Hubbell Incorporated (NYSE:HUBB) Q4 2023 Earnings Call Transcript

Hubbell Incorporated (NYSE:HUBB) Q4 2023 Earnings Call Transcript January 30, 2024

Hubbell Incorporated beats earnings expectations. Reported EPS is $3.69, expectations were $3.58. Hubbell Incorporated isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, and thank you for standing by. Welcome to Hubbell’s Fourth Quarter 2023 Earnings Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Dan Innamorato, Vice President of Investor Relations. Please go ahead.

Dan Innamorato: Thanks, Phoebe. Good morning, everyone, and thank you for joining us. Earlier this morning, we issued a press release announcing our results for the fourth quarter of 2023. The press release and slides are posted to the Investors section of our website at hubbell.com. I’m joined today by our Chairman, President, and CEO, Gerben Bakker, and our Executive Vice President and CFO, Bill Sperry. Please note our comments this morning may include statements related to the expected future results of our company and are forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Therefore, please note the discussion of forward-looking statements in our press release, considered incorporated by reference to this call.

Additionally, comments may also include non-GAAP financial measures. Those measures are reconciled to the comparable GAAP measures and are included in the press release and slides. Now let me turn the call over to Gerben.

Gerben Bakker: Great. Good morning, and thank you for joining us to discuss Hubbell’s fourth quarter and full year 2023 results. Hubbell delivered a strong finish to an exceptional year. For the full-year 2023, we achieved 9% sales growth, over 500 basis points of operating margin expansion, and over 40% growth in operating profit and earnings per share. These results were driven not only by our strong positions in attractive markets but also by the consistent execution of our people and maintaining industry-leading service levels for our customers while driving price and productivity across our businesses. Our strong financial performance also enabled us to invest back into our business and capacity, innovation, and productivity initiatives.

We invested $165 million in capital expenditures in 2023, almost double our investment levels from 2021. We are confident that these investments will drive future growth and productivity for our shareholders, and as we will describe in more detail later, we intend to grow profitably off of a strong multi-year base of performance. Turning to the fourth quarter, we delivered strong growth and margin expansion in both segments. Notably, we also returned to year-over-year volume growth in Electrical Solutions. As we noted on our previous call in October, we were confident that the channel inventory management that we had seen earlier in the year had largely normalized. As a result, we saw a stronger seasonal performance in the fourth quarter as well as continued strength across data centers and renewables verticals.

We also continued a trajectory of strong margin expansion in the Electrical segment and in the year with adjusted operating margins of 16.6%. We continue to see structural margin expansion opportunities as we make progress in our strategy of competing collectively as an operating segment and we plan to accelerate our restructuring investment in 2024 to drive long-term productivity. In Utility Solutions, fourth quarter trends were largely consistent with the third quarter. Transmission markets were strong and we continued to convert on past due backlog in communications and control as supply chain conditions have improved. Utility distribution markets continue to be impacted by channel inventory normalization as anticipated, though we continue to see visible demand strength in 2024 and beyond.

Telecom markets were weak in the quarter and while our long-term outlook here remains positive, we are taking a cautious initial view on 2024 until we have more visibility on timing of investments. We also executed on two important portfolio actions in the quarter as we closed on the previously announced acquisition of Systems Control and announced a definitive agreement to sell our Residential Lighting business, which we expect to close in early February. These transactions reflect our ongoing strategy to create a focused portfolio strategically aligned around grid modernization and electrification. These transactions improved the long-term growth and margin profile of our portfolio and we anticipate that they will be net accretive to 2024 adjusted earnings per share.

We will provide more details on our ’24 outlook at the end of this call, but we remain confident that Hubbell is uniquely positioned in attractive markets and that we can build off the success of this last several years to drive profitable growth off this higher base of performance. With that let me turn it over to Bill to walk you through the details of the quarter.

