Good day. And thank you for standing by. Welcome to the Fourth Quarter 2022 Hubbell Incorporated 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. Please be advised that today's conference call is being recorded. I would now like to turn the conference over to your speaker today, Dan Innamorato, Vice President, Investor Relations.

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 and full year 2022. The press release and slides are posted to 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 are forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Therefore, please note the discussion of forward-looking statements in our press release, and consider it incorporated by reference on 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, good morning, everyone. And thank you for joining us to discuss Hubbell's fourth quarter and full year 2022 results. 2022 was a strong year for Hubbell, as we effectively served our customers through a challenging operating environment, consistently delivering high quality, critical infrastructure solutions, which enable grid modernization and electrification in front of and behind the meter. We also delivered strong results for our shareholders with full year organic growth of 18%, adjusted operating profit growth of 29%, and adjusted earnings per share growth of 32%. We began 2022 by completing the divestiture of our C&I Lighting, successfully positioning the Hubbell portfolio for structurally higher long-term growth and margins. We also stepped up our investment levels to bolster our positions in key strategic growth verticals, through acquisitions and organic innovation, expanded our capacity in areas of visible long-term growth, and to improve our manufacturing and distribution footprint for future productivity. Importantly, we've been able to fund these investments while still expanding operating margins, driven by strong execution on price cost in the face of significant inflationary and supply chain pressures. Our employees have worked hard through a challenging environment to sustain a culture of excellence, delivering industry-leading service levels for our utility and electrical customers, along with differentiated financial operating performance. The critical contributions of our employees and partners are what led to a highly successful 2022 for all of our key stakeholders. Looking ahead, we believe that Hubbell's unique leading position in attractive markets will enable us to continue delivering on each of these fronts in 2023 and beyond. We will talk more in depth on our near-term outlook later in this presentation. But we anticipate continued market growth and strong execution driving positive price cost productivity to fund investments back into our business, which will generate long-term value for our customers while delivering attractive returns to our shareholders. Turning to page 4, our fourth quarter results were generally consistent with year-to-date trends. Utility customers continue to invest in upgrading, hardening, and modernizing aging grid infrastructure. Orders continued to outpace shipments, and we exited 2022 with record backlog levels, which gives us good visibility to continued growth in 2023 though continued investment is required to address areas of capacity constraints. In Electrical Solutions, orders and volumes softened in the fourth quarter, as customers actively managed inventory and cash flow into year-end. These dynamics were anticipated and contemplated in the outlook we provided last October. Operationally, we expanded operating margins by over 200 basis points in the quarter. While the overall environment remains inflationary, using raw material inflation and continued traction on price drove a net price cost productivity benefit. Finally, we continue to accelerate our investment levels. Most notably, we invested over $60 million in capital expenditures in the fourth quarter as we were able to execute several large capacity and productivity projects. For the full year, we invested just under $130 million in capital expenditures, up $40 million from 2021 levels. And we expect another year of elevated CapEx in 2023 as we believe that these high-return investments are the best current use of our shareholders' capital. So overall, the fourth quarter was a strong finish to a strong year for Hubbell. Let me now turn it over to Bill to provide you some more details on our performance.

