Hubbell Incorporated (HUBB) Earnings Call Transcript & Summary

Great. All right. Moving right along here. Hope you guys all enjoyed the fancy bag lunch. Paige and I spent all night putting those sandwich in those brown paper bags, so I hope you enjoyed them. So anyway, we're here with Hubbell starting the afternoon off with CFO, Bill Sperry; and director of IR? What's your official title these days?

VP of IR.

VP of IR, Dan Innamorato. So we'll do our usual Q&A here and then you guys can ask a few questions at the end.

First of all, thanks for being here. Second of all, maybe just talk about the demand that you're seeing out there so far through the quarter. I know when we used to talk years ago about the inconsistency coming out of the industrial recession, if you will, you would always say things were choppy and there wasn't really a trend. What are you guys seeing now across the utility business and then your more industrial -- the more industrial pieces of your pie?

Yes. So first of all, thanks for having us. Always good to be with you, and thank you all for joining us. Yes, I think as we had started to observe on our call for fourth quarter earnings, the utility demand, Steve, which is kind of a pretty important part of your question for us, really started to pick up with book-to-bill going above 1 for the first time in sort of 7-ish quarters or so. And I think we had felt like all along, the end demand had continued to be strong. In other words, material was continuing to get installed on poles and towers, but the utilities had acquired, over the last 1.5 years or so, a lot of inventory. And so they were satisfying their needs with inventory rather than ordering from us. And so seeing that trend starting to come to an end, I thought, was really significant. And I think to your word, I think there is a trend there. So the dating on those was out a little bit so that the shipments didn't happen in the fourth quarter. But we are certainly feeling like this destocking trend is really going to fade from what you and I talk about as '25 rolls on here, and that we're going to see shipments much more in line with install rates and that's going to be really welcomed by us. So that's all on the utility side.

And those orders have held up generally through your last reading, whenever that was, February, February end?

Yes. So that all feels trend-like rather than some episode. I think at our dinner last night, some people were wondering whether or not there was some kind of pre-buy with tariff expectations. And I just don't know that we've seen evidence of that, so it sort of felt trendy rather than driven by something like that. And I think on the electrical side, that demand had been pretty steady, particularly on the light industrial side, sort of some of the commercial bits maybe not as strong and not as steady but still good across that segment. So that demand picture actually seems intact.

Right. So things pretty stable, not a lot of volatility. I would assume March is kind of an important month for you guys, but so far, it sounds like things are pretty good demand-wise?

Yes, I would agree.

Okay. On the tariff situation, maybe just give us the -- any kind of detail on what your exposure is, whether you're covered by the current trade agreements, how you guys are looking at tariffs today?

Yes. So tariffs, I would argue, started in China here with a couple of rounds. Our Chinese exposure, for those of you who've followed us for a few years back in the '18 time frame, that caught us with some headwinds. Our exposure is down dramatically. We sold 2 businesses, both the consumer -- sorry, a resi lighting business as well as a commercial industrial lighting business, both of which was really the lion's share of our Chinese exposure. So that's down quite a lot. But that piece has been functional now for the month, and that's something where we're relying on price to make this whole. And since '18, there had been some onshoring and everybody asks about that, and we certainly did further reduce exposure by doing some of that. So next comes the countries of Mexico and Canada. To your question, we are compliant with USMCA. So I think we paid a day or 2 of tariffs while that was being decided to be pushed out again. So it's sort of an interesting stop-and-start policy implementation to all this. And so we'll now wait and see. But we've been -- certainly, with all of that, it's created an opportunity for us to have a lot of dialogue with our customers. Customers understand that significant price increases are on the way. And I think the distributors are eager to push those through and work with suppliers to get those implemented on a timely basis. And then lastly would be the material-based layers of steel and copper and aluminum. And again, I think price will be our biggest lever there. We've got the opportunity to push back on some vendors in some of these locations and ask for some price concessions. We're pushing productivity as hard as we can, places where there's supply chain realignment opportunities, studying where the FX has moved slightly. And so it's quite an analytic exercise, Steve, to be candid. You got lot of war room set up in a lot of places kind of crunching numbers and talking to customers and getting ready to pull some significant price. So I think it's -- we're right on the verge of all that.

