Good day. Thank you for standing by and welcome to the Fourth Quarter Hubbell 2021 Results 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.

[Operator Instructions] I would now like to hand the conference over to Dan Innamorato. Thank you. Please go ahead..

Thanks, operator. Good morning, everyone and thank you for joining us. Earlier this morning, we issued a press release announcing our results for the fourth quarter 2021. The press release and slides are posted at the Investors section of our website at hubbell.com.

I’m joined today by our Chairman, President and CEO, Gerben Bakker; and our Executive Vice President and CFO, Bill Sperry. Please note, our comments this morning may include statements related to the expected future results of our company and our forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995.

Therefore, please note the discussion of forward-looking statements in our press release and considered incorporated by reference into this call. Additionally, comments may also include non-GAAP financial measures. Those measures are reconciled to the comparable GAAP measures and are included in the press release and slides.

Before we get started, we also want to highlight that all results in our press release in the materials for this call are presented on a continuing operations basis, excluding the financial impact of our C&I Lighting business, following the recent closing of that divestiture, and the classification of C&I Lighting as discontinued operations.

We’ve also recast prior period financial results on a continuing operations basis to ensure we’re presenting the most relevant year-over-year comparisons and baseline for future results. These recast financials are summarized in this morning’s press release. Now, let me turn the call over to Gerben..

Great. Thanks, Dan and good morning, everyone. And thank you for joining us to discuss Hubbell’s fourth quarter and full year results. As you saw from our press release, we achieved a strong finish to 2021 with solid operating results in the quarter.

The performance of our core continuing operations in the fourth quarter exceeded our expectations, which were embedded in our most recent outlook a few months ago. Most notably, our Electrical Solutions segment drove exceptional performance, with close to 50% year-over-year growth and adjusted operating profit in the fourth quarter.

Demand remained strong for Utility and Electrical Solutions. We grew backlog further in the fourth quarter, as orders continue to outpace increased shipments, particularly in our Utility segment. For the full year 2021, we grew orders more than 30% year-over-year, and are exiting the year with a record backlog.

While we expect supply chain dynamics to remain tight and continue to constrain output into 2022, we are confident that grid modernization and electrification are secular trends which will drive attractive GDP plus growth over the next several years. And we will talk more about our unique positioning and the investments we are making.

From an operational standpoint, I am also pleased to highlight we turned the corner on price material in the fourth quarter.

We achieved 11 points of price realization, which fully offset the impact of material cost inflation on a dollar-for-dollar basis, though material inflation has been an accelerating headwind throughout 2021, we have been proactive and aggressive in our pricing actions, which have stepped up significantly as we have progressed through the year, and this sets us up well to turn this equation into a net tailwind in 2022.

Finally, we are providing our initial 2022 outlook this morning, which anticipates strong double-digit adjusted earnings per share growth.

We will talk about the outlook in more detail at the end of this presentation, but we expect continued strength in customer demand and significant price material tailwind to enable Hubbell to continue to navigate through a challenging supply chain environment, while investing in our business to better serve our customers, all while continuing to drive strong financial results for our shareholders.

We thought it would be helpful to give a brief update on our portfolio and strategy, following the divestiture of C&I Lighting. What we have achieved with this strategic action is a more focused portfolio with leading positions across the energy infrastructure in front of the meter, behind the meter and at the edge.

Strategically, we are focused on providing our customers with reliable and efficient critical infrastructure solutions in markets with higher growth and margin characteristic, where we have a unique right to play and ability to win.

Note, that we have broken out the Electrical Solutions segment for you, to provide more context on our product offering and market exposure, highlighting the depth and breadth of our electrical offerings across the industrial, non-residential and residential markets.

However, as we announced over a year ago, we now manage this segment as a unified business to more effectively utilize the combined strength of our branch, products and organizational talent in order to better serve our customers.

This integration has been highly successful, and you will see some of the early returns on this strategy when we take you through the Electrical Solutions’ results. In the Utility Solutions segment, we continue to believe that we have a best-in-class franchise with two highly complementary businesses.

Our leading position across components, communications and controls enables us to offer uniquely differentiated solutions to our customers across electric, water and gas applications. Utility Solutions now represents over half our total enterprise sales, following the divestiture of C&I Lighting.

