Hubbell Incorporated (HUBB) Earnings Call Transcript & Summary

Thank you, everybody, for being here. Super excited to kick off day 3 of the Laguna Conference with Hubbell. We have CEO, Gerben Bakker. Before we get into the fireside, Gerben is going to start off with some prepared remarks.

Great. Thank you, Chris, and thank you, everybody, for your interest in Hubbell, and early morning on the last day of a conference. And I appreciate Chris giving me a couple of minutes to set a little bit the stage of not only the long-term strategy of Hubbell, but also maybe look a little bit more near term where we stand. And if you were at or listened to our Investor Day in the summer or our more recent earnings call, I think you're going to find the themes today are very consistent with those. But perhaps I'll start just looking back a little bit because it's important as to where we're headed going forward. And certainly, we're very pleased with our performance over the last several years. We've done a lot of work on our portfolio, both on the exits of some businesses as well as adding to the portfolio that has positioned us very well to face the future. We've done a lot of work on our operating rhythm, and I would say the rigor of how we operate, much more of an operating company from perhaps more of a holding company mentality in the past. And not only has it allowed a better result, but I would say more consistent results in managing our business. And then finally, and perhaps most importantly, why we're in business is to serve our customers, and we continue to have as a priority for our business. Our reputation to our company is what earns us our business. We take this very serious. And we've done quite well in servicing our customer. Of course, this happened during a very disruptive period, but also a period where we saw demand starting to grow and trying to flex up our factories during difficult times. From a financial perspective, what that has meant is double-digit compounded sales growth over the period, over 5 points of operating margin expansion and about 30% earnings per share CAGR over the last 3 years. So I would say, hopefully, you're pleased with that performance, but that was then and this is now. So one of the things we set out to do in our business, and we communicated to our shareholders that we were confident in this new base of performance and that we could sustain, and not only sustain this base of performance but that we could grow off of that new base of performance from our company because of some of the things that we had done to the business, to the portfolio and how we operate. And so the outlook that we provided, which remains our outlook today, is to drive double-digit operating profit expansion off of that very strong base. So pleased with where we are. Of course, if we look a little bit more near term, we are managing through a couple of pockets of challenge, particularly in the distribution side of our utility business as well as some challenging telecom markets right now. But we're able to offset that by a very good strength in utility transmission, substation; on the electrical side to it, renewables and data centers. So we're finding ways, even though we have pockets of challenges in the business, to offset those with pockets of strength. I'd also say we continue to manage very -- with priority and focus, price, cost and productivity. And that's to, of course, manage the margin side of the business. As we then look out over the next 3 years, we are very bullish about the future. And if you think about some of the mega-trends, and I'm sure we'll get a chance to talk about that a little bit this morning, of grid hardening and modernization and electrification, really our business sits at the core of those mega-trends. And certainly, with our portfolio today, we will benefit of the growth that that brings us. If you look at the utility side, you've got trends that we've seen for the last few years already of grid hardening, then grid modernization, the integration of renewables onto the grid. These are some of the trends that we've seen. But more recently, and I'm sure we'll talk about this again a little bit, the growth of data centers and AI. And I would say this is still early innings perhaps for us of what the implication of that on the grid is with load growth, but I can tell you, our business, we're a leading supplier in the utility business and we stand to benefit from all these mega-trends. And then if you look on the electrical side of the business, we've done a lot of work there after we reshaped that portfolio. We're much better able to compete collectively, and we talk about this a lot of -- these businesses have a lot more in common, and this is the reason we brought them together. We've brought sales forces together, we've focused on verticals within that. And we're just better able to compete collectively in that and gain the benefits of growth through that. The other area is the opportunity for continued margin expansion with the efficiencies that we're driving, with the investments we're making into that business. So I say all of this to say that, as you bring that all together, we see the future, as we talked about at our Investor Day, at mid-single-digit growth, organic growth, on the business. And we think with the strong leverage we have on that, that we can deliver double-digit earnings per share. So I feel really good about the positioning of the company. I feel really good how we're executing with the company. And I'm very optimistic about the future that we face as a business. So with that, let's go to Q&A.