So steel is up pretty significantly. Are you already going out and issuing a price increase like as of today or yesterday or whenever on that? Or are you kind of waiting to see how the other shoe to drop on tariffs, how that drops and then you'll go out with price?

There have been some increases at the beginning of the year, but these will be step functions from here. But you're right, there have been some, yes.

Okay. What magnitude are these? Are these kind of, should we think like low single digit, like 1%?

Yes, there are some cases where you and your competitor are both in Mexico, and I think you're going to try to recover the dollars of tariffs using price. So now maybe FX gives you 2, 3 points, right? Maybe some productivity gets you another couple, but you start -- what's left to be covered by price is still really significant.

Is it a scenario where because of your accounting and kind of how things work, you could be maybe vulnerable for a quarter but all make up for it kind of over the course of the year? Is that how we should think about the timing on all this?

Yes, that's a good way to think about it. So I think what Steve's referring to is just the mechanical process of issuing the price increase, giving the customer a month or so to get that input into the system. Then things are satisfied out of backlog and all of a sudden, like you say, you've got roughly a quarter basically of LIFO recognition of the expense before the price hits. And then on the back side, the symmetry of that kind of comes back.

But other than like the 2 days of tariffs, it's not a first quarter event?

Yes. Well, there is -- I mean, I do...

It's more of a second quarter event?

There'll be a little bit in the first quarter, but yes. Yes, because you had some mid-March things on the materials. But to your point, domestic materials, right, have moved in the new year.

That's probably -- with all the noise, that's probably like the standout is you're playing old commodity costs and deal going up pretty dramatically, which just happened recently. So okay, that makes a lot of sense. Just stepping back into the businesses, kind of going back and diagnosing like what is actually happening here on the distribution side for you guys, obviously, the transmission side, that's very self-explanatory. There's a lot of projects out there. But on the distribution side, people have been kind of like scratching their heads as to all the demand coming on. Yet everybody that's in that D channel has just not seen the volumes pick up as you would have expected in the context of utility CapEx. Maybe just explain what has happened over the last 1.5 years, 2 years and why you're maybe not seeing the demand that maybe a guy like Eaton would have seen in their transformers or switchgear or some of those guys.

Yes, I think it goes back even longer than a couple of years. So as COVID disrupted the supply chain, our on-time, our delivery dates and promise dates gapped out quite substantially. Everybody needs material so they start putting in orders now. You build up a big backlog. And then as the supply chain heals itself and the promise -- your ability to deliver comes back from maybe 40 weeks to 2 weeks, all of a sudden, they don't need to buy anything because they've already bought it. So that inventory had built up '22 and '23 and was working itself down back part of '23 and '24. And I really do think we're getting to the point where it's fading. It's a -- if I use the word destocking, it sounds like it's a nice unilateral like a lever that it's either, are we destocking or we're not? But you're talking about many customers, talking about many geographies, you're talking about lots and lots of SKUs. It's not a monolithic thing. And so it's -- I think it has healed itself in many of those vectors. But there is just on distribution products with IOUs, it happens to be persisting even in the first quarter of '25. But it is -- you can start to see as the book builds, that's just going to all fade. And it's pretty clear that we're going to be shipping to install rates pretty soon in '25.

Has the demand profile shifted at all? I mean, a couple of years ago, at DistribuTECH and all these conventions, it was -- there were a lot of tailwinds, EVs, distributed energy, renewable onshoring, all this stuff. And then data center came on, and there was a period of time where it was like 5 real serious drivers. It looks like the drivers are now data center. Has that demand profile of just data center-driven growth, does that change the trend line on this spend? Or it's just a bit of a delay because we're building them today, we haven't really hooked a lot of them up? Has that changed relative to a couple of years ago because of the drivers?