We are very pleased with the evolution of our portfolio and we believe these actions position Hubbell well for the long-term. We continue to view portfolio management as an ongoing process, and an important lever to drive value for our customers, employees and shareholders.

Hubbell has a proven track record of effective capital deployment, and we expect to continue deliver active – attractive returns to our M&A model. Now, building off the portfolio discussion, we also wanted to highlight the importance of ESG to our strategy.

Hubbell has made significant progress on ESG over the past year, increasing our disclosures as well as setting multi-year targets for improvements on key metrics.

We released our Inaugural Sustainability Report in late 2021 and we encourage all of our stakeholders to view this report on the Sustainability section of our website and to continue to actively engage with the Hubbell leadership team on ESG topics. ESG at Hubbell is directly aligned to our business strategy.

In our Utility Solutions business, our products are critical to ensuring that electricity is transmitted and distributed safely, reliably and efficiently throughout the grid.

As the leading Utility T&D Components supplier, we play a critical role in bolstering the resilience of the grid as well as in hardening the infrastructure to withstand the impact of climate events and enabling the transition to clean renewable energy.

Our unique combination of utility components, communications and controls also enables us to play a leading role and making the utility infrastructure smarter across electric, water and gas applications.

In our Electrical Solutions segment, we provide solutions that enable the owners and operators of critical infrastructure to reliably and efficiently utilize electricity. These solutions are serving increasingly diversified end markets as electrification drives more applications to be plugged into the grid.

Electrical T&D, Utility Automation and Controls, Renewables, Data Communication and Electric Transportation are among our most attractive market verticals currently. And we see significant opportunity to drive further value for our customers and shareholders in these areas.

When we talk about orienting our portfolio towards high growth, high margin verticals, these are the areas of our portfolio where we see the most opportunity and return on invested capital. And for these reasons, we are stepping up our investment levels in 2022, reinvigorating our innovation strategy is a key priority for Hubbell.

But we plan to innovate, while sticking to our roots and evaluating opportunities through a lens of where we have a clear right to play and ability to win.

For instance, it has become increasingly clear to us over the past several years that our Power T&D Components’ business has transitioned from a GDP grower to – sustainable GDP plus trajectory and we are investing an additional capacity in key product categories in that business to effectively serve strong and visible customer demand.

We’ve also driven substantial recent growth in our electrical connection and bonding offering, for solar, telecom and data center applications, and we are investing in additional sales and engineering resources there to more effectively pursue those opportunities.

We are confident that we can accomplish this, while continue to deliver attractive and differentiated earnings growth over the near-term and long-term. And with that, let me now turn it over to Bill to walk you through our near-term financial results and outlook.

Bill?.

Thanks a lot, Gerben. And good morning, everybody. Appreciate you joining us. I’m going to use the slides to – to guide my comments and I hope you found those. I’m going to be starting on Page 6, which takes the fourth quarter results for us on a continuing operations basis.

I’ll make some comments when we get to the – the full year on how discontinued operations contributed so that we can see things on the same format that we started the year on. But you see, the first quarter results showed impressive sales growth of 20% to $1.1 billion. That 20% is comprised of 4% acquisition and 16% organic.

The 16% organic is comprised of 11 points of price and 5 of – 5% growth from unit volume. So very healthy amount of growth. I think commenting on the acquisition growth of 4 points, there were three specific acquisitions that contributed to that in the fourth quarter, one, on the Electrical Segments side, two on the Utility side.

The Electrical side, we had invested in business that – that makes the amounts and enclosures and antennas for some of the new telecom technology rollout some of the 5G product exposed to education and healthcare and warehouses some – some verticals that we liked.

We also bought an Enclosures business in the Utility area that that makes Enclosures at street level and pedestal level that electric and telecom utilities put a lot of their electronics in.

And the third was in Distribution Automation area, where we’re controlling and protecting infrastructure and all three of those businesses exhibiting high margin and high growth.

For some of those, we invested just about $235 million in those and so – I’m spending some time illustrating those because I think it’s important that we compare that to thinking about our portfolio changes as we just this week closed on the sale of C&I Lighting and thinking about bringing in these higher margin, higher growth businesses forward and swapping out that – that more challenged lower growth, lower margin businesses, some that we’re happy to keep continuing as Gerben mentioned in our M&A strategy.

