Hubbell Incorporated (HUBB) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Hubbell Inc. Second Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Dan Innamorato, Vice President, Investor Relations. Please go ahead, sir.

Thanks, operator. Good morning, everyone, and thank you for joining us. Earlier this morning, we issued a press release announcing our results for the second quarter of 2026. The press release and slides are on the Investors section of our website at hubbell.com. I'm joined today by our Chairman, President and CEO, Gerben Bakker; and our CFO, Joe Capozzoli. Please note our comments this morning may include statements related to the expected future results of our company. These are forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Please note the discussion of forward-looking statements in our press release and considered incorporated by reference into this call. Additionally, comments may also include non-GAAP financial measures. Those measures are reconciled to the comparable GAAP measures, which are included in the press release and slides. Now let me turn the call over to Gerben.

Great. Thanks, Dan. Good morning, and thank you for joining us to discuss Hubbell's second quarter 2026 results. Hubbell delivered strong financial performance with double-digit growth in sales, adjusted operating profit and adjusted earnings per share in the second quarter as well as year-to-date through the first half of 2026. Our strong positions in attractive end markets as well as continued execution on our strategy are demonstrated by our first half performance. As megatrends continue to accelerate, most notably in data center markets and load growth-related investment in utility T&D markets, we are seeing continued strength in our order book, which gives us increased visibility to our second half outlook. Operationally, we are managing inflation effectively through price and productivity actions, investing in capacity expansion to serve our customers in high-growth areas and deploying capital to further upgrade our portfolio in high growth and margin areas within our core. We are raising our full year 2026 guidance this morning to reflect double-digit growth in organic sales adjusted operating profit and adjusted earnings per share at the midpoint of our range. Turning to Page 4. We're pleased to have closed on the previously announced acquisition of NSI in early June. NSI is a business we know very well and have followed for a long time. It operates in the end markets with common customers, similar manufacturing processes and a broad portfolio of critical electrical components with low cost of ownership and high cost of failure. The acquisition of NSI fits squarely within our overall strategy and enables us to double down on our attractive core while adding another high-growth, high-margin business to our portfolio. Strategically, acquired a leading electrical fittings brand in Bridgeport Fittings fills a key product line gap in our HES segment in a high-value niche. While the Polaris brand complements our leading Burndy brand in electrical grounding and connectors and NSI's exposure in network infrastructure provides opportunity to further penetrate datacom, broadband and data center markets. We're also confident that the [ advent ] of NSI will further accelerate our successful HES segment unification journey, which has resulted in market outgrowth and significant margin expansion over the last several years. Our recent sales force realignment and vertical market investment will enable enhanced cross-selling and deeper penetration into high-growth verticals, while the leverage of scale and best practices across the two strong businesses will drive long-term productivity and cost savings, enhance service and optimization of capacity and manufacturing processes. Now let me turn the call over to Joe to give you some more details on the financial impact of the NSI acquisition as well as our second quarter results.

