Hubbell Incorporated (HUBB) Earnings Call Transcript & Summary

Thank you. Welcome to the 14th Annual Laguna Conference. For important disclosures, please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. And if you have any questions, please reach out to your Morgan Stanley representative. Pleased to have Hubbell here today with President and CEO, Gerben Bakker; and Vice President of IR, Dan Innamorato. I'm Toby Okwara. I'm part of our Morgan Stanley multi-industry research team.

Thank you guys for being here. And I guess starting off, just looking at the longer-term strategy, what's Hubbell's competitive advantage? Why do you win in your markets?

Yes. I would say, well, first of all, thank you for your interest here today with Hubbell. I would say, in short, it's the specification that we have on our product. I mean we generally our spec pro that's whether we're in the utility side or on the electrical side, a product that's critical to the function that they serve, and generally a relatively small percent of the cost. So what we do matters and certainly, the specification that we hold. The other competitive advantage, I would say, is the breadth and depth of our portfolio is a differentiator for us. And if you think about in today's environment, partners generally want to do business with lesser, more strategic relationships. And certainly, we have very strong relationship. We've built those over many years of how we serve them. And so it's our position in the markets, the breadth of our portfolio, prevalence of our scale around the customers that we serve is what helps us in our position.

And I guess kind of to that point, is there a difference in your competitive singer competitive strategy in electrical versus utility?

Yes. I would say, there's a lot of similarities there in that value proposition that I stated that being critical to the function and think about some of the products that we serve in utility. It's -- connector is relatively small. The average price of a component in our portfolio is $25. So it's quite small, but the function is very, very critical. So if 1 of those connectors is not available, you're not putting up your line and if 1 of those connectors feels your line comes down. So it's really hugely critical. And that applies on the electrical side as well, if you think about our burn and grounding system, if you're not grounding a building, the data center probably will not function really well or is not well protected. So again, a small cost piece in the overall scope, but very critical. And I think on both sides of the portfolio, the specification is what really matters and holds strongly so. So I'd say there's a lot of similarities for [indiscernible] on both sides of the portfolio.

Now I guess looking at utility in particular, you've had a lot of themes that have driven more competence in up cycle there, whether it be reshoring, electrification and now data center just bringing more demand to the grid. What gives you confidence in the durability of an up cycle and opportunity for that market to accelerate?

Yes. It's some of the underlying demand drivers and maybe separating the pieces and data centers. It's a conversation -- topic of every conversation that we're having. And certainly, we have an important presence in the data center with a balance of systems components on the electrical side with our power distribution skids that we serve. But I'd say equally on the utility side with the power that's needed to demand, that's needed to power all these data centers a tremendous portfolio on that side as well. So what I'd say data centers is an important element of our portfolio. It's not the only thing that drives our business. If you look at the utility, there's an element of data centers there with the power load. But if you think about the age and the state of our grid, when I talk about this, I don't talk in years, but I talk in decades of the investment need that needs to happen here. And it's -- we have very prominent and very strong position in this both in distribution, transmission and substation. And I think the drivers beyond load growth there is just a hard and modernized grid infrastructure that's required, and again, I love our position in that.

And just maybe on the confidence in the sustainability. I think the biggest thing that we see is it's starting to get reflected in utility capital budgets, and it's been a healthy CapEx cycle over certainly the last several years, but we've seen that, again, picking up as certainly we exited last year. We've seen utility capital budgets start to reflect some of these investments as we think about longer duration projects in areas like substation and transmission, we see our utility customers planning out a little bit further than typical, and it's because they have the visibility into load growth coming into their service territories, hardening projects that they need to do. And so I think those conversations with customers have extended, and we've also seen it reflected in their budgeting process.

I guess, kind of following on that point, you mentioned getting longer visibility from your customers. How would you compare conversations today where they were at the same time a year ago?

