Hubbell Inc

Good day, and thank you for standing by. Welcome to Hubble's fourth quarter 2023 earnings conference call. 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 the session, you will need to press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Dan Inamorato, Vice President of Investor Relations. Please go ahead.

Thanks, Dede. Good morning, everyone, and thank you for joining us. Earlier this morning, we issued a press release announcing our results for the fourth 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. 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, consider it incorporated by reference to 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.

Great. Good morning, and thank you for joining us to discuss Hubbell's fourth quarter and full year 2023 results. Hubbell delivered a strong finish to an exceptional year. For the full year 2023, we achieved 9% sales growth, over 500 basis points of operating margin expansion, and over 40% growth in operating profit and earnings per share. These results were driven not only by our strong positions in attractive markets, but also by the consistent execution of our people in maintaining industry-leading service levels for our customers while driving price and productivity across our businesses. Our strong financial performance also enabled us to invest back into our business in capacity, innovation, and productivity initiatives. We invested $165 million in capital expenditures in 2023, almost double our investment levels from 2021. We are confident that these investments will drive future growth and productivity for our shareholders, and as we will describe in more detail later, we intend to grow profitably off of a strong multi-year base of performance. Turning to the fourth quarter, we delivered strong growth and margin expansion in both segments. Notably, we also returned to year-over-year volume growth in electrical solutions. As we noted on our previous call in October, we were confident that the channel inventory management that we had seen earlier in the year had largely normalized. As a result, we saw stronger seasonal performance in the fourth quarter, as well as continued strength across data centers and renewables verticals. We also continue the trajectory of strong margin expansion in the electrical segment, ending the year with adjusted operating margins of 16.6%. We continue to see structural margin expansion opportunities as we make progress in our strategy of competing collectively as an operating segment, and we plan to accelerate our restructuring investment in 2024 to drive long-term productivity. In utility solutions, fourth quarter trends were largely consistent with the third quarter. Transmission markets were strong, and we continued to convert on past due backlog in communications and control as supply chain conditions have improved. Utility distribution markets continue to be impacted by channel inventory normalization as anticipated, though we continue to see visible demand strength in 2024 and beyond. Telcom markets were weak in the quarter, and while our long-term outlook here remains positive, we are taking a cautious initial view on 2024 until we have more visibility on timing of investments. We also executed on two important portfolio actions in the quarter as we closed on the previously announced acquisition of Systems Control and announced a definitive agreement to sell our residential lighting business, which we expect to close in early February. These transactions reflect our ongoing strategy to create a focused portfolio strategically aligned around grid modernization and electrification. These transactions improve the long-term growth and margin profile of our portfolio, and we anticipate that they will be net accretive to 2024 adjusted earnings per share. We will provide more details on our 24 outlook at the end of this call, but we remain confident that Hubble is uniquely positioned in attractive markets, and that we can build off the success of this last several years to drive profitable growth off this higher base of performance. With that, let me turn it over to Bill to walk you through the details of the quarter.

Thanks very much, Herb. Good morning, everybody.

Thank you for joining us. I'm pleased to have the chance to discuss with you our financial performance in the fourth quarter, which was very strong, capping a strong year and frankly a strong two years. I'm going to start my comments on page four of the slides that I hope you found. So the trends have been in place really for the last year and longer. Strong sales growth and operating profit growth, including margin expansion. being driven by strong markets as well as strong pricing, and strong cash flow is resulting. And those fundamental trends are obviously continuing here in the fourth quarter. So we reported $1.35 billion of sales, 10% growth. 2% of that comes from acquisitions. Eight is organic. Utility segment, a little bit stronger than electrical, but as Gerben noted, quite important for electrical volumes to return to growth as a sign that the inventory in the channel is normalized on that side of the house. Interesting too, sequentially, the fourth quarter seasonally stronger than is typical. So we think that's a good sign. On the operating profit margin side, you see 19.4%, three points of expansion really being driven by price, cost, and productivity, and creating some source of funding for investments that Gervin had described. Earnings per share at $3.69, 40% increase to prior year, and $284 million in free cash flow. helping to fund our CapEx and acquisition investments. So let's double click on that on page five and go one layer deeper. So the 10% sales we said was 8% organic. That was comprised of mid-single digits of price. We think that's good evidence of our quality of service and our brand positioning. and lowest single digits of volume, and welcome, as I said, the return to electrical volume growth. The 2 percent coming from acquisitions were all on the utility side, and we'll talk about those more when we get to the utility page. On the upper right, operating profit up 34 percent to $262 million. The margin expansion of three points really being driven by price, as well as materials, which continue to provide a tailwind, as they had for each quarter in 2023. So the inflation that we're experiencing is more on the wage and transportation side. That's where we're focusing a lot of productivity efforts, as well as we're absorbing there some operational productivity investments. On the lower left, you see earnings per share up 42%, a slightly higher growth rate than the operating profit. So below the line, we benefited from some tax rate favorability. And on the free cash flow side, you see $284 million, nearly 60% increase. And for the full year, we generated over $700 million of cash flow. And that supported a capex of around $165 million, which really helped drive some footprint restructuring, productivity, and capacity investing. So let's unpack the enterprise into the two segments. And we'll start with utilities on page six. And you'll see another excellent quarter from our utility team. double-digit sales growth and 40% operating profit growth. 13% sales growth is comprised of 9% organic and 4% from acquisitions. The acquisitions, to remind everybody, included EIG, which was our second quarter of ownership there, Balestro, and Systems Control. Systems Control was closed in the middle of December, so didn't contribute much yet. And we are reporting both Belestro and Systems Control in our T&D components, and EIG is in the comms and control side. We'll talk more about acquisitions in a minute and the last few years plus this year. As we think about the 9% organic growth, you'll see that it was skewed towards the communications and control side. If I start with transmission and distribution components, you'll see organic was at 1% where volume was a drag on price. And if we look inside the components, substation and transmission continued to be very strong. Distribution components, We continue to work through our second quarter of channel inventory management. I think as we had mentioned before, our electrical side had experienced that quicker and sooner earlier really than utility side. So we've emerged on the electrical side, still in on the distribution side. And then telecom has been weak, a function of, some overstocked inventories, as well as potential demand impacts from a combination of high interest rates and some customers who are waiting for stimulus dollars to kick off their projects. You see on the communications and controls, surging growth there. We've got both the Eclara and Beckwith businesses there on the Eclara side, you know, that those Chip's supply chain opening up has really allowed them to satisfy some existing backlog, and so we see some great growth there. Also to remind, there was – we have an easy compare there, as last year we had a commercial settlement that was a contra-sales item. And Beckwith as well, which makes protective relays and controls up double digits in sales. Very strong top-line performance by the segment, and even better on the OP side, a growth of 40% to $174 million, over 21% margins. And the price-cost story is the same, volume growth contributing, and we continue to make investments. A full year, this is obviously all fourth quarter performance, just at the bottom of the page, a full year comment on profit growth of about 60%. So congratulations to Greg and his team on just a really outstanding year. On page seven, we've got the electrical segments, and you see mid-single digits sales growth with two points of margin expansion, strong performance from the electrical team. And of that 6% sales growth, it's comprised of about half of that is price and half volume. And that volume, as we said, we thought in October that the channel inventories would be normalized and rebalanced, and that did occur in the fourth quarter, which is good news. You know, the volume came from some important verticals. Data centers was a big one. Recall last year we bought PCX, which is performing really strongly, serving that segment. Burndy as well is serving that segment. Burndy is also benefiting from the renewable vertical and a little bit of U.S. reshoring on the industrial side. Some favorable trends there, allowing for that volume growth. And on the profit side, you see 20% growth, two points of margin expansion as operating profit reached $88 million. Again, the price-cost really helping, as well as the return to volume growth. And a full-year comment I'll make on electrical, like I did On the utility side, we saw 20% growth in operating profit in the segment with two and a half points of margin expansion. So I think very successful year for the electrical and looking forward to Mark Mikes and his team continuing to push the segment to compete collectively where we think there's more growth and more margin available to us there. I mentioned that I wanted to talk about the portfolio management. And on page eight, we've laid out the last few years of activity just to remind ourselves of our intentions here. And I'll start with the divestitures where we have three companies divested and a fourth under definitive agreement that we're hoping to close in early February. and you see those businesses netted us a 500 million of proceeds. Um, and our intention here is to make sure we're investing in higher growth, higher margin, uh, businesses. And, and you'll see that, that, that 500, we rolled into a billion seven of acquisitions numbering about 10 over the last few years. Um, and, uh, You can see in the large blue bubble of T&D components where we added Contiga, Ripley, ArmorCast, Belestro, and in the yellow bubble there of connection and bonding, adding connector products. So those very intentionally adding businesses to our high-margin, high-growth areas as well as in specific growth verticals. like substation systems, like grid automation, data centers, PCX I mentioned, and wireless communications of a cell tech. So we think we are enhancing the growth and margin profile of the company. I did want to pause because of systems controls' recent closing as well as its size on the impact on capital structure. So that was a billion one purchase price that we funded with some cash as well as some CP and a term loan A provided by our supportive bank group. The result of that is a flexible and prepayable capital structure, which we think gives us some optionality and results in very manageable debt levels of 1.8 times debt to EBITDA on a net debt basis around 1.5. So we feel like that we're improving the portfolio, and I'll talk about the specific impacts of the acquisitions on our guidance in another couple pages. So as we switch to Outlook, let's start on page 10 with the markets. And then we'll talk about how those markets roll through our earnings expectations. So we've got utility segment on the left, electrical segment on the right. You can see the different pieces of the pie here. Starting with electrical distribution, they've been in the really two quarters now of managing their inventories relative to the backlog. We think that's normalizing quickly and expecting a healthy mid-single-digit growth rate there. Transmission, substation, and distribution automation, which is up around noon on the pie, we think those are both high single digits. Meters and gas in the mid-single digits. And Gerben talked about telecom having a very cautious outlook waiting for orders to restart there. I will just comment that's a short-term outlook. We do have very attractive medium and long-term outlook for telecom. So the result on the utility side is a mid-single-digit growth rate. On the electrical, you see it nets out at three to four, so low to mid. I think the industrial outlook, you see both light and heavy. low to mid single digits we have mid single digit growth rates in our verticals and I think non res we maybe have a bit of caution at flat to low single digits so a constructive market outlook for 2024 and let's go to page 11 and see how that rolls through our earnings outlook so you see the organic of three to five in our sales growth, combined with 5% net from M&A, one going out, one coming in, to create 8% to 10% sales growth. That generates a 10% growth in operating profit, results in 6% earnings, and free cash flow at about 90% of net income affording continued increase in capex. And let's just walk through the bridge to give you a feel for it. So we're under contract to sell residential lighting. That'll lose 20 million of OP. Systems control, EIG and Balestra will be adding about 90 million. So you can see almost a dollar coming from those before we pay the interest expense, which we have over on the right. We add for organic three to five, so we've comprised that of two to four volume and one point of price, which is in the next column. That's providing a nice lift, and we have continued investment, particularly on the electrical segment side. as we compete collectively there and continue to consolidate the footprint under our restructuring program. You see on the far right below OP, an increase in interest expense as a result of the borrowings that we outlined to close on systems control. And the result is about 6% or earnings growth to the midpoint of 1625. You see some modeling considerations listed there, and I might just add another one on seasonality for those of you who are modeling. We're anticipating 2024 being quite normal seasonality for the first and fourth quarters, being a little bit below the second and third quarters, which are seasonally stronger. And that just compares to last year where the first quarter was very strong in contributing to the full year. So we think a very constructive year in front of us. We feel well positioned. We're happy to have the return in volumes and we're happy to have made some portfolio net addition to continue to push profitable growth at Hubble.