We’ll talk more about the five volume points on the next couple pages when we talk about the two different segments.

But in general, despite the impressive year-over-year growth of the 20%, it’s also good news, I think sequentially compared to the third quarter, we saw an increase and usually typical seasonality would suggest that fourth quarter will be slightly down.

So to be up, I think is a testament to some of the backlog that Gerben had mentioned that we had built during the year, as well as some sequential price that came in. And – and I’ll talk a little bit more about how our price has progressed. And really good news as Gerben described is turning the corner.

Our operating profit, also impressive growth at 15% to $153 million. The margins side, however, you see was about 60 basis points lower than previous year. I think the good news to point out about that is as our quarters progressed, this is showing a tighter to prior year level than we’ve seen year-to-date.

And I think setting us up to show you margin expansion next year. And it’s really been driven by the price-cost dynamic. You know, on the cost side, you know we always look at each quarter compared to the prior – the quarter of the prior year.

And in that viewpoint, the material inflation really accelerated and continued to increase throughout the year, which caused us to have to be quite aggressive and responsive with our pricing.

And so, two ends this quarter with 11 points of price just to contrast that in the first quarter, we had pulled 1 point of price, you can see how diligent and effective a process that’s been during the year and Hubbell working very closely with its customers and thoughtfully on how to do that.

I think in particular, very encouraging to us to have gotten the fourth quarter to a point that we’re neutral on dollars between price and cost. I think it’s really interesting to note the math on – on margin, you know to just have comparable OP with higher costs and higher sales.

We actually had a couple of points of margin headwind, even though we were dollar neutral. And so that’s kind of speaks to the fact that we still got, we believe work to do and we’re looking forward to getting those margins expanded in ‘22.

Earnings Per Share up 20% in line with sales, a larger increase in operating profit as we had tailwinds in non-op areas, including in a better than prior year on the effective tax rate, as well as a lower interest expense.

The free cash flow, you see 70% growth to over $200 million of cash, but I’m going to save my cash flow comments till we get to the full year I think cash flow is better talked about not just the quarterly dynamics, but across really the – the entire year. So turning to Page 7, we’ll start with the Electrical segment results.

And this is really where the continuing operations effects. You see 22% sales growth to $489 million. We had 1% of that was acquired 14 points of price pulled in the segment and 8% unit growth. So, very impressive sales growth, impressive pricing performance – impressive unit expansion.

Of note, to that 13 points of price is ahead of the company at 11 which is indicating that our Electrical segment is ahead of our Utility segment by about a quarter in terms of getting that price pulled in concert with our distributor customers. I need to comment on the 8% unit growth. We had impressive growth in the Light Industrial product area.

Some verticals that are really providing attractive dynamics in renewables, data centers are quite attractive. The 5G rollout area which I’d mentioned before, Heavy Industrial we saw double-digit growth, quite strong recovery there, non-res on a continuing ops basis, our exposure is cut in about half to non-res.

But we saw some growth there expecting that to continue. The one area of softness was in residential. And that was really not a demand comment. But a – on the supply side, a lot of constraints there that prevented our resi business from growing.

On the operating profit side, you see 48% growth to $67 million of – of operating profit, margin expansion of 250 basis points. And you really got a lot of levers working for us here. One is the incremental drop through on the unit growth. And second is this segment had gotten themselves to a positive tailwind position on price above material costs.

So, impressive financial performance, I think not coincidental to the financial success is the success of us creating really a new Electrical segment. You recall a year and a half or so ago, we – we had been reporting this really as three different businesses, bringing it together under one segment has really allowed us to compete collectively.

And I think we’ve got some good traction on that front. I think we’ve seen both effectiveness benefits as well as efficiency, I think we’re more focused on our customer.

This pricing performance, I think is driven in large part to be able to – to do that across an entire segment rather than battle it individually and certainly efficiencies in marketing and product development and in operations as we utilize factory and distribution center, network space.

So, very successful implementation of really that – that one segment, which is quite similar what we had achieved on the Power side many years ago. Worth mentioning the full year for Electrical, because this certainly was a quarter of some relatively easier comps.

But for the full year for the Electrical segment on a continuing ops basis, we did see 30% growth in operating profit and 150 basis points of operating margin. So, really successful year as well for the segment. Page 8, flipping to our Utility solutions.

