Hubbell Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 25, 2023

There are 11 speakers on the call.

Operator

Good morning and thank you for standing by. Welcome to the Second Quarter 2023 Hubbell Incorporated 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 Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Dan Enomirato, Vice President of Investor Relations.

Operator

Please go ahead.

Speaker 1

Thanks, Michelle. Good morning, everyone, and thank you

Speaker 2

for joining us. Earlier this morning, we issued a press release announcing our results for the Q2 of 2023. The press release and slides are posted to the Investors section of our website at hubbell.com. We're joined today by our Chairman, President and CEO, Gerben Bacher Our Executive Vice President and CFO, Bill Sperry. Please note our comments this morning may include statements related to the expected future results of our company.

Speaker 2

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. These measures are reconciled to the comparable GAAP measures and are included in the press Now let me turn the call over to Gurvin.

Speaker 1

Great. Good morning, everyone, and thank you for joining us to discuss Hubbell's Q2 2023 results. Hubbell delivered another strong quarter of financial results. Our favorable position in attractive markets enabled us to achieve 6% organic growth, which combined with improved productivity and supply chain dynamics to drive significant and margin expansion in the quarter. Solid execution through the first half of twenty twenty three and good visibility to continued strength in our businesses give us the confidence to raise our full year outlook again this morning.

Speaker 1

In addition to the strong financial results, we continue to improve our service levels to customers. Hubbell's investments in capacity, innovation and supply chain resiliency are enabling increased sequential output and improved lead times. Looking ahead, we expect grid modernization and electrification to continue to drive elevated demand for Hubbell's critical infrastructure solutions Both in front and behind the meter. We will continue to make the investments into our business to support this growth in the second half of twenty twenty three and beyond. Before I turn it over to Bill to give you more insights on the performance in the quarter, I would like to introduce our 2 new segment presidents.

Speaker 1

You will recall from our press release a few weeks ago that we announced Alan Connolly's retirement from Hubbell after 10 years of leading Aclara and in recent years our combined Utility Solutions segment. Allen's strategic vision and passion for innovation Played a critical role in accelerating the segment's organic growth profile and I'd like to thank him for his many contributions to Hubbell as well as strong financial performance for our shareholders. I'm excited to share that we've appointed a very talented Sesser and Greg Gumbs to lead Hubbell Utility Solutions moving forward. Greg has a strong track record of leadership and performance in the utility, Electrical and Automation Industries over his career and his skill set is well suited to help us further our growth ambitions across utility components, communications and controls. I've gotten to know Greg over the past year and believe he will integrate quickly and effectively within the organization.

Speaker 1

His focus will be on driving profitable growth by building on a strong core foundation while innovating and expanding in attractive adjacency. I'm also excited to announce the appointment of Mark Meichs to lead Hubbell Electrical Solutions. Mark is a long tenured Hubbell leader with a proven track record of performance and operational execution, most recently in leading Hubbell Power Systems. The strong results of that business over the last several years speaks for itself. Some of you will know Mark from our Investor Days over the past few years And he was a key partner to me when I led the utility business.

Speaker 1

He played a critical leadership role in our efforts to unify a broad portfolio of acquired Under an integrated business in Power Systems, organized to compete collectively with a simplified operating structure. As we continue our multi year journey to execute a similar playbook in HES, Mark is well suited to drive Both Greg and Mark are well supported by experienced and talented leadership teams and I am confident they will continue to execute on our core strategy together and deliver consistently differentiated performance for our customers and shareholders. With that, let me turn it to Bill here to walk you through the financial performance in the quarter.

Speaker 3

Thanks very much, Gurbin, and good morning, everybody. Thanks for joining us. Congratulations to Greg and Mark. And On a personal note for me, very, very excited to partner with both of you as we drive to future success with Hubbell. They're both off to excellent starts in their new responsibilities.

Speaker 3

I'm going to start my comments on Page 5 of That's really just a summary, very strong financial performance in the second quarter. Most of the compares we'll show you in this deck are against the Q2 of prior year of 2022. We find it instructive also to look sequentially to the Q1 of 2023. And I think that we see A lot of continuation of the positive trends that we experienced in Q1 and things played out quite similarly in the second quarter So a 6% sequential top line growth and a 0.5% or so of margin added. So A lot of the same themes that you'll remember from our Q1 call.