Thank you, Gerben, and good morning, everyone. From a financial standpoint, we anticipate NSI to be accretive to both the Electrical Solutions segment and total Hubbell's growth and margin profile, and we expect the acquisition to add adjusted earnings accretion of approximately $0.20 in 2026 and approximately $0.80 in 2027. Looking further ahead, we are targeting attractive revenue and cost synergies over the next 3 years, including 2% to 3% sales synergies from increased channel and vertical market penetration as well as approximately 3% to 5% cost synergies from leveraging the combined scale of our respective operations, supply chains, IT systems and back-office capabilities. The $3 billion purchase price was financed with a combination of term loan, a bond offering and commercial paper. And our pro forma leverage moves to approximately 2.9x net debt to EBITDA following the acquisition. As we continue to generate strong free cash flow in the second half of 2026 and beyond, we intend to continue aggressively investing in high-return CapEx to drive further growth and productivity, while also returning cash to shareholders through dividend growth and modest share repurchases. We also intend to pay down significant portions of debt and deleverage our balance sheet over the next 24 to 30 months, which will drive strong adjusted EPS accretion in 2027 and position our strong balance sheet for further accretive M&A investment over the next several years. Moving to the second quarter results on Slide 5. Hubbell's second quarter financial performance, strong with double-digit growth across sales, adjusted operating profit and adjusted earnings per diluted share. Net sales of $1.712 billion in the second quarter of 2026 increased by 15% as compared to the prior year. Organic growth of 10% was driven by 6% organic growth in Utility Solutions, an 18% organic growth in [Audio gap] metrical Solutions, an acceleration relative to our prior quarters, driven primarily by strong performance in electric distribution and data center markets, supported by capacity expansion investments and incremental price realization. Acquisitions contributed 5 points to growth in the second quarter, driven primarily by DMC Power and a partial month of contribution from NSI, both high-growth and high-margin businesses which are off to strong starts and integrating nicely within our Utility Solutions and Electrical Solutions segments. From an operational standpoint, Hubbell generated $409 million of adjusted operating profit in the second quarter, representing 13% growth versus the prior year, with adjusted operating margins of 23.9%, representing modest contraction relative to a strong comparison in the prior year. Growth in adjusted operating profit was primarily driven by strong volume growth in high-margin areas as well as the impact of acquisitions. While cost inflation continues to increase, our pricing and productivity actions are keeping pace, and we are confident in our ability to continue to manage this equation throughout the second half of 2026, just as we have demonstrated very successfully over the past several years. We also continued to invest in our business throughout the second quarter to expand capacity in high-growth areas and generate future productivity. Adjusted earnings per diluted share were $5.52 in the second quarter, representing a 12% increase versus the prior year, driven primarily by adjusted operating profit growth. Below the line, higher interest expense associated with the recent borrowings for the NSI acquisition were largely offset by a lower year-over-year tax rate and a lower share count as a result of share repurchase investments made in the first half of 2026. While second quarter free cash flow of $213 million was down relative to the prior year on working capital timing and acquisition costs, first half year-to-date free cash flow of $259 million was up 12% year-on-year. On a full year basis, we are on track to deliver approximately 90% conversion of free cash flow to adjusted net income, which absorbs the impact of increased capital expenditures and acquisition costs. Turning to Page 6 to review our performance by segment. Utility Solutions delivered another strong quarter with double-digit growth in sales and adjusted operating profit. Utility Solutions generated net sales in the second quarter of $1.026 billion, which represented growth of 10% versus the prior year and includes organic growth of 6% and acquisitions that contributed 4%. Our larger, higher-margin Grid Infrastructure business grew 7% organically in the second quarter, driven by strong double-digit growth in distribution markets. Transmission and Substation growth was solid in the second quarter, and we continue to expect double-digit growth on a full year basis in these markets. as large projects ramp up in the second half and capacity investments come online. In Grid Automation, we were pleased to return to year-over-year growth in the second quarter as anticipated with continued strong growth in protection and controls, most notably in our substation switching products, while meters and AMI revenue grew sequentially and delivered strong orders that position us for continued recovery in the second half of 2026 and into 2027. As Gerben highlighted in his opening remarks, orders were strong in the first half. And while we're not typically a backlog-driven business, our first half book-to-bill ratio of approximately 1.2x for Utility Solutions is strong and provides high visibility to our second half outlook, where we expect organic growth to improve modestly relative to first half performance. This demand is broad-based across T&D markets, but with particular strength in orders and quoting activity for transmission and substation projects driven by load growth and data center build-outs. We continue to believe utility T&D markets are in the early stages of a multiyear investment cycle, and we are investing proactively in additional capacity to serve the long-term needs of our customers. Operationally, the Utility Solutions segment delivered $263 million of adjusted operating profit in the second quarter, representing 10% growth in adjusted operating profit versus the prior year, with adjusted operating margins up slightly year-over-year on a difficult prior year comparison. Operating profit growth was primarily driven by strong volume growth and acquisitions, while we continue to drive price and productivity actions to mitigate increased cost inflation. Moving to Page 7. Electrical Solutions results were also strong in the quarter. On the top line, Electrical Solutions generated net sales of $686 million, which represented growth of 25% versus the prior year. Organic growth of 18% was driven by strength in data center, light industrial and nonresidential markets. Data center sales were up approximately 65% in the quarter as capacity additions, new product introductions and content gains, drove out growth in a strong underlying market. Our vertical market strategy and sales force alignment initiatives continue to drive commercial success in the data center markets and other high-growth areas of our electrical solutions portfolio. The acquisition of NSI contributed $35 million of sales for the partial month of June, representing approximately 7 points of sales growth at accretive adjusted operating margins in line with our expectations. Our integration efforts are off to strong starts early in the -- early order activity has been favorable and customer response has been positive. As Gerben noted earlier, NSI is a strong strategic fit within our Electrical Solutions portfolio, and we are confident that this business will drive near-term and long-term value creation for our shareholders. Operationally, the Electrical Solutions segment delivered $146 million of adjusted operating profit in the second quarter, representing 18% growth versus the prior year. Strong volume growth strong price and productivity realization and attractive profit contributions from NSI were partially offset by higher cost inflation and increased year-over-year restructuring and related investments within the quarter. Adjusted operating margins of 21.2% were down 130 basis points versus a difficult comparison in the prior year, largely driven by the net margin impact of price/cost productivity as well as approximately 60 basis points of higher restructuring investment. However, we have continued to take [Audio gap] pricing and productivity actions throughout the second quarter, and we are confident that the Electrical Solutions segment will return to adjusted operating margin expansion in the second half of 2026. Turning to Page 8 to discuss our full year outlook. We are raising our 2026 outlook for sales growth, adjusted operating profit growth, adjusted operating margin and adjusted earnings per share. On sales, we are raising our growth outlook from plus 8% to 11% to plus 16% to 18%, reflecting an additional 5 points of acquisition contribution NSI as well as an increased organic growth outlook from plus 6% to 9% to plus 9% to 11%. We are raising our Utility Solutions organic growth outlook to plus 7% to 9%, largely reflecting strong visibility in T&D as a result of first half orders, and we are raising our Electrical Solutions organic growth outlook to plus 12% to 14%, driven by our increased expectations for data center growth of approximately 50% for the full year as well as stronger nonresidential and light industrial markets. Our organic growth rate is primarily driven by stronger volumes, along with modest incremental price realization relative to our prior outlook in both segments to offset increased inflation. Operationally, we anticipate adjusted operating margins of 23.1% to 23.4%, representing 40 to 70 basis points of year-over-year expansion. This outlook includes margin accretion from NSI, accelerated investments in service and capacity expansion to support customer needs in high-growth areas of our portfolio and increased full year restructuring investment. Additionally, we anticipate an improvement in price/cost productivity relative to our prior outlook, driven by anticipated net benefit of $20 million in the quarter, largely as a result of IPA refunds net of potential customer considerations and a slight increase in underlying tariff costs from recent changes to the Section 301 tariff framework. Below the line, increased net interest expense of $170 million is driven by borrowings for the NSI acquisition. We expect the full year adjusted tax rate of 22.0% to 22.5%, though we anticipate a higher tax rate of approximately 24% in third quarter, driven by timing of discrete items. We are raising our full year outlook for adjusted earnings per share from a range of $19.30 to $19.85, to a range of $20.25 to $20.55, which represents an increase of approximately 4% at the midpoint and a range of 11% to 13% growth year-over-year. We anticipate approximately 90% free cash flow conversion on adjusted net income in 2026, which reflects the impact of increased year-over-year spending on capital expenditures and NSI acquisition costs. Finally, I'll highlight that our full year outlook reflects approximately 20% adjusted operating profit growth at the midpoint of our range, reflecting highly attractive underlying operating performance. Now let me turn the call back over to Gerben to provide some concluding remarks.