Yes, I'd say definitely more conversations around the planning of what they're trying to accomplish. And if you think about the utility customers, you have a tremendous amount of demand right now to put load in. It's probably more demand than they have the capacity to do today. And so they rely on their whole supply chain to be able to do this as well. So not only are they limited and having to worry about their own capacities, and that's often time labor, but can everybody supply. So utilities have a lot of interest to talk with their partners, especially strategic partners like Hubble that supply them with a lot of the materials that they need to do this with about the visibility that they can give us so that we can make the needed investments in our business to service them. So I'd say the visibility is further out for us. The products that we serve, though are still relatively short lead time. Those are extending in some of the product lines were more constrained and we're investing in that to bring those lead times back down and that capacity up. But for us, what important part is to get the visibility to what they're trying to accomplish so that we can prepare our business and our capacities to serve that. But we tend to be late in the cycle. Generally, our products are measured in lead times of weeks to a couple of months. So I don't need to get the order until they're actually going to -- they're going to install that product. And that's typically what they do. We're a trusted partner in that. And when we say we can do something, we generally can so they can rely on us to not need to do that early, but the visibility to that demand -- those conversations are definitely happening more frequently and earlier right now.

You mentioned some of the limiting factors that potentially can temper the pace at which they can build out these projects. What are the main factors you see? And how can your solution -- how can Hubbell solutions help solve those?

Yes. Yes. I think one, and maybe we can help less with that is permitting that they need in PUC approvals. That's sort of part of the equation. And it's a tension point. It's just a reality of it. I would say regulators are supportive of the need to do this. There's a clear need, right, of load necessity and even a clearer understanding of the age and the state of our grid and that needs to be invested. And, I would say, even before data centers was a big thing. We've been in this business for a long time. We saw the investments ramp up just to harden our grid. It's the heart of our economy is the power grid. So the need to invest and support to do that is there. But certainly, that can affect the timing a little bit of getting that permitting and those right of ways that they require. I'd say the second part that utilities are dealing with is labor constraints. It's can they put it all up. Now I think they're doing a lot of things to help with that. I think you see utilities actually relying on third-party EPCs, for example, to help them with the build-out, and companies like Hubbell can help. So to the extent that we can make parts here to install, it helps utility. And a good example of that is in our transmission business where -- and because we have the breadth of of components that we can supply. If you think about what they do when they put up a transmission grid is they put every so many miles of tower, and then they put all the hardware on it. And so what we do is we actually bundle all that hardware together for each tower. So rather than them getting a whole bunch of insulators and connectors and hardware, and they have to sort it all out in their yards. We actually bundle it and creates some to partially assembled and they can put that right up when they build. It's a good example. The other 1 is in our substation control where we're actually building this control house in our factory and we ship in. So to the extent that we can take labor out the utility hands and put it in the factory, it's helpful. And we have a broad portfolio to be able to bring some of those solutions to them.

And then kind of following on the point I mentioned earlier about the utility budget. I think when I'm looking at transmission versus substation distribution, they were historically seen as kind of competing with each other for spend. Are we seeing that dynamic shift as you get a return to load growth and potentially getting rate cases start to rise?

Yes. Yes. We view them truthfully as not competing so much with each other. And if you look at the utility budget, you see the spend going up in both of those areas, and they do separate that. So utilities have, for example, hardening programs that they put in, and they get those approved. I think the utilities have gotten looked at ways to get those to regulatory approval in the past, it may be more MRO-type work now that bundle it as a hardening program. They can actually get returns on and get into the PUC. We've seen that play out over the last years. So we have visibility in both. It's not always perfect because you can have transmission products that serve both those needs. But we see the investment going on, both, of course, it's higher in those areas that are supporting low growth right now. We see those investment levels higher. We see that in our business right now. But the other important part, I think, to understand with our portfolio, we broadly serve distribution, transmission and substation equally. Now distribution is larger just because there's more miles, there's more spend going on there. But if you look at it, the content that undergrad that we supply, it's very evenly spread. So if there is a decision to spend the additional dollar into transmission versus distribution or vice versa, we're kind of agnostic to that because as long as we have visibility to it as well as we know that they're directing more 1 we can serve that demand equally well. So we think our position is unique in that perspective that it can if they make close decision. But we see them actually investing and increasing those investments in both areas.

