Hubbell Incorporated (HUBB) Earnings Call Transcript & Summary

Well, thank you, everybody. Chris Snyder, U.S. multi-industry analyst. Super excited to have Hubbell up here with me. We have current CFO, Bill Sperry. We have future CFO, Joe Capozzoli, and then we have Dan Innamorato from IR. So thank you guys for joining us today.

I guess maybe starting off high level. The company has gone from a GDP grower to now targeting mid-single-digit through cycle growth. I think a combination of secular trends in electrical and utility that we can all appreciate, but then also portfolio high-grading you guys mixing into better growth verticals in the market. But we've seen growth below that mid-single-digit level now for a few quarters. I guess what gives you guys confidence that this is now a mid-single-digit through-cycle growth business?

Yes, I think that's a great question to kick off with, and thank you all for joining us. I know the day is getting maybe a little long. And -- but I always love your conference because it feels like Labor Day is over, it's back-to-school. All the summer holidays are over, and we can all get back and grind and finish the year. So it's always fun to be here. So I'm going to introduce Joe, but I wanted to start and use your question maybe to frame where we are. So if you look at the last 5 years, we've been growing compounded at 10%. We've had some impressive margin expansion that time. So our earnings per share have actually grown at 20% compounded. So to me, that time frame helps answer your question that over the medium term, we're seeing higher growth and higher margin. And where '25 stand specifically is kind of interesting because we put out guidance in the beginning of the year. We had enhanced and increased guidance as the year went on. And as we see ourselves hitting that newer higher revised guidance, we might be getting there slightly differently. It's maybe a skew a little bit towards margin and away from volume. It might be a slight skew towards electrical and away from utilities. So things don't always happen the way exactly that you expect, but I think it's a good example of us executing and living up to our promises in a year that has, frankly, some challenges as tariffs and some other things have been layered in on us. But I think ultimately, that sets us up for our long-term expectation, which is that we think we can grow the top line mid-single digits over the medium term. We think there's 25% to 30% incrementals. That helps us grow margins. We think that results in, let's call it, 8% earnings per share growth. And then we've got some nice cash flow that can really help us buy companies and add another couple of points to get to steady state, medium term, double-digit earnings growth that we'd like to provide you. So I think the market, getting to your question, are really better than GDP. I know there's been some -- to your point, some slight dislocations over the last few quarters. But over the last 5 years, and we think over the next 5, you're going to see a really solid positioning, really good markets, and you're going to see it perform like that. And our strategy and how we're approaching things is going to be consistent. I'm happy to have the opportunity to introduce you guys to Joe. I have -- I'm approaching in next February, my 64th birthday, and have been in conversation with our CEO and our Lead Director about the best time to effect a transition. And as we've talked about that over the last couple of years, we kind of landed on it now at the time. And Joe has proven to be the perfect candidate, and he was part of our thinking. So I found Joe at a coffee shop and random coffee shop in Connecticut 13 years ago, convinced him to join as our Controller and Principal Accounting Officer. We had him excel at that role for a number of years. We then asked him to run shared services and he did incredible job, saving basis points out of the margin of the whole company by getting some services offshore and done much cheaper, including customer service, engineering some of the finance functions, et cetera. We then asked them to run operations which was a great opportunity for him to envision and lead some restructuring projects and again, kind of really pushing productivity and operational excellence. And then most recently, we've asked him to be the CFO of half the business in Electrical segment. So he's had a really great experience. He has excelled at all the roles we've asked him to do. And I'm really pleased that he's going to succeed me, and I'm hoping carry on basically the mission and the strategy. And so to me, great opportunity. Joe has just announced yesterday, and he's going to be leading our January call. So I thought perfect opportunity for him to meet all of you, and so that -- by the time we get to that January call, you'll feel it won't be a cold introduction. And so I welcome my partner, Joe, to the world.

Welcome Joe. A lot of excitement around utility. You guys compete really across the landscape. You have a lot of touch points, transmission, substation, electric distribution, smart meter. Can you kind of just talk about what you're seeing across those verticals on a near term, but then also what is the medium-term growth rate expectations for those?

