Hubbell Inc Q2 FY2023 Earnings Call

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 2023. 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 which 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 considered and incorporated by reference to this call. Additionally, comments may also include non-GAAP financial measures. These 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 second quarter results for 2023. Hubbell delivered another strong quarter of financial results. Our favorable position in attractive markets enabled us to achieve 6% organic growth, which combined with improved productivity and supply chain dynamics to drive significant margin expansion in the quarter. Solid execution through the first half of 2023 and good visibility through continued strength in our businesses give us the confidence to raise our full year outlook again this morning. In addition to the strong financial results, we continue to improve our service levels to customers. Hubbell's investments in capacity, innovation, and supply chain resiliency are enabling increased sequential output and improved lead times. Looking ahead, we expect grid modernization and electrification to continue to drive elevated demand for Hubbell's critical infrastructure solutions, both in front and behind the meter. We will continue to make the investments into our business to support this growth in the second half of '23 and beyond. Before I turn it over to Bill, to give you more insights on the performance in the quarter, I would like to introduce our two new segment presidents. You'll recall from our press release a few weeks ago that we announced Allan Connolly's retirement from Hubbell after 10 years of leading Clara and in recent years our combined Utility Solutions segment. Allan's strategic vision and passion for innovation played a critical role in accelerating the segment’s organic growth profile, and I'd like to thank him for his many contributions to Hubbell as well as strong financial performance for our shareholders. I'm excited to share that we've appointed a very talented successor in Greg Gumbs to lead Hubbell Utility Solutions moving forward. Greg has a strong track record of leadership and performance in the utility, electrical, and automation industries over his career, and his skill set is well suited to help us further our growth ambitions across utility components, communications, and controls. I've gotten to know Greg over the past year and believe he will integrate quickly and effectively within the organization. His focus will be on driving profitable growth by building on a strong core foundation while innovating and expanding in attractive adjacencies. I'm also excited to announce the appointment of Mark Mikes to lead Hubbell Electrical Solutions. Mark is a long tenured Hubbell leader with a proven track record of performance and operational execution most recently in leading Hubbell Power Systems. The strong results of that business over the last several years speak for themselves. Some of you will know Mark from our investor days over the past few years, and he was a key partner to me when I led the utility business. He played a critical leadership role in our efforts to unify a broad portfolio of acquired utility businesses under an integrated business in Power Systems, organized to compete selectively with a simplified operating structure. As we continue our multi-year journey to execute a similar playbook in HES, Mark is well suited to drive sustained improvement in the segment's long-term growth and margin profile. Both Greg and Mark are well supported by experienced and talented leadership teams, and I am confident they will continue to execute on our core strategy together and deliver consistently differentiated performance for our customers and shareholders. With that, let me turn it to Bill here to walk you through the financial performance in the quarter.

