Hubbell Incorporated (HUBB) Earnings Call Transcript & Summary

Fantastic. Well, thanks, everyone, and welcome to the second session this morning. It's my pleasure to have Hubbell up here. Gerben Bakker, President and CEO; Joe Capozzoli, CFO. So thank you very much, Gerben and Joe for being here with us this morning.

Maybe just kind of to launch into it. You had pretty good volume growth exiting 2025, up kind of, I think, mid-single digits is company-wide where you ended up last quarter. How sustainable do you think that type of volume growth is when you look at recent order intake activity and so forth?

Yes. We feel good about the exit rate from the fourth quarter. And our outlook for 2026 had contemplated about 5% to 7% organic growth, and we feel really well positioned entering this year to deliver that level of growth. You're right to point out that there was a nice order acceleration as orders picked up late third quarter into the fourth quarter. And we've seen that momentum continue nicely to the start of this year. So overall, feel really good about how the year sets up on the organic growth side.

And when you think more structurally about the U.S. kind of electrical market and particularly U.S. electricity consumption, are you expecting an acceleration in U.S. electricity consumption in a meaningful way? Maybe help us understand if we see that, how does it kind of percolate down into demand for Hubbell's products?

Yes. Yes. Clearly, electricity is a big driver for all that we do and particularly our utility business. We are seeing a growth in electricity demand. It's for many, many years that load was kind of flattish and we've seen it more recently even before the data center boost that we're seeing kind of growing again, and that's clearly now being helped by data centers. If we look at our business on the utility side, our transmission and substation business is seeing really nice growth, double-digit growth we saw last year. We see more of that this year, and that's really to help interconnect that grid and to help connect that load onto the grid and to the consumers. And then if you look too on our electrical business, our exposure to data centers and the balance of systems components, our power skid business that's obviously directly related to data centers, which is driving some of that load growth. So I'd say it's -- load growth is definitely driving our business over the next couple of years. And our position is just really strong to support that.

And when you look at kind of electric utilities behavior, and it's hard to generalize because there's many different sizes and types of them. But if you look at kind of their behavior in aggregate, do you see much in the way of accelerated replacement activity of their grid network? Any sense of how they're thinking about balancing distribution spend versus transmission spend, those types of factors?

Yes. Yes. I'd say, there is more bias today to the transmission. And when we say transmission, call it transmission, but it's really transmission and substation and part of the portfolio. And that's about 1/3 of our portfolio is in that area. We've grown that quite nicely with recent acquisitions in that. And that's an area where utilities are really spending a lot of time and effort for that load interconnect that we benefit from. But I'd also say on the distribution side, it's a very nice growth market for us as well. And if you think about what's driving that, it's the hardening, it's the resiliency that is needed on this very aged grid. So but I think there is certainly a biased towards transmission and substation where we're seeing double-digit growth. We see distribution kind of what we've guided at mid-single growth, also being driven by some of those needs. And the other thing maybe that I'd point out is if you look at our portfolio, I would say we're equally well positioned in both sides of that business to serve our customers. So we're truly a little bit agnostic where the next dollar goes. If that goes into transmission or distribution, I think we benefit equally for it because I do think at some point, there will be more of a focus again to the distribution side, and we can serve that very well. And then maybe even returning to that first question of electrical load growth. Another benefit truthfully of that is utilities are making more revenues and better profits. And when that happens, there is a tendency to reinvest back into that hardening of the distribution system. So these things are kind of a little bit circular helping each other, but it's definitely benefiting our business.

And if you think about that distribution portion, there was some noise the last couple of years around kind of restock, destock dynamics. Now it looks like it's on a more kind of stable footing in distribution. And just maybe help us understand what kind of medium-term growth in the distribution side you should expect now that, that inventory dynamic is behind us.

