Hubbell Incorporated ($HUBB)

All right. Good morning. We'll continue with I'm very pleased to have Gerben Bakker, CEO of [indiscernible] thank you very much for joining us this morning. I'm Joe O'Dea the multi here at Wells. If over the course of the dialogue [indiscernible].

We'll jump right into it. I'd love to start on the utility side and specifically infrastructure, talk about demand trends that you're seeing out there. Starting on the transmission and substation side of things. And so you are in a multiyear stretch of seeing solid strong growth in both of these verticals. Talk about the pipeline, how you think about the medium-term growth potential that's out there for transmission and substation?

Yes. Perfect. Thanks, Joe, and thanks for the opportunity to engage here. With this group. And thanks for starting off on the high point of utility, which clearly transmission and substation is for us right now. So I'd say the pipeline and the growth rates have been very good there. And certainly, if you look at the order rates and backlog, it's very supportive of that. And drivers there are load growth and interconnect. And I would say these are more recent drivers on top of what has already been a long-term trend in this industry, which is grid hardening. I think grid hardening is more broadly we talk about the other parts of the businesses as well, something that utilities have been very focused on and that we benefited on. But more recently, the load growth and interconnect part of that is driving our book and our shipments as well. So we talked a little bit about that business as being on the higher side of the portfolio of high single digits. And certainly, more recently, we've seen that exceeding those kind of levels. We're starting to think ourselves around the framework of what's the next few years going to look eventually, we'll do another Investor Day engagement with targets we set forward. But I would say certainly over -- as we look out right now, we see those growth rates exceeding those high single digits as we're realizing right now. So we're very optimistic. We're investing in this part of the business pretty aggressively to sustain those growth, but we're very optimistic about our transmission and substation future.

And what kind of visibility do you have out in the conversations that you're having with your customers in your pipeline?

Yes. I would say the conversations are longer term. Certainly, the -- for our customers to put in a decent place takes time. They got to go to the regulators, they got to go to approval process. So they look out. If you look at the CapEx budgets, it's part of the reflection as they've seen those go up. Our products are highly specified. So we're actually talking and engaging with customers to select our products and bundling of our products. So I'd say it's pretty far out, but that doesn't always translate into orders being led. Our products still, even if you think about transmission and substation, it's generally measured in months, [indiscernible] 6 months of lead time right now. So we talk more in agreements to supply with our customers, and we have long-term agreements, but the actual orders tend to come more as these projects happen. That's, I would say, actually a good part of our business as we look at our business, long backlog is actually something we try to shrink and this is usually a reflection of our lead times going out, and we want lead times actually much shorter, so we can be responsive to our customers. And the other part is if you get orders 3 years out, you either need all kinds of indexes to make sure you're protected, or you may be on the wrong side of that equation 3 years out. So we actually don't mind that it's shorter term. As long as we know the commitment is made to Hubbell and that's often time how we do these.

And then also then group infrastructure on the electrical distribution side, so the biggest vertical that you're going to serve within that unit [indiscernible] through a period of stocking and then [indiscernible]. And so just to unpack a little bit of where you are today when you start to lap the destock comps? And on the other side of that, how you think about the growth potential for the distribution side?

Yes. Yes. And I think you're right, how you kind of characterize that. We went through a period of destock last year that was kind of a quite lengthy process of [indiscernible] channel and then the end user, we started to see us coming out of that last year. The best indication of that was orders returning in addition to the conversations with our customer. We've seen that grow nicely here in the first quarter. Our orders continue to be supportive of certainly what we've indicated for the year going out. Hardening is a big driver there, a big continued driver of growth in that market. And we see that again, multi-years out, I even would say probably decades out of the need to invest in that market. So I think the kind of the rates that [indiscernible], there's probably a little bit of a comp still, and we're a little bit above that mid-single-digit, kind of, longer-term target that we've indicated. And I think that is a little bit comp short term. But we're very confident that this mid-single digit. It will lower than the transmission and substation for the drivers there, but still very attractive growth for us.