Thank you. So you talked a lot about the transformation of the business. And if I look back in a lot of the pre-COVID years, Hubbell was around-the-GDP type grower. Now it seems like more in that mid-single digit, maybe mid-single digit plus, depending on who you ask. I think everyone appreciates the secular opportunities in electrical and utility, but the company has also done a lot of portfolio high-grading, electrical. So can you just maybe talk about some of the most important portfolio actions that you guys have done over the last couple of years?

Yes. And in my opening, I started with we had -- the lighting business was big, and that was partially a commercial business and partially a residential business. That was more volatile in the portfolio. It didn't fit as well both from how we go to market. We have an extremely strong internal sales force. We went to market very differently with this business. It was more volatile in the good years, and we're -- so what you end up doing in those cases, you end up spending disproportionate attention for the return. And that's starting from me as the CEO, to the whole organization. So as we looked at that -- and we hadn't traditionally done that. We've got a great history in adding to the portfolio and we haven't always been so good at really critically looking at what perhaps is better off in somebody else's portfolio than in ours. So that served us really well to get out. We're now more focused and we're able to take the rest of that business, bring those together, what we call competing collectively, providing solutions for the customers on it. So that was a very big move. But at the same time that we did is we didn't stand still and we added to the portfolio as well. And really for us, adding to the portfolio is through those strategic growth verticals that have higher margin profile and have higher growth opportunity. Utility business is squarely in that area. So we've added several businesses, continue to add bolt-on businesses that we're quite good at, that's kind of like our DNA of what we do. But also some larger deals, so maybe more transformative deal with the more recent acquisitions of Systems Control. But all down that fairway of expanding our scope and presence and value to our customers in the utility business. So those have been, I would say, very important reshaping of the portfolio. But our work isn't done, I would say. We'll continue to -- and perhaps more now, adding to it again than trimming.

You mentioned Systems Control, one of the bigger acquisitions the company has ever done. Can you talk about how that business is performing? And what does that -- adding that do strategically for Hubbell?

Yes. So it's -- maybe I'll start with it's performing well since it's brought in, not just from a financial perspective, but as you can imagine, you got to integrate these businesses into our systems, our culture, and that's going really well. We look for that when we buy companies, is what's the -- not just the strategic fit to our business, but what's the strategic -- how do people feel when they come into the company? And a lot of times we have the discussion even before these companies join. What did our systems -- is it a heavy lift or is this an easier lift? And so we know what we get into. But that business is doing well so far. The strategic fit with this business, it's in utility. It's to the customers we serve. It's with the sales channel. We go into it. But what's interesting with this business, which is perhaps a little bit different, and it's a theme that I think we're seeing more of, is that what they do is, in the factory now, what traditionally has been done more in the field, which is putting these control systems for substations together. You can do this in the fields, you can get all the components, you can build this in the fields. And that's still done today, but I think what customers are finding value in is, if you can do this in a controlled environment with labor that's perhaps more available, that labor that's even perhaps a lower cost than if you have to use electricians in the field, there is real value for them. And labor is a constraint in this market, so it's a real valuable solution for our customers. Regarding the size of this deal, it is similar perhaps to the Aclara deal that we did in '18, but I could tell you the balance sheet of Hubbell today is quite different than it was then. So what you saw then is it levered up the balance sheet. And when we went into that, we said we're going to need some time to not only integrate the business, but to get our leverage down a little bit. That's quite different from Hubbell with the cash that we generate. So a similar-sized deal is truthfully easier on the balance sheet today than it was. And we'll anticipate us doing perhaps more of those.

Appreciate that. Maybe turning over to the market. I mean, utility, there's a lot of tailwinds, whether it's grid hardening, modernization, IIJA, [ IR Ag ], data center now. I mean, I guess just very open ended, of all the tailwinds and drivers and utility, which one gets you the most excited? What do you think is the best opportunity?

