This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk11: Thank you for standing by, and welcome to Hubble's third quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. To remove yourself from the question queue, you may press star 1-1 again. I would now like to hand the call over to VP of Investor Relations, Dan Inamorato.
spk09: Please go ahead. Thanks, Operator. Good morning, everyone, and thank you for joining us. Earlier this morning, we issued a press release announcing our results for the third quarter of 2023. 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, 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 Our forward-looking statements is 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. Now let me turn the call over to Gervin.
spk10: Thanks, Dan, and good morning, everyone. Thank you for joining us to discuss Hubble's third quarter results. Third quarter results demonstrate continued execution off of strong first half and multi-year performance. Price realization remains strong as prior actions to offset inflation continue to stick in the marketplace, supported by our leading position and service levels in attractive markets. Additionally, improved productivity and lower year-over-year raw material costs also contributed to another quarter of significant operating margin expansion. As anticipated, we accelerated our investments in capacity, productivity, and innovation initiatives in the third quarter to drive long-term returns for shareholders. We expect that grid modernization and electrification will continue to drive GDP-plus growth in our markets over the next several years. and Hubbell is uniquely positioned to solve these critical infrastructure needs for our customers in front and behind the meters. These investments we are making in the second half of this year will effectively position the company to capitalize on these visible growth opportunities through best-in-class quality and service, as well as through the introduction of new products and solutions. More near-term, we detailed last quarter how normalizing supply chain dynamics have enabled improved manufacturing lead times and allowed our channel partners to normalize their order patterns in response to more predictable product availability. This process continued in the third quarter. Bill will walk you through more of the details in a few minutes, but overall, we continue to view this as a natural outcome of supply chain normalization. Broadly, our sell-through to end markets remains healthy, and our positions with our customers remain strong. We anticipate that we will be mostly through this normalization process as we exit 2023. Our visibility to continued strong operating performance gives us the confidence that we can navigate effectively through the fourth quarter to deliver at the upper half of our prior guidance range. As we look ahead to 2024, we believe we are well positioned to drive profitable growth off of a strong multi-year performance base. And I will share some more color around our early planning considerations for next year at the end of the prepared remarks. Before I turn the call over to Bill, Hubbell announced in a press release yesterday the acquisition of Systems Control for $1.1 billion. And you'll note in today's presentation materials that we've also closed on a bolt-on acquisition of Belastro. Both of these acquisitions are high-quality businesses with strong strategic fits that enhance our industry-leading platform of utility components, communications, and controls. Systems Control is a leading manufacturer of mission-critical substation protection and control solutions. The business is complementary to our portfolio and enhances our leading value proposition to our core utility customer base. Substation automation is an attractive space within the utility market as control and relay solutions are critical to upgrading and protecting age infrastructure while also enabling the integration of renewables and the electrification of the grid. Systems control has a proven business model and a demonstrated track record of delivering value for customers and financial performance that will enhance Hubbell's long-term growth and margin profile. Celestro is a leading manufacturer of high-quality utility arresters and insulators that bolts on well to our existing portfolio. Importantly, this acquisition also provides us with additional manufacturing capacity that will enable incremental output in a constrained USD&D market. Bill will provide more color on both of these acquisitions in a few minutes, but we are very pleased to deploy capital to acquire attractive businesses like these that will drive strong return and strong long-term value for our customers and shareholders. With that, let me turn it over to Bill to walk you through the details of the quarter.