Thanks very much, Gerben and good morning everybody. Thanks for joining us. Congratulations to Greg and Mark and on a personal note from me, I'm very excited to partner with both of you as we drive for future success with Hubbell. They're both off to excellent starts in their new responsibilities. I'm going to start my comments on Page 5 of the materials that you hopefully grabbed. It's really just a summary of a very strong financial performance in the second quarter. Most of the comparisons we'll show you in this deck are against the second quarter of prior year of 2022. We find it instructive also to look sequentially to the first quarter of '23, and I think that we see a lot of continuation of the positive trends that we experienced in Q1. Things played out quite similarly in the second quarter, with 6% sequential top line growth and a point and a half or so of margin added. So a lot of the same themes that you'll remember from our first quarter call. You see sales at $1.37 billion, 9% growth with 3% coming from acquisition, and 6% organic. The organic growth is being driven primarily by price, which is a theme again you guys saw in the first quarter with us going back to last year. Operating profit margin reaching the 22% level, a very attractive level, nearly 6 point improvement over last year, really a result of the price cost being favorable as well as some productivity from the supply chain normalization of some of the efficiencies coming with that. Earnings per share above the $4 level, also very attractive at a 45% growth rate. That increase in earnings resulted from the sales growth and the margin expansion at the operating level. Free cash flow of $192 million, really driven by the strong net income growth, and that number is absorbing continued investment in CapEx and working capital. So I think that we're very pleased with this cash flow; it's allowed us to strengthen the balance sheet. If you look at the balance sheet at the midway point here of 2023, you've got nearly $0.5 billion of cash, about $1.4 billion of long-term debt. So our net debt to EBITDA is less than one, which we think really positions our balance sheet to be supportive of being in an investment profile. And we think that can come both in the form of CapEx, OpEx, as well as acquisition. On the acquisition front, we're very pleased to announce in the second quarter we were able to close on our acquisition of Electro Industries, a very typical Hubbell size bolt-on of $60 million. It fits into the utility segment; products are in the distribution automation area, sensing and controls, power quality, and metering, which fits very well with other products of ours in that space. So we welcome our new associates from Electro to the Hubbell family. I'm going to switch now to Page 6, which lays out our performance in bar chart format, and we'll drill a little bit into each item. So the sales growth of 9%. We said that 3% acquisition came from two major contributors, one from each segment, and I think a good reflection of our intentional investment strategy. On the Electrical side, the contribution comes from PCX, which was a data center acquisition we made. We just passed our first anniversary of owning PCX, and it's off to a great start, growth and margin wise. On the Power Systems side, Ripley Tools is a very good extension on the component side for us for Power Systems. So again, good signals of how we intend to deploy our capital here. On the upper right, you see operating profit up 47% and above the 22% level. Price cost is really the biggest driver there, and interestingly, both levers contributing to the margin expansion; you've seen our price story play out over the last couple of years. But also, this quarter, we had material costs flipping to a tailwind with actual deflation in both the raw and component costs, helping drive strong margins. We believe our pricing success has been driven by our differentiated service levels. We get consistent feedback from our customers that we're outperforming competitors in that regard, and that continues to inform us as we continue to invest. We want to push that differentiated performance and make sure we're able to support those pricing levels and continue to make our margins durable and truly emerge from the pandemic as a more profitable company. Besides price cost, there also was productivity. I think we're finding that our factories are performing better in '23 than in '22, really as supply chains normalize, we're getting a lot of those inefficiencies we experienced last year ironed out, and that's helping drive margins for us. We don't think they're all the way back but certainly a contributor. On the lower left, you have earnings per share, again, at the $4 level and a 45% increase, really all operating profit driven. Below the line was a slight drag as taxes were up just a little bit, but that was partially offset by a decline in interest expense, really net interest expense, as our cash, I mentioned, is up to close to $500 million, and that cash is actually starting to earn interest income to help offset the expense. On the lower right, you see free cash flow. This page depicts the three months of the second quarter, up 14% to $192 million. I find it a little more instructive to widen the lens and talk about the first six months where we've got $272 million of free cash flow, which is more than a doubling of what it was last year, and that's been absorbing a higher CapEx level or CapEx for the first six months of the year. It’s up about two-thirds from what it was last year to almost $70 million in the first half, as well as an increase in working capital investment as we continue to need the inventory to support our customer service. So I think given the fact that we're investing and increasing cash flow shows a good relationship there. Let's unpack the performance by segment. So on Page 7, we'll start with Utility. Utility has really been the engine of the Hubbell enterprise financial performance of late. We think really a leading business model, unique positioning across components, communications, and controls is very worthy of continued investment, as we'll discuss a little bit more later. So on the sales side, we see a 14% increase to $831 million, which is comprised of 1 point from acquisition, I mentioned Ripley Tools before, and 13% organic. That organic is comprised of roughly double-digit price and a low single-digit volume increase. We believe we've got a really nice end-market demand construct here, and it's really complemented across the two segments we're talking about here, the two business units, between the transmission and distribution components growing at 13% and the communications and controls growing at mid-teens. That communications and controls piece is largely the Aclara business. I think most of you following it will remember they've been held back by a shortage of chips over the last year and a half or so. As we saw easing of that chip supply in the second quarter, we got our communications business out of the gates first, and they had a really strong second quarter. We see because of their supply now they had a nice backlog of demand from their customers. With the supply chain improving on the chip side, we see a very good second half for the communications business. That happens to be a very attractive gross margin business, so a very mix-friendly development. On the Power Systems side, you've seen that over the recent quarters really having strong growth. I think you'll remember last quarter we showed you a chart that had a three-year review of orders and shipments. That chart essentially showed a relentless buildup of backlog over that time frame that was starting to peak at the end of that period. As we discussed then, the orders were reflecting strong demand but they were also reacting to the shortage of supply and the need of our customers to be ordering farther ahead in order to keep themselves stocked. That obviously was not sustainable, and especially in light of improving supply chains and shortening of promised delivery dates. As we've seen those lead times start to normalize, I would say in two particular segments of the components area, we've really started to see customers adjust their order pattern to reflect the fact that they can work off of inventory and can moderate their order pattern until that inventory gets to the proper levels. That's both the distribution side of Power Systems and the telecom end market, both of which have very attractive backlogs. So we'll be navigating a period of using the backlog as those order patterns adjust. As Gerben mentioned in raising our guidance, we feel that we've got the momentum to clearly carry us through the second half of the year. On the right side of the page, you see the operating profit story. Just a very impressive performance of 70% increase north of 25% margins. Really good price cost there, improved productivity, and the factories are getting rid of some of those prior year inefficiencies. I mentioned the mix with Aclara has been quite favorable. We are investing on the OpEx as well as the CapEx side and we anticipate increasing those investments in the second half.

