Earnings Call Transcript - HUBB Q2 2022

Operator, Operator

Thank you for joining us for the second quarter 2022 earnings conference call for Hubbell Corporation. Please note that today's program may be recorded. I would like to introduce your host for today's program, Dan Innamorato, Vice President of Investor Relations. Please proceed, Dan.

Daniel 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 second quarter 2022 results. 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 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. And with that, I'll turn the call over to Gerben.

Gerben Bakker, Chairman, President and CEO

Great. Thanks, Dan, and good morning, everyone, and thank you for joining us to discuss Hubbell's second quarter results. I will open our call this morning with a broad overview of our performance, markets and the investments we continue to make that drive value for our stakeholders. Bill will then provide details on our second quarter results, and I'll come back with some comments on the outlook for the year. Hubbell delivered another strong quarter of operating performance with year-over-year organic growth of 20% and adjusted operating profit growth of 29%. We are performing above our initial expectations through the first half of the year and have generated year-over-year adjusted EPS growth of 29% through the first two quarters. We are raising our annual outlook this morning to reflect that strong performance. While we anticipate the second half operating environment to remain dynamic, and we see uncertainty around macroeconomic conditions, we are confident in our ability to continue to execute effectively and deliver on the stronger outlook due to three key factors: the strength of our end markets; the strength of our position in those markets; and our continued operational execution, particularly proactively managing price/cost as well as supply chain constraints. Starting with markets. Customer demand for reliable and efficient critical infrastructure solutions in front and behind the meter continues to drive strong orders and sales growth. In particular, the Utility Solutions segment continues to build backlog even as customer shipments pick up sequentially. Grid modernization initiatives continue to drive robust investment levels from our core utility customers as they seek to upgrade and harden aging infrastructure while integrating renewables onto the grid. Our leading quality, reliability and service in these markets continue to position us well to effectively serve these critical needs for our customers. In Electrical Solutions, demand remains strong across most of our end markets. Electrification trends together with strong industrial and nonresidential markets continue to drive sales and order growth across most of our Electrical businesses, while residential markets remain soft as anticipated. I'd also like to highlight the ongoing strength we are seeing in communications markets, which is a key strategic vertical for Hubbell spanning across both segments. Telecommunications customers continue to invest in building out 5G networks, rural broadband access and fiber-to-the-home upgrades, driving demand for leading products and solutions across the Hubbell portfolio including enclosures, connectors, tooling and antennas. Results in the quarter were also driven by continued execution on price/cost. Price realization was 14% in the quarter, up again sequentially as the company continued to actively manage price and productivity to offset broad-based inflationary pressures. While material inflation is showing signs of easing, nonmaterial inflation and supply chain headwinds persist. Increased cost of labor, freight and logistics as well as tight availability in key materials and components continue to drive higher input costs and manufacturing and transportation efficiencies across our businesses. Despite these challenges, we were able to drive increased unit output and achieved strong year-over-year operating margin expansion of 130 basis points in the second quarter. Overall, a very strong quarter for Hubbell. We are confident in our ability to continue to effectively navigate a dynamic environment, and we are raising our full year expectations this morning, while at the same time, accelerating investments in the second half of the year to position us well for sustained long-term outperformance. We'll provide more color on the full year outlook at the end of this presentation. Before I turn it over to Bill to talk you through the financial results in more detail, I would like to welcome PCX and Ripley Tools to the Hubbell portfolio. These two high-quality businesses, which we acquired earlier this month, have strong financial profiles and attractive growth characteristics and bolster our position in key strategic growth verticals of data centers, renewables, electric T&D and communications. We also have a strong cash position and balance sheet and expect to continue investing in acquisitions as a core component of our strategy for long-term shareholder value creation. With that, let me turn it over to Bill.

