Q3 2022 Hubbell Inc Earnings Call

October 25, 2022

The conference will begin shortly to raise your hand during Q&A you can dial star one.

Yeah.

Good day, well, thank you for standing by.

Welcome to the Q3 2022 Hubbell incorporated earnings Conference call.

At this time.

All participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question. During the session you will need to press star one one on your telephone please.

Please be advised that today's conference call is being recorded.

I would now like to turn the conference over to Dan and Tomorrow. Please go ahead.

Thanks, Lisa good morning, everyone and thank you for joining US earlier. This morning, we issued a press release announcing our third quarter 2022 results.

Press release and slides are posted to the investors section of our website at <unk> Dot Com James.

I'm joined today by our chairman President and CEO carbon Parker, and our executive Vice President and CFO Bill Sperry. Please note. Our comments. This morning may include statements related to the expected future results of our company and are forward looking statements as defined by the private Securities Litigation Reform Act of 1095. Therefore, please note the discussion of forward looking statements in our press release.

And considered incorporated by reference in this call. Additionally comments May also include non-GAAP financial measures. Those measures are reconciled to the comparable GAAP measures and are included in the press release and slides.

I will turn the call over to Kevin.

Thanks, Dan and good morning, everyone and thank you for joining us to discuss <unk> third quarter results.

Consistent with the first half of 2022, our third quarter result was solid.

Markets are healthy our.

Our positions in those markets are strong and we continue to execute effectively from an operational standpoint.

Our third quarter results exceeded our initial expectations and we are raising our full year outlook to reflect a continuation of those positive trends throughout 2022.

We are well positioned in attractive markets that are supported by long term trends in grid modernization and electrification, which continued to drive strong demand for our products.

Utility customers are proactively, replacing aging infrastructure, while investing significantly to upgrade harden and modernize the grid driving another quarter of strong orders growth and backlog build.

The work that we have done to streamline our portfolio and the investments we are making a strategic growth verticals are positioning hubbell for sustainable GDP plus growth as our economy becomes more electrified.

From an operational standpoint margin expansion in the quarter was driven by volume growth and favorable price cost.

We have been active in pricing to address significant material and non material inflation over the last 18 to 24 months.

While general inflation persists throughout our supply chain. We've now started to benefit from easing in the portion of our cost base that is tied directly to certain raw materials.

While the operating environment remains dynamic we are proud of the way our employees have continued to effectively navigate through supply chain uncertainty to deliver on our commitments to customers.

As we look to drive continued success on this front I am also excited to welcome Akshay Mittal to the senior leadership team as Hubble's New operations leader.

Akshay comes to huddle with an extensive operation and supply chain background across various industrial manufacturing industries, and we look forward to build on the strong foundation, we have established while accelerating our efforts and footprint optimization factor automation and supply chain resilience.

Turning to page four I would like to highlight a few of the key financial outputs of the teams. We just talked about before letting bill walked you through the results in more detail.

In the third quarter, we achieved organic growth of 20% adjust.

Adjusted operating profit growth of 37%.

Adjusted operating margin expansion of 190 basis points adjusted earnings per share growth of 45% and free cash flow of $194 million.

These results were driven by strong price realization and volumes.

Bind with easing material cost and effective operational execution.

Overall, a very strong quarter for hubbell and attractive results for our shareholders.

I also want to turn to page five and take a few minutes on two recent achievements, which really highlight the strength of our franchise and the electric T&D market and the work we are doing to support critical infrastructure needs of our customers.

The first is our storm restoration efforts to hurricane Ian and Fiona with our $24 seven Hubbell emergency action teams.

Storms like these are unfortunate due to the impact on lives and community and they also put a lot of strain on utility customers to restore service and repair damage lines. We are proud to support our customers in these efforts through a dedicated team that prioritizes these requirements and gets our customers needed expert.

<unk> materials to enable successful and timely restoration of service.

This is a unique differentiator for hubbell as we can fully utilize our industry leading sales force.

And breadth of the product offering and operational capabilities to effectively serve our customers when they needed most.

Our people truly distinguish themselves during these events, which helps us forge long lasting customer partnerships based on quality reliability and service.

And on the topic of long term customer relationship. We are also pleased to have been recently awarded the annual supplier of choice Award by one of the largest investor owned utilities in the U S.

This award was given to a hub for our strong service not only over the last decade, but through the more recent challenging supply chain environment as our industry, leading scale and the investment we've been able to make in our business have enabled us to effectively deliver on our commitments.

While strong electric T&D market growth continues to be a key driver of our success. We also feel confident that we will continue to outperform these markets as we reinvest to first of all bolster our position.

With that let me now turn it over to Bill.

Good morning, everybody. Thanks for taking the time to be with us.

I also want to welcome Akshay to the team.

I'm personally excited to partner with him.

We can add a lot of value by ramping up our operational intensity. So looking forward to that my comments are going to start on page six.

And really summarize the very strong financial quarter that Hubble team turned in in the third quarter of 2022. So on the upper left we will start with sales you see an increase of 21% to just over $1 billion three in sales.

That's comprised of 21% increase is comprised of 20% organic 2% from M&A and a point of drag from FX.

The 20% organic is comprised of about 13% price and approximately 7% volumes. So.

Actually quite impressive contributions from both volume and price.

Which will filter through all of our comments around our performance and those are obviously comparisons to prior year, we find it instructive to to track sales on a sequential basis as well.

And for sales to be up mid single digits.

From the prior quarter.

Where there is kind of an equal contributions to that mid single digit growth sequentially from both price and volume.

That's a pretty.

Pretty good sign that we may be seeing some modest easing in the supply chain in other words I would say we are trying to operate at capacity in the second quarter function of our high backlog.

And the need to serve our customers, who who wanted our material and <unk>.

For us to be able to grow.

The volume part of that from second quarter to third quarter sequentially. I think is a little bit of signs of easing across the.

The availability of staffing available.

Availability of materials and.

And transportation is.

Well.

So as we think about the demand underlying net sales growth I would characterize it as broad based growth.

Both electrical and utility experiencing impressive growth and inside of the segments.

Quite a broad based contribution to growth.

Inside of each segment.

Orders continue to outpace sales and we are building backlog through the third quarter that skews towards the utility segment.

As our electrical segment has a much more balanced book and bill feel to it now starting to.

Get back in line in balance there, which I think is.

Also good news is we track.

No.

On the upper right Youll see operating profit.

A growth of 37% and operating profit dollars to $224 million.

And nearly two points of margin expansion in the quarter.

That margin expansion is really driven by price cost favorability.

And that favorability as needed to overcome the other inflation.

As well as some of the inefficiencies and the supply chain disruptions are causing inside of our factories.

The results here indicate incremental drop through in the mid twenties and that maybe gives you a little bit of a feel for.

That's quite normal incrementals. So if it was just price cost.

Favorability I think we'd see that.

Other than mid Twenty's incremental so you can see that we really needed that price.

US overcome the non material inflation as well as the other inefficiencies.

And then in the bottom left you see the EPS quadrant, 45% increase to $3 <unk> a share.

And that.

Is that roughly 95 <unk> increase in earnings year over year.

Is largely driven by the improvement in operating profit, but there also.

Some below the line contributions to tax is quite comparable.

We did some share repurchases with the proceeds from the sale of C&I lighting.

And there was some slight non op contribution as well.

Free cash flow for the quarter of $194 million.

Extremely favorable comparison to last year.

I think maybe more instructive to look at this at the year to date performance on cash flow, where we feel.

Very good.

About where we stand relative to delivering on our full year promise and we'll update.

Update you on our guidance slide as to how that's going but.

We're making very purposeful and intentional investments.

And working capital given the growth in.

In demand so both receivables and inventory are requiring investment for us to satisfy our customers.

We also.

