is to give you some insight into the complexities that we're working through and the thought process that We are as supply chain normalizes again, and we're now seeing that in Parts of our business, specifically in some of the non res businesses, you're really dealing with a couple of things. One is Just by the fact of lead times coming down should allow customers to not place orders for a little while and then place them again. The second component that's going on at the same time is when these lead times are coming down, the supply chain becomes more predictable. Customers and distributors don't need to have the inventory levels that they needed when there was a lot of uncertainties. At the same time, we're seeing Some of the inventory is coming down and managing both those dynamics is what Create some challenges for us to fully understand at what level is each distributor doing this, some are, some aren't.

Speaker 2

Are they really following the lead times down? Or are they still nervous in placing out? So there's a lot of complexities in it, which is why we're taking a more cautious approach kind of going into the second half for these dynamics.

Speaker 5

I appreciate it and I'll turn it back. Thank you.

Operator

Thank you. One moment for our next question. Our next question comes from the line of Josh Pokrzywinski from Morgan Stanley. Your question please.

Speaker 8

Hi, good morning guys.

Speaker 3

Good morning, Josh.

Speaker 2

So apologies, I missed a little bit of the

Speaker 8

prepared remarks. The call kept dropping. But I just want to dig in a little bit more on the utility side. I think even to start the year, there was some signaling that maybe things could be a little bit better. You saw like the EEI CapEx forecast looked pretty healthy, which is seasonally atypical.

Speaker 8

But just trying to get maybe my arms around How much of this is customers kind of preparing to do work and maybe building up some inventory? How much of this is maybe stimulus related, something like IRA? Because we've been in this environment of grid hardening and grid investment for a while, and This is just a big step function change. So trying to pin down how much of this is kind of episodic versus run rate?

Speaker 2

Yes. Maybe I'll start, Bill, and add in I would say, if you look at the underlying demand in the utility, It's still very strong, and we've seen that throughout the last couple of years ramp up. And We believe that, that fundamental longer term demand, what Bill talked about, mid single digits, It's still very much intact. Our Improvement has been, certainly, more driven by our ability to bring up our production capacities. And with some of these investments that we're making, We're not able to shift more.

Speaker 2

You can see that despite all of those efforts with the chart that Bill showed you that backlog Has still not come down. It's actually flattening a little bit and that's something we are expecting as we ramp up production and as lead times Come back in. So I would say we're still very bullish on the fundamentals here. I think the infrastructure bills are Very early. We expect more of that impact to come into next year and the next couple of years.

Speaker 2

So Yes. I don't think the increase is unusual by the actions that were It's just coming up a little faster than we anticipated with some of these investments that we're making.

Speaker 3

Well, I think, Josh, if you we're thinking it should be Mid single, if you take price out, this is sort of high single to double digit volume. So I do think can't prove this, but I think we have a little share gain involved in this. So partially, I think we're outperforming the market just because our service levels and our capacity is a little bit better because we've Supporting it with the investments that we needed to. You asked about projects, which is an interesting question, Because I do think the transmission side is quite healthy. Transmission tends to be more project driven.

Speaker 3

It has a more forward look to it, but net net, do I think utilities are like stockpiling Long term project partial inventories before they install it, we don't really see any evidence Of that, so I think it's I guess, I would say, I'm not sure if this is but I would respond to your question, San. I think the demand is a little bit stronger than the mid single that we think is the long run. I think we've got a little bit of share And that's kind of working out to our advantage and is frankly compelling us to continue to invest the CapEx In the business because the margins are there to generate really good returns for this incremental volume that we can get.

Speaker 8

Got it. Super helpful. And then just with kind of all the consternation around commercial construction. I know it's hard to follow every cable gland all the way to the job site, but any sense for what percentage of Business we should think about as kind of true new non res construction versus something that may be kind of away from The commercial element or more, I'll call it, retrofit, maybe not as dependent on something like bank financing.

Speaker 3

Yes. I think the answer to that It's about 2 thirds new and the balance is reno. And I agree, yes, that's sort of an estimate on our part.

Speaker 2

Got it. Okay. Thanks. I'll leave it there. Best of luck, guys.

Operator

Thank you. One moment for our next question. And our next question comes from the line of Joe O'Dea from Wells Fargo. Your question please.

Speaker 9

Hi, good morning.

Speaker 2

Good morning, Joe. Good morning.

Speaker 9

Hi. I wanted to start on margins. It looks like the guide is implying that Margins for the full year would be lower than where you were in the Q1. It doesn't sound like any of the commentary about the 2nd quarter Would suggest that we'd see something like that. So one, just to clarify that.

Speaker 9

And then 2, kind of what you're thinking about in terms of The back half of the year and what could contribute to margins maybe coming in a little bit lower than where you were in the Q1?

Speaker 3

Yes, Joe. So let's start with your first point, which is that we do see momentum into the 2nd quarter that we think Is Q1 like in terms of that? So yes. Secondly, the way this guide works, you're right, it's not just seasonally taken a first half and using the typical growth and margins off of that. So we've injected Caution, just because we don't know.

