Hubbell Inc

We're standing by and welcome to the second quarter 2022 earnings conference call for Hubble Corporation. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you'll need to press star 1-1 on your telephone. Once again, that's star 1-1. As a reminder, today's program may be recorded. And now I'd like to introduce your host for today's program, Dan Imerato, Vice President, Investor Relations. Please go ahead, sir.

Thanks, operator. Good morning, everyone, and thank you for joining us. Earlier this morning, we issued a press release announcing our second quarter 2022 results. The press release and slides are posted to the investor section of our website at hubble.com. I'm joined today by our Chairman, President, and CEO, Gervin 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 our 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 consider it 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. And with that, I'll turn the call over to Gerben. Great.

Thanks, Dan, and good morning, everyone, and thank you for joining us to discuss Hubble's second quarter results. I will open our call this morning with a broad overview of our performance, markets, and the investments we continue to make that drive value for our stakeholders. Bill will then provide details on our second quarter results, and I'll come back with some comments on the outlook for the year. Hubbell delivered another strong quarter of operating performance, with year-over-year organic growth of 20% and adjusted operating profit growth of 29%. We are performing above our initial expectations through the first half of the year and have generated year-over-year adjusted EPS growth of 29% through the first two quarters. We are raising our annual outlook this morning to reflect that strong performance. While we anticipate the second half operating environment to remain dynamic and we see uncertainty around macroeconomic conditions, we are confident in our ability to continue to execute effectively and deliver on the stronger outlook due to three key factors, the strength of our end markets, the strength of our position in those markets, and our continued operational execution. particularly proactively managing price cost as well as supply chain constraints. Starting with markets, customer demand for reliable and efficient critical infrastructure solutions in front and behind the meter continues to drive strong orders and sales growth. In particular, the utility solution segment continues to build backlog even as customer shipments pick up sequentially. Grid modernization initiatives continue to drive robust investment levels from our core utility customers as they seek to upgrade and harden aging infrastructure while integrating renewables onto the grid. Our leading quality, reliability, and service in these markets continue to position us well to effectively serve these critical needs for our customers. In electrical solutions, demand remains strong across most of our end markets, Electrification trends, together with strong industrial and non-residential markets, continue to drive sales and order growth across most of our electrical businesses, while residential markets remain soft as anticipated. I'd also like to highlight the ongoing strength we are seeing in communications markets, which is a key strategic vertical for Hubble spanning across both segments. Telecommunications customers continue to invest in building out 5G networks, rural broadband access, and fiber-to-the-home upgrades, driving demand for leading products and solutions across the Hubble portfolio, including enclosures, connectors, tooling, and antennas. Results in the quarter were also driven by continued execution on price cost. Price realization was 14% in the quarter, up again sequentially as the company continued to actively manage price and productivity to offset broad-based inflationary pressures. While material inflation is showing signs of easing, non-material inflation and supply chain headwinds persist. Increased cost of labor, freight and logistics, as well as tight availability in key materials and components continue to drive higher input costs and manufacturing and transportation efficiencies across our businesses. Despite these challenges, we were able to drive increased unit output and achieve strong year-over-year operating margin expansion of 130 basis points in the second quarter. Overall, a very strong quarter for Hubbell. We are confident in our ability to continue to effectively navigate a dynamic environment, and we are raising our full year expectations this morning while at the same time accelerating investments in the second half of the year to position us well for sustained long-term outperformance. We'll provide more color on that full-year outlook at the end of this presentation. Before I turn it over to Bill to talk you through the financial results in more detail, I would like to welcome PCX and Ripley Tools to the Hubble portfolio. These two high-quality businesses, which we acquired earlier this month, have strong financial profiles and attractive growth characteristics and bolster our position in key strategic growth verticals of data centers, renewables, electric T&D, and communications. We also have a strong cash position and balance sheet and expect to continue investing in acquisitions as a core component of our strategy for long-term shareholder value creation. With that, let me turn it over to Bill.