Our team to invest in Capex and the flavor of that Capex difference by segment will talk about in each segment, but it's skewed and electrical capex investing towards productivity on the utility side of the Capex is skewed towards expansion in capacity.

So very strong performance in <unk>.

Now.

Now unpack that by segment.

In page seven let's start with the utility solutions segment.

And just a really strong quarter turned in by our utility franchise performing extremely well.

In these market conditions.

You can see sales increasing 29%.

And operating profit dollars up 53%.

With with nearly three points of margin expansion. So so very very strong performance from the segment.

Let's look at sales a little more closely.

You see a 29% increase.

$775 million.

That's really.

Mostly organic.

Small 1% contribution from acquisitions.

Ordinarily would like to tell you a lot about the acquisitions Ripley tools as is new to the portfolio is performing extremely well, but you can see kind of pales in comparison to what's going on organically.

And.

That organic performance I would.

I would say is comprised of volumes in the low double digit range and price in the mid teens range to get to that 28% organic so.

Very very healthy market conditions there.

As well as a testament to our very very strong positioning in those in this attractive market.

<unk>.

The growth is really skewed towards the T&D components, rather than towards the comms and controls.

We had 38% growth from the T&D components Kerbin highlighted the trends there really have.

Aging infrastructure that requires upgrades and hardening.

We have the move towards renewables.

And that those new sources of generation need to.

Can be transmitted it needs to be distributed and it needs to be integrated into the system.

And certainly modernizing with smarter and more controls.

All of which being supported by some infrastructure legislation that I think is giving our customers the confidence that there is funding for their demand.

In the communications and control side, you see up a more modest 3%.

And that's really being skewed towards the automation controls area, which is up double digits as the.

The comps.

Ponant is still being constrained by the lack of chip availability. So while we see healthy demand, we're having a lot of trouble satisfying that demand.

On the operations side.

50% improvement in operating profit dollars very impressive performance to $144 million and the three points of margin expansion.

Price and material.

Being a strong contributor.

But let's not lose sight of the fact that we've got.

Double digit volume and Thats provides obviously good good operating leverage lift in Incrementals.

And at the same time, there are headwinds coming from non material inflation and just supply chain inefficiencies, but net net.

Really strong contribution from our utility segment.

On page eight we unpack the electrical solutions segment also strong performance, albeit not at the same high levels.

But youll see see an impressive 12% growth.

Two $542 million in sales.

That's comprised of low single digits in unit volume and high single digit in price. So I think youll remember that our electrical team started pulling price will sooner than our utility team and so see the utility team experiencing.

Experiencing higher price now as it came on a little bit later.

The demand here is broad based.

Across.

Our various product lines and across various end markets.

Exception is the resin market, where we're experiencing double digit contraction.

And thinking about.

Order of magnitude about 15% of the segment being down double digits gives us a couple of points of drag in this segment.

From that resi market, but.

Some of the verticals, namely data centers renewables in comms.

Performing very well.

And the industrial markets also doing very well both on the light and the heavy side.

So again broad based support for that 12% growth ex <unk>.

And on the right side you see.

Quite a nice improvement in operating profit of 15% to $80 million.

The you.

Do you see the margin expansion of 30 bps.

Driven by the price material favorability and the volume growth.

With the supply chain.

Creating headwinds along with non material inflation.

I think it's worth a little bit commenting on orders here.

We've had orders in line with sales.

So.

Balanced between book and Bill.

We get a lot of questions from investors.

We have seen slowing here in the order pattern and we have not.

We.

We're obviously very aware.

What's happening to the consumer out there and so thats, causing us to watch our order pattern very carefully.

It's causing us to invest in productivity and it's causing us to contingency plan in case we.

We do see a slowdown as we think about watching carefully.

<unk> become it will become a little challenging as we get closer to year end customer behavior in a year like this can get distorted.

They each have incentive plans with their employers.

Common for those incentive plans for the executives.

To have growth component as well as an inventory component.

And in a year when.

People have reached their growth targets they can switch.

Towards managing inventories down so it's not unusual in a year like this for us to see.

Kind of distorted.

Year end order patterns. So as we watch orders, we have to be careful not to overreact to one week or one month and be thoughtful and understand exactly what we're seeing.

But again for now not seeing any slowdown.

We also said we're investing in productivity.

And you can see that.

On the right side in the last bullet.

We've had extra investing in productivity and restructuring in this segment.

That's caused about an 80 point drag in margin.

So there had we not been doing that invest and you would've seen a better margin expansion, but I think investments in both automation and footprint consolidation that we're doing they're proving to be very important for a successful future in the segment.

So on page nine I wanted to transition to.

How the two segments performance, which you just discussed is influenced our view of the outlook for the balance of 'twenty two.

And.

Based on our better than expected performance in Q3, which we had talked about that.

A couple of weeks ago or last month in Laguna.

We outperformed our expectations and are thus raising our guidance.

The effect of that has to take EPS from a previous range of $940 to 980, and we're taking that up to $10 25.

To $10 45.

<unk>.

That's really been.

Our consistent outperformance throughout the year.

Qs one two and three.

All showing both volume and maybe even especially price being able to do better than expected. If you look at the left hand column.

On page nine.

We started the year with expectations of 8% to 10% sales.

Sales growth.

Which was centered at four points of volume and five points of price.

And we've done considerably better than that on price.

And better on volume as well.

And thats kind of been consistently shown throughout the quarters.

The year.

And as you look at I like this visual of our performance because you can see that.

But the volume is dropping through and adding nicely to to last year's level of our EPS.

But you can really see how important.

Our pricing strategy has been.

In order to get.

Price to overcome.

Costs.

Any of the inefficiencies.

Good to see the M&A program when we had.

A couple of additions during the.

The second quarter.

The form of <unk>.

<unk>, which is a data center business performing really really nicely since we've owned it ripley tools on the utility side, extending our brands. They're also performing really well so good to see them contribute to earnings this year and since they are mid year acquisitions they'll contribute.

Incrementally next year as well.

I think important to note we're not harvesting all of the earnings we could we continue to believe it's really important to invest.

To make sure our future success.

As bright as it can be in the three principal areas there include productivity.

That's as I said automation and plant consolidation.

If capacity additions in the utility segment and there's innovation spending.

Across both segments that we're trying to accelerate our new product development growth and allow us to outperform our end markets.

And do better in the future than the non op items are offsetting here, where some share repurchases and other income or offset.

By higher taxes slightly higher taxes and.

I would add at the bottom our free cash flow, we had been centered at 95% conversion rates.

And as the growth has exceeded our expectations.

We believe we need to invest more heavily in inventory and receivables to support our customers.

We also feel the need to invest in Capex.

And so we're bringing that free cash flow down around 90% conversion, but with the.

The increase in earnings.

We're going to get to the dollars we are expecting.

In.

Just kind of at a lower conversion rate and I think as we get into next year.

We'd probably be able to manage that working capital accounts and the balance sheet.

More efficiently and continue to improve on our customer service. So we've got some nice trends that we think we're finishing the year with.

And now I'll hand, it to <unk> to talk about.

How that.

Informs our outlook for next year.

Okay, great. Thanks, Bill and before we turn it over to Q&A.

We wanted to provide some initial thoughts on our setup into 2023, and how <unk> is planning to deliver continued attractive results for our shareholders.

While the macro environment remains uncertain headed into next year, we are confident that our markets are well positioned to continue outperforming GDP.

And utility solutions, we believe there is still plenty of runway and above average visibility to continued growth driven by long term grid modernization trends.

And electrical solutions, we expect the residential markets to remain challenging.

But we believe that the 20% of segment revenues exposed to our strategic growth verticals and PND renewables data centers and communications should prove resilient through cyclical dynamics.