Yes. I think they are different, and there's been years ago, it was quite similar across those. So I think it's an important question because they are behaving a little differently. So if you started with distribution, there's been, in our opinion, sort of a mid-single-digit growth end market where about mid-single digits materials being hung off of poles, and by distribution, I'm referring to that last mile in the suburban neighborhood, think of those 14-foot wooden poles. And we have some good evidence. We were under shipping that install rate and there had been some stocking both at our distributor level as well as at the end customer, the utility level. And we believe we've exited that period and we've started to see sequential growth and the book is progressing, meaning our orders are progressing in a kind of nice steady improvement level. And that leads us to believe that over the medium term and starting basically as this year ends, sort of that low towards mid-single-digit growth rate seems like the right level for that. It's interesting because that contrasts to the transmission and substation, which is growing double digits. We think that's being driven fundamentally by the demand coming from data centers where there's really the need to hook those up if you have a hyperscaler, they're going to need a substation. They're going to need some transmission to get the power to that data center. And those needs are quite urge and pressing and those customers are asking our utilities to hook them up and get them powered. And so we're benefiting from that on the substation and transmission side. And so those things don't always grow at different levels, but I think because of the nature of the drivers and the urgency of some of that need, we're going to see different growth rates over the medium term, which is interesting statement.

And then the other -- smart meters have been under pressure. Are you guys -- do you guys feel confident that maybe not things are getting a ton better, but the trough is in -- are the worst is in the rearview there?

Yes. I would say that's a good way to describe it. I think -- we've seen large projects roll off that haven't been backfilled. So we've seen over several quarters now a contraction in that business. And what we're starting to see now is a sequential flattening. And basically, the franchise right now is at a level where it's not needing to replace any mega projects. It's basically a franchise that's servicing munis and co-ops with smart meters enabled with comms -- on the electric side, it's providing comms to gas and water utilities. And it's selling meters to large IOUs that will more likely than not have someone else's comms in it. And there's small projects right now that are replenishing constantly. There's MRO and replacement work that's replenishing constantly. So it feels like it's flattened to that point and will emerge starting to grow in the fourth quarter, such that we're expecting at a modest growth level. And we think we probably won't be talking as much about Aclara next year. I think it's going to fit into the portfolio as a nice contributor.

Yes, I appreciate that. I wanted to follow up on kind of the disconnect that you're talking about between transmission and substation, double-digit growth, electric distribution, having cycled down. Is there a connection there in that -- if the utilities are spending more and more on transmission and substations, then there's effectively just less money to go in distribution and maybe that's why the destock and just the demand there has been softer than expected.

I think that's a very likely driver. I think the urgency -- so if you've got a budget and what's been exciting for us is to see utilities commit to larger budgets, especially including capital budgets, which they're quite explicit about talking about. But it's also good news that they've got load growth, which means their revenues are going up. They're quite a fixed cost industry. So that's a lot more profit and that helps fund a lot more spending, which is great news for us because certainly, the demand for both distribution and transmission substations product. But I think your finger is on the source of the differential growth rate is the urgency of getting higher data center installs hooked up. And I think that's what's driving. There's a slight crowding out or prioritization, let's call it, that's driving the transmission substation spending higher against a fixed budget.

Yes. A theme of this conference is something we're hearing again and again is a return to load growth for the utility sector. I think I understand that, that would be positive for Hubbell. But is there any way to think about like what that means? Is it -- if we get 1% load growth, is there like any sort of multipliers or things we could think about in terms of what that would mean for the spend, whether the OpEx or the CapEx?

I don't know, Dan, if you think of it in those terms. I mean, I don't know that I think about it that way.

It's hard to quantify it that way. I'd say generally load growth is great for the utility P&L. They have high fixed costs. So revenue growth is great for them. And I think particularly when you look at the OpEx side, things that they're funding themselves, that load growth dropping through nicely and incrementally will drive more investment on the OpEx side over time. That's a big opportunity there.

Appreciate that. Maybe going to the electrical side, you guys have high-graded this portfolio a lot over the last couple of years. We've seen those margins step up, maybe Joe gets credit for that. But -- can you talk about the exposure today and why that piece of the business is a better grower versus history?

Yes. Maybe I'll ask Joe to respond to that.

Sure. Yes, that's been a really important part of our portfolio transformation over the last couple of years in reshaping the end market exposure that we have, which is really peeled off a lot of our commercial exposure non-res as well as residential exposure, which leaves us with a very high concentration towards industrial as well as data centers. So that's been a very important and intentional part of our portfolio management. And we will continue to identify opportunities to prune and pair where appropriate. That was kind of on the addition by subtraction side. And then on the growth side is we've been acquiring companies on the electrical side in the high-growth, high-margin space. Again, that's kind of focused on data center and attractive areas within industrial. So that high grading has been an ongoing journey, very intentional part of our strategy, and we'll look to continue that.