William Sperry, Executive Vice President and CFO

Thank you very much, Gerben, and I appreciate everyone joining us this morning. I want to start by acknowledging the Stones fans and celebrating Mick Jagger's birthday today. I’ll begin with sales, which reached $1.26 billion, marking a 20% organic growth compared to last year, driven by both price and volume increases. Our operating profit margins stand at 16.6%, reflecting a 130 basis points expansion, thanks to the additional volume and favorable price/cost dynamics. Earnings per share were reported at $2.81, with operating contributions showing below-the-line tailwinds from non-operating factors. We also repurchased shares, reducing the share count and enhancing EPS, although this was somewhat countered by a higher normalized tax rate this year compared to last. Our cash flow for the quarter was $168 million, supported by increased income but impacted by significant investments in capital expenditures and working capital. Overall, we had a very strong quarter that exceeded our expectations. The key components of our story center around improved volume and favorable price/cost trends. Looking at Page 5, our enterprise results show a sales increase of 19% to $1.256 billion, driven by 14% from pricing and 6% from volume, though foreign exchange impacts slightly dampened our results. This shows an impressive growth compared to last year and is also strong when compared sequentially to the first quarter. We achieved high single-digit sales growth, with an equal contribution from price and volume. It’s encouraging to see that we were able to increase volume in the second quarter, indicating minor improvements in factory capacity, even though we continue to face supply chain challenges with labor, materials, and transportation. Nevertheless, demand remains robust across the board. On Page 5, operating profit rose by 29% to $208 million, maintaining a 16.6% margin, which reflects a 130 basis points increase. Incremental volume and favorable price/cost dynamics contributed to this growth, although we also faced some challenges from non-material inflation and operational inefficiencies. EPS grew by 27% to $2.81, aligning closely with operating profit growth. Free cash flow rose by 41% to $168 million. While this shows promising growth, we anticipate needing a strong collection of cash flows in the second half to meet our annual targets, considering that our fourth quarter is typically our largest. Notably, our CapEx investment increased by about 16% this quarter, reflecting our commitment to ongoing investment while managing rising receivables and inventory levels to support our 20% sales growth. Now, I’d like to discuss the performance of each segment, starting with the Electrical segment on Page 6, where sales increased by 13%. This growth comprised about 10 points from pricing and 4 from volume, although we faced a 1-point negative impact from foreign exchange. Overall, we saw broad strength across this segment, with the exception of the residential business, which I will address shortly. The non-residential areas, including Burndy and Wiring Device brands, showed great strength along with the heavy industrial markets. However, the residential segment, responsible for about 15% of sales, saw a significant decline in double digits, negatively affecting overall performance. On the operating profit side for the Electrical segment, we achieved $83 million, reflecting a 14% growth from last year and maintaining OP margins of 15.7%, slightly ahead of last year. The 4 points of volume growth translated to attractive incremental margins, supported by positive price/cost dynamics despite facing inflationary pressures in the supply chain and higher restructuring investments. It's crucial to note that without the adverse effects from the residential sector, we could have seen an additional percentage of margin expansion. Transitioning to the Utility Solutions segment on Page 7, we recorded an excellent quarter, particularly driven by the performance of Hubbell Power Systems. Overall, sales reached $729 million, marking a 24% year-over-year increase, with pricing in the mid-teens and volume growth in the high single digits. Demand remains strong in the T&D Components sector, which is part of our legacy Hubbell Power Systems, showing a 32% growth. Utilities are actively seeking to upgrade their infrastructure against environmental impacts and integrate renewables. Customer feedback has been positive, indicating that we perform better than our competitors, despite current service delays and longer lead times caused by supply chain issues. In terms of operating profit for this segment, we achieved $125 million, a 40% year-over-year increase with a margin expansion of over 200 basis points to 17.2%. This margin growth is mainly due to significant incremental volume along with favorable price/material cost balances, even as we navigate existing supply chain challenges. Also, as we approach the end of the year, I want to recall our Investor Day presentation where we discussed our commitment to growth in markets above GDP by leveraging our high-quality products and solutions. We are optimistic that we can outperform these markets, particularly in six targeted growth verticals where we have extensive exposure. Additionally, we have executed two acquisitions recently, reinforcing our strategic focus in these key verticals. The first acquisition is Ripley Tools, a well-established Connecticut-based company with a strong portfolio focused on fiber optics and telecom applications, expected to enhance our utility segment. The second acquisition, PCX, represents a significant advancement in our data center exposure, offering prefabricated electric rooms that simplify on-site labor needs and reduce cycle times. The combined investment for both companies was about $175 million, and we believe they will positively contribute to our growth rate for 2022 and beyond. In summary, at the halfway mark of the year, we’ve reshaped our portfolio positively through the sales of our C&I Lighting business and strategic acquisitions, positioning ourselves for growth in higher-margin markets. I’ll now hand it over to Gerben to discuss our outlook for the remainder of 2022.

