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Operator: Good day. And thank you for standing by. Welcome to the Fourth Quarter 2022 Hubbell Incorporated Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today’s conference call is being recorded. I would now like to turn the conference over to your speaker today, Dan Innamorato, Vice President, Investor Relations.

Dan Innamorato: Thanks operator. Good morning, everyone, and thank you for joining us. Earlier this morning, we issued a press release announcing our results for the fourth quarter and full year 2022. The press release and slides are posted to the Investors section of our website at hubbell.com. I’m joined today by our Chairman, President and CEO, Gerben Bakker; and our Executive Vice President and CFO, Bill Sperry. Please note our comments this morning may include statements related to the expected future results of our company and are forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Therefore, please note the discussion of forward-looking statements in our press release and considered incorporated by reference on this call.

Additionally, comments may also include non-GAAP financial measures. Those measures are reconciled to the comparable GAAP measures and are included in the press release and slides. Now let me turn the call over to Gerben.

Gerben Bakker: Great, good morning, everyone. And thank you for joining us to discuss Hubble’s fourth quarter and full year 2022 results. 2022 was a strong year for Hubble, we effectively served our customers through a challenging operating environment, consistently delivering high quality, critical infrastructure solutions, which enable grid modernization and electrification in front of and behind the meter. We also delivered strong results for our shareholders with full year organic growth of 18%, adjusted operating profit growth of 29% and adjusted earnings per share growth of 32%. We began 2022 by completing the divestiture of our C&I Lighting, successfully positioning the Hubble portfolio for structurally higher long-term growth and margins.

We also stepped up our investment levels to bolster our positions in key strategic growth verticals, through acquisitions and organic innovation, expanded our capacity in areas of visible long-term growth, and to improve our manufacturing and distribution footprint for future productivity. Importantly, we’ve been able to fund these investments while still expanding operating margins, driven by strong execution on price cost in the face of significant inflationary and supply chain pressures. Our employees have worked hard through a challenging environment to sustain a culture of excellence, delivering industry leading service levels for our utility and electrical customers, along with differentiated financial operating performance. The critical contributions of our employees and partners are what led to it highly successful 2022 for all of our key stakeholders.

Looking ahead, we believe that Hubble’s unique leading position in attractive markets will enable us to continue delivering on each of these fronts in 2023 and beyond. We will talk more in depth on our near-term outlook later in this presentation. But we anticipate continued market growth and strong execution, driving positive price cost productivity to fund investments back into our business, which will generate long term value for our customers, while delivering attractive returns to our shareholders. Turning to page 4, our fourth quarter results were generally consistent with year-to-date trends. Utility customers continue to invest in upgrading, hardening and modernizing aging grid infrastructure. Orders continued to outpace shipments, and we exited €˜22 with record backlog levels, which gives us good visibility to continued growth in 2023 though continued investment is required to address areas of capacity constrained.

In Electrical Solutions, orders and volumes softened in the fourth quarter, as customers actively managed inventories and cash flow into yearend. These dynamics were anticipated and contemplated in the outlook we provided last October. Operationally, we expanded operating margins by over 200 basis points in the quarter. While the overall environment remains inflationary, using raw material inflation and continued traction on price drove a net price cost productivity benefit. Finally, we continue to accelerate our investment levels. Most notably, we invested over $60 million in capital expenditures in the fourth quarter as we’re able to execute several large capacity and productivity projects. For the full year, we invested just under $130 million in capital expenditures, up $40 million from €˜21 levels.

And we expect another year of elevated CapEx in €˜23 as we believe that these high return investments are the best current use of our shareholders capital. So overall, the fourth quarter was a strong finish to a strong year for Hubbell. Let me now turn it over to Bill to provide you some more details on our performance.

Bill Sperry: Thanks very much, Gerben. And thank you all, for joining us this morning, looking forward to talking about fourth quarter full year, and in particular, our outlook for 2023. I’m going to start my comments on page 5 of the materials that Dan referenced. And we’ll start with the fourth quarter results for the Hubble Enterprise. You see sales growth of 11%, up over $1.2 billion, that 11% is comprised of high single digits of price, low single digits of volume. And one point from acquisition. We look at our sales performance through a few different lenses here. The first is against prior year. There’s double digit growth against double digit growth and last year’s fourth quarter shows good compounding, and good robust levels of demand.