spk07: Thanks very much, Gervin. Good morning, everybody. Appreciate you taking time to join us this morning. I'm going to start my comments on page four of the materials that I hope you found on the website. And you'll see here highlighted strong results for the third quarter. with our performance broadly consistent with the themes and trends we've been discussing throughout the year. If I were to try to summarize that neatly in a sentence, I would say we've been enjoying broad-based market strength in our key end markets, which has helped support strong margin expansion. primarily driven by execution on the price-cost front, and doing that while absorbing the channel, managing inventories down in response to the supply chain improving from pandemic deaths. And you'll hear us talk about, I think, a lot of those themes throughout the day as we discuss our performance with you. So you see sales of about $1.4 billion today. A 5% increase, 4% organic, one from acquisition. And again, that's basically in line with how we've been guiding you. The OP margins at 21.4%, plus 440 basis points to last year, marking the third quarter in 2023, where we've had margins above 20%. Again, very strong execution, particularly on the price lever there. And I'd say that it gave us the extra margin to help invest that we think will really help us both grow in future years as well as be more efficient. So I think as we think about earnings and profit, essentially in line with our expectations, a little bit stronger on margin, and maybe a little bit lighter on sales growth. So maybe getting there a little bit differently, but certainly in line with our expectations. You see $3.95 of earnings, 28% year-over-year increase, obviously the strong operating performance driving those results. And free cash flow of $159 million, higher income in the quarter, but also higher CapEx, higher investment in trade working capital. And we are confident in the year getting to $700 million as the fourth quarter is a very seasonally strong, as it typically is. So I think the way we're thinking about cash flow, and in Gerben's comments, he talked about multi-year trends. So we're talking about cash flow from 21 to 22 to 23, going from 425 million to 500 million to 700 million. And we're excited about the high-quality earnings giving us that cash flow because it allows us to lean into investing and making our great company even better even better in the future. Let's go to page 5, and we'll see performance graphically arrayed against prior year here. And I'm going to start in the upper left on sales. You see 5% increase to just under $1.4 billion. We had talked about organic being 4%, acquisitions being 1%. The acquisitions PCX, our data center acquisition, as now we've kind of lapped out of that. So the incremental is coming from both EIG and Ripley, which were component manufacturers in the utility space. So helping drive utility growth there mostly. On the organic, 4%. Price was 6%. And units were down 2%. As we think about the units, There was two soft end markets that we're managing through. One is the resi side where we've had double-digit declines. I think interest rates having a big effect there. And second is on the telecom side, and we can talk a little bit more about that where we still have very strong medium-term outlook expectations for telecom. But the balance... Where we see units being driven down, we believe, is coming from channel actions to manage their inventories in a very natural response to this kind of multi-year cycle of having our lead times gap out during pandemic problems where we had both material and labor shortages. We forced our customers, therefore, to order. and now they're managing that inventory back down to target the normal levels, meaning they're selling through to our end market at a higher rate than they're buying from us. And as Gerben said, we're starting to see that come to an end on the electrical side around now, and we're expecting the power side to be done by year end. So I think 24 should start to look like a much more normal order pattern here for us with healthy markets. On the upper right, you see operating profit, $295 million for the quarter, 21.4% OP margin, 31% increase in dollars, and a very healthy increase in basis points of margin expansion. Interestingly, as we look at trajectory and we see sequentially those margins are down versus the second quarter, that's primarily due to investments that we're making, essentially on the growth side where we're pushing hard on new product development, innovation, and also making some capacity expansions, as well as on the efficiency side where we're focusing on sourcing. I think we've shared with you in the past high charts of our cost structure and a lot of our costs in the material side. So our sourcing activity has to be very efficient and as well as supply chain efficiency. So we're happy to have the margin to make these investments because we think they're going to make us more profitable in the future as we go forward. And earnings per share on the lower left, you see a 28% increase to $3. and 95 cents. Basically in line with OP growth, we had some tax headwinds that were largely offset by interest income. So one of the interesting impacts of higher interest rates where we have significant cash balances, we've been earning about 5% on that cash, and even better, more towards 5.5% in the U.S., So helped offset that tax, said whether to keep earnings growth in line. And then you see the free cash flow down 18% to prior year. We obviously had more income, but we have higher CapEx, higher working capital investment in inventory. But one big driver was the timing of receipts, which flooded in in early October. And so October, has proved to be a very cash-rich month. We think going to drive a very cash-rich fourth quarter, which will get us over $700 million of cash flow for the year. So, again, that three-year walking cash really is supporting us being able to be in a net investment position. So now I want to unpack the results between our two segments, and on page six, I wanted to start with the utility segment. So another strong quarter for our utility franchise. You see 8% growth in sales and nearly 40% growth in OP dollars with five points of operating profit margin expansion. So strong performance by the franchise here. We'll focus on sales first, up 8%, 838 million. Seven points of that is organic, one being via acquisition. The organic is essentially all price, so units effectively flat. And interesting, we're starting to really