Hubbell Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
January 30, 2024

There are 14 speakers on the call.

Operator

Good day, and thank you for standing by. Welcome to Hubbell's 4th Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Dan Intermarado, Vice President of Investor Relations.

Operator

Please go ahead.

Speaker 1

Thanks, Didi. Good morning, everyone, and thank you for joining us. Earlier this morning, we issued a press release announcing our results for the Q4 of 2023. The press release and slides are posted to the Investors section of our website at hubbell.com. Joined today by our Chairman, President and CEO, Gerben Bacher our Executive Vice President and CFO, Bill Sperry.

Speaker 1

Please note our comments this morning may include statements related to 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 incorporated by reference 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 and slides. Now let me turn the call over to Gurvin.

Speaker 2

Great. Good morning and thank you for joining us to discuss Hubbell's 4th quarter and full year 2023 results. Hubbell delivered a strong finish to an exceptional year. For the full year 2023, we achieved 9% sales growth, over 500 basis points of operating margin expansion and over 40% growth in operating profit and earnings per share. These results were driven not only by our strong positions in attractive markets, but also by the consistent execution of our people and maintaining industry leading service levels for our customers while driving price and productivity across our businesses.

Speaker 2

Our strong financial performance also enabled us to invest back into our business and capacity, innovation and productivity initiatives. We invested $165,000,000 in capital expenditures in 2023, almost double our investment levels from 2021. We are confident that these investments will drive future growth and productivity for our shareholders and as we will describe in more detail later, We intend to grow profitably off of a strong multiyear base of performance. Turning to the Q4, we delivered strong growth and margin expansion in both segments. Notably, we also returned year over year volume growth in Electrical Solutions.

Speaker 2

As we noted on our previous call in October, we were confident that the channel inventory that we had seen earlier in the year had largely normalized. As a result, we saw stronger seasonal performance in the 4th quarter as well as continued strength across data centers and renewables verticals. We also continued the of strong margin expansion in the Electrical segment and in the year with adjusted operating margins of 16.6%. We continue to see structural margin expansion opportunities as we make progress in our strategy of competing collectively as an operating segment and we plan to accelerate our restructuring investment in 2024 to drive long term productivity. In Utility Solutions, 4th quarter trends were largely consistent with the 3rd quarter.

Speaker 2

Transmission markets were strong And we continue to convert on past due backlog in communications and control as supply chain conditions have improved. Utility distribution markets continue to be impacted by channel inventory normalization as anticipated, Though we continue to see visible demand strength in 2024 and beyond. Telcom markets were weak in the quarter And while our long term outlook here remains positive, we are taking a cautious initial view on 2024 until we have more visibility on timing of investments. We also executed on 2 important portfolio actions in the quarter as we closed on the previously announced acquisition of Systems Control and announced a definitive agreement to sell our residential lighting business, which we expect to close in early February. These transactions reflect our ongoing strategy to create a focused portfolio strategically aligned around grid modernization and electrification.

Speaker 2

These transactions improved the long term growth and margin profile of our portfolio and we anticipate that they will be net to 2024 adjusted earnings per share. We will provide more details on our 2024 outlook at the end of this call, But we remain confident that Hubbell is uniquely positioned in attractive markets and that we can build off the success of this last several years to drive profitable growth of this higher base of performance. With that, let me turn it over to Bill to walk you through the details of the quarter.

Speaker 3

Thanks very much, Herb, and good morning, everybody. Thank you for joining us. I'm pleased to have the chance to with you, our financial performance in the 4th quarter, which was very strong capping A strong year and frankly a strong 2 years. I'm going to start my comments on Page 4 of the slides that I hope you found. So the trends have been in place Really for the last year and longer, strong sales growth and operating profit growth, including margin expansion, being driven by strong markets, as well as strong pricing and strong cash flow is resulting.

Speaker 3

And those fundamental trends are obviously continuing here in the Q4. So we reported $1,350,000,000 of sales, 10% growth, 2% of that comes from acquisitions, 8 is organic. This utility segment a little bit stronger than electrical, but as Gurban noted, Quite important for electrical volumes to return to growth as a sign that the inventory in the channel is normalized on that side of the house. Interesting too, we sequentially The 4th quarter seasonally stronger than is typical. So we think that's a good sign.

Speaker 3

On the operating profit margin side, you see 19.4%, three points of expansion Really being driven by price cost and productivity and creating Some source of funding for investments that Gurvin had described. Earnings per share at $3.69 40% increase to prior year and $284,000,000 in free cash flow, helping to fund our CapEx and acquisition investments. So let's double click on that on Page 5 and go one layer Deeper. So the 10% sales, we said was 8% organic. That was comprised of mid single digits of price.

