Hubbell Incorporated (HUBB) Earnings Call Transcript & Summary

Good afternoon, everyone. I'm Joshua Pokrzywinski, Morgan Stanley's U.S. electrical equipment and multi-industry analyst. Welcome to Virtual Laguna. With me this afternoon on the virtual fireside chat, it's the management team of Hubbell. We have CEO, Dave Nord; incoming CEO, Gerben Bakker; and CFO, Bill Sperry, joining us from around the horn on the Hubbell ecosystem. Gentlemen, thanks for making the time this afternoon. Before we get started, I do have to read a quick disclaimer before we jump in. Please note that this webcast is for Morgan Stanley's clients and appropriate Morgan Stanley employees only. This webcast is not for members of the press. If you are a member of the press, please disconnect and reach out separately. For important disclosures, please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. With that, we'll jump right in. Gentleman, thanks for making the time this morning or this afternoon. I guess we're now graced with 2 generations of CEO at Hubbell. So Dave, appreciate you making the time here. Congratulations to both of you. Dave, on a great career and a lot of value unlocked for Hubbell and its shareholders. And Gerben, for the new opportunity that is richly deserved.

Maybe if you guys wouldn't mind just kind of talking a little bit about some of the -- of what you're seeing out there in the business, big strategic imperatives and then a little bit about the transition, if you don't mind, just to lead-off?

Sure. All right. Thanks, Josh, and thanks. I mean, this is always a great event. Obviously, it's better in Laguna during sitting at shelter. But the timing of it is always great because it's a great opportunity coming off the summer, getting into the fall to talk about what's coming up. And obviously, for us this time, there's something even bigger coming up. You saw the announcement last week of the conclusion of a long-planned succession process where we named Gerben as the next CEO. Hopefully, he's been the COO for the last year, 15 months. Hopefully, you've got to know him through that as well as some prior meetings, maybe in our Investor Day. But obviously, one of the reasons that he was selected was he's built a very strong track record in our Power business, our legacy Power business, which we now refer to as our Utility Solutions with the addition of Aclara. He's put some really good financial results there. And he's played a critical role as well in our drive for better and stronger execution and operating with discipline. And I think that's something that you've seen the results of even more recently in the last year or so. And I think that's really something that the combination of those 2 elements of his experience are one of the things that I think are -- I'm most optimistic obviously, I have a continuing vested interest in the future success of the organization. I hope I have been able to leave it better than I left it, and that's what I expect Gerben to be able to do as well. But he doesn't do it alone, obviously. We've got a very strong team here, and he's very keen on that. Particularly, one of the guys sitting at the table here is you've all known Bill for a long time, and Bill is a very important strategic partner for Gerben and expected to be going forward. Well, you've also seen, we've added some more senior leadership talent. Most recently, Peter Lau, who's going to head up our Electrical segment. Alexis Bernard, who you had a chance to meet at Investor Day. That's the only time anybody saw him even before he went into lockdown. So he had a very interesting introduction and so -- and more recently, we named a long time employee of Hubbell into a VP of Customer experience, Terry Watson. And so really getting into the elements around our customers and sales. So a lot of good things going on, all set up for future success and for Gerben to continue to drive that. So maybe, Gerben, if you want to comment further on what you see going forward?

