Hubbell Incorporated — 2024 Q1
Transcript
Each turn shows the speaker, their inferred role, the section, and that turn's net sentiment (×1000).
Ladies and gentlemen, thank you for standing by. Welcome to the First Quarter 2024 Hubbell Inc. Earnings Conference Call. [Operator Instructions] After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would like now to turn the conference over to your speaker today, Dan Innamorato, Vice President of Investor Relations. Please go ahead.
Thanks, Michelle. Good morning, everyone, and thank you for joining us. Earlier this morning, we issued a press release announcing our results for the first quarter of 2024. The press release and slides are posted to the Investors section of our website at hubbell.com.
Great. Good morning, and thank you for joining us to discuss Hubbell's first quarter 2024 results. Hubbell is off to a solid start to '24 and we are well on track to deliver on our full year outlook, which contemplates double-digit adjusted operating profit growth at the midpoint.
Thank you, Gerb. Good morning, everybody. We're well aware that you're all over schedule. There's a lot of releases today. So we appreciate you taking time to discuss Hubbell's performance.
00 there on the pie. That's the traditional T&D businesses between substation, transmission and distribution, then from about 6:00 -- or 7:00 to 9:00, you see the telecom and gas, which represents the specialty. And then from 9:00 to noon, you see the Aclara utility meters and then the protection products. So hopefully, that gives some clarity to the relative sizes of those different businesses.
Great. Thanks, Bill. So to sum it up, our performance in the first quarter with Hubbell well on track to achieve our full year 2024 outlook for double-digit adjusted operating profit growth, which we are reaffirming today. Relative to our prior outlook, our electrical markets are off to a stronger start, and we have better visibility to positive price traction across both of our segments, which we believe will enable us to absorb the near-term impact of weaker telecom markets.
[Operator Instructions] As a reminder on your telephone and wait for your name to . Our first question comes from Jeffrey Sprague with Vertical Research Partners.
A few questions from me. First, just on -- and I'm sorry if I missed it, just hopping between calls. Did distribution actually grow for Hubbell in the quarter? And if so, can you size it? And then whether the answer is yes or no, can you kind of triangulate that to what your view of end demand or sell-through might have been in the quarter in the channel?
Yes. So I think the second half of your question is, we'll get to first. I mean I think where we have the most visibility through our customer base and Gerben referred to being with 400 of them as recently as a week or 2 ago.
And maybe I'll add some context is what we see even through the first quarter and maybe coming even into April is, the good news is we are seeing a sequential as you look from February to March into April, increase in order rate. And I think that's a reflection of that channel inventory, the distribution channel inventory normalizing.
And then Bill noted, I think that some additional price has allowed you to kind of offset telecom in the guide, but cost is also going up, right? Copper is up, some other stuff is moving.
Yes. So we've got productivity levers too. And you're right to point out that we're looking at price kind of against material cost and then productivity against nonmaterial inflation. And you're right, that inflation persists. So I think important, Jeff, for us to keep our eye on the productivity ball, as well as make sure we're being as surgical on price as we can be.
Your price/cost equation really hasn't changed that much then.
No. I mean, it was stronger in the quarter than we had originally anticipated. But also, I think, as the year unfolds, when we told you that we had started our outlook with about a point of price, we obviously had 3 points in the quarter.
Great. And then just one more for me, if I could. What was the sequential impact on Utility Solutions margins from the Telcom weakness? It was encouraging to see the margins move up sequentially. And I think you have certainly mix headwinds between grid infrastructure, grid automation, relative growth rates. But Telecom specifically sequentially, was that a meaningful headwind in the quarter?
Yes, Jeff, it's still a headwind, less than the $150 million year-over-year, I'd say, though.
One moment for the next question. Our next question comes from Steve Tusa with JPMorgan.
Can you guys just give us a little bit of color on the second quarter on EPS, just relative to normal seasonality, any kind of sequential color there? And then how you expect the utility margins to trend throughout the year?
Yes. So it's a little bit of a -- first of all, nice sweep by the way, but it's a little bit of a tough question just because we don't give quarterly guidance.
