Q3 2024 Hubbell Inc Earnings Call
The End of the World
Speaker Change: Good day and thank you for standing by. Welcome to the third quarter, 2024, Hubble and Corferator Irings Conference call. At this time, we'll participants are an illicit only mode. After the speaker's presentation, there will be a question in the answer session.
Speaker Change: To ask a question during the session, you will need a press star, one-one on your telephone. You will then hear an automated message advising your hand is raised.
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Speaker Change: Please be advice, that today's conference is being recorded.
Speaker Change: Odenalic to hand the conference over here at Speakers' Day, Dan Innamorato, VP of Investory Relations. Please go ahead.
Dan Innamorato: Thanks, operator. Good morning everyone and thank you for joining us. Earlier this morning we issued a press release announcing our results for the third quarter of 2024. The press release implies that both of the investor section of our website at Hubble.com.
Dan Innamorato: I'm joined today by Chairman President and CEO Gerben Bakker, an executive vice president and CFO Bill Sparing. Please note our comments this morning may include statements related to the expected future results of our company, and our forward-looking statements that are defined by the private security litigation or format of 1995.
Dan Innamorato: Please note the discussion of forward-looking statements in our press release and consider it incorporated by reference to this call.
Dan Innamorato: Additionally, comments may also include non-GAAP financial measures.
Dan Innamorato: Those measures are reconciled with the comparable gap measures and are included in the press release and slides. Now let me turn the call over to Gerben.
Gerben Bakker: Great, good morning and thank you for joining us to discuss Hubble's 3rd quarter 2024 results.
Gerben Bakker: Hubbell delivered strong operating performance in the quarter, generating 14% year-over-year adjusted earnings per share and operating profit growth, as well as 180 basis points of adjusted operating margin expansion.
Gerben Bakker: We are raising our full-year outlook this morning, and we remain confident in delivering double-digit adjusted operating profit growth in 2024.
Gerben Bakker: In our utility solution segment, grid modernization and electrification continue to drive strong growth in transmission, substation, and grid automation markets.
Gerben Bakker: as utility customers invest in grid infrastructure upgrades to accommodate electrification-driven load growth and interconnect new sources of renewable generation.
Gerben Bakker: We believe that we are at the early stages of a multi-year T&D investment cycle, and that Hubble's leading positions and service levels position us for sustained GDP-plus growth over the long term.
Gerben Bakker: As anticipated, telcom markets remained weak.
Gerben Bakker: and utility distribution markets continue to reflect the impact of customer inventory normalization.
Gerben Bakker: Operational execution was strong in the quarter and utility solutions returned to year-over-year operating margin expansion.
Gerben Bakker: Electrical solutions delivered another quarter of strong core operating performance with solid organic growth and 190 basis points of adjusted operating margin expansion.
Gerben Bakker: Performance in the quarter was led by strength in data center and renewable markets.
Gerben Bakker: where we are executing effectively on our strategy to compete collectively in high-growth verticals.
Gerben Bakker: with specified positions, innovative new products, and an integrated solution-oriented service model for customers.
Gerben Bakker: From an operational standpoint, we continue to simplify our business to drive productivity and operating efficiencies.
Gerben Bakker: which, along with portfolio transformation efforts, contributed to robust margin expansion in the quarter.
Gerben Bakker: Overall, while we continue to navigate pockets of challenges in certain large, high-margin businesses, Hubble is proving the ability to compound off of recent outperformance.
Gerben Bakker: As we look ahead, our portfolio and strategy uniquely position Hubble to capitalize on grid modernization and electrification megatrends.
Gerben Bakker: We are confident in our ability to deliver on our increased full-year outlook, as well as to achieve differentiated performance for our shareholders over the long term.
Gerben Bakker: Before I turn it over to Bill to discuss the quarter in more detail, I would like to provide some additional context on recent storm activity and the potential implications to our business.
Gerben Bakker: First and foremost, our thoughts are with all the people and communities impacted by these catastrophes.
Gerben Bakker: Hubble has a large manufacturing presence in the U.S. Southeast, and three of our manufacturing facilities were impacted and encountered disruptions as a result of Hurricanes Aileen and Milton.
Gerben Bakker: However, all have quickly returned to full operation and I'm relieved that all of our employees are safe.
Gerben Bakker: I am proud of how Hubbell and our employees have responded in support of all of those in need during this time, as well as the collective efforts to serve our customers and ensure that critical infrastructure in the impacted community is restored safely and efficiently.
Gerben Bakker: When we highlight service as a key differentiator in our industry, storms are a prime example where our customers depend on trusted partners who can reliably serve their needs at scale and with agility.
Gerben Bakker: Our dedicated emergency response team is unique in this regard.
Gerben Bakker: providing customers with 24-7 support, dedicated storm inventory, prioritized production, engineering to support to identify alternative restoration solutions, and logistics capability to expedite delivery.
Gerben Bakker: and never charging premiums or fees but viewing it as our obligation and privilege to make a positive impact during these times of critical need.
Speaker Change: Bill will provide you with more specifics on the financial impacts of the storms in the third quarter in a few minutes, as well as the anticipated contribution of storm-related orders in the fourth quarter.
Speaker Change: As we have highlighted many times over the years, the impact of storms typically represent only a small portion of full-year revenues.
Speaker Change: With that, let me now turn it over to Bill to walk you through some more details of the quarter.