Gerben Bakker, Chairman, President and CEO

Great. Thanks, Bill. And I'd like to close our prepared remarks today with some comments on our '22 outlook on Page 9. As we highlighted at the beginning of the call, we are raising our full year 2022 outlook. We now anticipate mid-teens full year sales growth, up from low double digits from the prior guidance. And we are raising our adjusted earnings per share outlook to a range of $9.40 to $9.80 versus a prior range of $9 to $9.40. We continue to anticipate generating free cash flow conversion of 90% to 100% of adjusted earnings per share. Relative to our prior guidance, this raised 2022 outlook is driven primarily by stronger first half performance, stronger volume and price material assumptions, and a modest contribution from acquisitions and partially offset by higher general inflationary pressures and targeted investments in the second half. When we spoke to you all at Investor Day in early June, we outlined three key areas where we are looking to invest over the next 3 to 5 years. Footprint optimization and restructuring to drive a more efficient manufacturing and distribution network, primarily across our Electrical Solutions segment as we continue our HES journey as a unified operating segment. Second, targeted capacity expansion in markets with visible growth trajectories and strong Hubbell positions, primarily in certain power T&D and communication product lines where capacity is tight and customers have critical needs for our products. And finally, innovation to accelerate organic growth with an emphasis to capitalize on attractive megatrends and key strategic growth verticals through new products, solutions and go-to-market strategies. While we recognize that the near-term macroeconomic environment is uncertain, we believe that now is an opportune time to accelerate some of these previously planned investments from a position of strength to set the company up for sustained performance over the long term. We expect these initiatives to drive future productivity and cost savings while enabling us to better serve the critical infrastructure needs of our customers with differentiated solutions in front and behind the meter. To summarize this morning's call, Hubbell is off to a strong start through the first half of 2022. We have leading positions in attractive markets with long-term growth drivers and we are executing effectively in the areas within our control. We are confident in delivering on our raised 2022 outlook and in driving differentiated results to our shareholders over the long term. With that, let me turn it over to Q&A.

Operator, Operator

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

Jeffrey Sprague, Analyst

So a couple of things from me. First, regarding PCX, I understand the organic growth in that sector, but I'm a bit surprised that you're acquiring an integrator. It seems you're now purchasing electrical components from other providers and assembling them. Could you explain how you see this as advantageous and how it contributes to a sustainable strong business for you?

William Sperry, Executive Vice President and CFO

Yes, they do manufacture several of the products involved. However, there is a significant amount of sourcing as well. The design elements are created in very close collaboration with the owner/operator of the data center, which makes it a very engaging process that we believe enhances our margins. It's somewhat different in that there is a considerable amount of purchased content in the final product. Nonetheless, the nature of our interaction with the customer is quite personal and design-focused, which is very attractive to us.

Jeffrey Sprague, Analyst

Okay. Regarding pricing, the execution this quarter has been exceptional. Can you share some insights on how conversations with customers are currently progressing and what you anticipate for the future? There has been a notable decrease in prices for materials like steel and copper, along with most industrial metals. Could you provide some perspective on how you foresee these developments impacting the latter part of the year and next year, and whether you're experiencing any resistance concerning pricing?