Great. Thanks, Joe. We are confident in our ability to execute over the second half to deliver on a strong 2026 financial outlook. In the near term, we are focused on driving outgrowth in our attractive end markets through product and service differentiation, executing on investments to support customer needs and continuing to effectively manage price and productivity in an inflationary environment. Longer term, we continue to believe that our utility and electrical end markets are in the early stages of a highly attractive multiyear investment cycle, and we look forward to sharing more details with you on our long-term strategy and outlook in our next Investor Day, which we plan to host at our Utility Solutions training center in [Audio gap] Missouri on March 4, 2027. With that, let me turn the call over to Q&A.

[Operator Instructions] Our first question comes from the line of Jeffrey Sprague from Vertical Research.

Can we just dive a little bit more into the mascara structural the strength in distribution, I thought was notable. So kind of wondering there if there's some to restock after destock have gone through for a while there. And then on the transmission and substation side, it sounds like it wasn't particularly strong on the top line in the quarter, but obviously, you have all these orders. Was there some sort of timing benefit that impacted that part of the business in Q2 that fortifying your fuel in the second half?

Yes, Jeff, thanks for the question. And certainly, strong order rates, as we mentioned, up 1.2% in the quarter, pretty broad-based across our business, both from grid infrastructure as well as grid automation and within grid infrastructure also broadly distribution and transformation. So certainly, with distribution up double digits transmission and substation also growing very nicely in the quarter and accelerating in the second half, and that comes through the visibility that we have with the orders and the backlog. The pipeline, certainly the quoting activity continues to accelerate, so when we look ahead at the multiyear investment cycle, we see strong momentum. Long-term growth supported by data center in utility CapEx and our position, a position in these markets is really a leading position with the installed base, with back position and our reputation. So we feel really good. Certainly, I should think about transmission substation, which you point out, perhaps being a little bit lower. We're up high single digits in the first half, and we expect to be up double digits in the second half here. And I'd say there's really nothing to read into [indiscernible]. You get a little bit of project, I mean, when sometimes these projects steps up quarter-to-quarter may have a slight noise in it. But again, based on what we're seeing in market based on our quote activity and our order we feel really good with the increased organic growth guidance that we're giving for the year and the second half.

