Good day. And thank you for standing by. Welcome to the Fourth Quarter 2022 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 call is being recorded. I would now like to turn the conference over to your speaker today, Dan Innamorato, Vice President, Investor Relations.

Thanks operator. Good morning, everyone, and thank you for joining us. Earlier this morning, we issued a press release announcing our results for the fourth quarter and full year 2022. 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 and considered incorporated by reference on 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.

Great, good morning, everyone. And thank you for joining us to discuss Hubble's fourth quarter and full year 2022 results. 2022 was a strong year for Hubble, we effectively served our customers through a challenging operating environment, consistently delivering high quality, critical infrastructure solutions, which enable grid modernization and electrification in front of and behind the meter. We also delivered strong results for our shareholders with full year organic growth of 18%, adjusted operating profit growth of 29% and adjusted earnings per share growth of 32%. We began 2022 by completing the divestiture of our C&I Lighting, successfully positioning the Hubble portfolio for structurally higher long-term growth and margins. We also stepped up our investment levels to bolster our positions in key strategic growth verticals, through acquisitions and organic innovation, expanded our capacity in areas of visible long-term growth, and to improve our manufacturing and distribution footprint for future productivity. Importantly, we've been able to fund these investments while still expanding operating margins, driven by strong execution on price cost in the face of significant inflationary and supply chain pressures. Our employees have worked hard through a challenging environment to sustain a culture of excellence, delivering industry leading service levels for our utility and electrical customers, along with differentiated financial operating performance. The critical contributions of our employees and partners are what led to it highly successful 2022 for all of our key stakeholders. Looking ahead, we believe that Hubble's unique leading position in attractive markets will enable us to continue delivering on each of these fronts in 2023 and beyond. We will talk more in depth on our near-term outlook later in this presentation. But we anticipate continued market growth and strong execution, driving positive price cost productivity to fund investments back into our business, which will generate long…

Thanks very much, Gerben. And thank you all, for joining us this morning, looking forward to talking about fourth quarter full year, and in particular, our outlook for 2023. I'm going to start my comments on page 5 of the materials that Dan referenced. And we'll start with the fourth quarter results for the Hubble Enterprise. You see sales growth of 11%, up over $1.2 billion, that 11% is comprised of high single digits of price, low single digits of volume. And one point from acquisition. We look at our sales performance through a few different lenses here. The first is against prior year. There’s double digit growth against double digit growth and last year's fourth quarter shows good compounding, and good robust levels of demand. We also look at it through the lens of comparing it to the third quarter. We're down sequentially, about 7% roughly in line with fewer days and the per day shipment level reasonably flat to the third quarter sequentially. And we also believe that there was some, the channel was managing their inventory levels and we'll talk more about that in a couple of pages when we get to the electrical segment. The operating profit on the upper right of the page very impressive growth of 27% very healthy margin expansion of two points to 16%. And when we look at the incremental drop through on the growth, you see about mid-30s dropped through which we think is quite good. Price is really a very important part of the success of this financial performance. The price is sticking, Gerben made reference to the critical products in our customers, adding to their structural solutions and having this sticking price is really helping us as inflation is continuing to affect us in the non-material and value…

Right. Thanks, Bill. And as you said, let me summarize it here on page 13, Hubble is initiating our 2023 outlook, with an adjusted earnings per share range of $11 to $11.50. We believe this represents strong fundamental operating performance for our shareholders, and we are well positioned to deliver on this outlook in a range of macroeconomic scenarios. From a sales standpoint, we expect solid mid-single digit growth organically driven by 2% to 4% of volume growth and approximately two points of price realization. We believe this is a balanced view with good visibility into utility demand and less certainty in electrical markets at this stage. We expect the +2022 acquisitions of PCX Ripley Tools and REF to add an additional 1% to ‘23 revenues. Operationally, we expect that continued execution on price cost productivity will fund attractive high return investments back into our business. Our outlook range embeds solid margin expansion with high single digit to low double digit adjusted operating profit growth. This operational growth rate is consistent with the long-term targets we provided our at our Investor Day last June, despite the current macroeconomic uncertainty and a higher 2022 base following significant outperformance last year, and it puts us well on the path to achieve our 2025 targets. We expect the strong operating performance to enable us to absorb below the line headwinds from pension expense. And the previously communicated non repeat other income from the C&I Lighting divestiture. Overall, our 2023 outlook represents a continuation of the strong fundamental performance that Hubble demonstrated in 2022. With leading positions in attractive markets underpinned by grid modernization, and electrification mega trends, as well as a growing track record of consistent operational execution, I am confident that Hubble is well positioned to continue in delivering differentiated results for shareholders over the near and long term. With that, let me turn it over to Q&A.

