Thank you everybody for being here. Super excited to kick off day three of the Laguna Conference with Hubbell. We have CEO Gerben Bakker. Before we get into the fireside, Gerben's gonna start off with some prepared remarks.
Great, thank you, Chris, and thank you everybody for your interest in Hubbell, and early morning on the last day of a conference. I appreciate Chris giving me a couple of minutes to set a little bit the stage of not only the long-term strategy of Hubbell, but also maybe look a little bit more near-term where we stand. You know, if you were at or listened to our investor day in the summer or our more recent earnings call, I think you're gonna find the themes today very consistent with those. But perhaps I'll start just looking back a little bit because it's important as to where we're headed going forward.
Certainly we're very pleased with our performance over the last several years. We've done a lot of work on our portfolio, both on the exits of some businesses, as well as adding to the portfolio that has positioned us very well to face the future. We've done a lot of work on our operating rhythm, and I would say the rigor of how we operate, much more of an operating company from perhaps more of a holding company mentality in the past. Not only has it allowed better results, but I would say more consistent results in managing our business.
And then finally, and perhaps most importantly, why we're in business is to serve our customer, and we continue to have that as a priority for our business. You know, our reputation to our company is what earns us our business. We take this very serious, and we've done quite well in servicing our customer. Of course, this happened during a very disruptive period, but also a period where we saw demand starting to grow and trying to flex up our factories during difficult times.
So, from a financial perspective, what that has meant is double-digit compounded sales growth over the period, over five points of operating margin expansion, and about 30% earnings per share CAGR over the last three years. I would say, you know, hopefully you're pleased with that performance, but that was then and this is now.
So, you know, one of the things we set out to do in our business, and we communicated to our shareholders, that we were confident in this new base of performance, and that we could sustain, and not only sustain this base of performance, but that we could grow off of that new base of performance from our company, because of some of the things that we had done to the business, to the portfolio, and how we operate. And so, you know, the outlook that we provided, which remains, you know, our outlook today, is to drive double digit operating profit expansion off of that very strong base.
So, you know, pleased with where we are. Of course, if we look a little bit more near term, we are managing through a couple of pockets of challenge, particularly in the distribution side of our utility business, as well as some challenging telecom markets right now. But we're able to offset that by a very good strength in utility transmission, substation on the electrical side with renewables and data centers. So we're finding ways to, even though we have pockets of challenge in the business, to offset those with pockets of strength.
I'd also say we continue to manage very with priority and focus, price, cost, and productivity, and that's to, of course, manage the margin side of the business. As we then look out over the next three years, you know, we are very bullish about the future, and if you think about some of the megatrends, and I'm sure we'll get a chance to talk about that a little bit this morning, of you know, grid hardening and modernization and electrification, really, our business sits at the core of those megatrends, and certainly with our portfolio today, we will benefit of the growth that brings us.
You know, and if you look at the utility side, you got trends that we've seen for the last few years already of grid hardening, then grid modernization, the integration of renewables onto the grid. These are some of the trends that we've seen. But more recently, I'm sure we'll talk about this again a little bit, the growth of data centers and AI, and I would say this is still early innings perhaps for us, of what the implication of that on the grid is with load growth. But I can tell you, we're a leading supplier in the utility business, and we stand to benefit from all these megatrends.
And then, if you look on the electrical side of the business, we've done a lot of work there after we reshaped that portfolio. We're much better able to compete collectively, and we talk about this a lot, you know, these businesses have a lot more in common than they don't. This is the reason we brought them together. We've brought sales forces together. We focused on verticals within that, and we're just better able to compete collectively in that and gain the benefits of growth through that.
The other area is the opportunity for continued margin expansion with the efficiencies that we're driving, with investments we're making into that business. So I say all of this to say that as you bring that all together, we see the future, as we talked about our at our investor day, at mid-single digit growth, organic growth on the business, and we think with the strong leverage we have on that we can deliver double-digit earnings per share.
So I feel really good about the positioning of the company. I feel really good how we're executing with the company, and I'm very optimistic about the future that we face as a business. So with that, let's go to Q&A.
Yeah. Thank you. So, you know, you talked a lot about the transformation of the business, and, you know, if I look back in a lot of the pre-COVID years, Hubbell was, you know, around a GDP-type grower. Now we, you know, it seems like more in that mid-single digit, maybe mid-single digit plus, depending on who you ask.