Yes. And indeed, that is, this is what we worked through last year. And I think as we saw the exit rate of '25, we really saw after we saw -- getting through that destock, actually, the demand flex up to what's really been put out on to the pole. Our long-term view in here is from mid-single type growth. We do believe it's a little bit lower than what's on the transmission and substation side, but the need is really driven, again, what I said before, the need to invest in this grid is for us, a multiyear, I would even say, multi-decade. There is over 6 million miles of distribution out there to give you an idea, if all the roads, all the navigable roads in the U.S. is about 4.5 million miles. So it's about 50% more of that in distribution miles. And they're very aged. And so this truly will take decades to really work on. A question we always get asked, could it be better? Could it be better than that? And I think there is periods that utilities are trying to prioritize. And I think right now, clearly, utilities are prioritizing getting load -- more load onto the grid. But the need on distribution, one of the measures on that is even reliabilities, right? It's what we call SAIDI and CAIDI, it's the frequency of outages and the duration of outages and utilities are very driven there by those, and that drives them to keep an eye on the distribution network and having to invest. So I'm very optimistic about it. And could there be periods where it's higher than that? I'd say, yes. But as we think about our long-term planning horizon, that mid-single digit, consistent mid-single digit is kind of what our structure is of how we think about long term and about the business.

And one part of utility that's been under pressure most recently is around that meters side. So kind of help us understand where we are there? Because I guess the secular sort of penetration story is maybe somewhat played out...

Yes.

But then you have the cycle dynamic as well. So kind of where are we on those 2 fronts?

Yes. So the meter business has gone through quite a few years of probably some of the biggest disruption that we saw in our portfolio of products with the chip shortages. And then we saw the normalization of that following that. And then last year, we saw a lot of big projects that we're rolling off that we communicated. That business kind of exiting '25 is back to a base business of MRO and smaller projects. I think that's good. It's a smaller part. It's around 10% of the portfolio. So I think we've rightsized that business for where it is today. And so to your question of where can it go from here and in context of where are we with the AMIs cycle and meters. So I would say you're right to point out that today in the U.S. the first generation of this AMI meter. Those have traditionally been electric -- mechanical meters and then became electronic meters or the smart meters. That first phase is done for the most part. But why I point out what's different in this meeting, they're electronic meters today. And their lifespan is not what the old electrical mechanical meter is. So they are starting to come up to the end of life, and we're actually seeing that because we're seeing more MRO right now in our meters, meters that are actually starting to fail to replace. But going back to what our utility executives and companies prioritizing right now, it's load growth and how to support that. So what we see is on this AMI next cycle, some push outs, but eventually, they're going to need to do this again. And our view to it is muted or maybe a little more conservative in when that's going to snap back. I think we are seeing MRO coming back. I think you will see that business for here grow. But I say all of that to say, if the utility right now is investing their money into the other area, which is a larger part of our portfolio, a higher-margin part of our portfolio, that's not a bad trade for Hubbell.

And when we switch to maybe the electrical business, remind us, I suppose, the data center, the 2 main types of kind of product that you're selling into data centers and it looks like the guidance embeds quite a sharp slowdown this year in revenue in data center. Is that kind of purely conservatism or anything else happening there?

Joe, do you want to?

Yes. I would -- not that I'd call it a sharp slowdown. We're still anticipating mid-teens growth, which is quite nice. We've got 2 pieces of our electrical business that are servicing data centers. We've got a short cycle business, which is on connectors and grounding balance of systems products. And that tends to have more of the book-and-bill orientation towards it. So in terms of the visibility of what's out beyond, let's say, the next quarter or so is relatively limited. And so we want to be a little cautious about not getting ahead of our skis on how large the growth could be in the short-cycle side of the business. That said, we do continue to add capacity and investment in key product lines to service that short-cycle business in the data center space, and we're very well positioned to capture additional growth, if that is there to be had in short cycle. On the long cycle side of the business, where we've got our modular power distribution skid business, that business basically has a backlog that's got us booked full for 2026. So we feel really confident in the outlook on the long cycle. A little more capacity to flex on that side of the business, it is -- it tends to be a longer sales cycle. So we're really focused on '27, '28 orders at this point. So feel really good if there is a little more to be had in data center on the short cycle side, we feel, again, like we're in a good position to pick that up.

And is the sort of teens growth, is that just capped by capacity? Or no, there's potential to grow above that rate if the short cycle demand stays very strong.

Yes. The short cycle demand stays strong. I think we could exceed that mid-teens growth. But again, let's see how the year is progressing and if it's there, we'll get it.

Yes.