[Operator Instructions] Our first question comes from Jeff Sprague with Vertical Research Partners.

Thank you. Good morning, everyone. Hey, couple questions, maybe mostly focused on the utility side, first, on the IIJA and thanks for taking a shot at that a lot of companies have not been able to quantify or are a little worried to try to quantify it. But the nature of my question is really how that interplays with for lack of a better term spending that would have happened anyway. You're presenting it here like it's incremental. But I just wonder your confidence in that. Whether or not it's just replacing other investment or using government stimulus to spend what was going to be spend, be spent regardless?

Yes, I mean, I think, Jeff, ultimately, the dollars ultimately are fungible. But certainly, the customers, we've spent a good deal of time talking to have very specifically increased their CapEx assumptions because of it so. But that's so for us, it's important to kind of quantify it, though. It's ultimately contributing a pointer. So to a mid-single digit. So I agree with you there's a little bit of fungibility there at the end of the day.

And then just on the on the capacity if, as you know, some of it is tied to efficiency and supply chain resiliency. I mean it looks like demand will stay at a high level, right, but the rate of growth will maybe settle down to something more normal, maybe it's mid-single digit plus for a few years. Could you just to address the concern that maybe it's the wrong time they have the capacity and how you see the capacity being used, or what bottlenecks that might be uncorking for you.

Yes, I think it's important that it is on uncorking bottlenecks. So one of our specific areas has been on enclosures, Jeff, which has been a really high growth, high margin area. And there are we feel very good that the return on capital of that is going to be because we have such good visibility on that demand is going to be there. So we were -- we feel real good about it and excited about being able to serve our customers better. And I think they're rewarding us relationship wise as we're doing that.

And maybe, Jeff, I can provide to a little bit in addition to what Bill said and specifically he's referring to our utility enclosures in the utility business. But this is a business that and these are enclosures don't only serve utility market, but they serve communications markets, and they serve water markets that all have these applications. So it's not only do we see divisibility on the utility side, but these other markets have been high growth markets. So we're very, very confident here that this is a more sustained growth level. If you think about this investment, and we talked about this, this is a new facility that we're opening up in Oklahoma City, expanding not only the capacity of enclosures, but at the same time, we're consolidating some factories as well. So there's an element of productivity in these moves as well. So we believe and this is just one example of high return investment that we believe will serve our customers well, and will serve our shareholders well, long term.

And then just one last one for me, if I could, could you just elaborate a little bit more? What happened with the Clara in the quarter, I guess, I tend to think of a quote unquote, commercial resolution being a cost item, not a revenue item. But the way you're laying it out, you're at some kind of adjustment to revenues, or headwinds to revenues. So they'll expect you to name the customer, but maybe you could give us a little bit more color on what actually happened and what you resolved.

Yes, just the nature of it resulted, ultimately, Jeff, in the character of a price concession, so it hits the top line, and drop through to the OP line as well.

Our next question comes from Steve Tusa with JPMorgan.

Hey, guys, good morning. So can you talk about your price assumptions like first half and second half? You said, I think 2% embedded in the numbers. Maybe I'm thinking about a different call, I have been up five this morning. But any color on kind of that first half to second half price?

No, it's, you're right on the two. That's basically been layered in throughout ‘22. So as it wraps around, it sort of does have a tapering effect. But when you think about price cost, some of the commodities are coming down to and so really, how it nets, it does net a little more favorable early, in a little bit more favorable first quarter, first half. And but that's, Steve, ultimately, the net will be determined. I mean, we have a little more confidence in what we see in the price, but the cost side is obviously kind of what we'll have to react to.

Yes. And on the price side, I guess is there any, you're not embedding any quarter where it's actually negative?

No.

Okay. Where would we-- where would you look within your product lines to is the kind of canary in the coal mine on that front?

Where do you see the most price pressure?

Yes, where would you expect? You're not seeing it today. I don't think anybody's really seeing it today. But where would you be watching for that? Where would you be most concerned? If there were to be some pressure some pushback?

