Earnings Call Transcript
Hubbell Inc (HUBB)
Earnings Call Transcript - HUBB Q1 2023
Operator, Operator
Thank you for standing by and welcome to the Hubbell Incorporated First Quarter 2023 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. As a reminder today's program is being recorded. And now I'd like to introduce your host for today's program Dan Innamorato, Vice President, Investor Relations. Please go ahead, sir.
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 first 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 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 to this call. Additionally, comments may also include non-GAAP financial measures. Those measures are reconciled to the comparable GAAP measures and are included in the press release and slides. Now, let me turn the call over to Gerben.
Gerben Bakker, Chairman, President, and CEO
Great. Good morning and thank you for joining us to discuss Hubbell's first quarter 2023 results. Hubbell is off to a strong start to the year. Our first quarter results exceeded our expectations, driven primarily by three factors: stronger stick rates and realization on incremental price actions, effective ramp-up of recent capacity investments, and improved operational productivity. We are raising our full year outlook this morning to account for this outperformance while maintaining a balanced view of risks and opportunities as we navigate a more uncertain second half. Our investments in capacity, innovation, and productivity are yielding strong returns and enabling us to effectively serve strong customer demand for Hubbell's critical infrastructure solutions. Most notably, utilities continue to actively harden and upgrade aging infrastructure while also investing to facilitate renewables and electrification through new interconnections and enhanced smart grid applications. We achieved double-digit sales growth in the first quarter as improved production output enabled continued volume growth, while leading service levels supported continued demand strength and price realization. Operationally, we achieved over 600 basis points of adjusted operating margin expansion in the quarter, driven by favorable price cost and productivity in addition to volume growth. While Utility Solutions continued to perform exceptionally well in a strong market environment, we are also very pleased with the operating performance of Electrical Solutions, which achieved strong margin expansion in a more modest market backdrop. We're executing well in our strategy to compete collectively as a unified HUS operating segment and we'll talk more about that later. Before I turn it over to Bill to give you more details on the financial performance in the quarter, I want to highlight a few recent accomplishments which demonstrate that our strategy and the investments we are making into our business are driving value for all our key stakeholders. First, Hubbell Power Systems and Burndy are proud to have been named Supplier of the Year by two of our largest electrical distributors in 2022 with strong demand and tight supply chains in the utility, T&D, and industrial markets, delivering on commitments to get customers the product they need when they need it while maintaining consistent quality, reliability, and service is critically important. While the supply chain environment remains challenging, our ability to execute and our willingness to invest in production capacity and working capital has helped strengthen our long-term relationships with major customers. In our electrical segment, we're also pleased to have been recognized with Product of the Year award by a major trade publication for two innovative product launches. EdgeConnect Screwless Termination wiring devices is a product line we launched last year which innovates on a 100-year-old product design, eliminating the need for installation tools and delivering 80% labor savings for installers. Burndy's Quickshear bolt is a new product for solar and wind markets, which eliminates the need for compression tooling and manual torque wrenches, simplifying conductor installation and saving the contractor time in the field. These are just a couple of examples of the investments we are making into innovation to accelerate Hubbell's organic growth profile in core markets as well as strategic growth verticals. And finally, for the third consecutive year, Hubbell was named one of the world's most ethical companies by Ethisphere, a distinction that recognizes all of our employees for their dedication to upholding our core values each and every day. One aspect of those core values is our commitment to sustainability and as many of you will have seen in March, we released our annual sustainability report with refreshed multiyear goals to substantially reduce greenhouse gas emissions, water usage, and hazardous waste by 2030. These new goals supersede our initial 2025 goals, which we achieved ahead of schedule. Sustainability is a core component of our business strategy, not just in our own manufacturing and operations, but through the impact of our products in making critical infrastructure safer, more reliable, and more efficient. We continue to accelerate our investments in areas like T&D infrastructure, renewables, utility automation, electric vehicles, and broadband communications, each of which offer attractive growth opportunities for our shareholders while enabling Hubbell to further its mission to energize and electrify our economy and our communities in front and behind the meter. Now, let me turn it over to Bill to give you some more details on our performance.