Great. Thank you, Bill. Moving to our outlook. Hubbell is raising our 2023 outlook to an adjusted earnings per share range of $14.75 to $15.25, representing approximately 40% adjusted earnings growth for the year at the midpoint. We continue to project total sales growth in the range of 8% to 10% with 7% to 9% organic growth. Our improved outlook is primarily driven by improved visibility to second half margin performance as we expect to sustain favorable price cost and continue to drive productivity across our businesses. We're also accelerating our investment levels in the second half to increase capacity for future demand in areas with visible longer-term growth, drive higher productivity, accelerate innovation, and enhance supply chain resiliency. These investments position us to execute effectively across each of our strategic pillars, which are to serve our customers, grow the enterprise, operate with discipline and develop our people. I'm confident that our strategy will continue to deliver strong results for our stakeholders in the second half of '23 and beyond. With that, let me turn it over to Q&A.

The first question comes from Tommy Moll with Stephens.

Gerben, I wanted to start with a discussion of the utility outlook. Last quarter, you highlighted the transmission and distribution space is a mid-single-digit grower, maybe even higher next year with the stimulus contribution. Today, you highlighted a piece of the transmission market as a high singles grower, talked about needing to accelerate investment at Hubbell in preparation for next year. If you roll that all together, do you think that utility should be up mid or maybe even high single digits?

Yes, maybe I'll make a couple of comments, and Bill, I'm sure, will help me with this as well. You're right to point out the comments and of what Bill highlighted in transmission. It's an area that we've seen elevated investment for many years. It's probably one of the earliest areas where we really saw Utilities start investing with renewables and the integration of the interconnection of the grid. We have visible signs of that continuing to grow, and it's the reason why we're so optimistic about this business. I still believe, if you add it all together, to count on mid-single digits for this whole market is the right way to look at it. But certainly, we're optimistic. And that's why perhaps we made that comment is to say mid-single digits and there may be times or pockets where we can grow that. But Bill, maybe you have something too.

I don't think I would add a lot. I'd say, Tommy, the mid-single-digit long-term outlook is reflective of how we feel, and we're getting really good ROIs on these projects. So we're going to continue to invest and grow with our customers.

Shifting to Electrical. Qualitatively, it feels like the commentary is about the same as last quarter, but I'm just curious if anything has gotten better or worse there. And Bill, you referenced the destocking as potentially shifting to a rearview mirror item by the back half of this year. Any additional detail you could provide there would be helpful, maybe any insight you have into the sell-through would shine some light?

Yes, I agree that it felt quite similar to the first quarter regarding seasonal sequential growth. Even in the absence of volume, we're pleased that margins are expanding. Some of our productivity efforts and the work on pricing and costs are yielding results. When we interact with CEOs and leaders from our top 10 customers throughout the year, they previously mentioned having too much inventory. Now, they appear to be much closer to their desired inventory levels. Based on the data we have on point-of-sale, it seems that what we're providing is being sold. Thus, as we navigate this adjustment, it feels like we're nearing a balance. These comments specifically relate to the Electrical segment. On the distribution and telecom side regarding Utility, we may still be in the early to mid-stages of that adjustment. The responses from the two segments might be slightly staggered.

The next question comes from Josh Pokrzywinski with Morgan Stanley.

Just want to dig in a little bit on commercial construction. It sounds like, I guess, the tone in the slides is moderating or moderate. Data seems like it's softening up perhaps a bit more. I'm just wondering how much of what you guys are seeing right now is more of a timing function or I guess, prospectively, you're talking to distributors. Does this seem still more steady as she goes here for maybe the next few months, few quarters?