Speaker 3

We think that's good evidence of our quality service and our brand positioning and low single digits of volume and welcome, as I said, the return to electrical volume growth. The 2% coming from acquisitions

Speaker 4

were all

Speaker 3

on the utility side and we'll talk about those more Let me get to the utility page. On the upper right, operating profit, up 34% $262,000,000 the margin expansion of 3 points really being driven by price as well as Materials, which continued to provide a tailwind as they had for each quarter in 2023. So the inflation that we're experiencing is more on the wage and transportation side. That's where we're focusing a lot of productivity efforts as well as we're absorbing there some operational productivity investment going on. On the lower left, you see earnings per share up 42%, a slightly higher growth rate than the operating profit.

Speaker 3

So below the line, we benefited from some tax rate favorability. And on the free cash flow side, you see 284,000,000 nearly 60% increase. And for the full year, we generated over $700,000,000 of cash flow And that supported a CapEx of 100 around $165,000,000 which really helped drive some footprint restructuring, Productivity and Capacity Investing. So let's unpack the enterprise into the 2 segments and We'll start with utilities on Page 6, and you'll see another excellent quarter from our utility team, double digit sales growth and 40% operating profit growth. A 13% sales growth is comprised of 9% organic and 4% from acquisitions.

Speaker 3

The acquisitions to remind everybody included EIG, which was our 2nd quarter of ownership there, Balestro and Systems Control. Systems Control was closed in the middle of December, so didn't contribute much yet. And we are reporting both Ballesterone Systems Control in our T and D components And EIG is in the Comms and Control side. We'll talk more about acquisitions in a minute and the last few years plus this year. As we think about the 9% organic growth, You'll see that it was skewed towards the communications and control side.

Speaker 3

If I start with the transmission and distribution components, You'll see organic was at 1%, where volume was a drag on price. And if we look inside the components, substation and transmission continued to be very strong. Distribution components, we continue to work through our Q2 of channel inventory management. I think as we had mentioned before, our electrical side had experienced that quicker and sooner earlier really than utility side. So we've emerged on the electrical side still in on the distribution side.

Speaker 3

And then telecom has been weak, a function of Some overstocked inventories as well as potential demand impacts from combination of high interest rates and some customers who are waiting for stimulus dollars to kick off their projects. You see on the Communications and Controls, surging growth there. We've got both the Aclara and Beckwith businesses there on the Aclara side, the chips supply chain opening up has really allowed them to satisfy some existing backlog. And so we see some great growth there. Also to remind, there was we have an easy compare there as last year we had a commercial settlement That was a contra sales item.

Speaker 3

And Beckwith as well, which makes protective relays and controls up double digits in sales. So very strong top line performance by the segment And even better on the OP side, a growth of 40% to 174,000,000 over 21% margins and the price cost story is the same volume growth contributing and we continue to make investments. So from a full year this is obviously all 4th quarter performance just At the bottom of the page, a full year comment on profit growth of about 60%. So congratulations to Greg and his team on just a really outstanding year. On Page 7, we've got the Electrical segments And you see mid single digits sales growth with 2 points of margin expansion, Strong performance from the electrical team.

Speaker 3

And of that 6% sales growth, It's comprised of about half of that is price and half volume. And that volume, as we said, we thought in October that the channel inventories would be normalized and rebalanced and that did occur in the Q4, which is good news. The volume came from some important verticals, data centers was a big one. Recall last year we bought PCX, which is performing really strongly serving that segment. Boerne as well as serving that segment.

Speaker 3

Boerne is also benefiting from the renewable vertical and a little bit of U. S. Re shoring on the industrial side, so some favorable trends there allowing for that volume growth. And on the profit side, You see 20% growth, two points of margin expansion as operating profit reached 88,000,000 Again, the price cost really helping as well as the return to volume growth. And Full year comment I'll make on Electrical like I did on the utility side.

Speaker 3

We saw 20% growth in operating profit in the segment with 2.5 points of margin expansion. So I think very successful year for the electrical and looking forward to Mark Meikz and his team continuing to push the segment to compete collectively where we think there's more growth and more margin available to us there. I mentioned that I wanted to talk about the portfolio management. And on Page 8, we've laid out the last Few years of activity, just to remind ourselves of our intentions here. And I'll start with the divestitures where We have 3 companies divested and a 4th under definitive agreement that we're open to close in early February.