Bill Sperry, Executive Vice President and CFO
Thank you, Gerben, and good morning everybody. I appreciate your interest in Hubbell. I wanted to start by reminding us, when we were together in January, talking about our full year outlook. We established a couple of important components of a framework of that outlook. First was that we were confident in our end markets that they would outgrow GDP, a function of some of the key electrification megatrends. We were confident that we were well positioned in those end markets with brands and solutions and people processing technology to continue to satisfy and service the customer. We felt that our pricing, which is in response to a couple of years' impact of some inflation, had us set up well for 2023 with a couple of points of wraparound. And we also stated that our visibility to the first half was better than the second half and so it's important for us to get off to a good start and we were trying to be explicit that we had a front half-loaded outlook as a result of that second half uncertainty. And as Gerben had said in my comments, I'm starting on page five of the materials we exceeded our expectations significantly in the quarter. You see sales of $1.29 billion, an 11% growth was the sixth consecutive quarter of double-digit growth in sales for us. I think it's a pretty good indication of solid demand out there. Right now that demand is notably skewed towards the utility side of our business versus the electrical, and we'll talk a little bit more about that as we unpack the results. OP margin of 20.7%, that 20% level kind of a milestone achievement for us and really driven by some of the price cost drivers that Gerben had mentioned. Earnings up 70% to $3.61, nearly $1.50 almost of new earnings generated versus the prior year period end. Cash flow this is typically a seasonal low for us at the very beginning of the first quarter, but a nice amount of cash being generated because of the income that we generated. So on page six, let's drill down a layer into that strong performance. Starting in the upper left with sales, the 11% growth is comprised of a high single-digit price increase and low single-digit volume increase. The volume varied by segment where it was quite flat in electrical and very strong growth in utility. The OP on the upper right, you see an increase to $267 million of OP, a 66% increase over the prior year. And again, at that 20% benchmark level. Earnings per share grew just a little bit more than the operating profit driven obviously by that profit, but also taxes were just slightly lower this period. And on the net interest expense line we have our interest cost in the form of our bonds are fixed versus the cash we have that earns variable rates. And with rates rising, we earn more income, thus reducing the net interest expense. So you got a little bit of favorability below the line and inside of earnings. And the cash flow there you can see the comparison to last year. Right above it you see the amount of income becoming more cash flow. And it's quite important for us to have the cash to leave us in a position where we're poised to support our investment. We are keen to continue to increase CapEx. We think there are excellent growth opportunities for us on the utility side and continues to be good productivity opportunity on the electrical side, as well as having more capital to support investing in acquisitions and we'll talk about a couple of the acquisitions we've done and how they're doing since we've brought them on. Let's unpack those results by segment, and you'll see a different profile here as we go through. Utility right now is the engine driving the Hubbell enterprise. We find ourselves with a very constructive set of market dynamics coupled with a really excellent positioning and a best-in-class leading franchise that we've constructed over the decades here with components, communications, and controls really from the backbone to the edge, and a really strong franchise that's performing really well in these market conditions. So starting with sales, the 20% growth in sales to $782 million is comprised roughly half from price increase and half from volume gains. The volume was skewed more towards the transmission and distribution component side versus the communications and control side. We feel that the CapEx that we've been investing to add capacity has allowed us to grow sequentially and year-over-year. And that's been really helpful. I think besides helping us grow, it's helped us manage service levels. The feedback we keep getting from customers is that service level is beating that of the competition. And I think those service levels in turn are reinforcing our value proposition and helping us support a pricing environment as well as we believe leading to some share gains on the volume side. On the Communications & Controls, you see 4% growth there. You'll recall that through much of last year that was bumping along flat. And so we may be starting to see a little bit of buying in the supply of chips, allowing those meters to get built and installed. And we're looking forward to more of that as we move forward. On the operating profit side, 87% growth to $191 million, you see almost $90 million of new profit generated by the segment, just a really impressive financial performance for them. You have lots of things going right. You have price and material being positive. On the pricing side, that's a multi-quarter trend that you all have seen. On the material side, actually a little bit new to see that there was actually some tailwind that came from materials as opposed to we had been facing inflation all of last year on that side, so both of those contributing tailwinds, which as you see pushed up margins impressively. The volume that we enjoyed dropped through at attractive incrementals that helps push the margin up. And we've been talking to you about the impact of disrupted supply chains impairing our productivity last year. And we're seeing some return to normalcy in some of those dimensions where that productivity is starting to come back and be positive, so a lot of drivers really helping lift the margin and propel the results of the utility segment. We thought it would be helpful on page eight to maybe give a multiyear view of how the demand pattern has looked and we've shared with you a picture of the backlog. What you can see is starting really at the beginning of 2021, a very significant and sustained increase in the backlog on the utility side of distribution and transmission components. It's obviously driven by the fact that the demand exceeded our ability to be able to make and ship a like amount of material. And one of the reasons we wanted to show you the page is we feel that that level of demand is not the norm and would not be a sustainable level over the long term. Essentially, I think we see their pattern responding to longer lead times and the fact that we were in an increasing price environment both of those phenomena caused people to put their orders in earlier than they otherwise might, and that's evidenced and supported by the fact that there's quite a bit of content in this backlog that's dated longer than 90 days. We expect is that as we start to get the supply chain normalized, get our lead times