HUBB - NYSE

Good day, and thank you for standing by. Welcome to the Hubbell Incorporated Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Dan Innamorato, Vice President, Investor Relations. Please go ahead.

Thanks, Shannon. Good morning, everyone, and thank you for joining us. Earlier this morning, we issued a press release announcing our results for the second quarter of 2024. The press release and slides are posted to the Investors section of our website at hubbell.com. Joined today by our Chairman, President and CEO, Gerben Bakker; and our Executive Vice President and CFO, Bill Sperry. Please note our comments this morning may include statements related to the expected future results of our company and are forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Please note the discussion of forward-looking statements in our press release and 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 Gerben.

Great. Thanks, Dan. Good morning, everyone, and thank you for joining us to discuss Hubbell's second quarter 2024 results. Hubbell delivered strong operating performance in the quarter, generating 8% year-over-year adjusted operating profit growth and 40 basis points of adjusted operating margin expansion along with 7% year-over-year growth in adjusted earnings per share and free cash flow. Given our first half performance and continued visibility into the second half, we are raising our 2024 outlook this morning and are confident in our ability to deliver double-digit adjusted operating profit growth on a full-year basis. Performance in the quarter was highlighted by strong organic growth and margin expansion in the Electrical Solutions where robust project activity drove strong growth in data center and renewables markets and where our vertical market strategy is uniquely positioning Hubbell to serve the needs of our customers. As we highlighted at our Investor Day in June, HES is executing on two strategic focus areas to compete collectively in high-growth verticals while also simplifying our business to drive productivity and operating efficiencies. We are making good progress on both of these initiatives, and we also continue to benefit from our portfolio transformation efforts, which align the segment to structurally higher growth and margins over the long-term. In Utility Solutions, while we continue to be impacted by weak telecom markets and to a lesser extent, customer inventory normalization and utility distribution market as anticipated, T&D end market demand remains strong. Transmission and substation markets achieved robust double-digit growth in the quarter as utility customers invest in upgrading the grid infrastructure to interconnect new sources of renewable generation with load growth from data centers and other electrical applications. As we highlighted to you last month, our leadership across T&D markets and strong relationships with utility customers uniquely positions Hubbell for sustained outperformance over an attractive long-term utility investment cycle as grid modernization and electrification megatrends accelerate. Operationally, we drove positive price/cost productivity across both segments while continuing to invest in capacity and productivity initiatives, including another quarter of higher year-over-year restructuring and related investments. Overall, we are pleased with our operating performance in the quarter, even while absorbing pockets of challenges in certain large, high-margin businesses Hubbell is proving the ability to comp off of recent outperformance. This is a testament to the quality of our portfolio, the attractiveness of secular trends we are exposed to and the strength of our people and operating model. With that, let me now turn it over to Bill.