And what about -- could you comment on margin growth, that's all top line? You've been putting a lot of energy into improving productivity and efficiency. Maybe it's worth talking about growing the bottom line as to -- as well.

Yes. And I would say that margin expansion story has been -- which you've seen it over the last couple of years playing out, it's been kind of a multipronged approach. Portfolio being 1 piece of it. Restructuring has been another important piece of it, which is less episodic and more just in the normal push-ups and setups of running our business. We have opportunity to consolidate factories in our footprint where appropriate. Those tend to be longer lead time projects. They have really nice attractive returns, and that will continue. We've also kind of put our foot on the gas with our investment in capital and CapEx. And so electrical for a decade plus, that invested about 1.5% to 2% of sales in CapEx. We're now almost double that. And a lot of that CapEx investment is going into these very targeted areas of adding capacity to existing facilities, machine automation, where this capacity is in high demand. A lot of that's going into data centers and renewables and a few other key areas in industrial. And that incremental volume at very high margin has also contributed nicely to that margin expansion story in Electrical. The last piece of that -- the strategy of margin expansion is around operating as a unified segment. And you probably have heard Mark Mikes, our President, talk about that strategy, and that's a multiyear strategy that's well underway. And there's a lot of power in competing collectively, streamlining our systems and our processes, delayering our layers of management and other opportunities. So that's been ongoing, that's been part of the margin expansion story, and that will continue over the next several years as well.

Yes. I mean, I appreciate that. I wanted to follow up on data center. The very strong growth for you guys there in Q1 -- in the first half of the year within the Electrical business. Could you just maybe talk about for that are newer to the Hubbell story, what does the company exactly sell into data center? And a big theme is the gray space to the white space. Any -- does that have any impact on the company's content into data center?

So maybe I'm going to hand that to Joe, but think about -- he's going to talk about the products that are directly going to data centers on our electrical side. I would say there's a piece we don't attribute, which to your question of a 5 minutes ago, that the substation and transmission has been terrific even though our customer is the utility. So we call that utility, but influenced by the trend of data centers. So -- but maybe the direct products that you're selling to data center customers.

Sure. So we've got a handful of key products in the basket. One is we have mobile power distribution skids that go in and help power those data centers. Those tend to be larger, longer lead time, more visibility projects that were working on with hyperscalers well in advance of those projects. So that's 1 piece, a very large piece. We also have a number of components and connectors, grounding equipment, higher amperage condensed products, everything that's moving power through those data centers. And that's been flowing more through typical stock and flow business through distribution. So both have all complemented that offering very nicely. The other thing that we're seeing is that these data center designs are continuing to evolve and change rapidly. And they're also calling for higher average power supply through the data center. And so new product introductions and innovation has been a really important part of that, along with our acquisition strategy. So really, really nice opportunities for us there.

Maybe on that acquisition strategy, I mean, Hubbell has a long strong track record on M&A. Can you kind of just walk through the process that the company looks for when they're identifying targets and then ultimately integrating them and driving value.