Operationally, while commodity prices have east, we're planning for general inflationary and supply chain pressures to persist.

We will continue to manage price and actively drive productivity to come out net neutral or better relative to our overall cost base.

We also plan to continue reinvesting in our business to deliver long term growth and productivity.

And utility solutions, we plan to invest in capacity expansion to service a visible long term growth profile.

As we have highlighted in the past the inflection in T&D markets from a low single digit growth to mid single digit growth over the past several years has caused us to bump against capacity constraints in certain key product lines.

Looking ahead, we see a unique opportunity to further strengthen our position and better support visible customer investment plans by executing on high return expansion and innovation projects.

And electrical solutions, we plan to maintain elevated investment levels to support footprint optimization projects as we continue our multiyear journey as a unified operating settlement, which structurally higher long term margin profile.

The net of these early considerations for next year and acknowledging that there remains a lot of uncertainty that we have.

We're expecting to deliver solid performance in 2023 across a range of macroeconomic scenarios.

We plan to provide a more detailed 'twenty three outlook on our typical cadence along the release and discussion of our fourth quarter earnings results.

With that let me now turn it over to Q&A.

Thank you.

That's a question you will need to press star one on your telephone.

So I'll ask that you limit yourself to one question and one follow up.

Standby, while we compile the Q&A roster.

Okay coming to the stage now we have Jeffrey.

Bradley.

With vertical research partners. Please go ahead your line is open.

Hi, This is Jeff Sprague from vertical.

The introduction broke up a little bit.

Good morning, Jeff Hey, good morning.

Hey, maybe just start big picture group, but actually just on kind of the.

The operational plan and people.

You've had had some movement at the senior levels.

Susan and Peter while moving and that Akshay.

Is there a fundamental change in.

Youre kind of operational priorities or some kind of change in what you are.

Kind of expecting to deliver relative to maybe some of those longer term plans that you've put out before.

Yes, I'd say the short answer to that is absolutely not.

Certainly.

We're not going to comment on specific personnel matters, but as you look at the environment.

Generally.

It is an environment in our organization many organization of higher turnover.

And I would say that that.

We've lost people. We've also attracted very talented people I think.

We're actually in a very good position as you look at the strength of our business, where we play the markets that we're in and the potential of this business as we look to bring on people and Akshay is a good example of that they're very attractive to join a company like Hubble. So I'd say it's.

Part of.

What us and many others are just dealing with but.

We are continuing to be able to attract good talent to help us continue to develop.

And within Hubbell I'd say to the second question of is there some.

How an indication.

On our strategy. The answer is no and then Akshay case, it's felt like refilling back filling that position. There is a lot of work you've heard bill talk about.

Particularly in the in the electrical segment, what we need to do still on our footprint.

But equally in the utility.

Business as we look to expand capacity there is a lot of operational execution and those things as well.

If you look specifically at the strategy on our two segments.

It's something.

Something that we started to put in place if you recall when I was CFO .

It was a model after the utility business, where we proved that.

To be very successful in and bring in all of those brands.

There are common structure, so I would say.

A couple of years into that I feel really good where we stand, but there's still a lot of work to be done.

And even as I've spent a little more time with those gms here as I.

Kind of overlook at that business why we look for a new leader there.

Im really impressed with the talent there and so.

Very bullish on being able to execute that strategy and unifying that segment and that will lead to.

So a higher margin profile for that business going forward and I think growth that we're also seeing that there'll be able to get out of that by operating more as a unified.

Segment so.

Reinforcements and my answer is no.

Okay I appreciate that.

Maybe just then on.

Utility is sort of maybe a two part question really.

Was there was there a measurable.

<unk> impact.

In the quarter on the top line.

And maybe more significantly just on comms and controls and a clearer.

What is the visibility on potentially on working this.

<unk>.

Getting around some of the shortages and driving some growth there obviously.

It sounds like you expect T&D components to still be strong into next year, but your comp and top right. It would be nice to see a clearer finally gets a little bit of a tailwind there and begin to kind of fill in the blanks a little bit. Thank you.

Yes, great I'll, let me answer the first one and maybe had to build the second question.

Clearly there was an impact of storm I highlighted that.

And actually highlighting our team that debt.

Really supports those those efforts if you look at the order impact it was about 15 million one five.

As a result of those two storm that straddles a little bit if you recall the last one of those hit right at the end of the quarter, so that straddles a little bit.

Two quarter. So certainly there is always a impact to our business. When we serve is that as I've said, though in the past if you look at our overall business.

It's less of a driver of growth than it is for us.

An opportunity to showcase to our customers why they do business with us why we matter to them because because thats really where we shine is.

How we've taken even during a time when our capacity is constrained.

Really go above and beyond to service those customers.

Needed materials to rebuild the grid, so a little bit of an impact to sales, but I would say more importantly.

Opportunity for us to showcase our capabilities Bill maybe the second half.

Jeffs question was around Clara visibility.

And.

I would say Jeff. The first nine months were were challenging for us to see the value proposition of the solution of our smart meter have great resonance with the customer base have so much demand there.

Yet for have the supply chain struggle.

To support that has been challenging so youre talking your questions now around visibility going forward and there's kind of two dimensions to it one is.

Chip supply loosen up here as we've seen some demand for consumer electronics start to slack and we think that will evidence itself and secondly, we have been spending a lot of time.

Turning to validate alternative sources for the technology in.

We're making progress on that and so between those two avenues.

We're hoping by the time, we get together with you in.

In January and talk more quantitatively about 2023.

Be able to give you.

A more quantitative assessment of that visibility but.

Proves it appears to us to be improving.

And I agree with your.

Last payment that will be quite welcome to have a Clara <unk>.

Our growth in margin contributor.

Thank you guys.

Thank you.

Question.

The next question is coming up.

And our next question will come from Steve.

Morgan JP Morgan. Please go ahead.

Yes.

Hi, good morning.

Hey, Steve Good morning.

Congrats on a on a real bang up here great.

Great execution in a tough environment for sure.

Thank you.

Youre welcome.

On on the <unk>.

I guess on the 23 or fourth quarter and then in 'twenty three.

On the.

Kind of basket of costs you guys have in that you measure inflation off of maybe just remind us of whats.

That's what percentages, a little more sticky and what percentages like truly.

<unk> and moving around with the metals and then on the pricing side.

Just to remind us of any kind of.

Anything that.

An index on the metals are.

Anything like that that just kind of mechanical that moves around with with raws prices.

Yes, so, let's let's maybe start with the pricing half of it Steve I think that.

There is.

A reasonably small percentage that is specifically indexed and it's been much more.

Kind of working with our customers.

To get the price increases through.

And so I think about your question on stickiness.

Theres probably a.

Couple of points of price.

Can wrap around next year and be part of the.

Incremental sales.

That's supported by the incremental price experienced in the third quarter. That's maybe an interesting gauge of given some of that stickiness to the price.

Certainly to the extent, we come up on year end and is it typical time, we talk to customers about program.

Program pricing and blankets and all of that so again at the start of the year when we get together to give you our formal 'twenty three guidance I think we can we can be finer on what we expect from price, but some of the actions and indexing amount that we have in place I think we see tore.

<unk> a couple of points.

And on the basket of costs.

<unk>.

If we.

Simplistically describe.

Uh huh.

Debt.

That half of our costs are materials and that.

The inside of materials, there's a proportion that that's raw and we can all see those prices every day.

And then there is a proportion that has some bit of value add at the far end it would be purchased for resale item at the skinny year end it would be some kind of component that's been assembled or has some kind of value add to it.

And I think on on the raws to your point.

Super variable.

It comes right through we can all track that I think on the value add part of materials plus the non material part of our costs.

Sitting there at <unk>.

CPI of <unk>, 8% inflation gives gives you an idea of the math that we're trying to move around and why.