Speaker 3

And you see those businesses netted us $500,000,000 of proceeds. And our intention here is to make sure we're investing in higher growth, higher margin businesses and you'll see that $500,000,000 we rolled into $1,700,000,000 of acquisitions, numbering about 10 over the last few years. And you can see in the large blue bubble of T and D components, where we added Contiga, Ripley, ArmorCast, Balestro And in the yellow bubble there of connection and bonding, adding connector products, so those Very intentionally adding businesses to our high margin, high growth areas as well as in Specific growth verticals like substation systems, like grid automation, data centers, PCX I mentioned and wireless communications of Aceltek. So we think we are enhancing The growth and margin profile of the company. I didn't want to pause because of Systems Controls' recent closing as well as its size on the impact on capital structure.

Speaker 3

So that was $1,100,000,000 purchase price that we funded with some cash as well as some CP and a term loan A provided by our supportive bank group. The result of that is a flexible and prepayable capital structure, which we think gives us some optionality and results in very manageable debt levels of 1.8 times debt to EBITDA on a net debt basis around 1.5 times. So we feel like that we're improving the portfolio. And I'll talk about the specific impacts of the acquisitions on our guidance in another couple of pages. So as we switch to outlook, let's start on Page 10 with the markets, and then we'll talk about how those markets roll through our earnings expectations.

Speaker 3

So We've got utility segment on the left, electrical segment on the right. You can see the different pieces of the pie here. Starting with Electrical Distribution, they've been In the really two quarters now of managing their inventories relative to the backlog and We think that's normalizing quickly and expecting a healthy mid single digit growth rate there. Transmission, Substation and distribution automation, which is up around noon on the pie, We think those are both high single digits, meters and gas in the mid single digits. And Gerben talked about telecom having a very cautious outlook waiting for orders to restart there.

Speaker 3

I will just comment that's a short term outlook. We do have very attractive medium and long term outlook for telecom. So the results on the utility side is a mid single digit growth rate. On the electrical, you see That's out at 3% to 4%, so low to mid. I think the industrial outlook, you see both light and heavy is lowtomidsingledigits.

Speaker 3

We have mid single digit growth rates in our verticals. And I think non res, we maybe have a bit of caution at flat to low single digit. So a constructive market outlook for 2024 and let's go to Page 11 and see how that rolls through our earnings outlook. So you see the organic of 3% to 5% in our sales growth Combined with 5% net from M and A, one going out, one coming in, to create 8% to 10% sales growth, that generates a 10% growth in operating profit, results in 6% earnings and free cash flow at about 90% of net income affording continued increase in CapEx. And let's just walk through the bridge to give you a feel for it.

Speaker 3

So we're under contract to sell residential lighting That will lose $20,000,000 of OP. Systems control, EIG and Velestra will be adding about $90,000,000 So you can see almost $1 coming from those before we pay the interest expense, which we have over on the right. We had for organic 3 to 5. So we've comprised that of 2 to 4 volume And one point of price, which is in the next column, that's providing a nice lift and we have continued investment, particularly on the Electrical segment side, as we compete collectively there and continue to consolidate the footprint under our restructuring program. You see on the far right below OP, an increase in interest expense as a result of the borrowings that we outlined to close on systems control.

Speaker 3

And the result is about 6% earnings growth to the midpoint of 16.25. You see some modeling considerations listed there. And I might just add another one on seasonality for those of you who are modeling. We're anticipating 2024 being quite normal seasonality For the 1st and 4th quarters, being a little bit below the 2nd and third quarters, which are seasonally stronger. And that just compares to last year where the Q1 was very strong and contributing to the full year.

Speaker 3

So we think a very constructive year in front of us. We feel well positioned. We're happy to have the return in volumes, and we're happy to have made some portfolio net addition to continue to push profitable growth at Hubbell. And with that, I'd like to turn it back to Gurvin.

Speaker 2

Great. Thank you, Bill. And before we turn it over to Q and A, I think it's helpful on the last page to look at our 2023 performance and 2024 outlook in a longer term context. The results we delivered for shareholders not only in 2023, but over the last few years have been very strong. Most notably, we have doubled our adjusted operating profit and adjusted earnings per share over a 3 year period, while growing sales at double digit CAGR and expanding adjusted operating margins from the mid teens to over 20%.

Speaker 2

We have also doubled our capital expenditures over the last 3 years to further differentiate our service levels to customers and support attractive long term growth expectations. As grid modernization and electrification drive the need for a more reliable, resilient and renewable energy infrastructure, Hubbell is uniquely positioned with the right people, solutions and strategy to meet the evolving needs of our customers and deliver continued value to our shareholders. I'm extremely proud of our over 18,000 employees whose hard work and dedication have enabled us to achieve a new baseline of performance. And I am confident that we will build off of this success with continued attractive profitable growth in 2024 and beyond. We look forward to hosting an Investor Day later this year on June 4, where we will provide more details on our long term strategy with updated financial targets.