Yes. It's maybe a little bit of a copout in that they all are what makes and helps our business. It truly is. But I would say the base of it, and this is what we've been talking about for so long, even before we started to talk about this business more than the GDP growth, because for a long time this business has been a great business but growing at GDP, is the age of the grid and the grid hardening. And this grid is very, very aged. It serves a humongously critical function, of course, on our lives and our economy. And the need to invest in it is very much there. The utility companies are doing a lot of work, and I give them a lot of credit for the work that they're doing in hardening this grid, but a lot of many, many years or so. So I think that's the base that I would say of all the investment. Then when you look at that more recently, we've seen the integration of renewables. There has been a big push to move away from perhaps some of the more -- the coal and other factories to more green energy, and utilities have done that pretty aggressively over the last couple of years. We benefit from that. Any time you get a solar plant, a wind farm coming up, you need our infrastructure to take that energy back to the load centers. And then I think one that's in early innings is the data centers, the reshoring. And what that's doing is it's adding load. And that's one thing with utility. If you look at the load growth of utility, for many years, they've been flat. And just think about being a utility, you have to invest in the grid that's getting older, but your revenues aren't going up, right? So they've had to rely, and they continue to rely on commissions. I think the commissions recognize the need. But there's always tension there, right? There's rate payers that pay. So this is where I think stimulus can really help, is take some of the burden of the rate payers and still make those investments. So again say it all absolutely benefits our business. And this is why we feel this is not a couple of years. This -- to me, I mean, we generally don't talk decades in our business, but personally, if I think about what the time line is of what needs to, it cannot happen in a couple of years. This is over decades that you're going to address this.

Maybe turning to data center. I think everybody appreciates that, ultimately, what's going on in AI and data center is going to require investment into the grid. I think there's a lot less conviction, or maybe just more uncertainty as to when. Can you just kind of talk about how you ultimately think the CapEx we're seeing in data center flows into T&D?

Yes. Yes, maybe I'll take a little bit because data center for us affects both our electrical and utility business, which is really nice for us. And I'd say when you're putting up a data center, it's more in the -- clearly, on the electrical side, like the grounding systems, the connectors. We built a vertical around it. We organized our sales organization. We have product development teams to work to -- we're adding acquisitions to it to really grow the support of actually when you're putting a data center in. On the utility side, there is also a direct portion to it in that every data center needs a substation to it. And we are very strong in substation with utility segment. So that part is more direct. But I think what you're getting at is, if you think about what data center, I mean they are a huge consumer of electrical load. And you already see it, where the early data centers were going in, they're getting really, really constrained with being able to provide power. So now data centers are kind of looking where's the availability of power. But that's perhaps also a shorter answer. So what this will eventually do is drive load growth, and this is what utilities are thinking about. And you don't put up a power plant in a year, right? This is, again, thinking, planning decades out. So how do they solve for this? And I think this is where we can -- when we talk about utility automation, grid automation, how can you move power from one place to another? How can you have more efficient power? This is where we play. I think this plays out again over the longer term. This is where you got the challenge of both the funding for this that they need. They need to go to the utility commissions to make their cases for this. I think as we talked before we walked up to the stage here, the labor availability of that, can they get all this work done? And they struggle with that a little bit. I think what will help that eventually is that they will get support to do this from whether it's through stimulus or to the rate cases. You also see now in the labor availability, you see more prominence of EPCs, for example, that are complementing utility companies with labor. So I'm optimistic that we'll see some of that improve over time. But again, to me is it needs to happen. So it's just a matter of, is it going to be over a shorter period at a little higher rate? Or is it going to be over longer -- a little lower rate but it will be over a longer period? And that may be periods that will go -- and that's, I think, the debate a lot that you get, is it mid-single digit, is it perhaps higher than mid-single digit? That's so hard to pinpoint. We believe the mid-single-digit case is a prudent case. But we're prepared to serve it if it's better.

Yes. I guess on that path to mid-singles and then opportunities to maybe get above that, what are some of the -- is it like data center coming through faster? What are some of the opportunities out there that would actually get that algorithm above mid-single?