normalized, and bring those factors down, we think we'll be enabling our customers to get their orders put in with the anticipation that they will get the material much faster. Our anticipation is that the order rate can come down and we'll be reducing this backlog to get it back into balance and what we feel over the medium and long-term is a mid-single-digit sustainable book-and-bill order and ship rate. We really wanted to show you this page. It's part of what gives us the conviction to raise our guidance that Gerben mentioned at the top. We think this momentum will start to create visibility through the better part of this year. And so it gave us the confidence that we could give you that increase in guidance. On page nine, we switch to the electrical segment. You'll see very strong profit performance with an increase of 30% to 15% margins, $76 million of OP on flat sales. That flat sales includes an acquisition of PCX, which just to remind you was a very intentional increase in our exposure to the data center space. That business is based down in Raleigh. Gerben and I, and some of our partners had the opportunity to go visit the team last week in Raleigh and it's great to see them fly the Hubbell flag at their facility and see how excited they are to be part of the Hubbell family and the greater resources that we have, which they believe is going to enable them to be a more capable competitor. So we welcome those folks to our family. The counter is that the organic part of electrical was down a little bit. We saw softness in residential at the double-digit level. We had strength in our industrial markets and notably some of the verticals we've been calling out in renewables, data centers, and telecom. One way in a time like this, besides the compare to prior year is to also look at the sequential trend in demand and sales. Typical seasonality for us is to have the fourth quarter lead to a slight decline in the first quarter of a couple of points. That would be typical seasonal progression. The fact that it's flat this year is favorable compared to that typical season and leads us to believe that demand is in fairly healthy shape there. More impressive for us on the electrical side was the margin performance and similar to utility, very good price material performance, and same improved productivity where the plants are becoming more efficient after dealing with some of the inefficiencies forced on them by the pandemic. We also thought on page 10, it would be worthwhile to show you how we are building around some of these identified verticals. You'll remember at Investor Day and Gerben mentioned in his comments, we're trying to compete collectively in the electrical segment. At Investor Day, we shared some of the benefits of transitioning from a three vertical silo segment to a single segment. We think there's efficiency gains, but also importantly effectiveness gains. This is an example of the ability to be more effective. We organized around the renewable vertical. And again, to remind you, so this is solar and wind applications. We're not making solar panels. We're not making wind turbines. Our approach is around the balance of systems of components that those applications require. And those balance of systems can come from different business units across our electrical segment. So, the trick is to get the sales force to be very effective at cross-selling, to get the marketing team focused on helping to solve customer problems, to get the capital flowing toward new product development that can come out of that improved voice of customer that the newly organized sales force get. Gerben mentioned a couple of these products but they are good examples of us being able to serve a vertical more capably when we compete collectively as an electrical segment. We thought it noteworthy to show you that in just three years at the bottom, we've been able to double our performance in the vertical to about $100 million of exposure and we anticipate a similar amount of growth as we move forward. I think also think of this as a model of other verticals that we're intending to become more vertically oriented around, including data centers, telecom, and electric vehicles, all of which we're using similar techniques to become better and more effective. So how does this performance and all that we're doing compare to what we said when we were together in January and where does it take us as we look out? For us, it's important to share where we see improvement, where we see things the same, and what is still uncertain. On the improvement side, it clearly starts with the pricing actions. Actions that we were contemplating at the end of the year and implemented in the new year had stick rates far above historical averages and far above our expectations. I think it's an example of the channel really endorsing and embracing these pricing actions and that created a big improvement. Additionally, you recall our CapEx has gone from about $100 million to the ballpark of $130 million last year. We're anticipating taking it up to $160 million this year. Those big improvements in CapEx are paying off in our ability to ship more volume. Certainly, the productivity that was impaired a little bit last year by our labor not being available on a consistent basis, materials not being available on a consistent basis, and transportation likewise not being available on a consistent basis made it very difficult to plan and execute inside our plants. We're seeing those conditions improve, and we're seeing as a result productivity improvement. All of that is causing us to raise our sales and margin outlook. What's the same is utility demand and the market strength we see continuing. We showed you evidence of that order pattern in the backlog page. The electrical markets continue to trend. As we said, having a favorable comparison sequentially to the fourth quarter, we think is a good sign of demand. We still believe that we have a significant part of the portfolio that is going to show resistance to consumer-led recession effects that includes both utility side transition and distribution components, but it also includes elements on the electrical side where both industrial and some of those verticals inside renewable, telecom, and data centers we expect to grow through any macro. On the uncertain side on the right, we still have uncertainty in the second half. We think we see good momentum for the second quarter, which gives us some confidence. We are still working through channel inventory levels and making sure that what our customers have on the shelves is aligned with what they know they can move and ensuring they have the confidence to keep putting orders in with us to sell through. I think the non-residential end markets, whether they're impacted by any macro uncertainty again, we don't see signs of that yet. But we read the papers just like you all and know there are concerns out there. So that's causing us to have some conservatism as we think about the second half. In other words, our guidance that Gerben is about to talk through is not the first quarter seasonally extrapolated through the year. It involves good momentum into the second and then some caution around the second half. So I'll turn it to Gerben to quantify our outlook for you.