Same story for Utilities that we’ve had over the past few quarters, impressive growth of 19% to over – to $612 million. We acquired through the two companies I mentioned, 6 points of that growth price accounted for 9%. And the unit growth was about 4%. So, that 9% as you see is a little bit behind where our Electrical segment is.

But when you see the trajectory, the first half was about 2 points for utility. Third quarter was about 6 points, fourth quarter 9 points, so you can see how we’re trending and setting up well for ‘22 and we’ll talk about our outlook in just a minute.

The 4% unit growth really is being driven by demand in our Power Systems area where upgrades, system hardening and modernization continues to be important needs on the part of our customers we get – as Gerben was describing, the demand that we saw far exceeded our units shipped. And so we have some decent visibility into Power Systems.

On the Aclara side, the chip shortages did impact our Meter business there. Our results were down a little bit in the fourth quarter. And we’re anticipating that showing improvement next year as well. On the operating profit side, you see roughly comparable at $86 million of operating profit but down about 3 points.

So again, a slightly similar story to what we talked about in the third quarter, where the price material headwind, though we’ve gotten price up to 9 points, we’re still haven’t fully caught up on it on a dollar basis yet.

We see that catching up in the first quarter and ultimately in the second half, beyond catching up on dollars, we think we can start to get margins to expand in the second half here. So, I think the franchise extremely solid and as – as price-cost kicks in, you’re going to see a solid year we think in ‘22.

Pull the lens back to see the full year for our continuing operations, sales up 14%, the acquisitions were about 4, price was 6, and units were 4, last if you just remember that 6 points of price for the whole year when we talk about next year, that number is important, because we ended the fourth quarter with a 11 and that leaves us with 5 points of wraparound price, which we’ll talk about in our outlook coming up.

Our operating profit, you see up 8% to $610 million. You see a 14.5% achievement for the year. Just to remind everybody, we burden our – our operating profit with our restructuring expenses, we consider those part of running the business. We – we don’t have a corporate segment. So that’s fully loaded also for any corporate overhead.

And so, I’d like to think of that 14.5% as kind of a trough number with a year with – with a dramatic price-cost dynamic. And that will be onward and upward from here with both our new electrical portfolio as well as – as price-cost turning the corner for us. Earnings per share, you see up 13% at $8.05. So this again on the continuing operations basis.

If you look that as on the format that we launched 2021 on and you included the adjusted results from C&I, we would have been around the middle of our guidance range in the full year of performance.

And really since October, when – when we were talking about guidance last, our C&I, the discontinued ops have underperformed and our continuing ops have done better. So we got to that relative mid part of the range kind of with – with the strength of our continuing ops.

On a free cash flow basis, you see a difference between ‘20 and ‘21, ‘20 being a year where we had our sales down 9%. And in a year like that, you’re essentially liquidating working capital making working capital source. Here you see 14% sales increase that required an increase in investment in working capital, notably in receivables and inventory.

The supply chain unreliability I think caused us to be quite conscious about investing even more in inventory in the fourth quarter. And so you see that $424 million achievement was about at 96% of adjusted net income. So we’ll have a short of our target of 100 driven by that – that working capital need.

And I think that will inform us as we talk about our ‘22 guidance. So, on Page 10 I’d like to start looking forward here and show you how – how we think 2022 is – is going to play out. And it really starts with the unit volume on the sales side which we’re thinking in the mid-single-digit range.

We continue to think non-res can grow, Light Industrial can grow. We think our T&D Electrical Utility components can – can grow at the stronger end. And so, the combination of backlog and growth is good there.

If you think about how our order book looks in January, you continue to see quite strong demand into the New Year that’s supportive of that volume of outlook. Mentioned the price we achieved 11 by the fourth quarter and 6 for the year. So that’s 5 points of wraparound.

And so as we build our waterfall from our $8.05 starting point, you see two really good contributors, the incrementals dropping through on the volume. And then the price-cost productivity bucket being nice and tall and green.

We don’t think it’s going to be the full effect of the 5 points of price, because inflation – the second pair besides price and in addition to price, material cost is non-material inflation against productivity. And we are anticipating continued inflation from areas like salary and wages and transportation. And we expect headwinds in those areas.