Thanks very much, Gervin, and appreciate you all Joining us this morning, I'm going to kick off my remarks with a shout out to Stones fans and recognizing Mick Jagger's birthday today. I'm going to start on page four of the materials that Dan referenced. I hope you found those. Starting with sales, $1.26 billion, 20% organic growth over last year with very healthy contributions from both price and volume. OP margins of 16.6 percent, 130 basis points of margin expansion there, really getting the drop-through from incremental volumes and the price-cost tailwind. Earnings per share of $2.81. You saw the OP contributions to those earnings. You know, below the line, we have tailwinds from non-op, and we bought some shares that reduced the share count, helped BPS. Those were offset by a more normalized tax level in 22 versus a lower level the prior year. And then for cash flow, $168 million in the quarter, resulting, driven by higher income but with investments in both CapEx and in working capital, which we'll talk more about. So, you know, really a very strong quarter, high-quality beat of our own expectations. You know, there's a lot of moving pieces, as you see, but the simple part of our story is better volume and better price cost, and that's really the driver that you'll hear a lot about in our time this morning. Page 5, the enterprise results laid out here. Again, see the sales of 19% to $1.256 billion. That's comprised of 14% price, 6% units, and a point of drag from foreign exchange. So the 19% is obviously very strong compared to last year. When we do a sequential look back to the first quarter, also a very strong compare. We have sales up high single digits and about half of that driven by price and half driven by incremental volume. So I think strong top line in both perspectives. And I'd say the fact that we're able to get more volume out in the second quarter is a good sign, implies that our factories were able to improve their capacity slightly, even though the headwinds inside the supply chain still persist with labor materials and transportation all being a little bit inconsistent and continuing to cause inefficiencies on the part of our manufacturing operations. But the order pattern remains solid. Really, really good broad-based demand, and we'll talk more about that in each segment. On the upper right of page five, operating profit up 29% to $208 million, 16.6%, about 130 basis point margin expansion. Decent incrementals in the mid-20s being driven by six points of volume and the drop through there. tailwind from price costs, but some partial offsets from non-material inflation, as well as some of the plant inefficiencies and other returning costs. So we tend to focus purely on the materials, but the non-material inflation is still an important factor in our financial performance here in the second quarter. Up 27% to $2.81 is growth roughly in line with the operating profit growth. And free cash flow growing to $168 million, 41%. Looks like good growth, but in order for us to continue to meet our full-year target, we need to have a very strong second half of cash flow collection, as is typical for us. Fourth quarter tends to be our largest quarter, so that measure is quite back and loaded. It is noteworthy, though, I think, of the amount of that we're investing in CapEx is up about 16 percent in the quarter, so that's a claim on these cash flows, and continue to invest in working capital. Receivables naturally up with sales and inventory up as we continue to try to support our customers and have inventory on hand to support the 20% sales growth. So good cash flow growth despite some strong investments and continue to need to focus on some cash flow in the second half. Now I wanted to talk about each segment. and their performance, and I was gonna start with the electrical segment on page six. Sales up in the electrical segment 13%, nice solid growth rate, about 10 points of price, about four of volume, and one point of drag from foreign exchange. Really saw broad strength across the electrical segment with the very notable exception of the resi business, which I'll come to in a second. But the various components of the non-resi part of the segment, good strength in non-res, good strength in light industrial, both of the Burn D and wiring device brands doing very well in those markets. The heavy industrial markets also doing very well for us. And I think Gerben noted some of the verticals in communications and data centers providing some really nice growth for us there across the segment. Resi, definitely the notable exception to that good news. Resi for us representing about 15% of the segment sales. And they were down double digits. So had a significant effect on performance here. On the operating profit side, you see $83 million of adjusted operating profit generated a 14% growth to the prior year at 15.7% OP margins, a slight improvement over last year. So the volume growth of four points drops through at attractive incrementals. We have positive price costs. Those are offset partially by the supply chain inflationary headwinds, and we also had higher restructuring investment in the segment. I think that it's worth noting if without the resi drag on margins, this segment would have had about a point of margin expansion. So, despite only being 15 percent of the segment, RESI is impacting the performance there. On page seven, I want to switch to talking about the utility solution segment. And you can see just an excellent quarter turned in by our partners in the utility segment driven mostly by the performance of Hubbell Power Systems within the segment. So overall, $729 million of sales representing a 24% increase from prior year. That's got price in the mid-teens and volume in the high single digits. We've experienced robust demand. On the T&D component side, that's really the legacy hubble power systems. And you see 32% growth there. Just a lot of demand from utilities to continue to satisfy their needs to harden their infrastructure against environmental impact, integrate renewables, and upgrade their networks. So very strong growth. very strong demand and a position in the industry where we enjoy a lot of strength. And we continue to get very positive customer feedback that despite the fact that our service is right now below our standards and our lead times are longer than we'd like representing some of the supply chain difficulties. We're getting feedback from our customers that we are outperforming the competition, and I think that's serving us very well. The second part of the segment after the T&D components is the communications and controls. You'll see that's up more modestly at 3%, and the meters continue to be constrained by chip shortages, and though there's adequate backlog to support a lot more growth, the supply chain is just not cooperating to let us satisfy all that. So on the right side of the page in operating profit, you see the segment generated $125 million of adjusted operating profit, 40% increase from the prior year, and over a 200 basis point. margin expansion to 17.2%. That margin expansion is being driven by the drop-through on the incremental volume, which is substantial, plus the price, material cost, favorability, and they're overcoming the supply chain headwinds in order to drive that margin performance. So a really nice job by our utility team and really helping drive performance of the whole enterprise. On page eight, I wanted to recall us for a minute to Investor Day just a couple of months ago, where we introduced a very simple construct, which started with, first of all, us feeling that our high-quality products and solutions would be able to grow as the end markets they're exposed to grow, and we're anticipating that those end markets would outgrow GDP. Part of the reason is we highlighted these six growth verticals where we have an outsized exposure, about 40 percent of the sales exposed to these markets, and we think each of these will outperform GDP. We also introduced the second construct, which is that we had management levers to help us outgrow the end markets, which we think will outgrow GDP. Specifically there, we're going to use innovation acquisitions and some sales and marketing initiatives. And the third bucket of levers was to manage price-cost productivity as well as restructuring. And we'll talk about those in a moment as well. So, Gervin had indicated two acquisitions, and it just helps illustrate The point we're making at Investor Day, which is while we're exposed to these markets, we think they're going to outgrow GDP. We also are going to be directional and intentional with our investment and invest specifically in these verticals. And in July, closing on two acquisitions. So they are subsequent events to the second quarter, but we will enjoy their performance. for the second half of this year and then the full year next year. I'm very excited to have both of these fine companies in the portfolio. The first one is Ripley Tools, and Ripley is a bolt-on for our utility segment, a Connecticut-based company founded in 1936, so very well-established brands. high-quality products that are primarily focused to the communications area where they're working on fiber optic and telecom applications, some specialized tools required for that, as well as some tools for the power, the T&D industry that are a full complement to some tools that Hubble has So last year's sales of about $20 million. We paid ballpark of about $50 million for the business. High growth, high margin, exact example of getting exposure to markets where we think we can win and we think we can outgrow the economy. On the right side is PCX. And I know you've heard us talk about an interest in increasing our exposure to data centers, and PCX REC presents a significant step forward for us in that regard. They make prefabricated electric rooms for data centers, basically provide the power, power quality, uninterrupted supply. They do so by using manufacturer labor in a plant rather than needing specialized labor onsite. And so you're picking up a number of themes here with this investment. One is the data center growth. Two is the arbitrage in labor from onsite specialty to manufactured labor inside of a plant. And the third is the dramatic reduction in cycle time. that results from using these modular prefab units, and that's really of interest to the owner-operators of the megacenters and the colos as well. So we think a smart investment there, sales of about $50 million and a little bit less than $130 million investment. So when we look at the two together, we spent about $175 million invested. We think they will have about a one-point impact on growth in 2022. We think for the balance of the year, they will contribute roughly a dime of earnings and have a bigger impact next year in 2023. And I think as we stand back and evaluate 2022, at the halfway point, We've had some important portfolio reshapings where we sold our CNI lighting business for about $350 million. We've added these two, and we bought about $150 million worth of shares earlier at the end of the first quarter. So we've essentially deployed the cash from that sale replaced the earnings and positioned ourselves with much higher growth, much higher margin businesses. So I think a good example in just six months of the power of focusing on the portfolio. So with that, I'd like to turn it back to Gervin to talk about the outlook for the remainder of 2022. Great.

