If over the course of the dialogue you have a question, please just raise your hand and I'll get to you so we won't interrupt it. I'll make sure to get your question in there if you have anything. We'll jump right into it.
Yeah.
We'd love to start on the utility side, and specifically grid infrastructure, talk about the main trends that you're seeing out there. Starting on the transmission and substation side of things. You are gaining multi-year stretch. You're seeing solid, strong growth in both of these verticals. Talk about the pipeline, how you think about the medium-term growth potential that's out there for transmission and substation.
Yeah, perfect. Thanks, Joe. Thanks for the opportunity to engage here with this group. Thanks for starting off on the high point-
Yeah
of utility, which clearly transmission and substation is for us right now. I'd say the pipeline and the growth rates have been very good there. Certainly if you look at the order rates and backlog, it's very supportive of that. Drivers there are load growth and interconnect. I would say these are more recent drivers on top of what has already been a long-term trend in this industry, which is grid hardening. I think grid hardening is more broad. I'm sure we talk about the other parts of the businesses as well. Something that utilities have been very focused on and that we benefited on. More recently, the load growth and interconnect is part of that, is driving our book and our shipments as well.
We've talked a little bit about that business as being on the higher side of the portfolio, high single digits. Certainly more recently, we're seeing that exceeding those kind of levels. We're starting to think ourselves around the framework of what's the next few years going to look like. Eventually we'll do another investor day engagement. We'll obviously work where new targets were set for. I would say certainly as we look out right now, we see those growth rates exceeding those high single digits as we're realizing right now. We're very optimistic. We're investing in this part of the business pretty aggressively to sustain those growth rates. We're very optimistic about our transmission and substation future.
What kind of visibility do you have out there as to the conversations which you're having with your customers to understand what the pipeline looks like?
I would say the conversations are longer term. Certainly, for our customers to put in a decent load stage time, they've got to go through regulators, they've got to go through approval processes. They look out. If you look at their CapEx budgets, it's part of a reflection as they look out how they plan. Our products are highly specified, so we're actually talking and engaging with customers to select our products or the bundling of our products. I'd say it's pretty far out, but that doesn't always translate into orders being live. Our products still, even if you think about transmission and substations, generally measured in months. The furthest out maybe six months of lead time right now.
We talk more in agreements and supply with our customers, and we have long-term agreements, but the actual orders tend to come more as these projects happen. That's I would say, actually a good part of our business. As we look at our business, long backlog is actually something we try to shrink, and this is usually a reflection of our lead times going out, and we want our lead times actually much shorter so we can be responsive to our customers. And the other part is if you get orders three years out, you either need all kinds of indexes to make sure you're protected, or you may be on the wrong side of that equation three years out. We actually don't mind that it's shorter term, as long as we know the commitment is made to Hubbell, and that's oftentimes how we do these.
Also within grid infrastructure on the electrical distribution side, the biggest kind of vertical that you're going to serve
Yeah
within that unit. Went through a period of stocking and then de-stocking.
Yeah.
Just to unpack a little bit of where you are today, when you start to lap the de-stock comps and on the other side of that
how you think about the growth potential for the distribution side?
Yeah. I think you're right how you characterized that. We went through a period of destock last year that was a quite lengthy process. At first the channel and then the end user. We started to see us coming out of that last year. The best indication of that was orders returning. In addition to the conversations with our customer, we've seen that grow nicely here in the Q1 . Our orders continued to be supportive of certainly what we've indicated for the year going out. Hardening is a big driver there, a big continued driver of growth in that market, and we see that again, multi-years out. I even would say probably decades out of the need to invest in that market. I think the rates that you're seeing, there's probably a little bit of a comp still.
I mean, we're a little bit above that mid-single digit kind of longer term target that we've indicated. I think that is a little bit comp short term. We're very confident that this mid-single digit, it will be lower than the transmission and substation for the drivers there, but still very attractive growth for us.
Do you find that your utility customers are in a position where they've got to prioritize the transmission and substation spend such that it has any kind of impact on the distribution side, or that they can really manage to spend independently?