Thanks, Gerben, very much, and good morning, everybody. Appreciate you joining us recognize there's a number of releases this morning. I'm going to start my comments on Page 4 of the materials. You can see a strong performance in the second quarter by Hubbell exceeded our own expectations, thanks really to contributions from the Electrical segment. I think they came in the form of strong market growth in targeted verticals as well as good execution on the productivity and cost front. So turning to sales, 7% growth to $1.45 billion. That 7% is comprised of 2% organic which is all priced at two points and five points of acquired sales, and that's a net number. Just to remind everybody, we had 8% contribution from acquisitions from three different deals that were closed last year, and we had minus 3% headwind from the divestiture of Residential Lighting that we effected earlier this year. So plus 8% and minus 3% netting to 5% from M&A. Independent of the impact on volumes, you'll see benefits on the margin front from these portfolio reshaping when we get into some of the segment result pages, and I think it's been beneficial to our enterprise to exit lower growth, lower margin businesses and add higher growth, higher-margin businesses. And I think we're getting dividends from that acquisition program. Turning to OP operationally, you see 22.8% margins, expansion of 40 basis points year-over-year, quite important as we finish the year to keep improving on those margins. The margin story was driven by a big performance in Electrical, which we'll talk about in a couple of pages. Utility had sequential improvement in operating profit quarter-over-quarter and favorable price/cost, productivity performance in both segments showing really good execution. We're having success with pricing realization and some of the investments we made last year, resulting in some productivity improvement inside the factories this year. So good performance on the PCP side. Earnings per share, 7% growth to $4.37 adjusted EPS. So up above, we had 8% OP contribution and an increase in interest expense, which aligns to 7% earnings growth. On the free cash flow side, $206 million on track at halfway point here to hit our target of $800 million for the year. Turning to Page 5. I wanted to take advantage of these visual graphs and take us back about 1.5 months to Investor Day and really remind us of what I thought was one of the most important takeaways from that Investor Day, which was to pull the lens back for the last three-year period, remind ourselves of how much improvement there was in Hubbell's performance in 2022 and 2023. And basically, at Investor Day, we described that bigger and better Hubbell being the base off of which we are now going to grow and improve and get even bigger and better. So using Page 5 to illustrate that takeaway. In sales, to remind everybody, in '22 and '23, we had a compound annual growth rate of 14% off of that much higher base, we continue to grow sales 6%. On the upper right of the graph, you see operating profit. I remind everybody that in '22 and '23, that compound growth rate of 38% and off of those higher levels we're growing another 8%. And earnings per share on the lower left, to remind everyone, '22 and '23, we had a compound annual growth rate of 36% and we're continuing to grow 7% off that base. So I just really wanted to illustrate that point of how we're growing off that improved performance level. Page 6, let's start to unpack the performance by segment, and we'll start with the Utility segment. And there's really two halves to the story here, the sales and the OP and I'm going to start with sales, which are up 12% to $927 million. Those sales are comprised -- sales growth is comprised almost entirely of acquisitions with the organic down slightly. And we had a similar shape in the first quarter where both grid infrastructure and grid automation, the two units contributed double-digits to the growth. So let's unpack and start. I'm on kind of the lower left of the page and grid infrastructure being the first unit. Sales are up 12%, and that's really driven by the Systems Control acquisition that we closed in December. To remind everyone that is an integrated solutions provider for substations, for utility businesses. Business is doing really well since we've added, it's growing at attractive margin levels. So the acquisition driving sales, the organic is down mid-single-digit, and that's driven by the Telecom end market that we talked about at some length in the first quarter. And the results are very similar to that first quarter down 40%. I think we're starting to feel the bottom there, and we'll start to look forward to some slightly easier compares in the second half. And I think sometimes over the last two quarters, that performance of the Telecom market has somewhat taken away from the picture of what's going on in our core transmission and distribution business, which is growing organically and expanding margins. So very, very healthy there, the strength this year has been in the transmission and substation side of things. We really see robust project activity involving both new miles of construction as well as grid interconnections. On the distribution side of T&D, we continue to have -- we continue to have to navigate through some end customer destocking. It's not significant enough to prevent T&D from growing, but still a headwind. And that headwinds in particular areas like pole line hardware that are typically more on shelves and in stock. So let's pivot from that top grid infrastructure unit to the grid automation unit at the bottom. You see sales up double-digits, organic growth up at 8%. And we continue to have AMI, which is the comms part and meters conversion of backlog, and there continues to be strength in grid protection and controls demand, resulting in a smarter and more resilient grid. So I want to talk about margins on the right side of the page, which I think is a really important part of Page 6. So importantly, those margins from the first quarter are up sequentially, 220 basis points. So very nice execution from Q1 to Q2. You see an increase of 4% in dollars to $222 million. You see a decline year-over-year in margin from 25.6% to 24%. And basically, of the drivers on the lower right part of the page, you see three of them are headwinds. The most important of which is the decrementals on the Telecom volume which explains essentially the entire drop. In addition to that, we increased our restructuring investments, which was a drag on margins. And I mentioned the Systems Control acquisition being at attractive margin levels happens to be below last year's level slightly. So it creates a little bit of headwind. And so the fact that price/cost productivity is basically offsetting both the restructuring and acquisition effects, we think sets us up importantly for a good second half in Utility margins. So I'm going to continue to Page 7 and talk about the Electrical segment. And you see really strong performance turned in by our Electrical team in Q2. Sales grew 7% organically, while margins expanded 350 basis points to north of 20% level. The growth was driven primarily by our targeted vertical markets, most notably data centers and renewables. And a couple of things of note there. One, obviously, the markets are growing rapidly. Two is, we have a really good suite of products and solutions like connectors and grounding products that fit well with that segment and are helping our customers. And we've made some strides towards competing collectively there, which we think both assists cross-selling, product development and makes us easier to do business with. And we think that's helping us. These are relatively small businesses for us, comprising approximately 15% of the segment sales. But because the growth rates are so significant, they're actually driving a lot of the incremental growth. Beyond the verticals, though, I think the markets are in solid shape. Industrial markets, in particular, solid. We think non-res is pretty steady. And importantly, for us on this Electrical side, we've really exited the period of destocking that we were navigating through last year. On the margin side, you see 18% growth to $109 million and about 350 basis points expansion to 20.8%. I think one of the biggest effects there has been the disposition of the resi lighting business. And in the absence of that, we reduced sales by 9% in the segment, but we added over 50 basis points to this margin story. In addition to the absence of that business, we have incremental drop-throughs on as volumes return post destocking and in particular, in the highly attractive vertical markets of data center and renewables. And we have price cost productivity, favorability, good price realization with stick rates and good productivity. You heard Mark Mikes, our leader of this segment at Investor Day talk about looking to compete collectively and drive efficiencies and looking forward to Mark's continued strong performance here in this segment. With that, I want to turn it back to Gerben to focus on a couple of areas of growth.