Bill Sperry: Thanks very much, Gerben. Good morning, everybody. Thank you for joining us. I’m pleased to have the chance to discuss with you our financial performance in the fourth quarter, which was very strong, capping a strong year, and frankly a strong two years. I’m going to start my comments on Page 4 of the slides that I hope you found. So the trends have been in place really for the last year and longer, strong sales growth and operating profit growth, including margin expansion being driven by strong markets, as well as strong pricing and strong cash flow is resulting and those fundamental trends are obviously continuing here in the fourth quarter. So, we reported $1.35 billion of sales, 10% growth, 2% of that comes from acquisitions, 8% is organic.

This Utility segment little bit stronger than Electrical, but as Gerben noted, quite important for electrical volumes to return to growth as a sign that the inventory in the channel is normalized on that side of the house. Interesting truly sequentially, the fourth quarter seasonally stronger than is typical, so we think that’s a good sign. The operating profit margin side, 19.4%, 3 points of expansion, really being driven by price cost and productivity, and creating some source of funding for investments that Gerben had described. Earnings per share of $3.69, 40% increase to prior year, and $284 million in free cash flow helping to fund our CapEx and acquisition investments. So let’s double-click on that, on Page 5 and go one layer deeper.

So the 10% sales, we said was 8% organic that was comprised of mid-single-digits of price. We think that’s good evidence of our quality of service and our brand positioning and low-single-digits of volume, and welcome as I said, the return to Electrical volume growth. The 2% coming from acquisitions were all on the Utility side and we’ll talk about those more when we get to the Utility page. On the upper-right, operating profit up 34% to $262 million. The margin expansion of 3 points, really being driven by price as well as materials, which continued to provide a tailwind as they had for each quarter in 2023. So the inflation that we’re experiencing is more on the wage and transportation side, that’s where we’re focusing a lot of productivity efforts, as well as we’re absorbing there some operational productivity investments going on.

On the lower left, you see earnings per share, up 42%, a slightly higher growth rate than the operating profit, so below the line we benefited from some tax-rate favorability and on the free cash flow side, you see, $284 million, nearly 60% increase and for the full-year, we generated over $700 million of cash flow, and that supported a CapEx of around $165 million, which really help drive some footprint restructuring, productivity, and capacity investing. So let’s unpack the enterprise into the two segments and we’ll start with Utilities on Page 6, and you’ll see another excellent quarter from our utility team, double-digit sales growth and 40% operating profit growth. 13% sales growth is comprised of 9% organic and 4% from acquisitions. The acquisitions to remind everybody included EIG, which was our second quarter of ownership there, Balestro and Systems Control.

Systems Control was closed in the middle of December so didn’t contribute much yet. And we are reporting both Balestro and Systems Control in our T&D components and EIG is in the comms and control side. We’ll talk more about acquisitions in a minute in the last few years plus this year. As we think about the 9% organic growth, you’ll see, that it was skewed towards the communications and controls side. If I start with transmission and distribution components, you’ll see, organic was at 1% where volume was a drag on price, and if we look inside the components substation and transmission continue to be very strong distribution components. We continue to work-through our second quarter of channel inventory management. I think as we had mentioned before, our Electrical side had experienced that quicker and sooner earlier than Utility side.

So we’ve emerged on the Electrical side still in on the distribution side. And then, Telecom has been weak, a function of some overstocked inventories as well as potential demand impacts from a combination of high interest rates and some customers who are waiting for stimulus dollars to kick off their projects. You see on the communications and controls, surging growth there. We’ve got both the Aclara and Beckwith businesses there on the Aclara side. Those chips supply chain opening up has really allowed them to satisfy some existing backlog and so we see some great growth there. Also to remind, we have an easy compare there as last year we had a commercial settlement that was a conscious sales item. And Beckwith as well, which makes protective relays and controls, up double-digits in sales.

So very strong top-line performance by the segment and even better on the OP side, a growth of 40% to $174 million, over 21% margins, and the price cost story is the same, volume growth contributing and we continue to make investments. So, from a full-year – this is obviously our fourth quarter performance, just at the bottom of the page a full-year comment on profit growth of about 60%, so congratulations to Greg and his team on just a really outstanding year. On Page 7, we’ve got the Electrical segments, and you see, mid-single-digits sales growth with 2 points of margin expansion, strong performance from the Electrical team, and of that 6% sales growth, it’s comprised of about half of that is price and half volume. That volume, as we said, we thought in October that the channel inventories would be normalized and rebalanced and that did occur in the fourth quarter, which is good news.