We're putting so much emphasis on.

On pricing right because typically if I talked to you I would have set up a paradigm that we're trying to have price offset material and productivity offset non material inflation.

In this environment when that non material inflation is in the 8%.

10% range.

Range. It's it's just I think it is asking too much to find that much productivity. So we've put that incremental burden back on the pricing side.

Sure.

So as we kind of contemplate our plans for 2023, we're very focused I think the exact way you are thinking about it.

Plan and our cost to have inflation in a very significant portion even though the raws are coming down and so we are trying really hard to retain the discipline I think we found in towards the end of 'twenty, one and throughout 'twenty two on pricing I think you are putting your finger.

<unk>.

On an incredibly important part of our operating model is to make sure. We can price effectively for all these other costs that seem to be going in different directions, with the raws going down and all the other stuff going up.

So that so that.

So that bond slide on slide nine I mean is that going to be like similar to this year or it sounds like it's going to be less.

Yes.

It was this year.

I would like to open up.

Yes, I would expect it to be green, but obviously smaller maybe.

And maybe a couple of another.

Maybe addition to what Bill said.

We're managing right now in an environment, where the magnitude of these changes.

There is much larger than what they would've tradition, but both and how the cost is moving the prices.

Our move and certainly as we look forward, that's a little bit the challenge I would say our portfolio is generally well positioned to hold onto price driver a low percentage of the total cost of ownership high percent high cost of failure and.

That for us right.

Good for us, but on the other hand, the magnitude by which prices at move gives us some pause to say that we'll be able to hold on to that no matter. What so it's that dynamic that we're trying to manage I would say, though.

<unk>.

There is some slippage of price it would be associated with Comed.

Come down in cost and we would still be able to manage to what kind of bill said it is net neutral or better.

As a whole, but I would say managing those pieces is a little tougher than it would have been in a low inflation environment for us.

Sorry, one last quick one what's the fourth quarter embedded margin and is that normal seasonality. That's my last one for the total company. Thanks.

Yes.

The the top line.

Steve We're envisioning.

In the normal seasonality range and.

That's a function of having fewer shipping days.

That tends to be.

In.

The mid single digits.

Fewer.

Days and therefore, the same effect on sales and so.

I think that the effect of that will be normal seasonal impact on margins.

And so it does.

It is returning.

For us a little more to normal seasonality.

Thanks, guys really appreciate it.

Yes. Thank you.

The next question.

Our next question.

Alright.

Tommy Moll.

Please go ahead with your question.

Good morning, and thanks for taking my questions.

Tommy.

Urban and the 2023 early preview is helpful. I appreciate it and now we get to ask more questions on it of course.

Great.

Specifically on the utility solutions side, you did a good job.

Framing some of the secular trends.

<unk> trends Youre seeing.

We haven't yet talked about the recession sensitivity there.

Can you help frame that for us though.

Is that a business or a segment rather that you.

You can still grow topline, even if GDP is down in the U S. Just given some of the positive tailwind that you've called out.

Yes, I think youre looking at that in the correct way, Tommy and maybe I'll take a step back and first start to say what happened in the last time, we saw slow because thats actual data that we have in the business and what we tended to see in the utility business compared to the electrical that it lags.

The electrical bought by a quarter or two and then decline was shallower.

And it came out quicker so I would say that thats and that was driven at the time to abide by the need to invest in this area. There was infrastructure investments that were.

Coming out of there as a result of that slowdown and that really benefited our business. So I would absolutely see that the same way.

Could argue that it's actually intensifies the need to continue to invest in this great no matter what.

Macroeconomic conditions are of course.

Don't think its immune from it but when there is some of that depending on how deep and how long.

And whether it's a.

Consumer led or whether that goes into commercial and industrial eventually I would expect that to be affected.

But to a much lesser extent than I do see the possibility that you kind of explored or can you continue to grow to an environment that there is a scenario that I could see that happening.

That's very helpful. Thank you.

As a follow up I just wanted to touch again on personnel.

Specifically on the electrical segment leadership can you just give us an update on what kind of process you're running.

Potential timing for when there might be some news there.

Yes, so as we indicated in the press release I believe this is an area where were looking both internal.

And external.

These are of course.

A very important position on my leadership team.

And I am very pleased both with the internal.

External talent that we're seeing I think an element of it is what I described earlier of Av.

That we're in a tractive company and I would say, maybe we haven't always done the best job in describing what we do boat to our investors as well as in our employees and I think as we get sharper and really highlighting.

Why it is that we're matter and what it is that we do.

We find people.

Interested in coming to join US. So we are very active in this.

Process right now.

And I would expect that here in the fourth quarter, we will backfill that position.

Much appreciate it and I'll turn it back thank you.

Yes.

Thank you.

Thank you one moment.

Well get ready for the next question.

The next question is coming from Nigel Coe.

Well research. Please go ahead.

Thanks, Good morning, and Kevin I'll send my resume put my hat.

Okay.

Yeah.

That's great.

Yes, so just wanted to obviously the essential.

Down double digits I think 12%.

15%.

Can you just maybe delineate between licensing and components was that largely just like thing or do you see pressure in components as well.

Yes.

It is largely lighting, but there are some other components that we sell to the DIY market through big boxes. So there is there is some of the other stuff, but but but.

Majorities lighting.

And then if we then look at ex lighting.

How would the margins are booked in missile systems.

How are the margins on resi products you are saying.

Yes, well, yes residential margins, but if we look at the second vertical segments.

Dialogue.

Any sense on how that would look.

Okay.

Yes.

King.

Yes, I would like to highlight.

Margins, yes.

Lighting is a drag on the volume by a couple of points and certainly from a margin perspective.

It is also a significant drag.

So.

Yes, ex lighting margins would be larger and would be growing more because the.

The resi margins have suffered as the volumes come down.

Okay. That's helpful. And then just one more for me the restructuring.

The upsizing of the destruction I think 10.

I can.

Is that should we think of that as a pull forward from 'twenty three actions.

Yes, I don't know if it's necessarily a pull forward.

In our restructuring we have and I think we've talked about this job to supply chain issues.

Put some pressure on being able to both manage our supply chain and do a lot of these projects. So I'd say, it's more a program multi year program that we have.

Outline.

We see the ability to do more of some of those supply chain issues are easing I would say, they're not gone <unk>.

Trying to balance our time between solving those and continuing to invest in what will set up.

Electrical segment as well in the future. So I don't know thats necessarily in Poland from 'twenty three that it is a program that we're seeing we're able to accelerate a little bit Trs.

Go to the balance of this year.

Understood. Thanks, guys.

Thank you one moment Robert.

Last question.

Yes.

Next question is coming from Christopher Glynn.

Please go ahead with your question.

Thanks, Good morning, everyone.

Okay.

Yes.

Andy obviously lots and lots of good commentary and then a little more good commentary one thing I did want to ask about.

I think U S onshore wind in investments down quite a bit this year is that it.

Timing benefit to <unk>.

T&D.

Investment, where maybe some of the upgrades are front running revitalization and kind of wind investment it seems more like an afterthought question given all the positive commentary.

I wanted to ask about that factor.

Yeah look I do think there's some timing involved in wind.

Deployment decision, making.

Some of the policies are getting involved there and it kind of gives Chris I would say.

A little bit brighter near term visibility on solar and yet.

I do think the wins in the medium term still is quite positive.

I don't see that as having.

Any special kind of.

Predictive.

I think renewables is an area that's been driving.

Really good growth for us and for US. It's just a question of.

The wind in their is their solar in there and.

We would say for the foreseeable future. There is renewed we see renewable tailwind on a combined basis with with wind may be getting.

Maybe it's the wrong way to say a little more tailwind for wind.

In the medium term.

Okay.