Yeah, I think it's a little bit how you look at it. Maybe I'll start primarily what our customers are trying to solve for, which is providing power in a low growth environment and providing that in an efficient and reliable way. That drives, at the end, why they need our products. There's, of course, some constraints that utility customers have. One is affordability. They need to get, certainly they spend through regulators oftentimes and find support on what the impact on the end user. There is labor constraints in the market, and then just the budgets that they operate under. There's certainly some tension against the need to invest in this grid and how fast and at what level can they do it. I'd say perhaps less so that they're taking transmission from distribution.
I think as you see the CapEx budgets increasing, which clearly we're seeing happening right now, more of that is going to the transmission and substation. I think it's less about that it's being taken away from distribution. Is that more of the incremental investment that we're seeing is going to transmission and substation. Why we argue is that the growth rate of that is going to be above that of distribution. Maybe the other thing to highlight here is we look at our portfolio. We are equally strong in transmission and substation as we are in distribution. About 80%-90% of the components, of the hardware, of the materials that you need to build that grid, Hubbell makes. That's both in the transmission and the substation.
I would say if a utility makes a choice to spend the next dollar from distribution on transmission, we would benefit equally or vice versa. We're a little bit agnostic of where the next dollar comes. Our view is that more of it is being directed now to transmission. This is why we're investing. What does matter is, do you have the capacity to serve when they move that dollar? We're being pretty aggressive in our investment in that area.
Rounding out the grid infrastructure side of things. When we think about gas distribution and telecom, there's a period of time where you saw some pressure on the telecom side of things. Just help us understand where you are in the demand patterns there, how you think about that going forward.
I think it's a little lower level of growth than what we're seeing in T&D, but still attractive GDP plus. If you look at some of the drivers of that growth, I mean, our gas business, it's to a certain extent very similar to electric, very aged infrastructure that needs to be upgraded with our components. On the communications side of the business, we saw the big decline a couple of years ago. That's returned to growth. Right now, there's still a lot of fiber going in. I'd say those are GDP plus businesses going forward with, again, attractive dynamics of what we serve with our critical components.
The other part of utility on grid automation and specifically on meters and AMI, six or seven quarters into seeing declines in that business.
Yep.
What you view in terms of the outlook there when that business shifts to starting to see some growth?
Yep. Certainly have faced some challenges that we've talked about quite a bit here. That grid automation business, and that's kind of how we look at it holistically, will return to slight growth here in Q1 after some periods of decline, primarily driven by the meters and AMI business. We'll continue to see growth there into the second half as well. If you talk specifically about our AMI and meter business, and maybe just to put it in perspective, it represents about 10% of the revenue of utility. Less than five percent of the operating profit of Hubbell. It's quite a small contribution to the overall portfolio of what Hubbell does. We've addressed the cost side of that business. We were investing quite heavily to drive new technologies in there. We've refocused that business to areas where we've traditionally done very well.
Certainly our expectation and the headwinds are behind us right now of the decline of that business. Our view is as that business now grows and it'll grow more modestly, we'll see the margins improve. Those margins are below the average of our portfolio. Our expectations are for higher margins for that business. After the work we have done and with some modest growth, we can improve those margins.
What about its value to the broader utility business? When you think about lower growth, lower margin, is there synergy value that it brings into your overall offering that winds up having more value than what we see just in its independent business?
Yeah. It certainly serves the same customer base that we serve, and it's with critical products as well. It's clearly helped us build more of this grid automation business, and it's how we look at it. There's a lot of parts that are actually very attractive and growing, have been growing really attractive for it. As we looked at our business a number of years ago, we were primarily a hardware business. As we looked about what the grid of the future looked like, we started to see control on the grid and sensing on the grid, and we just didn't have that capability, and this was our way to build scale into that, and we've really benefited from that. We still measure our businesses in the pieces as well. It's what we do on our whole portfolio, how we look at the business.
This business has room to improve. I think with what I've told you, with the cost that we've taken out and with modest growth, our expectation is that this business will show a better margin profile, going forward.
Within the grid automation piece, half of it is the grid protection and controls.
Right.
What about the margin profile there?
Yeah
The growth opportunities?