The volume came from some important verticals. Data centers was a big one. Recall, last year we bought PCX, which is performing really strongly, serving that segment. Burndy as well as serving that segment. Burndy is also benefiting from the renewable vertical and a little bit of U.S. reshoring of the industrial side. So some favorable trends there allowing for that volume growth. And on the profit side, you see, 20% growth, 2 points of margin expansion as operating profit reached $88 million. Again, the price cost really helping as well as the return to volume growth. And the full-year comment I’ll make on Electrical like I did on the Utility side, we saw 20% growth in operating profit in this segment with 2.5 points of margin expansion. So, I think very successful year for the Electrical, and looking forward to Mark Mikes and his team continuing to push the segment to compete collectively, where we think there’s more growth and more margin available to us there.

I mentioned that I wanted to talk about the portfolio management, and on Page 8 we’ve laid out the last few years of activity just to remind ourselves of our intentions here. And I’ll start with the divestitures, where we have three companies divested and a fourth under definitive agreement that we’re open to close in early February. And you see, those businesses netted us $500 million of proceeds and our intention here is to make sure we’re investing in higher growth, higher margin businesses, and you’ll see that that $500 million we rolled into $1.7 billion of acquisitions, numbering about 10 over the last few years. And you can see in the large blue bubble of T&D components, where we added Cantega, Ripley, Armorcast, Balestro. And in the yellow bubble there of connection and bonding adding connector products.

So, those very intentionally adding businesses to high margin, high growth areas, as well as in specific growth verticals like substation systems, like grid automation, data centers, PCX that I mentioned, and wireless communications of Acceltex. We think we are enhancing the growth and margin profile of the company. I didn’t want to pause because of Systems Control’s recent closing as well as its size and the impact on capital structure. So that was a $1.1 billion purchase price that we funded with some cash as well as some CPE and a Term Loan A, provided by our supportive bank group. The result of that is a flexible and prepayable capital structure, which we think gives us some optionality and results in a very manageable debt levels of 1.8 times debt-to-EBITDA on a net-debt basis around 1.5. So, we feel like that we’re improving the portfolio and I’ll talk about the specific impacts of the acquisitions on our guidance in another couple of pages.

So, if we switched to outlook, let’s start on Page 10 with the markets, and then we’ll talk about how those markets roll through our earnings expectations. So, we’ve got the Utility segment on the left, Electrical segment on the right. You can see the different pieces of the pie here, starting with Electrical distribution, they’ve been – in the really two quarters now of managing their inventory is relative to the backlog and we think that’s normalizing quickly and expecting a healthy mid-single-digit growth rate there. Transmission, substation, and distribution automation, which is up around noon on the pie. We think those are both high-single-digits. Meters and gas in the mid-single-digits, and Gerben talked about Telecom having a very cautious outlook, waiting for orders to restart there.

I will just comment, that’s a short-term outlook. We do have very attractive medium and long-term outlook for Telecom. So, the result on the Utility side is a mid-single-digit growth rate. On the Electrical, you see, it nets out at 3% to 4%, so low-to-mid. I think the Industrial outlook, you see, both light and heavy is low-to-mid single-digits. We have mid-single-digit growth rates in our verticals and I think non-res, we maybe have a bit of caution at flat to low-single digits. So a constructive market outlook for 2024 and let’s go to Page 11 and see how that rolls through our earnings outlook. So, you see, the organic of 3% to 5% in our sales growth combined with 5% net from M&A, one going out, one coming in, to create 8% to 10% sales growth, That generates a 10% growth in operating profit, results in 6% earnings and free cash flow at about 90% of net income, affording a continued increase in CapEx. And let’s just walk through the bridge to give you a feel for it.