Bill Sparing: Thanks very much, Gerben, and good morning, everybody.
Bill Sparing: Appreciate you taking the time to be with us this morning.
Bill Sparing: I need to beg your patience. I've been fighting a cold this week and my voice is shot, so I'm sorry about that.
Bill Sparing: Reiterate what Gerben said, overall very strong operating performance for Hubble in the third quarter, 5% sales growth.
Bill Sparing: 180 basis points of OP margin expansion, 14% growth of earnings per share, and 19% growth in free cash flow.
Bill Sparing: Thank you. Thank you.
Bill Sparing: In addition to looking at these variances to prior year, we sometimes look back at sequentials.
Bill Sparing: and compared to the second quarter.
Bill Sparing: We had growth in OP dollars, OP margins, and earnings per share all up sequentially. So we think signs of healthy financial performance. So returning to sales of up five percent
Bill Sparing: That's comprised of Organic being down slightly and Net M&A contributing about six points.
Bill Sparing: The net M&A refers to the fact that we sold a lower-growth, lower-margin business of residential lighting.
Bill Sparing: and added some higher-margin, higher-growth businesses in the utility segment, most notably systems control, which we'll talk about the strong contributions we're getting from that acquisition when we get to the utility segment.
Bill Sparing: inside of the organic story.
Bill Sparing: We have strong end-customer demand.
Bill Sparing: across the portfolio, the exception being a particularly weak telecom industry and, as Gerben had mentioned, distribution utility still working through an overstock situation between the channel and our end customers.
Bill Sparing: Operationally,
Bill Sparing: You see mid-teens growth of 14% to $4.49 of adjusted EPS
Bill Sparing: and the operating profit side equal growth for the 180 basis points of margin expansion.
Bill Sparing: And that also compares favorably to the second quarter, where we had 40 basis points of sequential large expansion from it.
Bill Sparing: Q2 to Q3 and Adjusted Operating Profit.
Bill Sparing: There's improvement across both segments.
Bill Sparing: and we'll talk about those in the next two pages, but.
Bill Sparing: structural improvements in the electrical segment and on the utility side.
Bill Sparing: and many more. Thank you. Thank you.
Bill Sparing: strong, strong performance as well. I think you'll see good price cost productivity execution and you see the impact of successful portfolio transformation by selling, selling some lower growth, lower margin business and adding some higher growth, higher margin business.
Bill Sparing: The EPS growth in that mid-teens in line with the operating profit growth.
Bill Sparing: Below the line of OP, there was a little bit more in interest expense due to the acquisition and a little bit lower tax rate that offset each other.
Bill Sparing: and the cash flow in line to hit our full year target.
Bill Sparing: So on page 5 we'll start to disaggregate the company's performance into the two segments that I'm going to start.
Bill Sparing: as we usually do with the utility segment. So you see double digit sales growth in the third quarter of 11% to 933 million.
Bill Sparing: that's comprised of 15% via acquisition and minus 4% organic.
Bill Sparing: If we were to unpack that into the different divisions, you'll see growth in both with 15% growth in grid infrastructure and mid-single-digit growth in grid automation.
Bill Sparing: Just to remind everybody what we have in those two divisions, we have the old transmission and distribution, the old hubble power system, and the grid infrastructure, as well as
Bill Sparing: specialty, which includes both enclosures and gas components, plus systems control. And in the grid automation, we've got ECLARA, which has both meters and comms, plus switching and fusing, as well as some connected.
Bill Sparing: automation products.
Bill Sparing: Sequentially, we saw sales growth from Q2 to Q3, which we think is a good sign of healthy seasonality.
Bill Sparing: If we just aggregate a little bit into some of the markets.
Bill Sparing: Telcom continues to be weak.
Bill Sparing: down 30% in the third quarter.
Bill Sparing: That represents modest improvement over the first half as we're starting to flatten sequentially.
Bill Sparing: But it remains pretty bumpy month to month and we're expecting continued softness into the fourth quarter
Bill Sparing: Fourth quarter, though, will have easier compares, and important maybe to note that a flat from here would imply a growth in 2025.
Speaker Change: On the T&D side, the real strength on the transmission piece, double-digit growth.
Speaker Change: benefiting from megatrends.
Speaker Change: of Electrification and Renewables, both requiring new miles and new grid interconnections, which is...
Speaker Change: On the distribution side, continuing to work through channel and customer overstocking, but there continues to be, we think,
Speaker Change: Healthy Demand as more equipment is being installed.
Speaker Change: to harden the grid and for maintenance and repair.
Speaker Change: We believe that's obviously a temporary condition, and when we get to the end of this morning, Gerben will give you some outlook ideas into 2025.
Speaker Change: Systems Control is worth pausing on. They're off to a really great start for us.
Speaker Change: This is our third quarter reporting with them in addition to a very short stub period in December.
Speaker Change: Thank you.
Speaker Change: They are a growing versus prior year at a very healthy levels and delivering a very attractive margins.
Speaker Change: It's proven to be very attractive for customers.
Speaker Change: Thank you.
Speaker Change: Gerben and I had the chance to go out there and visit the team a couple of weeks ago. They're all very energized, excited to grow, very culturally consistent with Hubble, and great to watch our sales force interact with their sales force.
Speaker Change: I think we can see some long-range growth there as our customer base can be.
