Q2 2023 Hubbell Inc Earnings Call
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Okay.
Good morning, and thank you for standing by welcome kits, a second quarter 2023 Hubbell incorporated earnings conference call.
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Please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today, Dan and Morocco, Vice President of Investor Relations. Please go ahead.
Thanks, Michele good morning, everyone and thank you for joining US earlier. This morning, we issued a press release announcing our results for the second quarter of 2023 press release and slides are posted to the investors section of our website at <unk> Dot com.
Joining today are our chairman President and CEO , Kevin Barker.
Vice President and CFO Bill Sperry. Please note. Our comments. This morning may include statements related to the expected future results of our company are forward looking statements as defined by the private Securities Litigation Reform Act of 1995. Therefore, please note the discussion of forward looking statements in our press release.
<unk> incorporated by reference in this call. Additionally comments May also include non-GAAP financial measures. These measures are reconciled with the comparable GAAP measures and are included in the press release and slides now let me turn the call over to government.
Good morning, everyone and thank you for joining us to discuss <unk> second quarter 'twenty three results.
How 'bout delivered another strong quarter of financial results, our favorable position in attractive markets enabled us to achieve 6% organic growth, which combined with improved productivity and supply chain dynamics to drive significant.
And margin expansion and therefore.
Solid execution through the first half of 2023 and good visibility to continued strength in our businesses gave us the confidence to raise our full year outlook again this morning.
In addition to the strong financial results, we continued to improve our service levels to customers.
Both investments in capacity innovation and supply chain resiliency are enabling increased sequential output and improved lead times.
Looking ahead, we expect grid modernization in electrification.
To drive elevated demand for Hubble's critical infrastructure solutions, both in front and behind the meter.
We will continue to make investments into our business to support this growth in the second half of 'twenty three and beyond.
Before I turn it over to Bill to give you more insights on the performance in the quarter I would like to introduce our two newest segment presidents.
You will recall from our press release, a few weeks ago that we announced <unk> retirement from Hubbell. After 10 years of leading of Clara and in recent years, our combined utility solutions segment.
Our strategic vision and passion for innovation played a critical role in accelerating this segment's organic growth profile.
Like to thank him for his many contributions to hubbell as well as strong financial performance for our shareholders.
I am excited to share that we've appointed a very talented successor, Greg gums to lead public utility solutions moving forward.
Greg has a strong track record of leadership and performance in the utility electrical and automation industries over his career.
And his skill set is well suited to help us further our growth ambitions across utility components communications and controls.
I've gotten to know Greg over the past year and believe he will integrate quickly and effectively within the organization.
His focus will be on driving profitable growth by building on a strong core foundation, while innovating and expanding an attractive adjacency.
I'm also excited to announce the appointment of Mark Mike to lead Hobbled electrical solutions.
Mark is a long tenured hobbled leader with a proven track record of performance and operational execution, most recently, leading hubbell power systems.
Results of that business over the last several years speaks for itself.
Some of you will know mark from our Investor base over the past few years and he was a key partner to me when I left the utility business.
He played a critical leadership role in our efforts to unify our broad portfolio of acquired utility businesses under an integrated business in power systems organized to compete collectively with a simplified operating structure.
As we continue our multiyear journey to execute a similar playbook in hdds.
Mark is well suited to drive sustained improvement in the segment's long term growth and margin profile.
Both Greg and Mark are well supported by experienced and talented leadership teams and I am confident they will continue to execute on our core strategy together and deliver consistently differentiated performance for our customers and shareholders.
With that let me turn it to bill here to walk you through the financial performance in the quarter.
Thanks, very much Griffin and good morning, everybody thanks for joining us.
Congratulations to Greg and Mark and on a personal note for me very very excited to partner with both of you as we drive future success with humble they are both off to excellent starts in their new responsibilities.
I'm going to start my comments on page five of the materials that you hopefully grab.
It's really just a summary.
Strong financial performance in the second quarter.
Most of the compares will show you in this deck are against the second.
Second quarter of prior year of 2022, we find instructive also to look sequentially to the first quarter of 'twenty three.
And I think that we see a lot of continuation of the positive trends that we experienced in Q1.
Things played out quite similarly in the second quarter.
So a 6% sequential top line growth.
Five or so of margin added so.
A lot of the same themes that youll remember from our first quarter call.
You see sales at $1 billion.
Three seven.
9% growth with 3% coming from acquisitions, 6% organic.
The organic being driven primarily by price, which is the theme again, you guys saw first quarter with us.
Going back to last year.
<unk> margin, reaching the 22% level, a very attractive level nearly six point improvement over last year.
Really result of the price cost being favorable.
As well as some productivity from.
The supply chain normalization of some of the efficiencies coming with that.
Earnings per share above the $4 level also very attractive 45% growth rate.
That.
That increase in earnings.
Resulting.
Driven by sales growth and the margin expansion at the MLP level.
Our free cash flow of $192 million.
<unk>.
Driven by strong net income growth.
And.
That number's absorbing continued investment.
Capex and working capital.
So.
I think that we're very pleased with this cash flow, it's allowed us to strengthen the balance sheet.