So, we’re under contract to sell Residential Lighting. That will lose $20 million of OP. Systems Control, EIG, and Balestro be adding about $90 million, so you can see, almost $1 coming from those before we pay the interest expense, which we have over on the right. We had for organic 3% to 5%, so we’ve comprised that of 2% to 4% volume, and one point of price, which is in the next column, that’s providing a nice lift and we have continued investment, particularly on the Electrical segment side as we compete collectively there and continue to consolidate the footprint under our restructuring programs. You see, on the far right below, OP, an increase in interest expense as a result of the borrowings that we outlined to close on Systems Control, and the result is about 6% of earnings growth to the midpoint of 16, 25.

You see some modeling considerations listed there, and I might just add another one on the seasonality for those of you who are modeling. We’re anticipating 2024 being quite normal seasonality for the first and fourth quarters, be it a little bit below the second and third quarters, which are seasonally stronger, and that just compares to last year where the first quarter was very strong and contributing to the full-year. So, we think a very constructive year in front of us. We feel well-positioned. We’re happy to have the return in volumes and we’re happy to have made some portfolio net addition to continue to push profitable growth at Hubbell. And with that, I would like to turn it back to Gerben.

Gerben Bakker: Great. Thank you, Bill. And before we turn it over to Q&A, I think it’s helpful on the last page to look at our 2023 performance and ’24 outlook in a longer-term context. The results we delivered for shareholders not only in 2023 but over the last few years have been very strong. Most notably, we have doubled our adjusted operating profit and adjusted earnings per share over a three-year period while growing sales at double-digit CAGR and expanding adjusted operating margins from the mid-teens to over 20%. We have also doubled our capital expenditures over the last three years to further differentiate our service levels to customers and support attractive long-term growth expectations. As grid modernization and electrification drive the need for more reliable, resilient, and renewable energy infrastructure, Hubbell is uniquely positioned with the right people, solutions, and strategy to meet the evolving needs of our customers and deliver continued value to our shareholders.

I’m extremely proud of our over 18,000 employees whose hard work and dedication have enabled us to achieve a new baseline performance. And I am confident that we will build off of this success with continued attractive profitable growth in ’24 and beyond. We look forward to hosting an Investor Day later this year on June 4, where we will provide more details on our long-term strategy with updated financial targets. With that, let’s turn the call over to Q&A.

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Q&A Session

Operator: [Operator Instructions] And our first question comes from Steven Tusa of JPMorgan.

Steve Tusa: Hi, guys, good morning.

Gerben Bakker: Good morning, Steve.

Steve Tusa: Could we just get a little more color on the bridge, maybe what you’re expecting on price cost and then any segment margin color for the year and how you expect that to trend seasonally?

Gerben Bakker: Yes, so price cost we’ve got as flat, Steve. We have effectively one point of rollover on price embedded in there, which we’re using effectively to offset commodity inflation and then we’ve got productivity program that we think can help offset non-material inflation in places like transportation, wages, and things like that. So, it’s quite a flat expectation. And I think the way segments – I think as a result of that PCP assumption, our margins by segment are reasonably flattish, and I’d say that applies to both segments, I would say, Steve.

Bill Sperry: And maybe I would –

Gerben Bakker: Yes, go ahead.

Steve Tusa: Does the ish on utility kind of skew one way or the other, positive or negative-ish?

Gerben Bakker: Yes, I’d say flat, as you think about.

Steve Tusa: Okay. Okay, great.

Gerben Bakker: Maybe the two moving pieces on that I’ll give you, if you think about the addition of Systems Control that’s actually a little bit dilutive to the margin even though it’s – we’ve provided those numbers and very attractive addition. And if you think about volume, it’s a little bit accretive. And if you think the net of those with PCP flat, it’s roughly flat. If you look at maybe a little bit color on the Electrical because the Electrical I think it’s a slight expansion, but that is with a pretty good step-up on the restructuring, so if you take that out, it’s actually a nice expansion of that, and Bill referred to it earlier of the opportunity still in that segment as they work through organizing that better, competing collectively, there’s more room for margin expansion there.