Quick follow up on residential lighting I think the container costs are a big part of that and they were super high and come down quite a bit are you still.

Slowing through peak container cost and residential lighting.

No as you observe I think the costs are changing.

Coming coming back a little bit normal I think they are little bit higher than they had been.

But that will work itself.

Through our.

Through our chain Chris.

So and you're right to it.

It's a big variable to the business.

Okay. So you should see some improvement.

That basis.

Yes, lagged the flow through okay.

Benefit too.

That comes down and then I'm not sure if youre looking for a net effect because you also have volumes coming down which has a decremental effects. So you've got you've got a generally bad top line scenario and the and that kind of offset as in the Cogs that you are mentioning but.

The outlook is still a little is a little challenged.

Got you. Thank you.

Okay.

Thank you.

I would now like to turn the call back over to Jeremy.

Walker for closing remarks.

Great. Thank you everyone for your support your interest and your questions on our third quarter results and the discussion. We just had and we look forward to reconnecting with everyone again in the new year. So thanks again, and we'll see you in January .

Thanks.

Paul at this time, you may all disconnect and everyone have a great deal.

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Good day, and thank you for standing by.

Welcome to the Q3 2022 Hubbell incorporated earnings Conference call.

At this time.

All participants are in a listen only mode.

The speaker's presentation, there will be a question and answer session to ask a question. During the session you will need the Crestar one one on your telephone please.

Please be advised that today's conference call is being recorded.

I'd now like to turn the conference over to Dan and Amaro. Please go ahead.

Thanks, Lisa good morning, everyone and thank you for joining US earlier. This morning, we issued a press release announcing our third quarter 2022 results. The press release and slides are posted to the investors section of our website at <unk> Dot com.

I'm joined today by our chairman, President and CEO , Garbin Bakr, and our executive Vice President and CFO Bill Sperry. Please note. Our comments. This morning may include statements related to the expected future results of our company and are forward looking statements as defined by the private Securities Litigation Reform Act of 1095.

Please note the discussion of forward looking statements in our press release and considered incorporated by reference in this call. Additionally comments May also include non-GAAP financial measures. Those measures are reconciled to the comparable GAAP measures and are included in the press release and slides.

With that I'll turn the call over to Durbin.

Great. Thanks, Dan and good morning, everyone and thank you for joining us to discuss <unk> third quarter results.

Consistent with the first half of 2022, our third quarter result was solid on.

Markets are healthy.

Our positions in those markets are strong and we continue to execute effectively from an operational standpoint.

Our third quarter results exceeded our initial expectations and we are raising our full year outlook to reflect a continuation of those positive trends throughout 2022.

We are well positioned in attractive markets that are supported by long term trends in grid modernization and electrification, which continues to drive strong demand for our products.

The work that we've done to streamline our portfolio and the investments we are making a strategic growth verticals are positioning hubbell for sustainable GDP plus growth as our economy becomes more electrified.

From an operational standpoint margin expansion in the quarter was driven by volume growth and favorable price cost.

We have been active in pricing to address significant material and nonmaterial inflation over the last 18 to 24 months.

While general inflation persists throughout our supply chain, we've now started to benefit from easing and a portion of our cost base that is tied directly to certain raw materials.

As we look to drive continued success on this front I'm also excited to welcome Akshay Mittal to the senior leadership team as Hubble's New operations leader.

Turning to page four I would like to highlight a few of the key financial outputs of the teams. We just talked about before letting bill walked you through the results in more detail.

In the third quarter, we achieved organic growth of 20%.

Adjusted operating profit growth of 37%.

Adjusted operating margin expansion of 190 basis points.

Adjusted earnings per share growth of 45% and free cash flow of $194 million.

These results were driven by strong price realization and volumes combined with easing material cost and effective operational execution.

Overall, a very strong quarter for hubbell and attractive results for our shareholders.

The first is our storm restoration efforts to hurricane Ian and Fiona with our $24 seven Hubbell emergency action team.

Storms like these are unfortunate due to the impact on lives and community and they also put a lot of strain on utility customers to restore service and repair damage lines.

We are proud to support our customers in these efforts through a dedicated team that prioritizes these requirements and thats our customers the needed expedited materials to enable a successful and timely restoration of service.

This is a unique differentiator for hubbell as we can fully utilize our industry, leading sales force depth and breadth of the product offering and operational capabilities to effectively serve our customers when they need it most.

Our people truly distinguish themselves during these events, which helps us forge long lasting customer partnerships based on quality reliability and service.

And on the topic of long term customer relationship. We're also pleased to have been recently awarded the annual supplier of choice Award by one of the largest investor owned utilities in the U S.

This award was given to a hub for our strong service not only over the last decade, but through the more recent challenging supply chain environment.

Our industry, leading scale and the investment we've been able to make in our business have enabled us to effectively deliver on our commitments.

With that let me now turn it over to Bill.

Good morning, everybody. Thanks for taking the time to be with us.

I also want to welcome Akshay to the team.

Firstly excited to partner with him I think we can add a lot of value by ramping up our operational intensity. So.

Looking forward to that my comments are going to start on page six and really summarize the very strong financial quarter that Hubble team turned in.

The third quarter of 2022, so on the upper left we'll start with sales you see an increase of 21% to just over $1 billion three in sales.

That's comprised of 21% increase is comprised of 20% organic 2% from M&A and a point of drag from FX.

The 20% organic is comprised of about 13% price and approximately 7% volumes. So actually quite impressive contributions from both volume and price, which will filter through all of our comments around.

Our performance and those are obviously comparisons to prior year, we find it instructive to to track sales on a sequential basis as well.

And for sales to be up mid single digits from the prior quarter.

Where there is kind of equal contributions to that mid single digit growth sequentially from both price and volume.

I think that's a pretty.

Pretty good sign that we may be seeing some some modest easing in the supply chain in other words I would say we are trying to operate at capacity in the second quarter function of our high backlog.

And the need to serve our customers, who who wanted our material.

And for us to be able to grow.

The volume part of that from second quarter to third quarter sequentially. I think is a little bit of signs of easing across the.

The availability of staffing available.

Availability of a turn of materials and.

And transportation is.

Well.

So as we think about the demand underlying net sales growth I would characterize it as broad based growth.

Both electrical and utility experiencing impressive growth and inside of the segments.

Quite a broad based contribution to growth.

Inside of each segment.

Orders continue to outpace sales and we are building backlog through the third quarter that skews towards the utility segment.

As our electrical segment has a much more balanced book and bill feel to it now starting to get.

I'll get back in line in balance there, which I think is.

Also good news as we track.

So.

On the upper right Youll see operating profit.

A growth of 37% and operating profit dollars to $224 million.

And nearly two points of margin expansion in the quarter.

That margin expansion is really driven by price cost favorability.

And that favorability as needed to overcome the other inflation.

As well as some of the inefficiencies that the supply chain disruptions are causing inside of our factories.

The results here indicate incremental drop through in the mid twenties and that maybe gives you a little bit of a feel for.

That's quite normal incrementals. So if it was just price cost.

Favorability I think we'd see better than mid Twenty's incremental so you can see that we've really needed that price.

US overcome the non material inflation as well as the other inefficiencies.

And then in the bottom left you see the EPS quadrant, 45% increase to $3 <unk> a share.

And that.

That roughly 95 <unk> increase in earnings year over year.

Is largely driven by the improvement in operating profit, but there also.

Some below the line contributions to tax is quite comparable.

We did some share repurchases with the proceeds from the sale of C&I lighting.

And there was some slight non op contribution as well.

Free cash flow for the quarter of $194 million.

Extremely favorable comparison to last year.

I think maybe more instructive to look at the at the year to date performance on cash flow, where we feel.

Very good.

About where we stand relative to delivering on our full year promise and we'll update.

Update you on our guidance slide as to how that's going but we.