Yes, I'm not entirely sure if you were making a statement or asking a question. From our end, we've significantly reduced our exposure to commercial sectors after selling our C&I lighting business. Our focus has shifted towards specific areas like renewables and data centers. Currently, our commercial segment is experiencing adjustments; lead times for our customers have decreased from about 50 weeks to just two or three weeks. This change has influenced how our customers have been placing orders over the past couple of quarters, which is reflected in the unit volumes we're shipping. However, it seems like we're getting closer to achieving a balanced situation in the Electrical segment.

The next question comes from Josh Pokrzywinski with Morgan Stanley.

And then just to maybe follow up on the M&A environment. You guys noted a kind of a typical Hubbell deal here. Are you seeing, I guess, the acquisition environment or multiples start to increase with kind of this broader appreciation for electrification? And then I guess maybe as a sub-point to that, if there aren't really increasing, would you consider levering up a little bit more to just consolidate some of these assets with maybe a bit more value disconnect?

I think there are two parts to that question. The first concerns the M&A market. It is interesting, Josh, that there are more assets available than we usually see. We've noticed an increase in assets above the typical $60 million range that we normally encounter. This may be a reflection of owners believing it is a good time to achieve a favorable valuation. There is competition in those processes. The acquisition finance market is somewhat different; with interest rates being higher, that affects how some financial buyers approach the market. However, we are seeing an increase in assets in the pipeline, which is notable. Regarding your second question about the balance sheet, we consider it to be a significant strategic asset at this moment and feel we can invest aggressively. PCX is an interesting case; you specifically asked about multiples. If we were to buy PCX in the 12 to 13 times range, having held it for a year, it has shown impressive growth and improved margins due to our management. Currently, we are holding it in the single digits. Part of your inquiry pertained to higher multiples, and we believe that is justified by the growth and margin potential of some of the businesses involved. So, while I hope not too many investment bankers are tuned in, I do think there might be some upward movement in multiples based on your question.

Maybe to add to it just a bit; the resource capabilities to be able to go at a faster pace, I'll make some comments on. As I look across the two segments, I would say the GMs of the businesses are more involved than ever in this process, partially helped by the operational discipline that we put in place over the last couple of years. We've added resources to both of the segments of individuals focused on M&A, and that's obviously complemented by the enterprise resources. So I'd say not only is the pipeline fuller, but our resource capabilities to pull some of this off is better. I would expect that to be a good contributor for us going forward.

The next question comes from Nigel Coe with Wolfe Research.

So a couple of questions from me. One is on the Electrical segment, and you obviously talked about the inventory; it sounds like there's a bit more visibility on that. Are you seeing any differentiation between some of the smaller shippers out there and some of the larger national players, and are you seeing the bulk of the inventory coming out of the smaller players? And then within that, are you seeing any big difference between sort of core components and lighting? And I'm sorry if I missed that in your prepared remarks.

I’ll begin by discussing the inventory with the distributors. While it may be somewhat anecdotal, I believe the smaller distributors have felt less pressure to reduce their inventory compared to the larger ones, especially the public companies. When the pandemic began, these larger distributors may have had a heavier inventory, which they have retained longer to meet customer demand. I think the larger distributors have been more disciplined in adjusting their inventories to the market both at the onset of the pandemic and now, as they are managing the impacts of supply chain constraints. Therefore, I would argue that the situation may actually be the opposite.

And then on lighting, any sort of differentiation there?

On lighting, Nigel? Yes. I mean, lighting. I'm just wondering if that was disproportionately negative in that… So the residential piece that we still have did have significantly negative volumes. They were impacted on the top line that way. Interestingly, the productivity like we described, some of the supply chain normalizing, one of the biggest drivers for that residential business has been the transportation cost. It's imported product from Asia and those container costs have really gone from a pandemic cap of container costs up in the mid-teens of thousands of dollars back down to $2,000, $3,000. Despite the volume drop, that's really allowed that residential business to earn a margin again. So they kind of have two big cross currents there between volume and cost structure.

And then just my follow-up is on the transmission capacity investments. We don't normally think of Hubbell as a transmission player. Can you just remind us where you play in transmission? I remember you said the high voltage test business, but maybe just remind us on where you play and how big that business could be?