And kind of speaking on those investments and potential changes in the market, earlier this year, you guys mentioned some of the investments in high-voltage surmission. Are you starting to see any pickup there? And I guess, how do you kind of frame that longer-term opportunity?

Yes. Yes. And high voltage, it's a moving target, it seems like -- I'll start with this is in the core of what we do. This is -- if you think about our transmission and substation, we go today, anywhere from 35 KB up to 500-plus KB already. That's evolved. But a number of years ago, 500 was new and we developed those products, and we served us today. We actually have job going on right now. That's not voltage. And that voltage class the more recent voltaics the 765. It's actually a technology that's probably 20 years old, really never got adopted. That it's a very efficient way to move bulk power. So it's what we do. I would say we're developing those products. We need to test those products. We need to specify those products. But that's what we're doing with our customers right now. We've actually gotten 1 awards already that will start shipping next year, and the need for that is a very efficient way if you have more load growth. And if you -- especially if you think about some of the possibilities of load needed with the data center. It's a really efficient way to do it. So we'll play in that. We'll play an important role in serving that. And I think that will take time because those have to go to regulatory processes. But we believe that -- I think what we stated is that it's about a point of upside if you think about over the next decade, what plans are to invest in that, that we would benefit. But this is right down the fairway for what we do for living.

And kind of staying on that technology aspect, looking at the meters and AMI business, are you starting to see more progress with advanced metering and better adoption with customers? And how can we see that shifting from the headwind we've seen over the past few years to potentially growth driver?

Yes. Yes. So on that business, it's from just a volume set, maybe I'll start there and then I'll talk a little bit about the technology of that business. From the COVID days, it's been quite challenged and that we first couldn't supply and then the chip short it's broke and then we caught up and it was really high. And then as we got through that, then it came down again. One of the things that -- and that business has improved our expectation for that business is higher than what it is today, particularly in the margin front of that business. We've taken a box out of that. And we were investing a lot in that business, particularly in the AMI side to penetrate with the is tradition this business on the AMI side have been very strong with the smaller utilities, the co-ops, municipal utilities and our investment ramp to break into that IOU base proof just more difficult even for a company like Hubbell that has very strong relationships and a good reputation just very dire kind of reassess that strategy, and we're now focused more on where we're very strong traditionally with the power market. But this is an area where I believe where there's a lot of discussion of this spend being taken from 1 area to the other. And our view is that this is a little bit the case of if you're a utility company right now. Are you going to invest in your next-generation AMI system or you can upgrade that now? Or are you going to slow that a little bit while you're investing in these other areas, I think the answer to that is yes. Now the thing this is electronics. This isn't nuts and bolts that we normally do so. So we are seeing more of this equipment starting to feel getting to the end of its life. We're actually starting to see more MRO right now or they're just replacing meters while they delayed this a little bit. So I think the cycle welcome. Our view of it is much more modest, I think, than the rest of the portfolio. So as we look forward to specifically the Aclara business. And as we stated before, we've seen several quarters of decline, we believe that when we get to the end of the year, we'll start seeing that turn to modest growth again, but it's just part of that portfolio of great automation. And the other part of that, which is controls and Protection devices, thank you, is actually growing really nicely and more in line with the other side of portfolio. As far as technology, it's certainly an area that we'll continue to add to, if you think about our meters and what the meter can do not just as a cash register, but as a sensing device. And but I would say that's just what you have to do to stay relevant in this market. So those are clearly investments we are making to make sure that hardware is providers capable of providing more insights into the behind the meter to the grid, and we're making those investments.

I guess now shifting gears to the electrical side of the business. Data Center has been like a stronger growth driver, 50% in the first half of this year. When we're looking outside of data center, light industrial, real there's been another strong vertical. What's been driving the strength there in the other areas that have been outperforming? And how do you think about the trajectory for the business that have been somewhat softer?