Hubbell Incorporated (HUBB) Earnings Call Transcript & Summary

Great. So we're live, and we're going to wrap up day 2 of the Wolfe Industrials and Transportation Conference with Hubbell. Really looking forward to this discussion with Bill Sperry, CFO of Hubbell. I do recognize as well that we are between probably cocktails for everyone in the room here. So I do recognize that, but it should be a good discussion. So Bill, maybe set the stage with some opening remarks, whatever is in your mind, and then we can get into it.

Great. Well, first of all, thanks for having us. Always appreciate your conference, but I especially like that you gave us the nice room upstairs with all the Jerry Garcia posters and wall art. It was good all day to be in there. Yes, I think it's -- I think what's been interesting, Nigel, from my perspective is how much things are the same after so much change and kind of volatility policy-wise. So when we started the year, we thought volumes could be in the 3% to 4% range, thought there'd be a little bit of wrap on price, and we established a guidance range. Then we had sort of a first round of tariffs, and we've been a second round of tariffs and then a pause on the second round of tariffs. And I think in a lot of the meetings we've had today, those tariffs had kind of seemed like the story that was on everybody's mind. And yet for us, it's kind of the opposite. It's that the markets are still good. It's the same amount of volumes that we thought when we started talking at the beginning of the year to everybody about the expectations. And the tariffs are frankly a cost of doing business. We think we're going to offset them with price and with productivity. And so we're frankly back where we were. And I think in April, when we talked -- we added a maybe inconvenient element to our guidance where we put a $0 to $0.50, we called it a sensitivity to guidance and said we were targeting that at 0, but we put a sensitivity. And I would say that was largely us trying to anticipate reciprocals and whether or not those would have any potential elasticity demand kind of impacts. And so we're trying to contemplate some of that. And I would say it turns out we were ill-advised to do that, and we really don't need that in our guidance framework any longer. So in a weird way, we're back to where we were with 3% to 4% organic volume in the original kind of earnings guidance. So we continue to believe those markets are in good shape. We think they're growing twice GDP. We think we're getting our fair share. We're quite pleased to be departing a destocking environment in 2 important areas for us, one of which is on the utility side, which is the distribution. That last mile material that you might see hanging off of a 15-foot wooden pole in a suburban neighborhood. And that has gone through 6 quarters of inventory kind of normalization. And so I think we're happy to maybe not be talking about that again. And then likewise, we had a tough time last year on our Enclosures business in the Telcom segment. And that, too, feels like it's come to the end of its overstocking. And we've seen in both of those areas, a significant inflection in orders which leads us to be pretty highly confident that those are rebounding nicely. So we think the markets are in good shape. A couple of areas where our channel was overstocked has now feel normalized. So that feels good to be back. And we continue to feel that our balance sheet is very poised to be an investor in CapEx and acquisitions and share repurchase. So we feel net good about all that despite obviously a bit of swirling volatility on the policy front. And I know there's some tax negotiations out there. And I'd argue for us, that feels a little bit positive on the cash tax expectation front, probably on ETR as well. The question was posed to us whether those incentives would be strong enough to cause us to turn on projects. And I don't think I see it that way. I'd say the business case for the projects maybe get a little bit better rather than and that's with R&D and some of the depreciation angles of what's out there. So I know that there's just a lot of change, a lot of volatility, but we're sort of where we were.

Okay. So back to where we were. All right. So just to be clear, so the $0.50 of kind of contingency uncertainty regarding [indiscernible], that's now a big fat 0, right? So you're comfortable with that. So that's clear. You're right. When you hear that on our earnings call, you immediately assume the worst. So that's good news. So it sounds like you haven't seen any reaction to the 2 points you put through already on the price on the first bucket of tariffs, the [indiscernible] material. Price increases there have not seen any...

We think those are -- we're -- they've been announced for a while now. They've been in effect for several weeks now. We've been shipping orders at those new prices, and we think they feel, Nigel, quite sticky and well accepted, well adopted. And we were expressing confidence in April that those were sufficient to offset that first $135 million, and we continue to feel that way.

And on the second -- the $135 million, I think 90% of that was China related. So that $135 million has gone down to 15%, I guess, at this point?

Well, and then -- but now there's 10% on everybody. So there's still -- it's not gone to 0 is your point. So there is a May price increase that we still need and that's in process of being implemented as we speak. So...

And that May increase, is that to cover the -- whatever it is, $15 million, $20 million?

Yes.

And then if it did -- if Trump does decide to charge China 60% or 70% and go back with another...

Exactly. But we -- you're starting getting into our customer relationships and kind of did we ask for 150% price increase and then pull it back? We didn't, right? We've sort of waited for this information to be where it is. And I think our customers appreciate that transparency and the dialogue and the conversation rather than sending things across the [indiscernible] that are subject to change almost weekly or monthly or quarterly now.