And with that, I'd like to turn it back to Gervin. Great. Thank you, Bill. And before we turn it over to Q&A, I think it's helpful on the last page to look at our 2023 performance and 24 outlook in a longer-term context. The results we delivered for shareholders, not only in 2023, but over the last few years, have been very strong. Most notably, we have doubled our adjusted operating profit and adjusted earnings per share over a three-year period, while growing sales at double-digit CAGR and expanding adjusted operating margins from the mid-teens to over 20%. We have also doubled our capital expenditures over the last three years to further differentiate our service levels to customers and support attractive long-term growth expectations. As grid modernization and electrification drive the need for a more reliable, resilient, and renewable energy infrastructure, Hubbell is uniquely positioned with the right people, solutions, and strategy to meet the evolving needs of our customers and deliver continued value to our shareholders. I am extremely proud of our over 18,000 employees whose hard work and dedication have enabled us to achieve a new baseline of performance. and I am confident that we will build off of this success with continued, attractive, profitable growth in 24 and beyond. We look forward to hosting an Investor Day later this year on June 4th, where we will provide more details on our long-term strategy with updated financial targets. With that, let's turn the call over to Q&A.

As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. We ask that you please limit your questions to one question and one follow-up. Please stand by while we compile the Q&A roster. And our first question comes from Steven Tusa of JP Morgan.

Hey, guys. Good morning. Morning, Steve. Can we just get a little more color on the bridge, maybe what you're expecting on price-cost and then any segment margin color for the year and how you expect that to trend seasonally?

Yeah, so price-cost we've got as flat, Steve. We have effectively one point of rollover on price embedded in there, which we're using effectively to offset commodity inflation. And then we've got a productivity program that we think can help offset non-material inflation in places like transportation, wages, and things like that. So it's quite a flat expectation. And I think the way segments... I think as a result of that PCP assumption, our margins by segment are reasonably flat-ish, and I'd say that applies to both segments, I would say, Steve.

Maybe I'll add to that.

Yep, go ahead.

Yeah. Does the ish on utility kind of skew one way or the other, positive or negative ish?

Yeah, I'd say flat would, I should think about. Okay.

Okay, great.

Maybe the two moving pieces on that I'll give you. If you think about the addition of systems control, that's actually a little bit dilutive to margin, even though it's, you know, we've provided those numbers and a very attractive addition. And if you think about volume, it's a little bit accretive. And if you take a net of those with PCP flat, it's roughly flat. If you look at maybe a little bit color on the electrical, because the electrical, I think it's a slight expansion, but that is with a pretty good step up on restructuring. So if you take that out, it's actually a nicer expansion of that. And then Bill referred to it earlier of the opportunity still in that segment as they work through the organizing that better, competing collectively. There's more room for margin expansion there.

Got it. Okay, thanks, guys. Appreciate it.

Thank you. One moment for our next question. And our next question comes from Jeffrey Sprague of Vertical Research. Please go ahead.

Thank you. Good morning, everyone. Good morning. Just a little more color on the utility margins. Just also thinking about the comms, the Clara business, I'm not sure where the margins are at in that business, but that feels like it's a friction point also to some degree from a mixed standpoint. So I wonder if you can address that. I guess, Skirvin, you said flattish, so you're cowering through all that, but still would love some context on the mixed effect of a Clara. And can you just give us a little color on how much, you know, telecom was down in 2023? You know, I get we're looking for a week 2024, but we do have sort of at least a half a weakness in the base here for 2023, I believe.

Yeah, so maybe let's start with utility, you know, margins first. And, you know, I would say for Clara, you're right to say, their margins are below the transmission and distribution component margins, largely because of the amount of R&D investing that we're doing, working on developing the next-gen TOMS package. So I would say in 23, and particularly in this fourth quarter, when you saw them outgrowing, I would I think where you're going is that created a mixed drag, and it did in the fourth quarter. I think growth rates next year, you know, we maybe anticipate more balance, you know, Jeff. So I don't think we'll have a big mix, you know, effect in utility margins in 24. And your second question was on telecom.

Yeah, maybe provide a little context there, Jeff. And, you know, we really saw that slowing down towards the latter part of the year, particularly the fourth quarter, more specifically was down 20%. The first quarter, we still expect that to be down double digits. And what happened early in the year, we were still working through a lot of backlog in that, which kind of shielded us a little bit. So we certainly expect after the first quarter, probably the second quarter still to be down, and then we, you know, expect it to rebound in the second half as some of that stimulus funding frees up.

And, Gervin, can you also just address kind of your ability on just kind of factory throughput here as, you know, as the industry, particularly on the utility side, seems to, you know, want to compound out here at, you know, pretty healthy levels? growth rates, you know, everything kind of buttoned up on the factory work you've been doing, or is there more to do there? You know, maybe just a little of the skyline and what to expect on CapEx.

Yeah, I'd say more to do, Jeff. You know, some of those projects take time to get some of that equipment in and online. So, you know, if you think about, for example, our transmission and substation markets particularly strong last year and this coming year as well, as you saw. And that requires some capital that's still needing to come online. Now, I feel good about our ability to do that. We've done that very well, you know, over the last year. So, you know, that's going to support some of that growth that we have embedded in our guidance.