If you look at the balance sheet at the Midway point here of 2023, you've got nearly a $5 billion of cash.
One 1 billion four of long term debt, so our net debt to EBITDA.
Less than one we think really positions our balance sheet to be supportive.
Being an investment profile and we think that can come both in the form of Capex opex as well as acquisition.
And on the acquisition front.
Pleased to announce in the second quarter, we were able to close on our acquisition of electro industries.
Are there any typical hubbell size bolt on of $60 million.
It fits into the utilities segment.
Products are in the distribution automation area.
Sensing and controls power quality metering.
It's very well.
With.
Other products of ours in that space. So.
We welcome our new associates from electro too.
Family.
I'm going to switch now to page six.
Which lays out our performance.
<unk> format.
We'll drill a little bit into each item so the sales growth of 9%.
We said, 3% acquisition, 6% organic.
The organic is really all price volumes were down slightly overall.
As electrical volumes.
Worked down and partially offset by the growth in utility volumes I'll talk about each segment subsequent pages a little bit more.
The acquisitions from three points came.
From.
Two major contributors.
One from each segment and I think good reflection of our intentional investment strategy on the electrical side contribution comes from <unk>, which was the data Center acquisition. We made we just passed our first anniversary of owning <unk> off to a great start.
Gross margin wise.
The power systems side Ripley tools.
Very good extension on the component side for us for power systems.
Again, good good signals of of how we intend to deploy our capital here.
On the upper right, you see operating profit up 47% in and above.
The 22% level.
Price cost really the biggest driver there.
And interestingly, both levers contributing to the margin expansion I think <unk>.
Seeing our price story play out.
Over the last couple of years or so.
But also this quarter, we had material cost flipping to a tailwind so actual deflation in both the raws and our component cost Theyre, helping drive strong strong margins.
We believe our pricing success.
As has been driven by our differentiated service levels, we get consistent feedback from our customers that we're outperforming competitors in that regard.
That continues to inform us as we continue to invest.
Want to push that differentiated performance.
Performance.
Make sure we're able to support.
Those pricing levels.
Continue to make.
Make our margins durable and <unk>.
Truly emerge from the pandemic is a more profitable company.
Besides price costs are also was productivity.
I think we're finding that our factories.
<unk> better in 'twenty three that in 'twenty, two really is supply chain is normalizing.
We're getting.
A lot of those inefficiencies we experienced last year.
Ironed out.
Helping drive margins for us, we don't think Theyre, all the way back but.
Certainly a contributor.
Lower left you have earnings per share.
Again, the $4 level and a 45% increase.
Really all operating profit driven.
Below the line was a slight drag as taxes were up just a little bit.
But that was partially offset by a decline in interest expense really net interest expenses.
Our cash I mentioned that we are up to close to $500 million.
That cash is actually starting to earn interest interest income to help offset.
On the expense.
And on the lower right you see free cash flow. This page depicts.
The three months of the second quarter up 14% to 192.
I find a little more instructive to widen the lens and talk about the first six months.
Where we've got $272 million of free cash flow, which is.
More than a doubling of what it was last year and thats been absorbing.
Higher capex level, our capex for the first six months of the year is up about two thirds from what it was last year to almost $70 million in the first half.
As well as an increase in working capital investment as we continue to need.
Inventory to support.
Our customer service, so I think given the fact that we're investing and increasing the cash flow is good.
Good relationship there.
Let's let's unpack the performance by segment and on page seven we'll start with.
With utilities utility has really been the engine of the Hubble Enterprise financial performance of late.
Thank you.
Really a leading business model unique positioning across components communications and controls and very worthy of continued investment as we will discuss a little bit more later.
So on the sales side see 14% increase to $831 million.
That's comprised of one point from acquisition I mentioned repeat tools before and 13%.
<unk> organic.
That organic is comprised.
Roughly double digit price and low single digit volume increase.
And.
We believe we've got really nice end market demand construct here.
And it's really complemented.
Across the two segments, we're talking about here the two business units between the transmission and distribution components growing at 13% and the comms and controls growing at mid teens.
That comms and controls piece is the Clara largely the Clara business.
I think most of you following it will remember they've been held back by a shortage of chips over.
Last year, and a half or so.
And as we saw easing of that chip supply.
In the second quarter.
And for US, we got our comms business out of the gates first.
<unk> had a really strong second quarter.
We see because of their supply now they had a nice backlog of demand from their customers and with the supply chain improving on the chip side, we see a very good second half for the comps that happens to be a nice a very attractive gross margin business. So a very mixed friendly development in the <unk>.
Meter side.
We see exiting the quarter with the same kind.
Kind of supply trend. So we think meters will have.
Good second half visibility as well so I think good news to see the comps have kind of returning to.
Not being held back by the supply constraints.
On the power systems side.
You've seen that over the recent quarters really having.
Strong growth I think you'll remember last quarter, we showed you a chart.
That had a three year review of orders and shipments and that chart essentially showed a relentless buildup of backlog over that timeframe that was starting to peak at the end.
That period.
And as we discussed then orders were reflecting yes strong demand, but there are also reacting to the shortage of supply and the need of our customers to be ordering farther ahead in order to keep them sell stocks.
That obviously was not sustainable.