Yes, my guess is it would show up maybe on our electrical side, and maybe some of the more current, first of all resi products, there is sort of seeing contracting demand there with commercial that would maybe be most cyclical, responsive to that some of the more rough and electrical that might be where we will be paying a lot of attention, Steve.

Yes, and I think it's less about that certain product lines are going to see more cost, if I think that's pretty spread. And especially with a chart that Bill shows the raw materials, actually a fairly small percentage. So I think all of our product lines are exposed fairly similar to that other inflation. So I think it has more to do with the market dynamics and if there is a potential slowdown in the second half, that could put them additional pressure and that would be in the more on the electrical side and the utility.

Great, thanks for the caller. As always, all the details are helpful and I echo what Jeff said on the IRA stuff giving us a little bit of precision on that versus other companies that you just say it's great. So we appreciate it. Thanks.

Our next question comes from Tommy Moll with Stephens.

Good morning, and thanks for taking my questions. Also really appreciate the price cost productivity, glad you provided with all the details, especially because now we get to keep asking you about it.

So we knew it.

But jokes aside, here, the pie chart is very helpful. And you called out two, and the larger two of the components that are on your cost side, you continue to expect inflationary pressure, but on the raws, obviously, there's some easing anticipated there. And my suspicion might be, that would be the most visible and most talked about from the customer standpoint. And so my question is, if you're going to realize the two points wrap, which is really I think, just to hold price through the year, have you had to reframe or provide any increased visibility to your customers, as you're facing more than quarters of your costs is inflationary. They're not going to see that as much. How do we get confident you can hold?

Tommy, we have to use very similar visuals as what we're sharing with you. And I think it's our customers are very alive, for example, to labor inflation and wage inflation. And so I think that they kind of relate to where they see the inflation. And as you point out, when you look on a futures market, and you see the raw metals getting cheaper. That's really only a small part of the whole picture. So we've had to have that be part of a conversation part of a relationship discussion, right. It's not pure transactional, it's not sending people letters ,right. It's about having conversations and sharing the kind of analysis that you're looking at today.

Appreciate that, Bill. As a follow up here on the electrical solutions, and market visibility you provided, it sounds very similar to the early peak you gave us for 2023 a quarter ago, at least in terms of the direction. But has anything changed versus a quarter ago? It sounds like your visibility is pretty limited first quarter, maybe first half? But is there any change versus what we heard from you last quarter?

Yes. I think the part that we gained insight was the inventory management actions that appeared to us to have taken place in the fourth quarter. And if those are the new, Tommy, you could argue it might be a little softer than we had communicated. And that's why it's so important to us to see the pickup in orders in the first three plus weeks here in January. So I know it's a month is not the largest set of data points, but at least it's been sustained through the month. So I think that those two offsets, yet probably do get us back to where we were when we talked to you in October. But they're kind of equal and opposite reactions, I think.

Next question comes from Josh Pokrzywinski with Morgan Stanley.

Hi, good morning, guys. So not to look a gift horse in the mouth with the IIJA disclosure and all. And I'll echo what everyone else has said on how helpful that is. Maybe just to wonder if you could maybe estimate IRA, is that in your mind, bigger, smaller, longer duration, shorter duration, like how do you feel about that relative to what you put out there with IIJA?

Yes, I would say, Josh, the IRA impacts us to a lesser extent, but it does benefit us as well and here rather than direct funding, this is more about tax credits. But if you think about it, they extended the renewable tax credits for solar and wind. And that's an area that both our utility and electrical businesses benefit from the EV incentives. And while we're not directly in EV the balance of systems that goes around with this infrastructure, we benefit well, of as well. So I would say it does affect and coming back to it's so difficult to pinpoint what exactly what percentage of our growth will be tied to this. I would say it's helpful as well.

Got it. That's helpful. And then, Bill, your comment there on the destock. And then the order rebound. Seems like a lot of that is maybe washed out, but any more detail you can give on kind of portfolio breath that was impacted and sort of order of magnitude on size. Was it like, a five-point correction on inventory? Or like a 20 that came down sharply, and then came right back up?