Yes. So it starts with working with Dan as our corporate strategist, it extends then to the dedicated business development teams that we have in the 2 segments and then the dedicated business development team that we have at corporate. And it starts with identification of end markets that we think are outgrowing GDP. It extends to identifying targets in companies inside of those markets. And I would say we have evolved to become now very targeted where we're looking for specific things. I would say when I started with Hubbell 18 years ago, it was maybe a more reactive what company was for sale and it's now quite intentional. So from all that identification, we then create incentives for the field. So in other words, if Joe has a general manager and if she or he buys a company, I ask that they pay me back the cost of the capital for that and everything they earn above that is premium that goes into their bonus. So they have a nice incentive to actually go through the work. And our screening is driven by several important factors, but market growth is 1 margin and the potential for higher margin is another. So we look at the competitive intensity inside, we look at what is the nature of the competition. Would Hubbell as owner have the right to compete successfully. And when you go through those evaluations and you find the targets, we get involved in most often in auctions. There was 1 of our targets we landed recently, where it was through a direct approach and a long-term relationship, and you kind of work together and you end up agreeing on a price. That used to happen a lot more. I'd say today is much more governed by a hired banker intermediary and auction and going through a process like that. And when we're lucky enough to land something, we'll put together an integration team and that team will spend maybe 12 months, making sure that business gets integrated, some things happen in the first 100 days, getting bank accounts hooked up, getting receivables processes and payments processes lined up, getting the e-mail to work. You got to spend a lot of time on cybersecurity and making sure that stuff is hooked up. And then over the longer term, as Joe, maybe you bought something where the facility itself is subscale. So maybe we've got a restructuring project to bring that volume to 1 of our facilities. Often, we're buying things that have agent reps who are the sales force. You go through a process in the medium term of transitioning from reps to our sales force that creates a lot of value because they're expensive to hire third-party reps and our sales force already works for us. So it's quite an end-to-end process. We feel really good about doing it on a portfolio basis. We look -- we just had our board in this week, and we look every September backward at the last 5 years of deals we did, and we study the ROIC of them. We study their performance relative to the plans that we put together to get approval from the Board. And those reviews are quite favorable looking at it as a portfolio and looking at it as a process rather than episodically you do a $2 billion, $3 billion deal every 5 years as we're meant to do 3 deals, 4 deals every year, and we find that we can run into really nice success both with the integration and with their performance on a portfolio basis, and we feel very much that we're investing on behalf of our investors to find these private companies that public investors can invest in and that we are responsibly adding those. They're worth a lot more on our platform. We take cost out and we think we create lots of value. So I'd anticipate, as Joe takes over that, that continues to be big part of our strategy.

Yes. I appreciate that. I wanted to talk about the recently announced acquisition, DMC Power, $825 million, which is a bigger deal for you guys. I guess, can you talk about what the business brings to Hubbell? What kind of growth rates could we expect there? And does the -- what kind of visibility does that business have into next year?

Yes. So DMC, which is something we signed and announced, haven't yet closed. We're expecting to close it in the fourth quarter. It is a high-voltage transmission connector business. And we have connectors that work in high voltage and transmission applications. That product line for us is quite highly profitable. It's an area where quality matters a lot. And basically, these connectors, they take conduit and that connection is terminated using a couple of technologies. One is crimp, 1 is bolts, and the other is using welding. And the welding is the best connection but it's also really expensive to have welders in the field to do that. So DMC offers an extension of our product line with a technology they call swaging, which is a crimp, which is really cost effective, but they achieve weld-like results. And so it's kind of this really effective at being able to get welded prices but having a much cheaper cost structure. And so when we think about its growth rate, we're doing double digits on our side. This is going to outgrow the transmission market because this technique is actually gaining share. So it's been growing at 20% and I'm expecting that it continues to grow really impressively. Our existing product is very high margin. This is even higher margin because of this dynamic between super high-quality output and a cheaper cost structure. So we're really looking forward to having a joined Hubbell family in the fourth quarter. I think it's going to contribute nicely to 2026. What's interesting, you mentioned the $825 million of value. We're going to have to borrow to buy it. That has an interest rate. And so in the old days, accretion meant nothing because debt was free. So now you're borrowing in that 5% range. And so it becomes -- what I like about the financial side of DMC, it's growth, it's margin, but it's going to contribute incrementally to '26, because we'll close in the fourth quarter. But then at the end of '26, as we start paying the debt down, it's going to really contribute even more to '27. So it's quite a nice -- really nice strategic add and it's going to be a nice financial add too.

I was trying to do some mental math. Did you guys say -- was it $60 million EBITDA for that business next year?

Yes.

So 14x, 15x EBITDA for something that could grow 20%. Like -- how deep is the pipeline or like opportunity set to buy things that can grow like that for those kind of multiples.

So I would say data centers is an area that offers that transmission and substation offer that. But I'm much more in the habit of paying 10 to 12x things. So to see us go to 15x as a pretty good sign to you of the scarcity value of opportunities like that. And I think that's important that we lean in on the right things. And -- but we're always cognizant of value, making sure the returns are going to be attractive.

Maybe kind of like zeroing on the market a little bit. You guys obviously have a lot of metal content in the products you sell. So price is always a big topic or focus point. I believe -- like I think your pricing in Q1 was about 1%, and I think Q4 was maybe like something closer to 5%. So maybe like 4 points or so of tariff price. Can you just maybe talk about realization, market acceptance? Is there like pricing fatigue that's coming? What's going on in the pricing side?