Thanks, Bill. And I'd like to close our remarks today with some comments on that 22 outlook on page nine. As we highlighted at the beginning of the call, we are raising our full year 2022 outlook. We now anticipate mid-teens full year sales growth up from low double digits from the prior guidance. And we are raising our adjusted earnings per share outlook to a range of 940 to 980 versus a prior range of $9 to 940. We continue to anticipate generating free cash flow conversion of 90% to 100% of adjusted earnings per share. Relative to our prior guidance, this raised 2022 outlook is driven primarily by stronger first half performance, stronger volume and price material assumptions, and a modest contribution from acquisitions, and partially offset by higher general inflationary pressures and targeted investments in the second half. When we spoke to you all in Investor Day in early June, we outlined three key areas where we are looking to invest over the next three to five years. Footprint optimization and restructuring to drive a more efficient manufacturing and distribution network, primarily across our electrical solutions segment as we continue our HES journey as a unified operating segment. Targeted capacity expansion in markets with visible growth trajectories and strong hubble positions, primarily in certain power T&D and communication product lines where capacity is tight and customers have critical needs for our products. And finally, innovation to accelerate organic growth with an emphasis to capitalize on attractive megatrends and key strategic growth verticals through new products, solutions, and go-to-market strategies. While we recognize that the near-term macroeconomic environment is uncertain, we believe that now is an opportune time to accelerate some of these previously planned investments from a position of strength to set the company up for sustained performance over the long term. We expect these initiatives to drive future productivity and cost savings while enabling us to better serve the critical infrastructure needs of our customers, with differentiated solutions in front and behind the meter. To summarize this morning's call, Hubbell is off to a strong start through the first half of 2022. We have leading positions in attractive markets with long-term growth drivers, and we are executing effectively in the areas within our control. We are confident in delivering on our race 2022 outlook and in driving differentiated results for our shareholders over the long term. With that, let me turn it over to Q&A.