You know, I think everyone, you know, appreciates the secular opportunities in electrical and utility, but the company's also done a lot of portfolio high grading, you know, electrical. So can you just maybe talk about some of the most important portfolio actions that you guys have done over the last couple of years?
Yeah. Yeah, and in my opening, I started with we had, you know, the lighting business was a big, and that was partially a commercial business and partially residential business. That was more volatile in the portfolio. It didn't fit as well, both from how we go to market, to say we have an extremely strong internal sales force. We went to market very differently with this business. It was more volatile in, you know, the good years and worse. So what you end up doing in those cases, you end up spending disproportionate attention for the return, and that as an entire, starting from me as the CEO to the whole organization.
So, you know, as we looked at that. We hadn't traditionally done that. We've got a great history in adding to the portfolio, and we haven't always been so good at really critically looking at, you know, what perhaps is better off in somebody else's portfolio than in ours. So that served us really well to get out. We're now more focused. We're able to take the rest of that business, bring those together in what we call competing collectively, providing solutions for the customers on it.
So that was a very big move, but at the same time that we did this, we didn't stand still, and we added to the portfolio as well, and really for us, adding to the portfolio is to those strategic growth verticals that have higher margin profile and have higher growth opportunity. Utility business is squarely in that area, so, you know, we've added several businesses, continue to add, both bolt-on businesses that we're quite good at. That's kind of like our DNA of what we do. But also some larger deals, so maybe more transformative deal with the more recent acquisitions of Systems Control.
But all down that fairway of you know, expanding our scope and presence and value to our customers in the utility business. So those have been I would say, very important reshaping of the portfolio, but our work isn't done, I would say. You know, we'll continue to and perhaps more now on the adding to it again than trimming, but.
You know, you mentioned Systems Control. You know, one of the bigger acquisitions the company has ever done. Can you talk about how that business is performing, and what does adding that do strategically for Hubbell?
Yeah. Yeah, so it's... Maybe I'll start with, it's performing well since it's brought in, not just from a financial perspective, but as you can imagine, you've got to integrate these businesses into our systems, our culture, and that's going really well. We look for that when we buy companies, is what's the, not just the strategic fit to our business, but what's the strategic- you know, how do people feel when they come into the company? And a lot of times, we have the discussion even before this company joined. What is their system? Is it a heavy lift, or is this an easier lift?
So we know what we get into. But that business is doing well so far. You know, the strategic fit with that, with this business, is it's in utility. It's to the customers we serve. It's with the sales channel we go into it. But what's interesting with this business, which perhaps a little bit different, and it's a theme that I think we're seeing more of, is that what they do is in the factory now, what traditionally has been done more in the field, which is putting these control systems for substations together. You can do this in the field. You can get all the components, you can build this in the field, and that's still done today.
But I think what customers are finding value in is if you can do this in a controlled environment with labor that's perhaps more available, that labor that's even perhaps a lower cost than if you have to use electricians in the field, there's real value for them. And you know, labor is a constraint in this market, so it's a real, you know, valuable solution for our customers. Regarding the size of this deal, it is you know, similar perhaps to the Aclara deal that we did in 2018, but I could tell you the balance sheet of Hubbell today is quite different than it was then.
So what you saw then is it you know, it levered up the balance sheet. And when we went into that, we said, "You know, we're gonna need some time to not only integrate the business, but to, you know, get our leverage down a little bit." That's quite different from Hubbell with the cash that we generate. So, a similar size deal is truthfully easier on the balance sheet today than it was. And, you know, we'll anticipate us doing perhaps more of those.
You know, I appreciate that. Maybe turning over to the market, I mean, utility, there's a lot of tailwinds, whether it's, you know, grid hardening, modernization, IIJA, IRA, data center now. I mean, I guess just very open-ended, of all the tailwinds and drivers in utility, which one gets you the most excited? What do you think is the best opportunity?
Yeah, it's maybe a little bit of a cop-out in that they all are what makes and helps our business. It truly is. But I would say the base of it, and this is what we've been talking about for so long, even before we started talking about this business more than a GDP growth. Because for a long time, this business has been a great business, but growing in GDP is the age of the grid and the grid hardening, and this grid is very, very aged. It serves a humongously critical function, of course, on our lives, on our economy, and the need to invest in it is very much there.