Speaker 3

You see sales at 1,000,000,000 3.7%, 9% growth with 3% coming from acquisitions, 6% organic, The organic being driven primarily by price, which is a theme, again, you guys saw in the Q1 with us going back to last year. OP margin reaching the 22% level, a very attractive level, nearly 6 point Improvement over last year, really result of the price cost being favorable, as well as some productivity from The supply chain normalization and some of the efficiencies coming with that. Earnings per share above the $4 level, Also very attractive 45% growth rate that increase in earnings Resulting being driven by the sales growth and the margin expansion at the OP level. Free cash flow of $192,000,000 really driven by the strong net income growth And that number is absorbing continued investment in CapEx and working capital. So I think that we're very pleased with this cash flow.

Speaker 3

It's allowed us to strengthen the balance sheet. You look at the balance sheet at the midway point here of 2023, you've got nearly $500,000,000 of cash, About $1,400,000,000 of long term debt, so our net debt to EBITDA being less than 1, We think really positions our balance sheet to be supportive of being in an investment profile And we think that can come both in the form of CapEx, OpEx as well as acquisition. And on the acquisition front, very pleased to announce in the second quarter, we were able to close our acquisition of Electro Industries, A very typical Hubbell size bolt on of $60,000,000 it fits into the utility segment. Products are in the distribution automation area, sensing and controls, power quality, metering, It fits very well with other products of ours in that space. So We welcome our new associates from Electro to the Hubbell family.

Speaker 3

I'm going to switch now to Page 6, which lays out our performance in this bar chart format and we'll drill a little bit into So the sales growth of 9%, we said 3% Acquisition, 6% organic. The organic is really all price. Volumes were down slightly overall, As electrical volumes were down and partially offset by the growth in utility volumes, I'll talk about each segment in subsequent pages a little bit more. The acquisitions from 3 Points came From 2 major contributors, 1 from each segment and I think good reflection of Our intentional investment strategy on the electrical side contribution comes from PCX, Which was a data center acquisition we made. We just passed our first anniversary of owning PCX Off to a great start growth and margin wise.

Speaker 3

On the Power Systems side, Ripley Tools, Very good extension on the component side for us for Power Systems. So again, good signals of how we intend to On the upper right, you see operating profit up 47% and above The 22% level, price cost really the biggest driver there. And interestingly, both levers contributing to the margin expansion. I think you've Seeing our price story play out over the last couple of years or so, but also this quarter we had Material cost flipping to a tailwind to actual deflation in both the raws and our component costs there Helping drive strong margins. We believe our pricing success Has been driven by our differentiated service levels.

Speaker 3

We get consistent feedback from our customers That we're outperforming competitors in that regard and that continues to inform us as we continue to invest. We want to push that differentiated performance and make sure we're able to support Those pricing levels and continue to make our margins durable and truly emerge From the pandemic as a more profitable company. Besides price cost, there also was productivity. I think We're finding that our factories performing better in 2023 than in 2022 really as supply chain is normalizing. We're getting a lot of those inefficiencies we experienced last year to be ironed out and that's helping drive margins for us.

Speaker 3

We don't think they're all the way back, but certainly a contributor. On the lower left, you have earnings per share. Again, the $4 level and a 45% increase, really all operating profit driven. Expense, really net interest expense as our cash, I mentioned that we are up to close to $500,000,000 That cash is actually starting to earn interest income to help offset the expense. On the lower right, you see free cash flow.

Speaker 3

This page depicts the 3 months of the second quarter, up 14% to 192. I find a little more instructive to widen the lens and talk about the 1st 6 months, where we've got $272,000,000 of free cash flow, which is more than a doubling of what it was last year And that's been absorbing a higher CapEx level. Our CapEx for the 1st 6 months of the year It's up about 2 thirds from what it was last year to almost $70,000,000 in the first half, as well as an increase in working capital Investment as we continue to need the inventory to support our customer service. So I And given the fact that we're investing and increasing the cash flow shows a good relationship there. Let's unpack the performance by segment.

Speaker 3

And on Page 7, we'll start with Utilities. Utilities really been The engine of the Hubbell Enterprise Financial Performance of late, we think really a leading business model, Unique positioning across components, communications and controls, very worthy of continued investment as we'll discuss a little bit more later. So on the sales side, see 14% increase to 831,000,000 That's comprised of one point from acquisition, I mentioned Ripley Tools before, and 13% organic. That organic is comprised of roughly double digit price and low single digit volume increase. And we believe we've got really nice end market demand construct here And it's really complemented across the 2 segments we're talking about here, the 2 business units between the Transmission and distribution components growing at 13% and the comms and controls growing at mid teens.