So the product line is a traditional one. If you're driving on a highway and you look up at one of those steel towers and you see the insulators and the hardware up there, that's the part where Hubbell plays. Right now, if you exclude the substation, which we usually lump in, we're talking in the ballpark of $200 million of exposure for Hubbell. In the kind of 10%-ish range of the segment, a larger percentage of the components piece. We see that could be an area of acquisition investment, certainly capacity investment. I think we see organic growth there, Nigel, certainly in the high single digits for the foreseeable future for that segment and it continues to be a supply-constrained environment versus demand just because of all the drivers for hooking up to renewables and potential interconnects between FERC regions, etc.

The next question comes from Joe O'Dea with Wells Fargo.

I wanted to start on Utility and you've mentioned that service levels are a differentiator for you. As we see supply chain improvements, I'm curious if those differentiation opportunities are lessening at all and if you have any examples of how, even in a normalized supply chain environment, that service will continue to be a competitive advantage for you.

Yes, it's certainly during the pandemic, based on what customers have told us, we have outperformed. I would even go back to say service and quality have been absolutely core. When I ran that business, I would hammer that day in, day out, week in, week out because I always saw that as a differentiator, right. On price, you can make a decision overnight to compete on a different level. Quality and service, that's a lot harder. So proof during hurricane events, ice storms, and the pandemic, we've again outperformed. But you're right to point out, as the supply chains recover, you see others in the market improving and getting closer again to our levels. I would also say, when you during this period, we probably gained some share, and once you have that, it's hard to give up. You'd have to actually underperform again. We're able to hold on, but to continue to outperform at that level requires then us to just raise the bar. Part of the investments we're making, part of what Bill talked about, investing in capacity and transmission, allows us when the demand is up to continue to service. Being ahead of that, and we feel we are ahead of that, continues to allow us to raise the bar on servicing and it's a differentiator.

And then I wanted to ask on the deflation comment where you're seeing it in both raws and components, specifically on the components side. Is that a function of efforts that you are making and going to market and any supplier consolidation translating to some of it, or is it something that you're seeing broadly in the market on component deflation? Related to that, historically, when you do see some of it, what would generally be the lag time before you would start to see that filter into the conversation around price?

So my comments were around the sum of raws and components being a tailwind. I don't know, Dan, if there's a specific comment that components are behaving any differently. I wouldn't say it's the result of us doing something different. I think that's just kind of market pricing and reaction. It's interesting how you're describing the relationship between material cost. Dan had a page, I think, two quarters ago that did a nice job of showing our cost structure being about 50% driven by raws and material costs and the other half being labor and overhead and burden and other items. Usually, our paradigm is to have price offset the material cost and our productivity initiatives to offset inflation in the non-material areas. What you're asking usually, we would see if we were to see inflation in materials. If I'm going back three years ago and earlier, it would take a quarter or two for us to get the price kind of into the market to offset that. That was kind of a lagged hedge, if you will. I would say in the last two years, the pricing has been driven by lack of capacity rather than necessarily by cost. Connecting back to Joe's first question, service is kind of a relative question; you're trying to outcompete somebody else. It feels to us like we're leaning into investment. We're finding this utility space to be really core part of Hubbell's identity and sort of leaning into that maybe where others might be a smaller division of a larger diversified company.

The next question comes from Steve Tusa with JPMorgan.

Congratulations on another successful quarter. Could you provide some additional details? I joined a bit late, so if you already covered this, I can refer back to the transcript. Have you shared the expected price cost absolute numbers for the year and specifically for the fourth quarter? The Utility margin appears to be very strong. Do you have any updates on your outlook for the end of this year and moving into next year with this type of margin now comfortably in the mid-20s?

So let's start with price, Steve. We've talked about it being more than all of the organic for the quarter. So you're talking about 8 points roughly of price in the quarter. We're getting to the point where we're not pulling a lot of price in the last quarter. We're sort of riding out and lapping the previous price increases. One of the things you'll see in our second half, as you squeeze the second half expectation that's embedded in the guide, is the fact that that price starts to moderate a little bit in the second half, and the cost is a little bit harder for us to predict. It just looks like that dynamic will kind of year-over-year compare basis start to narrow just a little bit. Your utility question is related to that. I think we're going to be doing some more investing, this incrementally in transmission in the second half. We're going to be investing in areas like supply chain resiliency. Innovation continues to be an area of focus. As we get to our third quarter call with you all in October, we'll maybe start to have a better view of what some of our expectations into '24 will be. The fact that you saw us raise our guide, if you go to our mindset in April when we raised our guide by a couple of dollars, we were describing having some second half conservatism because we just weren't sure what to expect. By our raise of $1.75 midpoint here to midpoint, you're hearing us say we actually see momentum that gives us better visibility in the second half, and some of that caution has been taken away. Now you're extending that six months and saying, as you end the year with the momentum that you've got, ultimately, how will that appear in '24? We’d really like to make those margins as durable as we can. We're going to do a lot of work to try to do that, and we'll be talking more about that, obviously, over the next call or so.