Go ahead.

I'm sorry, if you're not done, go ahead. I just had one last little follow-up, if I could. Please go. I just want to do a kind of come back to the seasonality comment and everything. Totally get it, and that's sort of what I've been modeling. But, you know, given that margin comp, you know, in the beginning of the year, and you in particular, are you expecting EPS to actually grow year over year in Q1?

Yeah, I think that... We just don't do EPS by the quarterly guide basis. I just would say I'd anticipate our Q1 earnings to be in line with contributing to the full year at our typical seasonality, and more so than it did last year. Right. Thank you.

Thank you. One moment for our next question. And our next question comes from Tommy Mall of Stevens. Please go ahead.

Good morning, and thank you for taking my questions. Hi, Tommy. I wanted to start on the utility side of the business. It seems like for most of last year, it was more a discussion around availability rather than price. With that said, given some of the inventory destocking, particularly around distribution, has that conversation changed? conversation changed at all? Is price a bigger factor at this point?

I would not say so, Tommy. No.

Good to hear. Thank you. I guess that then begs a follow-up where in your full year outlook, you contemplate, I think you said, Bill, a point of wraparound price, but you did highlight some uncertainty in certain pockets. What are those pockets you were referencing there?

Yeah, so I think telecom would be the first, you know, to see a market down. You know, I think just puts a little pressure on that. And so that's really the most noteworthy one. I think other areas, you know, where things are overstocked can put a little pressure sometimes. So we've had a very successful... pricing tactic over the last, really, two years. And so it's something that we are, A, very focused on, B, are in very close conversations with our big customers. Gervin and I happen to be visiting with a few of our largest customers over the course of the last couple weeks. And, you know, just to your point, none of them are asking about price other than to make sure we're coordinated with them, give them enough time to implement price increases and let them manage that through their systems. But it's a, I've described price as of this moment, you know, Tommy is still quite constructive.

Maybe to your point of that, you know, there may be some headwinds. I'd also say that we, you know, build into the guidance to carry over But we also announced price increases early this year. It's early to tell at this stage, you know, only a few weeks in, you know, on the stick rates. But again, the conversations that we're having are very positive to those taking hold. So we have levers against potential headwinds by, you know, taking price too.

Thank you both. I appreciate it. And we'll turn it back.

Thank you.

One moment for our next question.

And our next question comes from Nigel Coe of Wolf Research. Please go ahead.

Thanks. Good morning, everyone. Good morning. So, Bill, just wanted to be a bit more specific. Typical seasonality for 1Q, it looks like about 20% of full years. Is that about the right zone?

Yeah, a little. I would have said 21 if you asked me. Yeah.

Okay. That's great. Thanks for the clarification there. And then just the electrical performance this quarter is obviously outstanding. You know, the 60% organic growth, pretty flat QVQ in both revenues and margins. So is that mainly a channel impact you're seeing there? I know you called out strength and electrification and data centers. I'm just curious in terms of the end market demand, what you saw there. during the quarter being a bit more specific there.

Yeah, I'm not sure I'm getting at the essence of what you're asking. We did find that vertically data centers and renewables were both good. That benefited our PCX business and our Burn D business. And I do think we saw from our big customers, if that's where you're pushing you know, in areas where they had been managing their inventories, we saw a return to growth in those as well. So I'm not sure if you were getting that customer behavior and markets there, but we had a kind of a little bit of a mix of both.

Yeah, I mean, it wasn't a straightforward question, I know, but do you think the channel impact was fairly neutral? So sell-in versus sell-out pretty similar, but I guess that's sort of the essence of my question, but Really, then, when we think about the margin exit rate for 4Q into 2024, I know you've said flattish impact in 2024. Restructuring is picking up, so that's obviously a headwind in 2024. But just curious about the lighting impact, because that's coming out. So I think that that would probably drive more of a bias towards expansion in electrical. So just curious if you agree with that.

I do agree. I do agree they were sort of that double digits versus what you see is a better margin at the segment. So I do agree.

And then sell-in versus sell-out?

Yeah, it's pretty consistent in the quarter, Nigel. Okay, great. Thank you.

Thank you. One moment for our next question. And our next question comes from Julian Mitchell of Barclays. Please go ahead.

Hi, good morning. Maybe just trying to understand and fully comprehend that you don't give sort of detailed quarterly guidance, but you've got the 4% organic growth guide for the year. in revenue, and you have the color around, you know, weak start to the year in telecom, a bit of extra utility destock, and maybe the last dregs of, you know, non-resi electrical destock. So all of that seems to suggest a stronger second half organic growth rate. Just wondered, you know, how much of an improvement Year on year, are you dialing in through the year as we go to get to that 4% for the year as a whole?

Yeah, Julian, first of all, welcome to the call. Nice to have you. And I would say that the utility destock, you know, we'll see. But we could, you know, if you – we could be – at the point of kind of having be done with that as well. And I would say on the electrical side, we feel more confident that we are. Your telecom point is right. I think we do anticipate a weaker start. And as you think about, you're sort of introducing sequential seasonality and how that's going to look, VPY, you know, compare. And I think what, on the VPY basis, some of the second half compares because of the de-stocking, you know, could actually be a little bit easier. For example, first quarter last year was actually quite strong. And I think seasonality-wise, You know, we upped our investments at the second half of last year. As those wrap around, you know, that creates a more consistent and easier second half. So I think as those things net against each other, that's kind of how we're getting to a more typical seasonal year, even though I hear you, there's obviously puts and takes and forces at work.

Maybe, Julian, I'll provide maybe a little more context on that. You're right to point out there's still some headwinds, but one way to look at it, and I realize it's an early data point, but as we look at how we're starting off the year and we look at our order patterns and trends here in January, it's actually supportive to what Bill is somewhat hesitantly saying that we could be exiting our destocking It's constructive. I'd say early read into the year is that it's constructive to this profile of seasonal guidance.

Thanks very much. And then just a quick follow-up. That slide 10, the non-residential vertical within electrical, the flat to plus low single guide for the year, you understand fully on the channel stocking. largely having run its course, but maybe just the market outlook, you know, you use that word uncertain, just any sort of color you could put around that, what you're seeing in different verticals in that non-resy bucket.

I just think, you know, maybe the pressure on office just feels like it puts a little bit less certainty. I mean, It's quite a constructive pie, so I guess by, I think, less certainty, you know, puts you in still a growth position, but it just, I think the institutional side probably be stronger, but maybe some of that office could be weaker. So I think there's that mixed effect just puts it in the low growth rather than the rest of the pie, which is more medium growth.

That's great.

Thank you.

Thank you. One moment for our next question. And our next question comes from Brett Lindsey of Mizuho. Please go ahead.

Hey, good morning, all. I wanted to come back to the investments, and you talked about some of the carryover in the first half. Just wanted to clarify, are these embedded within the volume portion of the bridge and separate from the footprint? Just trying to understand if you could quantify the investment versus restructuring and what those paybacks might look like.

Yeah, so if last year it was an investment that continues, i.e., if you added headcount, it would show up, yes, in margins in volume. As we step things up in areas last year, for example, like new product development or people to work on productivity initiatives, you know, that would wrap around higher costs, wouldn't be a new investment, right? It would show up, as you're saying, Brett, in March and on volume.

And then anything you can share in terms of the paybacks on these footprints, is something embedded this year or is that a little bit longer term?

Yeah, I think the new, I think there's order of magnitude, another 10 million of R&R in that bucket that will be invested this year. It's of a footprint, you know, nature. And I think the paybacks are, that we have good ROICs on that. The paybacks tend to be in the three-ish year range. And so we're sort of investing today in those cases with benefits that probably start a year or two from now.

Maybe the other thing that I would say is embedded is some of those improvements will drive a higher level of productivity that's embedded in our guidance. So when you look at the concept of flat price-cost productivity. It has a higher level of productivity and a higher level of inflation in it to offset it. So that's where some of those investments are going.

Okay, great. Yeah, thanks for the color there. And then just a follow-up on the price expectations. So it sounds like no incremental actions embedded in the planning. I'd imagine you're seeing some, you know, raw non-material inflation Maybe just a little context as to maybe what that potential hedge could look like if you do see a sticking of some of these actions that you are out in the marketplace with.