Gerben Bakker, Chairman, President, and CEO
Great. Thanks Bill for those additional insights on our results. Hubbell is raising our 2023 outlook to an adjusted earnings per share range of $13 to $13.50, representing approximately 25% adjusted earnings growth at the midpoint. This outlook now assumes 8% to 10% total sales growth and 7% to 9% organic growth for the full year consisting of approximately equal contributions from price realization and volume growth. We continue to expect full year free cash flow conversion of 90% to 95%. This updated outlook incorporates a continuation of strong fundamental performance from the first quarter, while also maintaining a balanced view of risks and opportunities. It also enables us to accelerate our investment levels to support high-return capacity, footprint, and innovation projects over the balance of 2023. We believe this balanced view should enable us to achieve our outlook in a range of macroeconomic scenarios. Not only is this updated outlook well ahead of our expectations coming into 2023, but it also puts us on the path to achieve our 2025 targets, which we laid out for you during Investor Day last summer two years ahead of schedule, all while accelerating investments back into our business and without substantial benefit from capital allocations. I am proud of our employees for the results that they are driving for our customers and shareholders, and we remain committed to delivering differentiated results over the near and long term. With that, let me turn it over to Q&A.
Operator, Operator
Certainly. One moment for our first question. And our first question comes from the line of Jeffrey Sprague from Vertical Research. Your question please.
Jeffrey Sprague, Analyst
Hi. Thank you. Good morning, everyone.
Gerben Bakker, Chairman, President, and CEO
Good morning, Jeff.
Bill Sperry, Executive Vice President and CFO
Good morning, Jeff.
Jeffrey Sprague, Analyst
Hey, just a couple of things. First just on utility. Is your remark about mid single-digit kind of the continuation off this new hire base, or do you foresee a timeframe, pick a year, maybe next year where revenues actually have to sag a bit to kind of normalize things?
Bill Sperry, Executive Vice President and CFO
I mean, we're anticipating it's off of the new base Jeff, but it's certainly something where we'll continue to be watching that graph we shared with you comparing orders to shipments. But there does appear to be adequate backlog to continue to grow off that base level.
Jeffrey Sprague, Analyst
And then just on electrical margins are we beginning to see also some of the kind of restructuring and plant realignment coming to bear here in these margins, or is it just really more kind of a very favorable price cost dynamics and maybe...
Bill Sperry, Executive Vice President and CFO
Yes, I would say it's more the latter i.e. more of the price cost and productivity that I would call being driven by the normalizing of operations inside the plants. I think that some of the efficiency that we'll get through integrating into a single segment is actually still in front of us.
Jeffrey Sprague, Analyst
And I'll leave the utility question to someone else. Gerben, lighting. This would seem like an ideal time to execute an exit of lighting, while you're just crushing it in utility. I just wonder your thoughts on that. How important is the business? Is there kind of a way to at least make it less important, even less so important than it's been recently?
Gerben Bakker, Chairman, President, and CEO
Yes. A lot of thoughts in that one, and let me just maybe give a couple of comments on it. First, maybe just set the perspective on that business. It's a single-digit revenue part of our business. So it's quite small. It operates at the lower end of our margins and margin expectations. It's been particularly challenged the last year plus when container rates, which this business depends heavily on, escalated 3x, 4x, 5x. The good news is while volumes are down and the markets clearly in residential are down the business is recovering quite well with costs coming back in line. But all that said, we take the responsibility to look at our portfolio quite seriously and you saw that we executed the C&I lighting business. I would say that for our portfolio was much more of a challenge in what our strategy was going forward. But we're active on this Jeff not just in the example that you may get of a residential lighting, but other product line skew actions. As a matter of fact, part of what drove the electrical margin slightly better this quarter was a conscious decision to exit some low-margin business, switched that partially to higher. So it had a net revenue hit by the net margin accretion. I don't ever say this kind of consideration is off the table. We talked about some of the areas that it does help us particularly with our digital strategy. But if this business is more valuable to somebody else, we would certainly consider our options.