That's great, Bill. And then you're one of the few companies still on LIFO. So you got this weird and wonderful LIFO charge in 2Q. You said $20 million -- sorry, $0.20 of -- sorry, $20 million of price cost activity in 2Q after $10 million in 1Q. How does that $20 million look in 2Q?

So the majority of that $20 million, and you're right to point out LIFO continued to be the materials, that first quarter set of tariffs that were now in for the full quarter. That was the majority and the smaller piece was reciprocal. So that reciprocal piece, I think, was in effect for maybe 3 weeks instead of the quarter. So that comes down a little bit, but so does the price that we were going to get to offset some of that. So there'll still be some price cost headwind. And at the same time, we're expecting an equal and offsetting price/cost tailwind in the second half to offset both the headwinds from first and second quarter. So that all -- that's why I'm saying we're back to where we were. You have now higher confidence in offsetting it all inside of calendar year '25.

So the only thing that has changed is we are still price cost neutral dollar for dollar for the full year. The thing that's changed is the potential $0.50 of contingencies now go. That's the framework.

Correct. We said we were targeting 0, and now I'm saying strong stronger than that.

Okay. That's great. And then orders, I mean, I think one thing that maybe got missed with all the noise of the earnings was the fact that orders in infrastructure, utility infrastructure was up double digits in the first quarter. It sounds like that's continued in April as well.

It's a good pattern on the bookings, and we're pleased that it just shows to me that we don't have to use the word destocking or have me come up with a euphemism called inventory normalization or something like that. But that's just evidence to me that we're back to booking and shipping at the install rate, right? And that's a really nice inflection point of basically last 6 quarters, basically.

You've got good data from the -- I mean the problem hasn't been distributors. It's been the customers, right? The customers have been destocking?

It was both, but what made it prolonged was the end customer. I think the distributors reacted faster, a little bit easier for them. They're used to booming and busting and rightsizing and utilities are not in the business of how much inventory do they need, right? So they sort of stepped into a slightly more challenging situation and taking that. I think that's what prolonged this phenomenon.

Yes, I think some of your sort of partners in the utility space have struggled to find dimension, how much inventory has been held by the utility. So what gives you confidence that we're now beyond this period? Is it just order rates? Or is there something else?

Yes. I mean our dialogue with them is first. I'd say second, Dan and I and some others inside of Hubbell, we spent a very decent amount of effort building a model that I wouldn't say was SKU by SKU, but product family by product family. And you have to make some assumptions in that modeling about what the install rate was versus what our ship rate was. And you saw a 6-quarter period where we outshipped install rate and a 6-quarter period where that reversed. Each one of those product families was different. Some started a little earlier, some ended a little later, some were steeper, some were shallower, but it was very instructive to us to do that and realize that we felt this was the quarter where that was coming to an end analytically, but there's assumptions that only make that as good as the assumptions now. You get the anecdotes from the customers saying we're at normal levels. But I'd say most powerful yet is the fact that the bookings have picked up. And so I'd say all 3 of those matter to me, but the bookings are more, I'd say, what I hang my hat on.

Yes. So if we're beyond this destocking, and how much would you say of the weakness has been caused by some deferral of MRO spending or project push? Because there was a bit of that as well, wasn't there?

Yes, I don't think a ton. I mean we think distribution has been growing throughout this time frame. I think transmission substation is certainly on the stronger end and I think outgrowing the distribution side. But throughout this, I think distribution market has been growing solidly. And I think there has been more certainty and clarity on rate cases, right? We highlighted that in the earnings call, and I think that's taken a more constructive tone in the last 6 months or so. So there's probably some of that as well. But I think throughout this, the distribution markets have been healthy.

Yes. The rate case renewals, I think, is huge, right, because that getting repriced and getting the ROI on the high inflation basis is important. Do you have any sense on what proportion of your customers have had that rate rebasing in the last couple of years?

Yes. I mean it's a good chunk of them. I think, again, typically, utilities operate on a 3- or 5-year capital budget and certain -- will come up in certain time frames. And I think, again, there's a good grouping of them that late last year sort of went through their rate cases, and that's about the time that they do it annually, right? And so again, it's going to be different utility by utility, right? Some are growing well above the average and some still below. So I think it's an ongoing dynamic, but it's, again, a good chunk of the utilities typically revisit it every year.

So is it too ambitious to assume that volumes in utility infrastructure could be mid-single digits in 2Q? Or is that more of a second half sort of run rate?

Well, I think you'll see it picking up and then coming to that level. But I don't think that's unrealistic.

Okay. Okay. And then transmission still remains the strongest...