I would say there's a supply side element to it that I would add to your data center point, which is, and that's maybe where some of this distribution work comes in. But that last mile, the 15-foot wooden pole in a suburban neighborhood exposed to environmental effects, whether that's fires in the West or hurricanes in the southeast and ice storms in the north. But the hardening of all of that has become really quite important. And the amount of outages has gone up, the frequency has gone up and the length of outages is going up. And so I think there's quite a lot of emphasis on hardening as well as the demand profile from data centers. And so I think that's where it gets interesting where you feel the need in those budgets, we feel those budgets are going to get satisfied. Whether or not in an inflationary environment, I think a subpart of your question could be, has the transmission and substation demand, which would be data center-impacted, influenced at least, if not driven, does that suck some of the dollars to that part and left D with maybe less budget? Perhaps. And they're satisfying those budgets in dollars so maybe there's fewer units going out. And so I think all of that is getting absorbed here. But it doesn't really change, I think, our medium-term outlook of the need for mid-single digits and better amount of material to satisfy all these needs. So it's still quite a bullish picture from our perspective of a multiple of GDP outlook.

Right. What's going on in the Aclara side on the metering front?

Yes. So they went through an interesting cycle, referring to your cycles of -- the chip supply constraints became very real post COVID. So they had built up quite a bit of backlog. And last year, they had -- they were living off of backlog and now they need new orders to really backfill. And so they had a contracting fourth quarter against a really tough comp that was up 40% or so in prior fourth quarter and equally tough comp this current quarter. So those 2 quarters are going to look rough year-to-year by compare. And they're -- with that backlog satisfied, they're getting to need new orders to be -- so the visibility of that backlog comes down and it looks like it used to, which is a book-and-bill business. So I think it's in a...

Can it still grow or is there a risk to that in the back half?

Yes, I think there's risk if you don't get new projects, yes.

Right. And the visibility on those new projects, are they out there?

Yes, there's activity, but I can't -- we don't have the visibility yet to confirm that.

Okay. And then on the telecom side, just kind of rounding out the HUS discussion, how is -- any signs of life in telecom?

Yes, I think there are that's quite welcome. We had a rough year in our enclosures business to the telecom sector in '24. We had quarterly progressions down between 20% and 40%, depending on the quarter. And again, that was telecom orders shifting. They had a lot of inventory. And so I think, finally, we're starting to see that order book and frankly benefiting as well from the easier compares. So you got a combination of the order book firming and flattening, just the flattening becomes quite constructive. So you sort of apply normal seasonality to the level of orders you got and you start to say, okay, from this kind of lower level, we can grow modestly from that. And you start to see the order activity and the pattern support that. So that visibility has actually gotten a bit better.

If we started seeing smaller data centers built in more distributed areas, would that benefit that business at all?

What do you think about that?

Yes, I don't think as much. The big driver there is fiber-to-the-home, which is more miles driven so it's maybe incremental a bit, not a ton.

Got it. Any -- in this business, any risk that you see out of any of these government programs that were out there that were not just Telecom but the Utility business in general, whether it was IRA or some of the Telecom spending they were trying to drive?

Yes. I mean, not to the near term. We weren't counting on a ton of that and certainly '25 outlook or the medium term. So it's more a governor on potential upside than, I'd say, a risk relative to the outlook we've laid out.

And those projects, was that out of IRA or was that...

That was IIJA's BEAD-related funding that went to rural broadband access.

Okay. On the electrical side and data center, maybe just talk about that business. I know you had a bit of volatility in that business, more of a timing issue. Just talk about what happened there and then where we are today on that one.

Yes. So our exposure in data centers, think of maybe 2 distinct buckets. The first would be balance-of-system products like grounding and other electrical connectors and such that would go into the data center. And the other is a modular approach where you have an enclosure that holds the panels and relays and other electrical componentry. And that we bought a company called PCX that has a solution that takes the construction of all that from the field, from union work out in the snow and the wind and the rain and brings it into a factory setting, much more controlled, much faster, much lower cost. And that business had gone through, with a hyperscale customer, a redesign on a product which created the timing question. And those new designs are now being constructed and installed and the order book is basically built for '25. So we have very good visibility on that. And the other business, the balance-of-system's growing really handsomely.

What are the growth rates of those buildings -- of those businesses in '25?

PCX would have been down double digits and the balance-of-system stuff was up strong double digits, I'd say.

But then what about for '25?

Mid-teens for both, I think, is embedded in the outlook.

And could there be upside for the PCX business, given the easy comp?

It's maybe harder on the PCX business if you're satisfying existing backlog. The balance-of-system stuff is more book and ship so that's where you'd see some swings.

And what are you seeing on a book-to-bill basis there? Are they delivering in '25 and they get a lumpy order at some time this year? Or is the order book -- should the order book continue to build the backlog, continue to build? Or are they eating into backlog for PCX?