Jeffrey Sprague, Analyst
Great. Thanks. Much appreciated.
Operator, Operator
Thank you. One moment for our next question. And our next question comes from the line of Steve Tusa from JPMorgan. Your question please.
Steve Tusa, Analyst
Hi, guys. Good morning.
Gerben Bakker, Chairman, President, and CEO
Good morning, Steve.
Bill Sperry, Executive Vice President and CFO
Good morning.
Steve Tusa, Analyst
Can you just maybe give us an update on some of the absolute numbers embedded in the bridge for the year price cost and productivity or anything else that on the quarter maybe just this quarter just absolutes?
Bill Sperry, Executive Vice President and CFO
Let's begin with the first half of the year and consider the outlook. In January, we anticipated a wraparound price increase of about two points, which has since improved. As Gerben mentioned, roughly half of our new sales guidance is driven by price, indicating a notable increase from a couple of points to more in the single digits on an absolute basis. That’s significant. Observing the cost curves has been interesting, especially as we closely monitor steel, with copper and aluminum exhibiting similar trends. We observed a peak in the fall of 2021, followed by a low at the end of 2022, and now we're witnessing a reinflation this year. This is starting to manifest as a positive influence. However, with the inflation we're experiencing, there could be some fluctuations. While isolating price is straightforward, determining the relationship between price and cost is more complex due to those cost dynamics. This is a key component of our current situation.
Steve Tusa, Analyst
So, as I expected, we had roughly a negative 90 in costs or something similar. I'm not sure if that figure was mentioned by you all. Are you indicating that the cost side is now just slightly positive for the year?
Bill Sperry, Executive Vice President and CFO
We got it positive in Q1. The way we're looking at it, we're anticipating a reasonably flat and benign contribution from the cost. So, it makes the price a little more drop-through rather than being absorbed. Now, you still have other inflation obviously in non-material places like wages and things like that. But the material and pricing equation has really improved quite a bit.
Steve Tusa, Analyst
Your understatements are legendary, at this stage a little more I think, it's a little more than a little more. But the last question, just on the electrical volumes. Were they down like high singles year-over-year, in the quarter? And I guess that's obviously, not all residential. What else would have been down to drag that down, or maybe it was all residential?
Bill Sperry, Executive Vice President and CFO
No. Residential, yes, your calculation is right, residential at double digits and being the percentage of the segment that it is represents a couple of points plus of that. But that still leaves others. And so there were spots inside the commercial business Steve, where we started to reduce our lead times. We started to see our customers managing their inventory. That kind of relates to I think Jeff's first question, right, where as the customer gets their inventory normalized, is there a period where you see maybe an underordering of a couple of weeks that affects things. That's what we saw in some of our commercial businesses.
Steve Tusa, Analyst
Makes sense. Okay. Thanks.
Operator, Operator
Thank you. One moment for our next question. And our next question comes from the line of Tommy Moll from Stephens. Your question, please.
Tommy Moll, Analyst
Good morning and thanks for taking my question.
Bill Sperry, Executive Vice President and CFO
Good morning, Tommy.
Tommy Moll, Analyst
I wanted to start on your revised revenue outlook, so up several hundred basis points from when we spoke last quarter. If we look at it by segment, last quarter the call on the utility side was for mid-singles plus, for the year, and on the electrical side, low singles both on an organic basis. You well exceeded that on the utility side and came in light on the electrical side, at least for the first quarter. So could you just refresh us on what the full year framework is like on either side of your business?
Bill Sperry, Executive Vice President and CFO
Yes, we've been quite careful to not reparse this framework into the two segments. But between them, we're thinking that volumes can be mid-singles. I think that will be, obviously, skewed towards utility being the heavy contributor there.
Tommy Moll, Analyst
Okay. May get a similar answer here, but I'll try anyway. Just specifically for your non-res exposure in electrical, if volumes there were down in the first quarter, it sounds like there's incrementally more caution in the second half of this year. So my assumption would be that your base case is for the volumes there to trend pretty consistently negative through the year. But if you could just comment there and also, just anything that's changed versus last quarter.