Yes. Great. Thank you, Dave, and thank you, Josh. And Dave, you said you left the company a better company than you inherited. And I thank you for that, a company that's today, 50% larger than when you took it over, almost 50% more profitable, more focused, and I agree with you with a management team that's the strongest that I have seen in my long tenure at Hubbell. So I'm really excited and honored to take this business over for you. You've set a great bar for me to leave it better as well. I've been with Hubbell my entire career, 30-plus years. So certainly, I've seen the great strength of our people, of our products and brands and of our customers, strong customer relationships that we hold. And I've also worked with both Dave and Bill for the last 8 or so years from when I ran the Power business to more recently as COO of setting and executing on our strategy, and it's certainly a strategy that I've been part of and that I believe in. I'd like to provide a couple of comments looking ahead with now a little more than halfway through our year. And the first thing that I have to do is to just recognize and say how proud I am, of all our people and businesses and how we've managed through these very uncertain and very difficult times. And I think you saw that reflected in our second quarter results. But then looking ahead even a little further into our third quarter. We continue to manage our business very well on the cost side. As we start to see the improvements, the incremental improvements quarter-over-quarter as we start to slowly come out of this pandemic. Our utility business continues extremely strong. I think here, the macro trends and the secular trends are helping to drive this growth. We've talked a lot about this at the Investor Day. And when I certainly when I ran the business of the need to upgrade this aged infrastructure the modernization that's happening on this grid that as renewables are coming on the grid, we cannot only help serve the need drive Transmission business, but it puts a lot more strain on the grid and again drives the need to upgrade it. I think these are macro trends that will happen independent of short-term economic or pandemic situation, we continue to see that business do extremely well. The other thing that we saw this quarter was storms. We're able to, fortunately, help our customers to put up the critical infrastructure when hurricanes, and hurricane Laura, in this case, took that down. And as I've stated again in the past, while as a percent of revenue, this tends to be small in a year, maybe it provides some lift in a quarter. More importantly, it shows the value that we bring to our customers and being to help them restore this absolutely critical infrastructure. In the Electrical segment, we've continued to see our markets more challenged, although we are seeing the sequential improvement that we had anticipated earlier in the year. On the resi side, we're seeing particular strength driven by big-box renovations and our e-commerce, and we're actually seeing year-over-year growth in this business. Our supply chains, we talked about this in the second quarter, we had some disruption. At this point, we're fully operational and able to supply our customers as an essential supplier. And we're also continuing to manage our cost very well to the third quarter. We're -- a lot of activity on restructuring, despite the pandemic, we're able to keep those going. Which sets us up very well for the second quarter and going into next year. So overall, I'm very optimistic on how we're managing our business despite still some of the challenges that we're seeing from this pandemic.

Got it. That's a helpful overview. I appreciate that, Gerben. Just digging in a little bit more on the Utility side, I can't remember at what point the switch happened, but utility went from being kind of an end market that people didn't think much about and maybe a GDP proxy to now something that -- getting a lot more questions on even from the ESG crowd. So a very long way from where we were 5 and certainly 10 years ago. But you mentioned 2 things as important drivers there, kind of this whole phenomenon of Grid Hardening, as well as the renewables piece. Obviously, with what's going on in California and much of the Western United States right now, the importance of Grid Hardening is clearly not getting any smaller. And then utility -- on the renewable side, a lot of momentum as well. But maybe frame-up individually, feel free to use a baseball analogy in terms of what inning or importance in terms of a driver how would you think about those 2 things in isolation? Is Grid Hardening driving a lot of the activity and there's a lot of runway? Is it renewables? And visibility there is more of a plateau? I'm making up the scenario, but maybe just try to think about some of those dynamics in isolation for us.

Yes, Josh, I think you're thinking about it quite right. They are very intertwined. This concept. Maybe the first thing for us all to just just take a step back to is to reflect on the age of the electrical infrastructure in the United States. And it's really, really aged. There's parts of the grids that are 100-years-plus old. And if you think about the life span of some of these systems, it's clear that the infrastructure needs to be upgraded. We have seen hardening over the last several years, and I think some of these climate change events, whether it's fires or hurricanes or ice storms continue to highlight how fragile this grid is. So I think there is a pretty long window out of the need to harden the grid. The one thing that's adding to the complexity of it is renewables. And when you put renewables on to the grid and the two-way flow of power onto the grid, it puts additional strain on an already aged infrastructure. So it becomes even more important that they harden, but then also, can you do that in a more modernized way. And that's indeed what we're seeing. And we see more of instead of like kind replacement everywhere to say where can you add intelligence onto the grid to help drive greater grid efficiencies. And for us, this is so exciting when Aclara came together with the legacy portfolio and this is that this puts us in such tremendous position to also serve that part of the market. So grid automation -- distribution automation is an area that we very much see longer-term secular growth. And so -- so we see it pretty optimistic over the next few years.