It does. It does. And there's confidence there because, again, there's a book and the lead times are a little slower there. So it's project-based and they want the material on time to complete the project. So it gives you some confidence that that's there.

Okay. So the backlog is in place for that. And then Telcom, I know Telcom is small, but it's -- when it is down 30%, it has an impact. I think we had growth, if I'm not mistaken, in the first quarter?

Well, it didn't grow in the first quarter. Year-over-year, it grew -- it did decline kind of double digits again. But compared to the 30% and 40% declines, we were -- it's -- you could see it and the sequential started to look much better. And now the bookings support much better than seasonal recovery there, even though there is a seasonal ramp-up traditionally. And so I think it's going to have a second half growth story that's going to be -- show that it's really through its destocking prices as well.

But you're not expecting Telcom to be up strong double digits. I think you've been more measured in your assumptions?

Yes. And frankly, the way we want to run it, I don't want to chase the cheapest volume just to get our sales back up. I sort of want to make sure we come back good pricing, good margins. The margins a year or 2 ago been really attractive part of our portfolio. And as it's shrunk when you lose attractive margins with lost volume, the decrementals are difficult, but it's still attractive where it is even despite steep decline. So I sort of want to turn it back into a predictable growth, margin expanding, not chasing the frothy kind of volume that might be there. So I hope you see us just build it back constructively and do that at really nice margins.

Yes. Thanks, Bill. Just touching quickly on the communications side, the meters. That was down mid-teens in the first quarter. I think it was down 15%, if I am not mistaken. How does that look for the balance of the year? You had very tough comps in the first half and then second half, obviously much easier. Do we flatten out the back half of the year? Just...

Yes. So the lens, I think, we've got to pull the lens back a little bit to understand it. So a few years ago, there's no chips available. They can't ship. And so you build up multi -- couple of years' worth of backlog. Satisfy that backlog and those -- some of the more significant projects rolled off at the end of 2024. And so now you saw, yes, year-over-year that decline that you mentioned, but sequentially, you saw essentially flat. And now you look at the bookings and they're at that flat level. And so I would make -- my insight would be, I think, they're prepared now to have a '25 at a durable level that's based much more on gas and water customers and munis and co-ops. So what I would call maybe smaller customers, but bread and butter, they've been -- they've won several competitions in the last month or 2. So I know they're competitive and winning, but at this kind of small base and that feels like a good expectation for the balance of '25, which should because of comps result in some growth by the end. But I think of that as seasonally where it is and the meaningful growth from here would come from any large investor-owned electric utility. That's really where they could have a $500 million, $800 million project. So I'd say it's at a nice sustainable level right now and wait for something like that to be a growth catalyst, yes.

Any questions from the audience? So...

So the question was around transformers. We don't make them. So I don't have a great point of view, but it just sounds from the industry like the lead times are going to stay at a year for a while. So I think it's still a long pole in a lot of project tents.

That's the 1 thing you don't do, transformers. Moving to margins. Maybe before we turn to margins in Electrical Solutions, anything within the end markets is moving around here because nonres does feel like there's pockets of weakness there. So anything you'd call out in terms of the end markets?

For us, the commercial is the softest. I'd say light industrial feels good. Heavy industrial feels good and you see steel prices up, so that should be good. I think as a horizontal theme across those vertical markets, data centers continues to actually be a big driver that we see across that. So -- and I think our Electrical segment story, so we've had in the mid-single-digit growth rate there. There's been a little bit of price in that. So that's not all units. But I think we still have margin opportunity there as we take what had traditionally been 3 businesses run as 3 silos and we've been -- Mark Mikes came from -- his career in our Power Systems unit kind of knocking those silos down and creating kind of compete collectively across that utility franchise. He's doing that again on the other side of our house, and he's been really constructive and really successful and he's got still a ways to go. So I think you've got -- I think with -- we had some lighting businesses inside of there, both on the commercial and industrial side as well as resi, we may be obscured for you all at the Electrical segment, it's actually got a really attractive piece to it. And now that we sold those 2. I think we're showing mid-single growth rates with multiyear margin expansion. That's just -- you know what I mean, that's self-help. That's not even incrementals on the growth. And I think, Nigel, that's -- we've got a kind of solid, repeatable, nothing crazy, right, kind of story on Electrical, that's going to play out over the next couple of years.

So I haven't done the math on what the sort of revised tariff pricing algo looks like, but it seems like the guide for 6% to 8% looks more like top line organic. Looks maybe I don't know, 4% to 6%, 5% to 7% in that range. You talked about margins for both segments to be down, is that still the case now with the revised sort of...