Speaker 2

With that, let's turn the call over to Q and A.

Operator

And our first question comes from Steven Tusa of JPMorgan.

Speaker 5

Hey guys, good morning.

Speaker 2

Good morning, Steve.

Speaker 5

Can we just get a little more color on the bridge maybe what you're expecting on price cost and then any segment margin color for the year and how you expect that to trend seasonally?

Speaker 3

Yes. So price cost, we've got as flat, Steve. We have Effectively one point of rollover on price embedded in there, which We're using effectively to offset commodity inflation. And then we've got a productivity program that we think can help offset nonmaterial inflation in places like transportation, wages and things like that. So It's quite a flat expectation.

Speaker 3

And I think the way segments, I think as a result of that PCP assumption, Our margins by segment are reasonably flat ish. And I'd say that applies to both segments, I would say, Steve.

Speaker 2

Maybe on that

Speaker 5

yes, go ahead. Yes. Does the ish on utility kind of SKU one way or the other, positive or negative ish?

Speaker 2

Yes. I'd say flat

Speaker 1

What I should think about.

Speaker 5

Okay, great.

Speaker 2

Maybe the 2 moving pieces on that I'll If you think about the addition of systems control, that's actually a little bit dilutive to margin, even though it's we've provided those numbers and very attractive addition. And if you think about volume, it's a little bit accretive. And if you take net of those With PCP flat, it's roughly flat. If you look at maybe a little bit color on the electrical, because the electrical, I think it's a slight expansion, but that is with a pretty good step up on restructuring. So if you take that out, it's actually a nicer expansion of that and then Bill referred to it earlier of the opportunity still in that segment as they work through organizing that better, competing collectively, there is more room for margin expansion there.

Speaker 5

Got it. Okay. Thanks, guys. Appreciate it.

Operator

Thank you. One moment for our next question. And our next Question comes from Jeffrey Sprague of Vertical Research. Please go ahead.

Speaker 4

Thank you. Good morning, everyone. Good morning. Just a little Good morning. Still a little more color on the utility margins.

Speaker 4

Just also thinking about the comms, Aclara business, I'm not sure where the margins are at in that business, but that feels like it's a friction point also to some degree from a mix standpoint. So I Wondering if you can address that. I guess, Gervin, you said flattish, so you're powering through all that, but still would love some context on the mix effect of Aclara. And can you just give us a little color on how much telecom was down in 2023? I get we're looking for a week 2024, but we do have sort of at least a half a weakness in the base year for 2023, I believe.

Speaker 3

Yes. So, maybe let's start with utility margins first. And I would say for Aclara, you're right to say their margins are below The transmission and distribution component margins largely because of the amount of R and D investing that we're doing, working on developing the next gen comms package. So I would say in 23, particularly in this Q4, where you saw them outgrowing, I would I think where you're going is that create a mix drag and it did in the Q4. I think growth rates next year, We maybe anticipate more balance, Jeff.

Speaker 3

So I don't think we'll have a big mix effect in utility margins in 2024? And your second question was on telecom.

Speaker 2

Yes, maybe provide a little context there, Jeff. And We really saw that slowing down towards the latter part of the year, particularly Q4, More specifically, it was down 20%. The Q1, we still expect that to be down double digits. And what happened early in the year, we were still working through a lot of backlog in that, which kind of shielded us a little bit. So we certainly expect After the Q1, probably the second quarter still to be down and then we expect it to rebound in the second half as some of that stimulus funding free trial.

Speaker 4

And Gurbin, can you also just address Kind of your ability on just kind of factory throughput here as the industry, particularly on the utility I seem to want to compound out here at pretty healthy growth rates. Everything kind of buttoned up on the factory work you've been doing or there's more to do there, maybe just a little bit of the skyline and what to expect on CapEx?

Speaker 2

Yes, I'd say more to do, Jeff. Some of those projects take time to get some of that equipment in and online. If you think about, for example, our transmission and substation markets are particularly strong last year and this coming year as well as you saw. And that requires some capital that's still needing to come online. I feel good about our ability to do that.

Speaker 2

We've done that very well over the last year. So that's going to support some of that growth that we have embedded in our guidance. And then just one last one. Go ahead.