Certainly. Ladies and gentlemen, if you have a question at this time, please press star 1-1 on your telephone. Our first question comes from the line. One moment for our first question. And our first question comes from the line of Jeff Strait from Vertical Research Partners. Your question, please.

Hey, thank you. Good morning, everyone. Morning, Jeff. Morning, Jeff. Hey, morning. So a couple things from me. Maybe just first on PCX. You know, I obviously understand the organic growth in that sector, but a little surprised you're buying an integrator, right? So you're basically buying now electrical components from other providers and packaging them, right? So maybe just explain, unless I'm wrong there, just maybe explain how you kind of advantage that and how that's kind of a sustainable, strong business for you.

Yeah, I think it starts with they do manufacture a number of the products that goes in, but you're right, there is an awful lot of sourcing. But the design element of it, Jeff, that is done in very close concert with the owner-operator of the data center, is a very sticky process and one that we think really enables the margin to be earned. And so it is a little different in that there is quite a bit of purchase for resale content in the end product, but I think the way, the nature of the interaction with the customer is quite intimate and design intensive, and that's very appealing to us.

Okay. And just on price here now, price cost, I mean, the pricing execution in the quarter is obviously phenomenal. I mean, maybe just address a little bit how these discussions are going now with customers, what you think might happen as we move forward. Obviously, there's been a pretty significant rollover on kind of steel, copper, aluminum, most industrial metals. Maybe just a little color on how you expect things to play out in the back half in the next year and if we're seeing any pushback now on pricing.

Yeah, Jeff, maybe I'll start with some comments and I'm sure Bill will have some as well. But I would say our approach to pricing has been to, A, not tie it specifically only to commodities but to general inflation. So while we see on commodities a pullback. Right now, general inflation is still tremendously high, and we feel that in our business. As we have these discussions with our customers, it's around the broader inflation and need to price. If you looked at last year, we were on the negative on that. I would say, despite very good traction and If you think about the charts that we've shown you in the past of how over time we manage that, we still need more positive price costs to claw back from the negative of last year. And those are discussions we have with our customers. I would say the other part in our portfolio is we're generally a small portion of the total cost of the systems. So the discussion around availability and quality and reliability is generally are more prominent than on price. Now, all that said, you know, with commodities, when they do come down at the magnitude at which they are coming down and that's sustainable over time, sure, we're going to feel eventually, you know, pressure to, you know, have discussions with pricing the other way. But I'd say that's still out for us a little bit.

