Yahoo Finance Hubbell Incorporated (NYSE:HUBB) Q1 2024 Earnings Call Transcript
Hubbell Incorporated (NYSE:HUBB) Q1 2024 Earnings Call Transcript April 30, 2024
Hubbell Incorporated misses on earnings expectations. Reported EPS is $ EPS, expectations were $3.54. 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: Ladies and gentlemen, thank you for standing by. Welcome to the First Quarter 2024 Hubbell Incorporated Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' 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.
Dan Innamorato: 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. 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. Please note the discussion of forward-looking statements in our press release and considered incorporated by reference into 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 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. Performance in the quarter was highlighted by strong organic growth and margin expansion in Electrical Solutions. Electrification and US manufacturing activity is driving broad-based strength across our markets, most notably in renewables and data centers which continued to grow double digits in the quarter. Our connectors and grounding business, which is strategically positioned in these verticals as well as in broader industrial markets, realized double-digit sales growth in the quarter.
We also continued to make progress in our HES segment unification strategy with 80 basis points adjusted operating margin expansion in the quarter despite increased restructuring investment in footprint optimization. With the completion of our residential lighting divestiture in February, we are confident that our Electrical Solution portfolio is aligned to structurally higher growth and margins going forward. In our Utility Solutions segment, performance in our core Utility T&D markets was solid, driven primarily by strength in our grid automation businesses and transmission markets. As anticipated, utility distribution markets continue to be impacted by channel inventory normalization, though end-market demand remains solid. We're also pleased with the positive contributions from our acquisitions in the quarter.
Systems Control is off to a good start and the integration is running smoothly, while Balestro and EIG delivered strong results in the quarter. Telcom markets were weak in the quarter, driving significant sales and margin declines in our utility enclosures business. While we continue to have a positive outlook on the long-term growth prospect of fiber deployment and broadband access, we expect this weakness to persist in the second quarter and are taking additional targeted actions in response. Bill will walk you through the details within the quarter in a few minutes, but overall we are confident in the setup for Utility Solutions over the balance of 2024 as our leadership in attractive Utility T&D markets positions us well to meet the grid modernization and electrification needs of our customers.
From an operational standpoint, we executed well in the quarter against a challenging prior year comparison. We're very pleased with our early traction on price realization, which continues to be supported by a strong position and leading service levels. While the operating environment remains inflationary, we achieved positive price/cost/productivity in both segments in the quarter. As we highlighted throughout 2023, we accelerated our investment levels as the year progressed in areas such as innovation and engineering, capacity and lean, as well as sourcing and procurement. These investments continued in the first quarter and we are confident they will deliver attractive payback through higher long-term growth and productivity levels. Before I turn it over to Bill, I wanted to share some insights from our Hubbell Utility Connect Customer Conference a few weeks ago.
We hosted over 400 utility customers to showcase our solutions across each of our brands, product lines and end markets. This was the first time Hubbell held a customer event of this magnitude across the entire Utility Solutions franchise, and I'd like to thank Greg Gumbs and his leadership team for creating a unique forum for us to engage with our customers to educate and collectively problem solve to make our critical infrastructure more reliable and resilient. Key takeaways from several days of discussions with our largest customers were clear. Utilities are in investment mode. Our customers anticipate a multi-year T&D investment cycle as the combined effects of aging infrastructure, renewables, electrification and load growth will require more hardened infrastructure as well as unique solutions to emerging challenges.
Hubbell's leading quality and service levels, together with our proactive investments in capacity and innovation, will position us well to grow with our customers as their investment levels accelerate in the coming years. In particular, utility customers are focused on the impact of load growth driven by data center power consumption. While this phenomenon is still early days, the impact to our customers is real and will require incremental investment over a period of many years as large projects progress and require grid interconnections. Higher load growth and more specifically, higher peak load growth, will require more transmission and substation infrastructure, areas where Hubbell has recently doubled down and will be well positioned to serve.
It also means novel solutions and grid modernization will be required to solve the emerging problems. And Hubbell's unique leadership across utility components, communications and control will enable us to partner with our customers for continued long-term success. With that, let me turn it over to Bill for more details in the quarter.