Speaker 3

That comms and controls piece is the Clara, largely the Clara business. I think most of you following it will remember they've been Held back by a shortage of chips over the last year and a half or so. And as we saw easing of that chip supply in the second quarter And for us, we got our comms business out of the gates first and they had a really strong second quarter. We see because of their supply now they had a nice backlog of demand from their customers and with the supply chain improving on the chip side, We see a very good second half for the comps. That happens to be a nice, a very attractive gross margin business, so A very mix friendly development and the meter side, we see exiting the quarter with the same Kind of supply trend, so we think meters will have a good second half visibility as well.

Speaker 3

So I think good news to see the comps half kind of returning to not being held back by the supply constraints. And On the Power Systems side, you've seen that over the recent quarters really having strong growth. I think you'll remember last quarter we showed you a chart that had a 3 year review of orders and shipments And that chart essentially showed a relentless buildup of backlog over that timeframe that was starting to peak at the end Of that period, and as we discussed then the orders were reflecting, yes, strong demand, But they were also reacting to the shortage of supply and the need of our customers to be ordering farther ahead in order to keep themselves stocked. That obviously was not sustainable, especially in light of improving Supply chain and shortening of promised delivery dates. As we've seen those lead times start to normalize, I would say in 2 particular segments of the components area, we've really started to see Customers adjust their order pattern to reflect, the fact that they can work off of inventory and can moderate their order pattern until that inventory gets to the proper levels.

Speaker 3

So that's both the distribution side of Power Systems as well as the telecom End market, both of those have very attractive backlogs. So we'll be navigating a period of Using the backlog as those order patterns adjust and as Gurman had mentioned In raising our guidance, we feel that we've got the momentum to clearly carry us through The second half of the year. And on the right side of the page, you see the operating profit story, just A very impressive performance of 70% increase, north of 25% margins, Really good price cost there, improved productivity as the factories are getting rid of some of those Prior year inefficiencies, I mentioned the mix with Aclara has been quite favorable, and we are investing on the OpEx side as well as the CapEx side. And we anticipate increasing those investments in the second half. And we'll talk a little bit about that on the next page.

Speaker 3

So Page 8, we wanted to highlight for you The transition space, and this is kind of defined more narrowly as transmission. We often lump in Substation here, but this is kind of the more narrow transmission piece smaller than the distribution side of the components world. But nonetheless, a really critical area to enable the grid modernization and hardening, electrification And really getting renewable generation to the point where the user is. And so we think The trends here are very attractive. We see long term growth rates in the high single digit range.

Speaker 3

Right now, we're seeing in contrast to what I described in telco and distribution, we're seeing Orders and quotes up over 50% over prior year. We think there's some support here from stimulus packages, From government policy where IRA is helping spur development through the provision of the tax credits Versus the IIJA providing harder funding dollars to really spend on the project. So We think really nice growth dynamics in the area. We also think that we are really well positioned. We feel we have the best depth and breadth of products, quality and reliability.

Speaker 3

We also feel Help in the problem solving and design area plays to Hubbell's strengths and ultimately To help with the complexity of getting material to these projects, I think there's a tendency to want fewer suppliers. So That plays very well to our positioning. So we feel very well positioned in very attractive markets such that we'll get our fair share And at the point where that's going to require investment on our part to help support our customers, the graph is of the Total Hubbell Enterprise CapEx, but you see over a couple of years a very strong increase in that capital. On the electrical side, it's going a little bit more to productivity. And on the utility side, I'd say It's tending more to the growth side and I'd say the distribution part of utility was earning The early CapEx raises and now we're starting to shift our focus on to T.

Speaker 3

And you'll see we've put a little plus sign to the right of the 160. As those dynamics play out over the second half of the year, I don't think we would shy away from investing even more if the dynamics require it. We think we are so we have attractive growth, we're well positioned and we're prepared to invest to earn more than our fair share. As we map out these projects, they have excellent ROI when you just analyze the financials. But I also think it's a really good A way for us to continue to differentiate our customer service and solutions that we provide to our customers, which ultimately helps support the sustainability of our utility margins To last, just beyond a big quarter.

Speaker 3

So that kind of underlies One of our rationales for continuing to want to support our customers in a differentiated way. Page 9 is the Electrical segment and you can see 1% growth Year over year to $535,000,000 that's also 6% sequential growth. So A little bit better than typical seasonality there. The acquisition of PCX that I had talked about Added 5 points, so the organic was actually down 4 and that included A mid single digit of price. From the market's perspective, the industrial end market is showing us Strong demand, I think the reshoring trend is providing strength in U.