Yes, I mean, I think it was fairly broad based. I think if you interviewed our customers, they were feeling a little overstocked. I think, Josh, some of that, driven by when promise dates were extended, they had customers who wanted materials. So they were just making sure their shelves were stocked, I think there's also been places where they may be bundling or kidding something, and they may have a decent chunk of inventory that needs one last part to the bundle, and then that'll get shipped. And so I think what we care a lot about is our orders going to come to a sustainable level through a nice, orderly overtime process as promised delivery dates get shorter. Or is there going to be something a little more sharp or reactionary. And I think through the fourth quarter, and now through one month in the third, the first quarter of New Year that feels, it just feels manageable. So the breath that you're talking about is preventing any real spiky kind of problematic situation right now. So for us the way that it's kind of evolving here is it feels manageable to us right now.

Our next question comes from Brad Lindsey with Mizuho.

Good morning, all. Hey, I just want to come back to the communications controls business. So down 10% driven by chip supply, could you just talked about the timing of the chip situation improving, and really anything the team is doing in terms of redesigns or reengineering to help monetize some of that backlog?

Yes, let me provide some content, maybe Bill, fill in as well. But chip availability has been the Achilles heel, throughout the pandemic, and we're all aware of that. So we pretty early on realized that there just wasn't going to be a short-term turnaround. So to your point of redesign, we have -- we've been very active in that, as a matter of fact, it's what had taken a good part of the engineering resources of a Clara to do. This isn't a simple chip replacement. And you go there's a ton of design in it, and then a lot of testing to make sure that this product functions in the field. So we right now have a product out in the field, that's being tested. And if that continues, as we expect, we will be able in the second quarter to substitute chips. And that's part of the reason we believe that even if the supply chain is still a challenge, we should be able to start seeing growth back into that business. And the other thing is we read about chip availability getting better. And of course, we track this very closely as well with our suppliers and it's really the types of chips that matter and we've certainly I've learned a lot about chips over the last year, but the memory chip, those kinds of chips that are used in phones have become much more available. The types of chips the microprocessor types of chips that we use in our products have been the one they'd have been still more challenged from our supply perspective. We do anticipate that improved throughout this year. And the combination of just a general improvement with our redesign is why we're optimistic and confident we can grow throughout 23.

Thanks for that, I guess just a follow up, I imagine there's a lot of labor underutilization factory and efficiencies and so on in that business. Have you tried to size what that magnitude could be? And really, if you can uncork some of the backlog improve continuity of supply and so on what the earnings power could be as part of the clear recovery.

Yes, I maybe thought more general into efficiency in the factories and certainly this business, it's felt that although to this business, there's also a component of contract manufacturing, that happens to a certain extent, and we're shielded. But in our business in general, that's absolutely a right common tomato with all the disruption it's driven, more inefficient factory and I would say if ‘22 was all about pricing and managing price cost productivity. ‘23 will continue to be that but a high focus of us in returning to higher productivity in our footprint.

Next question comes from Nigel Coe with Wolfe Research.

Good morning, everyone. Hi, guys. So just want to go back to the commercialization of Clara, did I get that right, Bill came through with a price concession. So that impacted the headline price in utilities?

Yes.

Okay. That's been, and I'm saying that about $20 million - $25 million. Is that in right zone?

No, that's too high.

Too high. But that would have impacted EBITDA as well. So that was both revenue and EBITDA impact, correct?

Correct.

Okay, great. Okay, this is my clarification questions. And then moving on to my real questions. So on the inventory, did you see that hidden primarily within residential products? Or was it much more sort of generalized immunity clearance?

Yes, I would say much more generalized. So utility, which is -- had very impressive growth, but we invested in utility inventory too right, so trying to, we're still going to have our AA items on time delivery, performance levels where we want them, Nigel, so that inventory has been kind of across the board. It's skews at this point, if you looked at our yearend balance sheet, it skews in a raw versus finished good or [inaudible] maybe that's obvious, because if it was finished, we would have shipped it but so is that still has to work its way through the factories and get converted. And so that's kind of part of what Gerben saying, we should be able to run the factories a little bit hotter and get some efficiencies as we burn through a lot of that raw material.

Right. Okay. And then just a quick one on below line item, I mean, pension in any kind of big swings on pension, and I think there's some TFA income rolling off this year. So in any impact there would be helpful.

Yes. So both of those you saw when Gerben walks through the waterfall, we've got this red bar at the end. So the nonrecurrence of the PSA is part of it and the pension, while we've benefited from our liabilities going down with higher interest rates, the gap between return. expected return on assets and discount rates it has narrowed and so that creates a cost headwind for next year, that's its pension that is not cash, but it does create an income statement headwind for us and that other.

Our next question comes from Christopher Glynn with Oppenheimer.