Speaker 3

One of the things we're expecting Is to invest more in the second half and that'll be a combination of growth investing and productivity investing. But just I think we felt we have decent visibility to the 2nd quarter And it feels like it gets more opaque to us. I think if I were to maybe Rephrase your question and say if the trends continue as they are in the first half into the second, we would actually do better Then this guide. So the guide is just has a cautious second half. We think out of prudence, We don't want to get our cost structure out too far ahead.

Speaker 3

At the same time, if there is growth in volume There, we're going to we feel very confident we can get our share and more than that. So, but so I think your observations are very accurate.

Speaker 2

Yes. And I think the Bill stated during his prepared remarks, a little bit of the Q1 is a lot of things going In the right direction for us, both the pricing that carried over, the new pricing that we implement at the same time that we saw some of the commodities Actually going down. Some of that is reversing. So we're seeing commodities actually going up and that would be Certainly, a slight headwind for the Q2. The other one is around pricing.

Speaker 2

And our view on pricing is that We've generally been able to hold on to it longer rather than shorter. I think in this environment, that's particularly But the magnitude of some of those price increases has us a little bit cautious too there of if Materials stay down. Can you hold on to those prices longer term? And then the last part is around what I talked about Of supply chains come back in, what happens on a more shorter term basis with inventory levels and how to manage through that. So Just a little more certainty going into that second half with some of these variables that has us a little more cautious.

Speaker 2

But yes,

Speaker 7

it could be better.

Speaker 9

I appreciate all the details. And then also just wanted to ask about sort of maybe more opportunities on the cost side when you talk about Commodity is getting a little bit better, obviously monitoring that, but also just smoother operations. Presumably, your suppliers are seeing some of the same types of benefits. And so just wondering how you're approaching that dynamic if you See opportunities to sort of go to your suppliers and sort of look for a little bit better kind of cost profile?

Speaker 2

Yes. Yes, absolutely. We're active In that, I would say, not just with the supply chain, but we're increasing our focus. And this will be Throughout this year, this will go into next year on productivity to bring that to a higher level. We've really struggled Throughout the pandemic with productivity, our factories weren't running smoothly, our supply chain was disrupted.

Speaker 2

So we're focused on one of those focuses is exactly what you said, is going back to our suppliers and looking for cost out. The other thing that I will say and this goes in part of the investments and could go will partially go counter to what I'm just saying is We're also spending a lot of time to improve the resiliency of our business, resiliency of supply chain. It's at the end what earns us The slight premium in the market is our delivery and our ability to service our customers. And we're doing quite a bit of work to strengthen that supply chain In cases, reassuring it, in other cases, finding duplicate Sources of supply and that at times as a cost actually increased to us to do certainly investment with tooling, But it's one that will serve us well in the longer term and will help us retain some of that premium in the market. So a lot of work and other work is going

Operator

on. Thank you. One moment for our next question. And our next question comes from the line of Nigel Coe from Wolfe Research. Your question please.

Speaker 7

Hi, good morning. Thanks guys. Thanks for the question.

Speaker 3

Good morning, Nigel. So I'm going

Speaker 7

to probably retread some of the maybe re ask The seasonality question is a slightly different way. Obviously, utility margins were gangbusters. When you go back in time, you'll see the 1Q margin So, this is normally the low point for the year. Clearly, the guy doesn't embed that. So, just curious, what could feasibly happen to materially break that Trend in the margin.

Speaker 7

Is there anything funky or one time ish in the 1Q margins for utilities? Just really curious What are you assuming on the margin line for utilities as we go through the year?

Speaker 3

Yes. I would say, Nigel, We really don't have a lot of noise or one timers in those margins. I would say, If you took a typical 4 quarter hubble year seasonality wise, There's less activity installation of our material in the 1st and fourth quarter And more in the second and third as a result of weather. And those volume changes typically drive incremental drop through such that you get the pattern that you just mentioned. So Part of what's different is we're operating at capacity right now, right?

Speaker 3

It's There's no there's going to be no seasonality in the sense of, oh, as the weather gets better, We'll be able to ship more because we're kind of cranking away. I think the second is, Again, thinking about price cost as a net number, and we sort of had Both variables break right here in the Q1 with price being very strong, as we said, channel being Very supportive and materials, a combination of commodities And components and PFR actually being for the first time In the last few years actually being a tailwind. And we're not anticipating that tailwind to continue, Nigel. So As we saw the commodities pick up starting in the New Year, we're thinking that'll be inflation To us, so, it is I know what you're saying when you look at a typical year, it has that seasonality and you think Things are getting better from here to us. We may be just in a little more of a sequential kind of Analytic framework and VPY because we're kind of building off the Q1.