Right. And the size of the guide, obviously, can base the confidence. Is there anything though like kind of the variance around that in terms of supply chain, your own capacity business or project timing that creates sort of a variable outcome in the second half in your opinion?

Yes, I would say nothing really to say on the supply [Audio gap] chain, we are continuing to add capacity in our business. Our substation part of the business, particularly where we're adding capacity. But again, this is embedded in our guidance, supported by the orders and the backlog. So it's why we're confident that we'll see growth accelerating there as we go into the second half.

And then maybe just one final one, maybe it's for Joe. But just thinking about sort of the illicit margin expansion in the back half that's part of the guide here. Would you level load that across the quarters? Just a little bit more back loaded. I mean, I guess you got the tariff refund in Q3, so maybe it's front-loaded Q3 to Q4. Just a little bit of color there, I think, would be helpful.

Yes. You put your finger on it there, Jeff. We're anticipating it is going to be a little more front-loaded given the nature and the timing of those IEPA tariff refunds and how they roll through. but really confident in that back half margin expansion playing out.

Our next question comes from the line of Chris Snyder from Morgan Stanley.

You guys talked about in utility specifically, the first half book-to-bill of 1.2x. It gives you guys pretty good visibility into the back half. I guess my question is, are you guys starting to build any sort of visibility into '27, or is it still too early to see that in the order book in the backlog? And then just maybe if you can't see it there, how have customer conversations trended on '27. Does it feel like you guys can sustain maybe something at the higher end or even above the organic target?

Yes. I would -- echo here. We are seeing orders starting to be booked into 2027. That's particularly on the transmission and substation side of the business. Again, if you look at what utilities are doing, they're having a plan well into the future with some of these load growth and capacity that they're bringing online as we see higher voltage systems, those tend to book out further. So yes, we're seeing orders being booked in our transmission substation area into '27. And again, we feel based on both what we're seeing in the order book, the conversations we're having. And if you just think about with what's going on, right, with the data center build-out and the need to add additional load in addition to what we've been talking about for years, which is system that needs to be hardened. It's just -- it's multiyear and utilities are starting to look further out.

I appreciate that. And maybe if I could just follow up on price. I don't remember a much prepared commentary on this. But if I remember correct, you guys pushed through price and I think it was in April. Can you just maybe talk about the realization of that? Has there been any pushback in the channel to the action. And then should we expect more price action here into the back half, just given kind of the clear inflationary pressure that's out there in the world.

Sure. Good morning, Chris. So yes, on the price equation, we did push price through in April and the expectation of that price increase, which was broadly across utility and electrical we were anticipating about 1 point of price to come out of that action. And at that point, was raising our full year price expectation to about 3 points. And since then, we've experienced a little more inflation, and we've gone out with additional price in July. And our expectation for that most recent price increases, we see about another 0.5 point in the back half of the year. So coming into the year, we were anticipating 2 points. We had the April price increase at a point, and now we're adding roughly another 0.5 point or so. So kind of think about it like 3 to 4 points for the full year, Chris.

And our next question comes from the line of Chad Dillard from Bernstein.

So just a question for you guys on your capacity expansion. Can you give a little bit more color on what verticals are you expanding? How do you think about the revenue unlock? And when do you think that will be completed?

So Chad, so the capacity expansion story is a really important part of our growth initiatives here as we continue to service strengthening demand out in the market. And so our CapEx investment this year, we're anticipating roughly $175 million to $190 million of CapEx, and that's up from our $155 million last year. A lot of our CapEx spend is going towards adding capacity and to adding productivity initiatives, but largely focused on capacity. Over the last couple of years, we continue to bring new capacity online in every quarter as that gets turned on, we continue to absorb new revenues into that capacity. It's hard to say exactly how much that translates to every quarter. But if you think about on a go-forward basis, bring on roughly $25 million of new capacity-ish. It's not always linear, but we'll continue to do that as we progress the back half '26 and as we work our way through '27.