see, we report to you in these two different business units between the components for transmission and distribution versus the comms and controls business units. And we're starting to see the portfolio effect here where for the past couple years, the T&D components business has been outgrowing communications and controls. Last quarter, the growth was quite balanced. And this quarter, you see comms and controls outgrowing components. I think both effects being driven effectively by supply chain disruption becoming more normalized, and let's talk through that for a minute. So on the T&D side, we'll talk about three components, first transmission, second distribution, and third telecom. The transmission part of the business continues to be very strong, demand strong, shipment growth strong, backlog strong, pricing strong. On the distribution side, There are elements that continue to be quite strong on backlog and growth. In particular, there's places where there's some part shortages and, in particular, some of these MOV blocks, which we'll talk about a little bit later, that are causing some of the insulator arrestor units to have the growth constrained, essentially. But where the book and bill parts of distribution have come back and lead times have come way back, we're seeing, again, our channel manage the inventory down in some of those parts and the distribution portion bigger than transmission. Telecom is clearly weakening temporarily here. We make... primarily enclosures, a little bit of connectors and hardware as well. But we make plastic, fiberglass, and polymer concrete enclosures. If you're crossing the street and you look down as you're pushing the crosswalk button, you know, you'll often see on those corners a lid, and our brand would say Quasite. You might see the brand name of the telco. And those are boxes that contain the electronics, keep them safe and dry and accessible for maintenance. And Telcom had become an important customer of the enclosures business, and we see very clear weakening there by the telcos. I think there's a mix of high interest rates, but we're seeing the timing of their projects being affected by stimulus dollars, where if they wait to start a project into next year, they'll receive some stimulus and have someone else pay for it. So we're seeing that have pretty significant demand on the timing of projects. The medium-term outlook for that spending is still very robust, so we still consider it a growth vertical. having this stimulus impacted, I think, weakness. So that's up in T&D. On the comm side, similarly, affected differently by the supply chain disruption, basically have been prevented from finalizing chips and AMI going into meters. And so business has been constrained. We've seen the chip supply loosen up here in the third quarter. Nice, nearly 30% growth at attractive margins. And so we see some momentum now coming on the com side. So basically the portfolio, the pieces and cylinders of our portfolio are firing at different times here, but the net result is a very strong performance, especially as you look over on the operating profit side on the right side of the page, nearly 40% growth to $200 million of profit at 24% margins. Price costs still quite a positive dynamic. We feel good about that, that the price continues to stick. You know, the cost has all of 22 was, Inflationary from a materials perspective in 23 actually turned to become tailwind, so providing an awful lot of lift to that margin story and some momentum into our fourth quarter that gives us confidence, as Gurman mentioned, to raise our guidance for the fourth quarter. So again, utility franchise performing really nicely. Great financial performance. And we'll go to page seven to talk about the electrical segment. And for them, quite strong execution on the operating profit line by electrical solutions segment. You see the 17% growth and the attractive margin expansion there. All accomplished. with a 1% decline in sales to $538 million. That 1% decline is comprised of price being up low single digits and the volume being down mid single digits. And so we're sort of talking about the different end market pieces there. And before breaking it down, I think important to note that the volume is up sequentially. And we think that's a very good sign. You've heard me talk about the channel managing the inventories down. That's most notable in our non-res exposure area. And with that volume up sequentially, and as we see the order patterns emerging, we believe the fourth quarter we'll see the segment be able to grow. we'd be able to discuss the end of the channel inventory management phase, which would be quite welcome. On the resi side, it's been soft down double digits. The industrial is the brighter part. We see growth and healthy shipments. The reshoring tailwind we think is real. And in particular, our verticals are doing very nicely between data centers and renewables. And so when we look to the right side of the page, we see the margin expansion. We see the growth of OP dollars while absorbing some of the volume impacts of the channel inventory management phase and soft resi. It's actually, we think, quite a successful story. But Gervin, in his opening comments, mentioned a couple of portfolio moves. And on page eight, I want to walk you through a little bit more detail than he gave you in his remarks. This is really the outcome of our business development process, which is very intentional and focused on finding us high-growth, high-margin profile businesses that we can acquire and make more valuable on our platform than they are as standalone companies. And we believe we have two really good instances of that that I'll talk you through and really good to see the cash flow performance of the enterprise really enable us to comfortably do Not only two acquisitions, but one being in the billion-dollar kind of size range. So that's good. I'm going to start at the bottom of the page with Balestro. You see Balestro, an $85 million deal with 40 million of sales. That, I think, looks very typical to you all. I would call it a very typical Hubble tuck-in. We've been in contact with them on the hunt for many years. It's exciting to get this to fruition. But Lestro has a very attractive local business in Latin America making insulator arrestor products. But the real attraction for us is what you see on the left of the picture. Those little hockey pucks are MOV blocks. They help take... inflator-restored products, which you see kind of in the spine there, and prevents the conduction of