Speaker Change: and Jeffrey Sprague. Thank you all. Thank you.
Speaker Change: based. The selling cycle's a little bit longer, so the backlog...
Speaker Change: provides actually very strong visibility into 2025 already. So you'll hear us be quite confident about systems control. And on the grid automation side,
Speaker Change: growth up mid-single digits.
Speaker Change: A good tale wins in grid protection and control solutions as our customers continue to invest in grid resiliency and in particular switching and fusing doing quite well in substation applications.
Speaker Change: So, on the right side of the page, turning to margins, you see very strong margin performance.
Speaker Change: up 18% in dollars to $236 million. You see 130 basis points of margin expansion to over 25%, which is a nice benchmark, we think.
Speaker Change: and that represents over a point of sequential expansion from the second quarter.
Speaker Change: So you have acquisitions contributing new dollars, you've got really strong price-cost management.
Speaker Change: and you see some returns on prior year investments.
Speaker Change: Thank you.
Speaker Change: some of the decrementals from the contraction in telecoms. So a very strong performance and utility segment and
Speaker Change: Let me elaborate a little bit on Gerben's comments on the storms.
Speaker Change: So, to the utility segment, the storms had a neutral impact in the quarter.
Speaker Change: We have a couple of facilities.
Speaker Change: in Aiken, South Carolina and Largo, Florida that were impacted and had to be closed for the last several days.
Speaker Change: and we believe we lost about 5 million in shipments from those closures.
Speaker Change: But that was offset by about 5 million of shipments on storm orders that we got, that we had in inventory, and represented about a quarter of the 20 million in orders that we received.
Speaker Change: So, net effect is in the third quarter neutral, in the fourth quarter we'll get those shipments out and including $15 million more in storm orders, which are already out there.
Speaker Change: Thank you.
Speaker Change: So I'm going to turn to page 6 in the electrical segment, another nice quarter for the electrical segment as they've done in 2024. You see 3% organic growth.
Speaker Change: with 190 basis points of margin expansion.
Speaker Change: and 5% operating profit growth.
Speaker Change: The 3% organic growth nets out the effect of the disposition of residential lighting.
Speaker Change: If you also added back the effect of storms on the electrical segment, there we have a facility in Arden, North Carolina, near Asheville, the western part of North Carolina.
Speaker Change: and we're estimating they lost about 5 to 10 million in sales from having to close those last several days of the quarter. Had those shipments gone out normally, you would have seen about 5% sales growth.
Speaker Change: So, we think electrical has got good trends.
Speaker Change: and doing nicely on the sales side. That growth is being driven by data centers and renewables, where we've enacted our vertical sales strategy, which is proving to be quite effective.
Speaker Change: We've unified the marketing materials, integrated the sales force.
Speaker Change: becoming much more effective at cross-selling the balance of system products and
Speaker Change: installed in a wide range of products across a wide range of industries.
Speaker Change: lesser contributions from heavy industrial and commercial. So, decent trends across the portfolio, but the clear strength is
Speaker Change: Data Centers Renewables.
Speaker Change: and Light Industrial.
Speaker Change: On the right side of the page, operating profit continues to strong performance.
Speaker Change: We've been seeing in 2024, you see a 5% increase in operating profit. That would be double digits if you netted out RISD from last year.
Speaker Change: So, quite healthy growth, 190 basis points of margin expansion. Seeing good drop-through on that incremental growth. Effective price-cost management.
Speaker Change: the effect of the portfolio management is seen very clearly.
Speaker Change: Yeah, I think...
Speaker Change: What portends best for the future is watching Mark Mikes and his team continue to simplify and streamline the business.
Speaker Change: continue to compete collectively, reorganize the sales force by geography versus product.
Speaker Change: eliminate functional redundancies.
Speaker Change: and ultimately made the segment more efficient and more effective.
Speaker Change: So we're excited to see the path that Mark and his team have segmented on. I think they're set up for good multi-year performance.
Speaker Change: and more. Thanks for watching. I'm Daniel Innamorato.
Speaker Change: On page 7, I'm going to give the remainder of 24 Outlook, and then I'm going to ask Gerben to comment.
Speaker Change: on next year. So we're raising our
Speaker Change: to 1635 to 1655.
Speaker Change: That's mid-single-digit growth.
Speaker Change: and just to remind everybody that's off of a base.
Speaker Change: that over the last two years, in 22 and 23, is up about 75%.
Speaker Change: and many more. Thank you. Thank you.
Speaker Change: and so to us having what is in effect a 20% CAGR since 2020 levels
Speaker Change: is what we were trying to convey at Investor Day by describing kind of the new-new, where we're gonna be growing off of this base.
Speaker Change: And that's quite important, we believe. The year specifically has evolved a little differently than we expected back in January. Namely, we've generated lower sales volume.
Speaker Change: as the telecom market.
Speaker Change: Weakness has persisted longer than we believed and the utility
Speaker Change: customers on the distribution side.
Speaker Change: holding more inventory than we believed. So managing through those two headwinds but we're quite pleased that
Speaker Change: The Hubble business model is really performing very nicely and despite those volume challenges is delivering at the high or above high end of the original EPS range.
Speaker Change: So we've got multiple levers to pull obviously. This year we're relying on the acquisition lever as well as
Speaker Change: the price-cost productivity lever and those are proving to be very effective. Maybe just a comment on the fourth quarter itself.