Thanks very much, Gerben. And thank you all for joining us this morning. I'm looking forward to talking about fourth quarter full year and in particular, our outlook for 2023. I'm going to start my comments on page 5 of the materials that Dan referenced. And we'll start with the fourth quarter results for the Hubbell Enterprise. You see sales growth of 11%, up over $1.2 billion. That 11% is comprised of high single digits of price, low single digits of volume, and one point from acquisition. We look at our sales performance through a few different lenses here. The first is against the prior year. There's double-digit growth against double-digit growth, and last year's fourth quarter shows good compounding and good robust levels of demand. We also look at it through the lens of comparing it to the third quarter. We're down sequentially about 7%, roughly in line with fewer days, and the per day shipment level reasonably flat to the third quarter sequentially. And we also believe that there was some channel management of their inventory levels, and we'll talk more about that in a couple of pages when we get to the electrical segment. The operating profit on the upper right of the page shows very impressive growth of 27% with a very healthy margin expansion of two points to 16%. When we look at the incremental drop through on the growth, you see about mid-30s drop through which we think is quite good. Price is a very important part of the success of this financial performance. The price is sticking. Gerben made reference to the critical products that our customers are adding to their structural solutions, and having this sticking price is really helping us as inflation continues to affect us in the non-material and value-added sectors. When we talked about next year, we'll give you a little bit more breakdown about how we're anticipating price costs. On the lower left, you see earnings per share growing at 26%, in line with the profit growth. On the non-operating side, we had some headwinds from taxes as well as from pensions. But Gerben had referenced that we started last year with the disposal of the C&I Lighting business, and we used some of the proceeds from that sale to buy back shares, which partially offset these non-operating headwinds. The free cash flow, you see, is down 9%. That more than explains the CapEx increase that Gerben described. So the OCF side here is quite healthy, and we're being quite intentional in making these investments to position Hubbell for the future. Page 6 switches to breaking the fourth quarter down between our two segments. Page 6 starts with the utility segment. You see a really strong finish to an outstanding year by our utility franchise, set up for success for 2023. Total sales growth here was 17%, to about $716 million of sales. That 17% of sales is comprised of a low double-digit increase in price and a mid-single digit increase in volumes. Demand continues to be very robust despite high double-digit shipments, and we continue to add to the backlog in the fourth quarter. You’ll see that the T&D Components, the historical Hubbell power systems infrastructure business, are showing the most growth at 27%. The trends continue to be driven by the need for grid hardening and for renewables and continues to reinforce the shift that we've seen from mere kind of GDP-type replacement levels of spending to the need for our customers to really upgrade the grid. I think you'll see evidence of our strong positioning as utilities continue to turn to us with these critical needs. That's really helping inform and drive some of our CapEx decisions that Gerben mentioned, to continue to support our customers here. The Communications and Control side will see a decrease of 10% in sales while demand was still strong due to two drivers: number one, the persistent shortage of chips from the supply chain preventing us from growing, and that’s been a persistent problem for the last few quarters, keeping our communications and controls business relatively flat. In addition, we had a one-time event in the fourth quarter where we recognize the commercial resolution stemming from a legacy dispute that preceded Hubbell's acquisition. It became obvious it was time to resolve that so that we could move forward with a constructive relationship with a big customer, to our mutual benefit we believe, but that had the impact of driving down sales in the quarter for the communications and control segment. We expect this chip situation to improve during 2023. So while the quarter was down, we have expectations of the comms business growing. That said, it may still be a little choppy in Q1, but we're anticipating getting this chip supply situation to improve during the course of the year. And we're looking forward to returning that business to growth. On the right side of the page, you’ll see very impressive operating profit growth of 42%, adding three points to operating profit margin, up over 17% in the fourth quarter by the utility team. That performance is driven by price, which we've really needed to overcome inflation, as well as inefficiencies in our plans that come from some of the disruptions from the supply chain. The mid-single digit volume growth is also dropping through at attractive levels, so really a good year by our utility franchise, and you can see a good quarter setting us up for a good year next year. On page 7, we've got the electrical solutions results, and you'll see 3% sales growth, more modest than on the utility side, but a good 60 basis points margin expansion, 8% operating profit growth to a 14.3% margin. That 3% sales growth is comprised of mid-single digits price and volume compared unfavorably to last year. We think that the fourth quarter results were significantly impacted by some of our mix. You see residential sales down significantly—a strong double-digit decline for residential as consumers continue to struggle with high interest rates. While we saw some growth in a few verticals we’ve been investing in, namely data centers, renewables, and telecom, the balance is more exposed to the non-residential cycle. Also, we perceived some destocking activity in the quarter. Some of that observation is based on anecdotes and discussions with our customers, and in other places, we have hard data where we can analyze point-of-sale and point-of-purchase data and see that our replenishment orders given to us are below what's going out the door. We believe that the way the channels are incentivized, whether on the volume side, those incentives may have maxed out, or on the cash flow side, where obviously managing inventories in December becomes very important to our customers. So I think there's a little bit of distortion in the fourth quarter. As we've seen in the first several weeks of January, we've seen a nice rebound in orders, and so we'll continue to monitor that quite carefully. On the operating profit side, you see the nice margin expansion, and again, price and material tailwinds are enough to overcome the impact of lower