Our productivity is going to be hampered a little bit by returning costs in areas like T&E, we think our salespeople are going to have much more time on the road being able to be with our customers, things like medical and other items, we think our returning costs that will prevent productivity from fully offsetting inflation, but still a very healthy contribution from that second green bucket.

We’ve got EPS centered at $9. Nice double-digit growth to that. Not all of that volume and price is going to drop through, we’re anticipating making some specific investments. On the innovation side, we’ve got some new product development efforts underway in attractive high growth areas like renewables, utility, automation and comms.

We think there’s some areas there that were really well positioned to invest some of this goodness and come out in ‘23 beyond much stronger. There’s also some capacity expansions in the Power area, which has really continued to grow. So we’ll be – we’ll be adding some capacity there.

In the non-operating, you see – essentially a breakeven we’re anticipating, initiating some share repurchases with the proceeds from the sale of C&I Lighting. We’re thinking that could be in the neighborhood of $125 million or so. We’ve got plenty of – authorization from our Board to execute on those levels.

There’s also some positive contribution from other income relating to some credits we anticipate getting for supporting transition services around our divestiture and that all nets against anticipated of a normal tax rate which would reverse some of the tailwind we had this year. So, net of that double-digit growth to $9.

On the free cash flow side, we’re anticipating similar range to this year. We finished at 96% this year and as we grow, we think that the investment and working capital is going to be continued to be required. And we also believe that we will be investing on the capital expense side and growing that double-digits way to support the Power expansions.

And on the Electrical side, a big aggressive plan around automation and driving efficiencies there. I think of note, you see that organic investment. But you don’t see the benefit from inorganic investment.

And the same way we had that $235 million of investment in three deals last year, we would hope to be able to deploy some capital on the acquisition side. And we have quite an active pipeline and finding higher growth, higher margin acquisitions, we hope will enhance this outlook.

So with that, I’d turn it back to Gerben for – for comments on the New Year..

Great. Thanks, Bill. And before we begin Q&A, I’d just like to underscore a couple of key points from this morning’s presentation. Hubbell is well positioned for the near-term and long-term.

We enter 2022 with a high quality portfolio of complementary businesses, which are strategically aligned around the electrification and grid modernization, and with visible strength and demand.

While the operating environment remains uncertain, we are turning the corner on price costs and continue to navigate a dynamic supply chain environment to effectively serve our customers. The outlook we have provided you this morning reflects strong fundamental operating performance and we are confident in our ability to deliver.

And finally, I want to highlight that we are planning to hold an Investor Day in New York on June 7th this year. Well, we look forward to giving you further insights into our long-term strategy. And with that, let’s turn it over to Q&A..

Thank you. [Operator Instructions] Your first question comes from the line of Jeff Sprague from vertical research partners. Your line is now open..

Thank you. Good morning, everyone..

Good morning, Jeff..

Hey, good morning. I apologize, I missed a little bit at the beginning of the call here.

But can you just elaborate a little bit more on you know, the price realization in Electrical? Is it broad-based across you know, the entire segment? And whether or not you have kind of additional price coming into the market to begin the year here?.

Yeah, Jeff. It is quite broad-based in Electrical. You know, close cooperation with our customers wasn’t easy certainly. And there was many price poles, but that’s been a good success story for the Electrical team. And I think right now we’re planning it that the wraparound.

So how we exited the year is going to be the wraparound, you know as there’s continued inflation, wages and other areas there may be need to pull price. And as I’m saying the kind of mass of dollar neutrality leaves you margin short. And that’s another reason that we might need to still not be done on the price point.

You know, so I think there’s some – we’re planning it as a wraparound and – and kind of see how it develops..

And the price material positive for Electrical that’s a dollar number or a margin rate number?.

Yeah, it’s a dollar Number. Yeah..

And on Aclara, I get it, you know, the semi shortages and the like. Do you have any visibility on just kind of improving supply there? I would imagine you’ve been working on supply you know for the better part of a year here.

Just wonder if there’s any kind of light at the end of the tunnel or anything else going on with site access or anything that might still be holding that business back..

Yeah. So specifically to Aclara, Jeff, the chip shortages are continuing. You know, we expect those to continue well into 2022. There’s obviously a lot of work going on to build chip capacity. But – but as you know that’s multiyear you know, timing to get those up and running.