And especially in.
Right of improving supply chain and shortening of promised delivery dates and as we've seen those lead times start to normalize I would say in two particular segments.
Of the components area.
Really started to see customers adjust their order pattern to reflect.
The fact that they can.
Work off of inventory and can moderate their order pattern until that inventory gets to the proper levels. So thats, both the distribution side of power systems as well as the telecom.
And market both of those.
Have very attractive backlogs, so we'll be navigating a period of using the backlog.
As those order patterns Justin.
As <unk> had mentioned.
And raising our guidance.
We feel that that we've got the momentum to clearly carried us through.
Second half of the year.
And on the right side of the page you see the operating profit story.
Just a very impressive performance of 70% increase.
North of 25% margins.
Really good price cost there.
Improved productivity.
Factories are getting rid of some of those prior year inefficiencies.
You mentioned the mix with the Claire has been quite favorable.
And we are investing on the opex side as well as the Capex side.
And we anticipate it.
Increasing those investments in the second half.
And we'll talk a little bit about that on the next page.
So page eight we wanted to highlight for you the transition space.
And this is kind of defined more narrowly as transmission, we often lump in substation here, but this is kind of the more narrow.
Transmission piece smaller than the distribution side of the components world, but nonetheless, a really critical area to enable the grid modernization and hardening electrification and really getting renewable generation to the point, where the user is.
And so we think the trends here are very attractive we see long term growth rates in the high single digit range.
Right now we are.
Seeing in contrast to what I described in telco and distribution, we're seeing orders in quotes up over 50% over prior year.
We think there is some support here from stimulus packages.
From government policy, where.
IRA is helping spur development through the provision of the tax credits versus the IHA, providing harder funding dollars to really spend on the project. So.
We think really nice growth dynamics in the in the area. We also think that we are really well positioned.
We feel we have the best depth and breadth of products.
Quality and reliability.
Also feel helping the problem solving and design area plays to <unk> strengths.
And ultimately to.
To help with the complexity of getting material to these projects I think theres a tendency to want fewer suppliers. So.
Plays very well to our positioning so we feel very well positioned in very attractive markets such that we will get our fair share and at the point, where that's going to require investment on our part to help support our customers.
<unk> of the total Hubbell enterprise Capex.
But you see over a couple of years, a very strong increase in that capital.
On the electrical side, it's going a little bit more to productivity and on the utility side I'd say, it's trending more to the growth side and I'd say the distribution part of utility was earning.
The early Capex raises and now we're starting to shift our focus onto T.
And you'll see we've put a little plus signed to the right of the 160.
So those dynamics play out over the second half of the year I don't think we would shy away from investing even more dynamics require it.
We think we are so we have attractive growth, we're well positioned and we're prepared to invest to earn more than our fair share.
As we map out these projects they have excellent ROI when.
When you just analyze the financials, but I also think it.
It's a really good.
A way for us.
To continue to differentiate our customer service.
And solutions that we provide to our customers, which ultimately helps support the sustainability of our utility margins.
I'll ask just beyond.
A big quarter, so that kind of underlies.
One of our rationale for continuing to want to support our customers in a differentiated way.
Page nine is the.
The electrical segment.
And you can see 1% growth.
Year over year to $535 million.
That's also 6% sequential growth so.
A little bit better than typical seasonality there.
The acquisition of <unk> that I had talked about added five points.
So the organic was actually down four and that included.
Our mid single digit of price.
From a market perspective.
The industrial end markets, showing a strong demand I think the re shoring trend.
As providing strength in U S manufacturing oil and gas steel and transportation all all being.
Strong contributors to growth for us the verticals that we've focused on between data centers and renewables.
We've been very successful growing there.
And the more commercial arena.
We're seeing similar as I described.
In the power systems were the.
D in the telecom customers were starting to adjust their order patterns.
We've seen that.
In our.
Our electrical segment.
More on the commercial side.
And the customer anecdotes are suggesting.
Days of inventory are getting in line with targets they have and therefore, we may be.
We think nearer to the end of that adjustment period.
Our expectation is second half will be a little more balanced between book and Bill.
And on the op side on the right.
See an improvement of 12% growth.
It's obviously not the volume that's driving it the price cost has been very positive and the productivity has been good right there.
And I think it's sort of points out.
Where mark is going to be focused with us as he takes over this segment. He was incredibly successful on the power side, bringing together multiple brands and multiple acquisitions to compete collectively as a business and I think he'll he'll be able to help us.
The same inside of the electrical segment and we.
We will continue to.
Support Mark in acquiring.
Higher growth higher margin businesses, we're going to be focused on innovation, where new product development should come in at higher margins.
On the vertical focus can help us.
Pull a lot of balance of system product into high growth areas.
Continue to focus on that productivity.
Try to again make those margins durable.
As we go forward.
So those are the that's the financial performance in the two segments.
I'll give it back to <unk> to share with you.
How that affects our outlook as we stand here at the halfway point.
Great. Thank you Bill.
And moving.
Moving to our outlook Hubbell is raising our 2023 outlook to an adjusted earnings per share range of $14 75 to <unk> 25, representing approximately 40% adjusted earnings growth for the year at the midpoint.