We also look at it through the lens of comparing it to the third quarter. We’re down sequentially, about 7% roughly in line with fewer days and the per day shipment level reasonably flat to the third quarter sequentially. And we also believe that there was some, the channel was managing their inventory levels and we’ll talk more about that in a couple of pages when we get to the electrical segment. The operating profit on the upper right of the page very impressive growth of 27% very healthy margin expansion of two points to 16%. And when we look at the incremental drop through on the growth, you see about mid-30s dropped through which we think is quite good. Price is really a very important part of the success of this financial performance.

The price is sticking, Gerben made reference to the critical products in our customers, adding to their structural solutions and having this sticking price is really helping us as inflation is continuing to affect us in the non-material and value added places. And when we talked about next year, we’ll give you a little bit more breakdown about how we’re anticipating price costs. On the lower left, you see earnings per share growing at 26% in line with the profit growth. On the non ops side, we had some headwinds from taxes as well as from pension. But Gerben had referenced that we started last year with the disposal of the C&I Lighting business and we use some of the proceeds of that sale to buy back shares, which partially offset these non op headwinds.

The free cash flow, you see is down 9% That’s — that more than explains the CapEx increase that Gerben described. So the OCF side here is quite healthy, and we’re being quite intentional. I’m making these investments in order to position Hubble for the future to be successful. Page 6, we’ll switch to breaking the fourth quarter down between our two segments. And page 6 starts with the utility segment. And you see a really strong finish to an outstanding year by our utility franchise set up for success for 2023. You see total sales growth here of 17% to about $716 million of sales, that 17% of sales is comprised of a low double digit increase in price and a mid-single digit increase in volumes. Demand continues to be very robust despite high double-digit shipments here, we continue to add to the backlog in the fourth quarter.

You’ll see that the T&D Components, the historical Hubble power systems infrastructure business, showing the most growth at 27%. The trends continue to be driven by the need for grid hardening and for renewables, and continues to reinforce the shift that we’ve seen from mere kind of GDP type replacement levels of spending to the need for our customers to really upgrade the grid. And I think you’ll see the evidence of our strong positioning, as utilities continue to turn to us with these critical needs. That’s really helping inform and drive some of our CapEx decisions that Gerben had mentioned, to continue to support our customers here. On the Communications and Control side, you’ll see a decrease of 10% in sales while demand was still strong.

There are two drivers to that contraction. Number one is the persistent shortage of chips from the supply chain that’s really preventing us from growing and that’s been a persistent problem for the last few quarters and has kept our communications and controls business relatively flat. In addition, we had a onetime event in the fourth quarter where we recognize the commercial resolution. This was stemming from a legacy dispute that preceded Hubble’s acquisition. And it became obvious it was time to resolve that so that we could move forward with a constructive relationship with a big customer and to our mutual benefit we believe, but that had the impact of driving down sales in the quarter for the communications and control segment. We expect this chip situation to improve during 2023.

So while the quarter was down, we have expectations of the comms business growing, that it may still be a little choppy in Q1. But we’re anticipating getting this chip supply situation to improve during the course of the year. And we’re looking forward to returning that business to growth. You can see on the right side of the page, very impressive operating profit growth of 42%, adding three points to operating profit margin, up over 17% in the fourth quarter by the utility team. That performance being driven by price, which we’ve really needed to overcome inflation, as well as inefficiencies in our plans that coming from some of the disruptions from the supply chain, the mid-single digit volume growth is also dropping through at attractive levels.

So really good year by our utility franchise, and you can see a good quarter setting us up for a good year next year. On page 7, we’ve got the electrical solutions results, and you’ll see 3% sales growth more modest than on the utility side, but a good 60 basis points margin expansion, 8% op growth to a 14.3% margin. That 3% is comprised of mid-single digits price, and volume compared unfavorably to last year. We think that the fourth quarter results significantly impacted by some of our mix. So you see residential sales down significantly. So strong double-digit decline for resi as consumers continue to struggle with high interest rates. And we saw some growth in some of the verticals we’ve been investing in, namely datacenters, renewables and telecom and the balance being more exposed to the non res cycle.

And so, we also thought that we were able to perceive some destocking activity in the quarter. We’ve mentioned this before with you all. Some of that observation is based on anecdotes and discussions with our customers. And other places, we have hard data where we can analyze point of sale and point of purchase data and see that our replenishment orders given to us or below what’s going out the door. We believe that the way the channels incentives or structure, whether on the volume side those incentives may have maxed out, or on the cashflow side, where obviously managing inventories in December becomes very important to our customers. So I think there’s a little bit of distortion in the fourth quarter. As we’ve seen the first several weeks of January, we’ve seen a nice rebound in orders.