So, you know certainly our – our plans and projections continue to project that that we’re going to be dealing with these challenges throughout 2022. You know that so, I think access has gotten better you know certainly you know we’ve been – we’ve been hearing they’re held back with – with you know Omicron coming up.

We are about to wrap up a big project in a big IOU utility this quarter. So we’ll put that behind us and – and have continued to be able to do this. So I’d say it’s probably less access and more material shortages that are – that are holding that business back.

And that’s you know more broadly on our entire business the case and – and we’ve done a lot of work I think you know as Bill explained, sequentially we’ve continued to – to increase our production. And that’s – that’s a function of solving some of these things, not only in our own plants, but supply chain.

So we do see it getting better, but – but it’s slow coming I’d say..

Okay, thank you..

Your next question comes from the line of Tommy Moll from Stephens. Your line is now open..

Good morning and thanks for taking my questions..

Good morning, Tommy..

Gerben, I wanted to start off on the investments you have budgeted for some of the innovations.

What additional can you add, if anything on – on some of the specific product – product development initiatives you have underway? And then as we think about the dollars budgeted here, is there any way you can frame it just total size of that budget maybe ‘22 versus ‘21? And when you do allocate those dollars, what’s the rough payback period or – or cycle time until you see first revenue? Thank you..

Yeah, great. Let me – I’ll start with that and I’m going to kick it to Bill to kind of provide some color on – on the – the numbers around it. But it is first of all geared towards these higher margin, higher growth opportunity.

So you know think solar, think data centers, think utility products you know we have portfolio of products that are – that are adjacent to those. So it’s – it’s in a lot of cases modifying products that – that we make for those specific applications. I’d also say it’s, it’s not just about product, but it’s about production.

And you know when we talk about the capacity that we’re adding to serve as the Utility and you know, one example of that is actually a little bit of restructuring and investment, we’re taking three sites and we’re consolidating those into one.

And on top of that, adding additional capacity to one of our – our Enclosures business at needed capacity to serve this – this increased demand not only from Utility, but from – from the Communications market that really has been grown and we continue to see and grow as GDP plus.

So it’s – it’s not one area, I would say, but it’s definitely more focused for us to – to do this in you know areas that matter for us, higher growth, higher margin areas. And – and that takes investment. And maybe Bill, you can give a couple of comments of on the magnitude..

Yeah, the magnitude, Tommy, good morning. You know we’ve got about $0.20 in that waterfall dedicated to the investments and on the payback cycle you know that – that does not pay back you know this year, we’ll start to see good traction next year. And the way our plans have in year three really start to get your payback there.

So, but I think we’ll have lots of intermediate signposts that tell us that the investments can have a big and nice payoff. And – but we think we’ve picked some really kind of nice return lower risk places like Gerben was highlighting..

Yeah, maybe I’d close. Wanted to say, I mentioned in my comments, Investor Day coming up in June. And I’d really encourage you to – to you know, join us for that that’d be an opportunity where we look to be more specific on some of the investments that we’re making and innovation. So I think we’ll – we’ll provide some more color there as well..

We’ll be there. Just – just a quick follow-up on the EPS outlook you’ve provided for the full year. So double-digits on – on full year ‘22 versus ‘21.

Anything you would offer to help us frame the seasonality in terms of the contribution across the quarters maybe just comparing it to a typical cadence?.

Yeah. Yeah, it’s interesting, Tommy. We – we think it’s returning to look a lot more normal seasonally on the top line. And you know what I’d say on the earnings front, that’s a little bit challenging is you know, for Jeff’s question, we have really, really nice insight on price. We know what’s in the market.

We know what our products are selling for you know as a LIFO company, there’s just a little bit of uncertainty on the material cost and you know, we’re starting to see steel costs potentially come down. And so, we – I’m not sure we’ve got that pegged perfectly to know that – that up the earnings level, it will behave seasonally.

But because the top line is, we’ve got it planned out in a much more seasonal way. I would say the way we’re looking at price cost. It’s slightly back-half weighted benefit. But – but I’m not sure that our – you know, we’re using jump off points right rather than have perfect knowledge of where the costs are going to be..

Yeah, fair enough. I appreciate the insight and I’ll turn it back..