Yeah, I mean, you'd be kind of maybe asking a little bit about a speculative sensitivity analysis, right? So you could see each point of price you know, gets us north, obviously, of $50 million of price. And that's a lot of leverage if there's no corresponding inflation to that. Conversely, if you have to give a little, it equally has, you know, kind of this 100% sort of drop through. And so as Gerben sort of outlined, I think we have, because of the investments we made last year, we have a more ambitious productivity target level. And we certainly see some inflation on the wage, transportation area, as well as in the material-related area. So I think getting the rigor that we need to focus on all of those levers to come out even or ahead is sort of an obsession. We review it really carefully every month at Gerben's and my level and continue to push enough initiatives to make sure we stay even or ahead.

Got it. Appreciate the insight.

Thank you.

One moment for our next question.

Our next question comes from Joe O'Day of Wells Fargo. Please go ahead.

Hi. Good morning. Thanks for taking my questions. I first just wanted to focus on the 2024 bridge. If we think about it, I guess, in three buckets with the organic piece, the M&A piece, and then some of the restructuring, is it fair to think about a 25% incremental on the organic piece? And then on the M&A side of things, can you add any detail on what you think interest expense is in 24, just so we get that right in the model? And does that interest expense contemplate the deployment of resi lighting proceeds? Thanks.

Yes. So I think you could put in about $40 million of incremental interest expense. And I think the drop through of 25 on volume is reasonable.

I'd rather see that more like 30, but somewhere in that high 20s is reasonable, I think.

And the regulating proceeds?

Yeah, so you see we have interest income there as a plus and interest expense as a minus. So we sort of built a construct that It's either cash that's going to earn or it's going to be available to pay down. And I guess the one thing I'd say is it's explicit that we're not modeling in our guidance any new acquisitions. And so that would be incremental to this guide.

Got it. And then on the electrical side, Can you size roughly what the D-Stock headwind was to top line growth in 23? And so just kind of the non-repeat of that, what we should think about is that kind of contribution to the plus three to four for 24.

Yeah, overall, I'd say sell-through volumes were down kind of in the high single to low double digits most of the year. And I think sell-through was flattish to slightly up. So it got better in the fourth quarter.

But overall, I think you can think about about a single digit impact on a full year basis.

Okay. And then just a clarification that the fourth quarter, 9% organic and utility, did you give the price and volume split of that?

Yeah, the volume was negative, right? So it ate into the price.

Volume is slightly positive, Joe. Sorry. Volume is slightly positive? Yeah.

Sorry. You're asking for a whole of utility. Sorry. I thought you were talking about power. Yeah.

Yeah. Sorry. Just that 9% whole organic. So slightly positive volume. Got it. All right. Great. Thanks very much.

Thank you.

One moment for our next question.

And our next question comes from Nicholas Amakuchi of TD Cowan. Please go ahead.

Hey, good morning, guys. Morning.

Just had a couple. Wanted to hone in on the electrical solution segment. So obviously, you know, going to benefit somewhat this year from the footprint on the position. Just wanted to see how much I mean, how much more headroom do you guys have from an optimization perspective within that segment?

Yeah, I mean, the – I'd say that we still have projects that are – you know, this year they'll be consolidating locations, so you'll be absorbing volume in existing locations. And then after you get to that, there's always the chance to keep putting in bigger, more scaled facilities. So you can answer your question with a very long perspective, but if you took it a little bit more narrowly, I'd say in the next few years, we'd be at a stage where we'd be quite happy with the optimization process. You're probably never done, I guess, but I think we'll We'd go a long way to achieving sort of our desired goals in just a few years.

Sure. That's fair. Then I did want to touch upon, too, so I think the guidance within the press release had indicated about $1.60 of the amortization. That's within adjusted EPS, and so if you do the math, that's roughly $86 million for the year. We did just, within utilities, I mean, I understand that there was a significant step up in 4Q probably related to the systems control, but just wanted to get a better sense of kind of the timing of that amortization and kind of the breakdown between utilities and electrical solutions.

Yeah, so the increment, so we've been running at $1 for a while, so the $0.60 that's new is all in utilities. So as you separate them And when you think about the amortization, a lot of it is going to customer value and places that have quite a long, you know, and by long I mean like, you know, 20-year. So it's, you know, it's a pretty stable run rate.

Got it.

Perfect.

Yes, that's all I got. So thanks, guys. Thank you. Thank you.

Thank you.

One moment for our next question.

And our next question comes from Chris Snyder of UBS. Please go ahead.

Thank you. I wanted to ask on utility margins and, you know, specifically I guess the expectation that on an organic margins will be flattish for 2024. And I'm just asking because you guys are exiting the year, you know, well below where you started and maybe emanated a bit of a headwind in Q4, but it feels like organic is, you know, in Q4 down a good deal versus the first half. So is it fair to, does the guide assume that utility organic margins are down year on year in the first half and then return to growth into the back half? Or should we expect them up year on year throughout the year?

Yeah, I would assume they're kind of flattish through. Like, I don't think there's anything. I think I'd look maybe at the shape of 23, because I know exactly what you're observing, right? You see a sequential step down in margins. Some of that is attributable to some spending, investing that we're doing. Some of it's attributable to the Eclair mix effect, some of it's attributable to the fact that the volumes inside of power systems were going through their destocking work with our customer channels, partners. And so I think, again, we just see that, you know, Chris returning to a more normal shape. And so I think the volume piece of power systems becomes quite important to that. I think we see the mix with the Clara start to, you know, balance to equal or equal contributions. And so I think in a balanced world, we would expect margins in Q1 and Q4 to be below the margins in Q2 and Q3. And that that shape in 24 should feel quite normal.

Thank you. I appreciate that. And then just as a follow-up on utility margins, so I know they're always down sequentially into Q4, just lower revenue. This quarter came in quite a deal sharper than we expected. Is the company starting to feel the impact of higher metal prices? I know steel has been up a lot over the last three, four months. Was that starting to come through in Q4 on those utility margins, or is that still more of maybe a 24 dynamic?

Yeah, I mean, we certainly saw starting November, December, steel move. And I would say the way that works through the supply chain, there's usually a couple of months lag on when we as a LIFO company pay those most recent prices. So I think we'll feel those prices, those costs, if you will, in the first quarter.

And maybe the mid to end of the first quarter.

Thank you. Thank you. One moment for our next question. And our next question comes from Scott Graham of Seaport Research Partners. Please go ahead.

Hey, good morning. Thanks for squeezing me in. Just really the question I have is about the portfolio management slide. And, you know, particularly now with systems control in the fold, you know, you have a couple of nice sized bubbles under which to acquire what is the outlook there for, you know, what does the pipeline look like? I mean, you've got a 1.4 net leverage is a really good number to work off of. And so what are your aspirations in 24, maybe even by telling us, would you be disappointed without another good size deal this year?

Yeah, it's an interesting way to phrase the question. I had come at it from two perspectives. The first you already raised, which is, We are very comfortable with our leverage levels. So we think financially we certainly can afford to invest in acquisitions. And I would say secondly, you know, is kind of the integration perspective. And we'd like to make sure that we have systems control, you know, well integrated. a healthy amount of people kind of working together. It's off to a great start. Our customers are happy with it. It feels like a good cultural fit, but it still takes work to make sure that it's integrated and we don't want to have too many plates spinning. So your question may be well revisited three months from now, but I agree with you that strategically we'd love to add businesses in the Northeast and financially Northeast of this two by two matrix of, of higher growth, higher margin. And, um, and yes, we feel we have, uh, capacity both in as cashflow generation, you know, we'll be up in the 800 million range this year. Plus, as you pointed out, I think balance sheet capacity. So, um, we're, uh, So I think let's just revisit that question maybe in three months and see how we feel. But it's a good question.

Well, fair enough. I guess I was just wondering also what the pipeline itself looked like. And, you know, you can put people off a little bit.

Yeah, there is a pretty decent pipeline. And there's quite a few things we're expecting to at least – probe the market in the second half of the year. So that doesn't mean we'll buy any of those or that they'll be attractive. But there is an interesting amount of what appears to be inventory maybe coming to market. Thanks so much. Yep.

Thank you. At this time, I'd like to turn it back to Gerbenbacher for closing remarks.

Great. Thank you. I appreciate all the questions, the quite robust time we put out for that in this call to focus on our outlook. Maybe I'll close by saying that I feel really good about the year and our ability to deliver on our commitments to you to drive profitable growth after a few years of really outperformance. So You know, look forward to our investor day later in the year and to our first quarter call. Let's talk about, you know, how we're doing so far this year. So thanks much.