electricity, which then allows our products to really protect other expensive equipment from high-voltage surges and other damaging effects. So effectively, our insulator risk through business in the U.S. has been constrained by lack of availability of these MLV blocks. And so it's an exciting deal for us, besides local business, to really help us now get that supply chain vertically integrated, make more capacity available so we can actually grow and grab share in those businesses, which are high margin businesses. So very strategic acquisition for us, even though of typical tuck-in sort of size. Systems control being a larger size than typical for us. On this page, I may talk about the footprint of systems control. And next page, I'll maybe switch to a little bit more what it does. But you see a billion one of acquisition size with 400 million of sales. That's all in backlog, essentially, so it's kind of pre-wired for that for next year. We are anticipating closing. We've just signed it. We're anticipating closing by year end, as normal closing conditions get satisfied. We will be anticipating... source of funds for the acquisition coming from cash and debt. As a result of the acquisition, we're anticipating our debt to EBITDA being around 1.7 times on a gross basis, a net basis about 1.5. So interesting to see how the balance sheet has grown and the cash flow has grown to allow a billion dollar deal to be very affordable by leverage means. We're anticipating attractive accretion from the acquisition. It may be worth noting, I think a couple of you put out some notes that were emphasizing synergies. And I would not describe systems control as a synergy-oriented deal, at least on the cost side. There certainly will be cost synergies, but there's always in the first year integration costs as well. So the net of that doesn't tend to be a big impact. But the real synergy for us is with our sales force and our client base really being able to grow the business very, very effectively. And as well, I think the second item on interest expense, we mentioned our cash. We've been earning about five points and borrowing will probably be in the sixes, but that's all subject to market conditions at time of close. So We'll kind of reserve the time to get that organized for when we give you guidance. We'll give you more specifics on all of that. And maybe on page nine, I can do a better job of explaining exactly what systems control is and what it does. So you see on the bottom of the page, when you have generation, you've got to step up the voltage to transmit it on one of those 90-foot steel towers. When it gets to the last mile, it gets stepped down in voltage and then distributed to the user. And each of these substations around, it's fun if you drive on the highway, you'll now start to look, I hope, and see these white buildings inside of the substation, which contain these control and relay panels, which monitor and control the flow of electricity and prevent damage to any of the really expensive equipment around it. And so this business kind of fits very nicely with Hubbell in many ways. It's all the same customers. In fact, you're getting relationship-oriented customers who like this product done on a turnkey basis, which is good for us. If you look around that substation on the upper left, we're already selling insulators, arrestors, switches, bushings, hardware, connectors, and the like sprinkled around. So this is now kind of a chunky investment here in the control building. It has the same traits as typical Hubble power systems where the cost of our product is quite low relative to the investment in the performance and the other equipment around it. So the protection of that becomes very valuable. It's going to involve very close work with our customers in designing and executing these buildings. So we're very pleased and think it fits well. Its financial history has been very attractive. It's grown at double digits over the last eight years or so. The investment thesis growth is really simple here. The outlook for substation spending is very robust as the 53,000 substations out there start to age. And secondly, the way these buildings are constructed, we think there's going to be a pivot from infield construction to in-factory construction. and this turnkey solution that systems control provides fits that trend. We think both of those trends are going to allow for continued double-digit growth at high margins. So I think the last part of FIT worth mentioning is the management team. Brad and his team, we really enjoyed getting to know them. We think a lot of times with private equity-owned businesses, we run into a mercenary who's been hired you know, to dress something up and sell it. And Brad is a 22-year vet of this company. He has a deep passion to grow it. And I would say we're really excited to partner and provide Hubble's resources to enable Brad to engage in the growth strategy. And we welcome Brad and his team to the Hubble family. So let's talk about how the year is expected to finish, and then I'll let Gurman tell you about how that sets up 24. But on page 10, you'll see that we had sales growth when we talked to you last in July of 8% to 10%. We're narrowing that to the 8% range. In July, we had earnings at 14.75% to 15.25%. We're cutting that range in half, and we feel good that the fourth quarter momentum will get us to the upper half of the range that we had initially shared with you back then, and the cash flow remaining robust at over $700 million. So the fourth quarter is all that's left, obviously, and we think what we should expect in our fourth quarter is typical seasonality, and there's mid-single-digit fewer days, so we usually get that impact. on sales sequentially. The price-cost dynamic, we've got momentum there, which is going to help drive margin expansion in the fourth quarter. And we're going to continue to invest in both our business's growth prospects as well as its efficiency to set up a stronger 24 and beyond. So again, I think the three-year walk shows a pretty interesting a picture of the pandemic contraction in 20, the expansion with supply chain disruption in 21 and 22 and 23 being normalizing supply chains and price cost really driving this 25% growth over that three-year period. So we really feel we're coming out of the pandemic as a bigger, stronger, more profitable enterprise. And I think we're pleased with the investing we've been able to do in 23 to really help support 24 and beyond. I'll let Gervin sort of give you some of his preliminary thoughts on that.