Bill Sperry: 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. My comments are starting on Page 5 of the slides that you hopefully found. And overall, the enterprise performed solidly, a little bit better than we anticipated. The net had some puts and takes, but very consistent with our full year outlook and our expectations of normal seasonality. Our sales for the quarter were $1.4 billion, a high single-digit growth. Organic was about 2% of that, inorganic about 6%. So we'll talk about the inorganic story quickly. Three acquisitions contributing in the quarter, Systems Control, which is a substation turnkey solution business, Balestro, which is helping our arresters business; and EIG, which is power control components, all three in the Utility segment, contributing about 8.5 points of growth in the quarter.
And we closed on residential lighting disposition in very early February. So we lost two months of sales in the first quarter, and that cost us about 2 points. So I think that's the quantitative side of the inorganic. But qualitatively, we feel we meaningfully added to the growth and margin profile of the enterprise. Operating profit at attractive levels of 19.7%, down 1 point. Better than expected performance on price/cost/productivity was more than offset by decremental and our enclosures business, which is where the telcom exposure is, and higher investment levels in growth and productivity, including some restructuring spending, which we'll talk more about when we get to the segment review. Earnings per share was $3.60, flat to last year, and operating profit dollar growth was offset by interest expense.
And free cash flow on track to deliver our full year outlook of $800 million. We'll dig down on Page 6 a little bit deeper into the performance and specifically, we're showing the year-over-year compares. And as we do that, it's worth a mention of the first quarter of 2023 was -- it's quite a difficult compare. Really, really strong performance last year, where price/cost was a particularly strong tailwind. It was pre-destock and pre-investments that we made. Maybe just to remind everybody, we had OP and earnings per share up 70% and margins up 7 points. So I think that context is important as we look to the year-over-year compares. Sales were up, as we said, 9% to $1.4 billion. 2% of that was organic, which is comprised of 3 points of price, really driving the top line.
Volume was slightly down. And we're quite pleased with that price performance, showing real strength of our franchise. The operating profit is up 3% in dollars to $275 million. And as we talked about the difficult compare year-over-year, because you see it's down a point, it's worth commenting on the sequential, where we see margins up 30 basis points sequentially. So we think that's quite positive to setting up a normal seasonal year. Earnings per share at $3.60 flat to last year, the OP was offset by interest expense from the three companies that we bought. I mentioned those. The combined value of that investment was about $1.25 billion. And it's worth maybe a comment on how the balance sheet absorbed that level of investment. We financed those three acquisitions with a combination of debt and cash, and also sold a business, as we mentioned.
So the balance sheet impact of all that, we went from 1.3 times gross debt to EBITDA, we increased a half turn to 1.8 times. So after investing $1.25 billion a quarter, still a very, very solid balance sheet, very easily absorbed and very well positioned to continue to invest in acquisitions and CapEx, which I'll talk about in a second. When you see free cash flow at $52 million, and I did want to highlight that that's absorbing a 20% increase in capital expenditures to $40 million. And I really think that our confidence in our short and medium-term outlook, you can see that when we're ramping up CapEx at the 20% level. So I think we'll learn a lot as we dig into the segments. We'll start with the Utility segment on Page 7. I see sales up 14% and OP up 2%.
The 14% growth in sales is essentially all acquisitions. The organic is neutral where there's 3 points of price and offset by a similar size decline in volume. You'll see with the bold words on the lower left that we've reclassified the businesses into these two units to be consistent with the way Greg has organized his operating team. So, grid infrastructure versus grid automation. In grid infrastructure, we have our traditional T&D business. We have the new acquisition that's in substation turnkey solutions. And we have some specialty infrastructure businesses, namely enclosures and gas components. That's all in the grid infrastructure area. And then in automation, we have Aclara, which is the meters and the communications products, as well as protection and control products.
You'll recall the name Beckwith with the controls, as well as switching and fusing products, which are providing the protection. So we'll show you on the next page all the sizes and what to expect from those. But the infrastructure business, it was -- and the core utility business performed very, very well. Transmission up double digits. Distribution still going through their channel inventory normalization. We're getting near the end of that, persisting a little longer than we expected as we think the channel has worked, largely worked its way through, but we think the end customers are still holding some inventory. So we're getting closer to putting that behind us. And when we get to the Electrical segment next, you'll see that they went through the same last year and have emerged very healthily.