We're making very purposeful and intentional investments.

And working capital given the growth.

In demand so both receivables and inventory are requiring investment for us to satisfy our customers.

We also.

Our keen to invest in Capex and the flavor of that Capex difference by segment will talk about in each segment, but it's skewed and electric hold the capex investing towards productivity on the utility side of the Capex is skewed towards expansion in capacity.

So very strong performance in <unk>.

Now unpack that by segment and page seven let's start with the utility solutions segment, and just a really strong quarter turned in by our utility franchise performing extremely well.

In these market conditions.

You can see sales increasing 29%.

And operating profit dollars up 53%.

With with nearly three points of margin expansion. So so very very strong performance from the segment.

Let's look at sales a little more closely.

You see a 29% increase.

To $775 million.

Thats really.

Mostly organic.

Small 1% contribution from acquisitions.

Ordinarily, we would like to tell you a lot about the acquisitions Ripley tools as is new to the portfolio is performing extremely well, but you can see kind of pales in comparison to what's going on organically.

And.

That organic performance I would.

I would say is comprised of volumes in the low double digit range and price in the mid teens range to get to that 28% organic so.

Very very healthy market conditions there.

As well as a testament to our very very strong positioning in those in this attractive market.

The growth is really skewed towards the T&D components, rather than towards the comms and controls.

We had 38% growth from the T&D components Durbin highlighted the trends there really have.

Aging infrastructure that requires upgrades and hardening.

We have the <unk>.

Move towards renewables.

And that those new sources of generation need to.

It can be transmitted needs to be distributed and it needs to be integrated into the system.

And certainly modernizing with smarter and more controls.

All of which being supported by some infrastructure legislation that I think is giving our customers the confidence that there is funding for their demand.

The communications and control side, you see up a more modest 3%.

And thats really being skewed towards the automation controls area, which is up double digits as the.

<unk> com.

<unk> still being constrained by the lack of chip availability. So while we see healthy demand, we're having a lot of trouble satisfying that demand.

On the operations side.

50% improvement in operating profit dollars very impressive performance to $144 million and the three points of margin expansion.

Price and material.

Being a strong contributor.

But let's not lose sight of the fact that we've got.

Double digit volume that's provides obviously good good operating leverage lift in Incrementals.

And at the same time, there are headwinds coming from non material inflation and just supply chain inefficiencies, but net net.

Really strong contribution from our utility segment.

P. J, we unpack the electrical solutions segment also strong performance, albeit not at the same high levels.

But you see see an impressive 12% growth.

Two $542 million in sales.

<unk> higher price now as it came on a little bit later.

The demand here is broad based.

Across.

Various product lines and across various end markets.

Exception is the resin market.

We're experiencing double digit contraction.

And thinking about.

Order of magnitude about 15% of the segment being down double digits gives us a couple of points of drag in this segment.

That resi market, but.

Some of the verticals, namely data centers renewables in comms.

Forming very well.

And the industrial markets also doing very well both on the light and the heavy side. So again broad based support for that 12% growth ex <unk>.

And on the right side you see.

Quite a nice improvement in operating profit of 15% to $80 million.

The <unk>.

You see the margin expansion of 30 bps.

Driven by the price material favorability and the volume growth.

With the supply chain.

Creating and headwinds along with non material inflation.

I think it's worth a little bit commenting on orders here.

We've had orders in line with sales.

No.

Balanced between book and Bill.

We get a lot of questions from investors, if we have seen slowing here in the order pattern and we have not.

But.

We're obviously very aware.

What's happening to the consumer out there and.

And so thats, causing us to watch our order pattern very carefully.

It's causing us to invest in productivity and it's causing us to contingency plan in case we.

We do see a slowdown as we think about watching carefully.

It's become it will become a little challenging as we get closer to year end customer behavior in a year like this can get distorted.

They each have incentive plans with their employers.

It's very common for those incentive plans for the executives.

To have growth component as well as an inventory component.

And in a year when.

People have reached their growth targets they can switch.

Towards managing inventories down so it's not unusual in a year like this for us to see.

Kind of distorted.

Year end order patterns. So as we watch orders, we have to be careful not to overreact to one week or one month and be thoughtful and understand exactly what we're seeing.

But again for now not seeing any slowdown.

We also said we're investing in productivity.

And you can see that.

On the right side in the last bullet.

We've had extra investing in productivity and restructuring in this segment.

That's caused about an 80 point drag in margin.

So on page nine I wanted to transition to.

How the two segments performance, which you just discussed is influenced our view of the outlook for the balance of 'twenty two.

And <unk>.

Based on.

Our better than expected performance in Q3, which we had talked about that.

A couple of weeks ago or last month in Laguna.

We outperformed our expectations and are thus raising our guidance.

The effect of that has to take EPS from a previous range of $940 to 980, and we're taking that up to $10 25.

To $10 45.

That's really been.

Our consistent outperformance throughout the year.

Qs one two and three.

All showing both volume and maybe even especially price being able to do better than expected. If you look at the left hand column.

Page nine we.

We started the year with expectations of 8% to 10% sales.

Sales growth.

Which was.

<unk> four points of volume and five points of price.

And we've done considerably better than that on price.

And better on volume as well.

And thats kind of been consistently shown throughout the quarters.

Year.

And as you look at I like this visual of our performance because you can see.

But the volume is dropping through and adding nicely to to last year's level.

Yes.

But you can really see how important.

Our pricing strategy has been.

In order to get.

Price to overcome.

Costs in any of the inefficiencies.

Good to see the M&A program when we had.

A couple of additions during the.

The second quarter.

The form of <unk>.

Incrementally next year as well.

I think important to note we're not harvesting all of the earnings we could we continue to believe it's really important to invest in.

To make sure our future success.

As bright as it can be in the three principal areas there include productivity.

That's as I said automation and plant consolidation.

Capacity additions in the utility segment.

And there is innovation spending.

Across both segments that we're trying to accelerate our new product development growth and allow us to outperform our end markets.

And do better in the future than the non op items are offsetting here, where some share repurchases and other income or offset.

But by higher taxes slightly higher taxes and.

I would add at the bottom our free cash flow, we had been centered at 95% conversion rates.

And as the growth has exceeded our expectations. We believe we need to invest more heavily in inventory and receivables to support our customers.

We also feel the need to invest in Capex.

And so we're bringing that free cash flow down around 90% conversion, but with the.

The increase in earnings.

We're going to get to the dollars we are expecting.

In.

Just at a lower conversion rate and I think as we get through next year.

We'd probably be able to manage that working capital accounts and the balance sheet.

More efficiently and continue to improve on our customer service. So we've got some nice trends that we think we're finishing the year with.

Okay.

Hand, it to <unk> to talk about.

How that.

Informs our outlook for next year.

Okay, great. Thanks, Bill and before we turn it over to Q&A.

Wanted to provide some initial thoughts on our setup into 2023, and how <unk> is planning to deliver continued attractive results for our shareholders.

While the macro environment remains uncertain headed into next year, we are confident that our markets are well positioned to continue outperforming GDP.

And utility solutions, we believe there is still plenty of runway and above average visibility to continued growth driven by long term grid modernization trends.

And electrical solutions, we expect the residential markets to remain challenging, but we believe that the 20% of segment revenues exposed to our strategic growth verticals and PND renewables data centers and communications should prove resilient through cyclical dynamics.

Operationally, while commodity prices have east, we're planning for general inflationary and supply chain pressures to persist.

We will continue to manage price and actively drive productivity to come out net neutral or better relative to our overall cost base.

We also plan to continue reinvesting in our business to deliver long term growth and productivity.

And utility solutions, we plan to invest in capacity expansion to service a visible long term growth profile as we have highlighted in the past the inflection in T&D markets from a low single digit growth to mid single digit growth over the past several years has caused us to bump against capacity constraints.