And so we’ll continue to watch that quite carefully obviously. On the operating profit side, you see the nice margin expansion and again, price and material tailwinds enough to overcome the impact of lower volumes and enable us to operate very well through the operating disruptions, but also overcoming some of the drag coming from the resi lighting business. We thought to be constructive on page 8, to step back and discuss the full year’s performance and really illustrates some of the trends that Gerben highlighted in his opening remarks. Sales of 18% very strong growth, mid-single digit volume and double-digit price, very robust demand environment for us. You see the 140 basis points of margin expansion to just under 16% on the OP side 29%, growth in OP, diluted earnings per share growing a little bit better than in line with that operating profit and the cash flow being up 20% year-over-year, being held back a little bit with the heavy investment in CapEx that we had mentioned, as well as significant investment in inventory, as we continue to try to support our customer service, but you really see the trends for the whole year that have persisted strong demand number one.

Number two, a tough operating environment where the availability of our people, materials and transportation has been inconsistent throughout the year and leads to operating inefficiencies. Three is the execution on price, which was excellent job by the Hubble team really required to counter inflation, as well as those inefficiencies. And the fourth trend was investment, acquisitions, CapEx and inventory all sources of investment. On the acquisition side, we closed on three deals in the year, we invested about $180 million to do so. We were quite intentional about adding exposure to desirable verticals that are exhibiting higher growth and higher margin potential than our average. So we added to our utility tool business, we added datacenter exposure, and we added a nice bolt-on to our grounding, business and connect her business that, again, is supporting high growth high margin there.

So we’ll switch now from 2022, wrap a bow on that and start to look forward to ’23 in our outlook, we were proposing to go through this a little bit differently than we have in the past, we’ve got a little more granularity in our discussion of the different pieces and parts. So that we can help provide a little more context to why we’re guiding the way we see it. So on page 10, we’re starting with our markets outlook. And you’ll see on the yellow call out box at the bottom of the page, a mid-single digit expectation of organic growth. And you’ll see from that’s driven, really by the strength of the utility business on the left of the page, those growth drivers remain intact. We see our customers continuing to need material, continuing to install it at a high rate in response to the need to modernize their grid and respond to renewable needs.

We starting the year with a highly visible backlog. And in addition, we’ve got some support for funding from the policy side here and without line away where we believe that the IIGA probably gives us a lift of a point or two above what otherwise the markets who would give us. So we’re anticipating the utility markets giving us mid-single digit plus. More modest on the electrical side. And we’ve decomposed our exposure in this pie graph here to try to give you a sense of residential, really, we think is the starting point of the cycle they’re in a point of contraction right now, will continue to be in ’23 we believe. Consumers dealing with high mortgage rate high interest rates affecting demand there, usually non res follows the resi cycle, and then into industrial.

And you see, we’ve added this blue segment where we think our electrical business is exposed in a much less cyclical, much more resilient set of end markets, namely the datacenters, renewables and telecom as well as some of the enclosures we sell as connectors to the to the utility businesses there. So if we continue to believe resi will contract that gives us a low single digit outlook for the electrical segment. Our visibility, frankly is better to the first half than it is the second half. And we may even argue that the first quarter better visibility than the first half. So we’ve got a little bit of caution built in there for what’ll happen second half in the non res markets. We also on page 11 wanted to peel back our view of price cost productivity.

And at the bottom, you’ll see we’re anticipating about $50 million of tailwind coming out of our price cost productivity management scheme here, we’ll start on the edges where it’s a little bit more straightforward on price. We believe we’ve got about two points wrapping around from our actions we’ve taken in €˜22. And we continue to hear feedback from our customers that despite on time service being below where we typically are that we’re still leading in those service levels. And so we anticipate that price sticking on the productivity side, we’re anticipating in the ballpark of about a point of contribution from productivity. And this cost pie, you’ll see we’ve disaggregated into two halves, the material and the non-material half. On the right, in the blue section, the non-material, mostly labor, and manufacturing costs, we’re anticipating mid-single digit inflation there.

Likewise, on the material side, you’ll see that the raw materials were anticipating there to be benefits and tailwinds as there’s deflation in the raws. But our component pie where there’s value add is larger than that. And we’re anticipating the same mid-single digit inflation rate there. So the netting of all that gets us to about $50 million. And on page 12, you’ll see we’re anticipating investing about half of that benefit in the future success. And so page 12 shows our investments, starting with footprint and successful multiyear restructuring program that Hubble has implemented, where we spent about $17 million in 2022, which was an increase from $10 million in €˜21. So our margin performance absorbed, extra expense in €˜22, we’re anticipating to keep that flat in €˜23.