We continue to project total sales growth in the range of 8% to 10% with 7% to 9% organic growth.
Improved outlook is primarily driven by improved visibility at the second half margin performance as we expect the sustained favorable price cost and continue to drive productivity across our businesses.
We're also accelerating our investment levels in the second half to increase capacity for future demand in areas with visible longer term growth.
Five higher productivity.
Accelerate innovation and enhanced supply chain resiliency.
These investments position us to execute effectively across each of our strategic pillars, which are to serve our customer.
Brody enterprise.
Operate with discipline and develop our people.
I am confident that our strategy will continue delivering strong results for our stakeholders in the second half of 'twenty three and beyond.
And with that let me turn it over to Q&A.
As a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced.
To withdraw your question. Please press star one again.
As a reminder, please limit to one question and one follow up.
Please stand by while we compile the Q&A roster.
The first question comes from Tommy Moll with Stephens. Your line is now open.
Good morning, and thanks for taking my questions.
Good morning, Tommy.
Carbon I wanted to start with a discussion of the utility outlook last quarter.
Highlighted the transmission and distribution space is a mid single digit grower, maybe even higher next year with the stimulus contribution today you highlighted a piece of the transmission market has a high singles grower talked about needing to accelerate investment hubbell and preparation for next year.
If you roll that altogether.
The utility shouldnt be a bit or maybe even though a single digit share.
Yeah, maybe I'll make a couple of comments and Bill I'm sure will help me with this as well.
You're right to point out.
The comments.
And so a lot of what bill highlighted in transmission. It's an area that we've seen elevated investment of many years, it's probably one of the earliest areas, where we really saw utilities starting to invest in renewables and the integration of the <unk>.
The interconnection of the grid.
We have visible.
Signs of that.
Continuing to grow.
And it's the reason why we're so optimistic about this business I still believe if you add it altogether.
Count on mid single this whole market.
It's the right way to look at it but.
But certainly we're optimistic and thats.
Why perhaps would make that comment to say mid single digits and there.
There may be times of pockets, where we cannot grow that.
But bill.
Bill maybe you have something too.
I would add a lot I'd say Tommy the mid single digit.
Long term outlook.
Is reflective of how we feel and.
We're getting really good.
On these projects so we're going to continue to invest and grow with our customers.
Shifting to electrical.
Qualitatively.
Feels like the commentary about the same as last quarter, but I'm just curious if anything has gotten better or worse, there and bill you referenced the destocking is.
Potentially.
Shifting to a rearview mirror item by the back half of this year, but any additional detail you could provide there would be helpful. Maybe any insight you have into the sell through.
I think with shine some light.
Yes, I think that.
Youre right that it felt quite similar to the first quarter seasonal sequential growth.
Even without volume, we're sort of happy that theyre expanding margins. So some of that productivity work and the price cost work is paying off.
And I think the.
As we spend procurement spend time with.
Ceos and leaders of our top 10 customers throughout the year.
No.
I think when we were talking to them last year. They all use the word we have too much inventory and.
When we meet with them now.
They they sound like they're much closer to their target inventory levels.
For the data that we do have point of sale.
It feels like what we're providing is getting sold so it just.
And as we've gone through that adjustment.
It does just feel like we're closer to that being in balance in and those are specifically comments to the electrical segment I think on the distribution and telecom side on utility.
We're sort of maybe earlier to the middle of that that site. So maybe they've been too.
Two segments, Tommy where maybe spread out a little bit on customer response.
Thank you both I appreciate it and I'll turn it back.
Please standby for the next question.
The next question comes from Josh <unk> with Morgan Stanley . Your line is open.
Hi, good morning, guys.
Yes.
Just wanted to dig in a little bit on commercial construction.
It sounds like I guess, the tone and the.
The slides are moderating or moderate.
Data seems like it's softening up perhaps a bit more I'm just wondering how much of what you guys are seeing right now is more of a timing function or I guess prospectively youre talking to your distributors does this seem still more I guess steady as she goes here for for maybe the next few months or few quarters.
Yes, Im not sure exactly if you were making a statement or a question I would say for us the commercial side.
We reduced our exposure to commercial pretty dramatically as we sold our.
Our C&I lighting business.
We have a balance.
That we were described Josh is being.
More.
Post some of these specific verticals like renewables and data centers.
The balance of commercial.
As where we were kind of going through this adjustment.
Where our customers our lead times are now they were out at I.
I'd say urban towards the 50 week range and they are now down to two three weeks range and so that's had an impact we think Josh ultimately on.
How our customers have been ordering for us for the past couple of quarters.
And that's been affecting as you see the the unit volumes that were shipping but it does.
Like that adjustment period on electrical.
And we're getting a little bit closer and closer to the balance point.
Got it and then just to maybe follow up on the M&A environment.
You guys noted a kind.
A typical hubbell deal here are you seeing.
I guess the acquisition environment are multiples start to increase with kind of this broader appreciation for electrification and then I guess, maybe as a sub point to that.
Not really increasing would you consider levering up a little bit more to just consolidate some of these assets with maybe a bit more value disconnect.
Yes, I think some.
Two parts to that question the first is M&A.