Speaker 7

No, I agree with that. Thanks for the color, Phil. And then we talked about residential and commercial. Data center is a relatively small market for you guys, but it's growing and obviously will continue to grow. What are you seeing in that market?

Speaker 7

Because there's a lot of chatter about weakening trends. Just curious what your perspective is on data center?

Speaker 3

Yes. I mean, I think maybe because we're small, we still even if the FANGs Our firing people, we don't you can read that as, oh, man, they're not going to invest In data centers and we just think they were had maybe in the pandemic Overstaffed themselves as the war on talent kind of made them all hire each other's people a little bit. So we're sort of looking more As they're specking out these new data centers, I'd say they continue to revisit designs And they really are focusing on speed. And that's what they're saying to us. And It's possible, Nigel, that because we still are kind of enhancing our footprint here through better vertical sales force, Better balance of systems with products.

Speaker 3

This new acquisition is giving us quite a lot of visibility at the front end of projects. So I'm not sure if I'm saying we're bullish because maybe we're coming from a small share, It just feels to us like we see years of runway still and that may not be as much a market commentary as it is our

Operator

And our next question comes from the line of Chris Snyder from UBS. Your question please.

Speaker 10

Thank you. The company produced a very Strong 35% gross margin in the quarter. I know that there was some seasonal impact and obviously very strong price cost. So I do just kind of curious what you guys think is like normalized gross margin for the business. And I also believe you said that relative to February, the expectation is for a bigger price cost tailwind this year.

Speaker 10

And that comes despite metal reflation over the past couple of months. So just kind of curious more color on Thank you.

Speaker 3

Yes, Chris. So maybe let's start with your price cost. Yes, so the pricing actions that we We're taking at the end of the year that we didn't have insight into their stickiness when we shared Our full year outlook at the end of January, it was a much better take up than we expected and much better than historical average on price increase take up. So the price side of that is quite a bit bigger. And then it really does dominate and overwhelm what will happen from The amount of inflation that we've seen in the New Year on the materials side, and as I think Joe was asking beyond materials, we've got to do a really good job Of working our suppliers and making sure that Any lower material costs they got in 2022 that we're that's getting passed through to us.

Speaker 3

So We've got to do a really good job to make sure that, that cost side is managed, Chris. But I do think that the price cost, which we had 2 of price when we last Talked about this. We've added a couple of points to that and that's quite, quite meaningful.

Speaker 10

Thank you. I appreciate that. And then if I could just ask one more quick one. For T and D, the expectation that there's long term mid single digit So I was just kind of curious, when do you think the business will kind of compress back to that level? Is that like a 2024 expectation?

Speaker 10

Or do you think you could still realize outsized growth even through next year as well? Thank you.

Speaker 3

Yes. I think the Josh had asked about stimulus And we're not seeing a ton of direct impact of the stimulus yet. There's lots of planning around it. I think it is true that our customers are feeling that there's funding there. And so maybe in the absence of the stimulus, Chris, we might see that mid single digits maybe materialize in 2024.

Speaker 3

It's also possible stimulus will give us a little lift for a couple of years, but That's a little bit outside of our crystal ball right now.

Speaker 2

Thank you.

Operator

And one moment for our final question for today. And our final question for today comes from the line of Christopher Glynn from Oppenheimer.

Speaker 8

Thanks for squeezing me in and congrats on a rocking start to the year. So just had a follow-up on the accelerated price realization in the quarter, particularly in Utility Solutions. There is a long term dynamic where the utilities get rate increases to fund regulatory required CapEx So I'm curious, you're talking about expanding capacity a lot there. Is that dynamic starting to Shift to you where utilities are kind of goading you in a sense to continue that capacity investment?

Speaker 3

I would say encouraged, I would use rather than goaded, but we have Yes, strong to violent support from them that they're eager that we do that. I would say they're backing that up, I think, by giving us a little more share in the short term, such that that's encouraging us further. But for sure, There's even a case where Gerben can tell you where He wanted to get into some lines of business that we don't even have, just because they're looking for the Lead time management to get better and they're thinking that we could do a better job. And so yes, there's a lot of what you're saying

Speaker 2

Yes, absolutely. And the nice thing about our position in this is that we have direct engagement With a lot of the end users, right? So we have firsthand insights and Bill mentioned an example of a CEO that I just happened a couple of weeks ago in the conversation, but we have many of these Conversation. So our insight into where the demand is up and how sustainable or not that is quite good. And that's why we're Making the kind of levels of investments that we are right now in that, particularly in the utility business, Sean.

Speaker 2

Thanks. Talk soon.

Speaker 3

See you, Chris.

Operator

Thank you. This does conclude the question and answer session of today's program. I'd now like to hand the program back To Dan Amorado for any further remarks.

Speaker 3

Dan, maybe having technical difficulties. So he's he would like to close the call and tell you all that he's going to be around All day and all week to answer questions as you may have them. So, appreciate your interest. Thanks for attending.

Operator

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect.

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Earnings Conference Call
Hubbell Q1 2023
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