And do you find that your utility customers are in a position where they've got to prioritize transmission and substation spend such that it has any kind of impact on the distribution side that they can really manage [indiscernible]

Yes. I think it's a little bit how you look at it. And maybe I'll start primarily what our customers -- our customers are trying to solve for, which is providing power in a low growth environment, and providing that in efficient and reliable way. And that drives at the end why they need our products. But then there is, of course, some constraints that utility customers have. One is affordability. They need to get, certainly, the spend to regulators oftentimes and find support and what the impact on the end user. There is labor constraints in the market and then just the budgets that they operate on there. So there's certainly some tension against the need to invest in this grid and how fast, and at what level can they do it? I'd say perhaps less so that they're taking transmission from distribution. I think as you see the CapEx budgets increasing, which clearly we're seeing happening right now, more of that is going to the transmission and substation. So I think it's less about that has been taken away from distribution is that more of the incremental investment that we're seeing is going to transmission and [indiscernible] and why we -- our view is that the growth rate of that is going to be above that of distribution. But maybe the other thing to highlight here. As we look at our portfolio. We are equally strong in transmission and substation as we are in distribution. About 80% to 90% of the components of the hardware of the materials that you need to build that grid Hubbell makes, and that's both in the transmission and the substation. So I would say if a utility makes a choice to spend the next dollar from distribution on transmission, we would benefit equally or vice versa. So we're a little bit agnostic of where the next dollar comes. But our view is that more of this is being directed now to transmission. This is why we're investing. So what does matter is do you have the capacity to serve when they move the dollar and we're being pretty aggressive in our investment in that area.

And then rounding out the infrastructure side of things when we think about gas distribution and telecom, there's a period of time where you saw some pressure on the telecom side of things. But just help us understand where you are in the demand patterns there? How do you think about that moving forward?

Yes. Yes. I think it's a little lower level of growth than what we're seeing in T&D, but still attractive GDP plus. And if you look at some of the drivers of that growth, [indiscernible] our gas business, it's to a certain extent, very similar to electric very aged infrastructure that needs to be upgraded with our components. And on the communications side of the business, we saw the big decline a couple of years ago that's returned to growth. Right now, there's still a lot of fiber going in. So I'd say those are GDP plus businesses going forward with, again, attractive dynamics of what we serve with our critical components.

And then the other part of utility on grid automation and specifically on meters and AMI. 6 or 7 quarters into seeing declines in that business. What you view in terms of the outlook there when that business shifts to starting to see some growth?

Yes. You have to certainly have faced some challenges that we've talked about quite a bit here. That grid automation business, and that's kind of how we look at it holistically, will return to slight growth here in the second quarter after some periods of decline, primarily driven by the meter in AMI business, and we'll continue to see growth there into the second half as well. If you talk specifically about our AMI and meter business. And maybe just to put it in perspective, it represents about 10% of the revenue of utility. But less than 5% of the operating profit of Hubbell. So it's quite a small contribution to the overall portfolio of what Hubbell does. We've addressed the cost side of that business that we were investing quite heavily to drive new technologies in there. We've refocused that business to areas where we've traditionally done very well. And certainly, our expectation and the headwinds are behind us right now of the decline of that business. So our view is as that business now grows and it will grow more modestly. We'll see the margins improve. Those margins are below the average of our portfolio, our expectations are for higher margin for the business. But after the work we have done and with some modest growth, we can improve those margins.

What about its value to the broader utility business? And so when you think about lower growth, lower margin, but is there a synergy value that it brings into our overall offering that winds up having more value than what we see just [indiscernible]

Yes, it certainly serves the same customer base that we serve, and it's with critical products as well. It's clearly helped us build more of this grid automation business, and it's how we look at it. There's a lot of parts that are actually very attractive and growing -- have been growing really attractive [ for it ]. As we looked at our business a number a few years ago, we were primarily a hardware business. And as we looked about what the grid of the future look like, we started to see control on the grid and sensing on the grid, and we just didn't have that capability. And this was our way to build scale into that, and we've really, really benefited from that. But we still measure our businesses in the pieces as well. It's what we do on our whole portfolio, how we look at the business. And the business has room to improve. And I think with what I told you with the cost that we've taken out and we modest growth, our expectation is that this business will show up that margin profile going forward.