The M&A market and.
I do it is interesting Josh there more.
Assets coming to market than we typically see.
And there is more assets kind of above this little averaged $60 million tuck in that is quite typical for us.
So yes, maybe feel that is in response to owners figuring. This is a good time to get a good valuation.
And I think we.
C.
The competition in those processes.
It's interesting the acquisition finance market is a little bit.
It's a little bit different ride you have higher interest rates.
That's kind of affecting how some financial buyers approach the market.
But we are seeing a little bit more assets kind of in the pipeline, which is interesting I think your second question is around the balance sheet and I think we do view that as a major strategic asset right now.
And we.
We we feel we can certainly invest aggressively.
And.
<unk> is an interesting one.
I think because you were specifically asking.
About multiples.
And so if.
If we were if we were buying <unk> and the 12 13 times range.
Had it for a year.
It's both grown really impressively in the margins have done better because of what we do with it.
We find that we own it.
In the single digits.
And so I think part of your question was.
The higher multiple we think can be justified given the growth and margin potential of.
Some of the businesses that are putting being put in so.
I'm, hoping not too many investment bankers are listening right now, but I do think there is probably.
There is probably some upward drift in multiple as a result of what you are asking.
Maybe to add to it.
Maybe the resource capabilities to be able to go at a faster pace I'll make some comments on in.
As I look across the two segments I would say that the gms of the businesses are more involved than ever.
In this process, partially helped by the operational discipline that we've put in place over the last couple of years, we've added resources to both of the segments.
Individuals focused on.
On M&A and obviously complemented by the by the enterprise resources, So I'd say no.
Not always the pipeline forward with our resource capabilities to pull some of this office is better so.
We'd expect that to be a.
A good contributor for us going forward.
Got it I appreciate it best of luck guys.
Please standby for the next question.
Okay.
The next question comes from Nigel Coe with Wolfe Research Your line is open.
Sure.
Thanks, Good morning.
Thanks, I will detail.
So a.
A couple of questions for me one is on the electrical segment.
Obviously, you talked about the inventory it sounds like there's a bit more visibility on that but have you seen any differentiation between some of the smaller strip at that than some of the larger national players.
The bulk of the inventory.
Coming out of the smaller players and then within that you see.
Any any big difference between kind of core components of my thinking and I'm, sorry, if I missed that in your prepared remarks.
Yes, maybe I'll start with the inventory.
The distributors it's actually.
There's very little bit anecdotal, but also a little bit from from an insider I would say is the smaller distributors.
Raleigh had felt less pressure.
To reduce inventory then.
Larger distributors, particularly the <unk>.
Public comp.
Companies.
We saw that actually when the pandemic.
Startup.
They have actually been heavier on the inventory that kept those longer in place really to serve.
Customers I think the larger so it's probably been a little more discipline.
<unk>.
Adjusting their inventories stood at a market when the pandemic started.
And then now again.
Again, adjusted after they've been been loaded because of the supply chain constraints. So I would argue it may actually be the opposite Nigel.
Oh, Okay that's interesting.
And then unlike thing any any any sort of differentiation.
On lighting Nigel.
Yes, I mean like thing I'm, just wondering if that was disproportionately negative in that month pool.
Yes, sorry, so so the resi piece that we still have did have.
Significantly negative.
All volumes.
And.
So they were impacted on the top line that way, but interestingly.
The productivity like we described.
Some of the supply chain normalizing one of the biggest drivers for that <unk> business has been the transportation cost.
<unk> product from Asia.
And those container costs have really gone from.
Our pandemic gapped out.
Container cost up in the mid teens of thousands of dollars back down to two to 3000, and so thats really.
Despite the volume drop allowed that resi business too.
Earn a margin again so.
They kind of have 222, big cross currents, there between volume and cost structure.
Interesting and then just my follow up is on the transmission capacity investments, we don't when we think of.
A couple of other transmission player can you maybe just remind us.
Where you play in transmission.
You said the high voltage test business, but maybe just remind us on where you play in and how big that business could be.
Okay.
Yes, so the product line.
Is the.
The traditional so if you're driving on a highway and you look up at one of those steel towers.
And you see the insulators up there in the hardware up there.
That's the part where hubbell plays.
And right now if you exclude the substation, which we usually kind of lump in.
We're talking in the ballpark of $200 million of exposure for Hubbell.
So in the kind of 10% ish range of segments.
A larger percentage of the kind of components piece.
But.
We see that could be an area of acquisition investment certainly capacity investment.
And again I think we see organic growth there Nigel certainly in the high single digits for the foreseeable.
Future for that and continues to be.
Supply constrained environment versus demand just because of all that.
I think the drivers for hooking up to renewables.
Potential interconnects between FERC regions et cetera.
Okay. Thanks, Bill Thanks, Kevin.
Thank you.
Please standby for the next question.
The next question comes from Joe O'dea with Wells Fargo. Your line is open.
Hi, good morning.
I wanted to start on on utility and just you've talked about.
Service levels being a differentiator for you as we do see supply chain, improving just curious whether or not youre seeing some of that differentiation opportunities.
Diminish a little bit and maybe any sort of anecdotes is even when we get to sort of a normalized supply chain environment, where where that service will remain a competitive opportunity for you.