Bill Sperry, Executive Vice President and CFO
I want to clarify a couple of points. Firstly, we are not becoming more cautious about the second half of the year. Secondly, the slight contraction in our electrical contracting business in the first quarter is partly due to the significant growth we experienced in the first quarter of 2022. There was a notable increase from the fourth quarter last year, which typically shows a decline. Therefore, we've had a tough comparison this time. To address your question, our performance will increasingly rely on sequential analysis, and the fact that we remained flat from Q4 to Q1 indicates some positive signs. Moving forward, the comparisons will not be as difficult, which shapes our outlook. However, I wouldn’t say we've grown more cautious for the second half.
Gerben Bakker, Chairman, President, and CEO
And maybe adding to that a little bit, just to give you some insight into the complexities that we're working through and the thought process that we are for this, as supply chain normalizes again and we're now seeing that in parts of our business, specifically in some of the non-res businesses, you're really dealing with a couple of things. One is just by the fact that lead times coming down should allow customers to not place orders for a little while and then place them again. The second component that's going on at the same time is when these lead times are coming down, the supply chain becomes more predictable. Customers and distributors don't need to have the inventory levels that they needed when there was a lot of uncertainty. So at the same time, we're seeing some of the inventories coming down. Managing both those dynamics creates some challenges for us to fully understand at what level each distributor is doing this; some are, some aren't. Are they really following the lead times down, or are they still nervous and placing orders? There's a lot of complexities in it, which is why we're taking a more cautious approach going into the second half for these dynamics.
Tommy Moll, Analyst
I appreciate it and I'll turn it back. Thank you.
Operator, Operator
Thank you. One moment for our next question. Our next question comes from the line of Josh Pokrzywinski from Morgan Stanley. Your question, please.
Josh Pokrzywinski, Analyst
Hi. Good morning, guys.
Gerben Bakker, Chairman, President, and CEO
Good morning, Josh.
Josh Pokrzywinski, Analyst
So, apologies, I missed a little bit in the prepared remarks, the call kept dropping. But I just want to dig a little bit more on the utility side. I think even at the start of the year there was some signaling that maybe things could be a little bit better. You saw like the EEI CapEx forecast looks pretty healthy, which is seasonally atypical. Just trying to get maybe my arms around how much of this is customers kind of preparing to do work and maybe building up some inventory? How much of this is maybe stimulus-related something like IRA? Because we've been in this environment of grid hardening and grid investment for a while and this is just a big step function change. So trying to pin down how much of this is episodic versus run rate?
Gerben Bakker, Chairman, President, and CEO
I would start by saying that the underlying demand in the utility sector remains very strong. We have observed this growth over the past couple of years. We believe that the longer-term demand, as Bill mentioned, is still intact at a mid-single-digit growth rate. Our improvement has largely stemmed from our ability to increase production capacities through our investments, allowing us to ship more. Despite these efforts, the backlog remains steady and has even flattened a bit, which we expect as we ramp up production and lead times normalize. We remain optimistic about the fundamentals in this sector. The infrastructure builds are still in the early stages, and we anticipate that their impact will become more significant over the next year or two. Therefore, the increase we are seeing is not unusual given our actions; it is just happening a little faster than we initially expected due to these investments.
Bill Sperry, Executive Vice President and CFO
I think, Josh, we were expecting mid-single digits. Excluding price, we are seeing high single to double-digit volume. I believe we are gaining some market share as we are outperforming the market due to our improved service levels and capacity, backed by necessary investments. Regarding projects, the transmission side looks quite healthy and tends to be more project-driven with a forward-looking approach. However, we have not observed utilities stockpiling long-term project inventories before installation. Overall, I would say that demand seems to be stronger than the mid-single digits we anticipate in the long run. We are gaining a little market share, which is benefiting us and encouraging continued investment in capital expenditures because the margins are strong enough to yield excellent returns on this additional volume.
Josh Pokrzywinski, Analyst
Got it. Super helpful. And then just with kind of all the consternation around commercial construction. I know it's hard to follow every cable gland all the way to the job site. But any sense for what percentage of the business we should think about as kind of true new non-res construction versus something that may be kind of away from the commercial element or more I'll call it retrofit and maybe not as dependent on something like they verified.
Bill Sperry, Executive Vice President and CFO
Yeah, I think the answer to that is it's about two-thirds new and the balance is rental. And I agree, yeah, that's an estimate on our part.
Josh Pokrzywinski, Analyst
Got it. Okay. Thanks, all. I leave it there. Best of luck guys.
Operator, Operator
Thank you. One moment for our next question. And our next question comes from the line of Joe O'Dea from Wells Fargo. Your question please.
Joe O'Dea, Analyst
Hi, good morning.
Bill Sperry, Executive Vice President and CFO
Good morning Joe.