volumes and enable us to operate very well through the operating disruptions while also overcoming some of the drag coming from the residential lighting business. We thought to be constructive on page 8, to step back and discuss the full year’s performance, which really illustrates some of the trends that Gerben highlighted in his opening remarks. Sales of 18% show very strong growth, mid-single-digit volume, and double-digit price—there's a very robust demand environment for us. You see the 140 basis points of margin expansion to just under 16% on the operating profit side with 29% growth in OP, diluted earnings per share growing a little bit better than in line with that operating profit, and the cash flow being up 20% year-over-year, being held back a little bit by the heavy investment in CapEx that we mention, as well as significant investment in inventory, as we continue to try to support our customer service. But really, you see the trends for the whole year that have persisted: strong demand is number one; a tough operating environment where the availability of our people, materials, and transportation has been inconsistent throughout the year, leading to operating inefficiencies; the execution on price, which was an excellent job by the Hubbell team, was required to counter inflation as well as those inefficiencies; and the fourth trend was investment, through acquisitions, CapEx, and inventory—all sources of investment. On the acquisition side, we closed on three deals in the year, investing about $180 million to do so. We were quite intentional about adding exposure to desirable verticals that are exhibiting higher growth and higher margin potential than our average. We added to our utility tool business, we added data center exposure, and we added a nice bolt-on to our grounding business and connector business that again is supporting high growth and high margin there. So we'll switch now from 2022, wrap a bow on that, and start to look forward to 2023 in our outlook. We were proposing to go through this a little bit differently than we have in the past; we've got a little more granularity in our discussion of the different pieces and parts so that we can help provide a little more context to why we're guiding the way we see it. So on page 10, we're starting with our markets' outlook. You'll see in the yellow callout box at the bottom of the page, a mid-single-digit expectation of organic growth. That’s driven really by the strength of the utility business on the left of the page. Those growth drivers remain intact. We see our customers continuing to need material, and continuing to install it at a high rate in response to the need to modernize their grid and respond to renewable needs. We're starting the year with a highly visible backlog. Additionally, we've got some support for funding from the policy side here and without a line away, where we believe that the IIGA probably gives us a lift of a point or two above what otherwise the market would give us. Therefore, we're anticipating the utility markets giving us mid-single-digit plus. More modestly, on the electrical side, we've decomposed our exposure in this pie graph to try to give you a sense of residential; we really think is the starting point of the cycle they’re in a point of contraction right now and will continue to be in 2023, we believe. Consumers are dealing with high mortgage rates and high interest rates affecting demand there. Usually, non-res follows the residential cycle and then into industrial. You see we’ve added this blue segment where we think our electrical business is exposed in a much less cyclical, much more resilient set of end markets, namely the data centers, renewables, telecom, and some of the enclosures we sell as connectors to the utility businesses there. If we continue to believe the residential market will contract, that gives us a low single-digit outlook for the electrical segment. Our visibility, frankly, is better for the first half than it is for the second half, and we may even argue that the first quarter is better than the first half. Therefore, we've got a little bit of caution built in there for what'll happen second half in the non-res markets. We also on page 11 wanted to peel back our view of price cost productivity. At the bottom, you'll see we're anticipating about $50 million of tailwind coming out of our price cost productivity management scheme here. We’ll start on the edges where it's a little bit more straightforward on price. We believe we've got about two points wrapping around from our actions we took in 2022. We continue to hear feedback from our customers that despite on-time service being below where we typically are, we're still leading in those service levels. So we anticipate that price sticking on the productivity side, we're anticipating in the ballpark of about a point of contribution from productivity. You'll see we've disaggregated the cost pie into two halves, the material and non-material halves. On the right, in the blue section, the non-material, mostly labor and manufacturing costs, we're anticipating mid-single-digit inflation there. Likewise, on the material side, you'll see that the raw materials; we’re anticipating there to be benefits and tailwinds as there's deflation in the raw materials. However, our component pie, where there's value added, is larger than that. We're anticipating the same mid-single digit inflation rate there. So the netting of all that gets us to about $50 million. And on page 12, you'll see we're anticipating investing about half of that benefit in future success. Page 12 shows our investments, starting with footprint and successful multi-year restructuring program that Hubbell has implemented, where we spent about $17 million in 2022, which was an increase from $10 million in 2021. Our margin performance absorbed extra expenses in 2022, and we're anticipating to keep that flat in 2023. So nothing incremental as far as the income statement is concerned, but still good activities with good projects that typically give us, we find, a three-year average payback range. As for capacity, we continue to find that in the utility side and parts of electrical that we need to invest in our capacity. Our CapEx has moved impressively from $90 million in 2021, to about $130 million in 2022, and we're anticipating this year to go up to about $150 million. That ultimately results in about $15 million of incremental operating expense that we would add, along with another $10 million or so of innovation expense. Those of you who joined us for Investor Day saw some of those innovation ideas, and we continue to be encouraged by early results. However, for us to get impact, it's still going to take some time. We've got a good business case of gaining about 0.5 points of growth above our markets from those activities. So, those pieces are what we thought we'd give you regarding the puts and takes, and let Gerben on our last page, kind of sum it out in our typical waterfall format that you’re used to seeing.