Your next question comes from the line of Steve Tusa from JP Morgan. Your line is now open..

Hey, guys. Good morning..

Good morning, Steve..

Can you just give some color on you know, the – the segment margins and you know, any – any drivers there may be just like price-cost spread between – for both of them for ‘22?.

Yes. So on the Electrical side you know, Steve by – by the end of the year, they had gotten ahead. But – but for the year, they still had headwind on the price-cost side. And so, I think that they’re really benefiting from – for the year anyway, really having that volume kind of dropped through an attractive way.

And so I think the Utility guys, in contrast, are about a quarter you know behind that, Steve and the Utilities themselves have just been – takes a little more time to get those price pulled through versus our distributor partners I think were – were quite nimble as – as the year progressed, and this became the order of the day.

And so you know the Utility folks had – had more than those 3 points of price you know we’re – we’re coming – 3 points of margin negative compare or more than that was coming from the price-cost. So I think the key to us getting Utility margins up in the second half of next year is getting that price to catch up and crossing over.

So it’s going to be quite important to – to that for us to – to achieve that..

Great, thanks..

Your next question comes from the line of Brett Linzey from Mizuho. Your line is now open..

Thanks, and good morning..

Good morning, Brett..

Yeah wanted to come back to the – the order growth, 20%.

How does that split between the segments? And I’m curious you know are you seeing any more advanced ordering as – as customers look to – you know secure a spot? Or any double ordering? Or is it really just commensurate with the underlying demand you’re seeing in your core markets?.

Yeah, I would say that the order pattern has been skewed towards the Utility. And our unit shipped you know was a little lower in Utility. So a lot of the backlog has been built on that side. And I think you’re right to point out that the order pattern is above what our expectation for a sustained you know annual you know growth rates will be.

And so, I think Utilities are doing a lot of things, they – they see the promise to deliver dates gap out, and so they’re getting in line, they’re seeing some of the materials you know be available erratically. And so they’re making sure they’re in the queue and they see price increases.

So they want to be you know ahead of that and so for all those reasons, I think that demand and yet you know they really have the need to put that product into the Utility infrastructure and so that’s – that’s been pretty skewed towards the Utility side, Electrical on their side has had – they have built backlog and then they built a decent amount of backlog but – but not nearly as much as Utility I think we’re seeing distributors order and they can basically sell it when – when they order it on the Electrical product side..

Yeah, that – makes sense. And then on that point with the order backlog is – is some of that were you know subject to you know repricing or there escalator clauses within that.

You talked about some of the inflationary pressures you’re seeing sort of outside roles just – just thinking about how – how they might be able to move up over you know over the course of the year on a repricing basis?.

Yeah, that’s – I would say there is a very little, we probably have the pockets here and there where – where we see this, but for the most part, we don’t.

And that’s one of the reasons when Bill talked about that lag between you know when we see commodities come up, when we go at price and where we actually start to realize that, be in you know a little longer in Utility is exactly for that reason, right, there’s more demand out there, more orders that have – have been placed with future dates.

So it takes us a little longer to recover it. But – but clear and we’ve shown – showed this chart in the past where we kind of show price and cost over longer cycles. And you can see that over the cycles, we show being you know equal or even net ahead. But that it can take some time.

And that’s really the view we take with our customer, the longer-term view of you know having to recover cost increases with price. That’s one of the reasons we – we are able to effectively do it. We do a good job communicating this. We’re fairly consistent in our approach of doing it.

But yeah, it takes a little time to recapture, but then we hold on to it on the other side as well when – when we see commodities going down, that’s – that’s that dynamic that we’ve shown over – over time being – being net positive for our story..

Yeah, it makes sense. Thanks a lot. I’ll pass it along..

[Operator Instructions] Your next question comes from the line of Josh Pokrzywinski from Morgan Stanley. Your line is now open..

Hi. Good morning, guys..

Hi, Josh..

So I – I want to continue the discussion here on price-cost and maybe some specific inputs and sensitivity. So I don’t buy a lot of boot place, farrell connectors, whatever those are, but you know just looking over at the catalog there, there’s an awful lot of steel or stuff that looks like it’s made out of it.