spk10: Great. Thanks, Bill. And as we look ahead, we feel well-positioned for 2024 and beyond. Grid modernization and electrification megatrends remain intact, and we continue to believe our utility markets can deliver mid-single-digit organic growth over the next several years. Our industry-leading utility franchise is uniquely positioned to enable us to serve our utility customers as they invest to make the grid infrastructure more reliable, resilient, and renewable. While we anticipate telecom markets to remain weak through the first half of next year, strong demand in T&D markets, particularly transmission and substation, support visible growth. We also anticipate that the deployment of infrastructure stimulus funding will drive further demand for Hubble Utility Solutions in the second half of next year. In electrical solutions, we continue to see significant opportunity to drive further value across the portfolio by competing collectively and operating more efficiently as we bring these businesses closer together. We've made good progress in reshaping this portfolio over the last several years, with 25% of segment revenues now tied to growth verticals aligned to megatrends like data centers, renewables, and utility T&D. And we expect continued growth in these areas next year. Industrial markets have been solid, with support from U.S. industrial nearshoring and manufacturing project activity, and non-residential markets have remained stable. We've yet to see the signs of macroeconomic uncertainty or higher interest rate impact in these markets, but this is something we are closely monitoring as we build out contingency scenarios for planning into next year. From an operational perspective, the price-cost productivity equation will be more dynamic to navigate as we enter a more normalized environment, but we have levers at our disposal to manage this effectively. We expect that execution and productivity initiative will become more important focus area for us moving forward to enable us to offset persisting inflation while maintaining the strong pricing levels we have achieved over the last several years. We'll provide additional color along with our 24 outlook early next year, but overall we remain confident in our ability to deliver continued profitable growth off of a strong multi-year base of performance. With that, let me turn it over to Q&A.
spk11: As a reminder, to ask a question, you will need to press star 1-1 on your telephone. To remove yourself from the queue, you may press star 1-1 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Jeff Sprague of Vertical Research.
spk08: Thank you. Good morning. First, just thinking about Q4 implied, you know, kind of a nice acceleration in organic growth. Obviously the comp is easier. But I just wonder if you could give us a sense of how you see volume progressing in Q4. Sounds like you would expect it to inflect positive in EP. And I'm backing into probably a decent volume quarter in utility also. But I'd love your perspective on just some granularity on the organic as part one here.
spk07: Yeah, Jeff, I think you almost answered your own question. But it is significant to us. that the electrical side has been facing some of this overstock situation for a few quarters now. So we think that's nice to see that inflecting into a growth position and sort of getting that period back to, you know, back to a normal book and bill sort of fourth quarter and really 24. And I think that's kind of the story.
spk08: And then just thinking about margins into next year, Bill or Gerben, you know, obviously we're coming off a high level. So it sounds like you expect price to be positive. You still have inflation in aggregate, maybe not so much in materials, but maybe just kind of talk about, you know, roughly how you would bridge this on an incremental or however you want to frame it, because we're also trying to dial in these investment headwinds i would assume you're going to continue to invest for growth going forward but it sounds like maybe it's a headwind in 2023 but is more kind of maybe just in the base and part of sales growth in 2024 but maybe you could just give us a little bit more color on you know how to think about bridging the margins yeah i think look i think we're frankly will be much more uh
spk07: give you much more granularity when we're together in January and we give you our guidance. But I think you're putting your finger on some important things. Basically, you've got the expectation that volumes will be positive. And in those cases, it's the fixed cost absorption and the incrementals helping push margins up. I think the investment point We're still calibrating exactly how much we're going to do. I think from Gerben's and my perspective, the great news is to see how creative and aggressive our teams have been in coming up with investment ideas. So it's more a function of Gerben and I regulating that as opposed to, gee, we don't have any ideas as to how to improve the franchise. I think on the price comment that you made, There is a little bit of wraparound embedded from the timing of price increases in 23, but that's pretty small, certainly compared to the last two years. And whether there's any new price beyond that will remain to be seen, and we'll share that with you as we get to year end. I think we do expect productivity because because you mentioned the inflation side, and we've been pretty simplistically trying to maintain a balance between price and material cost on the one hand, and productivity and non-material inflation on the other. When the non-material inflation gets five-ish percent, it's a little bit harder to rely on just productivity to do that. That being said, we have a lot of this investment that we've been talking about. is aligned towards being more productive. So we're going to continue, you know, to target that price-cost productivity, you know, to be balanced. But again, I think we'll be a lot more clear with you and granular with you, Jeff, when we're together next time.
spk08: And maybe just a quick one for Gerben. Nice deal here, obviously, on the utility side. I just wonder if you could give us a little bit more color on how you can leverage it internally, either for growth or margin expansion. Bill kind of tried to dial us back a little bit on cost synergies. I'm sure there are some, though, like how do you integrate this into your footprint, leverage purchasing, that sort of thing to fully maximize the value here.