Right. Thanks, Bill. And as you said, let me summarize here on page 13: Hubbell is initiating our 2023 outlook with an adjusted earnings per share range of $11 to $11.50. We believe this represents strong fundamental operating performance for our shareholders, and we are well positioned to deliver on this outlook in a range of macroeconomic scenarios. From a sales standpoint, we expect solid mid-single-digit growth organically driven by 2% to 4% of volume growth and approximately two points of price realization. We believe this is a balanced view with good visibility into utility demand, and less certainty in electrical markets at this stage. We expect the 2022 acquisitions of PCX Ripley Tools and REF to add an additional 1% to revenues in 2023. Operationally, we expect that continued execution on price cost productivity will fund attractive high return investments back into our business. Our outlook range embeds solid margin expansion with high single-digit to low double-digit adjusted operating profit growth. This operational growth rate is consistent with the long-term targets we provided at our Investor Day last June, despite the current macroeconomic uncertainty and a higher 2022 base following significant outperformance last year, and it puts us well on the path to achieve our 2025 targets. We expect the strong operating performance to enable us to absorb below the line headwinds from pension expense and the previously communicated non-repeat other income from the C&I Lighting divestiture. Overall, our 2023 outlook represents a continuation of the strong fundamental performance that Hubbell demonstrated in 2022, with leading positions in attractive markets underpinned by grid modernization, electrification mega-trends, and a growing track record of consistent operational execution. I am confident that Hubbell is well positioned to continue delivering differentiated results for shareholders over the near and long term. With that, let me turn it over to Q&A.