This concludes today's conference call. Thank you for participating and you may now disconnect. Thank you. Thank you. Thank you. Thank you. Good day, and thank you for standing by. Welcome to Hubble's fourth quarter 2023 earnings conference call. 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 the session, you will need to press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Dan Inamorato, Vice President of Investor Relations. Please go ahead.

Thanks, Dede. Good morning, everyone, and thank you for joining us. Earlier this morning, we issued a press release announcing our results for the fourth 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. 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, considered incorporated by reference to 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.

Great. Good morning, and thank you for joining us to discuss Hubbell's fourth quarter and full year 2023 results. Hubbell delivered a strong finish to an exceptional year. For the full year 2023, we achieved 9% sales growth, over 500 basis points of operating margin expansion, and over 40% growth in operating profit and earnings per share. These results were driven not only by our strong positions in attractive markets, but also by the consistent execution of our people in maintaining industry-leading service levels for our customers while driving price and productivity across our businesses. Our strong financial performance also enabled us to invest back into our business in capacity, innovation, and productivity initiatives. We invested 165 million in capital expenditures in 2023, almost double our investment levels from 2021. We are confident that these investments will drive future growth and productivity for our shareholders. And as we will describe in more detail later, we intend to grow profitably off of a strong multi-year base of performance. Turning to the fourth quarter, we delivered strong growth and margin expansion in both segments. Notably, we also returned to year-over-year volume growth in electrical solutions. As we noted on our previous call in October, we were confident that the channel inventory management that we had seen earlier in the year had largely normalized. As a result, we saw stronger seasonal performance in the fourth quarter, as well as continued strength across data centers and renewables verticals. We also continue the trajectory of strong margin expansion in the electrical segment, ending the year with adjusted operating margins of 16.6%. We continue to see structural margin expansion opportunities as we make progress in our strategy of competing collectively as an operating segment, and we plan to accelerate our restructuring investment in 2024 to drive long-term productivity. In utility solutions, fourth quarter trends were largely consistent with the third quarter. Transmission markets were strong, and we continue to convert on past due backlog in communications and control as supply chain conditions have improved. Utility distribution markets continue to be impacted by channel inventory normalization as anticipated, though we continue to see visible demand strength in 2024 and beyond. Telcom markets were weak in the quarter, and while our long-term outlook here remains positive, we are taking a cautious initial view on 2024 until we have more visibility on timing of investments. We also executed on two important portfolio actions in the quarter as we closed on the previously announced acquisition of Systems Control and announced a definitive agreement to sell our residential lighting business, which we expect to close in early February. These transactions reflect our ongoing strategy to create a focused portfolio strategically aligned around grid modernization and electrification. These transactions improve the long-term growth and margin profile of our portfolio, and we anticipate that they will be net accretive to 2024 adjusted earnings per share. We will provide more details on our 24 outlook at the end of this call, but we remain confident that Hubble is uniquely positioned in attractive markets and that we can build off the success of this last several years to drive profitable growth off this higher base of performance. With that, let me turn it over to Bill to walk you through the details of the quarter.

Thanks very much, Herb. And good morning, everybody.

Thank you for joining us. I'm pleased to have the chance to discuss with you our financial performance in the fourth quarter, which was very strong, capping a strong year, and frankly, a strong two years. I'm going to start my comments on page four of the slides that I hope you found. So the trends have been in place really for the last year and longer. Strong sales growth and operating profit growth, including margin expansion, being driven by strong markets as well as strong pricing and strong cash flow is resulting. And those fundamental trends are obviously continuing here in the fourth quarter. So, we reported $1.35 billion of sales, 10% growth, 2% of that comes from acquisitions, 8% is organic. Utility segment, a little bit stronger than electrical, but as Gerben noted, quite important for electrical volumes to return to growth as a sign that the inventory in the channel is normalized on that side of the house. Interesting too, sequentially, the fourth quarter seasonally stronger than is typical. So we think that's a good sign. On the operating profit margin side, you see 19.4%, three points of expansion really being driven by price, cost, and productivity, and creating some source of funding for investments that Gervin had described. Earnings per share at $3.69, 40% increase to prior year, and $284 million in free cash flow. helping to fund our CapEx and acquisition investments. So let's double click on that on page five and go one layer deeper. So the 10% sales we said was 8% organic. That was comprised of mid-single digits of price. We think that's good evidence of our quality of service and our brand positioning. and lowest single digits of volume, and welcome, as I said, the return to electrical volume growth. The 2% coming from acquisitions were all on the utility side, and we'll talk about those more when we get to the utility page. On the upper right, operating profit up 34% to $262 million. The margin expansion of three points really being driven by price, as well as materials, which continue to provide a tailwind, as they had for each quarter in 2023. So the inflation that we're experiencing is more on the wage and transportation side. That's where we're focusing a lot of productivity efforts, as well as we're absorbing there some operational productivity investments. On the lower left, you see earnings per share up 42%, a slightly higher growth rate than the operating profit. So below the line, we benefited from some tax rate favorability. And on the free cash flow side, you see $284 million, nearly 60% increase. And for the full year, we generated over $700 million of cash flow. And that supported a capex of around $165 million, which really helped drive some footprint restructuring, productivity, and capacity investing. So let's unpack the enterprise into the two segments. And we'll start with utilities on page six. And you'll see another excellent quarter from our utility team. double-digit sales growth and 40% operating profit growth. 13% sales growth is comprised of 9% organic and 4% from acquisitions. The acquisitions, to remind everybody, included EIG, which was our second quarter of ownership there, Balestro, and Systems Control. Systems Control was closed in the middle of December, so didn't contribute much yet. And we are reporting both Belestro and Systems Control in our T&D components, and EIG is in the comms and control side. We'll talk more about acquisitions in a minute and the last few years plus this year. As we think about the 9% organic growth, you'll see that it was skewed towards the communications and control side. If I start with transmission and distribution components, you'll see organic was at 1% where volume was a drag on price. And if we look inside the components, substation and transmission continued to be very strong. Distribution components, We continue to work through our second quarter of channel inventory management. I think as we had mentioned before, our electrical side had experienced that quicker and sooner earlier really than utility side. So we've emerged on the electrical side, still in on the distribution side. And then telecom has been weak, a function of, some overstocked inventories, as well as potential demand impacts from a combination of high interest rates and some customers who are waiting for stimulus dollars to kick off their projects. You see on the communications and controls, surging growth there. We've got both the Eclaire and Beckwith businesses there on the Eclaire side, you know, that those Chip's supply chain opening up has really allowed them to satisfy some existing backlog, and so we see some great growth there. Also to remind, we have an easy compare there, as last year we had a commercial settlement that was a contra-sales item. And Beckwith as well, which makes protective relays and controls up double digits in sales. Very strong top-line performance by the segment, and even better on the OP side, a growth of 40% to $174 million, over 21% margins. And the price-cost story is the same, volume growth contributing, and we continue to make investments. So from... A full year, this is obviously all fourth quarter performance, just at the bottom of the page, a full year comment on profit growth of about 60%. So congratulations to Greg and his team on just a really outstanding year. On page seven, we've got the electrical segments, and you see mid-single digits sales growth with two points of margin expansion, strong performance from the electrical team. And of that 6% sales growth, it's comprised of about half of that is price and half volume. And that volume, as we said, we thought in October that the channel inventories would be normalized and rebalanced, and that did occur in the fourth quarter, which is good news. You know, the volume came from some important verticals. Data centers was a big one. Recall last year we bought PCX, which is performing really strongly, serving that segment. Burndy as well is serving that segment. Burndy is also benefiting from the renewable vertical and a little bit of U.S. reshoring on the industrial side. So, Some favorable trends there allowing for that volume growth. And on the profit side, you see 20% growth, two points of margin expansion as operating profit reached 88 million. Again, the price cost really helping as well as the return to volume growth. And a full year comment I'll make on electrical like I did On the utility side, we saw 20% growth in operating profit in the segment with 2.5 points of margin expansion. So I think a very successful year for the electrical. Looking forward to Mark Mikes and his team continuing to push the segment to compete collectively where we think there's more growth and more margin available to us there. I mentioned that I wanted to talk about the portfolio management. And on page 8, we've laid out the last few years of activity just to remind ourselves of our intentions here. And I'll start with the divestitures where we have three companies divested and a fourth under definitive agreement that we're hoping to close in early February. and you see those businesses netted us a 500 million of proceeds. Um, and our intention here is to make sure we're investing in higher growth, higher margin, uh, businesses. And, and you'll see that, that, that 500, we rolled into a billion seven of acquisitions numbering about 10 over the last few years. Um, and, uh, You can see in the large blue bubble of T&D components where we added Contiga, Ripley, ArmorCast, Belestro, and in the yellow bubble there of connection and bonding, adding connector products. So those very intentionally adding businesses to our high-margin, high-growth areas, as well as in specific growth verticals like substation systems, light grid automation, data centers, PCX I mentioned, and wireless communications of a cell tech. So we think we are enhancing the growth and margin profile of the company. I did want to pause because of systems controls' recent closing as well as its size on the impact on capital structure. So that was a billion one purchase price that we funded with some cash as well as some CP and a term loan A provided by our supportive bank group. The result of that is a flexible and prepayable capital structure, which we think gives us some optionality and results in very manageable debt levels of 1.8 times debt to EBITDA on a net debt basis around 1.5. So we feel like that we're improving the portfolio, and I'll talk about the specific impacts of the acquisitions on our guidance in another couple pages. So as we switch to Outlook, let's start on page 10 with with the markets, and then we'll talk about how those markets roll through our earnings expectations. So we've got utility segment on the left, electrical segment on the right. You can see the different pieces of the pie here, starting with electrical distribution. They've been in the really two quarters now managing their inventory is relative to the backlog. And we think that's normalizing quickly and expecting a healthy mid-single-digit growth rate there. Transmission, substation, and distribution automation, which is up around noon on the pie, we think those are both high single digits. Meters and gas in the mid-single digits. And Gerben talked about telecom. having a very cautious outlook waiting for orders to restart there. I will just comment that's a short-term outlook. We do have very attractive medium and long-term outlook for telecom. So the result on the utility side is a mid-single-digit growth rate. On the electrical, you see it nets out at three to four, so low to mid. I think the Industrial outlook, you see both light and heavy, is low to mid-single digits. We have mid-single digit growth rates in our verticals. And I think non-res, we maybe have a bit of caution at flat to low single digits. So a constructive market outlook for 2024. And let's go to page 11 and see how that rolls through our earnings outlook. So you see the organic of three to five in our sales growth combined with 5% net from M&A, one going out, one coming in, to create 8% to 10% sales growth. That generates a 10% growth in operating profit, results in 6% earnings, and free cash flow at about 90% of net income, affording continued increase in capex. And let's just walk through the bridge to give you a feel for it. So we're under contract to sell residential lighting. That'll lose 20 million of OP, systems control, EIG and Balestro will be adding about $90 million, so you can see almost a dollar coming from those before we pay the interest expense, which we have over on the right. We add for organic three to five, so we've comprised that of two to four volume and one point of price, which is in the next column. That's providing a nice lift and We have continued investment, particularly on the electrical segment side as we compete collectively there and continue to consolidate the footprint under our restructuring program. You see on the far right below OP an increase in interest expense as a result of the borrowings that we outlined to close on systems control. And the result is about 6% earnings growth to the midpoint of 1625. You see some modeling considerations listed there, and I might just add another one on seasonality for those of you who are modeling. We're anticipating 2024 being quite normal seasonality for the first and fourth quarters being a little bit below the second and third quarters, which are seasonally stronger. And that just compares to last year where the first quarter was very strong in contributing to the full year. So we think a very constructive year in front of us. We feel well positioned. We're happy to have the return in volumes. And we're happy to have made some portfolio net addition to continue to push profitable growth at Hubble.