And maybe just one last one for me. On Eclaire, that business would seem like it's spring-loaded for growth if supply chain, you know, ever eases up. But actually, is that a good characterization? In other words, are you seeing business move away from you because you can't deliver there or are backlogs, in fact, building? And maybe just give us a little bit of color on the outlook for that business in the back half.

Yeah, you know, as we... There's a couple elements to your question. The first is, yes, there's a ton of backlog there. So I think we're starting to hear rumblings that the supply chain may be thawing a bit and may be improving. We haven't anticipated that that happens until the start of next year. And it's not clear to me that that shape would enable a spring like you're describing, or will it be, you know, so it'll be dependent on how those chips come back. But you're right to characterize the demand is there to buy a lot of smart meters, you know, absolutely.

Great. Thank you, guys. Appreciate it.

Thank you. Thank you. One moment for our next question. And our next question comes in the line, Tommy Maul from Stevens. Your question, please.

Good morning, and thanks for taking my questions.

Good morning, Tommy.

Good morning, Tommy. I want to start off at a high level on your revised guidance, specifically around EPS. And just help me if I'm missing something here, but looking at the typical seasonality first half to second half, It would appear at first glance that even the revised outlook may be conservative for second half, just given that price material appears to be a positive now underlying demand, particularly on the utility side where you called out great organic growth and backlog build. It raised the question for me, could there still be some conservatism baked in? So any context you could give there would be helpful. Thank you.

Yeah, Tommy, if you did a typical first half, second half, what does the first half contribute to a year's worth of earnings? It would appear to be conservative, and I think we're trying to achieve conservatism. We're very aware of some of the latest trends coming out of consumer-facing companies and some of the challenges that appear to be While we don't have much consumer exposure, the consumer is such a large part of the economy that we're still going to be exposed to that macro phenomenon. I think the way, Tommy, we're looking at it, we would anticipate effects from a consumer to hit our electrical segment first. That would be typical impact of a consumer-led recession. and our utility franchise would typically lag the effect that our electricals, and it would be shallower and come out faster. So I would say this guidance has got some conservatism worried about that uncertainty. I think the one thing I would point out to you, that you maybe not factored into your question is we are planning on a significant amount of investment in restructuring in the second half. We've put a specific bar there just to highlight that. But if you go back to 2020, we had about $27 million of restructuring and in 22, we're trying to do about 30, so consistent number. And to get there, we would have an aggressive second half investment level of a little north of $20 million in the second half. So we think those projects are really important to setting up 23 and getting both capacity in our power side as well as efficiency on the electrical side. So we think those are very wise investments, but that also would create just a specific drag to that first half, second half seasonality that you're looking at. That's why we wanted to show that on the bridge on page nine, just to be clear about that.

Yep, that's helpful. Thank you, Bill. As a follow-up, I wanted to ask about the EV charging solution that you talked about earlier this summer. So I guess a couple parts to the question. Just in terms of the model here, is the idea that you go in as a preferred partner with your incumbent utility customers for some base rate budget? I guess that's the first question. And then second question would be just on timing and magnitude toward a meaningful P&L impact. If all goes well, what kind of timeframe are we looking at here?

Yeah, let me tackle the first part, which is, yeah, I'd say the only partner, not the preferred partner, because we think we're kind of combining unique elements of metrology, you know, revenue grade, meter, with the charging units, and yet the idea would be you have the utility that they in turn think about offering that to a consumer, offering a differential rate cheaper to charge the car overnight, and that that benefits the consumer and the payback to the utility because the marginal cost of production generation would be very, very low. So the margin on that would be very, very good and really help load manage for the utility. So we think there's an optimum solution that works really well for, as you say, our core utility customer, their customer, and that we're uniquely provided to do that. The timing is going to take a while, and I really wouldn't hazard to tell you when we start to see any impact there.

Yeah, and maybe, you know, as we talked about it in Invest Today as an example of where we're investing in what we refer to as MPX, which is new products that are magnitudes larger than our traditional. You know, this kind of solution, different from, you know, the chargers that are available, is very unique. So I would say while Certainly we're very excited about it. It's very early days of development of what's a completely new solution to the market. And some of these are going to be successful and some of them won't be. And I think that's one of the reasons why we're more uncertain on the timing and the magnitude of the impact. But these are projects that are, if successful and unsuccessful, are much larger scale than we would traditionally see with our new product development processes.