Our first question comes from Jeff Sprague with Vertical Research Partners.

Thank you. Good morning, everyone. Hey, a couple of questions, maybe mostly focused on the utility side. First, on the IIJA, thanks for taking a shot at that. A lot of companies have not been able to quantify or are a little worried to try to quantify it. But the nature of my question is really how that interplays with, for lack of a better term, spending that would have happened anyway. You're presenting it here like it's incremental. But I just wonder your confidence in that—whether or not it's just replacing other investment or using government stimulus to spend what was going to be spent regardless?

Yes, I mean, I think, Jeff, ultimately, the dollars are fungible. But certainly, the customers we've spent a good deal of time talking to have very specifically increased their CapEx assumptions because of it, so for us it's important to kind of quantify it, though. It’s ultimately contributing a point, so to a mid-single-digit. I agree with you, there's a little bit of fungibility there at the end of the day.

And then just on the capacity, if, as you know, some of it is tied to efficiency and supply chain resiliency, I mean it looks like demand will stay at a high level, right, but the rate of growth may settle down to something more normal—maybe it's mid-single-digit plus for a few years. Could you just address the concern that maybe it's the wrong time to have the capacity and how you see the capacity being used, or what bottlenecks that might be uncorking for you?

Yes, I think it's important that it is on uncorking bottlenecks. So one of our specific areas has been on enclosures, Jeff, which has been a really high growth, high margin area. We feel very good that the return on capital of that is going to be because we have such good visibility on the demand is going to be there. So we feel real good about it and excited about being able to serve our customers better. I think they're rewarding us relationship-wise as we're doing that.

And maybe, Jeff, I can provide a little bit in addition to what Bill said, specifically referring to our utility enclosures in the utility business. This is a business that serves not only the utility market but also communications markets and water markets that have these applications. So it's not only do we see divisibility on the utility side, but these other markets have been high growth markets. We're very confident here that this is a more sustained growth level. If you think about this investment, and we've talked about this, this is a new facility that we're opening up in Oklahoma City, expanding not only the capacity of enclosures but at the same time, we're consolidating some factories as well. There's an element of productivity in these moves as well. We believe—and this is just one example of a high-return investment—that we believe will serve our customers well and will serve our shareholders well in the long term.

And one last one for me, if I could, could you just elaborate a little bit more? What happened with the Clara in the quarter? I tend to think of a commercial resolution being a cost item, not a revenue item. But the way you're laying it out, you’re at some kind of adjustment to revenues, or headwinds to revenues. So I'm not expecting you to name the customer, but maybe you could give us a little more color on what actually happened and what you resolved.

Yes, just the nature of it resulted, ultimately, in the character of a price concession, so it hits the top line and drops through to the operating profit line as well.

Our next question comes from Steve Tusa with JPMorgan.

Hey, guys, good morning. So can you talk about your price assumptions like first half and second half? You said, I think 2% embedded in the numbers. Maybe I'm thinking about a different call; I’ve been up five this morning. But any color on kind of that first half to second half price?

No, you’re right on the two. That's basically been layered in throughout 2022. As it wraps around, it has a tapering effect. When you think about price cost, some of the commodities are coming down too, so how it nets does net a little more favorable early in the year, particularly in the first half. Ultimately, the net will be determined, and we have a little more confidence in what we see on the pricing side. However, the cost side is obviously what we'll have to react to.

Yes. And on the price side, I guess, are you embedding any quarter where it's actually negative?

No.

Okay. Where would we look within your product lines to is the kind of canary in the coal mine on that front?

Where do you see the most price pressure?

Yes, where would you expect? You're not seeing it today. I don’t think anybody's really seeing it today. But where would you be watching for that? Where would you be most concerned if there were to be some pressure or some pushback?

Yes, my guess is it would show up maybe on our electrical side and maybe some of the more current products, especially the residential products, which are seeing contracting demand. That would be the most cyclical and could respond to that. Some of the more rough electrical might be where we will be paying a lot of attention, Steve.

Yes, and I think it's less about certain product lines seeing more cost; that's pretty spread. Especially with a chart that Bill shows, raw materials actually account for a fairly small percentage. All of our product lines are exposed fairly similarly to other inflation. I think it has more to do with market dynamics, and if there's a potential slowdown in the second half, that could put additional pressure, particularly on the electrical side and the utility.