Yes. That's actually the part that I said that we've really built up, and it was a capability that eight, nine years ago, we really didn't have. It's really hard for a company that's what we call heat and beat. We're doing forgings and stampings and plating as a core competency, and that's still a hugely important part of our portfolio. As we looked at what the future of the grid is, that's a hard pivot for companies to do, and I think we've done that very successfully. If you look at the other half of the grid automation business, it's an indication of what we've done there, both on organic growth as well as acquisitions. We've grown that. That's growing high single digits, and there's periods that it's actually above that as well. Margin profiles that are very similar to the T&D business.
Examples of new product that we've brought in more recently that have done really well is, for example, our Line Defender. It's a distribution product that actually helps with faults further down the line. These are very expensive faults to correct. Truck rolls is one of the highest costs the utility will have, and to the extent that you can have self-correcting and identifying where faults are, and this is one of those products, and it's taken off really nicely. Another one is a power quality measurement. It's another business that we actually acquired that sits in that. Serves not only utilities, but serves data centers. Power quality in data centers is very, very important. Doing really well. I'd say that business overall is attractive margins, high growth.
We just need to get that one piece that we just talked about in a better. It's a very nice segment.
Shifting to the electrical side, and kind of the non-data center piece of electrical, if we start there. In an environment where non-res activity has been challenged.
Yeah.
What you're seeing with respect to interest rates and inflation as overhangs versus, say, just duration of a challenged market that starts to give way to some green shoots.
Yeah.
Kind of what you're seeing out there in non-res.
Yeah. Non-res has just become a smaller part of our portfolio as we've certainly grown the company. We saw some modest improvements early in the year in that area. I'd say as we see the current situation, that has persisted modest. We believe driven by short cycle activity around these markets. If you think about some of the electrification and the reshoring that's happening and some of the activity that's happening around that on the non-res side. Interestingly enough, too, that it's not consistent throughout the region. We see a lot where data centers are going in. We see more activity around other non-res activity. It's not broad in the market. It's coming off a low. It's been kind of slow, so I'd characterize it as okay, perhaps. We have seen modest growth this year that we see sustaining.
On the data center side, if you could just size your revenue for us and explain the different ways that you're serving the data centers, both through the legacy side of the business as well as the M&A that you've done in PCX and in DMC.
Yep. Data centers, we often talk about data centers on the electrical side of the business, but actually the larger exposure in the rec of data centers and in the utility business. I'll talk a little bit about both of those here. On the electrical side, about 10% of our revenues come out of data center, and that's split between the balance of systems and then what we call the PCX business, which is the power skid business. On the balance of systems components, we have a very strong position. These are products that are sold in Bless you. That are sold in general industrial applications. If you think about our Burndy grounding, if you think about our wiring devices, Pin and Sleeve products, these are anchor brands and products that we sell in data centers as well. Actually, a lot of organic growth there as well.
If you think about as data centers are ever increasing the capacities of both amperages and different voltages, we're adapting our products to that. We just introduced a very innovative, we call PowerGain product in Pin and Sleeve. A Pin and Sleeve is literally an industrial application that we've used for decades. It's a big, bulky, round connector that have done very well in data centers. As the amperage have gone up and we've redesigned that product, we've actually made the shape of it such that you can fit it much easier behind direct space constraints, is a big deal for data. They're actually working with the data center operators to bring new innovation into the market. It's how we've continued to adapt that business. If we look at the utility side of the business as well.
A lot of the transmission and substation work that's happening there is, even if it's utility work that's happening, it's to support those data centers. Our position there is very strong. Certainly benefit from serving those markets. As far as acquisitions that you mentioned, the DMC Power systems control acquisition, and even the one that we recently announced, that NSI has about 10% of their revenues also going to data centers, is adding to the portfolio of products that not only serve attractive core markets that we serve today, but data centers as well.
As we think about kind of behind the meter powering of data centers, just what that means for you from a revenue content. Think about it, versus in front, behind, how the content opportunity changes for you.
Yeah. The reason this is actually happening is because data centers need power. I think if you ask most, if not all data center operators, how they would prefer to have their power, it would be to rely on the utilities, but there's some challenges with that right now. I would say it's very early in that process, and we're having some discussions through the EPCs that are helping or the IPPs that are involved in this, in what those solutions are. For us, the gear, the equipment that we serve is very similar. These need substations and if they put their own generation source behind it, they're still going to put a substation still with equipment that's the equipment that we sell to utility companies.