Gerben Bakker, Chairman, President and CEO

Yes, Jeff, maybe I'll start with some comments, and I'm sure Bill will have some as well. But I would say our approach to pricing has been to, a, not tie it specifically only to commodities, but to general inflation. So while we see on commodities a pullback, right now, general inflation is still tremendously high, and we feel that in our business. So as we have these discussions with our customers, it's around the broader inflation and need to price. If you looked at last year, we were on the negative on that, I'd say, despite very good traction. And if you think about the chart that we've shown you in the past of how over time we manage that, we still need more positive price/cost to claw back from the negative of last year, and those are discussions we have with our customers. I would say the other part in our portfolio is we're generally a small portion of the total cost of the systems. So the discussion around availability and quality and reliability, generally are more prominent than on price. Now all that said, with commodities, when they do come down at the magnitude at which they are coming down, and that's sustainable over time, sure, we're going to feel eventually pressure to have discussions with pricing the other way. But I'd say that's still out for us a little bit.

Jeffrey Sprague, Analyst

And maybe just one last one for me. On Aclara, that business would seem like it's spring loaded for growth if supply chain ever eases up. But actually, is that a good characterization? In other words, are you seeing business move away from you because you can't deliver there? Or are backlogs impact building? And maybe just give us a little bit of color on the outlook for that business in the back half?

William Sperry, Executive Vice President and CFO

Yes, there are a lot of backlogs. We are starting to hear that the supply chain may be easing a bit and could improve. However, we don't expect that to happen until next year. It's uncertain whether this improvement will lead to the spring growth you're mentioning, as it will depend on the return of chip supply. Nonetheless, you are correct that there is strong demand for smart meters.

Operator, Operator

And our next question comes from the line of Tommy Moll from Stephens.

Thomas Moll, Analyst

I want to begin by discussing your updated guidance, particularly concerning EPS. Please correct me if I'm wrong, but considering the usual seasonality from the first half to the second half, it seems that even the revised forecast might be conservative for the second half. This impression is based on the positive outlook for price material and strong underlying demand, especially in the utility sector, where you've noted substantial organic growth and an increase in backlog. This raises a question for me: could there still be some inherent conservatism? Any insight you could provide on this would be appreciated.

William Sperry, Executive Vice President and CFO

Yes, Tommy. If we consider a typical earnings distribution between the first half and the second half of the year, it seems that our first half projections might be on the conservative side, and we're aiming for that conservatism. We're quite mindful of recent trends from consumer-focused companies and the challenges that are emerging. Although our direct consumer exposure is limited, the consumer sector has a significant influence on the economy, which means we will still be impacted by these macro trends. Typically, we anticipate that the consumer effects will first impact our Electrical segment, a common outcome during consumer-driven recessions. Our utility business usually experiences these effects later, and they tend to be less profound and recover more quickly. Therefore, I would characterize our guidance as somewhat conservative due to the prevailing uncertainties. Additionally, I want to highlight that we are planning substantial investments in restructuring during the second half of the year. In 2020, we allocated around $27 million for restructuring, and in 2022, we aim for approximately $30 million, which is a consistent figure. To reach that goal, we expect to invest over $20 million in the second half. We believe these investments are critical for positioning us for 2023, enhancing capacity in our power division and efficiency in our Electrical segment. While these are prudent investments, they could also create additional pressure on the seasonal earnings distribution that you are inquiring about. That's why we wanted to clarify this on the bridge on Page 9.

Thomas Moll, Analyst

That's helpful. As a follow-up, I wanted to ask about the EV charging solution that you talked at Investor Day earlier this summer. So I guess a couple of parts to the question. Just in terms of the model here, is the idea that you go in as a preferred partner with your incumbent utility customers for some base rate budget? I guess that's the first question. And then second question would be just on timing and magnitude towards a meaningful P&L impact. If all goes well, what kind of time frame are we looking at here?