It's probably a year out or so in terms of backlog for PCX so it's more consistent on that front, but they are ordering longer out.

Yes. I think that could just build and roll forward with a year of visibility, I would guess.

And still grow in '26?

Yes.

Yes, okay. In general, just non-tariff-related price, any -- I think it's probably hard to parse that out at this stage. But what are you seeing in the channel? What were you seeing on the channel before the tariffs started to come into play this quarter?

Yes. I mean, I think price -- I think what we've learned sort of through '22, '23, and even in '24 is how willing the channel is to pull price. They're looking for reasons to raise price. Distribution businesses typically run on huge volumes and thinner margins, so price to them is a really good way to get some margin dollars and maybe margin percentage. So they're incredibly supportive and are just kind of want to work with us and understand how to communicate well, make sure their systems can handle it, not be surprised. So I think it's quite a supportive attitude towards price. And I think it's important to acknowledge we had, through '22 and '23, some extraordinary pricing years percentage-wise. And I would describe '24 as a return to normal and maybe to your question. So I'm saying they're welcoming price, but now you're returning, let's say, tariffs out of it. They're sort of saying, yes, 0.5 point is good, 2/3 of a point is good when we were pulling multiple points before. So it's -- but as opposed to, which I think there was a narrative where we were getting a lot of questions anyway that you've overpriced and you're going to be giving it back. So to me, it's quite significant to say a lot of receptivity towards an untariffed 0.5 point. And that's important to me because it, I think, should dispel the thought that somehow price has to go back to '21 levels or something like that, which is -- that's important.

Right. It has to be probably a pretty deflationary environment for that to happen. It is interesting that these are such large customers, right? But I guess your -- that should have some sort of real buying power. But I guess you're just such a small part of the equation for them. Saving a couple of points of price on you guys is really...

You're talking about channel partners?

Yes, yes. Well, I guess the ultimate customers, right?

Yes, I think of it the other way. We're so important to the channel customer that they want to work with us. But conversely, building a mile of distribution network, if we're 3% of that cost, then it's just compared to right of way, the pull, the conduit, our component is just a small piece. So yes, I think that creates a certain inelasticity, right?

How should we think about margins going forward here? How much low-hanging fruit is left on the electrical side? And what do you think about your kind of incremental volume, incremental margin algorithm going forward?

Yes. So as you asked that question, I envision a margin bridge from sort of in '22 and '23. That margin bridge must have added 5 points to margin and it had an awful lot of price in it. And as I think about '24 and '25, that bridge looks a little different, and it has less price but productivity continuing to work with price to offset inflation, both of materials and nonmaterials. So I would describe '25 bridge as being much more normalized, meaning productivity offsetting inflation. And again, this is let's do pre-tariffs just to make it a little bit easier. And all of a sudden, that bridge returns to volume and incrementals in that 30-ish percent range delivering the lift of margins. So we get a lot of questions, well, if your gross margins are in sort of in the 30s, shouldn't your incrementals be in the 30s? And I would say they are. I always talk about 30% incrementals, even maybe high 20s because we would like to invest some of that. So we're not trying to harvest all that the financial model could produce because those investment dollars can go to add capacity or initiate a productivity project. And that, we feel, like creates value into the future rather than maximizing the equation today. So I would say, if you go back 3, 4 years, the bridge gets really steep with a lot of price, and now it looks more normal to me where volume is really driving the lift.

Yes. Portfolio and capital allocation, how is the M&A pipeline? Has that at all picked up for you guys?

I don't know if I'd say it's picked up but there certainly is a lot of activity. And we were able to close on a company at the beginning of the year, and we'd like to do a couple more this year. So I think we talked at Investor Day with you all about how the financial model is producing more cash flow. And that cash flow is growing at a rate that you can't give it all to CapEx, right? You don't have enough engineers even though the CapEx projects have doubled for us maybe over the last 3 years or so. So we're doing a lot more CapEx, but you just can't keep doing that. And so I do think acquisition is going to be a big part of our story going forward. And I do think there seems to be just a lot of activity. I think we showed you at Investor Day our average deal size is getting a little bit bigger. But we talked to you about having $2 billion-plus of disposable cash to invest over the next 3, 4 years. And so we got to have a certain pace and a certain size to have that deployed effectively. And that if you're effective at doing that, we think you can add 2.5-ish, 3 points to the top line in a kind of programmatic way, not an episodic way, with kind of a programmatic way. And that's what we're going to try to pull off. To the extent that those opportunities aren't out there, I think some of you might have noticed. We upped our share repurchase authorization recently. And so we'll -- I don't think we're interested in letting the balance sheet get too delevered. And so I think we would buy some stock back to the extent that it starts to build up a little bit.