And then within the grid automation piece, half of it is the grid protection and controls. What about the margin profile there and the growth [indiscernible]

Yes, yes. And then that's actually the part that I said that we've really built up, and it was a capability that 8, 9 years ago, we really didn't have. And it's really hard for a company that's what we call heat and beat. We're doing [indiscernible] and stampings and plating as a core competence, and that's still a hugely important part of our portfolio. But as we looked at what the future of the grid, that's a hard pivot for companies to do. And I think we've done that very successfully. And if you look at the other half of the grid automation business, an indication of what we've done there. Both on organic growth as well as acquisitions, we've grown that. That's growing high single digits. And this period that is actually above that well margin profile that are very similar to the T&D business. Examples of new product that we've brought in more recently that have done really well is, for example, our [ line defender ]. It's a distribution product that actually helps with faults further down the line. These are very expensive faults to correct. Truck rolls, it's one of the highest cost the utility will have and to the extent that you can have self-correcting and identifying where faults on and this is one of those products, and it's taken off really nicely. Another one is a power quality measurement. It's [indiscernible] that we actually acquired that sits in that. Serves not only utilities, but serves data centers. Power quality and data center is very, very important, doing really well. So I'd say that business overall is attractive margins, high growth. We just need to get that one piece that we just talked about in the better and -- but it's a very nice segment.

And then shifting to the electrical side and kind of the non-data center piece of electrical if we start there. In an environment where non-res activity has been challenging. But what you're seeing with respect to interest rates and inflation as overhangs versus, say, just duration of a challenged market that starts to give way to some [indiscernible] kind of what you're seeing there nonres?

Yes. Nonres it's -- become a smaller part of our portfolio as we certainly grown the company. We saw some modest improvement early in the year in that area. And I'd say, as we see the current situation that has persisted [indiscernible], we believe, driven by short-cycle activity around these markets. And if you think about the some of the electrification and the re-shoring that's happening, and some of the activity that that's happening around that on the non-res side. Interestingly enough, too, that, that's -- it's not consistent throughout the region, and we see a lot where data centers are going in. We see more activity around other nonres activity. So it's not broad in the market. It's coming off a low. It's been kind of slow. So I'd characterize it as, okay, perhaps, and we have seen [indiscernible] growth this year that we see sustaining.

And then on the data center side, if you could just size your revenue for us. Explain the different ways that you're serving your data centers, both through the legacy side of the business as well as the M&A that you've done in PCX and in [indiscernible]?

Data centers, I mean, we often talk about data centers on the electrical side of the business, but actually the larger exposure indirect of data centers and utility business, and I'll talk a little bit about both of those here. On the electrical side, about 10% of our revenues come out of data center and that's split between the balance of systems and what we call the PCX business, which is the [ Power Skid ] business. And on the balance of systems components, we have a very strong position. These are products that are sold in [indiscernible] that are sold in general industrial applications. If you think about our Burndy Grounding, if you think about a wiring device has been in sleeve products, these are anchor brands and products that we sell in data centers as well. Actually, a lot of organic growth there as well. And if you think about as data centers are ever increasing the capacities of both amperages and different voltages, we're adapting our products to that. We just introduced a very innovative, we call power gain product [indiscernible] literally an industrial application that we've used for decades at a big bulky round connector that have done very well in data centers. But as the amperage have gone up and we've redesigned that product, we've actually made the shape of it such that you can fit it much easier behind [indiscernible] constraints is a big deal for data set, actually working with the data center operators to bring new innovation into the market. It's how we've continued to adapt that business. But then if we look at the utility side of the business as well. A lot of the transmission and substation work that's happening there is -- even if it's utility work that's happening, it's to support those data centers. And it's -- our position there is very strong. We certainly benefit from serving those markets. As far as acquisitions that you mentioned, the DMC systems control acquisition, and even the one that we recently announced with NSI has about 10% of their revenues also going to data centers, is adding to the portfolio of products that not only serve attractive core markets that we serve today, but data centers as well.

And then as we think about kind of behind-the-meter powering of data centers, just what that means for you from a revenue content. Think about it versus behind how the content opportunity changes for you?