The utility companies are doing a lot of work, and I give them a lot of credit for the work that they're doing in hardening this grid, but a lot of many years or so. So I think that's the base that I would say of all the investment. Then when you look at that more recently, we've seen the integration of renewable. There has been a big push to you know, move away from perhaps some of the more the coal and other factors to more you know, green energy, and you know, the utilities have done that pretty aggressively over the last couple of years. We benefit from that.
Anytime you get a solar plant, a wind farm coming up, you need, you know, our infrastructure to take that energy back to the load centers, and then I think one that's in early innings is the data centers, the reshoring, and what that's doing is it's adding load, and that's one thing utility. If you look at the load growth of utility, for many years, they've been flat, and just think about being a utility. You have to invest in the grid, it's getting older, but your revenues aren't going up, right, so they've had to rely, and they continue to rely on commissions.
I think the commissions recognize the need, but there's always tension there, right? There's ratepayers that pay. That's so this is where I think stimulus can really help, is take some of the burden off the ratepayers and still make those investments. So again, it all absolutely benefits our business, and this is why we feel this is not a couple of years. This, to me, I mean, we generally don't talk decades in our business, but you know, personally, if I think about what the timeline is of what needs to. It cannot happen in a couple of years. This is over decades that you're gonna address this, so.
I maybe turning to data center, I think everybody you know appreciates that, you know, ultimately what's going on in AI and data center, you know, is going to require investment into the grid. I think there's a lot less conviction or maybe just more uncertainty as to when or-
Mm-hmm.
Can you just kind of talk about how you ultimately think the CapEx we're seeing in data center, you know, flows into T&D?
Yeah, yeah. I mean, maybe I'll take a little bit, because data center for us affects both our electrical and utility business, which is really nice for us. And I'd say, you know, when you're putting up a data center, it's more on the, clearly on the electrical side, right? The grounding systems, the connectors. We built a vertical around it. We organized our sales organization. We have product development teams. We're adding acquisitions to it to really grow the support of actually when you're putting a data center in.
On the utility side, there's also a direct portion to it in that, you know, every data center needs a substation to it, and you know, we are very strong in substation with utility segment. That part is more direct. But I think what you're getting at is, if you think about what data... I mean, they're a huge consumer of electrical load. And you already see it, where the early data centers were going in, they're getting really constrained with being able to provide power. So now data centers are kind of looking where's the availability of power. But that's perhaps also a shorter answer.
So what this will eventually do is drive load growth, and this is what utilities are thinking about. And you don't put up a power plant in a year, right? This is again thinking, planning decades out. So how do they solve for this? And I think this is where we can... When we talk about a utility automation, grid automation, how can you move power from one place to another? How can you have more efficient power? This is where we play. I think this plays out again over the longer term. This is where you got the challenge of both the funding for this that they need.
They need to go to the utility commissions to make their cases for this. I think, to say we talked before we walked up to the stage here, the labor availability of that. Can they get all this work done? And they struggle with that a little bit. So I think what will help that eventually is that they will get support to do this from whether it's through stimulus or to the rate cases. You also see now in the labor availability, you see more prominence of EPCs, for example, that are complementing utility companies with labor. So I'm optimistic that we'll see some of that improve over time. But again to me it needs to happen.
So it's just a matter of, is it gonna be over a shorter period at a little higher rate? Or is it gonna be over a longer a little lower rate, but it'll be over a longer period? And that may be periods that will go. And that's, I think, in the debate a lot that you get, is it mid-single digit? Is it perhaps higher than mid-single digit? That's so hard to pinpoint. We believe the mid-single digit case is a prudent case to go, but we're prepared to serve it if it's better.
Yeah, I guess, you know, on that, you know, path to mid-singles and then, you know, opportunities to maybe get above that, you know, what are some of the... Is it, like, data center coming through faster? What are some of the opportunities out there that would actually get that organic above mid-single?
Yeah. Yeah, I think it's, again, not one thing. I think, and we see in some of the areas, we see it above that. If we look, for example, our transmission and substation business, our grid automation business, these are businesses that are running, you know, mid- to high- to double digits right now, right? So, we see pockets where that's happening, and I think that's how it'll be. And sometimes, you know, we get the question a lot, is one in tension with the other? If they invest in transmission, is that at the expense of distribution a little bit? While that could be, it benefits us because we do both.