Yes. Okay. And the -- if you're thinking about the rest of electrical, there's a lot of investor focus at this event on kind of industrial activity in the U.S. is that picking up the PMI got people excited and that kind of thing. Are you seeing any change in the industrial demand landscape in the U.S. or it's pretty steady?

Yes. I think we've got, some of the leading indicators that you point to and others that we're looking at. We do see favorable trends there, and that would certainly bode well for some of our more cyclical areas of our portfolio. We have seen nice mid-single-digit growth in our light industrial business over the last few years, and we're anticipating in our 2026 outlook, kind of anticipated more of the same, mid-single digit in light industrial. In nonres and heavy industrial portion there, we've been relatively soft over the last few years, and we haven't seen a meaningful acceleration in growth in orders yet. And so until we see that kind of click through, we're kind of holding with a low single-digit growth profile. Again, those businesses for us are well positioned. They've got ample capacity to service more demand, should it start to accelerate. So we'll see how that plays out as this year progresses.

And then in terms of technology changes, and this affects, I suppose both the utility and the electrical segments at Hubbell, but a lot of focus on the 800-volt DC straight into the IT room, higher voltages in general within the data center. Maybe help us understand kind of how well positioned is Hubbell for that transition? Is it an opportunity, a risk, a bit of both? How should we think about that?

Yes, I'd say on net probably not a big driver either way for our portfolio. And and maybe first talk a little bit about our portfolio. So we are anywhere from the electrical side from very low voltage product to when you think about the utility side ultra-high voltage product. So we covered a range of certainly products that are out there. But as you point out, data centers are innovative -- innovating quite rapidly. And one of those things is around 800-volt DC. So if you look at our portfolio and things like connectors and grounding, really no effect. These are more mechanical products that you would need to put into a data center, no matter what the power source or voltages or amperages are. Then when you think about our electrical wiring devices or pin and sleeve would be a product. These are products that we are developing with our customers to be able to adapt to higher amperages, which is what we're seeing already going into the data center as well as the voltage, the 800 kV. So we'll have products available for that as that happens. Then if you think about the portfolio that they have of our power skid business, and that's really a configurable products. We put different gear and different materials, some our own, some third party on that. And that clearly will evolve with 800-volt DC, but that's a little bit what that business is, right? We're doing that right now. And as that equipment changes, we'll configure different equipment on those skids and sell those. So I think, again, that will be somewhat neutral for us. And then really on the utility side, I say very little change in how that -- the power still needs to come into the data center from which then it rectifies and changes to 800-volt DC, but little change there. So I'd say overall, not much of a change, but it does require us to reconfigure product, different to develop products, but that's what we do. So...

Fantastic. And maybe talk a little bit about the operating margin outlook. The metal costs and other things have been going up. What's the confidence in being able to pass those on to customers? And also when we think about kind of margin expansion from here across the 2 segments, do you still see a lot more upside in the electrical business because of the self-help actions?

Joe, why don't you take...

Yes. The operating margins have made a lot of progress over the last several years, and we would anticipate that we continue in line with our long-term financial framework to continue to expand our margins across both electrical and utility. There has been some inflation, certainly over the course of last year, mid-single digits for us. We're projecting another mid-single-digit year of inflation on our total cost base. And we've got effective price and productivity programs in place to manage to offset neutral or better on the cost inflation side. Certainly with mid-single-digit levels of inflation, if you're neutral on price cost management, there is a little bit of a margin headwind from that dynamic, and that could play out this year. We'll see how that -- how much price and productivity we're able to recover. But again, neutral or better, still positions us very well. On the electrical side, we have expanded our operating margins by over 500 basis points in the last several years. We would describe that as a middle innings program with a lot of initiatives, the a, that have been completed over the last several years, and b, that are still on the horizon for us ahead. Things like portfolio management with the different brands and businesses, exiting noncore, low-growth, low-margin businesses and acquiring high-growth, high-margin business has been part of that, as has our ongoing restructuring program where we continue to reshape our footprint, exiting subscale factories and consolidating into larger, more efficient factories. We've continued to delayer our management structure, and as Gerben has talked about in the past around reshaping from more of an independent hold company -- holding company type of an operating model to an integrated operating company environment has also been a very important part of that program and also has been consolidating our systems and our business processes as we talk about segment unification. So a lot of pillars at play and they're, I guess, the middle innings, but more runway to go in electrical and continued progress on utility.