And with that, I'd like to turn it back to Gervin. Great. Thank you, Bill. And before we turn it over to Q&A, I think it's helpful on the last page to look at our 2023 performance and 24 outlook in a longer-term context. The results we delivered for shareholders, not only in 2023, but over the last few years have been very strong. Most notably, we have doubled our adjusted operating profit and adjusted earnings per share over a three-year period, while growing sales at double-digit CAGR and expanding adjusted operating margins from the mid-teens to over 20%. We have also doubled our capital expenditures over the last three years to further differentiate our service levels to customers, and support attractive long-term growth expectations. As grid modernization and electrification drive the need for more reliable, resilient, and renewable energy infrastructure, Hubbell is uniquely positioned with the right people, solutions, and strategy to meet the evolving needs of our customers and deliver continued value to our shareholders. I am extremely proud of our over 18,000 employees whose hard work and dedication have enabled us to achieve a new baseline of performance. And I am confident that we will build off of this success with continued, attractive, profitable growth in 24 and beyond. We look forward to hosting an investor day later this year on June 4th, where we will provide more details on our long-term strategy with updated financial targets. With that, let's turn the call over to Q&A.

As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. We ask that you please limit your questions to one question and one follow up. Please stand by while we compile the Q&A roster. And our first question comes from Steven Tusa of JP Morgan.

Hey, guys. Good morning. Good morning, Steve. Can we just get a little more color on the bridge, maybe what you're expecting on price-cost and then any segment margin color for the year and how you expect that to trend seasonally?

Yeah, so price-cost we've got as flat, Steve. We have effectively one point of rollover on price embedded in there, which we're using effectively to offset commodity inflation. And then we've got a productivity program that we think can help offset non-material inflation in places like transportation, wages, and things like that. It's quite a flat expectation. And I think the way segments, I think, you know, as a result of that PCP assumption, you know, our margins by segment are reasonably flat-ish.

And I'd say that applies, you know, to both segments, I would say, Steve. Maybe I'll add this. Yep, go ahead.

Yeah, does the ish on utility kind of skew one way or the other, positive or negative ish?

Yeah, I'd say flat would I should think about.

Okay. Okay, great.

Maybe the two moving pieces on that I'll give you. If you think about the addition of systems control, That's actually a little bit dilutive, the margin, even though we've provided those numbers and a very attractive addition. And if you think about volume, it's a little bit accretive. And if you take the net of those with PCP flat, it's roughly flat. If you look at maybe a little bit of color on the electrical, because the electrical, I think it's a slight expansion. but that is with a pretty good step up on restructuring. So if you take that out, it's actually a nicer expansion of that, and Bill referred to it earlier, of the opportunity still in that segment as they work through organizing that better, competing collectively. There's more room for margin expansion there.

Got it. Okay, thanks, guys. Appreciate it.

Thank you.

One moment for our next question.

And our next question comes from Jeffrey Sprague of Vertical Research. Please go ahead.

Thank you. Good morning, everyone. Good morning. Still a little more color on the utility margins. Just also thinking about the comms, the Clara business, you know, I'm not sure where the margins are at in that business, but that feels like it's a friction point also to some degree from a mixed standpoint. So I'd I wonder if you can address that. I guess, Skirvin, you said flattish, so you're cowering through all that, but still would love some context on the mixed effect of Eclera. And can you just give us a little color on how much, you know, telecom was down in 2023? You know, I get we're looking for a week 2024, but we do have sort of at least a half a weakness in the base here for 2023, I believe.

Yeah, so maybe let's start with utility margins first. And I would say for Clara, you're right to say their margins are below the transmission and distribution component margins, largely because of the amount of R&D investing that we're doing, working on developing the next-gen comms package. So I would say in 23, and particularly in this fourth quarter, where you saw them outgrowing, I think where you're going is that created a mixed drag, and it did in the fourth quarter. I think growth rates next year, we'd maybe anticipate more balance, Jeff, so I don't think we'll have a big mix you know, effect in utility margins in 24. And your second question was on telecom.

Yeah, maybe provide a little context there, Jeff. And, you know, we really saw that slowing down, you know, towards the latter part of the year, particularly the fourth quarter, more specifically was down 20%. The first quarter, we still expect that to be down double digits. And what happened early in the year, we were still working through a lot of backlog in that, which kind of shielded us a little bit. You know, so we certainly expect, you know, after the first quarter, probably the second quarter still to be down, and then we, you know, expect it to rebound in the second half as some of that stimulus funding frees up.

And, Gerben, can you also just address – kind of your ability on just kind of factory throughput here as, you know, as the industry, particularly on the utility side, seems to, you know, want to compound out here at, you know, pretty healthy growth rates. You know, everything kind of buttoned up on the factory work you've been doing, or is there more to do there, you know, maybe just a little bit of the skyline and what to expect on CapEx?

Yeah, I'd say more to do, Jeff. Some of those projects take time to get some of that equipment in and online. So if you think about, for example, our transmission and substation markets are particularly strong last year and this coming year as well, as you saw. And that requires some capital that's still needing to come online. I feel good about our ability to do that. We've done that very well over the last year or so. You know, that's going to support some of that growth that we have embedded in our guidance. And then there's one last one.