Speaker Change: We're expecting revenues to be a little bit stronger seasonally as that storm shifted some of the sales out of 3Q into 4Q and created some new sales for the utility segment.
Speaker Change: But we expect the operating performance.
Speaker Change: to continue to increase margins. And so that gets us to the high end or maybe modestly above the high end as a range for the balance of the year. And I'll ask Gerben to give you thoughts as we're thinking about next year at this point.
Gerben Bakker: Great, thanks Bill. I'm confident in our ability to deliver on a raced full year 2024 outlook and believe that Hubble is well positioned for 2025 and beyond.
Gerben Bakker: With unique leading positions across the energy infrastructure, in front of the meter, behind the meter, and at the edge, we believe that Hubble will achieve attractive GDP-plus growth through the cycle, as secular grid modernization and electrification megatrends accelerate.
Gerben Bakker: In utility solutions, we anticipate that robust P&D budgets will drive attractive growth across most of our end markets, as utility customers continue to invest in making the grid infrastructure more reliable, resilient, and renewable.
Gerben Bakker: Project pipelines and interconnection backlogs drive high visibility to continued strength in transmission and substation markets.
Gerben Bakker: And, we are confident that our sales and distribution markets will return to growth levels corresponding with healthy end-customer demand.
Gerben Bakker: While our exposure in telecom markets will be reduced headed into next year, easing comparisons and stabilizing markets provide a constructive setup.
Gerben Bakker: In grid automation, we anticipate that meter project roll-offs will be more than offset by strength in protection and control solutions.
Gerben Bakker: In electrical solutions, secular growth markets of data centers, renewables, and T&D make up more than 25% of our portfolio and are positioned for continued strength.
Gerben Bakker: While macroeconomic conditions drive some uncertainty in pockets of our business, we are well positioned to continue executing on our growth and productivity playbook to achieve differentiated performance.
Gerben Bakker: Hubble has demonstrated over the last several years to collectively show their ability to execute across a wide range of environments and market conditions.
Gerben Bakker: driving over 20% compounded growth in adjusted operating profits and earnings per share.
Gerben Bakker: We expect to continue building off this strong base of performance in 2025 and beyond, and we look forward to sharing more details with you when we provide our initial outlook next year. With that, let me turn the call over to Q&A.
Gerben Bakker: Thank you.
Speaker Change: As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced.
Speaker Change: To withdraw your question, please press star 1 1 again.
Speaker Change: In the interest of time, we ask that you please limit yourself to one question and one follow-up.
Speaker Change: Please stand by while we compile the Q&A roster.
Speaker Change: Our first question comes from Jeffrey Sprague with Vertical Research. Your line is open.
Jeffrey Sprague: Hey thanks, good morning everyone. Just in terms of getting level set on the actual results that you know on slide five you used to kind of give us the organics. I've got systems controls looks like it's a hundred and twenty million issue revenues and in the quarter you could maybe let us know if that's right and I guess that implies
Jeffrey Sprague: for the grid infrastructures down, I don't know, 6% organic or so, but maybe you could just share those numbers.
Speaker Change: Yeah, you've got systems control. Yeah, that's right, Jeff.
Speaker Change: And how about grid automation? There's a little bit of M&A in there too, or is that 4% a good organic number?
Speaker Change: That's organic, yeah.
Speaker Change: That's all organic. And then on the on the storm impact itself
Speaker Change: Is there any...
Speaker Change: confidence that this
Speaker Change: you know, flushes out remaining channel inventory. I suppose if you need inventory in North Carolina and it's sitting in Arizona, it's not moving across the country, so maybe you don't really know, but you've been trying to solve this riddle all year.
Speaker Change: Where do you think we're at on the channel and kind of getting to normalization?
Speaker Change: Yes, so Jeff, maybe I'll take that one and the short answer to it is yes, this is helping to flush out inventory as you well point out. This is in with very specific customers in very specific regions, and I would even say within those customers
Speaker Change: as they prepare for storm or branch. When they see that coming, they're gonna place storm orders looking at their inventories, not necessarily what exists across the whole enterprise network, perhaps. But yeah, this is clearly gonna help with flush that inventory through.
Jeffrey Sprague: And maybe just kind of a separate follow on, Bill mentioned strong price cost, could you give us a sense of how price performed in the quarter across the two segments?
Speaker Change: Yeah, so price was positive in both segments, you know, about a point to the enterprise.
Speaker Change: and I think I didn't want to mention it in my remarks just because I think it's gonna you know we're pivoting Jeff to a period where it's just going to be a smaller part of the price cost equation versus
Speaker Change: in 22 and 23, it was such a large thing, but about a point for the enterprise.
Speaker Change: and positive on both.
Speaker Change: Right, thank you.
Speaker Change: Thank you and our next question comes
Speaker Change: Thank you.
Speaker Change: Hey, good morning. Can you hear me okay?
Speaker Change: Yep. That'd be great.
Speaker Change: I'm sure you're talking to your customers. How are those kind of negotiations playing out here for you guys, especially in utility for next year?
Speaker Change: Yeah, maybe you got...
Speaker Change: You know, I'd say our price traction this year in both segments have been good, right? The outlier to that is in the telecom.
Speaker Change: You know, we've given back some price to get, you know, specific some targeted projects. But if you look at the P&D part of the business and the rest of the business,
Speaker Change: The price stick and a price actually, additional pricing that we've taken has held.