Speaker 3

S. Manufacturing, Oil and Gas, Steel and Transportation, all being strong contributors to growth for us. The verticals that we focused on between data centers and renewables, we've been very successful growing there. In the more commercial arena, we're seeing similar as I described in the power systems where The D and the telecom customers were starting to adjust their order patterns. We've seen that In our electrical segment, more on the commercial side and The customer anecdotes are suggesting that their days of inventory are getting in line with targets they have And therefore, we may be, we think nearer to the end of that adjustment period.

Speaker 3

And our expectation is second half will be a little more balanced between book and bill. And on the OP side on the right, you see an improvement Of 12% growth, it's obviously not the volume that's driving it. The price cost has been very positive and The productivity has been good right there. I think it sort of points out Where Mark is going to be focused with us as he takes over this segment, he was incredibly successful on the power side, Bringing together multiple brands and multiple acquisitions to compete collectively as a business and I think he'll be able to help us Do the same inside of the Electrical segment and we'll continue to support Mark in acquiring Higher growth, higher margin businesses, we're going to be focused on innovation where new product development should come in at higher margins And the vertical focus can help us pull a lot of balance of system product into high growth areas and continue to focus on that productivity and try to again make those margins durable as we go forward. So those are the that's the financial performance in the two segments and I'll give it back to Gurman to share with How that affects our outlook as we stand here at the halfway point?

Speaker 1

Great. Thank you, Bill. And moving to our outlook, Hubbell is raising our 2023 outlook to an adjusted earnings per share range of $14.75 to $15.25 representing approximately 40% adjusted earnings growth for the year at the midpoint. We continue to project total sales growth in the range of 8% to 10% with 7% to 9% organic growth. Our improved outlook is primarily driven by improved visibility to second half margin performance as we expect to sustain favorable price cost and continue to drive productivity across our businesses.

Speaker 1

We're also accelerating our investment levels in the second half to increase capacity for future demand in areas with visible longer term growth, drive higher productivity, accelerate innovation and enhance supply chain resiliency. These investments position us to execute effectively across each of our strategic pillars, which are to serve our customer, Grow the enterprise, operate with discipline and develop our people. I'm confident that our strategy will continue delivering Strong results for our stakeholders in the second half of twenty twenty three and beyond. And with that, let me turn it over to Q and A.

Operator

As a reminder, Please limit to 1 question and one follow-up. Please standby while we compile the Q and A roster. The first question comes from Tommy Moll with Stephens. Your line is now open.

Speaker 4

Good morning and thanks for taking my questions.

Speaker 1

Good morning, Tommy. Good morning, Tommy.

Speaker 4

Kerwin, I wanted to start with a discussion of the utility Outlook, last quarter you highlighted the transmission and distribution space is a mid single digit grower, maybe even higher next year With the stimulus contribution today, you highlighted a piece of the transmission market as a high singles grower, Talked about needing to accelerate investment at Hubbell in preparation for next year. If you roll that all together, is there anything that utility Shouldn't be up mid or maybe even high single digits for sure.

Speaker 1

Yes, maybe I'll make a couple of comments and Bill, I'm sure will help me With this as well, you're right to point out the comments and so what Bill highlighted in transmission. It's an area that we've seen elevated investment of many years. It's probably one of the earliest areas where we really saw utilities starting to invest in with renewables And the integration of the interconnection of the grid, we have visible Signs of that continuing to grow, and it's the reason why we're so optimistic about This business, I still believe if you add it all together to count on mid single of this whole market is the right way to look at it. But certainly, we're optimistic and that's why perhaps we made that comment is to say mid single digits and there may be Times or pockets where we cannot grow that, but, Bill, maybe you have something too. I don't

Speaker 3

think I would add a lot. I'd Hey, Tommy, the mid single digit long term outlook is reflective of how we feel and We're getting really good ROIs on these projects. So we're going to continue to invest and grow with our customers.

Speaker 4

Shifting to electrical, qualitatively, it feels like The commentary is about the same as last quarter, but I'm just curious if anything's gotten better or worse there. And Bill, you referenced that destocking is Potentially shifting to a rearview mirror item by the back half of this year, but any additional detail you could Provide there would be helpful, maybe any insight you have into the sell through, which would shine some light.