Are you seeing any impact from the shift towards transmission as you feel more optimistic about it? I see this as more of a mid to late cycle trend as we recover from the bottom of the T&D cycles. The distribution side involves smaller projects, so is there any effect we should consider from the transition to transmission?

No, I think I agree with you that the distribution projects are smaller, while the transmission projects are larger. However, our margin profile remains quite consistent across both types, despite that difference. In the second quarter, we experienced a mix benefit from Aclara's strong performance in communications, which is interesting to observe. Their gross margins are relatively high compared to our overall portfolio. If we can build some positive momentum around that, it could contribute positively to our mix.

The next question comes from Chris Snyder with UBS.

I wanted to follow up on some of the comments made in the prepared remarks regarding changes in order patterns from utility customers. Should we interpret that as a decline in utility orders during the June quarter, and did the backlog decrease as well? Did this affect Q2 revenue, or are we looking at a longer timeline before we see revenue impacts due to the backlog still being high?

The orders were down in utility. But as you noted, the backlog is there, and that gives us enough backlog, not just to support the second quarter, but we view there's enough backlog to support the second half. Which is really the underpinning of our guidance raise; it’s the confidence that comes from that. I think it's just that adjustment period to confuse our customers with really long lead times as the supply chain was impaired. Now that it's recovering in many places, they just really don't need to be ordering as far out, and we're just going through that adjustment period right now.

I think the really important part because for a period as they adjust, it makes it harder year-over-year. If you think back to last year, during the first half, our orders increased over 50% and within the quarter, 70%. Even then we said that’s just not a sustainable level. That's not a reflection of real demand at the time that lead times were going out. Those are the comps to which we now compare. Even when orders are down, it's still at a very elevated level. Our backlog in utility came down very modestly last quarter. It's still well above historical levels. The other thing I would say, it's very much timed to us taking our lead times down. It's in the areas where we're taking our lead times down that we see this adjustment. So it's all as we anticipated and I would say pretty predictable.

No, I really appreciate that. When we look at the guide, and the company is guiding utility margins lower in the back half than the first half, but still obviously at really strong levels. When we think about that first half to second half decline, is that just a function of price being held and costs going higher on the raws and the components? Is it mix maybe from the Aclara installations coming back, or is there some expectation that maybe price will have to be given back in some capacity just because as like supply chains are recovering and there’s not the same urgency to procure that there was a year ago?

Chris, we are not expecting to provide price details. However, as we look at year-over-year performance, we anticipate that the price cost will become slightly narrower. In the second quarter, we experienced some positive mix effects, and we also expect to increase investments in operating expenses within this segment. All these factors contribute to the margin levels you mentioned, which are favorable compared to a solid comparison from last year.

The next question is from Christopher Glynn with Oppenheimer.

So curious about Utility's capacity to run fixes and upgrade and modernize on the distribution side. Is there anything in terms of plateauing in their ability to consume the products yourself? I know it's kind of a mixed kind of question against the dynamic of the lead time adjustments. But hopefully, I asked clearly enough.

I think what you're getting at is whether installers face some constraints. Within the utility sector, there are limitations; you can't just increase capacity at will. However, there are outsourced companies that are skilled at expanding installer capacity. The demand for infrastructure is present, Chris. Our expectation is that they can add more within the mid-single digit units.

And on the Aclara, you referenced the gross margin mix favorability and I think total margin favorability. At one point, we consistently thought of that as dilutive mix within the Utility segment. We haven't had a clean read through the pandemic and more extended semiconductor dynamics there. So just curious what changed there that we're talking about Aclara being mix favorable now.

Yes, because your first comments were as they were volume constrained with chip supply disruption, they were sitting there absorbing all the overhead. It was kind of a lower margin profile. I'm now really speaking to the incrementals of the comms side inside of Aclara, which I'm sort of cheating and using gross margin as a proxy for that being quite attractive on the incremental side. All we're doing is talking about at a constrained volume absorbing overhead, not as profitable. Now as we add in a high growth area, the incrementals are attractive that way.

At this time, I show no further questions. I would now like to turn the call back to Dan for closing remarks.

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

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