Great, thanks for the call, as always. All the details are helpful, and I echo what Jeff said on the IRA stuff, giving us a little bit more precision on that versus other companies that just say it's great. Our next question comes from Tommy Moll with Stephens.

Good morning, and thanks for taking my questions. Also really appreciate the price cost productivity, glad you provided all the details, especially because now we get to keep asking you about it.

So we knew it.

But jokes aside, here, the pie chart is very helpful. You called out two, and the larger two of the components that are on your cost side; you continue to expect inflationary pressure, but on the raw materials, obviously, there's some easing anticipated there. My suspicion might be that would be the most visible and most talked about from the customer standpoint. So my question is, if you're going to realize the two points wrap, which I think is just to hold price through the year, have you had to reframe or provide any increased visibility to your customers? As you’re facing more than quarters of your costs being inflationary, they're not going to see that as much. How do we get confident you can hold?

Tommy, we have to use very similar visuals as what we're sharing with you. Our customers are very aware, for example, of labor inflation and wage inflation. They can relate to where they see the inflation. When you look at the futures market and see raw metals getting cheaper, that’s really only a small part of the whole picture. So we've had to have that be part of the conversation, part of a relationship discussion—it's not pure transactional; it's about having conversations and sharing the kind of analysis that you’re looking at today.

Appreciate that, Bill. As a follow-up here on the electrical solutions and market visibility you provided, it sounds very similar to the early peak you gave us for 2023 a quarter ago, at least in terms of the direction. But has anything changed versus a quarter ago? It sounds like your visibility is pretty limited in the first quarter, maybe first half? But is there any change versus what we heard from you last quarter?

Yes. I think the part we gained insight from was the inventory management actions that appeared to us to have taken place in the fourth quarter. If those are the new numbers, you could argue it might be a little softer than we had communicated. That's why it's so important to see the pickup in orders in the first three plus weeks here in January. I know a month is not the largest set of data points, but it’s been sustained through the month. So I think those two offsets do get us back to where we were when we talked to you in October, but they're kind of equal and opposite reactions.

Next question comes from Josh Pokrzywinski with Morgan Stanley.

Hi, good morning, guys. So not to look a gift horse in the mouth with the IIJA disclosure, and I'll echo what everyone else has said on how helpful that is. Maybe just to wonder if you could estimate IRA; is that in your mind bigger, smaller, longer duration, shorter duration? How do you feel about that relative to what you put out there with IIJA?

Yes, I would say, Josh, the IRA impacts us to a lesser extent, but it does benefit us as well; rather than direct funding, this is more about tax credits. If you think about it, they've extended the renewable tax credits for solar and wind. That’s an area that both our utility and electrical businesses benefit from—the EV incentives. While we're not directly in EV, the balance of systems that goes around with this infrastructure, we benefit well from too. So I would say it does affect us, and coming back to the point, it's so difficult to pinpoint exactly what percentage of our growth will be tied to this, but I would say it's helpful.

Got it. That's helpful. And then, Bill, your comment there on the destock and then the order rebound seems like a lot of that is maybe washed out, but any more detail you can give on the kind of portfolio breadth that was impacted and sort of order of magnitude on size? Was it like a five-point correction on inventory? Or did it come down sharply by 20 and then came right back up?

Yes, I think it was fairly broad-based. If you interviewed our customers, they were feeling a little overstocked. I think, Josh, some of that was driven by when promise dates were extended, they had customers who wanted materials. They made sure their shelves were stocked. I think there's also been places where they may be bundling or kidding something. They may have a decent chunk of inventory that needs one last part to the bundle, and then that will get shipped. We care a lot about our orders coming to a sustainable level through a nice, orderly overtime process as promised delivery dates get shorter. It feels manageable; the breadth that you’re talking about is preventing any real spiky problems. Right now, it just feels manageable to us.