I appreciate the time, and I'll turn it back. Thank you.

Thank you. Ladies and gentlemen, we ask that you please limit yourself to one question and one follow-up. You may get back in the queue as time allows. And our next question comes from the line of Nigel Coe from Wolf Research. Your question, please.

Hey, good morning. This is Wolf Rankon for Nigel.

Morning, Wolf.

Morning. So first... On the backlog, I was wondering if you could talk about the dynamic of orders that are greater than versus less than 90 days dated, how that performed in the quarter and how you see that trending through the back half of the year.

Yeah, if we think about the order pattern and the backlog, maybe the first comment to make would be between the segments where The utility order pattern has been stronger than the electrical and we've been building therefore more backlog on the utility side. Electrical is approaching still building backlog, but approaching a lot more book and bill sort of balance. And I think that the over 90 days. has been a component and in certain places like smart meters we're talking about that are constrained, you know, you're seeing, you know, more of that. But I think if your question's getting at do we see customers reacting to supply chain improvements, And will that, you know, reduce order so they don't have to have what I might call a safety order in? Yeah, I mean, I think that reaction is going to be immediate in response to lead times coming back in and kind of allowing them to not need to kind of feel like they got to get in the queue. So if we were to tell you what's the state of the supply chain, you know, we still – are a little bit uneven with labor, allowing them to not need to kind of feel like they got to get in the queue. So if we were to tell you what's the state of the supply chain, we still are a little bit uneven with labor, still a little bit uneven with material supply. And so our lead times are still elevated to what we'd want them to be. My guess is that's contributing to customers wanting to get in line to make sure they can get the material that they need.

Got it. And then what are your expectations? Could you provide any detail on how you're thinking about gross margins for the rest of the year?

Yeah, I think the contribution to gross margin – that would come from unit growth and effectively dropping through incrementals at above average margin. There's a component of that that would show up as gross margin. And then price cost would also show up as gross margin. So those two drivers, I think, Our tailwinds, when we ultimately see our factory efficiency return, which we don't see yet returning in the second half, but that ultimately, in the more medium term, that would come back into gross margin as well.

Thanks, guys.

Thank you. One moment for our next question. And our next question comes from the line of Josh from Morgan Stanley. Your question, please.

Hey, good morning, guys.

Hey, Josh.

Just a question on what you guys are seeing out there in channel inventory. Apologies, I have to end a bit late, so if you already covered it, I can always look back. But I think it's kind of maybe a richer mix between what's going on in consumer versus industrial markets. I know you guys don't really touch consumers much, but any observations across the different lines of business would be helpful.

Yeah, I'd say in general and inventory, and that's a topic that we cover with our customers quite often, every opportunity we have with them to do checks on that. We also follow date on selling and sell out to have a look at real demand. I would say that generally still our products are selling through. Certainly in this supply chain crunch, distributors are trying to get their hands on products. I would say there has been a level of getting inventory in. So I would say at this point, our distributors are perhaps appropriately stocked rather than overstocked. I would say they were probably understocked for a period of time, so there has been stocking going on. But in our products, no signs of any overstock position. Now, the one thing that remains to be seen, if there is a slowdown, are the levels that they have too high for what they need? Then you could see a correction in that with inventory level. But at this point, we don't see a big risk of overstocking and the consequences of destocking in the absence of a significant slowdown.

Got it. That's helpful. And then I think just as maybe some of the macro data has softened up in pockets here. Folks are always trying to look for prior recessionary periods as kind of a starting point. But my guess is that your markets, at least on a volume basis, aren't up terribly much since like the, what was that, 2018 kind of soft patch. Any way to contextualize even kind of rough numbers, what some of those various markets are doing on a volume basis versus kind of pre-COVID levels?

Yeah, it's an interesting way to look at it.

I thought you were going to talk about, you know, how our exposure would perform, you know, in a consumer-led recession as opposed to, you know, a financial institution-led crisis or an industrial recession. I'm not sure I have – I think maybe Dan and I should follow up with you. I'm not sure I have good analysis at my fingertips of – of some of those levels, you know, versus kind of 18, 19. Got it.