spk10: Yeah, sure. And we're obviously very excited to both deals, but obviously the systems control the size and the scale that it adds to the franchise. We're really excited. But the good news with this business coming in, that it's historically been high growth and it's very profitable, as you can see. So that's certainly a nice position coming into the portfolio. As we looked and we diligence this business, There's some really nice trends that I think will serve this business right. One is that they've been for 60 years a relay and control panel manufacturer. But over the last 10 or 20 years, they've moved into more turnkey systems. And in essence, what that does is take labor of putting these systems together traditionally in the field. to a more controlled environment in the factory where they can not only have a better control environment, but they test them, and it takes a lot of time out of the field. So this is a trend that we're actually seeing in the business. We saw this when we acquired PCX. It had similar dynamics. Some of the new products that we're developing have those features in place. So it's an area that we believe we'll see outsized growth coming in. Where we can add to it is we looked at who their customers are. It aligns extremely well with who some of our customers are, with the exception that they still have a much smaller share of those customers. And I think this is where we really see that with our sales or with our people, we can add to complementing that. So I do believe it's more about sales growth and then probably you know typical cost synergies that we would see you know smaller tuck-ins coming in um but but real excited about having this in the portfolio and what we can do with it great thank you very much thank you our next question comes from the line please stand by our next question comes from the line
spk01: of steve tusa of jp market hi guys good morning uh so just on the can you update us update us on the price cost uh productivity um numbers and then you know bill you're you always have like a pretty good um balanced view of the macro here i remember back in the day you know you would talk about how things were either you know, kind of trending as you would expect with a rhythm to it or whether things were, you know, kind of choppy in a low growth world. How would you kind of characterize the demand you're seeing today into 24, like just from a consistency and visibility perspective across your portfolio?
spk07: Yeah, I would say, you know, the hard part about your question is I think you're asking about out the door demand from our channel, you know, to, the end user. And I think that has been a nice, you know, stable demand. I'd point out two weak areas between Telco and Resi and together, you know, they're each on one side of our segment and they're each about 10%, you know, so there's 80% of the company, I would say, Steve, that's seeing nice, healthy markets from, you know, the out-the-door sales side. I think the part that's you know makes it a little more challenging is you know how much of that's coming out of inventory in the channel versus how much is coming out of our factory shipping new stuff and that's where we're sort of in this inflection phase that I think our electrical side was probably a quarter earlier and so I think they're out of it and our power side has another quarter so to go and so I But that disconnect just makes it a little less smooth. And I think you're using a good word of predictability, visibility. I think we're looking forward to 24 being a little more straightforward of demand begets an order, begets a shipment.
spk01: And that is price, cost, and productivity for the year? Like what that new number is? If there's an update to it? Price-cost productivity?
spk07: When you look at it on a year-over-year basis, we got this eight-quarter, 22 and 23, very positive picture. 22, I would characterize as really strong price pull with material inflation. 23 has been a little bit less price pull, but with material tailwind, so it created an even bigger net. And as you look at it quarterly, it's stepping down in the second half. So third and fourth quarter, a little bit less, but still, I mean, on an absolute basis, a really big contributor to our margin expansion story.
spk01: Can you get an absolute number?
spk09: driving the majority of the margin expansion, Steve.
spk01: Okay.
spk09: Great.
spk01: Thanks a lot, guys.
spk11: Thank you. At this time, we'd like to remind analysts to limit your questions to one question and one follow-up. Again, that's one question and one follow-up, then return to the queue. Please stand by for our next question, which comes from the line of Nigel Coe of Wolf Research.
spk00: Thanks. Good morning, guys. So I only get one question, one follow-on. Okay. Okay, fair enough. Can you maybe just give us, you know, kind of your thinking on what gives you confidence that this utility destock is sort of going to be finished by your end? Because I think that's the key for a lot of folks here. So any metrics on kind of, you know, selling the sellouts, you know, backlog burn or, you know, days on hand, any intel there would be helpful.