Yes, yes. And the reason this is actually happening is because data centers need power. And I think if you ask most, if not all data center operators how they would prefer to have their power, it would be to rely on the utilities, but there are some challenges with that right now. I would say it's very early in that process, and we're having some discussions through the EPCs that are helping, or the IPPs that are involved in this in what those solutions are. And for us to gear the equipment that we serve is very similar. These need substations. And if they put their own generation source behind it. They're still going to put a substation still with equipment that's the equipment that we sell to utility company. So if they stay disconnected from the grid, which our view is that they're probably going to want to interconnect at some point. But if they didn't, you'd lose that interconnection piece. I'd say it's a smaller [indiscernible] of that. But our view is that they probably want to interconnect but very importantly is utilities are trying to solve for this. Our conversation with utility customers is how they're adding capacity, how they're adding -- this is the whole load growth. So if some of this is going to happen, it's probably going to be incremental growth over this period where utilities are trying to solve for it. And if we need to ramp up quicker and data center are able to solve for that, we'll probably see higher growth rates for a period of time as a result of that. So we see it as incremental, but our content is fairly [ similar ].

And then you mentioned NSI. Let's talk about that a little bit more. I think, $3 billion deal, the largest in the company's history. The fit within the business, just explain to us what NSI is going to you?

Yes. Yes. And first it's -- maybe I'll talk a little bit about our capital allocation. It's an important thing that we do. We've got, obviously, a strong history of adding quality businesses to the portfolio. We've talked a lot about the balance sheet getting larger and larger, and that's very positive. But how you deploy that capital, and we've indicated that we're going to remain disciplined in the types of businesses that we're going to add. And in periods where we don't have a business to add, but still have a strong balance sheet. We see buyback as a very attractive alternative. Well, and we've done some of that earlier this year. So the point of that is, while the balance sheet is getting bigger, we're going to remain disciplined on where and how we invest our capital. So as we screen that -- and a lot of our businesses are coming out of -- a lot of acquisitions come out of our P&Ls, and we still run our business by P&L. We have GMs that manage. It's a way to really stay close to the customer as we get bigger. And a lot of that development of businesses goes through those, [ GM ]. And then we have an enterprise resource group to help execute on those. So very few deals will come through, if any, that we don't have visibility. And it's -- we don't always want to acquire these businesses. We're not always successful in acquiring this business. But it's where that property would come to market that we don't have in NSI was no different. But one of the things, as we have broader part of the organization looking for deals, we really have a screen [indiscernible] what we call it the [indiscernible] of deals. And we put them through a screen, and it's more than these 5, but these are the main ones is, does it serve the same customer that we have? Does it go through the same channel that we serve? Are the products complementary to what we do? And then what's the growth rate of the business and what's the margin profile of the business? And the last 2 are more a reflection of the market and the customers that we serve and the strength of the brand. And then we rate those things of the businesses. And sometimes they're squarely down the middle and sometimes they go in one of the categories a little bit, out of it. And it doesn't mean that if it goes out and when we won't acquire it, but its eyes open on. I'd say NSI hits all those boxes right down the middle. It's customers that we serve today. It's through the same channel that we serve it today. Very complementary product basket to what we have. These are anchor brands. This is like Burndy and Wiring. Is [ Bridgeport fitting ] and [ Polaris ], you kind of use those in those same veins. Which brings to it a preference and a margin profile. So when we see that, we certainly lean in more to want to have the portfolio while we remain disciplined, I would say, some multiples of business have gone up, but so have margin profiles and growth rates. But we see this business fitting extremely well within the Hubbell portfolio. This will be -- we talk about this like when we acquired Burndy and what that has done for us, that's how we see this company coming really what we would say right down the fairway.

And then this comes in expected to close middle of the year, margin accretive to HES. Our math on it is it could be $0.15 or $0.20 kind of lift. That sound reasonable?

Yes. Yes. I think, certainly, once we close it, we'll come back with depending on the timing and what it is, but I think you're pretty good at math. So I think you're in the ballpark of what you just indicated, yes. And margin accretive too. Its earnings accretive, certainly, and margin accretive to the company.

Yes. Something you brought up on the most recent earnings call, is the high-voltage opportunity out there when we talk about 765 kV. You sized that it's a $1.5 billion, sort of 10-year market opportunity. Just unpack a little bit for us in terms of the time line that you're looking at to start generating revenue there, what that ramp could look like?