And you mentioned this, so kind of in anticipation of my question that as repairs are being done or proactive hardening is taking place, that is a catalyst for a smarter upgrade as well. So the 2 do go hand-in-hand?

They do. They do. There's absolutely still a need for that a hardware, the bolts and the nuts to put the grid up and that won't go away. But if you can add elements of insights into the grid, and there's data collection points and then utilize that through the software systems that can analyze and act on that, now you get a more intelligent grid and a more efficient grid going forward. The legacy part going necessarily away. But we augment it with part of our portfolio that's more intelligent.

Is there a way to just kind of frame for folks? And I understand it might be hard to have right on the tip of your fingers, some sort of attachment rate, $1 of hardware spend in the right circumstances can also be worth another dime of software, something like that. There's probably no great example, but any way to just kind of show us what the goalposts look like there?

Yes, Josh, that's a good question. I'm not sure if I've thought of it in that way. So I'd probably want to give that some thought before giving an answer on this. But definitely, I would say there is -- there will be an increased spend on the smart side, certainly from where we are today. It's still, I would say, in its infancy to a certain extent, as we think about the future. So I do believe that, that has a higher growth rate going forward than the legacy hardware side of it, which is why we're so interested in investing in this side of the business.

Got it. And I guess related to that, and something that probably is a little bit more concrete. As I think Dave has historically talked about the pipeline for Aclara with some pretty impressive numbers over time. Maybe just kind of update us on where that stands today and what that would have looked like when you bought the business because clearly, has done very well on the growth side.

Yes. Yes. So it has, Josh, seen nice growth for us over the last couple of years. I'd say the pipeline is still very solid, probably in line with what we described during the Investor Day. So despite -- no more challenging times to close on contract. This business has continued to maintain a pretty strong backlog during this time. It's still very much something that our customers want and need to invest in, certainly been a little bit challenged right now on deploying some of it. Our installation business, as COVID hit. Came almost a halt for a period of time. We resumed that, fortunately. But the underlying demand here is still there. And so this business to continue to operate where we hoped and expected to. And I think the next upside for this business really is when the large IOU start their replacement cycle on their AMI system, we see that still a couple of years out to the 3 years out. But we have technology that we've developed our RF technology that's not only well suited for an IOU but also well suited for distribution automation, which we believe will play an important part as IOU's upgrade their AMI system of adding that requirement. So we believe we're well positioned to see some upside over the next few years with that.

Now understanding this has become kind of one of the gems of the Hubbell portfolio. Has that changed the competitive climate as well, where you're starting to see more folks in that space either bidding on larger projects or kind of showing up to call on customers? Or is this still something where Hubbell's kind of existing relationships are getting in the door still as often as they historically would?

Yes. I would actually say it's probably strengthened with those 2 businesses coming together because Aclara on its own had very strong relationship and the Power business did and we're really utilizing the combined strength of these business. I'd say we're as well, if not better positioned for the future in this business.

Got it. That's good to hear. Just switching over to the other side of the house on Electrical. I think as much as there's a lot of different submarkets within non-resi, resi, some industrial, some oil and gas in that. I think there's a bit more agita out there in the world on nonresidential markets. As it pertains to kind of just lower demand for new construction, maybe a mature cycle. Is that something you're starting to see in new construction now? Do you think we're kind of living at the market? Or is there a sense that maybe there's still a backlog of existing construction that hasn't been completed. I know Hubbell wouldn't have a lot of backlog in the Electrical business, but maybe your customers or construction firms?