Speaker 4

I'm sorry, if you're not done, go ahead. I just had one last little follow-up if I could.

Speaker 5

Please go.

Speaker 4

I just wanted to kind of come back to the seasonality comment and everything, totally get it and that's sort of what I've been modeling. But given that margin comp in the beginning of the year and you in particular, are you expecting EPS actually grow year over year in Q1?

Speaker 3

Yes. I think that we just start we don't do EPS in the by the quarterly guide basis, I just would say I'd anticipate our Q1 earnings to be in line with contributing to the full year at our typical seasonality and more so than it did last year.

Speaker 1

Great. Thank you.

Operator

Thank you. One moment for our next question. And our next question comes from Tommy Moll of Stephens. Please go ahead.

Speaker 6

Good morning and thank you for taking my questions.

Speaker 2

Hi, Tommy.

Speaker 6

I wanted to start on the utility side of the business. Seems like for most of last year, it was more a discussion around availability rather than price. With that said, given some of the Inventory destocking, particularly around distribution, has that conversation changed at all? Is price a bigger factor at this point?

Speaker 3

I would not say so, Tommy. No.

Speaker 6

Good to hear. Thank you. I guess that then begs a follow-up where In your full year outlook, you contemplate, I think you said, Bill, a point of wraparound price, but you did highlight some uncertainty in certain pockets. What are those pockets you were referencing there?

Speaker 3

Yes. So I think telecom would be the first To see a market down, I think just puts a little pressure on that. And so that's really the most noteworthy one. I think other areas where Things are overstocked can put a little pressure sometimes. So we've had a very successful pricing tactic over the last really 2 years.

Speaker 3

And so it's something that we are A, very focused on B, are in very close conversations with our big customers. Gurvin and I happen to be visiting with A few of our largest customers over the course of the last couple of weeks and just to your point, none of them are asking about price other than to make sure we're coordinated with them, give them enough time to implement price increases and let them manage that through their systems. But it's a I would describe price as of this moment, Tommy is still quite constructive.

Speaker 2

Yes. And maybe to your point of that there may be some headwinds. I'd also say that we Build into the guidance to carry over, but we also announced price increases early this year. It's early to tell at this stage, only a few weeks On the stick rates, but again, the conversations that we're having are very positive to those taken hold. So we have levers against potential headwinds by taking price too.

Speaker 6

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

Operator

Thank you. One moment for our next question. And our next question comes from Nigel Coe of Wolfe Research. Please go ahead.

Speaker 7

Thanks. Good morning, everyone. So, hi, good morning. So, Bill, just wanted to be a bit more specific. Typical seasonality for 1Q, it looks like about 20% of full year.

Speaker 7

Is that about the right zone per year, Matt?

Speaker 3

Yes. I would have said 21% if you asked me. Yes.

Speaker 7

Okay, that's great. Thanks for the clarification there. And then just the Electrical performance this quarter is obviously outstanding. The 6% organic growth, Pretty flat Q over Q in both revenues and margins. So is that mainly a channel impact you're seeing there?

Speaker 7

And I know you called out strength in and data centers. I'm just curious in terms of the end market demand, what you saw during the quarter being a bit more specific there?

Speaker 3

Yes. I'm not sure I'm getting at the essence of what you're asking. We did find that vertically data centers and renewables were both good that benefited our PCX business and our Berndy business. And I do think we saw from our big customers, if that's where you're pushing in areas where they had been managing their inventories, we saw a return to growth in those as well. So I'm Not sure if you're getting at customer behavior or end markets there, but we had a kind of a little bit of a mix of both.

Speaker 7

Yes, I mean, it wasn't a straightforward question, I know. But do you think the channel impact was fairly neutral? So sell in the sell out Pretty similar. I guess that's sort of the essence of my question. But really then when we think about the margin exit rate for 4Q into 2024, I know you've said flattish impact in 2024.

Speaker 7

Restructuring is picking up, so that's obviously the headwinds in 2024. But Just curious about the lighting impact because that's coming out. So I think that that would probably drive more of a bias towards expansion in Electrical. So just curious If you agree with that.

Speaker 3

I do agree. They were sort of at double digits versus what you see is a better margin at the segment. So I do agree.

Speaker 7

And then selling the sellout?

Speaker 1

Yes, pretty consistent in the quarter, Nigel.

Speaker 7

Okay, great. Thank you.

Operator

Thank you. One moment for our next question. And our next question Comes from Julian Mitchell of Barclays. Please go ahead.