Yes. Yes, I think it's, again, not one thing. I think -- and we see in some of the areas, we see it above that. If we look, for example, our transmission and substation business, our grid automation business, these are businesses that are running in mid to high to double digits right now, right? So we see pockets where that's happening. And I think that's how it will be. And sometimes, we get a lot -- the question of, is one intentioned with the other? If they invest in transmission, is that at the expense of distribution a little bit? Well, that could be. It benefits us because we do both. So $1 that's moved from distribution to transmission is $1 that we can serve on the transmission side as well. So that's a little bit what the work. So I think that could be and that we're seeing sectors or periods where it is higher, I think some of these things that I talked about with the need to get funding, that takes time as well with the labor availability of it, with -- the reality is too utility is managing their budgets as well. That, again, we believe the mid-single digit is prudent. We've seen -- if you look at our core T&D business over the last couple of years, that's what it's grown at. And again, with some higher, some lower in it. So we feel it's a responsible guidance and for us to think about how our business grows. But again, we're very, very well positioned that, if it's better and if there's pockets where it's better, we're going to get the opportunity to serve that and the ability to do so. This is why we're investing in our business. You see our investment back into the business, while we take -- do it where we see visible demand, but it's to serve our customers, and I go back to our biggest value proposition, servicing our customers. So I don't mind being a little bit ahead of that to have. And then when some of those markets do grow higher, we can serve it.

Appreciate that. So obviously, a lot to be excited about in utility. But the business currently is not really growing because destocking on the distribution side and just telco weakness. Where are we in that destock cycle? And how do you see the company coming out of it over the next couple of quarters?

Yes. So the destock, as you point out, is in a particular part of the business. It's in the distribution side of the business. This is our more make-to-stock area of the business. And certainly through the supply, we were the ones actually that caused this, right, and not just we as Hubbell, but we as the industry. We were very, very constrained during the pandemic and our lead times shut out, our customers were desperate, if I may use the word, to get product. We served them and serviced them really well, but not good by our standards. So what you saw in that, if people could get products, they would get their hands on. Where this particularly got worse is when our supply chain started to normalize, because now all of a sudden, we got our factories ramping up, we were able to get more out the doors, and at this point, customers are taking it, right? They're like -- they're not going to tell you, "Don't ship it to me." So we actually think it's a good thing that this is happening because it's an indication that our supply chains are normalizing, our lead times are coming down. We are much, much better able to serve our customers. But the result of that is they got to work through it. We got through this in the channel earlier, and that's a little bit different from the utility than the electrical. And what we're working now through is more to the end-customers that have it. And even when you look at the end customers, there's a difference between where there's more and where there's less. And particularly in the IOU, the large investor-owned utility, that's where a lot of this overstock situation. When we look at the public power market, the co-ops, the munis, we actually are seeing growth. The other thing that we're seeing, it's -- and this is a good thing again for us, it's different by customer, it's different by product line, again, it's an indication of where our supply chains have normalized, our lead times have come down, that's where you're starting to see this inventory normalization. And that's a good thing for us. Because just imagine if everything happened at once and everybody stopped ordering and needing product, our factories would be down for 2 months. I mean you couldn't operate. So the fact that it's actually in pockets, we can keep our labor forces, we can keep our factories running. But what it does, it extends the cycle a little bit of doing so. We are still in this. We believe that through the balance of this year, we'll continue to work through this normalization. But I can tell you where we're through it, we can see the lifts starting to happen. So this is, at the end, a very temporary thing that we're going to go through, and then we'll see -- serve the demand that's out there.

Yes. I mean if we're going to electrical, we're kind of running ahead by a couple of quarters on that. Electrical got destocked last year, business has recovered to mid-high single-digit growth. I think it's the only short-cycle business I cover where I can very clearly see the -- go through the destock and then come out of the destock and return to healthy growth. I guess, what is driving demand there? And are you confident that that business will continue to generate solid growth over the coming quarters?

You're talking about the electrical?

Electrical, yes.