Yes.
It certainly during the pandemic.
It's based on what customer has told us.
We have outperformed and I would even go back to say service and quality have been absolutely core when I ran that business.
I would hammer that day in day out weekend week out because I always saw that as a differentiator right on price you can make a decision overnight to compete on a different level quality and surface. That's a lot harder.
So.
Roof during hurricane event ice storms and endemic.
And so we again.
Performed but youre right to point out.
The supply chain to recover.
You see.
Although it is in the market.
Probing and getting closer again to <unk>.
<unk> levels I would also say when you during this period, we've probably gained some share.
Once you have that.
Hard to give up you'd have to actually underperform again.
So I'd say, we're able to hold on.
To continue to.
Outperform on that level requires than us to just raise the bar and part of the investments that we're making part of what bill talked about investing in capacity and transmission that allows us when the demand is up to continue to service. So being ahead of that and we feel we are ahead of that.
Continuous to allow us to raise the bar on servicing and its a differentiator.
And then I wanted to ask on the deflation comment where youre seeing it in both Ross and components, specifically on the components side.
Is that a function of efforts that you're making in going to market in any supplier consolidation. That's translating some of it or is it something that you are seeing broadly in the market on component deflation and then related to that I mean, historically when you do see some of it.
What would generally be the lag time before you would start to see that filter into the conversation around price.
Yes. So my comments were around the the sum of raws and components were a tailwind.
But so.
I don't know Dan if there's a specific comment that components are behaving any differently I wouldn't say, it's the result of us doing something different I think those are that's just kind of market.
Pricing in reaction and it's interesting how youre describing.
The relationship between material cost and.
And Dan had a page I think two quarters ago.
Did a nice job of showing our cost structure being about 50% driven by raw material cost and the other half being labor and overhead burden and other items.
And usually.
I would say our paradigm is to have price offset.
The material cost and our productivity initiatives to offset inflation and the non material areas and so.
What you are asking usually.
We would see if we were to see inflation in materials, So I'm going back three years ago and earlier.
It would take a quarter or two for us to get the <unk>.
Price kind of into the market to offset that so that was kind of a lagged hedge if you will but I would say the last two years.
The pricing has been driven by lack of capacity rather than necessarily buy.
Cost and connecting back to Joe.
The first question.
Service is kind of a relative question youre trying to out compete somebody else and it.
It just feels to us like we're doing.
We're leaning in on the investment I think where we.
We're finding this to be utility space to be really core part of hubbell's identity.
Sure sort of leading into that maybe where maybe others.
Might be a smaller division of a larger diversified company.
Okay.
That's helpful. Thank you.
Please standby for the next question.
The next question comes from Steve Tusa with Jpmorgan. Your line is open.
Hey, guys good morning.
Good morning, Steve.
<unk> on another good quarter of execution.
Thank you.
Yeah.
Can you just give us a little more.
I joined a little bit late so if you already gave it then I can just go back to the transcript, but have you guys. Given the just price cost. The absolute number is now what you expect for the year and.
What that would be kind of in the fourth quarter and then.
Yes.
Utility margins, obviously very strong.
Any updates on kind of how you feel about exiting the year and into next year with this.
Of margin level, Thats now Blake comfortably into the into the mid twenties.
Yes, so let's start with price Steve.
And we talked about it.
Being more than all of the organic for the quarter. So you are talking about.
Eight points roughly of price in the quarter.
We're getting to the point.
We're not pulling a lot of price in the last quarter. So we're sort of riding out.
Lapping the previous price increases so.
One of the things that Youll see in our second half.
You squeezed second half expectation thats embedded in the guide is the fact that that.
That price starts to moderate a little bit.
Half.
And <unk>.
The cost is a little bit harder for us to predict but it just looks like that dynamic.
We're kind of on a year over year compare basis start to narrow.
Just a little bit.
And so it gets to your utility question is related to that.
And.
I think we.
We're going to be doing some more investing.
This incrementally in transmission second half, we're going to be investing in areas.
Mike.
<unk> chain resiliency.
And.
Innovation continues to be an area of focus.
And so as we get I think to our third quarter call with you all in October .
Well maybe start to have.
A better view of what some of our expectations into 'twenty four.
It will be.
But I think by the fact that you saw us raise our guide right. If you can.
Go to our mindset in April when we raised our guide by a couple of dollars.
We were describing having some second half.
Conservatism, because we just werent sure what to expect.
By a raise of $1 75 midpoint here to midpoint.
Youre hearing us say, we actually see momentum that gives us better visibility of the second half and some of that.
Caution has been taken away I think maybe now you're extending that six months in saying as you end the year with the momentum that you've got.
Ultimately how will that appear in 'twenty four and.
We'd really like to.
Make those margins as durable as we can Steve and we just we're going to do a lot of work to try to do that.
And we'll be talking more about that obviously over the next next caller so yes.
Got it.
And any any mix impact from the euro.
You are now kind of more bullish on transmission I guess that I view that as kind of like a bit more of a.
Our mid to late cycle dynamics.
As you come off the bottom in these T&D cycles.
Distribution is a little bit smaller ticket projects, maybe perhaps.