Speaker Change: We're coming into what we call blanket season again with utilities right now, and as we think about it, price will still be a lever for us going forward. There's still inflation in the market. It will be much more modest levels.
Speaker Change: But we continue to focus on what our true value proposition is, right, which is service first, and the recent storms have again shown our customers why they do business with us. So we still believe that, while at a much more modest level,
Speaker Change: that, you know, our customers will value first and foremost the quality of the service, and of course, then at a competitive price. So, you know, as we stated before, you know, our whole construct is not to go backwards.
Speaker Change: And I think we've proven that in 24, and that's our views and setup for 25 as well.
Speaker Change: So we look at kind of the margin you guys put up this year, a pretty strong result. Was there anything in the comps?
Speaker Change: As we look to next year, that plays out as a bit of a headwind, so should we assume that the 24 margins are kind of a base to at least grow off of for next year for utility margins? Because you just keep beating those numbers, obviously.
Speaker Change: Yeah look I think Steve the way we wanted to set up the future with with our with our Investor Day outlook was
Speaker Change: Kind of shifting the idea of our OP walk.
Speaker Change: to be going from a price-cost, kind of really big...
Speaker Change: step up in 22 and 23, and still a little bit in 24. And so, as you think about us going forward, think a little bit more about that volume driving incrementals.
Speaker Change: And that's why you sort of saw us in that 25% to 30%
Speaker Change: drop through that we're kind of expecting.
Speaker Change: You know, there's a little bit of investment activity still, but I would think of our ability to drive margins next year to be largely driven on incrementals from volume.
Speaker Change: You know, what's driving our margins now as well, right, is...
Speaker Change: in the absence of some of those investments.
Speaker Change: Right, and sorry just one last quick one on utility. Should we think of next year as like an easy comp because you still have destocking this year so it should be above kind of your long-term average and on some of these more stock and flow items?
Speaker Change: Yeah I mean I think that that we're anticipating transmission to remain really strong and you're right that the D should should be able to bounce back and so I would agree with your statement.
Speaker Change: Okay, thanks a lot.
Speaker Change: Thank you. Thank you. Thank you.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: Thanks, good morning.
Speaker Change: So Bill, you do sound like you're struggling there, so hopefully, it won't take too long to answer this question, but the way I'm trying to decompose here, I mean, I think Geoff's map is right down to 6% for core utility components.
Speaker Change: It looks like telecom is the bulk of that, so I'm getting to sort of ex-telecom, flattish, maybe down 1% core. Is that correct? And then just kind of going from there, if that is correct, a couple of things. Number one,
Speaker Change: What do you estimate to be your end customer, utility customer spending across your businesses, their distribution and maybe in terms of inside? And then, is this the weakness in residential new zones have an impact?
Speaker Change: on that business, so this is really just a de-stalking impact.
Speaker Change: Yeah, maybe let me take the first one and you take the rest if you want, Bill. I'd say your math is correct, as you pointed those out, with both what the closures or Telcom contributes and then what the rest of the T&D.
Speaker Change: And, you know, I'd say end-demand is mid-single-digit, what we've been talking about. So I think you have it all.
Speaker Change: you know, assessed, right?
Bill Sparing: Yeah, no, and I think of the Resi side.
Bill Sparing: You know, you continue to...
Bill Sparing: I mean, if you think about Rezi's impact on us...
Bill Sparing: We had a Resi lighting business we got rid of. On the electrical side, we still have some exposure through the big boxes that goes into Resi applications, but that's I think your question was how as it affects utility
Bill Sparing: We think that...
Bill Sparing: The maintenance and repair is really the way to drive that, and that is still strong. The effect of what's happening in new developments would be a smaller effect.
Speaker Change: Thank you.
Speaker Change: Okay. And then a quick one on the margins. Utility margins were, you know, really impressive, especially given the mix impact, etc. SG&A came in a lot lighter than what we had. I think SG&A was down 4%.
Speaker Change: Obviously, we've got some portfolio changes going on here, but is that a sustainable level of SG&A? Is there someone times in there? And did that land primarily within utility components in terms of that SG&A impact?
Speaker Change: Thank you.
Speaker Change: I would say the SGNA was spread.
Speaker Change: I would say the level of spending is sustainable. As Gerben was saying, there was some elevated investments happening at the end of last year.
Speaker Change: Between last year's SG&A and this year's, I think this year's is kind of the durable, maintainable level. Yeah, and maybe as a percentage-wise, certainly with the addition of systems control that, right, and sales growth that reduces SG&A as a percentage.
Speaker Change: And then I'd say the other area in some of the business, particularly in the telecom and enclosure business, we've taken some actions to address cost appropriately for that decline in volume.
Speaker Change: Okay, that's really helpful, thanks.
Speaker Change: Thank you. Thank you.
Speaker Change: Thank you. And our next question comes from Julian Mitchell with Barclays. Your line is open.
Speaker Change: Hey, Julian.
Speaker Change: Julian, please check your mute button.
Julian Mitchell: Hi, good morning. Just wanted to circle back on the H-U-S sales outlook again. So perhaps
Julian Mitchell: You know, maybe help us understand that the telecom piece, you know, how much are you thinking that's going to be down this year? I think before you said maybe down in the mid-twenties. I'm wondering if that's still held. When we're thinking about 2025.