And with the LIFO maybe you know deflation a little bit more – more imminent. But could you just sort of you know help us with the sensitivity to steel in particular, since that’s kind of rolling over here. I mean, you know just kind of doing some back of the envelope like you start to come up with numbers and the like, the dollars of EPS tailwind.

And since we’re heading into that in the next couple of quarters you know how do you think about kind of snapping the line on you know some of the futures rates out there on steel if you were to hold the price like is it that big? Or is there something on you know either price leak or – or some other inflationary item that we should you know just keep an eye on so we don’t run away with individual points?.

Yeah, I think you know the math problem that you’re solving, you’re coming at it you know an interesting way and the same way that I look at it, right, where you have gross margins in this you know 30% range, so you got – you got your COGS up there in 70 kind of point land and sort of half of those COGS is labor and overhead and burden.

So, the – the balance of half of those COGS is a combination of component costs, sub assemblies, purchased for resale amounts as well as some raw materials. And when you look at the raw materials, and you’re right to look at a catalog and you – there’s aluminum and copper for sure, but steel is, would be our largest exposure.

And so you know as we’ve been looking at the forward numbers and watching the market you know you kind of have seen copper in the relatively flattish area, you’ve seen aluminum in a favorable area and certainly steel you’re – you may be seeing in the – in the favorable area.

So as that unfolds you know to the extent there is some sustained movement you know down from here you know that would be you know upside to how we see the plan.

And you know in order to accomplish that you got to basically hold on to the price, which is why where Gerben was talking about the conversation with the customer right, we very specifically, you know, Josh, do not have those conversations as a steel surcharge, right, we have it as a set of broader inflationary pressures so that when – if a customer were able to see you know steel going down that they don’t just ask for the price cut down.

So, it’s – it’s hard for us to say the sensitivity because if it goes down a lot, you’d give up some price. So it’s not just the subtraction of that. But you’re – you’re right to point out that steel is the biggest. Then you’re right to point out that – that it can – it can be – it can be you know sensitive. So you’re right to point that out..

Yeah, yeah maybe to add a couple of concepts as we think about ‘22 more generally, I would say there is among the many things that we look at then and track two, I would say commodities as key, one is commodities and inflation and what’s going to happen with that inflation, particularly those related to supply chain things like freight and labor.

And – and you know what’s the impact of those on our results? And the second one really the ongoing supply chain challenges, and what’s the impact on volume, so commodities and inflation and volume are really two big leverage.

You’re right to point out that this point and we’re tracking this closely, steel is showing some you know retrenchment, but I’d also say still plenty of challenges. One, steel is the biggest copper and aluminum are also pretty significant for us, one that we’re actually looking at right now is aluminum.

You know what made a lot of that is coming out of Russia. And you know that needs to play out still here. So – so we said early in the year, I’d say while – while we do see some upside on steel particularly right now there’s still a lot of uncertainties this early in the year.

So you know our approach is to monitor this closely and as the quarters go well you know we’ll certainly update you. And if that requires updates to our – to our guidance, we’ll do so. So..

Great. That’s super helpful detail, and I’ll squeeze in a shorter extra one, just because of that.

In the – the T&D Components section, is there you know kind of a Pareto of growth in there, you know as it pertains to some of these mega trends like grid hardening? Or you know is it you know kind of evenly spread across that segment? Different way of saying, do you sort of own what you need to own to capture the upside? Are there areas where you’d like to double down?.

Yeah, I would say just on the infrastructure hardware side. You know I think we feel really great about our position and feel like we have a leading position. As you get to the edge and meters, we feel like we’re a very important leading player there.

So one of the places that’s exciting to us is that space in between the meter and the components and areas of automation and control and protection. So that’s kind of place where you’ll see us some of the questions came up about new product development will be there as well as frankly acquisition potentials as well.

But if you’re talking just T&D Components, we feel incredibly well positioned with our breadth of product, our relationship with the customer.

And I would say, Gerben during ’21 given all the ups and downs for the Utilities and dealing with their suppliers, it feels to me like our relationships probably improved in our ability to kind of work well with them during you know a volatile year..

Perfect, appreciate it..

There are no further questions at this time. Presenters you may continue..

All right, great. Thanks, everyone for joining us and I’ll be around all day for calls..

Thank you..

Ladies and gentlemen. This concludes today’s conference call. Thank you for participating you may have – you may now disconnect..