And certain key product lines.

Looking ahead, we see a unique opportunity to further strengthen our position and better support visible customer investment plans by executing on high return expansion and innovation projects.

And electrical solutions, we plan to maintain elevated investment levels to support footprint optimization projects as we continue our multiyear journey as a unified operating segment, which structurally higher long term margin profile.

The net of these early considerations for next year and acknowledging that there remains a lot of uncertainty.

We're expecting to deliver solid performance in 2023 across a range of macroeconomic scenarios.

We plan to provide a more detailed 'twenty three outlook on our typical cadence along the release and discussion of our fourth quarter earnings results.

With that let me now turn it over to Q&A.

Thank you.

That's a question you will need to press star one on your telephone.

Also ask that you limit yourself to one question and one follow up.

Please standby, while we compile the Q&A roster.

Okay coming to the stage now we have Jeffrey.

Bradley.

Of vertical research partners. Please go ahead your line is open.

Hi, This is Jeff Sprague from vertical.

The introduction of broke up a little bit.

Good morning, Jeff Hey, good morning.

Hey, maybe just start Big picture group and actually just on kind of.

The operational plan and people.

<unk> had had some movement at the senior levels.

Susan and Peter while moving that Akshay.

Is there a fundamental change in.

Youre kind of operational priorities or some kind of change in what you are.

Kind of expecting to deliver relative to maybe some of those longer term plans that you've put out before.

Yes, I'd say the short answer to that is absolutely not.

Certainly.

I'm not going to comment on specific personnel matters, but as you look at the environment.

Generally.

It is an environment in our organization many organization of higher turnover.

And I would say that that why.

We've lost people. We've also attracted very talented people and I think.

We're actually in a very good position as you look at the strength of our business, where we play the markets that we're in and the potential of this business as we look to bring on people and Akshay is a good example of that they are very attractive to join a company like <unk>. So I'd say it's.

Part of what us and many others are just dealing with but.

We are continuing to be able to attract good talent to help us continue to develop.

And within Hubbell I'd say to the second question of is there some.

How an indication.

On our strategy. The answer is no and then Akshay case, it's felt like refilling back filling that position. There is a lot of work you've heard bill talk about.

Particularly in the in the electrical segment, what we need to do still on our footprint.

But equally in the utility.

Our business as we look to expand capacity there is a lot of operational execution and those things as well.

If you look specifically at the strategy on our two segments.

It's something.

Something that we started to put in place if you recall when I was CEO .

Hello.

It was a model after the utility business, where we proved that.

To be very successful in and bringing all those brands.

Under a common structure, so I would say.

A couple of years into that I feel really good where we stand, but there's still a lot of work to be done.

And even as I've spent a little more time with those GM Crs as I kind of overlook at that business why we look for a new leader there.

Im really impressed with what the talent there and so.

Very bullish on being able to execute that strategy and unifying that segment and that will lead to.

So a higher margin profile for that business going forward and I think growth that we're also seeing that there'll be able to get out of that by operating more as a unified.

Segment so.

Reinforcements and my answer is no.

Okay I appreciate that.

Yes, maybe just then on.

On utility is sort of maybe a two part question really.

First was there was there a measurable.

<unk> impact.

In the quarter on the topline.

And maybe more significantly just on comms and controls and a clearer.

What is the visibility on potentially uncorking. This.

<unk>.

Getting around some of the shortages and driving some growth there obviously.

Yeah, Greg Let me answer the first one and maybe hand to build the second question.

Clearly there was an impact of storm I highlighted that in actually highlighting our team that debt.

Really supports those those efforts if you look at the order impact it was about 15 million one five.

As a result of those two storm that straddles a little bit if you recall the last one of those hit right at the end of the quarter, so that straddles a little bit.

Two quarter. So certainly there is always a impact to our business. When we serve is that as I've said, though in the past if you look at our overall business.

It's less of a driver of growth than it is for us.

An opportunity to showcase to our customers why they do business with us why we matter to them because because thats really where we shine is.

How we've taken even during a time when our capacity is constrained.

Really go above and beyond to service those customers.

What needed materials to rebuilt the grid, so a little bit of an impact to sales, but I'd say more importantly, an opportunity for us to showcase our capabilities Bill maybe the second half.

Jeffs question was around a clear visibility.

And.

I would say Jeff. The first nine months were were challenging for us to see the value proposition of the solution of the smart meter have.

Great resonance with the customer base have so much demand there.

And yet for have the supply chain struggle.

To support that has been challenging so youre talking to your questions now around visibility going forward and there's kind of two dimensions to it one is.

Chip supply loosen up here as we've seen some demand for consumer electronics start to slack and we think that will evidence itself and secondly, we have been spending a lot of time trying to validate alternative sources for the technology.

We are making progress on that and so between those two avenues.

We're hoping by the time, we get together with you.

In January and talk more quantitatively about 2023.

I'll be able to give you.

Okay.

A more quantitative assessment of that visibility, but it approves it appears to us to be improving.

And I agree with your.

Last payment that will be quite welcome to have a clarity.

Our growth in margin contributor.

Thank you guys.

Okay.

Thank you one for the next question.

The next question coming up.

And the next question will come from Steve.

Morgan JP Morgan. Please go ahead.

Yes.

Hi, good morning.

Hey, Steve Good morning.

Congrats on a on a real bang up here great.

Great execution in a tough environment for sure.

Thank you.

Youre welcome.

On on the.

I guess on the 23 or fourth quarter and then in 'twenty three.

On the call.

And a basket of costs you guys have in that you measure inflation off of maybe just remind us of whats.

Stuff, that's what percentages, a little more sticky and what percentages like truly.

Variable and moving around with the metals and then on the pricing side.

Just to remind us of any kind of.

Anything that.

An index on the metals are.

Got it anything like that.

Mechanical that moves around with with raws prices.

Yes, so, let's let's maybe start with the pricing half of it Steve I think that.

There is.

A reasonably small percentage that is specifically indexed and it's been much more.

Kind of working with our customers.

To get the price increases through.

And so I think about your question on stickiness.

Theres, probably a couple of points of price.

Can wrap around next year and be part of the.

Incremental sales.

That's supported by the incremental price experienced in the third quarter. That's maybe an interesting gauge of given some of that stickiness to the price.

Certainly to the extent, we come up on year end and is it typical time, we talk to customers about.

Program pricing and blankets and all that so again at the start of the year when we get together to give you our formal 'twenty three guidance I think we can we can be finer on what we expect from price, but from the actions in indexing amount that we have in place.

We see towards a couple of points.

And on the basket of costs.

<unk>.

If we.

Simplistically describe.

Uh huh.

Debt.

That half of our costs are materials and that.

The inside of materials, there's a proportion that that's raw and we can all see those prices every day.

And then there's a proportion that has some bit of value add at the far end it would be purchased for resale item at the skinny year end it would be some kind of component.

Been assembled or has some kind of value add to it.

And I think on on the raws to your point.

Super variable.

Comes right through we can all track that I think on the value add part of materials plus the non material part of our costs.

Sitting there at <unk>.

CPI of <unk>, 8% inflation gives gives you an idea of the math that we're trying to move around and why.

We're putting so much emphasis on on pricing right because typically if I talked to you I would have set up a paradigm that we're trying to have price offset material and productivity offset non material inflation in it.

In this environment when that non material inflation is in the 8%.

Sandra.

Range. It's it's just I think it's asking too much to find that much productivity. So we've put that incremental burden back on the pricing side.

<unk>.

So as we kind of contemplate our plans for 2023.

We're very focused I think the exact way you are thinking about it.

Plan and our cost to have inflation in a very significant portion even though the raws are coming down.