So a dollar that's moved from distribution to transmission is a dollar that we can serve on the transmission side as well. So that's a little bit what there works. So I think that could be, and that we're seeing sectors or periods where it is higher. I think, you know, some of these things that I talked about with the need to get funding, that takes time as well with the labor availability of it, with, you know, the reality, too, is utilities managing their budgets, as well. That again, we believe the mid-single digit is a prudent.
We've seen, if you look at our core T&D business over the last couple of year, that's what it's grown at, and again, with some higher, some lower in it. So we feel it's a responsible guidance and for us to think about how our business grows. But again, we're very, very well positioned that if it's better and if it's pockets where it's better, we're gonna get the opportunity to serve that and the ability to do so. This is why we're investing in our business. You see our you know, investment back into business while you know, we do it where we see visible demand.
But it's to serve our customers and echo back to our biggest value proposition is servicing our customers. So I don't mind you know, being a little bit ahead of that to have. And then when some of those markets do grow higher, we can serve it.
Appreciate that. So, you know, obviously a lot to be excited about in utility. You know, but, you know, the business currently is, you know, not really growing, because, you know, destocking on the distribution side and just telco weakness.
Yeah.
You know, where are we in that destock cycle, and how do you see the company coming out of it over the next couple of quarters?
Yeah. Yeah, so the destock, as you point out, is in a particular part of the business. It's in the distribution side of the business. This is our more make to stock area of the business. And, you know, certainly through the supply, we were the ones actually that caused this, right? And not just we as Hubbell, but we as the industry, where we're very, very constrained during the pandemic, and our lead time shot out. You know, our customers were you know, desperate, if I may use the word, to get product. We served them and serviced them really well, but not good by our standards.
So what you saw in that, if people could get products, they would get their hands on. Where this particularly got worse is when our supply chain started to normalize, because now all of a sudden we got our factories ramping up. We were able to get more out the doors, and at this point, customers are taking it, right? They're like, they're not gonna tell you me, "Oh, don't, don't ship it, to me." So we actually think it's a good thing that this is happening, because it's an indication that our supply chains are normalizing, our lead times are coming down.
We are much, much better able to serve our customers, but the result of that is they gotta work through it. We got through this in the channel earlier, and that's a little bit different from the utility than the electrical. What we're working now through, it's more to the end customers that have it. And even when you look at the end customers, there's a difference between where there's more and where there's less, and particularly in the IOU, the large investor-owned utility, that's where a lot of this overstock sits. When we look at the public power market, the co-ops, the Munis, we're actually seeing growth.
The other thing that we're seeing, it's, and this is a good thing again for us, it's different by customer, it's different by product line. It's again an indication of where our supply chains have normalized, our lead times have come down. That's where you're starting to see this inventory normalization. And that's a good thing for us, because just imagine if everything happened at once and everybody stopped ordering and needing product, our factories would be down for two months.
I mean, you couldn't operate, so the fact that it's actually in pockets, we can keep our labor forces, we can keep our factories running, but what it does, it extends the cycle a little bit of doing, so we are still in that. We believe that through the balance of this year, we'll continue to work through this normalization, but I can tell you, you know, where we're through it, we can see the lift starting to happen, so this is at the end a very temporary thing that we're gonna go through, and then we'll see, you know, serve the demand that's out there.
Yeah, I mean, you know, if we're going to electrical, we're kind of, you know, running ahead by a couple quarters-
Right
On that. You know, electrical got destocked last year. Business has recovered to, you know, mid-high single-digit growth. I think it's the only short cycle business I cover, where I can very clearly see the go through the destock and then come out of the destock and return to healthy growth. I guess, what is driving demand there? And, you know, are you confident that that business will continue to, you know, generate solid growth over the coming quarters?
You're talking about the electrical?
Electrical, yeah.
Yeah, yeah, and if you look at the electrical world where we play and how we position this business, we have some very nice verticals of renewables, data center, and that business has a, you know, reasonable size utility as well in it with our Burndy business that serves both of those. And we've been talking about the trends in there, right? So those we see actually, you know, in the first half of this year, we're seeing, you know, double-digit growth in that business, and we see that continuing on the horizon.