Our next question comes from Brad Lindsey with Mizuho.

Good morning, all. I just want to come back to the communications controls business. So down 10% driven by chip supply. Could you just talk about the timing of the chip situation improving and anything the team is doing in terms of redesigns or reengineering to help monetize some of that backlog?

Yes, let me provide some context, and maybe Bill can fill in as well. Chip availability has been the Achilles heel throughout the pandemic, and we're all aware of that. We pretty early on realized that there just wasn't going to be a short-term turnaround. To your point of redesign, we’ve been very active in that; as a matter of fact, it’s taken a good part of the engineering resources of Clara to do. This isn't a simple chip replacement. There's a ton of design in it, and then a lot of testing to make sure this product functions in the field. Right now, we have a product out in the field, that's being tested, and if that continues as we expect, we will be able to substitute chips starting in the second quarter. That’s part of the reason we believe that even if the supply chain remains a challenge, we should be able to start seeing growth back into that business. We also read about chip availability getting better, and of course, we track this closely with our suppliers. It's really the types of chips that matter; we learned a lot about chips over the last year. The memory chips, used in phones, have become much more available. The types of chips, the microprocessor types, that we use in our products have been the ones that have been challenged from our supply perspective. We do anticipate that to improve throughout this year, and the combination of just a general improvement with our redesign is why we're optimistic and confident we can grow throughout 2023.

Thanks for that. I guess just a follow-up. I imagine there's a lot of labor underutilization in the factory and efficiencies and so on in that business. Have you tried to size what that magnitude could be? If you can uncork some of the backlog to improve continuity of supply and so on, what could the earnings power be as part of the clear recovery?

Yes, I'd like to speak more generally about factory efficiency. Certainly, this business has felt that, although there's also a component of contract manufacturing that occurs to some extent, and we're shielded. In our business in general, that’s absolutely a common impact—it’s driven more inefficient factory workloads. I would say if 2022 was all about pricing and managing price cost productivity, 2023 will continue to be that but with a high focus on returning to higher productivity in our footprint.

Our next question comes from Nigel Coe with Wolfe Research.

Good morning, everyone. Hi, guys. So just want to go back to the commercialization of Clara. Did I get that right? Bill came through with a price concession, so that impacted the headline price in utilities?

Yes.

Okay. That's been, and I'm saying that about $20 million - $25 million. Is that in the right zone?

No, that's too high.

Too high. But that would have impacted EBITDA as well, so that was both revenue and EBITDA impact, correct?

Correct.

Okay, great. Okay, this is my clarification question. Moving on to my real questions. So on the inventory, did you see that hidden primarily within residential products? Or was it much more generalized immunity clearance?

Yes, I would say much more generalized. Utility has had very impressive growth, but we invested in utility inventory too—still trying to make sure our AA items have on-time delivery performance levels where we want them, Nigel. So that inventory has been kind of across the board. It skews at this point, if you looked at our year-end balance sheet, it skews in a raw versus finished good, maybe that's obvious, because if it were finished, we would have shipped it, but it still has to work its way through factories and get converted. That's part of what Gerben is saying; we should be able to run the factories a little bit hotter and get some efficiencies as we burn through a lot of that raw material.

Right. Okay. And then just a quick one on below-the-line item. I mean, pension in any kind of big swings on pension, and I think there's some TFA income rolling off this year. Any impact there would be helpful?

Yes. On both of those, you saw when Gerben walked through the waterfall. We have the non-recurrence of the pension as part of it. While we've benefited from our liabilities going down with higher interest rates, the gap between the return, expected return on assets and discount rates has narrowed. Therefore, that creates a cost headwind for next year. That said, it’s not cash but does create an income statement headwind for us, alongside the other items.

Our next question comes from Christopher Glynn with Oppenheimer.