Go ahead. I'm sorry. If you're not done, go ahead. I just had one last little follow-up, if I could. Please go. I just want to do a kind of comeback to the seasonality comment and everything. Totally get it. And that's sort of what I've been modeling. But given that margin comp in the beginning of the year and you in particular, are you expecting EPS to actually grow year over year in Q1?

Yeah, I think that if we just start, we don't do EPS by the quarterly guide basis. I just would say I'd anticipate our Q1 earnings to be in line with contributing to the full year at our typical seasonality uh and more so than it did last year so right thank you thank you one moment for our next question and our next question comes from tommy maul of stevens please go ahead

Good morning, and thank you for taking my questions. I wanted to start on the utility side of the business. It seems like for most of last year, it was more a discussion around availability rather than price. With that said, given some of the inventory destocking, particularly around distribution, has that conversation changed at all? Is price a bigger factor at this point?

I would not say so, Tommy, no.

Good to hear. Thank you. I guess that then begs a follow-up where in your full year outlook, you contemplate, I think you said, Bill, a point of wraparound price, but you did highlight some uncertainty in certain pockets. What are those pockets you were referencing there?

Yeah, so I think telecom would be the first one. you know, to see a market down, you know, I think just puts a little pressure on that. And so that's really the most noteworthy one. I think other areas, you know, where things are overstocked can put a little pressure sometimes. So we've had a very successful pricing process over the last really two years. And so it's something that we are, A, very focused on, B, are in very close conversations with our big customers. Gerben and I happen to be visiting with a few of our largest customers over the course of the last couple weeks. And, you know, just to your point, none of them are asking about price other than to make sure We're coordinated with them, give them enough time to implement price increases and let them manage that through their systems. But it's a, I've described price as of this moment, you know, Tommy is still quite constructive.

Maybe to your point of that, you know, there may be some headwinds. I'd also say that we, you know, build into the guidance to carry over, but we also announced price increases early this year. It's early to tell. This stage, you know, only a few weeks in, you know, on the stick rates. But again, the conversations that we're having are very positive to those taking hold. So we have levers against potential headwinds by, you know, taking price too.

Thank you both. I appreciate it. And we'll turn it back.

Thank you.

One moment for our next question.

And our next question comes from Nigel Coe of Wolf Research. Please go ahead.

Thanks. Good morning, everyone. Good morning. So, Bill, just wanted to be a bit more specific. Typical seasonality for 1Q, it looks like about 20% of full years. Is that about the right zone per year, Matt?

Yeah, a little. I would have said 21 if you asked me. Yeah.

Okay. That's great. Thanks for the clarification there. And then just the electrical performance this quarter is obviously outstanding. You know, the 60% organic growth, pretty flat QVQ in both revenues and margins. So is that mainly a channel impact you're seeing there? I know you called out strength electrification and data centers. I'm just curious in terms of the end market demand, what you saw during the quarter being a bit more specific there.

Yeah, I'm not sure I'm getting at the essence of what you're asking. We did find that vertically data centers and renewables were both good. That benefited our PCX business and our Burn D business. And I do think we saw from our big customers, if that's where you're pushing, you know, in areas where they had been managing their inventories, we saw a return to growth in those as well. So I'm not sure if you were getting that customer behavior and markets there, but we had a kind of a little bit of a mix of both.

Yeah, I mean, it wasn't a straightforward question, I know, but do you think the channel impact was fairly neutral? So sell-in versus sell-out pretty similar. I guess that's sort of the essence of my question, but really then when we think about the margin exit rate for 4Q into 2024, I know you've said flattish impact in 24. Restructuring is picking up, so that's obviously a headwind in 24. But just curious about the lighting impact, because that's coming out. So I think that that would probably drive more of a bias towards expansion in electrical. So just curious if you agree with that.

I do agree. I do agree they were sort of at double digits, you know, versus... you know, versus what you see is a better margin at the segment. So, I do agree.

And then sell-in versus sell-out?

Yeah, it's pretty consistent in the quarter, Nigel. Okay, great. Thank you.

Thank you. One moment for our next question. And our next question comes from Julian Mitchell of Barclays. Please go ahead.

Hi, good morning. Maybe just trying to understand and fully comprehend that you don't give sort of detailed quarterly guidance, but you've got the 4% organic growth guide for the year. in revenue, and you have the color around weak start to the year in telecom, a bit of extra utility destock, and maybe the last dregs of non-resi electrical destock. So all of that seems to suggest a stronger second half organic growth rate. Just wondered, you know, how much of an improvement year on year are you dialing in through the year as we go to get to that 4% for the year as a whole?

Yeah, Julian, first of all, welcome to the call. Nice to have you. And I would say that the utility destock, you know, We'll see, but we could be at the point of kind of having be done with that as well. And I would say on the electrical side, we feel more confident that we are. Your telecom point is right. I think we do anticipate a weaker start. And as you think about You know, you're sort of introducing sequential seasonality and how that's going to look, VPY, you know, compare. And I think what, on the VPY basis, some of the second half compares because of the destocking, you know, could actually be a little bit easier. For example, first quarter last year was actually quite strong. And I think seasonality-wise, you know, we upped our investments at the second half of last year. As those wrap around, you know, that creates a more consistent and easier second half. So I think as those things net against each other, that's kind of how we're getting to a more typical seasonal year, even though I hear you, there's obviously – puts and takes and forces at work here.

And maybe, Julian, provide maybe a little more context on that. And you're right to point out there's still some headwinds. But one way to look at it, and I realize it's an early data point, but as we look at how we're starting off the year and we look at our order patterns and trends here in January, it's actually supportive to what Bill is somewhat hesitantly saying that we could be exiting or destocking. It's constructive to this. I'd say early read into the year is that it's constructive to this profile of seasonal guidance.

Thanks very much. And then just a quick follow-up. That slide 10, the non-residential vertical within electrical, the flat to plus low single guide for the year, you understand fully on the channel stocking largely having run its course, but maybe just the market outlook, you know, you use that word uncertain, just any sort of color you could put around that, what you're seeing in different verticals in that non-res-y bucket.

I just think, you know, maybe the pressure on office just feels like it puts a little bit less certainty. I mean, It's quite a constructive pie, so I guess by I think less certainty puts you in still a growth position, but I think the institutional side would probably be stronger, but maybe some of that office could be weaker. So I think that mix effect just puts it in the low growth rather than the rest of the pie, which is more medium growth. That's great. Thank you.

Thank you. One moment for our next question. And our next question comes from Brett Lindsay of Mizuho. Please go ahead.

Hey, good morning, all. I wanted to come back to the investments, and you talked about some of the carryover in the first half. Just wanted to clarify, are these embedded within the volume portion of the bridge and separate from the footprint? Just trying to understand if you could quantify the investment versus restructuring and what those paybacks might look like.

Yeah, so if last year it was an investment that continues, i.e., if you added headcount, it would show up, yes, in margins in volume. As we step things up in areas last year, for example, like new product development or people to work on productivity initiatives, you know, that would wrap around higher costs, wouldn't be a new investment, right? It would show up, as you're saying, Brett, in March and on volume.

And then anything you can share in terms of the paybacks on these footprints, is something abetted this year or is that a little bit longer term?

Yeah, I think the new, I think there's order of magnitude, another 10 million of R&R in that bucket that will be invested this year. It's of a footprint, you know, nature. And I think the paybacks are, that we have good ROICs on that. The paybacks tend to be in the three-ish year range. And so we're sort of investing today in those cases with benefits that probably start, you know, a year or two from now.

Maybe the other thing that I would say is embedded is some of those improvements will drive a higher level of productivity that's embedded in our guidance. So when you look at the concept of flat price-cost productivity. It has a higher level of productivity and a higher level of inflation in it to offset it. So that's where some of those investments are going.

Okay, great. Yeah, thanks for the color there. And then just a follow-up on the price expectations. So it sounds like no incremental actions embedded in the planning. I'd imagine you're seeing some, you know, raw non-material inflation Maybe just a little context as to maybe what that potential hedge could look like if you do see a sticking of some of these actions that you are out in the marketplace with.