Great. Thanks, Bill. And before I go to the full-year outlook, I want to take the opportunity and just highlight a couple of growth areas for us. And as Bill just talked about in the segment discussions, we are seeing some strong pockets of growth in specific markets and product lines within our businesses. And one of the themes that emerges when you look across the performance of the portfolio is that some of the strongest growth is in the areas which tend to be exposed early in the industrial project cycle, in particular, in data center and renewables verticals across both utility and electrical markets. For example, Hubbell has a leading position in electrical grounding with our Burndy brand, where we are highly specified across key end markets with the premier grounding solution in the industry. These products are typically installed early in a project cycle once construction breaks ground and year-to-date revenue in this product category is up over 30%, which much of that growth being driven by data center and renewable projects. This is a positive indicator for continued market growth in these areas as we continue to execute on our vertical market strategy and pull through other specified solutions as these project progress. In Utility Solutions, Bill highlighted strong growth in transmission and distribution -- and transmission and substation markets. And as we think about substations, this market is very much at the intersection of trends in renewables and data center as substations are needed to interconnect new sources of generation and load. We have a strong position in utility substation and one of those key product categories is substation switching, which is a critical solution enabling utilities to isolate portions of the grid for maintenance and repair. We have realized over 40% sales growth in this product category in the first half with orders and demand outstripping sales. As we consider the longer-term impact of load growth on the grid, Hubbell is uniquely positioned with our offerings across transmission, substation and distribution to enable the upgrading of this aged infrastructure. We believe that grid modernization and electrification will continue to drive growth across our portfolio over a multiyear investment cycle. We have positioned our portfolio and our strategy to take advantage of these opportunities and to serve the needs of our customers, both in front and behind the meter. Now turning to our outlook for the second half and full-year. Hubbell is raising our full-year adjusted earnings per share outlook this morning to a range of $16.20 to $16.50. We currently anticipate 7% to 8% sales growth and approximately 3% organic growth for the full-year with adjusted operating margins of 21% to 21.5%. This represents double-digit free cash flow and adjusted operating profit growth at the midpoint as well as solid adjusted operating margin expansion off of strong 2023 levels. Our first half performance puts us well on track to achieve this increased full-year outlook. Looking ahead to the second half, we see continued momentum in execution in Electrical Solutions and we expect utility solutions to achieve improved levels of organic growth while returning to year-over-year adjusted operating margin expansion. Longer term, we remain confident in Hubbell's ability to compound on recent outperformance. At our Investor Day last month, we laid out a multiyear financial outlook for mid-single-digit organic growth and attractive incremental margins, along with strong free cash flow generation and deployment as grid modernization and electrification megatrends accelerate into 2025 and beyond, Hubbell is well positioned to consistently deliver on these commitments while serving the growing needs of our utility and electrical customers. With that, let me now turn the call back over to Shannon for the Q&A session.