No, that's perfect. That's absolutely perfect. And then just the Utility margin over the course of the year?
Yes. I think that as we get normal seasonality for us is to pick up volume and margin in second and third quarters, Q4 kind of steps back.
But the second quarter will be up from the sequential expect margins in the second quarter over the first. Stay elevated and that stays in the third quarter and then declines...
One moment for our next question. Next question comes from Nigel Coe with Wolfe Research.
So just going back to the Utility inventory levels. So where are we in terms of the channel inventory? So I think 6 weeks is historically where they've been in the past, just wondering if we're getting down to those levels.
Yes. Maybe I'll start, Bill, fill in. I would say in the distribution channel, and that's where we have better visibility, right? Because we sell and then we see their sell-out in fairly good amount of them that are stronger partners there.
Okay. So thinking about the sequencing of the full year for the Utility Solutions segment, 4% to 5% for the full year. So the second quarter still below that bar, I'm assuming? And then the second half above on [Indiscernible]?
Yes. And again, I think as we've tried to put in that little box, we think there's T&D compares get a little bit easier, and some of the automation compares get a little harder. But the larger part of the business is the infrastructure piece, and that's where we think you'll see the back-end growth.
Okay. I had a quick one on utility margins. Obviously, recognizing that the bulk of the year-over-year was driven by the Telcom headwinds. So the balance, the roughly 100 basis points outside of that headwind, would that be mainly volume deleverage? Or was there an M&A impact from the Systems Control?
Yes. The M&A impact from Systems Control was very modest, given that it right, it was 14% of sales and the margins were in the mid-20s that it was kind of comping against. So it did very nicely in its margin, but it had a slightly -- it had a slight drag from there.
One moment for the next question. The next question comes from Tommy Moll with Stephens.
I wanted to start on the topic of the supply environment for your utility business. You've invested in response to significant demand in expanding your supply base, but others in the market have as well.
Yes. I think where we're adding capacity is in the areas where we see visible longer-term growth, right?
A couple of metrics that support, I think, Gerben, is I think our service levels are reaching very good levels. And our lead times are in most areas coming back to normal. And those 2 facts or outcome, I would say, are pretty demonstrative of an improving supply chain environment.
Yes. And maybe I'll go on that again, Bill, because what our customers want most from us is that we service them well with quality products. And again, in the discussion that we have with them, that's what they're really concerned about.
I wanted to follow up on the comment you made regarding pricing for Telco. Just clarify a bit what you meant? I think, Bill, that was a comment you made in the context of a broader pricing discussion.
Yes. I mean I think we're really pleased generally with the pricing construct. We had about 1 point of wraparound price from our last year actions. So for us to garner 3 points in the first quarter implies success at getting some new price.
One moment for the next question. The next question comes from Julian Mitchell with Barclays.
Just apologies I wanted to circle back to Telcom. Just that I see the color on sort of Slide 8. And clearly that exposure was down 40% in the first quarter. But just to try and understand, full year as a whole, kind of what are you dialing in for that Telcom business in terms of year-on-year trends in Telcom?
We're anticipating, Julian, double digits down for the full year. We see the second quarter kind of continuing from the first quarter, the comps in the second quarter get easier because this started as we went through the second half and accelerated as we went towards the end of the year.
That's helpful. And then just my second question would be around Utility margins and the trajectory there.
It's the right way to think about it, indeed. The only, I would say, clarification to that, typically, in the fourth quarter, we'll see it come down again.
One moment for the next question. The next question comes from Brett Linzey with Mizuho.
Yes, I just wanted to come back to the investments. Can you just remind us in size what you're thinking about in terms of investments for the year?
Yes. So let's characterize the investments maybe first, right? So some of it is in capacity expansion inside of the Utility segment. And that as Gerben sort of highlighted, comp focused in the transmission and substation area.
And maybe the only thing to add there that if you look sort of out year expense, I think as you stated, what you'll see over year-over-year is that, that will start flattening as the year progresses because we accelerated investment, particularly in the second half of last year. So from that perspective, the comps just get easier on that investment?