Then the other two parts of the business is the non-res and industrial side and, you know, I would say it's steady for us. It's you know, if you look at some of the reshoring that's happening, some of the industrial activity, it's been you know, quite okay for us. What's the future? What's the future of that business? You can probably tell us better than us what happens to them. But what I can tell you is, we're very well positioned, that no matter what the macro is going forward, we can do well with those businesses. So yeah, we feel good about the portfolio.
Yeah, I mean, maybe moving over to price. I mean, the company's taken a lot of price-
Yeah
... over the last three to four years. You guys are, you know, a big consumer of metal. So and a lot of that was cost inflation. You know, what is your outlook for price going forward? And is there any difference between electrical and utility?
Yeah. Yeah, so we've used, we've had to use price during the last couple of years because of that. I mean, we're we are, you know, a heavy user of metal and not so much sometimes people think of us as, like, commodities of metal, but we're actually a much higher user of components, right? That have value added at them, but you still have the metal in that.
And perhaps in the past, we've been criticized a little bit and truthfully, even been self-critical after we reflected on it, on how quickly we reacted to that, and I think that hopefully you'll agree with me, that we were much, much more aggressive the last time, when this happened. But the big question, I think, that you had, is this sustainable, or are we somehow gonna go backwards? And then we asked ourselves this question a lot, right? And what's the value proposition of Hubbell? And, you know, what's the earnings we deserve for what we do for our customer?
When we analyzed this, we were really convinced that this could be the base to serve the future. And if you think about what we do, we are generally a very small percentage of the cost of the systems that get put in place. Usually measured in single-digit % of what it costs to put the whole infrastructure. Yet, we're hugely critical. If one of our components fails on the grid, the grid will equally go down as if, you know, the much more costly, the much more, what adds the other, you know, 90% of the cost to it. And we're very complex.
We provide a lot of complexity, a lot of components that we manage for our customers. So does that deserve, you know, a little bit of a premium? I think it does, and I think it's proven that our customers value that as well. So we've continued to. So even after that period, we've seen that we're continuing to be in an inflationary environment, not so much metals, but certainly labor has continued to go up. You know, freights, and even though it went down, it's since come up again. So our view is that while moderating, it's still inflationary.
So we've used price even earlier this year, and I'd say the stick rate on that was good. So a couple of pockets, where the business, the telecom business particularly, where we showed the pressure that we've had to use price a little bit for new business. But I can tell you there, too, we're very disciplined to not chase that volume with price. But I think that's a good first indication that price can continue to be a lever. I mentioned earlier in my opening comments, that managing price, cost, productivity, and that's how we look at it.
We don't look at just one, where we have a very robust action to drive productivity and drive higher productivity because we think that the future inflationary environment is higher. We have cost, right? The times where we can invest, and times where we you know pull back on that investment or restructure the business. We really look at it as the three levers that we wanna manage to neutral or better over the cycle going forward. But I see price there as one of those lever. Not to the extent that we've used it the last couple of years, but still a lever that we'll use going forward.
Yeah, I mean, I guess, another, you know, factor that drives margins is, you know, the capacity investments you guys have been making. You know, there's been some margin headwinds that have come with that, I think, in the back half of last year.
Right.
You know, these investments you guys are making to support growth, do they ultimately go from headwinds to tailwinds as you start leveraging all of that? Or is it, well, the business is gonna continue to grow, so we need to continue to invest-
Yeah
... in just kind of steady state?
Yeah, and I would say probably both, because very few of the investments that we're making are adding multi-year capacity. It's usually the next molding machine, the next stamping press. And yes, you get a little bit ahead of it, but if growth rates continue, I would say we continue to invest. Now, I think there was a period where we really had to catch up a little bit, if you may call it, where we get. So we look at it ourselves. So is it at the same levels of increase? I don't think so. But yeah, I think it is. But yeah, you get the leverage on it as well.
It's what I talked about earlier, that with, you know, that mid-single-digit growth and the operating leverage that we get on that to drive double-digit earnings. It's a little bit through that you do get the leverage.
I think we went over the 30 minutes, but a lot of good stuff to talk about.
Uh-huh.
So, I really appreciate the time. Thank you, Gerben.
Thank you.
Love to come back.