Joe O'Dea, Analyst
Hi. I want to start on margins. It looks like the guide is implying that margins for the full year would be lower than where you were in the first quarter. It doesn't sound like any of the commentary about the second quarter would suggest that we'd see something like that. So one just to clarify that? And then two, what you're thinking about in terms of the back half of the year and what could contribute to margins maybe coming in a little bit lower than where you were in the first quarter?
Bill Sperry, Executive Vice President and CFO
Yeah, Joe, so let's start with your first point, which is that we do see momentum into the second quarter that we think is first quarter-like in terms of that, so yes. Secondly, the way this guide works, you're right it's not just seasonally taking the first half and using the typical growth in margins off of that. So we've injected caution just because we don't know. One of the things we're expecting is to invest more in the second half, and that will be a combination of growth investing and productivity investing. But just I think we felt, we have decent visibility to the second quarter. It feels like it gets more opaque to us. If I were to maybe rephrase your question and say if the trends continue as they are in the first half into the second, we would actually do better than this guide. The guide is cautious because we don't want to get our cost structure out too far ahead; at the same time if there is growth in volume there, we feel very confident we can get our share and more than that.
Gerben Bakker, Chairman, President, and CEO
And I think as Bill stated during his prepared remarks, a little bit of the first quarter is a lot of things going in the right direction for us both the pricing that carryover, the new pricing that we implemented at the same time that we saw some of the commodities actually going down. Some of that is reversing. We're seeing commodities actually going up and that would be certainly a slight headwind for the second quarter. The other one is around pricing. Our view on pricing is that we've generally been able to hold on to it longer rather than shorter. I think in this environment that's particularly going to be true. But the magnitude of some of those price increases has us a little bit cautious too there. If materials stay down can you hold on to those prices longer term? And then the last part is around what I talked about of as supply chains come back in what happens on a more shorter-term basis with inventory levels and how to manage through that. Just a little more uncertainty going into that second half with some of these variables that has us a little more cautious. But, yes, it could be better.
Joe O'Dea, Analyst
I appreciate all those details. And then also just wanted to ask about, sort of, maybe more opportunities on the cost side when you talk about commodities getting a little bit better, obviously monitoring that, but also just smoother operations. Presumably your suppliers are seeing some of the same types of benefits. So just wondering how you're approaching that dynamic if you see opportunities to go to your suppliers and sort of look for a little bit better kind of cost profile.
Gerben Bakker, Chairman, President, and CEO
Yes, we're actively working on this. Our focus is not only on the supply chain but also on improving productivity this year and into next year. We faced significant challenges during the pandemic, including disruptions in our factories and supply chain. One of our main objectives is to engage with our suppliers to find cost reductions. Additionally, we're investing time to enhance the resilience of our business and supply chain, which allows us to command a slight premium in the market due to our reliable delivery and customer service. We are undertaking efforts to strengthen our supply chain, including reshoring and identifying alternative sources of supply. While this may lead to increased costs in the short term, particularly with tooling investments, it will benefit us in the long run and help maintain our market premium. A lot of work is underway.
Operator, Operator
Thank you. One moment for our next question. And our next question comes from Nigel Coe from Wolfe Research. Your question, please.
Nigel Coe, Analyst
Hi. Good morning. Thanks, guys. Thanks for the question.
Gerben Bakker, Chairman, President, and CEO
Good morning, Nigel.
Bill Sperry, Executive Vice President and CFO
Good morning.
Nigel Coe, Analyst
I would like to revisit the seasonality question in a slightly different way. Utility margins were excellent. Historically, the first quarter utility margins tend to be the lowest point of the year. Clearly, the guidance does not reflect that. I'm curious about what could significantly alter that trend in margins. Is there any unusual or one-time factor affecting the first quarter utility margins? I'm just really interested in what you're observing regarding utility margins as we progress through the year.
Bill Sperry, Executive Vice President and CFO
Yes. I would say Nigel, we really don't have a lot of noise or one-timers in those margins. If you took a typical four-quarter Hubbell year seasonality-wise, there is less activity installation of our material in the first and fourth quarters, and more in the second and third as a result of weather. Those volume changes typically drive incremental drop-through such that you get the pattern you just mentioned. Part of what's different is we're operating at capacity right now. There’s no seasonality in the sense of as the weather gets better we'll be able to ship more because we're kind of cranking away. I think the second is again, thinking about price/cost as a net number. We sort of had both variables break right here in the first quarter with price being very strong as we said, the channel being very supportive. Materials, a combination of commodities and components, and PFR is actually for the first time in the last few years actually being a tailwind. We're not anticipating that tailwind to continue, Nigel. As we saw the commodities pick up starting in the new year, we're thinking that will be inflation to us. I know what you're saying when you look at a typical year it has that seasonality and you think things are getting better from here. We may be just in a little more of a sequential kind of analytic framework than BPY because we're kind of building off the first quarter.