I guess since you're volunteering, though, how do you feel about, you know, kind of a consumer-led recession impacting the business?

Yeah, I mean, I think we're anticipating that it's going to affect our electrical segment first, that our electrical segment will feel it with a little more severity and that our utility segment might have a one or two quarter lag versus our electrical and that it would probably be shallower and shorter in duration. And I think the, you know, some of the underlying demand provided we're talking a little bit about the infrastructure bill and does that provide a little ballast or not, you know, but the fact is, you know, we don't believe, you know, Josh, that we're immune to this macro by any means and that, you know, we're sitting here at that halfway mark of the first year with, you know, roughly 20% sales growth and margin expansion. We recognize in price, you know, in the double digits, right? We know that that's those are not kind of sustainable like steady state kind of performance so we're trying to be very very cautious and looking at these markets with a keen eye you know we've chosen to invest in inventory because we see enough backlog that we feel good about being able to clear that inventory and Gerben kind of also commented on, we feel like the balance sheet is poised to invest, and it's a really good time to help support the utility business with some growth capital and support the electrical segment with some productivity capital. And that's kind of how we're operating going forward. We think the time for us to make those investments is the second half of this year to help support 23 and 24. Got it.

Thanks a lot.

Thank you. One moment for our next question. And our next question comes from the line of Chris Schneider from UBS. Your question, please.

Thank you. I was just hoping for more color on the back half margin drivers. So, you know, relative to Q2, the guidance calls for putting material fall-off in margins into the back half. It just seems more significant than what would be implied by the $20 million back half restructuring spend. So I understand there's maybe slight volume declines as well. But I would have expected a more material offset from improving price costs with LIFO accounting and the recent decline in steel. Any color on these buckets would be helpful. Thank you.

Yeah, Chris, I would say that it's been – a little bit difficult for us to forecast all those variables you just highlighted with precision. And so I think where we've had, you know, trying to make sure we're not over our skis is in areas like volume and areas like price cost. We believe there's a relationship between price and cost, such that if costs react, prices eventually will as well and so. I guess maybe I'd answer your question by saying there are easy to see scenarios where our second half margin assumptions are conservative. We just happen to believe that's the proper posture for us to have right now, but but we certainly. I certainly understand your question and. We're going to manage our best to outperform, but we wanted to have a proper level of caution around those couple variables that you highlighted.

I really appreciate that, Collin. I think the strategy makes sense for the macro at hand. To your kind of response, there's obviously been a lot of moving parts and just an overall difficult to manage macro for two plus years now. But I guess if we think about one day going back to a normalized environment, what do you view as, you know, kind of normalized incrementals for the two segments?

Yeah, I think that I'm hoping we emerge from this period with a higher level of margin, and that would be driven by selling CNI lighting, investing, in acquisitions that have good margins, getting innovation and new product development in areas with high margins. So I'm hoping we kind of, I like your word normalize, so when we get to normal, the new normal, I'm hoping we're at a higher level of margin than we entered. And you're asking then dynamically from there, you know, I would argue, we would anticipate incremental margins to be in the mid-20s. And that's always going to be a function of how much investing are we doing versus are you just purely harvesting new volumes. But that would be my expectation for our financial model over the next couple of years.

Thank you for all that. I appreciate it.

Okay.

Thank you. One moment for our next question. And our next question comes from the line of Christopher Glenn from Oppenheimer. Your question, please.

Thank you. Good morning, everyone.

Hey, Chris.

Hey, so at your investor day, you guys spent a little time talking about channel strategies, the electrical segment, and some of the different tiers of distribution you know top 10 versus the the tail um just curious any comments on your present contributions and if you think the 50 basis points a year from that strategy might be uh something that you're more likely to overshoot yeah i wouldn't say that uh our estimates have changed in the last couple of months