Steve Tusa: Got it. Okay. Thanks, guys. Appreciate it.

Operator: Thank you. One moment for our next question. And our next question comes from Jeffrey Sprague of Vertical Research. Please go ahead.

Jeffrey Sprague: Thank you. Good morning, everyone. Just a little – good morning. Still little more color on the Utility margins. Just also thinking about the comms, Aclara business, not sure where the margins are at in that business, but that feels like it’s a friction point also to some degree from a mix standpoint. So, I wonder if you could address that. I guess, Gerben you said flattish and you are covering through all that, but still I love some context on the mix effect of Aclara. And can you just give us a little color on how much Telecom was down in 2023? I guess, we’re looking for a weak 2024, but we do have sort of at least half a weakness in the base here for 2023, I believe.

Bill Sperry: Yes. So, maybe let’s start with Utility margins first, and I would say for Aclara, you’re right to say their margins are below the transmission and distribution component margins, largely because of the amount of R&D investing that we’re doing, working on developing the Next-Gen comms package. So, I would say, in ’23 and particularly in this fourth quarter where you saw them outgrowing, I would – I think where you’re going is, is that create a mix drag and it did in the fourth quarter. I think growth rates next year, we maybe anticipate more balanced, Jeff, so I don’t think we’ll have a big mix effect in Utility margins in ’24. And your second question was on Telecom. Maybe provide a little context there, Jeff, and we really saw that slowing down towards the latter part of the year, particularly the fourth quarter, specifically was down 20%.

The first quarter, we still expect that to be down double-digits. And what happened early in the year, we’re still working through a lot of backlog in that which kind of shielded us a little bit. So we certainly expect after the first quarter, the second quarter sales to be down, and then we expect that to rebound in the second half and some of that stimulus funding frees up.

Jeffrey Sprague: And Gerben, can you also just address kind of your ability on just kind of factory throughput here as the industry, particularly on the Utility side seems to want to compound out here pretty healthy growth rates, everything kind of buttoned up on the factory work you’ve been doing or are there sort of more to do there, maybe just a little bit of skyline and what to expect on CapEx?

Gerben Bakker: Yes, I’d say more to do, Jeff. Some of those projects take time to get some of that equipment in and online. So, if you think about, for example, our transmission and substation markets, particularly strong last year and this coming year as well as you saw, and that requires some capital that still need to come online, and I feel good about our ability to do that. We’ve done that very well over the last year, so that’s going to support some of that growth that we have embedded in our guidance.

Jeffrey Sprague: And then just one last question – I’m sorry, if you’re not done, go ahead, I just had one last follow-up, if I could.

Gerben Bakker: Please go.

Jeffrey Sprague: I just wanted to kind of come back to the seasonality comment and everything, totally get it and that’s sort of what I’ve been modeling, but given that – given the margin comp in the beginning of the year in particular, are you expecting EPS to actually grow year-over-year in Q1?

Bill Sperry: Yes. I think that we just aren’t – we don’t do EPS in the – by the quarterly guide basis. I just would say I’d anticipate our Q1 earnings to be in line with contributing to the full-year at our typical seasonality and more so than it did last year so.

Jeffrey Sprague: Great. Thank you.

Operator: Thank you. One moment for our next question. And our next question comes from Tommy Moll of Stephens. Please go ahead.

Tommy Moll: Good morning, and thank you for taking my questions.

Gerben Bakker: Hi, Tommy.

Bill Sperry: Hi, Tommy.

Tommy Moll: I wanted to start on the Utility side of the business. It seems like for most of last year it was more a discussion around availability rather than price. With that said, given some of the inventory destocking, particularly around distribution, has that conversation changed at all? Is price a bigger factor at this point?

Gerben Bakker: I would not say so, Tommy. No.

Tommy Moll: Good to hear. Thank you. I guess that then begs a follow-up where in your full-year outlook you contemplate, I think you said, Bill, a point of wraparound price, but you did highlight some uncertainty in certain pockets, what are those pockets you were referencing there?