Speaker 3

Yes. I think that You're right that it felt quite similar to the Q1, seasonal sequential growth. Even without volume, we're sort of happy that they're expanding margins. So some of that productivity work and the price cost Work is paying off. And I think the as we spend Kurt Gervin and I spend time with CEOs and leaders of our top 10 customers throughout the year, I think when We were talking to them last year, they all used the word we have too much inventory and when we meet with them now, They sound like they're much closer to their target inventory levels.

Speaker 3

For the data that we do have point of sale add, it feels like what we're providing is getting sold. So it just As we've gone through that adjustment, it does just feel like we're closer to that being in balance and And those are specifically comments to the Electrical segment. I think on the distribution and telecom side on utility, We're sort of maybe earlier to the middle of that side. So maybe they've been the 2 segments, Tommy, we're maybe spread out a little bit on customer response.

Speaker 4

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

Operator

Please standby for the next question. The next question comes from Josh Pokrzywinski with Morgan Stanley. Your line is open.

Speaker 5

Hi, good morning guys.

Speaker 2

Hey, Zach.

Speaker 6

Hey, just want to dig in

Speaker 5

a little bit on commercial construction. Sounds like, I guess, the tone in the slides is moderating or moderate. Dave, it seems like it's softening up perhaps a bit more. I'm just wondering how much of what you guys are seeing right now is more of a timing function or I guess, prospectively, you're talking to your distributors. Does this seem still more, I guess, steady as she goes here for maybe the next few months, few quarters?

Speaker 3

Yes. I'm not sure exactly if you were making a statement or a question. I would say For us, the commercial side, we reduced our exposure to commercial pretty dramatically as we sold Our C and I Lighting business, we have a balance that we would describe, Josh, as being More exposed to some of these specific verticals like renewables and data centers. The balance of commercial It's where we were kind of going through this adjustment where our customers our lead times are now they were out at I'd say, Gerben, towards the 50 week range and they're now down to 2, 3 weeks range. And so that's had You know an impact we think Josh ultimately on how our customers have been ordering for us for the past couple of quarters And that's been affecting as you see the unit volumes that we're shipping.

Speaker 3

But it does just feel like that adjustment period on electrical, And we're getting a little bit closer to the balance point.

Speaker 5

Got it. And then just to maybe follow-up on the M and A environment. You guys noted a kind of a typical Hubbell deal here. Are you seeing, I guess, the acquisition environment or multiples Start to increase with kind of this broader appreciation for electrification? And then I guess maybe as a sub point to that, If they aren't really increasing, would you consider levering up a little bit more to just consolidate some of these assets with maybe a bit more value disconnect?

Speaker 3

Yes, I think it's 2 parts to that question. The first is M and A market and I do. It is interesting, Josh, there are more assets coming to market than we typically see. And there's more assets kind of above this little average $60,000,000 tuck in that is quite typical for us. So, yes, I maybe feel that is in response to owners figuring this is a good time to get a good valuation.

Speaker 3

And I think we see competition in those processes. It's Interesting. The acquisition finance market is a little bit it's a little bit different, right? You have higher interest rates and That's kind of affecting how some financial buyers approach the market. But we are seeing a little bit more assets kind of in the pipeline, which is interesting.

Speaker 3

I think your second question is around The balance sheet and I think we do view that as a major strategic asset right now And we feel we can certainly invest aggressively. And PCX is an interesting one. I think because you were specifically asking About multiples and so if we were buying PCX In the 12, 13 times range, we've had it for a year. It's both grown really impressively and the margins have done better Because of what we do with it and we find that we own it in the single digits. And so I think part of your question was A higher multiple we think can be justified given the growth and margin potential of some of the businesses that are putting being So, I'm hoping not too many investment bankers are listening right now, but I do think there's probably There is probably some upward drift in multiple as a result of what you're asking.

Speaker 1

Maybe to add to it, So maybe the resource capabilities to be able to go at a faster pace, I'll make some comments on. And As I look across the two segments, I would say the GMs of the businesses are more involved than ever in this process, partially helped by the operational discipline that we put in place over the last couple of years. We've added resources to both of the segments of individuals focused on M and A and that's obviously complemented by the enterprise resources. So I'd say Not only is the pipeline fuller, but our resource capabilities to pull some of this off is better. So I would expect that to be a good contributor for us going forward.

Speaker 1

Got it. Appreciate it. Best of luck guys.

Operator

Please standby for the next question. The next question comes from Nigel Coe with Wolfe Research. Your line is open.