William Sperry, Executive Vice President and CFO

Yes. Let me tackle the first part, which is, yes, I'd say the only partner, not the preferred partner because we think we are kind of combining unique elements of metrology, revenue-grade meter with the charging units. And yes, the idea would be you have the utility that they, in turn, think about offering that to consumer, offering a differential rate cheaper to charge a car overnight and that benefits the consumer and the payback to utility because of the marginal cost of production generation to be very, very low. So the margin on that will be very, very good and really help load manage for the utility. So we think there's an optimum solution that works really well for, as you say, our core utility customer, their customer and that we're uniquely provided to do that. The timing is going to take a while and I really wouldn't hazard to tell you when we'd start to see any impact there.

Gerben Bakker, Chairman, President and CEO

Yes. As we mentioned during Investor Day, we're investing in NPX, which refers to new products that are significantly larger than our traditional offerings. This type of solution is distinct from the chargers currently available and is quite unique. While we are certainly excited about it, it's still in the early stages of development for what will be a completely new solution in the market. Some of these projects will be successful while others may not, which is one reason for the uncertainty regarding timing and the potential impact. However, if these projects succeed, they will operate on a much larger scale than what we typically observe in our new product development processes.

Operator, Operator

And our next question comes from the line of Nigel Coe from Wolfe Research.

William Vranka, Analyst

This is Will Vranka on for Nigel. So first on the backlog. I was wondering if you could talk about the dynamic of orders that are greater than versus less than 90 days dated, how that performed in the quarter and how you see that trending through the back half of the year?

William Sperry, Executive Vice President and CFO

Yes. If we consider the order pattern and the backlog, I would first mention that the utility order pattern has been stronger than the Electrical segment, leading to more backlog on the utility side. The Electrical segment is still building backlog but is approaching a more balanced book-and-bill situation. Orders over 90 days have been a factor, especially in areas like smart meters where there are constraints. Regarding your question about whether customers are responding to supply chain improvements and if that will decrease orders to avoid what I would call a safety order, I believe that response will be immediate as lead times improve, allowing customers to feel less compelled to get in line. As for the state of the supply chain, it remains somewhat uneven with labor and material supply, and our lead times are still longer than we would like. This likely contributes to customers wanting to ensure they receive the materials they need.

William Vranka, Analyst

Got it. And then what are your expectations? Could you provide any detail on how you're thinking about gross margins for the rest of the year?

William Sperry, Executive Vice President and CFO

Yes, I believe that unit growth will positively impact our gross margin by allowing us to achieve higher margins on additional units sold. This will contribute to our overall gross margin. Additionally, the relationship between price and cost will also affect margins. I see these two factors as beneficial. Looking ahead, we anticipate that as our factory efficiency improves—though we don't see that happening in the second half of the year—this will further enhance our gross margin in the medium term.

Operator, Operator

And our next question comes from the line of Josh Pokrzywinski from Morgan Stanley.

Joshua Pokrzywinski, Analyst

I have a question regarding the channel inventory. I apologize for joining late, so if this has already been addressed, I can refer back to it. I'm curious if you are noticing a richer mix between consumer and industrial trends. I understand your focus is not heavily on the consumer side, but any insights you have across the various lines of business would be appreciated.

Gerben Bakker, Chairman, President and CEO

Yes. Yes, I'd say in general, in inventory, and that's a topic that we cover with our customers quite often every opportunity we have with them to do checks on that. We also validate on sell-in and sell-out to have a look at real demand. I would say that generally still our products are selling through. Certainly, in this supply chain crunch, distributors are trying to get their hands on products. I would say there has been a level of getting inventory in. So I would say at this point, our distributors are perhaps appropriately stocked rather than overstocked. I would say they were probably understocked for a period of time. So there has been stocking going on. But in our products, no signs of any overstock position. Now the one thing that remains to be seen if there is a slowdown are the levels that they have too high for what they need, then you could see a correction in that with inventory level. But at this point, we don't see big risk of overstocking and the consequences of destocking in the absence of a significant slowdown.

Joshua Pokrzywinski, Analyst

Got it. That's helpful. And then I think just as maybe some of the macro data has softened up in pockets here, folks are always trying to look for prior recessionary periods as kind of a starting point. But my guess is that your markets, at least on a volume basis, are up terribly much since like the, what was that, 2018 kind of soft patch. Like any way to contextualize even kind of rough numbers what some of those various markets are doing on a volume basis versus kind of pre-COVID levels?