If they stay disconnected from the grid, which our view is that they're probably going to want to interconnect at some point. If they didn't, you'd lose that interconnection piece. I would say it's a smaller piece strictly of that. Our view is that they probably want to interconnect. Very importantly is, utilities are trying to solve for this. Our conversation with utility customers is, how they're adding capacity, how they're adding This is the whole load road. If some of this is going to happen, it's probably going to be incremental growth over this period, where utilities are trying to solve for it. If we need to ramp up quicker and data center are able to solve for that, we'll probably see higher growth rates for a period of time as a result of that.
We see it as incremental, but our content is fairly similar.
You mentioned NSI. Let's talk about that a little bit more. I think $3 billion deal, the largest in the company's history.
Yeah.
The fit within the business. Just explain to us kind of what NSI is going to bring to you.
First, maybe I'll talk a little bit about our capital allocation. It's an important thing that we do. We've got, obviously, a strong history of adding quality businesses to the portfolio. We've talked a lot about our balance sheet getting larger and larger, and that's very positive, but how do you deploy that capital? We've indicated that we're going to remain disciplined in the types of businesses that we're going to add. In periods where we don't have a business to add but still have a strong balance sheet, we see buyback as a very attractive alternative. Well, we've done some of that earlier this year. The point of that is, while the balance sheet is getting bigger, we're going to remain disciplined on where and how we invest our capital.
As we screen that, a lot of our acquisitions come out of our P&Ls, and we still run our business by P&L. We have GMs that manage. It's a way to really stay close to the customer as we get bigger. A lot of that development of businesses goes through those GM. Then we have an enterprise resource group to help execute on those. Very few deals will come through, if any, that we don't have visibility in. We don't always want to acquire these businesses. We're not always successful in acquiring these businesses, but it's rare that a property would come to market that we don't have insight. NSI was no different.
One of the things as we have broader part of the organization looking for deals, we would have a screener, and we call it the corners of deals. We put them through a screener, and it's more than these five. These are the main ones, does it serve the same customer set that we have? Does it go through the same channel that we serve? Are the products complementary to what we do? Then what's the growth rate of the business? What's the margin profile of the business? The last two are more a reflection of the market and the customers that we serve and the strength of the brand. Then we rate those things of the businesses, and sometimes they're squarely down the middle, and sometimes they go in one of the categories a little bit out of it.
It doesn't mean that if it goes out of them, we won't acquire it, but it's eyes open. I'd say NSI hits all those boxes right down the middle. It's customers that we serve today. It's through the same channel that we serve it today. Very complementary product basket to what we have. These are anchor brands. This is like Burndy in wiring, is Bridgeport fitting in Polaris. You kind of use those in those same veins, which brings to it a preference and a margin profile. When we see that, we certainly lean in more to want to have these in the portfolio while we remain disciplined I would say, to multiples. Our businesses have gone up, but so have margin profiles and growth rates. We see this business fitting extremely well within the Hubbell portfolio.
We talk about this like when we acquired Burndy and what that has done for us. That's how we see this company coming. Really what we would say right down the fairway.
This comes in expected to close middle of the year, margin accretive to HES. Our math on it is could be $0.15 or $0.20 lift.
Yeah.
Does that sound reasonable?
Yeah. I think certainly once we close it, we'll come back with, depending on the timing, on what it is, but I think you're pretty good at math.
People are good at math
in the ballpark of what you just indicated. Yeah. It's earnings accretive, certainly, and margin accretive to the company. Yeah.
Something you brought up on the most recent earnings call is the high voltage opportunity out there when we talk about 765 kV. You sized it as a $1.5 billion sort of 10-year market opportunity. Just unpack it a little bit for us in terms of the timeline that you're looking at to start generating revenue there, what that ramp could look like.