Got you. That's super helpful. And then just secondly, it sounds like you're seeing a larger slug of projects flowing through. So I'd be just curious how does your win rate on those larger projects compare versus the corporate average? And then maybe you can talk a little bit more about your modular approach and then how that helps you win?

Yes. So maybe starting on the modular and then I'll come back to the win rate here. Tad, it's actually a trend that we're seeing broadly in our business. And I think in the market. And it's a lot driven by labor availability and by quality control of something that you can build in a factory setting versus doing it on site. So if you think about our businesses in the electrical side, like data center and the BCX business, what was the power skid or if you think about the substation business with system control, where you do the control houses and you're basically building these in a factory environment with good quality control that you then plug and play into a system. But you're also seeing it more on a SKU level and component and DCM -- DMC, sorry, is a really good example of a connector that you -- where you're crimping the connector onto the bus bar and the traditional way of that would have been to do a well in the field and now you can do a crimp in the field with less skilled labor requirement quicker. So there's absolutely a trend going on where you're bundling more. And we have a great position. We have -- if you think about the portfolio and the breadth of our SKUs, there's a lot of opportunities for us to bundle things together find solutions, how you -- one component can integrate each with the other. So surely a trend in the market. As it relates to project and project flow, and I'd say this has accelerated. And if you look, for example, in our transmission and substation business. The project quote has about doubled in the last couple of years, and that's driven in part by these higher-voltage projects where utilities are just looking further out, they're planning these further out and by the strength of our portfolio to be able to offer some of those projects. So I'd say the win rate on those is probably similar to what we've seen traditionally, but there's just more of those coming through right now.

And our next question comes from the line of Tommy Moll from Stephens.

Gerben, I wanted to start with the recent trends in distribution. Great to see up double digits this quarter, but that's clearly above the trend line for that business. So what more can you tell us about what's driving that strength? And what are you embedding for your assumption in the second half there?

Yes. Thanks. So distribution is off to a good start, I would say. It is a reflection of the strong underlying markets. But also, if you recall, destock of the last couple of years. And in a year over, I'd say, the comps are still somewhat easy to lap. There's a lot of investment going on into transmission and substation market, and that's great to see. But underlying distribution markets also remain very strong. And the foundation of that strength and I see that as a long-term positive is the age of that infrastructure and the need to harden and the resiliency. And that still remains, even though it's oftentimes overshadowed right now by the need for loan growth, the need to -- there's a good support for that. You see that embedded in CapEx budgets as well. So we believe the underlying -- we see the underlying market to be strong, but a little bit of Comcast. So longer term, we see this continue to be attractive and certainly going into the second half and going into 2027. And we continue to see over longer term for this to be a mid-single-digit plus market.

I also wanted to ask about the recent trends you called out in meters and AMI. I think you said you started to see steadily improving market there, maybe some orders suggesting continued growth second half this year, even into next year. That's a very different tone than what we've heard recently. And so any gaps you can fill in would be appreciated.

Yes, a little bit. And if you think back on what we said, right? So Grid Automation had gone through some declines for several quarters led by the Aclara business that we've talked a lot about. And what we had said last quarter that we expected grid automation to return to slight growth in the second quarter, and that indeed happened. The book-to-bill also there was above 1. And so that gives us confidence that what we also call was to see continued growth into the second half, and this provides us certainly confidence on that. If you then go specifically, I think your question was on the Aclara one. we're seeing improvement in the project flow there, particularly in the [ Munich ] cost space. If you recall, this is really an area we refocused on last year to really pivot the investment more to that to take some of the investments -- prior investment that we're making out to rightsize the business a little bit. And we're starting to see that pay off right now. So small and medium projects, some international projects that we're seeing that, that set us up for growth in the second half even in the Aclara business right now. So yes, it's a little bit what we expected this year, Tommy, but it's -- we're certainly happy that it's unfolding that way.

And our next question comes from the line of Christopher Glynn from Oppenheimer.

On the accelerated data center growth, you talked about the impact of the markets, capacity adds, new products as well as content. I just want to drill into the content component there. Is that a change in the allocations you're getting for certain product categories or really an expansion of the scope of your design wins?

Yes. I would call it more of the same. And so as we continue to add capacity on core product lines that are going into the data center. What's really important in a lot of this, we call it our short-cycle data center support business is if you've got the inventory available right time, right place. They're pulling it pretty quickly. And we've been very aggressive in adding capacity and making sure we're investing in the inventory on the shelf. So that's really supporting our vertical market strategy, which is putting us in the position to slice that business, but that's a big piece [Audio gap]