William Sperry, Executive Vice President and CFO

Yes, it's an interesting perspective. I anticipated you would discuss how our exposure might perform in a consumer-driven recession rather than one led by financial institutions or industry. I'm not sure I have the analysis readily available regarding those levels compared to 2018 and 2019. Perhaps Dan and I should follow up with you on that.

Joshua Pokrzywinski, Analyst

Got it. Since you're volunteering, how do you feel about a consumer-led recession impacting the business?

William Sperry, Executive Vice President and CFO

Yes, we expect our Electrical segment to be impacted first and most severely, while our utility segment may experience a 1 or 2 quarter delay and likely a milder and shorter effect. We are considering factors such as the infrastructure bill and whether it could provide some stability. However, we do not believe we are immune to macroeconomic conditions. Currently, we are halfway through the first year with approximately 20% sales growth and margin expansion, and our pricing is in the double digits. We recognize that these performance metrics are not sustainable in the long term. Therefore, we are being very cautious and closely monitoring the markets. We have decided to invest in inventory due to a sufficient backlog that gives us confidence in clearing that inventory. Gerben mentioned that our balance sheet is ready for investment, and we see a good opportunity to support the utility business with growth capital and the Electrical segment with productivity capital. We plan to make these investments in the second half of this year to bolster our performance in 2023 and 2024.

Operator, Operator

And our next question comes from the line of Chris Snyder from UBS.

Christopher Snyder, Analyst

I was just hoping for more color around the back half margin drivers. So relative to Q2, the guidance calls for a pretty material falloff in margins into the back half. It just seems more significant than what would be implied by the $20 million back half restructuring spend. So I understand there's maybe slight volume declines as well. So I would have expected a more material offset from improving price/cost with LIFO accounting and the recent decline in steel. Any color on these buckets would be helpful.

William Sperry, Executive Vice President and CFO

Yes, Chris, I would say that it's been somewhat challenging for us to accurately forecast all the variables you mentioned. Therefore, we've been cautious about not overstating our predictions, particularly regarding volume and price/cost. We believe that there is a connection between pricing and costs, indicating that if costs change, prices will eventually follow suit. I would respond to your question by noting that there are clear scenarios where our margin expectations for the second half are conservative. We feel that this cautious approach is appropriate at this time. I certainly understand your concerns, and we will do our best to exceed expectations, but we wanted to maintain a reasonable level of caution regarding the variables you pointed out.

Christopher Snyder, Analyst

No, I really appreciate the back color. And I think the strategy makes sense for the macro at hand. So to your kind of response, there's obviously been a lot of moving parts and just an overall difficult to manage macro for 2-plus years now. But I guess if we think about 1 day going back to a normalized environment, what do you view as kind of normalized incrementals for the 2 segments?

William Sperry, Executive Vice President and CFO

I hope that we come out of this period with improved margins, which would be supported by our sales in C&I Lighting, strategic investments in high-margin acquisitions, and focusing on innovation and new product development in high-margin areas. My aim is that when we reach a new normal, our margins will be higher than they were before. In terms of future expectations, I would anticipate incremental margins in the mid-20s. This will depend on the balance between our investments and the harvesting of new volumes. That is how I see our financial model evolving over the next couple of years.

Operator, Operator

And our next question comes from the line of Christopher Glynn from Oppenheimer.

Christopher Glynn, Analyst

So at your Investor Day, you guys spent a little time talking about channel strategies, the Electrical segment and some of the different tiers of distribution, top 10 versus the tail. Just curious, any comments on present contributions? And if you think the 50 basis points a year from that strategy might be something that you're more likely to overshoot?