Is there any kind of mix impact from the handoff to transmission that we have to keep in mind.
No I think I agree with you that the D is smaller projects to your bigger projects, but.
Margin profile is actually reasonably consistent across the two despite that difference and.
We did see a mixed benefit in the second quarter from Clara comps kind of outperforming.
So that's that's sort of interesting to watch that trend.
Just their gross margins are high and as part of our relative to our portfolio.
So if we can get some good momentum behind that that could be an interesting mix contributor.
Eight.
Great. Thanks.
Thank you.
Please standby for the next question.
The next question comes from Chris Snyder with UBS. Your line is open.
Thank you I wanted to follow up to some of the commentary in the prepared remarks about customers on the utility side, alright closing their order patterns.
Should we close to that to mean that order for utility were down in the June quarter on good backlog comedown alongside that.
Does that have any impact on Q2 revenue or.
We won't get revenue awkward, but longer stealing bottlenecks.
Okay.
Yes, Chris.
Orders were down in utility.
But as you noted the backlog is there and.
That gives us.
Enough backlog not just to.
To support the second quarter, but we view.
There is enough backlog to support the second half, which is really the underpinning of our guidance raise is the confidence that comes from that so I think it's just that adjustment period to us confusing our customers with really long lead times is the supply chain was impaired and now that it's recover.
In many places.
They just really don't need to be ordering as far out and we're just going through that adjustment period, right now and I think the really important part because this.
Fourth period as they adjust.
It is it makes it harder year over year. So if you think back of last year during the first half our orders increased 50 over 50%.
And then within a quarter, 70% so.
Then we said that's just not a sustainable level, that's not a reflection of real demand at the time that lead times are going out. So those are the comps, which we now compare so even when orders are down.
It's still.
Very elevated level our backlog.
<unk> came down very modestly last quarter.
It's still well above historical levels. So.
And the other thing I would say, it's very much time to us taken our lead times down so it's in the areas, where we've taken our lead times down that we see this adjustment. So it's all as we anticipated and I would say pretty predictable.
No no I really really appreciate that thank you for all the color.
And then when we kind of look at the guide and the.
The company is guiding you.
Utility margins lower in the back half than the first half, but still obviously, it really really strong levels.
When we think about that first half the second half decline is.
Is that just a function of price being held in costs going higher on the raws in the components.
Is it mix, maybe from the acquire installations coming back.
Or is there some expectation that maybe price will have to be given back in some capacity just because supply.
Supply chains are recovering and there is not the same urgency to procure that there was a year ago.
Yes, Chris we're not anticipating giving price.
But as we go year over year.
We are anticipating that price cost to be a little narrower and.
We did have some mix richness in the second quarter and we are anticipating.
Increasing our investments on the Opex side inside of segments. So that all is.
Contributing.
As you say high level of margin just kind of.
Off of off of a nice comp.
Thank you.
Please standby for the next question Jan.
The next question is from Christopher Glynn with Oppenheimer. Your line is open.
Thanks, Good morning, guys.
Good morning, Chris So.
Curious about utilities kind of capacity to <unk>.
Run fixes upgrade and modernize on the distribution side.
Is there anything in terms of plateauing and their ability to consume the products yourself I know, it's kind of a mixed.
So I had a question against the dynamic of the lead time adjustments, but hopefully I guess clearly enough.
Yes, I mean I think that.
Install I think what you're maybe getting at is our installers.
Some form of constraints.
I think inside of utility there is some degree of that you can't just add but there are outsource companies that are good at adding.
Basically adding installer capacity.
So I think that.
The need from the Infrastructure's, there Chris and.
From.
Being able to put.
Mid single digit units hang more.
I do think that the.
Ultimately, that's that's what our expectation is.
Okay great.
On the acquirer you referenced the gross margin mix favorability and I think total margin favorability.
One point, we consistently thought of that as dilutive mix within the utility segment and then we haven't had a clean read through.
Pandemic and.
More extended.
Semiconductor dynamics there. So just curious what changed there that we're talking about a claris mixed favorable now.
Because.
Your first comments were.
As they were volume constrained with chip supply.
Disruption.
They were sitting there absorbing all the overhead rate and it was kind of a lower margin profile.
Now really speaking to the Incrementals of the comms inside of Clara, which.
Cheating and using gross margin as a proxy for that being quite attractive on the incremental side and so I think all.
All we're doing is talking about.
At a constrained volume absorbing overhead.
Not as profitable now as we add in a high growth area. The incrementals are attractive that way.
That makes sense great yeah, thanks for the clarification.
At this time I show no further questions.
I would now like to turn the call back to Dan for closing remarks.
Great. Thanks, everybody for joining us and I'll be around all day for questions. Thank.
Thank you.
This concludes today's conference call. Thank you for participating you may now disconnect.
Yeah.
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Good morning, and thank you for standing by walking through the second quarter 'twenty twenty-three Hubbell incorporated earnings conference call.
At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone you wouldn't hear an automated message advising your hand, just right to withdraw your.
Question. Please press star one one again please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today, Dan in Morocco, Vice President of Investor Relations. Please go ahead.