Thanks. Good morning, guys. Just curious your thoughts on the acquisition pipeline—couple angles. Anything in electrical or focused pretty much on utility? Part of the thought there is maybe there’s more premium on the utility side deals, but obviously, you can add lots of value. Should we be thinking exclusively along the lines of the typical bolt-on sizes?

Yes, so I would say, Chris, the pipeline is equal opportunity. Two of the three deals we closed in 2022 are electrical. I would not think about it being exclusively utility. If you thought about activity doing 180 in 2022, for me, I'd find that slightly disappointing; I would have rather had a fourth to get us into the mid-twos as an annual kind of investment rate. We’ve got the cash to keep doing that. The year was a little challenged for us in getting sellers to accept the uncertainty of the macro. It was a little harder to get buyers and sellers to agree in the end. We had a couple that we thought maybe could get done that ultimately didn’t. We’re looking to be more active. The pipeline is supportive of that activity level, but you’re asking about the size; it’s going to be more typical, traditional historical levels? I would say yes, but I would think about there being opportunities in both electrical and utility.

Great. Thanks for that. Another question was on the electrical margin. Historically, you have a little bit more of a seasonal margin tail off in the fourth quarter over the third quarter, but last year was moderate too. Are there any sequential factors that ease that? Or are the last couple of years really a better guidepost to your margin even historically?

No, I mean, look, I think the seasonality can be driven by fewer days in the fourth quarter. If the weather prevents construction, those are the two factors I'd mention. I'd say we’ve been operating with backlogs such that maybe you’d see less weather impact, but the days are there. The electrical side has less backlog than the utility side right now. The biggest sequential factor continues to be price cost tailwinds and contributions from that help lift the electrical margins.

Our next question comes from Chris Snyder with UBS.

Thank you. So guidance puts electrical at low single-digit organic growth in 2023, flat to up versus 1% in Q4, with price fading. We think that guidance for volumes to increase from here. Is this solely the result of moving past this customer inventory digestion period, or is there something else driving volumes higher from this point?

Yes, I think that's a sequential fact from the fourth quarter—consider the fourth quarter is a little distorted by that. There might be further destocking throughout 2023, though, as well. Hopefully, that's kind of measured. I think if you look year-over-year at the high-end market, we’re anticipating residential contracting significantly—creating drag. We think those blue markets, which are more resilient to a consumer-led recession and some of the inflation and interest rate problems consumers are having, are quite secularly driven right now. The balance of non-residential and industrial—we see industrial probably in slightly stronger shape and the non-residential being a little quicker to follow residential. So we have a range of confidence that you’ll hear us maybe express more confidence in the first half and more visibility with a little more uncertainty in the second half.

No, I really appreciate that color. Obviously a tough macro environment. I guess just the follow-up—anything to worry about on data centers or telecom? Some other companies have flagged some slowdown concerns there. Thank you.

Yes, but I think when you talk about data centers, you think about two segments of that market: the mega centers being run by the Fangs in the big tech world. You certainly see them reacting with headcount reductions, for example. Could that lead to some slowing of growth on the capital side? I think that's possible. However, we do see growth on the telecom side; we’re still seeing the build out. In the medium term, we’re very bullish on both of those factors. Even though I do agree with you that there could be some reshaping of the mix inside of data centers. It’s important to identify what net effect it has. Still, we’re anticipating growth out of both of those.

And maybe to your second part of whether there’s further destocking—we would say that there probably is, especially if you look at sales. Some of our distributor partners are still struggling to get supply, so they have the materials they need for projects but are missing some parts. When those come in, that will naturally cause inventories to come down a little more. We believe our products are less exposed to that because we've performed relatively well through it, but we would say there’s still probably some destocking in the early part of 2023.

I would now like to turn the call back over to Dan Innamorato for any closing remarks.

Great. Thanks, everybody, for joining us. I'll be around all day for questions. Thank you.

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