So nothing incremental, as far as the income statement is concerned. But still good activities with good projects that typically give us we find in that three-year average payback range. As for capacity, we continue to find in the utility side and parts of electrical that we need to invest in our capacity. So we’ve got our CapEx has moved impressively from $90 million in €˜21, to about $130 million in ’22. And we’re anticipating this year up to about $150 million. And that ultimately results in about $15 million incremental operating expense, that we would add another $10 million or so of innovation expense. And those of you who joined us for Investor Day, saw some of those innovation ideas. And we continue to be encouraged by early results.

But for us to get impact, it’s still going to take us some time. But we’ve got a good business case of getting about 0.5 point of growth above our markets from those activities. So those pieces we thought we’d give you the puts and takes. And let Gerben on our last page kind of sum it out and netted out in our typical waterfall format that you’re used to see.

Gerben Bakker: Right. Thanks, Bill. And as you said, let me summarize it here on page 13, Hubble is initiating our 2023 outlook, with an adjusted earnings per share range of $11 to $11.50. We believe this represents strong fundamental operating performance for our shareholders, and we are well positioned to deliver on this outlook in a range of macroeconomic scenarios. From a sales standpoint, we expect solid mid-single digit growth organically driven by 2% to 4% of volume growth and approximately two points of price realization. We believe this is a balanced view with good visibility into utility demand and less certainty in electrical markets at this stage. We expect the +2022 acquisitions of PCX Ripley Tools and REF to add an additional 1% to €˜23 revenues.

Operationally, we expect that continued execution on price cost productivity will fund attractive high return investments back into our business. Our outlook range embeds solid margin expansion with high single digit to low double digit adjusted operating profit growth. This operational growth rate is consistent with the long-term targets we provided our at our Investor Day last June, despite the current macroeconomic uncertainty and a higher 2022 base following significant outperformance last year, and it puts us well on the path to achieve our 2025 targets. We expect the strong operating performance to enable us to absorb below the line headwinds from pension expense. And the previously communicated non repeat other income from the C&I Lighting divestiture.

Overall, our 2023 outlook represents a continuation of the strong fundamental performance that Hubble demonstrated in 2022. With leading positions in attractive markets underpinned by grid modernization, and electrification mega trends, as well as a growing track record of consistent operational execution, I am confident that Hubble is well positioned to continue in delivering differentiated results for shareholders over the near and long term. With that, let me turn it over to Q&A.

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

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

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

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

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

Gerben Bakker: And maybe, Jeff, I can provide to a little bit in addition to what Bill said and specifically he’s referring to our utility enclosures in the utility business. But this is a business that and these are enclosures don’t only serve utility market, but they serve communications markets, and they serve water markets that all have these applications. So it’s not only do we see divisibility on the utility side, but these other markets have been high growth markets. So we’re very, very confident here that this is a more sustained growth level. If you think about this investment, and we talked about this, this is a new facility that we’re opening up in Oklahoma City, expanding not only the capacity of enclosures, but at the same time, we’re consolidating some factories as well.

So there’s an element of productivity in these moves as well. So we believe and this is just one example of high return investment that we believe will serve our customers well, and will serve our shareholders well, long term.

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

Gerben Bakker: Yes, just the nature of it resulted, ultimately, Jeff, in the character of a price concession, so it hits the top line, and drop through to the OP line as well.

Operator: Our next question comes from Steve Tusa with JPMorgan.

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

Bill Sperry : No, it’s, you’re right on the two. That’s basically been layered in throughout €˜22. So as it wraps around, it sort of does have a tapering effect. But when you think about price cost, some of the commodities are coming down to and so really, how it nets, it does net a little more favorable early, in a little bit more favorable first quarter, first half. And but that’s, Steve, ultimately, the net will be determined. I mean, we have a little more confidence in what we see in the price, but the cost side is obviously kind of what we’ll have to react to.

Steve Tusa: Yes. And on the price side, I guess is there any, you’re not embedding any quarter where it’s actually negative?

Bill Sperry : No.

Steve Tusa: Okay. Where would we– where would you look within your product lines to is the kind of canary in the coal mine on that front?