Thank you. [Operator Instructions]. Our first question comes from the line of Jeffrey Sprague with Vertical Research Partners. Your line is now open.

Thank you. Good morning everyone.

Good morning, Jeff.

Hey, good morning. Just on Utility in general, and I guess just kind of specifically, first question is just on the inventory dynamics. It doesn't sound like you're necessarily declaring victory on the channels being cleared at the customer level. Maybe just give us any kind of additional insight on where we stand as it relates to that. And your view of what end demand and distribution might have been in the quarter even though you were dealing with some sell-in issues as inventories correct.

Yes. Let me start that, Jeff. And as we indicated early in the year, the destocking, particularly in the distribution side of utility lasted a little longer than initially anticipated. And it primarily came to the lesser visibility that we have as we look into the end customer. I would say there is evidence that this is improving, but it's very hard to call because it's happening at different levels, different speeds at different customers within different product lines. So certain product lines right now, we're seeing that ending and then we're seeing the demand inflect up, but then others, we still continue to see some of that destocking continuing. And just as a perspective, we dealt with this in the Electrical segment last year. At that time, too, it was hard to predict. But the best sign of it was that when it was over, we saw demand inflecting back up and we returned to growth in that. So we still see end demand strong. We see this through -- if you look at the CapEx budgets for utilities, those are growing, not only in the actual spend, but in the projections out. Discussions that we have with our customers indicate that they continue to invest. And again, in areas of the portfolio where the destock is over, certainly -- certain product lines, but then also other areas like transmission and substation, the demand is very strong. So we have good indication that the end demand in T&D continues to be strong and that this is a period that we'll have to work through over the second half to continue to get through it with the different customers and the different product lines.

And then just on the kind of the transmission and substation markets, the comment that things are growing double-digit there. Obviously, systems control is not in the organic base, but is it also growing at that double-digit pace? And I just want to clarify on margins, too. I think Bill said margins there were down versus last year. I think you just meant the mix effect of the lower margin business coming in. But can we clarify that, maybe how the margins are tracking and systems control also.

Yes. Let's start with the second question. So their margins are at attractive levels. We didn't have them last year, but they're just a little bit below the mid-20s. And so we love adding that kind of margin, Jeff, but it's interesting. It creates a little bit of headwind quarter-over-quarter. And I would say that the transmission and substation growth of double-digits is an organic, not an acquisition impact. It's grown organically at that level.

But Systems Control growing in line with that double-digit pace in the broader market.

It is. And again, we didn't own it last year, but it is kind of -- yes, it is compared to what it was doing last year.

Great, all right. Thank you.

Thank you. Our next question comes from the line of Steve Tusa with JPMorgan. Your line is now open.

Hey, good morning.

Good morning, Steve.

Can you just give us some color in Utility on what the like margin is in the second half kind of an exit rate? And then any color you have on pricing there?

Yes. Maybe we'll start with pricing. I think that we can still continue to operate, Steve, in an inflationary environment and some materials between copper and steel are moving around in opposite directions sometimes here. But with the other value-add on components and with things like labor and transportation and things like that, we still feel we're operating. And I may be reading into your question too much, but we get the question a lot of, if steel is down, will we have to give up Utility price. And we really aren't feeling that pressure rate at this moment. And we continue to believe that our customers are paying for quality, reliability, on-time delivery, really helping out down in Houston over the last month being reminded of supporting customers with if there's a hurricane outage or something of that like, being there to support them and get their customers back up and turned on as fast as possible. Though part of what we think is the value proposition that ultimately supports our pricing level. So I may be reading too much into it that you're asking about to do commodities impact, but that's -- we're not feeling that pressure at this moment, Steve.

So I guess just the margin like a little more precision on the margin, your exit rate or the second half?

Let me help you. We expect margins in the second half to improve from the first half with some of that organic volume coming back.

And then just one last one for you on the seasonality. You said last quarter that you expected kind of a normal seasonal year, 47%. You were very precise on that of EPS in the first half. Any reason why that would change?