Yes. And if you look at the electrical, where we play and how we positioned this business, we have some very nice verticals of renewables, data center, and that business has a reasonable sized utility as well in it with our Burndy business that serves both of those. And we've been talking about the trends in there, right? So those we see actually, the first half of this year, we're seeing double-digit growth in that business, and we see that continuing on the horizon. Then the other 2 parts of the business is the non-res and industrial side. And I would say it's steady for us. If you look at some of the reshoring that's happening, some of the industrial activity, it's been quite okay for us. What's the future of that business? You can probably tell us better than us what happens. But what I can tell you is we're very well positioned that no matter what the macro is going forward, we can do well with those businesses. So yes, we feel good about the portfolio.

Yes. Maybe moving over to price. I mean the company has taken a lot of price over the last 3 to 4 years. You guys are a big consumer of metal. So a lot of that was cost inflation. What is your outlook for price going forward? And is there any difference between electrical and utility?

Yes. So we've used -- we've had to use price over the last couple of years because of that. I mean we are a heavy user of metal. And not so much -- sometimes people think of us as like commodities of metal, but we're actually a much higher user of components, right, that have value-added. But you still have the metal in that. And perhaps in the past, we've been criticized a little bit, and truthfully, even been self-critical after we reflected on it, on how quickly we reacted to that. And I think that hopefully you'll agree with me that we were much, much more aggressive the last time when this happened. But the big question I think that you had, is this sustainable? Are we somehow going to go backward? And we ask ourselves this question a lot, right? And what's the value proposition of Hubbell? And what's the earnings we deserve for what we do for our customer? When we analyzed this, we were really convinced that this could be the base to start. And if you think about what we do, we are generally a very small percentage of the cost of the systems that get -- put in place, usually measured in single-digit percentage of what it costs to put the whole infrastructure. Yet we're hugely critical. If one of our components fails on the grid, grid will equally go down as if -- the much more costly, the much more what adds the other 90% of the cost to it. And we're very complex. We provide a lot of complexity, a lot of components that we manage for our customers. So does that deserve a little bit of a premium? I think it does. And I think it's proven that our customers value that as well. So we've continued to -- so even after that period, we've seen that we'll continue to be in an inflationary environment. Not so much metals, but certainly, labor has continued to go up. Freights, even though it went down, it's since come up again. So our view is that, while moderating, it's still inflationary. So we used price even earlier this year, and I'd say the stick rate on that was good. We saw a couple of pockets where the business, the telecom business particularly were so depressed that we have had to use price a little bit for new business. But I can tell you there too, we're very disciplined to not chase that volume with price. But I think that's a good first indication that price can continue to be a lever. I mentioned earlier in my opening comments that managing price, cost, productivity. And that's how we look at it. We don't look at just one. We have a very robust action to drive productivity and drive higher productivity because we think that the future inflationary environment is higher. We have cost, right? There are times where we can invest and times where we pull back on that investment or restructure the business. We really look at it as the 3 levers that we want to manage to neutral or better over the cycle going forward. But I see price there as one of those levers. Not to the extent that we've used it the last couple of years, but still a lever that we'll use going forward.

Yes. I mean, I guess another factor that drives margins is the capacity investments you guys have been making, there's been some margin headwinds that have come with that, I think, in the back half of last year. These investments you guys are making to support growth, do they ultimately go from headwinds to tailwinds as you start leveraging all of that? Or is it, "Well, the business is going to continue to grow, so we need to continue to invest," just kind of steady state?

Yes. And I would say probably both, because very few of the investments that we're making are adding multiyear capacity. It's usually the next molding machine, the next stamping press. And yes, you get a little bit ahead of it, but it's -- if growth rates continue, I would say we continue to invest. Now I think there was a period where we really had to catch up a little bit, if you may call it, where we get. So we look at that ourselves. So is it at the same levels of increase? I don't think so. But yes, I think it is -- but yes, you get the leverage on it as well, as what I talked about earlier, that with that mid-single-digit growth and the operating leverage that we get on that to drive double-digit earnings, it's a little bit through that that you do get the leverage.

Well, I think we went over the 30 minutes, but a lot of good stuff to talk about. So really appreciate the time. Thank you, Gerben. Loved the conversation.

Thank you, Chris, and thank you all for your interest. Thank you.