So we are trying really hard to retain the discipline I think we found in towards the end of 'twenty, one and throughout 'twenty two on pricing.

Youre, putting your finger on an incredibly important part of our operating model is to make sure. We can price effectively for all of these other costs that seem to be going in different directions, with the raws going down and all the other stuff going up.

Right. So that so that bond slide on slide nine I mean is that going to be like similar to this year or it sounds like it's going to be less.

Yes.

Then it was this year I would think so.

Yes, I would expect it to be green, but obviously smaller.

Maybe a couple of another.

Maybe addition to what Bill said.

We're we're managing right now in an environment, where the magnitude of these changes are just much larger than what they would have tradition, but both and how the cost is moving how the prices are move and certainly as we look forward.

But the challenge I would say our portfolio is generally well positioned.

Hold on enterprise driver, a low percentage of the total cost of ownership high percent high cost of failure.

And that for us right.

Good for us, but on the other hand, the magnitude by which prices at move gives us some pause to say that we will be able to hold on to that no matter. What so it's that dynamic that we're trying to manage I would say, though if.

There is some slippage of price it would be associated with.

Come down in cost and we would still be able to manage to what kind of bill said is net neutral or better.

As a whole, but I would say managing those pieces is a little tougher than it would've been in a low inflation environment for us.

Sorry, one last quick one what's the fourth quarter embedded margin and is that normal seasonality.

My last one for the total company.

Yes.

The the top line.

Steve We're envisioning.

In the normal seasonality range and.

That's a function of having fewer shipping days.

That tends to be.

In.

The mid single digits.

Fewer.

Days and therefore, the same effect on sales and so.

I think that the effect of that will be normal seasonal impact on margins.

And so it does.

It is returning.

For us a little more to normal seasonality great. Thanks, guys really appreciate it.

Thank you.

The next question.

Yes.

Our next question.

Alright.

Tommy Moll.

Please go ahead with your question.

Good morning, and thanks for taking my questions good.

Morning, Tommy.

Urban and the 2023 early preview is helpful and appreciate it and now we get to ask more questions on it of course.

Specifically on the utility solutions side, you did a good job.

Framing some of the secular trends.

Backlog trends Youre seeing.

We haven't yet talked about the recession sensitivity there.

Can you help frame that for us though.

Is that a business or a segment rather that.

You can still grow topline, even if GDP is down in the U S. Just given some of the positive tailwind that you've called out.

Yes, I think youre looking at that in the correct way, Tommy and maybe I'll take a step back and first start to say what happened in the last time, we saw.

Sauce lab, because thats actual data that we have in the business and what we tended to see in the utility business compared to the electrical that it lags.

Electrical bought by a quarter or two and then decline.

Shallower.

And it came out quicker so I would say that thats and that was driven at the time to buy by the need to invest in this area was infrastructure investments that were.

Coming out of there as a result of that slowdown and that really benefited our business. So I would absolutely see that the same way and I could argue that it's actually intensifies the need to continue to invest in this great no matter what.

Macroeconomic conditions are of course.

I don't think its immune from it but when there is some that are pending.

On how deep and how long.

And whether it's.

Consumer led or whether that goes into commercial and industrial eventually I would expect that to be affected.

To a much lesser extent than I do see the possibility.

That Uganda, VIX, Florida can you continue to grow to an environment that there is a scenario that I could see that happening.

That's very helpful. Thank you.

As a follow up I just wanted to touch again on personnel.

Specifically on the electrical segment leadership can you just give us an update on what kind of process you're running.

Potential timing for when there might be some news there.

Yes, so as we indicated in the press release I believe this is an area where we're looking both internal.

And external these are of course.

A very important position on my leadership team.

And I am very pleased both with internal and external talent that we're seeing I think an element of it is what I described earlier of Av.

Why it is that we're matter and what it is that Purdue.

We find people.

Im interested in coming to join US. So we are very active in this.

The process right now and I would expect that here in the fourth quarter, we will backfill that position.

Much appreciate it and I'll turn it back thank you.

Yes.

Thank you.

One moment, while we get ready for the next question.

The next question is coming from Nigel Coe.

Well research. Please go ahead.

Thanks, Good morning, and Kevin I'll send my resume put Manhattan.

Yes.

Yeah.

Great.

Yes, so just wanted to obviously the residential.

Down below there.

So I think 12% if I'm not mistaken 15%.

Can you just maybe delineate between light thing and components.

Lockheed lighting.

Do you see pressure in components as well.

Yes.

It is largely lighting, but there are some other components that we sell to the DIY market through big boxes. So there is there is some of the other stuff but.

But.

Majorities lighting.

And then if we then look at ex lighting, how would the margins are booked in missile systems.

How are the margins on resi products Youre, saying.

Well residential margins, but if we look at the segment level segments.

Dialogues.

Any sense on how that would look.

Okay.

Yes.

I think it was.

Yes, I would like to highlight margins yes.

Lighting is a drag on the volume by a couple of points and certainly from a margin perspective.

It is also a significant drag.

So.

Yes, ex lighting margins would be larger and would be growing more because the.

<unk> margins have suffered as the volumes come down.

Okay. That's helpful. And then just one more for me the restructuring.

The upsizing of the destruction I think 10.

I can.

Is that should we think of that as a pull forward from 'twenty three actions.

Yes, I don't know if it's necessarily a pull forward.

In our restructuring we have and I think we've talked about this drug to supply chain issues.

Put some pressure on being able to both manage our supply chain and do a lot of these projects.

Say, it's more a program multi year program that we have.

Outline.

We see the ability to do more of some of those supply chain issues are easing.

They're not gone <unk>.

Im trying to balance our time between solving those and continue to invest in what we'll set up this electrical segment well into the future. So I don't know that necessarily in Poland from 'twenty three that it is a program that we're seeing we're able to accelerate a little bit here as we go.

Go to the balance of this year.

Understood. Thanks, guys.

Thank you one moment Robert.

Question.

Yes.

Next question is coming from Christopher Glynn.

Please go ahead with your question.

Thanks, Good morning, everyone.

Okay.

Yes.

Andy obviously lots and lots of good commentary and then a little more commentary one thing I did want to ask about.

I think U S onshore wind in investments down quite a bit this year is that a timing benefit to T&D.

Investment, where maybe some of the upgrades are.

Running revitalization and kind of wind investment it seems more like an afterthought question given all the positive commentary.

I wanted to ask about that factor.

Yeah look I do think there's some timing involved in wind.

Deployment decision, making.

Some of the policies are getting involved there and it kind of gives Chris I would say.

A little bit brighter near term visibility on solar and yet.

I do think the wins in the medium term still is quite positive.

I don't see that as having.

Any special kind of predictive.

I think renewables is an area that's been driving really good growth for us.

For us it's just a question of.

Is there a wind in there as they are solar in there and we would say for the foreseeable future. There is renewed we see renewable tailwind on a combined basis with with wind may be getting.

Maybe it's the wrong way to say a little more tailwind for wind.

In the medium term.

Okay.

Quick follow up on residential lighting I think the container costs are a big part of that and they were super high and come down quite a bit are you still.

Flowing through peak container cost and residential lighting.

No as you observe I think the costs are changing.

Coming coming back a little bit normal I think they are little bit higher than they had been.

But that will work itself.

Through our.

Through our chain Chris.

And so and you are right to it.

It's a big variable to the business.

Okay. So you should see some improvement.

That basis.

Yes, lagged the flow through okay.

Benefit too.

And that kind of offset as in the Cogs that you are mentioning but.

The outlook is still a little is a little challenged.

Gotcha. Thank you.

Hey.

Thank you.

I would now like to turn the call back over Jonathan blocker for closing remarks.

Thanks.

Paul at this time, you may all disconnect and everyone have a great deal.

Q3 2022 Hubbell Inc Earnings Call

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