Yes. I mean I think -- I think the 47% is a pretty gross measure, and I used it to just remind everybody that we'll be -- we would be seasonally something normal. I think if you look back on our last five to 10 years, you see 47%, 48%, 49%. And so I do think that it is a growth -- I think maybe you're pointing out, it's a pretty sensitive and gross way to describe seasonality. So our guide right now, Steve, is more in the 48% plus, closer to 49% expectation.

Okay. I got the math. Thanks a lot.

Thank you. Our next question comes from the line of Nigel Coe with Wolfe Research. Your line is now open.

Thanks. Good morning. Maybe Bill, I'll turn to kind of the implied question, maybe you want Steve's question on its tail. Maybe you talk about steel prices have come down a lot since you gave your plan in January. So perhaps price cost might be more tailwinds from here. I mean, how do you respond to that, given that the pricing and utility remains very strong.

Yes. I think you're pointing out a variance in steel, which is favorable. There's been some negative variances in copper and higher inflation and things like transportation and wages. And so there's a -- it's hard to try to isolate on a single commodity and try to read that through too much into any kind of favorable PPV if you will.

So it's all kind of mixing back to plan. I just wanted to maybe just try and dig into the trends within core Utilities. So organic down 6% this quarter. Did I miss the price within Utility, I'm assuming it's 2%, 3%, but -- so let's call it down high single-digit volumes. But then if we ship out Telecom, are we back to sort of low-single-digits for core Utility component -- core Utility components ex-Telecom volumes? And then maybe just talk about the book-to-bill as well. Are we now at a point where book-to-bill is above 1%.

Yes. So let's see a couple of components there. Let's start with -- you had the price right at a couple of points. And I think your you're kind of extracting the enclosures, the Telecom market correctly to get to attractive growth rates inside of the core transmission and distribution. I think the book-and-bill question is one that we spend some time looking at and it's not yet. It's not at this split second all the way back to one, but you're right to point out it was in couple of years past, it was way north of one, and I think that's still kind of normalizing right now, Nigel.

Maybe a comment to add on to that because the back of -- most of our businesses are book-to-bill. Now we've added some businesses recently where -- like Systems Control or Aclara where backlog is a bigger component because of the -- there's just a long lead time nature or order planning of that. But most of our business is book-to-bill, where you're generally around one typically. And as you look back over the last couple of years, as Bill noted, when we were well above it, our laser priority was, and it continues to be to get those backlogs back down because that's a reflection when you do that your service is better, that your lead times get shorter, and that's a good thing. That's one of the key value propositions that we have for our customers when we're able to do that. So for us, actually, a reduction in backlog, driving that down is very strategic in how we want to operate. And we still have pockets where our lead times are too long and where our backlog is the high, where we're focused on taking that down. So it's a hard question for us to answer in the context of growth. We look at [indiscernible] and if that's growing and then backlogs, we want to get them as low as possible to have attractive lead times and service levels.

Great. I'll leave it there. But if you could maybe just clarify, Bill, the proportion of the Utility business with Telecom. So you can just pull that up appropriately, that would be great. Thanks.

About 10% of the segment, Nigel.

Thank you.

Thank you. Our next question comes from the line of Julian Mitchell with Barclays. Your line is now open.

Hi, good morning.

Hi, Julian.

Good morning. Maybe just wanted to clarify the 3% organic growth for the total company for the year. So is that kind of very low single-digit growth in Utility and then sort of mid-single-digit plus in HES, is that the right framework? And just within Utility, curious what the updated Telecom assumption is for the sales change in the year after down 40% in the first half, please?

So let me start with Telecom, which was -- when we started our guide, we thought it was going to be down double-digit. We had it down 40% first quarter. That persisted into the second at down 40%, and that caused us to adjust our Telecom expectations to order of magnitude down 25% for the year. And I think as you were trying to parse the two segments into the 3%, it would be Electrical at mid-singles and the Utility at low single-digits.