So really good PCP performance in that T&D business and set it up very constructively for its financial performance. Grid automation, likewise, double-digit growth both in the meters and comm area, but also in the control and protection area. So really strong contribution there. The headwind is really coming from the telcom sector, which is inside that specialty infrastructure business and are really enclosures that we make for the telcom segment. They are navigating both channel and customer inventory normalization period, creating a significant headwind with 40% decline in volumes. The business line is very profitable and so it's creating an op drag. So the effect of that is about 4 points on the segment top line and as you can see about 1.5 points on the OP line.
So the OP for the segment is up 2%. Again, to remind you of the compare, last year the utility OP was up 87%. So growing off of that is very impressive. A decline of 2.5 points of margin being led by the decrementals in telcom. And to be clear, our medium-term outlook for telcom business is quite positive. And we've also made -- continue to make investments in the long-term growth and productivity of the segment. Those created about 1 point of drag. And the acquisitions that we mentioned, which are all doing really well and are all performing very profitably, but against that mid-20s level actually created a 0.5 point of drag essentially in the first quarter of Systems Control being part of Hubbell. So still, I think, very good performance there.
And the price/cost/productivity equation was positive. So again, we're showing you the year-over-year compares. I do want to highlight sequentially from the fourth quarter of last year, the margins are up 40 bps. So we're feeling again like what we're setting up for a successful normal seasonality year here. I wanted to add a page, on Page 8, just to make sure we're being clear about our nomenclature and where we have the different business units. So on the left, you can see the grid infrastructure comprising 75% of the segment and the balance is grid automation. You can see from about noon to about 06:00 there on the pie. that's the traditional T&D businesses between substation, transmission and distribution. Then from about 06:00 -- or 07:00 to 09:00, you can see the telcom and gas, which represents the specialty.
And then from 09:00 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. And we just added a little bit because they're not all performing exactly the same, so we wanted to lay out first quarter trends against what we're expecting for the balance of the year. And distribution, we're expecting that sequential improvement, Transmission, substation very strong. Telcom was weak, as we said, and we're anticipating some softness, but again, where -- the rebound will come in the medium term. And so balancing our cost-cutting there against being able to serve when demand comes back is representing interesting challenge. Meters has been successful on its backlog conversion.
We expect that to continue. We're noting the comps get a little more difficult for them, and the protection and controls product is very strong. So in sum in utility, very pleased with the pricing of these segments. We've got strong visibility in the majority of our markets and we're expecting the normal seasonality and a nice healthy setup, really, we think, a uniquely positioned business. So I want to switch to -- on Page 9 to the Electrical segment, a little bit more straightforward to explain to everybody. You see flat sales at about $500 million. You take out the effect of the divestiture of residential lighting, we were up 6 points organically, 2 points of price, which we're pleased about, 4 points of volume, which we're also pleased about as they emerge from their destocking and helps give us confidence that, that will be quick on the Utility side as well.
There's strength in industrial markets, but also specifically in what we describe as our growth verticals of renewables as well as data centers. which are up to over 20% each. So great to see Electrical Solutions performing so well on the top line and that's translating nicely at the Op level, you see a 6% increase to $80 million and 80 basis point expansion of margin on both the volume and price/cost performance. We would call out that Mark and his team, as we've discussed with you all, are continuing to execute on the playbook that he so successfully implemented at Power Systems to create a more compete collectively mindset in the segment, really emphasizing cross-selling, optimizing the footprint, simplifying the structure. So there's some R&R spending to be done and we would have added another 5 points of OP growth, i.e., being double digits and another 80 bps of margin expansion if we were to adjust out that restructuring as many of our peers do.
But great to see Electrical having such a solid quarter. And with that, I'll turn it back to Gerben on our outlook for the balance of the year.
Gerben Bakker: Great. Thanks, Bill. So to sum it up, our performance in the first quarter puts 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 telcom markets. Additionally, we are increasing our expectations for full year restructuring investments from $0.25 to $0.35 as we proactively manage our cost structure in certain areas of the business while continuing to invest in the long-term growth and productivity initiatives.
Looking further ahead, the acceleration of grid modernization and electrification megatrends, together with our unique leading positions in front of and behind the meter, will enable Hubbell to continue to deliver differentiated performance for our shareholders over the long term. We look forward to sharing more details on our long-term strategy and outlook with you at our upcoming Investor Day on June 4. With that, let me now turn it back to Michelle to begin our Q&A session.
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