I'd say there continues to be a lot of uncertainty, but it does feel to us, you know, like our relationships with that top tier of channel partner is really strong. I think Gerben was alluding to it in talking about pricing. It's been a very hand-in-glove and close relationship process over the last couple years, and... They've required us to communicate early. They've required us to be coordinated in how we do things as opposed to try to disrupt how their systems load prices. And I think the grades certainly that Gerben and I get when we meet with senior leadership are quite favorable in terms of helping manage through this pricing environment. And I would say maybe underlying this is the obvious point that this price increases have not damaged demand in any way, right? We haven't hit some elasticity point as such that demand would go down, and therefore, you know, maybe it's been easy that we and our channel partners are on kind of the same side of the table, as it were. But I would say that... The sales and marketing team is doing some, have some interesting initiatives about utilizing better tools for cross-selling, organizing better materials for vertical market sales, and getting kind of Hubble to compete collectively with solutions in some of those markets rather than one-off product sales. And I think, I'd say, you know, Chris, we feel really good about that, but I wouldn't say we've upped our forecast in the last two months, really.

I appreciate that time frame. I might have asked that on Investor Day, but I didn't. And then on utility, you know, despite the longer lead times, you're getting great grades on serving the competition well. So, you know, as that T&D business is really running like wild horses, would you expect that kind of, uh, you know, gratuity or upside from, uh, channel shift in your favor, would that be sticky in the run rates in the future? Do you hold that?

Yeah.

I mean, I think it's, um, I think, I think what you're asking is if we're gaining share right now, would we expect to keep that? I would say we would. I think, um, we, uh, We feel that we're supporting our customers by investing in new product, investing in capacity. We hear feedback from them that others aren't doing that. And so, yeah, Chris, I mean, I expect that there's stickiness and reward for support during, you know, choppy and challenging operating environments. So we think so. Sounds great. Thank you.

Thank you. One moment for our next question. And our next question comes in line with Steve from J.P. Morgan. Your question, please.

Hey, guys. Good morning. Good to see you. How are you? Thanks for squeezing me in.

Thanks for joining us.

Yeah, I'm sorry. I've got six other earnings or five other earnings today, so... Anyway, and I think you guys are kind of an easy one, so it's nice not to have to jump up and down here. The price-cost spread, I mean, have you guys kind of detailed how you expect that to trend over the next couple of quarters, and would some of that potentially carry into next year?

Yeah, I think it's a dynamic that we're going to be watching really carefully. We haven't provided much detail, and it's largely because it's hard for us to really anticipate steel and copper and aluminum costs. We think that price will be in sympathy with those costs up or down. And I think, Steve, for us too, the amount of non-material inflation that we've been experiencing in the form of things like salaries, wages, healthcare, all the kind of stuff transferred to this that's not in materials, it's really been significantly above the amount of productivity we've been able to generate. And so that's put kind of a higher burden on our price because we can't cover, you know, whatever the economists, if they're telling us inflation's at 9%, we're not, we don't have 9% productivity, right? So I think we are assuming therefore price can't come down quickly as materials because there's a lot of other inflation. We're sort of netting all that stuff in sort of our guidance and our outlook. And it'll be interesting as we get to maybe our October call and we maybe talk about our 23 setup and as we get to our January call where we'll give guidance. That, I think the variable that you're asking about is potentially, you know, one of the most significant variables. So we got... We're going to do a lot of analysis on it. We're watching it very closely. And I agree with your premise, I guess, that it sets up to have a favorable contribution to our 23.

Yeah, to next year. Okay. And as far as the trends in non-resi are concerned, what are you seeing most recently there?

Yeah, I mean, to us, It still feels good, and that's why it's almost feel, you know, like watching some of these consumer-facing companies and seeing what's happening, it feels a little, you know, maybe uncorrelated right now, but for now what we see, the non-res is healthy.

And on the resi side, I think you said that it was down 20% or something. Did I miss that?

Yeah, double digits. So it represents about 15% of the segment, and it's been down double digits. So it's a pretty good drag, unfortunately.

Right, so that volume would be down then strong double digits, like 20%-ish. More like teens. Yeah, okay. All right, thanks, guys.

Really appreciate it. Thanks, Steve. Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Gerbenbacher, Chairman, President, and Chief Executive Officer for any further remarks.

Great. Thanks, everyone, for your time today and your questions and interest in Hubble. A strong second quarter and year so far and well positioned to continue to execute through the numerous uncertainties and opportunities ahead. I hope you all have a great rest of the summer, and we look forward to speaking with you again in the fall in our third quarter. Thank you.

Thank you for your participation at today's conference. This does conclude the program. You may now disconnect. Good day.