Speaker 8

Hi, good morning. Maybe, just trying to understand and fully comprehend that you don't give sort of detailed quarterly guidance, but you've got the 4% organic growth guide for the year in revenue and you have the color around Weak start to the year in telecom, a bit of extra utility destock and maybe the last dregs of Non resi electrical destock. So all of that seems to suggest a stronger second half organic growth rate. Just wondered how much of an improvement year on year are you dialing in through the year as we go to get to that 4% for the year as a whole?

Speaker 3

Yes, Julian, first of all, welcome to the call. Nice to have you. And I would say

Speaker 4

That's

Speaker 3

the utility destock, We'll see, but we could if you we could be at the point of kind of having be done with that as well. And I would say on the electrical side, we feel more confident that we are. Your telecom point is right. I think we do anticipate a weaker start. And as you think about you're sort of introducing Sequential seasonality and how that's going to look VPY compare.

Speaker 3

And I think what On the VP wide basis, some of the second half compares because of the destocking could actually be a little bit easier. For example, Q1 last year was actually quite strong. And I think seasonality wise, we upped our investments at the second half of last year. As those wrap around that creates a more consistent and easier second half. So I think As those things net against each other, that's kind of how we're getting to a more typical seasonal year, even though I hear you.

Speaker 3

There's obviously puts and takes and forces at work here.

Speaker 7

And maybe Julian, I'll provide maybe

Speaker 2

a little more context On that, you're right to point out there's still some headwinds. But one way to look at it and I realize It's an early data point, but as we look at how we're starting off the year and we look at our order patterns and trends here in January, It's actually supportive to what Bill is somewhat hesitantly saying that we could be exiting our destocking. It's constructive. So as I'd say early read into the year is that it's constructive to kind of this profile of seasonal guidance.

Speaker 8

Thanks very much. And then just a quick follow-up. That slide 10, the non residential vertical within The flat to plus low single guide for the year. You understand fully on the channel stocking largely having run its course, but maybe just the market outlook, you used that word uncertain. Just any sort of color you could put around that, what you're seeing in different verticals in that non resi bucket?

Speaker 3

Just think maybe the pressure on office Just feels like it puts a little bit less certainty. I mean, it's quite a constructive pie. So I guess by, I think less certainty puts you in still a growth position, It just I think the institutional side probably be stronger, But maybe some of that office could be weaker. So I think there's that mix effect just puts it in the low growth rather than the rest of the pie, which is more medium growth.

Speaker 8

That's great. Thank you.

Operator

Thank you. One moment for our next question. And our next question comes from Brett Lutensee of Mizuho. Please go ahead.

Speaker 9

Hey, good morning all. Hi, Brett. I wanted to come back To the investments and you talked about some of the carryover in the first half. Just wanted to clarify, are These embedded within the volume portion of the bridge and separate from the footprint, just trying to understand if you could quantify the investment versus restructuring and what those paybacks might look like?

Speaker 3

Yes. So if last year it was an investment that continues I. E. If you added headcount, it would show up yes in margins in volume. So As we step things up in areas last year, for example, like new product development or people to work on productivity initiatives that would wrap around at the higher cost wouldn't be a new investment, right?

Speaker 3

It would show up as you're saying, Brett, in March of that volume.

Speaker 9

And then anything you can share in terms of the paybacks on these footprints is something embedded this year or is that a little bit longer term?

Speaker 3

Yes. I think the new I think there's order of magnitude another $10,000,000 of R and R in that bucket that will be invested this year. It's of a footprint nature And I think the paybacks are that we have good ROICs on that. The paybacks tend to be 3 ish year range. And so we're sort of investing today in those cases with benefits that probably start a year or 2 from now.

Speaker 2

Maybe the other thing that I would say is embedded is some of those investments will drive a higher level of productivity That's embedded in our guidance. So when you look at the construct of flat price cost productivity, it has higher level of productivity and higher level of inflation in it to offset it. So that's where some of those investments are going.

Speaker 9

Okay, great. Yes, thanks for the color there. And then just a follow-up on the price expectations. So it sounds like no incremental actions embedded in the planning. I'd imagine seeing some raw non material inflation.

Speaker 9

Maybe just a little context as to maybe what that potential hedge could look like if You do see sticking of some of these actions that you are out in the marketplace with?

Speaker 3

Yes. I mean, you'd be kind of maybe asking a little bit about a speculative sensitivity analysis, right? You could see each point of price It gets us north, obviously, of $50,000,000 of price. And if that that's a lot of leverage if there's no corresponding inflation to that. Conversely, if you have to give a little, it equally has kind of this 100% sort of drop through.