Yes. Yes. And 765, even though there's a lot of activity and discussion about it. 765 actually has been around for 20-plus years. At the time, some infrastructure was put in and where -- where 765 really help, it's for bulk loads, trends for and for clearing capacity for -- for load really. And if you get load constrained on the grid, if you won't need a lot of power and it's trying to go to the infrastructure that you have and that's a constraint, I think about it pipe and water. And all of a sudden, you need a lot more pressure going through that, that pipe is going to burst. And that's kind of the infrastructure. So if you need more bulk transfer, it's very efficient. And then a load growth environment, it's actually a very efficient infrastructure to deploy. So we've been actually working with some of our customers and that's, again, the value that we have if we are a leading prominent supplier of T&D materials with the largest installed base. So as we talk about new things coming up. Again, we've been working with our customers for some time already on this. Earlier this year, a first fairly large-scale 765 was awarded, and we were fortunate to be the recipient of that award. That -- and that was a combination of actually working and designing, inspecting that product with our customer. We'll start to see that start shaping in the early part of next year. So I'd say it's early still in the cycle of 765. There's more projects that were certainly working on. And really, it's incremental to what's still needing to be done in interconnection, in hardening. And by the way, when you put 765 in, you need off-ramps of those. So you need [indiscernible] substations to go along with that. So it's additive to the growth of the grid is how we're looking at the network. We kind of sized it and -- it's not precise and the timing can vary a little. But you need to get these things to approval. But there's a real need for -- there's a good case for it. And we believe it's actually incremental to the investment that's already have on why we call that we think this could add a point of growth to what we've already indicated.

And then shifting to the price cost side of things when we think about some of the inflationary pressures over the course of the year. You saw commodity inflation to start the year. Tariffs and whatever impact that could have had in kind of April. Just explain what you've done on the pricing side of things? Any quantification of what you've had to do out there for pricing year-to-date?

Yes. Yes. And we've been -- over the last few years, certainly more -- much more aggressive, proactive and better organized. It's actually one of the benefits of having gone to more of an operating company that we put capabilities in place across the enterprise and pricing was one of them that we've moved from product management, and against product [indiscernible], but they're probably not the best prices and to really do scientifically. And it's just a muscle that we've built that has really benefited us. So for us continuing to be price cost neutral, what we call it price cost productivity neutral or better, positive, and we've been to the positive side of that is our thought process there. And so we see more inflation. The -- a couple of things happened here recently, which the tariff regime continues to change, and this latest one is actually neutral to Hubbell. There's some pluses and minuses in that but not a lot of impact there. But we have seen inflation. We came out with price earlier this year, and that's going in. And I would say, as inflation continues to happen, we'll continue to respond to that with price and productivity to manage that to the net neutral or positive. And then longer term, I think the margin is welcome. That's the other thing that we've proven over time that while we manage short term, this a neutral or positive, over the cycle with volume growth with -- as commodities maybe come down or we find more productivity, we actually see the margins go back, or actually up because certainly dollar-for-dollar price and cost would decrease your margin, though this is math, but we've actually proven to be able to recover that and then actually expand margins. And that's how we view it.

And so pricing that would have gone in place, I think, around February, you haven't had to do additional pricing?

Yes, we had some that went in effective April, right, then. And [indiscernible] But there's still inflation happening -- and so our view is as that happens, we'll continue to price for it.

And then the margin dynamic and the seasonality we see volume being the biggest kind of component, or in the middle of the year?

Correct. Volume and then longer-term productivity, we're still driving a lot, right? If you think about the efforts that we're doing in the electrical. And if we're doing the restructuring programs that we're still doing that has productivity. So I think that's another adder over the longer term to find margin expansion.

On that productivity front and one of the initiatives is around within electrical, the unification and simplification. And so that was a function of footprint rationalization, SKU reduction. Where are you in that process?

Yes. Yes, I'd say really good early success in that, and you can see that certainly by the margin of the Electrical segment that we've continued to expand after we shed our lighting business and a reflection of that effort. I'd say, over the last couple of years, we've been very busy with supply chain challenge in both during the COVID period, and more recently, was just inflation. So I'd say there's still opportunity there going forward of refocusing on that and doing more. So I expect more work there and more margin expansion as a result of it. But I would say we're maybe middle innings, a little past the [indiscernible] on that work.

Okay. Terrific. Well, I think that brings us to the end of our time. So thank you very much. Really appreciate you being here. Thanks for [indiscernible]

Thank you, Joe. Thank you all.