Julian Mitchell: You know, what slope of sort of telecom bounce should we see and on the Transmission side of utility is that kind of steady growth?
Julian Mitchell: next year, you know, any kind of acceleration because of what's going on in backlogs, maybe help us understand on that piece as well.
Speaker Change: I'd say on the telecom side, it's more like 30% this year. It was of course stronger in the first half.
Speaker Change: And, you know, we're very careful to how to build that business back up.
Speaker Change: The goal is not to try to recapture that volume.
Speaker Change: but to grow that profitably going forward. And even now, as we see,
Speaker Change: You know, some projects come back and we're quoting, you know, some pretty sizable projects for next year. We're just being very, very thoughtful to not...
Speaker Change: just capture that volume at any price. So,
Speaker Change: So, I wouldn't expect it to bounce back at those kind of levels that it declined, but more steady growth from here going forward.
Speaker Change: I think your second half was around transmission.
Speaker Change: and transmissions been cranking you know at double digits and we're anticipating that to continue and I wouldn't I think your question was whether there was some acceleration and I would say we're expecting it to continue to crank in double digits.
Speaker Change: Thank you. Thank you.
Speaker Change: That's helpful, thank you. And then, just kind of following up on that, on the inventory aspect of the customers, realize the visibility is perhaps not as high as one would like. Is your impression that...
Speaker Change: The inventory issue, you know, we won't still be talking about it early next.
Speaker Change: Do you have some sense of where those inventory levels lie at the major customers? Yeah, let me give some comments and insights on it. And as we think about the D-STAR,
Speaker Change: What we see is that it's driven mainly by our large IOU customers. You know, in many cases, these are VIP relationships, long-term strategic alliances.
Speaker Change: and this is an area where we actually prioritized them when we, you know, started to see the supply chain normalize, you know, in part helping to create this. In other areas like the smaller munis co-ops
Speaker Change: and the public power, where this overstock has been less pronounced, we're actually seeing very nice growth in line with what is demand, what we see as demand.
Speaker Change: Certainly, as we've said, the storms
Speaker Change: have helped this a little bit. You know we continue to have conversations with our customers. We continue to analyze the sell-through data with conversations with these customers and I'd say that provides a constructive outlook for us.
Speaker Change: for distribution growth in 2025. Now, of course,
Speaker Change: The timing of precise, you know, at the turn of the year, is it overdose? Those are just very hard.
Speaker Change: to call, but I'd say what's for us encouraging, that we're also right now starting to see some of these customers sign a place.
Speaker Change: 25 orders specifically for projects that they start having visibility to so that that gives us confidence that that demand is strong.
Speaker Change: So, while I would say calling a specific date is very hard, we anticipate that this situation will be much, much improved exiting this year.
Speaker Change: and return to the world more importantly.
Speaker Change: That's great, Gerben. And just to clarify sort of what proportion roughly of your utility revenue is that type of customer where the inventories have been high? Any rough sense of proportion?
Speaker Change: We haven't disclosed that, Julian.
Julian Mitchell: Understood. Thanks very much.
Julian Mitchell: Thank you.
Speaker Change: Thank you. Our next question comes from Joseph O'Dea with Wells Fargo. Your line is open.
Joseph O'Dea: Hi, good morning. Thanks for taking my questions
Joseph O'Dea: I wanted to circle back. I thought, Gerben, your comment on telecom and being selective in the volume you go after is interesting. Just any perspective on, kind of, margin mix within HUS as we think about, sort of, transmission distribution substation versus, like, telco and gas distribution, trying to think about
Joseph O'Dea: You know, as Telco comes back, but you're more selective with it, just some of the margin considerations there, as well as with the growth contributions may be changing a little bit next year, any margin mix considerations.
Speaker Change: Yeah, Joe, it's interesting thinking about mix.
Speaker Change: specifically with telecom, the margins had been really high and as we've worked through this volume decline you know they've come down but you'd expect as it comes back the margins to return to attractive levels and
Speaker Change: I wouldn't get to, I don't think there's a ton of mixed drivers in all those different pieces. Much more, much more consistent I would say.
Speaker Change: Thank you.
Speaker Change: Got it. And then just anything on tariff scenario considerations, you know, in particular as it relates to sourcing, I think the the portfolio moves would have...
Speaker Change: diminished some of the direct exposure that you have, but I'm not sure in terms of the portfolio as it exists today, and just, you know, as we're mindful of sort of scenario considerations, anything on the on the tariff front.
Speaker Change: Yeah, I think you're right to point out their exposure has been reduced, particularly the lighting businesses were...
Speaker Change: You know, highly exposed to that, but I'd also say, you know, in the last couple of years, as part of our resiliency and strengthening during the supply chain crunch, we've also reduced our exposure to, you know, serving one of those regions that were highly exposed to tariffs.
Speaker Change: in the past. I'd say today, to Hubble, it's a lower exposure than it was. And I'd say the second thing is we've learned a lot from the earlier days of when we perhaps were self-critical of not going after that fast enough.
Speaker Change: And I think we've proven over the last couple of years, whether it's tariff or other inflation,
Speaker Change: you know, we've much better reacted to those. So I'd say, you know, I'm confident that, you know, when tariffs, if and when tariffs do happen, that it's A, a smaller impact to our business, but B, that we'll manage it.
Speaker Change: I appreciate it. Thank you.