Speaker 6

Thanks. Good morning. Thanks for all the details. So a couple of questions from me. One is on the Electrical Segments and you obviously talked about the inventory.

Speaker 6

It sounds like there's a bit more visibility on that. But are you seeing any differentiation between some of the smaller shippers out there and some of The larger national players, I mean, are you seeing the bulk of the inventory coming out of the smaller players? And then within that, Are you seeing any big difference between sort of core components and lighting? And I'm sorry if I missed that in your prepared remarks.

Speaker 1

Maybe I'll start with the inventory on the distributors. It actually It's a little bit anecdotal, but also a little bit from inside, I would say, is the smaller distributors Probably have felt less pressure to reduce inventory than the larger distributors, particularly the public Companies that we saw that actually when the pandemic started that Those may have actually been heavier on the inventory. They've kept those longer in place really to serve customers. I think the larger are probably been a little more disciplined in adjusting their inventories to the market when the pandemic started. And then now, again adjusting after they've been loaded because of the supply chain constraints.

Speaker 1

So I would argue it may actually be the opposite, Nigel.

Speaker 6

Okay. That's interesting. And then on lighting, any sort of differentiation there?

Speaker 3

On lighting, Nigel?

Speaker 6

Yes. I mean, lighting, I'm just wondering if that was disproportionately negative in that mine's fall?

Speaker 3

Yes, sorry. So the resi piece that we still have did have significantly negative Volumes, and so they were impacted on the top line that way. But interestingly, the productivity like we described, some of the supply chain normalizing, One of the biggest drivers for that resi business has been the transportation cost. It's a Imported product from Asia, and those container costs have really gone from a pandemic gapped out Container cost up in the mid teens of 1,000 of dollars back down to $2,000 $3,000 And so that's really Despite the volume drop allowed that resi business to earn a margin again. So, they kind of have Two big cross currents there between volume and cost structure.

Speaker 6

Interesting. And then just my follow-up is on the transmission capacity Investments, we don't normally think of Hubbell as a transmission player. Can you maybe just remind us where you play in transmission? I remember you said that high voltage test business, but maybe just remind us on where you play and how big that business could be?

Speaker 3

Yes. So the product line is the traditional like so if you're driving on a highway And you look up at one of those steel towers, and you see the insulators up there and the hardware up there, That's the part where Hubbell plays. And right now, if you Exclude the substation, which we usually kind of lump in, we're talking in the ballpark of $200,000,000 of exposure for Hubbell. So in the kind of 10% -ish range of the segments, a larger percentage of the Kind of components piece, but we see that to be an area of acquisition investment, Certainly capacity investment and again I think we see organic growth there Nigel certainly in the high single digits For the foreseeable future for that and continues to be a supply constrained Environment versus demand just because of all the, I think, the drivers for hooking up to renewables and Potential interconnects between FERC regions, etcetera.

Speaker 6

Okay. Thanks, Bill. Thanks, Kevin.

Speaker 7

Yes. Thank you.

Operator

Please stand by for the next question. The next question comes from Joe O'Dea with Wells Fargo. Your line is open.

Speaker 8

Hi, good morning. I wanted to start on utility and just you've talked about service levels being a differentiator diminish a little bit and maybe any sort of anecdotes as even when we get to sort of a normalized supply chain environment where that service will remain a competitive opportunity for you?

Speaker 1

Yes, man. It's Certainly during the pandemic, it's based on what customer have told us, we have outperformed. And I would even go back To say service and quality have been absolutely core. When I ran that business, that I would hammer that day in, day out, week in, week out, Because I always saw that as a differentiator, right? On price, you can make a decision overnight to compete on a different level, quality and service, that's a lot harder.

Speaker 1

So that's proof during hurricane event, ice storms and pandemic. And so we again outperformed, but you're right to point out as the supply chains recover, You see others in the market improving and getting closer again to Our levels, I would also say, when you during this period, we probably gained some share. And once you have that, that's Hard to give up. You'd have to actually underperform again. So I'd say we're able to hold on.

Speaker 1

But to continue to Outperform on that level requires then us to just raise the bar. Part of the investments that we're making, part of what Bill talked about, Investing in capacity and transmission, that allows us when the demand is up to continue to service. So being ahead of that, and we feel we are ahead of that, Continues to allow us to raise the bar on servicing and it's a differentiator.