Water meters, is that at all in your funnel?

It could be. That's something that we would think about or have thought about for sure.

For $4 billion, though?

I think our scale right now, I would not equate those 2. I would not touch those 2 points of your question. But we could do a $4 billion deal and we would think about water meters. But I would not -- I would decline to answer whether we would look at a $4 billion water meter deal.

Got it. And maybe other deals to sell? Now we'll go to questions. Anybody have any questions? Yes. All right, let's wait for the mic. It's coming around.

Yes. You mentioned sort of data center spend maybe pulling some of that from budgets towards, I guess, data centers away from maybe -- I want to clarify that you said distribution. So is it really just towards the power generation side of things in Transmission, creating new hookups, if you could just clarify that.

Yes, towards the transmission and substation areas, so forgetting generation for the minute, I was -- and I wasn't saying it was happening. I was kind of maybe thinking out loud, could that be happening where dollars of budget might be prioritized at the transmission and substation side? I think because Steve's point of those data center demands are pretty significant. And does that influence some distribution spending in that last mile? I don't know. I couldn't prove that it does, but I just was suggesting it might.

What's your take on nonres outside of data center, the activity there?

Yes. For us, again, it's been -- light industrial has been good. I think the parts of commercial, a little more modest, I'd say, for us.

And any risk in the -- everybody's got a kind of government and institutional exposure on that side. Have you -- any kind of a pause there as they evaluate their real estate footprints?

Yes, it will be interesting to watch all that. I think for us, that ends up being a smaller part of the equation, but I think it's an interesting trend to watch.

Right here.

What percent of your cost of goods sold is metals materials cost?

Yes. So Dan put together an interesting chart for Investor Day showing about $4.5 billion of costs, about half of that being material-related, and of the half that's material-related, would you say that was a 40% slice?

A little less than half would be direct.

40% would be raws, of which that's where the metals would be inside of that.

Pardon me. And how much of that is sourced from domestic supply chains versus import?

Yes, the majority would be from domestic. And a little bit gets to Steve's question, I think, of even where the metals are not tariffed, you're seeing domestic prices rise in sympathy with that. So it's almost like there's been a price headwind or cost.

Do you think this is all going to work out okay? Like do you think that's going to be like, what are you -- how are you guys discussing this in the Board room? Is there -- is it kind of like let's wait and see if he goes through with it and we'll reevaluate in a month? Like what is the...

It's interesting that this is quite a significant statement of policy. And we don't exactly have the statement of what the objective of that policy is or at least we have conflicting statements of what examples of the objectives could be. So I think we're approaching it as it's a -- it's the new, new, which is a tariff situation. So I think inside of our decision-making rooms, it has an impact. So clearly, this price analysis is first and foremost. But we might have had a -- I should say, we have restructuring projects that we're going to go from -- to Mexico, and you're not going to do that right now. So it does have -- it impacts how you make decisions, and lack of clarity makes some of those decisions put some either on hold or you have to think harder about them, or yes, it's a more challenging decision. I would just pause it. It's a more challenging decision-making environment, I think.

Yes. It seems to me so far, the sentiment is basically like uncertain near term, but there's this kind of like corporate date, that like 6 -- 3, 6 months from now, whatever, it's all going to kind of work out? Like that seems to be the narrative from corporates.

I mean, I think that it sort of fits what I've been telling you, which is that I think T&D spending is going to be strong for years to come. And then I'd just tell you, let's just put tariffs to the side. So yes. But that -- so I think that demand profile feels like it sets up really well. You tell me some scenario where there's a hard landing and then you introduce some new thoughts.

Yes. All right. Well, on that note, thanks a lot, Bill. Thanks, everybody.

Thanks for coming.