I mean, the fatigue is an interesting question. I was going to ask Dan to give you a little bit of the ramp. And I think -- generally, I would say the prices are sticking well. Fatigue is a pretty interesting question. I think there's conversations continually about price. I think lots of us are doing price elasticity analysis. But I would say, generally speaking, the prices are sticking. Maybe Dan can give you a sense of the momentum of that and how it's going?

Yes, I think your math is in the right ballpark. We saw a step up in second quarter. I think we'll see a step up in the third quarter as price layers in. Obviously, inflation will layer in as well. So price will offset the inflationary impacts as we progress through the year, and we'll see another step up in the fourth quarter just as things layer through the P&L.

Bill, you mentioned doing like elasticity analysis. I'd be interested in like what is the -- it doesn't feel like at least on the utility side, there is that much elasticity in the market.

Yes. So I'll maybe ask Joe to respond. I think when we started in March, thinking about price increases, Joe and his counterpart utility might have said, well, we're planning on this much elasticity and I would say it was an educated guess at best. It feels to me like you guys have really interesting data now, much more experience of sort of 6-ish months of dealing with operating in a higher price environment. And -- what would you say about trying to assess elasticity?

Yes, I would say it's been a very important part of our pricing strategy here since this tariff on slot set in the first quarter. We were very quick to evaluate our product lines and our exposures, and we were very quick to evaluate our competition's product line exposures to the best that we could. So based on our overall assessment of the landscape of where we're at, where our competition is at, there are certain areas where we had to be very thoughtful about price. We price up. Competitors don't have exposures from those same geographies, and we could be losing share. So we really had to be thoughtful about it. We built models for many of our product lines -- actually all of our product lines that had exposure from, let's call them, high tariff countries or regions. And so going into it, those models were formulated based on a number of assumptions and our best guesses with our teams and lots of collaboration and people knowing our competition. And so we put all of that into our elasticity of demand models, and they're playing out now over time. So we've been monitoring them very closely. And we've had to make some tweaks to pricing up and down along the way. And the interesting thing is with multiple waves of tariffs, we've had multiple waves of price actions as well, which has enabled us to manage and navigate prices up, down as the year has been playing. So they've been really instrumental in terms of our ability to manage price.

And I think on the utility side, communication has been a really important part of creating the inelasticity that you're observing. And some of that is with the utility themselves, but a lot of it has been with our distributor partners. And a couple of them, in particular, have approached us and really wanted to understand our cost structure and wanted to understand the justification for the price increase. And that proved to be really constructive. So as they got to understand why we were asking for the price and where it was justified and the fact that we had productivity and other factors that were offsetting what you might think you had to ask for that enabled them to be effective wholesalers essentially of that thought process. And so there's been besides analytics, there's been a lot of communication and customer relationship discussions that have really -- been a really essential part of managing through kind of a year of increasing inflation.

I appreciate that. The latest 232 expansion that came through in August, does that have an impact on Hubbell? Is it something that we would expect more price for?

I mean, in a small degree, yes, maybe Joe could describe. But I would say materially, it's just noise in the tariffs. That being said, I mean, you're putting through some October increases, right?

Yes. I mean relative to what transpired in the first 7 months of the year, the new 232 was quite small in relation to the revenue.

Yes. I appreciate that. Maybe on the electric distribution side, that was obviously kind of a pretty big drag for the company for a while. Q2 seem to show positive momentum. Are you guys continuing to see signs that, that market has turned versus risk of kind of stepping back down.

You're talking about utility, the distribution...

Your electric distribution. Yes.

Yes. So I would say, yes, the order book is improving, it's creating a decent amount of confidence from us that we're going to see that improve. I think in the second half, we're expecting a nice steady improvement, not some kind of dramatic snapback, but nice steady improvement in -- for us where that -- it gets back to your first question, which is from there, that should set up for '26, '27 and beyond a nice base from which 2 that we all grow from there. So it's kind of emerging from this period of having been overstocked and I think we're just getting to the point where we'll be exiting the year in a really kind of better, more healthy, much more normal book-and-bill kind of relationship. So we're looking forward to that being nice steady improvement over the next few years.

Well, I appreciate that. We're up on time. Thank you guys. Really enjoyed the conference.

Thanks for having us. Thank you all for joining us.

Thank you.

Thank you.