spk07: Yeah, so we've been using backlog, you know, Nigel. Let's say that, to simplify your question, electrical is already in the position of being kind of book and bill, okay? So we've used backlog in the second and third quarters of this year, and we still have, you know, more backlog than we traditionally do, I would say, pre-pandemic. We would think about backlog being in the six week range as being very normal and typical of our book and bill kind of enterprise. I'd say we're sort of in the quarter and a half of backlog now. So it's maybe two and a half times typical size. So we still have the backlog on the power side. And I think that the models that we've built and the way that we're looking at those specific businesses who have gone to a much more normal lead time. And we see those are the areas where we think they're shipping more than they're receiving from us. And as we talk to our customers and the models that we've created, feels to us like that burns off that that whole phase burns off by the end of the year and we kind of using what we saw in electrical because it's that's a good precursor we think and so those two all that stuff combines but I do appreciate I think there's maybe some some art and some science mixed together in that answer maybe I'll provide an additional comment here Nigel is is that while
spk10: I think Bill correctly points out there's a lot of moving parts. The good part is we have very strong tie-ins with not just our electrical channel partners, but with our utility and customers. So through those discussions, we can have discussion where the inventory sits in that channel because it sits in both places. And we see clearly in certain product lines supported by the order rate and the shipment rates, that inventories come down and they're telling us, you know, when they're getting towards that end of where they want to be. But I'll also remind you that the demand in the utility sector is still very, very strong. And, you know, in those same conversations, customers are very optimistic about the, you know, increased higher levels of spend. If you look at their CapEx plans going forward, elevated, so While it's certainly a little bit uncomfortable managing through this time, as we look out a little bit, we feel really good about the end demand and that we can continue to grow our business through the cycle.
spk00: Okay, that's helpful. Thanks, guys. And then just on the electrical solutions margins, I think with all this noise and utility, I think we're forgetting that these are continuing to like inflate to record levels, especially when we consider, you know, the residential business would be obviously well below that average. So, you know, when volumes inflect, I think you're calling for volumes to inflect in the fourth quarter and then obviously in 2024. Do you think you can actually build on these margins or is there going to be some offsets? You know, I can't think of any, but are you confident you can push margins into maybe the other team's levels?
spk07: Yeah, I think you're looking at it the same way we are, which is that this is a new base and that new volumes should drop at incrementals. And I think the one overlay to all that that gives me maybe even more confidence than you is, you know, Mark Mike's spent seems like a lifetime making our power systems multi-brand platform compete collectively. and act really efficiently. And he really is at the early days of him adding what I would just call overall segment efficiencies to how those different silos are running. And so there's both the math of growth and incrementals, but also Mark's experience with us and track record of finding just structural ways to make it cheaper to operate it, more efficient, I said.
spk02: Okay. Thanks, Bill. Cheers.
spk11: Thank you. Our next question comes from the line of Brett Lindsey of Mizuho.
spk06: Hey, good morning, all. Yeah, I wanted to come back to common controls up 28% and other strong quarters you catch up on supply chain. I know at one point you had a billion-dollar backlog, $6 billion a pipeline of projects in the funnel. Just curious what the conversion of that funnel has been looking like, and then do you think you can build off some of this catch-up growth this year as we flip the counter to 2024?
spk07: Let me start with the first one, or sorry, the second one, and let Gervin comment maybe on the overall picture. But yes, we think the momentum of having the chip supplies thawed is really helping us get some backlog from the meter side out and as well on the AMI side. So it's a welcome surge of momentum that certainly will carry us through a fourth quarter, Brett, and maybe let Gervin talk more macroly about the positioning of Clara.
spk10: And now regarding the backlog, it still sits around that billion-ish mark. As we look forward, especially with some of the technologies that we are developing to serve some of those new applications of distribution automation, we feel well-positioned in this market over the next several years out and We see it in our quotation activity that's picking up. You know, these are big projects that the timing of which tends to be a little more unpredictable than the regular stock and flow part of our business. But we're, you know, quite optimistic and bullish about what this business can contribute over the next few years.
spk06: Yeah, that's helpful. Thanks. And then just to follow up, I think you noted the additional manufacturing capacity, the two recent deals. you know, could be favorable. I guess, how does this change your current capacity plans or, you know, what you're thinking in terms of 24 budgeting? Can you absorb some of the acquired capacity? Any context there?
spk07: Yeah, I think on the Belestra side, it's really adding to the capacity of our North American insulator rest or business. I think on the systems control side, yeah, You know, as I was mentioning, you know, Brad has some ambitious growth plans that we really embrace. So I think we'll be looking to add capacity. As we mentioned, they've been growing double digits for eight years in a row. And so we're looking to help address that.
spk10: Yeah. Yeah, and let's say on the specific to Velastro, helps with the investment needs even into next year, because that was one of the areas we were contemplating having to make investments to grow that block or this capacity. But it's not the only one. We're constrained in other areas. If you look at our transmission business and other parts of the businesses, we clearly still need to invest into next year to be able to capture that growth over the next few years.
spk02: It helps, but it's not unique. Understood. Thanks for the questions. Thank you.
spk11: Our next question comes from the line of Chris Snyder of UBS. Please go ahead, Chris.