Speaker Change: Thank you. Our next question comes from Chris Snyder with Morgan Stanley. Your line is open.
Chris Snyder: Thank you. I wanted to follow up on the utility organic growth commentary. It seems like, at least based on my kind of back of the envelope math, it seems like utility is up low single digits organic in Q4. And really all of that is driven by the storm, whether it's the deferments out of Q3 or just the storm orders you guys got.
Chris Snyder: So I guess my question is, you know, how fast do you think that this business can get back to that, you know, mid-single-digit kind of plus target? It sounds like you guys think next year, at or above.
Chris Snyder: Is that more of a back half that we get there, or do you think you could start the year at that level? It just seems like a big step up from what's implied on Q4.
Speaker Change: Yeah, I mean, I think that our view is that
Speaker Change: It could bounce back.
Speaker Change: when, you know, this inventory levels are fine, they're natural level, and that we think
Speaker Change: you know, at the end market level, the materials getting installed.
Speaker Change: at a level higher than our shipments are right now.
Speaker Change: As Gerben said, I think the situation keeps getting better every day. There's a mathematical point at which...
Speaker Change: You can still grow even if customers are still destocking and
Speaker Change: You know, so that's, we haven't given you our guidance for 25 yet, but we do anticipate, you know, organic utility growth starting at the beginning of next year.
Speaker Change: Thank you. Appreciate that. Thank you. And maybe just following up on that, you know, can you maybe talk a little bit about what's expected for a Clara, you know, came out of a period of really strong growth, but a lot of that was, you know, driven by kind of working down the backlog, you know, is the expectation that a Clara kind of.
Speaker Change: Flatlines, or should we expect a Clara to enter a period of decline just given how tough some of the prompts are? Thank you.
Speaker Change: Yeah, I mean, I think Eclair has got ability to grow its comms, half of its business.
Speaker Change: And so the your question is really pointed I think at the meter piece and There is a couple of big projects that are rolling off
Speaker Change: and the business has become a little bit more a maintenance and repair type business and when new projects get added back ultimately that would provide you know the next surge of growth I would say.
Speaker Change: And maybe put a finer point on it, I think as we look to 2025, we expect, you know, meters to be down, but more than offset by the AMI and protection and controls growth. And that's how we kind of look at business as a whole as grid automation.
Speaker Change: Thank you.
Speaker Change: Thank you. Our next question comes from Christopher Glenn with Oppenheimer. Your line is open.
Christopher Glenn: Thanks. Good morning and feel better, Bill.
Christopher Glenn: Just wanted to ask about the heavy industrial and commercial markets. Said a little softer, it didn't sound like it was particularly, maybe it's flattened. Does that feel like just kind of wonkiness in the end market or some fundamental slowing, maybe the facility impact hit those products?
Speaker Change: Yeah, I think it's an interesting one as we look at it, Chris, you know, if you start on the heavier industrial side.
Speaker Change: You know, we're serving, for example, steel plants.
Speaker Change: And when you see steel prices down...
Speaker Change: You know, that tells you something about demand.
Speaker Change: and gives us an indication of...
Speaker Change: something that keep our eye on as we give you guidance for 25 when we're together in January we'll have I think more to say about what we're expecting there
Speaker Change: Okay, and commercial markets, non-res?
Speaker Change: Yeah, so again, it's interesting. We used to, with the big lighting business there, we used to have a lot of exposure and we have a lot less now, but...
Speaker Change: You know, it's been, again, pretty modest for us right now.
Speaker Change: and Joe Sperry. Thank you. Thank you.
Speaker Change: Okay, and then just kind of a final question on all the distribution products discussions. Anything interesting in the third quarter book to bill versus the first half?
Speaker Change: I don't think anything terribly...
Speaker Change: enlightening. Now I think Gerben's comments on
Speaker Change: how you're sort of peeling away, you know, where would there be destocking on the distribution side? It's not in co-ops and duties and public power anymore.
Speaker Change: I think we just started moving out, you know, kind of from Houston through Florida in the southeast. The hurricanes have probably flushed that all out, right? So we keep, we just keep getting better on that side, I would say.
Speaker Change: Great, thank you.
Speaker Change: Thank you. Thank you.
Speaker Change: Thank you. Our next question comes from Brett Linzey with Mizuho. Your line is open.
Speaker Change: Hey, good morning. This is Peter Kosson for Brett. So just one on the deeds program. Is there any update to how you're thinking about that, the impact of the funding, and then are you worried about any political risk there? Just should there be a Trump presidency, particularly with Musk trying to cut costs, and he's more outspokenly opposed to the program? Thanks.
Speaker Change: Thank you. Thank you. Thank you.
Speaker Change: Yeah, I mean, what we've said, Peter, is limited contributions this year and probably not until later next year until BEAD funding starts to flow. There's been a couple of approvals recently for money to flow, but in terms of big project visits associated with BEAD, it's not something we've seen yet. And so I think later next year was sort of the base case of when some of that could start to contribute.
Speaker Change: All right, thanks. And just on the M&A pipeline, anything on deal velocity, general sizing, or just white spaces you're looking to fill out? Thanks.
Speaker Change: Yeah, I think the M&A pipeline is pretty robust right now.
Speaker Change: Thank you. Bye-bye.