We'll have to -- I think we'll have to revisit that formally when we report next. But I think what you're pointing out is the reason they were down is because if all you do is offset $1 of cost for the dollar of price that is margin dilutive. And we had a fair bit of that in what we showed you and now that, that's moderating. I think you got a better chance. If we looked at it just kind of organically, there's margin organically. Organic, I don't know if that's the right word, but ex an artificial cost and price environment, there was margin expansion. So we're getting, I think, we must be getting back closer to that.

I think it's about 50 basis points of maybe benefit from that mathematical. It was about 1 point of impact under the prior construct. Again, you did the math, it's probably not -- it's probably still more than half that, so you're getting in that range.

Yes. Okay. Okay.

So you'll come back to us with that. And then coming back to the electrical margins. Obviously, with the lighting out of the equation, margins are a lot better, but you're still kind of lagging some of the electrical peers sort of if you look at, say, Legrand or even Eaton's electrical segment margins, you're still well below that. So I'm just wondering where you think you can get these margins to over the next 3 to 5 years?

Yes. So I think there's -- first of all, we burdened our Electrical segment with corporate segment, which not all of those that you mentioned do. And I would say there's hundreds of basis points of just cleaning up redundancy, you don't need -- everybody doesn't need the full finance team. You don't need the full HR team. You don't need -- the sales force has been reorganized to be segment-based rather than single product underneath that much more efficient and effective. SAP company code, which sounds somewhat tactical, but you don't need as many transactions. You don't need all the staffing. And so it's remarkable. Mark's had a good career run doing this before, and he tells me he still has points to go not basis points. He has points. And so we think it's going to look on a comparable burdened basis a lot like some of those franchises you talked about, and we think that's a solid electrical segment that we have, yes.

So it seems like well north of 20%. Yes, capital allocation. The message from the I-Day which was last June, I think, June 2024, was larger deals, which I think is like $100 million plus type deals, maybe a little bit more than that. Where are we right now in terms of the M&A pipeline? What's the -- what kind of multiples you're seeing out there, conviction in deploying capital here?

So maybe to remind everyone on the basis of Nigel's question, we're thinking that for '25, '26 and '27 when you think about operating cash flow, less CapEx, less dividends, less share repo. There's more than $2 billion of cash that's deployable that actually ignores, Nigel, the fact that the balance sheet would have incremental leverage capacity if you wanted to stay at 2x, for example. And so that is -- that would suggest a good amount of acquisition activity. And as Nigel says, if you did $100 million deals, that's a lot to try to do. So I think it does suggest some bigger. And I would say right now, the portfolio, we're active looking at the pipeline. We're in a number of discussions. There's everything from $100 million, as you say, to $1 billion, which we've done in the past. And everything in between. And it is a pyramid. There's more of the smaller size than there are the bigger. I would say we are very intentional about finding growth and margin in our acquisitions that's causing us to be intentional in transmission and distribution space, data center space, and anything in utility that lets us sense data, communicate data and control the infrastructure. We think those areas are really interesting. And so we're looking to be acquisitive for sure, and we think the balance sheet is positioned for that. I'd say, as I think about it and how much cash that is, I think, I'd also expect if you studied our capital allocation, you'd see share repo in many, many years over the last 14 or so, you would have seen about $40 million as an anti-dilutive amount of share repurchase. And I would expect that to be higher annually. So a slightly richer mix of share repo and an increased level of acquisition. So that's all. So in other words, capital deployment, there's more to deploy. And so I think both levers will probably be used.

I think you did a pretty big buyback in 1Q '25. Is that sort of 1 and done this year? Or do you think you can do more buybacks this year?

I think we'll keep looking at that. Yes. I guess that's my point is what I think we'll be -- I think we'll be relying on that lever really more than we have in the past.

Okay. I think we're getting hooked here. But maybe 1 more, Systems Control, obviously, control house within the substation utilities seen a number of deals, nVent done a couple of deals, Eaton disclosed 1 as well. What is going on that's making these controls house assets more valuable?

I think the fundamental is what the solution does, is it takes labor out of the field, which is subject to weather and availability and it brings it into a factory environment and just much more controllable. You can control costs, you can control timing better. So fundamentally, I think, those examples are all taking advantage of the same trend, which is much more reliable. And in substations often delivery time, matching the project when it's ready becomes incredibly important part of the value proposition, and we can just do that better out of a factory environment. So it appears to us as we have worked with customers, they start with us, then they do a few more and then it grows to become part of how they do their substation work. And so now that it's on our platform with our breadth of relationships, we have the assumption that we'll start more clients at that modest starting point and grow them to be how they do at substations. So we're very excited about what it can do. We're prepared to invest in it and add to its footprint and grow because the dialogue with customers has been really good. But I think we're not the only ones who have that same thesis, yes.

Okay. Bill, we'll leave it there. Thanks for the discussion. That was a great overview. Thank you.

Thanks for hanging in, everybody.

Thank you.