Speaker 3

And so as Gurban sort of outlined, I think we have because of the investments we made last year, we have a more ambitious productivity target level and we certainly see some inflation on wage, transportation area, as well as in kind of a material related area. So I think getting the rigor that we need to focus All of those levers to come out even or ahead is sort of a it's an obsession. We review it really carefully every month at Gurbin's and my level and continue to push enough initiatives to make sure we

Operator

Thank you. One moment for our next question. And our next question comes from Joe O'Dea of Wells Fargo. Please go ahead.

Speaker 10

Hi, good morning. Thanks for taking my questions. First, just wanted to focus on the 2024 bridge and if we think about it, I guess, in 3 buckets with the organic piece, the M and A piece and then some of the restructuring. Is it fair to think about a 25% incremental on the organic piece? And then on the M and A side of things, can you add any detail on what you think interest expense is in 2024 just so we get that right in the model?

Speaker 10

And does that interest expense contemplate the deployment of resi lighting proceeds? Thanks.

Speaker 3

Yes. So, I think we you could put in about $40,000,000 of incremental interest expense. And I think the drop through of 25 On volume is reasonable, I'd rather see that more like 30, but Somewhere in that high 20s is reasonable, I think.

Speaker 10

And the resiliating proceeds? Yes.

Speaker 3

So we've you see we have interest income there as a plus and interest expense as a minus. So We sort of built the construct that it's either cash that's going to earn or it's yes, it's going to be available to pay down. And I guess so I guess the one thing I'd say is it's explicit that we're not modeling in our guidance any new acquisitions and so that would be incremental to this guide.

Speaker 10

Got it. And then on the electrical side, can you size roughly what the destock headwind was to top line growth in 2023. And so just kind of the non repeat of that, what we should think about is that kind of contribution to the plus 3 to 4 for 2024?

Speaker 11

Yes. Overall, I'd say sell through volumes

Speaker 2

were down kind of in

Speaker 1

the high single to low double digits most of the year and I think sell through was flattish to slightly up. So it got better in the Q4. But overall, I think you can think about it about mid single digit impact on a full year basis.

Speaker 10

Okay. And then just a clarification that the 4th quarter 9% organic and utility, Did you give the price and volume split of that?

Speaker 3

Yes. The volume was negative, right? So it ate into the price. Volume was slightly positive, Joe, sorry.

Speaker 10

Volume is slightly positive.

Speaker 3

Yes. Sorry, you're asking for a whole of utilities. Sorry, I thought you're talking about power.

Speaker 10

Yes, Yes, sorry, just that 9% whole organic, so slightly positive volume. Yes.

Speaker 2

Got it.

Speaker 10

All right, great. Thanks very much.

Operator

Thank you. One moment for our next question. And our next question comes

Speaker 12

Just had a couple. Wanted to hone in on the Electrical Solutions segment. So obviously, Try to benefit somewhat this year from the footprint optimization. Just wanted to see how much I mean, how much more headroom do you guys have from an optimization perspective within that segment?

Speaker 3

Yes. I mean, the I'd say that we still have projects that are This year, there'll be consolidating locations, so you'll be absorbing volume in existing location. And then after you get to that, there's always the chance to keep putting in bigger, more scaled facilities. So You can answer your question with a very long perspective, but if you took it a little bit more narrowly, I'd say in the next few years, We'd be at a stage where we'd be quite happy with the optimization process. You're probably never done, I guess, at this point.

Speaker 3

But I think we'll we go a long way to achieving sort of our desired goals in just a few years.

Speaker 4

Sure. That's fair.

Speaker 2

Then,

Speaker 12

did want to touch upon too. So I think the guidance within the press release had indicated about $1.60 of the amortization, that's within adjusted EPS. And so if you're doing that, that's roughly $86,000,000 for the year. We did just within utilities, I mean, I understand that there was a significant step up in 4Q probably related to the systems control, but just wanted to get a better sense of Kind of the timing of that amortization, and kind of the breakdown between utilities and Electrical Solutions?

Speaker 3

Yes. So the incremental we've been running at $1 for a while. So the $0.60 that's new is all in utilities. So as you separate them. And when you think about the amortization, a lot of it is going to customer value and places that have quite a long, by long, I mean, like 20 year.

Speaker 3

So It's a pretty stable run rate.

Speaker 10

Perfect.

Speaker 12

Yes, that's all I got. So thanks guys.

Speaker 2

Thank you. Thanks.

Operator

Thank you. One moment for our next question. And our next question comes from Chris Snyder of UBS. Please go ahead.