Yeah, I mean, you'd be kind of maybe asking a little bit about a speculative sensitivity analysis, right? So you could see each point of price you know, gets us north, obviously, of $50 million of price. And that's a lot of leverage if there's no corresponding inflation to that. Conversely, if you have to give a little, it equally has, you know, kind of this 100% sort of drop through. And so as Gervin sort of outlined, I think we have, because of the investments we made last year, we have a more ambitious productivity target level. And we certainly see some inflation on the wage, transportation area, as well as in the material-related area. So I think getting the rigor that we need to focus on all of those levers to come out even or ahead is sort of an obsession. We review it really carefully every month at Gerben's and my level and continue to push enough initiatives to make sure we stay even or ahead.

Got it. Appreciate the insight.

Thank you.

One moment for our next question.

And our next question comes from Joe O'Day of Wells Fargo. Please go ahead.

Hi, good morning. Thanks for taking my questions. I first just wanted to focus on the 2024 bridge. And if we think about it, I guess, in three buckets with the organic piece, the M&A piece, and then some of the restructuring, is it fair to think about a 25% incremental on the organic piece? And then on the M&A side of things, can you add any detail on what you think interest expense is in 24, just so we get that right in the model? And does that interest expense contemplate the deployment of resi lighting proceeds? Thanks.

Yes. So I think you could put in about $40 million of incremental interest expense. And I think the drop through of 25 on volume is reasonable.

I'd rather see that more like 30, but somewhere in that high 20s is reasonable, I think.

And the regulating proceeds?

Yeah, so you see we have interest income there as a plus and interest expense as a minus. So we sort of built the construct that It's either cash that's going to earn or it's going to be available to pay down. And I guess the one thing I'd say is it's explicit that we're not modeling in our guidance any new acquisitions. And so that would be incremental to this guide.

Got it. And then on the electrical side, the Can you size roughly what the D-Stock headwind was to top line growth in 23? And so just kind of the non-repeat of that, what we should think about is that kind of contribution to the plus three to four for 24.

Yeah, overall, I'd say sell-through volumes were down kind of in the high single to low double digits most of the year. And I think sell-through was flattish to slightly up. So it got better in the fourth quarter.

But overall, I think you can think about about a single digit impact on a full year basis.

OK. And then just a clarification that the fourth quarter, 9% organic and utility. Did you give the price and volume split of that?

Yeah, the volume was negative. So it ate into the price.

Volume is slightly positive, Joe. Sorry. Volume is slightly positive?

Yeah. Sorry. You're asking for a whole of utility. Sorry. I thought you were talking about power. Yeah.

Yeah. Sorry. Just that 9% whole organic. So slightly positive volume. Got it. All right. Great. Thanks very much.

Thank you. One moment for our next question. And our next question comes from Nicholas Amakuchi of TD Cowan. Please go ahead.

Hey, good morning, guys. Morning. Morning.

Just had a couple. Wanted to hone in on the electrical solution segment. So obviously, you know, going to benefit somewhat this year from the footprint on the position. Just wanted to see how much I mean, how much more headroom do you guys have from an optimization perspective within that segment?

Yeah, I mean, the – I'd say that we still have projects that are – you know, this year they'll be consolidating locations, so you'll be absorbing volume in existing locations. And then after you get to that, there's always the chance to keep putting in bigger, more scaled facilities. So you can answer your question with a very long perspective, but if you took it a little bit more narrowly, I'd say in the next few years, we'd be at a stage where we'd be quite happy with the optimization process. You're probably never done, I guess, but I think we'll We go a long way to achieving sort of our desired goals in just a few years.

Sure. That's fair. Then I did want to touch upon, too, so I think the guidance within the press release had indicated about $1.60 of the amortization. That's within adjusted EPS, and so if you do the math, that's roughly $86 million for the year. We did just, within utilities, I mean, I understand that there was, you know, a significant step up in 4Q probably related to the systems control, but just wanted to get a better sense of kind of the timing of that amortization and kind of the breakdown between utilities and electrical solutions.

Yeah, so the increment, so we've been running at $1 for a while, so the $0.60 that's new is all in utilities. So as you separate them And when you think about the amortization, a lot of it is going to customer value and places that have quite a long, you know, and by long I mean like, you know, 20-year.

So it's, you know, it's a pretty stable run rate. Got it.

Perfect.

Yep, that's all I got. So thanks, guys. Thank you. Thank you.

Thank you.

One moment for our next question.

And our next question comes from Chris Snyder of UBS. Please go ahead.

Thank you. I wanted to ask on utility margins and, you know, specifically I guess the expectation that on an organic margins will be flattish for 2024? And I'm just asking because you guys are exiting the year, you know, well below where you started and maybe emanated a bit of a headwind in Q4, but it feels like organic is, you know, in Q4 down a good deal versus the first half. So is it fair to, does the guide assume that utility organic margins are down year on year in the first half and then return to growth into the back half? Or should we expect them up year on year throughout the year?

Yeah, I would assume they're kind of flattish through. Like, I don't think there's anything. I think I'd look maybe at the shape of 23, because I know exactly what you're observing, right? You see a sequential step down in margins. Some of that is attributable to some spending, investing that we're doing. Some of it's attributable to the Eclaire mix effect, some of it's attributable to the fact that the volumes inside of power systems were going through their destocking work with our customer channels partners. And so I think, again, we just see that, you know, Chris, returning to a more normal shape. And so I think the volume piece of power systems becomes quite important to that. I think we see the mix with the Clara start to, you know, balance to equal or equal contributions. And so I think in a balanced world, we would expect margins in Q1 and Q4 to be below the margins in Q2 and Q3. And that that shape in 24 should feel quite normal. Thank you.

I appreciate that. And then just as a follow-up on utility margins, so I know they're always down sequentially into Q4, just lower revenue. This quarter came in quite a deal sharper than we expected. Is the company starting to feel the impact of higher metal prices? I know steel has been up a lot over the last three, four months. Was that starting to come through in Q4 on those utility margins, or is that still more of maybe a 24 dynamic?

Yeah, I mean, we certainly saw starting November, December, steel move. And I would say the way that works through the supply chain, there's usually a couple of months lag on when we as a LIFO company pay those most recent prices. So I think we'll feel those prices, those costs, if you will, in the first quarter. And maybe the mid to end of the first quarter.

Thank you. Thank you. One moment for our next question. And our next question comes from Scott Graham of Seaport Research Partners. Please go ahead.

Hey, good morning. Thanks for squeezing me in. Just really the question I have is about the portfolio management slide. And, you know, particularly now with systems control in the fold, you know, you have a couple of nice sized bubbles under which to acquire What is the outlook there for, you know, what does the pipeline look like? I mean, you've got a 1.4 net leverage is a really good number to work off of. So what are your aspirations in 24, maybe even by telling us, would you be disappointed without another good-sized deal this year?

Yeah, that's an interesting way to phrase the question. I had come at it from two perspectives. The first you already raised, which is, We are very comfortable with our leverage levels. So we think financially we certainly can afford to invest in acquisitions. And I would say secondly, you know, is kind of the integration perspective. And we'd like to make sure that we have systems control, you know, well integrated. We've got, you know, a healthy amount of people kind of working together. It's off to a great start. Our customers are happy with it. It feels like a good cultural fit, but it still takes work to make sure that it's integrated and we don't want to have too many plates spinning. So your question may be well revisited three months from now, but I agree with you that strategically we'd love to add businesses in the Northeast and financially Northeast of this two by two matrix of, of higher growth, higher margin. And, um, and yes, we feel we have, uh, capacity both in cashflow generation, you know, we'll be up in the 800 million range this year. Plus, as you pointed out, I think balance sheet capacity. So, um, we're, uh, So I think let's just revisit that question maybe in three months and see how we feel. But it's a good question.

Well, fair enough. I guess I was just wondering also what the pipeline itself looked like. And, you know, you can put people off a little bit.

Yeah, there is a pretty decent pipeline. And there's quite a few things we're expecting to at least – probe the market in the second half of the year. So that doesn't mean we'll buy any of those or that they'll be attractive. But there is an interesting amount of what appears to be inventory maybe coming to market. Thanks so much.

Yeah. Thank you. At this time, I'd like to turn it back to Gerbenbacher for closing remarks.

Great. Thank you. I appreciate all the questions, the quite robust time we put out for that in this call to focus on our outlook. Maybe I'll close by saying that I feel really good about the year and our ability to deliver on our commitments to you to drive profitable growth after a few years of really outperformance. So You know, look forward to our investor day later in the year and to our first quarter call. Let's talk about, you know, how we're doing so far this year. So thanks much.

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