Yes. And I'd say maybe to add to this. This was really what Joe and Mark, who runs that segment, came out of the utility business. That's what we did there for many years. So it's almost taken that playbook that we've seen work out, and that's why they can clearly see where they are in the innings and what's still available, if we've gone through this in our utility business before. So we feel quite confident in our ability to execute on this.

And I think last year, you already exceeded the 2027 sort of margin goal. So very good performance on that front. I think you're at the low 20s right now on margin. Should we just kind of see that moving into the mid-20s, and we'll get some update on that goal at some point?

Yes. We see continued progress there. I would point to our long-term financial framework, mid-single-digit organic revenue growth. Roughly 25% to 30% incrementals on that, and that will continue along with the other actions that we've been driving to drive margin expansion. So multiyear margin expansion program, lots of opportunity to continue to expand, and we'll continue to update as we progress there.

And sort of very short term, anything to watch out for seasonality or anything like that this year? Or you think most of the quarter is pretty steady top line growth and margin expansion kind of similar to the full year guidance?

We feel coming out of last year was an atypical seasonal year with a pretty strong fourth quarter. And as we turn the page to '26, we do see a bit of a more normal seasonal year where we typically -- we describe it as a head and shoulders where our first quarter is the lowest revenue and a profitability quarter and that grows as we go through 2Q peak in 3Q and come back down in 4Q. That's more of the shape of the year that we're anticipating. The way that we see our business set up both in our book-and-bill business as well as the projects that are slated for the longer cycle businesses.

And when we think about that price/cost element, does that have any particular headwind in any period? Or again, the margin expansion should be fairly steady through the year?

It should be fairly steady throughout the year. That's how we're anticipating without any major spikes.

Great. And then lastly, I think capital deployment. Hubbell's has been extremely successful at acquisitions. What's the pipeline looking like now? And as there's been some IPOs in the electrical space, I don't know if that's had an effect on pushing up private valuations? How does that look right now?

Yes. Yes. So I'd say the -- it's a big part of our strategy. It's a big part, I would say, of our core competency to both in the bolt-ons as well as in periodically the larger deals that we do. I'd say the pipeline has both of those in it, the timing of which is always hard to predict. But our focus really with our M&A is to continue to build scale and breadth in the market in the areas that we're in, and we still see a lot of opportunity to do that. When we do that is when we get the best returns because, we built scale. We -- our fixed cost spread over more SG&A, you can generally take out. We know how to operate in this market. We know how to fold these businesses in. So that continues to be the focus for us. To your point of valuation, clearly, we've seen from when we're buying businesses a number of years ago to now multiples go up. But I'd say our returns on those businesses are still very, very good because we're operating in higher growth markets. So you're paying more. So I mean, I'd say we are disciplined in this, Julian. We look at those multiples and when the return -- when we believe the returns are good and sometimes you have to use a little bit of the synergies to get there, but that's okay. You don't want to give all the synergies away, but keep some those as well. But I think we'll continue to be successful in this. And of course, our balance sheet, right? We have a much, much larger balance sheet today than we've had in the past. And my point of discipline is, we're not just going to go buy crazy, right? If there's periods where the timing doesn't work out, we have other ways to deploy that capital, and you've seen us do higher buybacks here more recently. And we believe that, that's also a good way to deploy our capital in those periods.

Fantastic. Well, now we'll switch quickly to audience response questions, please. So the first one, I think, is around current ownership of Hubbell. It's about half, not owning it yet. Second question is around kind of general bias or attitude to the stock today.

These look good.

Yes. So positive to neutral. Third question is around EPS growth expectation kind of versus the multi-industry average here. So in line to above. Next question is about capital deployment and balance sheet usage. So a mishmash, but basically bolt-on M&A. Next question is around valuation, what year 1 PE should Hubbell trade at? So sort of low 20s. And then final question is kind of what's the main valuation headwind or anchor facing Hubbell right now? So core growth. So with that, thanks so much. Thank you, Gerben and Joe for being here.

Thanks for doing this.

Thank you very much.

Thanks a lot.

Good to see you.