Speaker Change: A couple of things swirling around and I would say of the traditional sizes
Speaker Change: You know there's more
Speaker Change: In our typical 50 to 100 million size range, but there are also the things in the billion-ish range where
Speaker Change: You've seen us do a couple things recently. So it's uh, it's something we continue to feel there will be opportunities for us to strengthen
Speaker Change: both the electrical and utility segments. There continues to be good brands out there. We can buy ways to strengthen, you know, our product and solution suite.
Speaker Change: And, you know, the...
Speaker Change: We continue to look for growth rates and margin potential that's additive to us.
Speaker Change: So one of the interesting implications of that is...
Speaker Change: I think we are seeing higher multiples and yet...
Speaker Change: because of the higher margin and higher growth rates.
Speaker Change: We're still able to deliver the same, or even often better, rates of return. So it's an interesting outcome that I feel like the multiples have crept up on us the last year or two, but that I think it's...
Speaker Change: I just actually think it's warranted and justified given the return potential.
Speaker Change: Perfect, thank you.
Speaker Change: Thank you.
Speaker Change: Our next question comes from Nicole DeBlaise.
Speaker Change: Deutsche Bank, your line is open.
Nicole DeBlaise: Yeah, thanks guys. Good morning. A lot of questions have been asked already, but I guess maybe just on channel inventory, I mean obviously a lot of discussion around what's happening at the end customer level, but just want to confirm that you guys still feel comfortable with where channel inventory is today.
Speaker Change #101: Yeah, I'd say yes.
Speaker Change #101: Thank you. Thank you.
Speaker Change #102: Okay, got it. That's clear.
Speaker Change #103: Okay, cool. And then I guess on the 4Q outlook, it seems like you guys are saying this, but just wanted to confirm, like we should be kind of assuming a normal seasonal outcome and then just layer on the impact of the storm push out from 3Q to 4Q. So you guys expect to recapture all of that in the fourth quarter.
Speaker Change #104: Yeah, that's a better way. I think I said better than seasonal, but it's probably you said it better, which is it'll be seasonal plus.
Speaker Change #105: a pickup from the storms. You said it better than I did.
Speaker Change #106: Thank you. Our next question comes from Scott Graham with Seaport Research Partners. Your line is open.
Scott Graham: Hi, good morning. Thank you for taking my question. Two questions, really.
Scott Graham: The renewables and the data center businesses, were those up sort of in the 15-20 territory or was it actually 20?
Speaker Change #108: You have some strong double digits, Scott.
Speaker Change #109: POS utility level being, you know, sort of running up mid-single. Is that across both grid infrastructure and automation or was that just a comment on just infrastructure?
Speaker Change #110: Thank you for watching.
Speaker Change #111: There's a comment on distribution markets within utility and some of the customers that aren't in an overstock position.
Speaker Change #111: Thank you.
Speaker Change #111: Great. Thank you.
Speaker Change #112: Thank you. And our next question is a follow-up from Jeffrey Sprague with Vertical Research. Your line is open.
Jeffrey Sprague: Hey, thanks for letting me back in. I just want to come back to systems control.
Speaker Change #113: I think we were working with the assumption that it was a $400 million business last year.
Speaker Change #114: You know, you kind of confirmed you just did $120-ish in revenues here in Q3.
Speaker Change #114: I'm sure there's some seasonality, but I mean, is this business growing 15, 20% organically currently? Maybe you could just give us a sense. You mentioned order strong, modulization offering, getting traction, just kind of a little bit more color on how that business is performing.
Speaker Change #115: Yeah, so first of all, we didn't have it last year, so I'm comparing. No, I know, but yeah, whatever the basis was, exactly. But yes, growth rate is strong.
Speaker Change #115: It isn't perfectly linear. I would say the third quarter was particularly strong.
Speaker Change #115: But I think you're right to infer that it's growing very handsomely and at nice margins and that
Speaker Change #115: I believe over the long term, but this would require investment on our part, but I think with our sales force and our relationships.
Speaker Change #115: I really think we can grow that business over the long term, you know, Jeff, in a really important way. So we're really pleased to have systems control in the family. Just a point of clarification, $400 million was the expectation for revenues this year, Jeff.
Speaker Change #116: I think somebody might have asked a tariff question, I'm going back and forth a little bit between calls, but can you give us a sense now of what percent of your cogs are U.S.-based?
Speaker Change #117: I don't know that I have that off the top of my head. The question was asked and we said
Speaker Change #118: A, it's smaller. It was the inverse. It was what exposure would you have?
Speaker Change #118: And it's smaller, A, because...
Speaker Change #118: We sold off two lighting businesses that had a lot of exposure. Second, we had done some redundancy planning and pulled some volume back domestically.
Speaker Change #118: and then secondly the fact that
Speaker Change #118: We have a lot more confidence in our ability to manage whatever tariff headwinds via price and productivity.
Speaker Change #118: We, uh...
Speaker Change #118: We'll keep our eyes very closely on the tariff question, but we're a pretty significant majority of our COGs are U.S. based.
Speaker Change #118: is a North American base.
Speaker Change #119: Appreciate it, thanks.
Speaker Change #120: Thank you.
Speaker Change #121: Thank you. I'm showing no further questions at this time. I would now like to turn it back to Dan Innamorato for closing remarks.
Dan Innamorato: Thanks everybody for joining us. We'll be around all day for calls. Appreciate it.
Speaker Change #122: This concludes today's conference call. Thank you for participating. You may now disconnect.
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