Yeah. 765, even though there's a lot of activity and discussion about it, 765 actually has been around for 20 plus years. At the time, some infrastructure was put in, and where 765 really helped is for bulk load transfer and for clearing capacity for load, really. If you get load constraint on the grid, if you need a lot of power and then it's trying to go to the infrastructure that you have, and that's constrained. Think about it as a pipe and water, and all of a sudden you need a lot more pressure going through that pipe's going to burst, and that's kind of the infrastructure. If you need more bulk transfer, it's very efficient. In a load growth environment, it's actually very efficient infrastructure to deploy.
We've been actually working with some of our customers, and that's, again, the value that we have is we are a leading prominent supplier of T&D materials with the largest installed base. As we talk about new things coming up, again, we've been working with our customers for some time already on this. Earlier this year, first fairly large scale 765 was awarded, and we were fortunate to be the recipient of that award. That was a culmination of actually working and designing and specifying that product with our customer. We'll start to see that start shipping in the early part of next year. I'd say it's early still in the cycle of 765. There's more projects that we're certainly working on. Really it's incremental to what's still needing to be done in interconnection and hardening.
By the way, when you put 765 in, you need off-ramps of those. You need 345 kV. You need substations to go along with that. It's additive to the growth of the grid is how we're looking. That's why we kind of sized it, and it's not precise, and the timing can vary a little, but you need to get these things for approval. There's a real need for it. There's a good case for it, and we believe it's actually incremental to the investment that's already happened. Why we call it that, we think this could add one point of growth to what we've already indicated.
Shifting to the price cost side of things. When we think about some of the inflationary pressures over the course of the year, you saw commodity inflation to start the year. Tariffs and whatever impact that could have had in kind of April. Just explain what you've done on the pricing side of things, any quantification of what you've had to do out there for pricing your debate.
Yeah. We've been, over the last few years, certainly much more aggressive, proactive and better organized. It's actually one of the benefits of having gone to more of an operating company that we put capabilities in place across the enterprise, and pricing was one of them that we've moved from product managers. Nothing against product managers, but they're probably not the best pricers and to really do it scientifically. It's just a muscle that we've built that has really benefited us. For us, continuing to be price cost neutral, what we call it price cost productivity neutral or better, positive, and we've been to the positive side of that is our thought process there. We've seen more inflation. A couple of things happened here recently. The tariff regime continues to change, and this latest one is actually neutral to Hubbell. There's pluses and minuses in that.
Not a lot of impact there. We have seen inflation. We came out with price earlier this year, and that's going in. I would say as inflation continues to happen, we'll continue to respond to that with price and productivity to manage that to the net neutral or positive. In longer term, I think the margins will come. That's the other thing that we've proven over time, that while we manage short term, this to neutral or positive over the cycle with volume growth, with as commodities maybe come down or we find more productivity, we actually see the margins go back or actually up because certainly dollar for dollar, price and cost would decrease your margin, although this is math.
We've actually proven to be able to recover that and then actually expand margins. That's how we view it.
Pricing that would have gone in place, I think around February, you haven't had to do additional pricing beyond.
We had some that went in effective April, right? Yeah. Dotcom. There's still inflation happening, and so our view is, as that happens, we'll continue to price for it.
Mm-hmm. The margin dynamic and the seasonality, we see volume being the biggest kind of component.
That's right
to seasonals
Correct
in the middle of the year.
Correct. Volume and then longer term productivity. We're still driving a lot, right? If you think about the efforts that we're doing in the electrical, and if we're doing the restructuring programs that we're still doing that has productivity. I think that's another adder over the longer term to find margin expansion.
On that productivity front, one of the initiatives is around within Electrical, the unification and simplification.
Yeah.
That was a function of footprint rationalization, SKU reduction. Where are you in that process?
Yeah.
Where to do-
Yeah. I'd say really good early success in that, and you could see that certainly by the margin of the Electrical segment that we've continued to expand after we shed our lighting business and a reflection of that effort. I'd say over the last two years, we've been very busy with supply chain challenges both during the COVID period and more recently with just inflation. I'd say, there's still opportunity there going forward of refocusing on that and doing more. Expect more work there and more margin expansion as a result of it. I would say we're maybe middle innings to a little past the middle innings on that work.
Okay. Terrific. Well, I think that brings us to the end of our time. Thank you very much. Really appreciate you being here, thanks for this.
Thank you, Joel. Thank you all.