Speaker 8

And then I wanted to ask on the deflation comment where you're seeing it in both raws and components, Specifically on the components side, is that a function of efforts that you are making in going to market and any Higher consolidation that's translating to some of it or is it something that you're seeing broadly in the market on component deflation? And then related to that, I mean historically when you do see some of it, what would generally be the lag time before you would start

Speaker 3

Yes. So my comments were around the sum of raws and components were a Tailwind, but so I don't know, Dan, if there's a specific comment that components are behaving any Definitely. I wouldn't say it's the result of us doing something different. I think those are that's just kind of market Pricing and reaction and it's interesting how you're describing the relationship between material cost and Dan had a page, I think, 2 quarters ago that did a nice job of showing our cost structure being About 50% driven by raws and material costs and the other half being labor and overhead and burden And usually, I would say, our paradigm is to have Price offset the material cost and our productivity initiatives to offset inflation in the non material areas. And so, what you're asking usually, we would see if we were to see inflation in materials, so I'm going back 3 years ago and earlier, it would take a quarter or 2 for us to get The price kind of into the market to offset that.

Speaker 3

So that was kind of a lagged hedge, if you will. But I would say the last 2 years, the pricing has been driven by lack of capacity rather than necessarily by And connecting back to Joe to the first question, Service is kind of a relative question, right? You're trying to outcompete somebody else and it just Feels to us like we're doing a we're leaning in on the investment. I think we're finding this to be Utility space to be really core part of Hubbell's identity and sort of leading into that maybe where maybe others Might be a smaller division of a larger diversified company.

Speaker 1

That's helpful. Thank you.

Operator

Please standby for the next question. The next question comes from Steve Tusa with JPMorgan. Your line is open.

Speaker 1

Hey guys, good morning. Good morning, Steve.

Speaker 9

Congrats on another good quarter of execution.

Speaker 3

Thank you.

Speaker 6

Can you just give us

Speaker 9

a little more I joined a little bit So if you already gave it, then I can just go back to the transcript. But have you guys given the just price cost absolute numbers now what you expect for the year and What that would be kind of in the Q4? And then this utility margin is obviously very strong. Any updates on kind of how you feel about exiting the year and into next year with this type of margin level that's now like comfortably

Speaker 3

Yes. So let's start with price, Steve. And we talked about it Being more than all of the organic for the quarter, so you're talking about 8 points roughly of price in the quarter. We're getting to the point where we're not pulling a lot of price in the last quarter. So we're sort of riding out And lapping the previous price increases.

Speaker 3

So one of the things that you'll see in our second half, As you squeeze the second half expectation that's embedded in the guide is the fact that that price starts to moderate A little bit in the second half, and the cost is a little bit harder for us to predict, but It just looks like that dynamic will kind of on a year over year compare basis to start to narrow Just a little bit. And so it gets to your utility question is related to that. And I think we're going to be doing some more investing This is incrementally in transmission in the second half. We're going to be investing in areas Like supply chain resiliency and innovation continues to be October will maybe start to have a better view of what some of our expectations into 'twenty four We'll be but I think by the fact that you saw us raise our guide, right? If you go to our mindset in April and We raised our guide by a couple of dollars.

Speaker 3

We were describing having some second half conservatism because we just weren't sure what to expect. I think by our raise of $1.75 midpoint here to midpoint, you're hearing us say We actually see momentum that gives us better visibility in the second half and some of that caution has been taken away. I think maybe now you're extending that 6 months and saying as you end the year with the momentum that you've got, Ultimately, how will that appear in 2024? And we'd really like to Make those margins as durable as we can, Steve, and we're going to do a lot of work to try to do that, and we'll be talking more about that obviously over the Next call or so.

Speaker 1

Yes. And any

Speaker 9

mix impact from the You're now kind of more bullish on transmission. I guess that I view that as kind of like a bit more of a mid to late cycle dynamic as you come off The bottom in these T and D cycles, distribution is a little bit smaller ticket projects maybe perhaps. Is there any kind of mix impact from the handoff to transmission that we have to keep in mind?

Speaker 3

No, I think I agree with you that the The E is smaller projects, the T are bigger projects, but our margin profile is actually reasonably consistent across the 2 despite that difference. And We did see a mix benefit in the Q2 from Aclara Comms kind of outperforming. And so that's sort of Interesting to watch that trend. Just their gross margins are high as part of our relative to our portfolio. So if we can get Some good momentum behind that, that could be an interesting mix contributor.

Speaker 9

Great. All right. Thanks.

Speaker 3

Thank you, Steve.