spk04: Thank you. I want to just ask about, you know, confidence in the ability to hold utility margins at around these levels into next year. You know, obviously up a lot year on year, and it felt like a big piece of that expansion, you know, was obviously on price costs. So, you know, kind of just talk about, you know, expectations there into next year.
spk10: Yeah, maybe I'll start and Bill will fill in. And if you look at the margins, particularly utility, but I think it's across our business that in 23, we're looking to expand our margins there by 700 basis points. That's quite attractive. And our view is going into 24 is that we can grow profitably on that base. You know, one of the drivers is going to be volume next year. We do expect that business to grow in volume. We expect to manage through this price-cost productivity equation that we talked about earlier. And we'll continue to invest in the business. So I think, you know, as a setup to think of profitable growth on top of this base is the right way. And certainly we'll come back in January to provide more color on the different moving pieces and where that may fall with, you know, margins more specifically.
spk04: I appreciate that. And maybe just on the price side of utility, I mean, it seems like, you know, obviously there's been a lot of price the past couple of years. It seemed like the drivers of that was obviously metal inflate or raw materials inflating higher. And then also just supply, you know, couldn't keep up with the strong demand. But, you know, now with, you know, deflation and it seems like supply is in a better place, you know, allowing the channel to destock. Any change around
spk10: price pushback um in the channel thank you yeah i would say on the utility we're not uh seeing it and and you know you mentioned a couple of things that cost the price but i'd say beyond metals just general inflation we've seen over the last year just just incredible non-material inflation and i think you know we talked in the past of what the pure commodities is and it's actually a relatively small part of it the bigger part is is the purchase components the labor and all that has inflated pretty well. The other thing that we continue to have discussions with our customer around is the investments that we're making back in our business. And you don't always see that reflected in our operating performance or EPS, but the level of CapEx and the elevation that we've done in CapEx and other areas is an area that clearly benefits our customers short-term and long-term. I think much more the discussion continues to be around, you know, the value that we can add by the product and the services that we deliver than price first as a lever. Not unimportant, but it's not the leading part of discussion.
spk02: I appreciate that. Thank you. Thank you.
spk11: Our next question comes from the line of Joe O'Day of Wells Fargo.
spk05: Hi. Good morning. Morning. First question, just wanted to ask if you're seeing higher funding costs factor into conversations with utilities and their spend plans at all in your sort of comments around ongoing mid-single-digit growth. Doesn't really seem like it. And then just related to that, I think your kind of outlook for the transmission and substation growth to outpace distribution growth, maybe a little bit more context on sort of what's behind and driving that.
spk07: Yeah, I mean, I think on – let me take the second question first. Transmission and substation growth I think is being impacted quite a bit by renewables as well as electrification trends. So, you know, you need a new substation if you're doing a, you know, utility size solar farm, you know, that needs to be, you know, generated and then transmitted and then stepped down again to the extent you had some kind of massive data center or battery factory, um, you know, electrification impacts like that, you know, that kind of increases the demand on substations. And in addition, you just have those 53,000 substations, you just have some aging equipment that, uh, you know, needs to be, needs to be, um, you know, upgrade updated. So it, it, um, It's not that distribution has bad growth outlook. It's just that the projects on the T and substation side we just think are going to outgrow a little bit. We did a little deep dive last quarter on that because we think it's an interesting little subset of the space. As far as interest rate impact on project management, I think... it obviously is weighing on people's consideration of cost of capital. And I just think the returns on their projects, you know, are just higher than the cost of capital. So we just haven't seen the dialogue, you know, step down because of interest rates. But that may, I don't know. We just haven't seen that yet.
spk10: The other thing that will help is the infrastructure bills that are starting to come out. We're seeing some of those being released right now. We just recently saw money being released in those areas. A good bit of those are going into transmission projects that we've been following, so that gives us confidence that certainly over the near term that area is a little stronger. But that affects positively even to your interest rate question. I think bodes well for us going into next year, particularly the second half.
spk05: That's helpful. And then just on the sequential margin trends in utility, I think clearly a mixed impact with the comms and controls strength within the power side and anything from a mixed side there to be mindful of in terms of the sequential move, or was it really just the comms and controls mix?
spk07: Yeah, I would say nothing inside of power systems would create sequential issues.
spk02: Got it. Thanks very much. Thanks, Joe.
spk11: Thank you. I would now like to turn the conference back to Dan and to Murado for closing remarks. Sir?
spk09: Great. Thank you, everybody, for joining us, and we'll be around all day for calls. Thank you. Thank you.
spk11: This concludes today's conference call. Thank you for participating. You may now disconnect.
Disclaimer