Nigel Coe, Analyst
No, I agree with that. Thanks for the color Bill. And then we talked about residential and commercial. Data center is a relatively small market for you guys but it's growing and obviously will continue to grow. What are you seeing in that market? Because there's a lot of chatter about weakening trends. Just curious what your perspective is on data center?
Bill Sperry, Executive Vice President and CFO
Yes, I think our smaller size may play a role in our perspective. Even though larger companies are downsizing, we believe that they may have overhired during the pandemic due to intense competition for talent. As they plan new data centers, they are re-evaluating their designs with a strong emphasis on speed. We're seeing improvements in our own operations through a better salesforce and a more balanced approach to systems and products. Our recent acquisition has also increased our visibility at the beginning of projects. While I may not be overly optimistic because of our small market share, it feels like we still have significant growth opportunities ahead, which may be more reflective of our brand than general market trends.
Operator, Operator
Thank you. And our next question comes from the line of Chris Snyder from UBS. Your question please.
Chris Snyder, Analyst
Thank you. The company produced a very strong 35% gross margin in the quarter. I know that there is some seasonal impact and obviously very strong price/cost. So, I do just kind of curious what you guys think is like normalized gross margin for the business. And I also believe you said that relative to February, the expectation is for a bigger price cost tailwind this year. And that comes despite metal reflation over the past couple of months. So just kind of curious for more color on that. Thank you.
Bill Sperry, Executive Vice President and CFO
Yes, Chris. Let's begin with the pricing situation. The pricing actions we implemented at the end of last year exceeded our expectations when we provided our full-year outlook in January, showing a much higher acceptance than we anticipated and surpassing historical averages for price increase acceptance. The impact from pricing is significantly greater and will largely counteract the inflation we've experienced this year regarding materials. Additionally, as Joe inquired, we need to effectively collaborate with our suppliers to ensure that any reduction in material costs from 2022 is reflected in our costs. It's crucial that we manage this aspect well, Chris. I also believe that the price effects we discussed previously have improved, adding a couple of points, which is quite significant.
Chris Snyder, Analyst
Thank you. I appreciate that. And then if I could just ask one more quick one. For T&D, the expectation that there's long-term mid-single-digit sustainable growth. So I was just kind of curious, when do you think the business will kind of compress back to that level? Is that like a 2024 expectation or do you think you could still realize outsized growth even through next year as well? Thank you.
Bill Sperry, Executive Vice President and CFO
Yes, Josh inquired about the stimulus, and we aren't noticing a significant direct impact from it. There is a lot of planning related to it, and our customers seem to recognize that there are funding options available. Without the stimulus, we might see a mid-single-digit growth materialize in 2024. However, the stimulus could also provide us with a boost for a couple of years. But it's difficult to predict that with certainty right now.
Operator, Operator
Thank you. One moment for our final question for today. And our final question for today comes from the line of Christopher Glynn from Oppenheimer.
Christopher Glynn, Analyst
Thanks for squeezing me in and congrats on the rocking start to the year. So just had a follow-up on the accelerated price realization in the quarter, particularly in Utility Solutions. There's a long-term dynamic where the utilities get rate increases to fund regulatory required CapEx imperative. So, I'm curious you're talking about expanding capacity a lot there. Is that dynamic starting to shift to you where utilities are kind of encouraging you in a sense to continue that capacity investment?
Bill Sperry, Executive Vice President and CFO
I would say encouraged, I would use rather than goaded, but we have strong support from them that they're eager that we do that. I would say, they're backing that up, I think, by giving us a little more share in the short term, such that that's encouraging us further. There’s even a case where Gerben can tell you, where he wanted Gerben to get into some lines of business that we don't even have, just because they're looking for the lead time management to get better and they're thinking that we could do a better job. So yes, there's a lot of what you're saying going on.
Gerben Bakker, Chairman, President, and CEO
Yes, absolutely. And the nice thing about our position in this is that we have direct engagement with a lot of the end users, right? So we have firsthand insights and Bill mentioned an example of a CEO. That actually happened a couple of weeks ago in the conversation, but we have many of these conversations. Our insight into where the demand is up and how sustainable or not that is quite good. That's why we're making the kind of levels of investments that we are right now in that particularly in the utility business.
Christopher Glynn, Analyst
Thanks, talk soon.
Operator, Operator
Thank you very much for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.