Operator

Please standby for the next question. The next question comes from Chris Snyder with UBS. Your line is open.

Speaker 7

Thank you. I wanted to follow-up To some of the commentary in the prepared remarks about customers on the utility side changing their order patterns, Should we take that to mean that orders for utility were down in the June quarter? And Did the backlog come down alongside that? And did that have any impact on Q2 revenue? Or Is this we won't get revenue for a bit longer just given backlogs elevated?

Speaker 7

Thank you.

Speaker 3

Yes, Chris. The orders were down In Utility, but as you noted, the backlog is there and That gives us enough backlog not just to support the 2nd quarter, but we view There's enough backlog to support the second half, which is really the underpinning of our guidance raise is the confidence that comes from that. So I think it's just that adjustment period to us confusing our customers with really long lead times as the supply chain was Now that it's recovering in many places, they just really don't need to be ordering as far out and we're just going through that Yes.

Speaker 1

And I think the really the important part because this for period as they adjust, It makes it harder year over year. So if you think back of last year, during the first half, our orders Increased over 50%. And within a quarter, 70%. So even then, we said that's just not a Sustainable level, that's not a reflection of real demand at the time that lead times going out. So those are the comps To which we now compare.

Speaker 1

So even when orders are down, it's still at a Very elevated level. Our backlog in utility came down very modestly last quarter and it's still well above historical level. So and it's and the other thing I would say, it's very much time to us taking our lead times down. So it's In the areas where we're taking our lead times down that we see this adjustment. So it's all as we anticipated and I would say pretty predictable.

Speaker 7

Yes. No, no, I really appreciate that. Thank you for all the color. And then when we kind of look at the guide and The company is guiding utility margins lower in the back half than the first half, but still obviously at really, really strong levels. When we think about that first half to second half decline, is that just a function of price Being held in costs going higher on the raws and the components, is it mix maybe from the Aclara installations coming back?

Speaker 7

Or is there some expectation that maybe price will have to be given back in some capacity just because it does feel like supply There's not the same urgency to procure that there was a year ago. Thank you.

Speaker 3

Yes, Chris, we're not anticipating giving price, But as we go year over year, we are anticipating that price cost to be a little narrower. And we did have some mix richness in the second quarter and we are anticipating Increasing our investments on the OpEx side inside of the segment. So that all is contributing, As you say, high level of margin, just kind of off of a nice comp.

Speaker 1

Thank you.

Operator

Please standby for the next question. The next question is from Christopher Glynn with Oppenheimer. Your line is open.

Speaker 10

Thanks. Good morning, guys. Good morning, Chris. So curious about utilities Kind of capacity to run fixes and upgrade and modernize on the distribution side. Is there anything in terms of plateauing and their ability to consume the products yourself?

Speaker 10

I know it's kind of a mixed sort of question against the dynamic of the lead time adjustments, but hopefully I Yes, clearly enough.

Speaker 3

Yes, I mean I think that I think what you're maybe getting at is our installers Some form of constraints, and I think inside of utility there is some degree of that. You can't just But there are outsourced companies that are good at adding basically adding installer capacity. So I think The need from the infrastructures there, Chris, and from being able to put Mid single digit units hang more. I do think that ultimately that's What our expectation is.

Speaker 10

Okay, great. And on the Aclara, you referenced the gross margin mix Favorability and I think total margin favorability. At one point, we consistently thought of that as dilutive mix within the utility segment. And then we haven't had a clean read through the pandemic and more extended semiconductor dynamics there. So just curious what changed there that we're talking about Aclara's mix favorable now?

Speaker 6

Yes, because

Speaker 3

Your first comments were as they were volume constrained with chip supply Disruption, they were sitting there absorbing all the overhead, right, and it was kind of a lower margin profile. I'm now really speaking to the incrementals of the comps inside of Aclara, which I'm sort of cheating and using gross margin as proxy for that being quite attractive on the incremental side. And so I think all we're doing is talking about At a constrained volume absorbing overhead, not as profitable. Now as we add in a high gross area, the incrementals Are attractive that way, if that makes sense.

Speaker 10

Great. Yes. Thanks for the clarification.

Operator

At this time, I show no further questions. I would now like to turn the call back to Dan for closing remarks.

Speaker 2

Great. Thanks everybody for joining us and I'll be around all day

Operator

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

Remove Ads
Powered by Quartr
Earnings Conference Call
Hubbell Q2 2023
00:00 / 00:00
Remove Ads