Thanks, Michele good morning, everyone and thank you for joining US earlier. This morning, we issued a press release announcing our results for the second quarter of 2023 press release and slides posted to the investors section of our website at <unk> Dot com.
I'm joined today by our chairman President and CEO , Kevin Barker, our executive Vice President and CFO Bill Sperry. Please note. Our comments. This morning may include statements related to expected future results of our company are forward looking statements as defined by the private Securities Litigation Reform Act of 1995. Therefore, please note the discussion of forward looking statements in our press release.
<unk> incorporated by reference into this call. Additionally comments May also include non-GAAP financial measures. These measures are reconciled with the comparable GAAP measures and are included in the press release and slides I'd like to turn the call over to Garvin.
Good morning, everyone and thank you for joining us to discuss <unk> second quarter 2003 results.
How 'bout delivered another strong quarter of financial results.
Our favorable position in attractive markets enabled us to achieve 6% organic growth, which combined with improved productivity and supply chain dynamics to drive significant.
And margin expansion and therefore.
Solid execution through the first half of 2023 and good visibility to continued strength in our businesses gave us the confidence to raise our full year outlook again this morning.
In addition to the strong financial results, we continue to improve our service levels to customers.
Both investments in capacity innovation and supply chain resiliency are enabling increased sequential output and improved lead times.
Looking ahead, we expect grid modernization in electrification.
To drive elevated demand for Hubble's critical infrastructure solutions, both in front and behind the meter.
We will continue to make investments into our business to support this growth in the second half of 'twenty three and beyond.
Before I turn it over to Bill to give you more insights on the performance in the quarter I would like to introduce our two newest segment presidents.
You will recall from our press release, a few weeks ago that we announced Alan <unk> retirement from Hubbell. After 10 years of leading our Calera and in recent years, our combined utility solutions segment.
Our strategic vision and passion for innovation plays a critical role in accelerating the segment's organic growth profile and I'd like to thank him for his many contributions to the Hubble as well as strong financial performance for our shareholders.
I'm excited to share that we've appointed a very talented successor, Greg gums to lead public utility solutions moving forward.
Greg has a strong track record of leadership and performance in the utility electrical and automation industries over his career.
And his skill set is well suited to help us further our growth ambitions across utility components communications and controls.
I've gotten to know Greg over the past year and believe he will integrate quickly and effectively within the organization.
His focus will be on driving profitable growth by building on a strong core foundation, while innovating and expanding an attractive adjacency.
I'm also excited to announce the appointment of Mark mics to lead hobbled electrical solutions.
Mark is a long tenured hubbell leader with a proven track record of performance and operational execution, most recently, leading hubbell power systems.
The strong results of that business over the last several years speaks for itself.
Some of you will know mark from our Investor days over the past few years and he was a key partner to me when I left the utility business.
He played a critical leadership role in our efforts to unify our broad portfolio of acquired utility businesses under an integrated business in power systems.
We're organized to compete collectively with a simplified operating structure.
As we continue our multiyear journey to execute a similar playbook in HTS Mark is well suited to drive sustained improvement in the segment's long term growth and margin profile.
Both Greg and Mark are well supported by experienced and talented leadership teams and I am confident they will continue to execute on our core strategy together and deliver consistently differentiated performance for our customers and shareholders.
With that let me turn it to bill here to walk you through the financial performance in the quarter.
Thanks, very much Griffin and good morning, everybody thanks for joining us.
Congratulations to Greg and Mark and on a personal note for me very very excited to partner with both of you as we drive future success with Hubble. They are both off to excellent starts in their new responsibilities.
I'm going to start my comments on page five of the materials that you hopefully grab.
It's really just a summary of a very strong financial performance in the second quarter.
Most of the compares will show you in this deck are against the second quarter of prior year of 2022, we find instructive also to look sequentially to the first quarter of 'twenty three.
And I think that we see.
A lot of continuation of the positive trends that we experienced in Q1.
Things played out quite similarly in the second quarter.
So a 6% sequential top line growth and a 1.5 or so of margin added so.
A lot of the same themes that youll remember from our first quarter call.
You see sales at $1 billion.
Three seven.
9% growth with 3% coming from acquisitions, 6% organic.
The organic being driven primarily by price, which is a theme again you guys saw first quarter with us.
Going back to last year.
<unk> margin, reaching the 22% level, a very attractive level nearly six point improvement over last year.
Really result of the price cost being favorable.
As well as some productivity from.
The supply chain normalization of some of the efficiencies coming with that.
Earnings per share above the $4 level.
Also very attractive 45% growth rate.
That.
That increase in earnings.
<unk>.
Being driven by the sales growth and the margin expansion at the LP level.
Our free cash flow of $192 million.
Really driven by the strong net income growth.
And.
That number's absorbing continued investment in <unk>.
Capex and working capital.
So.
I think that we're very pleased with this cash flow, it's allowed us to strengthen the balance sheet.
When you look at the balance sheet at the Midway point here of 2023, you've got nearly a <unk> 5 billion of cash.
$1 four of long term debt, so our net debt to EBITDA.
Being less than one we think really positions our balance sheet to be supportive.
Being an investment profile and we think that can come both in the form of Capex opex as well.