Thanks very much. And then just -- there was some discussion earlier about sort of first half, second half dynamics. But maybe within the second half, just curious around sort of seasonality of third versus fourth quarter. I think sort of typically, it looks like earnings are often flattish sequentially in the third quarter and then down maybe mid-high-single-digit in the fourth quarter sequentially. Is that the right way to think about sort of 2024 as well?

Yes, Julian. I think our typical seasonality as the second and third quarters kind of form our head in the first quarter and fourth quarter on shoulders. And so second quarter and third, you can sometimes step up a little bit, but it's not wrong to think of those as two big quarters and then steps down in the fourth quarter.

That's great. Thank you.

Thank you.

Thank you. Our next question comes from the line of Brett Linzey with Mizuho. Your line is now open.

Hey, good morning all. Thanks. Just wanted to come back to the telecom markets down again as expected. But -- any insights you can share as to the level of visibility into the back half and customer readiness with some of the speed funding?

Yes, so maybe I'll start that one. And maybe if you take a step back, as you look at last year, Telecom was up double-digits in the first half of '23. It went down sharply double-digits in the second half of '23. So certainly, as we go into the second half now, we're going to see easier comp. But as you look at maybe first half, I mean second half to second quarter, we see that pretty flattish BEAD money you talk about, that's still an area that we believe will drive growth and need to invest in this area is very clear to us, especially in rural deployment of fiber. So we see that coming. Money is starting to flow to some of the states and the states have got to identify the projects. They got a bid those. So we see that more as a '25 and perhaps later in '25 coming back. So we do believe we're at the bottom here. We believe we'll be along the bottom for a little while, and then we'll see that coming up slowly through the balance of this year and then into next year.

Okay. Great. Thanks for that color. And then just on Aclara, so continued backlog conversion here. Maybe just an update on the level of visibility on backlog into '25, how orders progressed during the quarter and just really the appetite amongst some of your customers to continue to spend here?

Yes. And we've clearly seen us work backlogs down here. That was -- I talked about this earlier, where with too much backlog, past-due backlog with all the chip shortages. So certainly the second half of last year and continue going into this year, we've been working the backlogs down. One of the other things that we mentioned that during this period, the new projects were slower, especially the large projects were slower to come to market or to bid. We are seeing increased pipeline. There's pockets particularly where we're seeing that now, for example, in water. We're also excited to have actually gotten some projects, if you look at some of the great resiliency for the grid funding. There's a few customers there that have gotten that funding that's translated into orders for us that we'll ship next year. So I would say we are seeing increased pipeline. We still got a bit on these projects that -- to fill our '25 pipeline. So I'd say it's perhaps a little early to talk about '25 at this point, but we're active in bidding on these projects.

Appreciate the insight.

Thank you. Our next question comes from the line of Joe O'Dea with Wells Fargo. Your line is now open.

Hi, good morning. Thanks for taking my questions. I wanted to start on the second quarter electrical op profit. And so if we just look at it sequentially, it was up $29 million. Revenue was up $21 million. So any bridge details there in terms of the op profit growth exceeding the revenue growth sequentially with that bridge on what you saw on the price side, I imagine there were some costs and maybe some mix, but any details you can help with would be great?

Yes, Joe, as we went from first quarter to second quarter one of the contributors to that incremental drop through sequentially was the absence of the Residential Lighting business. The second was the strong, strong growth in data centers and renewables is occurring in product areas that are very strong margin areas. So you're getting a mix effect there. And then lastly, there have been some productivity improvements and just cost consciousness between first and second quarter that showed up. So that a lot of those us are working together to get those kind of sequential drop throughs.

So this wasn't a matter of some new pricing in the quarter. It was much more kind of mix and productivity?

Yes, yes.

Got it. And then on the grid infrastructure side and core T&D comments and talking about solid end market demand, have you seen anything in terms of utility spend moving from the first half of the year to the second half of the year? We've heard a couple of references to this and whether it's sort of specific at some utility customers or whether it's interest rates, but just overall, kind of if you've seen some of that spend move a little bit.

I don't think we've heard that as any kind of market trend, Joe.

Got it. Thanks very much.

Thank you. Our next question comes from the line of Christopher Glynn with Oppenheimer. Your line is now open.

Thanks. Good morning guys.

Good morning, Chris.