Thanks. Good morning, guys. Just curious your thoughts on the acquisition pipeline, couple angles, anything in electrical or focused pretty much on utility and part of the thought there is maybe more premium on the utility side deals, but obviously, you can add lots of value. And also, should we be thinking exclusively along the lines of the typical bolt-on sizes?

Yes, so I would say, Chris, the pipeline is equal opportunity. So two of the three deals we closed in ‘22 are electrical. So I would not think about it being exclusively utility. If you thought about activity doing 180, in ‘22, for me is slightly disappointing I would have rather had a fourth you get us into the mid twos as an annual kind of investment rate. And so we've got the cash to keep doing that. And I think the year was a little challenged for us in getting, I think, sellers to accept sort of the uncertainty of the macro. And so I think it was a little harder to get buyers and sellers to agree, at the end of the day. So we had a couple that we thought maybe could get done that ultimately didn't. And so we're looking to be more active. The pipeline, though, is supportive of that activity level. But you're asking about is the size going to be more typical traditional historical levels? I would say, yes. But I would think about there being opportunities in both electrical and utility, Chris.

Great. Thanks for that. And other question was on the electrical margin. Historically, you have a little bit more of a seasonal margin tail off in the fourth quarter over the third quarter. But last year was moderate too. Are there any particular sequential factors that ease that? Or is the last couple of years really a better guidepost to your margin even historically?

No, I mean, look, I think the seasonality can be driven by fewer days in the fourth quarter. And then if the weather prevents construction, right. Those are the two factors, I'd say. And I do think we've been operating with backlogs such that maybe you'd see less than that weather impact, maybe, but the days are there. And the electrical side has less backlog than the utility side right now. So I think the biggest sequential factor continues to be price costs tailwinds and contributions from that help lift that helpless margins.

Our next question comes from Chris Snyder with UBS.

Thank you. So guidance puts electrical at low single digit organic growth in 2023. So flat to up versus 1% in Q4, and with price fading, we think that guidance for volumes to increase from here. Is this solely the result of moving past this customer inventory digestion period or something else driving volumes higher from this point? Thanks.

Yes, I mean, I think that's a sequential fact from the fourth quarter. Do you think the fourth quarter is a little distorted by that? They're very well could be destocking throughout ‘23, though, as well. Hopefully, that's kind of measured. But I think that if you just look year-over-year and you go kind of high-end market, we're anticipating resi contracting significantly. That's creating ultimately a drag. We think those blue markets that line up, that we think are going to be quite resilient to a consumer led recession and some of the inflation and interest rate problems that consumers are having. We think those are a little more secularly driven right now and then the balance of non res and industrial we see industrial being in slightly probably stronger shape and the non res being a little more, maybe quick to follow resi. And so, I think we have kind of a range like that Chris of kind of confidence. And that's you'll hear us maybe be a little bit more confident in the first half a little more visibility and a little more uncertainty in the second half, I think.

No, yes, I really appreciate that color. And obviously a tough macro. But I guess just the follow up -- incremental -- for ‘23, I'm sorry, hearing background noise, and then also anything to worry about on datacenter or telecom. Some other companies have kind of flagged some slowdown concerns there. Thank you.

Yes, but I think when you talk about datacenters, you think about the two segments of that market, the mega centers and being run by the fangs in the big tech world. And you certainly see them reacting with headcount reductions, for example. And could that lead to some slowing of growth on the capital side? I think it's, that's possible, and it could, I think, the telecom side, we still see the build out. So we're still, I'd say, in the medium term, we're both -- we're very bullish on both of those factors. Even though I do agree that there could be because the second side of datacenters, outside of the mega, all these colos, I think there's probably going to be demand at that part of it. So could be maybe a reshaping of mix inside of datacenters. And so I do think your questions important to figure out what net effect it has, but I think we're still anticipating growth out of both of those.

Yes, and maybe to your second part of is there further destocking? We would say that there probably is, especially if you look at sales, that some of our distributor partners are still struggling with getting supply. So they have a lot of the materials they need for project, they're missing something. And when that comes in, that will naturally cause inventories to come down a little bit further, we believe our products are less exposed to that because we've certainly performed relatively well through it, but we would say there's still probably some destocking in the early part of ‘23.

I would now like to turn the call back over to Dan Innamorato for any closing remarks.

Great. Thanks, everybody, for joining us. I'll be around all day for questions. Thank you.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.