Speaker 11

Thank you. I wanted to ask on utility margins. And specifically, I guess the expectation that margins will be flattish for 2024. And I was asking because you guys are exiting the year well below where started and maybe M and A had a bit of a headwind in Q4, but it feels like organic is in Q4 down a good deal versus the first half. So is it fair to does the guide assume that Utility organic margins are down year on year in the first half and then return to growth into the back half or should we expect them up year on year throughout the year?

Speaker 3

Yes. I would assume they're kind of flattish through Like I don't think there's anything I think I'd look maybe at the shape of 23 Because I know exactly what you're observing, right? You see a sequential step down in margins. Some of that is attributable to some spending investing that we're doing. Some of it's attributable to The Aclara mix effect, some of it's attributable to the fact that the volumes inside of Power Systems We're going through their destocking work with our customer channels partners.

Speaker 3

And So I think, again, we just see that, Chris, returning to a more normal shape. And so I think the volume piece of power systems becomes quite important to that. I think we see the mix with Aclaris start to balance to equal more equal contributions. And so I think in a balanced world, we would expect margins in Q1 and Q4 to be below the margins in Q2 and Q3, and that, that shape in 2024 should feel quite normal.

Speaker 11

Thank you. I appreciate that. And then Just as a follow-up on utility margins, so I know they're always down sequentially into Q4, just lower revenue. This quarter came in quite a deal sharper than we expected. Is the company starting to feel the impact of higher metal prices, I know steel has been up a lot over the last 3, 4 months.

Speaker 11

Was that starting to come through in Q4 on those utility margins? Or is that Still more of maybe a 24, dynamic? Thank you.

Speaker 3

Yes. I mean, we certainly saw starting November, December steel move. And I would say the way that works through the supply chain, there's usually a couple of months lag on when we as a LIFO company pay those most recent prices. So I think we'll feel those prices those costs, if you will, in the first quarter And maybe the mid to end of the first quarter.

Speaker 2

Thank you.

Operator

Thank you. One moment for our next question. And our next question comes from Scott Graham of Seaport Research Partners. Please go ahead.

Speaker 13

Yes. Hey, good morning. Thanks for squeezing me in. Just really the question I have is about the Portfolio Management slide and particularly now with systems control in the fold, You have a couple of nice sized bubbles under which to acquire. What is the outlook there for what does pipeline look like?

Speaker 13

I mean, you've got a 1.4 net leverage is a really good number to work off of. And so whatever your are your aspirations in 'twenty four, maybe even by telling us is, would you be in 'twenty four, maybe even by telling us that would you be disappointed without another good sized deal this year?

Speaker 3

Yes, it's an interesting way to phrase the question. I had come at it from 2 perspectives. The first you already raised, which is We are very comfortable with our leverage levels. So we think financially, we certainly can afford to invest in acquisitions. And I would say secondly, is kind of the integration perspective and We'd like to make sure that we have systems control well integrated.

Speaker 3

We've got A healthy amount of people kind of working together. It's off to a great start. Our customers are happy with it. It feels like a good cultural fit. But it still takes work to make sure that it's integrated and we don't want to have too many plates spinning.

Speaker 3

So your question may be Well revisited 3 months from now. But I agree with you that strategically we'd love to add businesses in the Northeast and financially Northeast of this 2 by 2 matrix of higher growth, higher margin. And yes, we feel we have Capacity both in cash flow generation will be up in the $800,000,000 range this year plus as you pointed out, I think balance sheet capacity. So we are so I think let's just revisit that Maybe in 3 months and see how we feel, but it's a good one. It's a good question.

Speaker 13

Well, fair enough. I guess I was just wondering also what the pipeline South look like and you can run people off a little bit?

Speaker 3

Yes, there is a pretty decent pipeline And there's quite a few things we're expecting to at least probe the market in the second half of the year. So that doesn't mean we'll buy any of those or that they'll be attractive. But there is an interesting amount of What appears to be inventory maybe coming to market.

Speaker 5

Thanks so much.

Speaker 2

Yes.

Operator

Thank you. At this time, I'd like to turn it back to Gurban Bakker for closing remarks.

Speaker 2

Great. Thank you. I appreciate all the questions, the quite robust time we put out for that In this call to focus on our outlook. Maybe I'll close by saying that I feel really good about the year and our ability to deliver on our commitments to you to drive profitable growth after Few years of really outperformance. So, look forward to our Investor Day later in the year and to our Q1 call.

Speaker 2

Let's talk about how we're doing so far this year. So thanks much.

Operator

This concludes today's conference call. Thank you

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Earnings Conference Call
Hubbell Q4 2023
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