Just on the distribution, some topics about maybe impacts of subdivision build-outs declining and incremental emphasis on transmission and generation spend. Does that borrow from distribution spend at all? Just curious about those couple of dynamics, as may or may not relate to destock lasting a little longer than maybe you thought three or six months ago?

Yes, it's a hard question perhaps to do the funding that are spending compete with one another. I'm sure to a certain extent, Utilities have budgets and if they, in one year, direct more one way or another could happen. The good thing is our portfolio is well exposed to both sides. I would say if they're diverting from one area to the other, we'll see the benefit in those areas. I'd say narrowly to your question of residential and starts, I would say it's probably a fairly small effect on our sales and our portfolio much more to us drivers are, things like grid hardening, grid modernization, load growth in general, and those are all good vectors that are helping to grow our markets.

Sounds great. And then on the industrial comments for HES said, particularly solid there. I think that sort of general industrial, whether that's through distribution or MRO and not including the real powered -- high powered verticals right now. Do I have that right? That just kind of general industrial MRO?

Yes, you are right.

Okay. Great. Thank you.

Thank you. Our next question comes from the line of Scott Graham with Seaport Research Partners. Your line is now open.

So good morning. Thank you for taking my question. I have a couple, hopefully, just quick ones. The distribution where you say the end market demand is solid. Is that -- does that mean like the POS is flat up 8%. Can you give us a little more color on what you mean by that? Is that POS?

Yes. I think what we mean is that out in the field, there's product being put up on distribution poles that's exceeding our sales to our customers. And that's the -- where we see the "demand." So maybe we're not talking about like orders. We're talking about demand for the material in the market. And that's where we see the inventory positions getting worked down and think we'll be returning to a more normal book-to-bill kind of relationship there.

Yes. And maybe just to add that visibility on that is not completely clear, right? We don't have actual reports of what -- it's more to what I said earlier, when you look at Utility CapEx budgets that are up and continue to be projected to be up, discussions that we're having with our customers on what to do. We recently saw here storm where we know material was used, that would normally happen within a quarter, a little bit of effect. And in this case, they actually told us they were working through -- that through inventory. So that's also a good sign. So it's through these data points with our position in the market and our connection that we have with our customers that we make this observation that the end demand is actually still strong.

Thank you. Two other quick ones, if I may. Is it -- will cloud be up in the second half, very big comparisons there, particularly in the fourth quarter. And if it's at all possible, could you split out data center or renewables and tell us what HES organic look like without them?

Yes. I think cloud is going to be flattening out. And I would think of it that way. And ex-verticals, I don't know that we've offered that.

Yes, renewables and data center are up double-digits in the quarter though.

That's fine. Thank you.

Thank you. Our next question comes from the line of Nicole DeBlase with Deutsche Bank Securities. Your line is now open.

Yes, thanks. Good morning guys.

Good morning, Nicole.

Just maybe to circle back on electrical margins, obviously, really strong year-on-year performance this quarter. I think typically, you see a bit of an uptick in margins sequentially into 3Q. Just on the back of that really strong performance in 2Q, do you think that, that normal seasonal relationship will hold? And I guess I'm just trying to get the sustainability of the margins that you saw in the second quarter?

Yes. I mean, I think we probably aren't banking on sequential pickup in third quarter and then again, by the time we get to fourth quarter, you start to see the shoulder of the head and shoulders shape. So we're sort of in the -- I think already in the second quarter, we're seeing the sweet part of the margin seasonality.

Got it. Okay. Thanks. And then just on the full-year guidance, if you could clarify, think you guys trimmed the sales outlook a little bit. No change to the margin guidance. So what drove the uplift at the low end of the range? Is it just better rolling through better one half performance?

We did actually change the margin. So we had embedded in our guidance originally, kind of flattish margins and explicitly now we're saying up 10 to 50 basis points. So that's how...

Okay. And no change to like below line items that we should think about?

No.

Thank you. I'll pass it on.

Thank you. And I'm currently showing no further questions at this time. I'd like to hand the call back over to Dan Innamorato for closing remarks.

Great. Thanks, Shannon. And thank you, everybody, for joining us. We'll be around all day for questions. Take care.