William Sperry, Executive Vice President and CFO

Yes. I wouldn't say that our estimates have changed in the last couple of months. I'd say there continues to be a lot of uncertainty. But it does feel to us like our relationships with that top tier of channel partners is really strong. I think Gerben was alluding to it and talking about pricing. It's been a very hand in glove and close relationship process over the last couple of years. And they've required us to communicate early. They've required us to be coordinated in how we do things as opposed to try to disrupt how their systems load prices. And I think the grades certainly, that Gerben and I get when we meet with senior leadership are quite favorable in terms of helping manage through this pricing environment. And I would say maybe underlying this is the obvious point that this price increases have not damaged demand in any way, right? We haven't hit some elasticity point as such that demand would go down. And therefore, maybe it's been easy that we and our channel partners are on the kind of the same side of the table as it were. But I would say that the sales and marketing teams doing some interesting initiatives about utilizing better tools for cross-selling, organizing better materials for vertical market sales and getting kind of humbled to compete collectively with solutions in some of those markets rather than one-off product sales. And I think I'd say, Chris, we feel really good about that. But I wouldn't say we've upped our forecast in the last two months, really.

Christopher Glynn, Analyst

I appreciate that time frame. I might have asked that at Investor Day, but I didn't. And then on utility, despite the longer lead times, you're getting great grades on serving the competition well. So as that T&D business is really running like wild horses, would you expect that kind of gratuity or upside from channel shift in your favor? Would that be sticky in the run rates in the future? Do you hold that?

William Sperry, Executive Vice President and CFO

Yes, I think what you're asking is whether we're gaining market share right now and if we expect to maintain that. I would say we would. We believe we are supporting our customers by investing in new products and expanding our capacity. We've received feedback that competitors are not doing the same. So yes, Chris, I expect that there will be a lasting impact and rewards for our support during this turbulent and challenging operating environment. We think so.

Operator, Operator

Our next question comes from the line of Steve Tusa from JPMorgan.

Charles Tusa, Analyst

Anyway, and I think you guys are kind of an easy one. So it's nice not to have to jump up and down here. The price cost spread, I mean, have you guys kind of detailed how you expect that to trend over the next couple of quarters? And would some of that potentially carry into next year?

William Sperry, Executive Vice President and CFO

Yes, we will be closely monitoring this dynamic. We haven't shared a lot of specifics because it's challenging for us to predict the costs of steel, copper, and aluminum. We believe that prices will move in relation to those costs. Additionally, we've experienced significant non-material inflation resulting from higher salaries, wages, healthcare, and transportation costs, which has exceeded our productivity gains. This situation increases the pressure on our pricing since our productivity does not match the inflation rate economists are reporting. Consequently, we anticipate that prices won't decrease as quickly as material costs due to this broader inflation. We are considering all these factors in our guidance and outlook. It will be interesting to address this further in our October call as we prepare for our 2023 setup and in our January call when we provide guidance. The variable you mentioned could be one of the most pivotal, and we will conduct thorough analysis on it. We are monitoring it closely and agree that it could positively impact our outlook for 2023.

Charles Tusa, Analyst

Yes, looking ahead to next year, what are you seeing recently in the non-residential trends?

William Sperry, Executive Vice President and CFO

Yes. I mean, to us, it still feels good. And that's why it's almost feel like watching some of these consumer-facing companies and seeing what's happening. It feels a little maybe uncorrelated right now. But for now, what we see, the nonres is healthy.

Charles Tusa, Analyst

And on the resi side, I think you said that it was down 20% or something. Did I miss that?

William Sperry, Executive Vice President and CFO

No, double digits. So it represents about 15% of the segment sales, and they were down double digits. So it's a pretty good drag, unfortunately.

Operator, Operator

This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Gerben Bakker, Chairman, President and Chief Executive Officer for any further remarks.

Gerben Bakker, Chairman, President and CEO

Great. Thanks, everyone, for your time today and your questions and interest in Hubbell. A strong second quarter and year so far and well positioned to continue to execute through the numerous uncertainties and opportunities ahead. Hope you all have a great rest of the summer, and we look forward to speaking with you again in the fall in our third quarter. Thank you.

Operator, Operator

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.