Okay, great. And then just a quick follow-up, Bill. In your prepared remarks, you noted something about a sequential 30 basis point pickup. Was that 1Q to 2Q? Just the context in what you meant there?
No, no, 4Q to 1Q is what I meant. So just when you saw a 1 point year-over-year decline, it also is a 30 basis point improvement from the fourth quarter. And so we actually think that's a good sign.
One moment for the next question. The next question comes from Nicole DeBlase with Deutsche Bank.
Just on the Electrical segment outlook, just double checking that organic, you guys are still thinking up 3% to 4% for the full year? And I guess, in light of the outperformance in the first quarter, could this maybe be an area of upside?
Yes. I think you've got the outlook right, and I think you also have that we were encouraged by the first quarter. So I think both of your statements, I agree with yes.
Okay. Perfect. And then secondly, on the Meters and AMI business, you guys kind of put that additional color in the slides. Is your expectation that it actually declined year-on-year in the second half on the back of those tough comps or still up, but just not as much as the first half?
Yes. We were just, Nicole, trying to indicate a flattening there. So you saw pretty impressive growth in the first quarter. And as those comps get harder and we kind of managed through the backlog, we were expecting that to be a lot flatter.
One moment for the next question. The next question comes from Christopher Glynn with Oppenheimer.
Nicole, just beat me to the punch on the Electrical question there, but going in a touch further, you talked about electrification driving broad-based strength across industrial markets. Can you talk a little bit about the kind of [indiscernible] in an industrial market. What type of electrification capitalization are you associating with that?
Yes. Look, there's, I think, a lot of kind of background trends, Chris, going on. I think there's some legitimate onshoring. I think there's some legitimate like electrification driving really big semiconductor plants. So there's big kind of construction and project work that's being driven there.
Okay. Just a little stale on the size of the renewables and the data center businesses, if you could help there.
Yes. It's in the range of 5% to 10% in each of the segment, Chris. Less than 10% each .
One moment for the next question. The next question comes from Joe O'Dea with Wells Fargo.
Just wanted to ask on Telcom and it sounds like challenged environment currently, but also constructive medium-term outlook. And so can you just parse a little bit the key developments that you need to see to transition from kind of current challenges into something that's -- that's more constructive.
And I was just going to say that the -- we saw the orders start to dip last year and it was coupled with a very large backlog. So we started liquidating that backlog, but watching the low orders suggest that once the backlog kind of got down to book and bill levels that basically, what we need, Joe, is the order pattern to pick back up.
And so it sounds like it's more of an inventory normalization headwind than it is in end market activity headwind. Is that fair?
We 100% believe that that's true, yes.
Okay. And then just a question related to utility distribution side of things and the degree to which you see any instances of long lead times in certain product categories, not necessarily what you ship that are inhibiting some end market activity.
I think you point out a good point that our distribution products, by and large, the lead times are quite normalized, very quick to be able to satisfy demand.
The next question comes from Scott Graham with Seaport Research Partners.
I have one and one follow-up. On HUS, would it be fair to say second quarter sales volumes flat? Or can they be up? And then obviously, second half is up? Then I have that follow-up.
Yes. So Scott, we're not giving quarterly guidance. I think the Slide 8 should give you good considerations of how we're viewing it sequentially and how the comparisons play out in 2Q in the second half? .
No problem. You made a comment in the HES slide on project activity. Could you elaborate on that a bit?
I just think there are some big projects out there and things like chip plants and reshoring of large-scale industrial projects that -- our multiyear projects, our products tend to go in mid- and late cycle on that construction.
I show no further questions at this time in the queue. I would like to turn the call back over to Dan for closing remarks.
Great. I'll take it from Dan. I appreciate everybody's time, as Bill said, on a busy morning. We really look forward to spending time with you in June at our Investor Day, we'll talk a lot more there about where our business is going in the next 3 years.
This concludes today's conference call. Thank you for your participation. You may now disconnect.