Bill Sperry : Where do you see the most price pressure?

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

Bill Sperry : Yes, my guess is it would show up maybe on our electrical side, and maybe some of the more current, first of all resi products, there is sort of seeing contracting demand there with commercial that would maybe be most cyclical, responsive to that some of the more rough and electrical that might be where we will be paying a lot of attention, Steve.

Gerben Bakker: Yes, and I think it’s less about that certain product lines are going to see more cost, if I think that’s pretty spread. And especially with a chart that Bill shows the raw materials, actually a fairly small percentage. So I think all of our product lines are exposed fairly similar to that other inflation. So I think it has more to do with the market dynamics and if there is a potential slowdown in the second half, that could put them additional pressure and that would be in the more on the electrical side and the utility.

Steve Tusa: Great, thanks for the caller. As always, all the details are helpful and I echo what Jeff said on the IRA stuff giving us a little bit of precision on that versus other companies that you just say it’s great. So we appreciate it. Thanks.

Operator: Our next question comes from Tommy Moll with Stephens.

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

Gerben Bakker: So we knew it.

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

Bill Sperry : Tommy, we have to use very similar visuals as what we’re sharing with you. And I think it’s our customers are very alive, for example, to labor inflation and wage inflation. And so I think that they kind of relate to where they see the inflation. And as you point out, when you look on a futures market, and you see the raw metals getting cheaper. That’s really only a small part of the whole picture. So we’ve had to have that be part of a conversation part of a relationship discussion, right. It’s not pure transactional, it’s not sending people letters ,right. It’s about having conversations and sharing the kind of analysis that you’re looking at today.

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

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

Operator: Next question comes from Josh Pokrzywinski with Morgan Stanley.

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

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

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

Bill Sperry : Yes, I mean, I think it was fairly broad based. I think if you interviewed our customers, they were feeling a little overstocked. I think, Josh, some of that, driven by when promise dates were extended, they had customers who wanted materials. So they were just making sure their shelves were stocked, I think there’s also been places where they may be bundling or kidding something, and they may have a decent chunk of inventory that needs one last part to the bundle, and then that’ll get shipped. And so I think what we care a lot about is our orders going to come to a sustainable level through a nice, orderly overtime process as promised delivery dates get shorter. Or is there going to be something a little more sharp or reactionary.

And I think through the fourth quarter, and now through one month in the third, the first quarter of New Year that feels, it just feels manageable. So the breath that you’re talking about is preventing any real spiky kind of problematic situation right now. So for us the way that it’s kind of evolving here is it feels manageable to us right now.

Operator: Our next question comes from Brad Lindsey with Mizuho.

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

Gerben Bakker: Yes, let me provide some content, maybe Bill, fill in as well. But chip availability has been the Achilles heel, throughout the pandemic, and we’re all aware of that. So we pretty early on realized that there just wasn’t going to be a short-term turnaround. So to your point of redesign, we have — we’ve been very active in that, as a matter of fact, it’s what had taken a good part of the engineering resources of a Clara to do. This isn’t a simple chip replacement. And you go there’s a ton of design in it, and then a lot of testing to make sure that this product functions in the field. So we right now have a product out in the field, that’s being tested. And if that continues, as we expect, we will be able in the second quarter to substitute chips.

And that’s part of the reason we believe that even if the supply chain is still a challenge, we should be able to start seeing growth back into that business. And the other thing is we read about chip availability getting better. And of course, we track this very closely as well with our suppliers and it’s really the types of chips that matter and we’ve certainly I’ve learned a lot about chips over the last year, but the memory chip, those kinds of chips that are used in phones have become much more available. The types of chips the microprocessor types of chips that we use in our products have been the one they’d have been still more challenged from our supply perspective. We do anticipate that improved throughout this year. And the combination of just a general improvement with our redesign is why we’re optimistic and confident we can grow throughout 23.

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

Gerben Bakker: Yes, I maybe thought more general into efficiency in the factories and certainly this business, it’s felt that although to this business, there’s also a component of contract manufacturing, that happens to a certain extent, and we’re shielded. But in our business in general, that’s absolutely a right common tomato with all the disruption it’s driven, more inefficient factory and I would say if €˜22 was all about pricing and managing price cost productivity. €˜23 will continue to be that but a high focus of us in returning to higher productivity in our footprint.

Operator: Next question comes from Nigel Coe with Wolfe Research.

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

Bill Sperry : Yes.

Nigel Coe: Okay. That’s been, and I’m saying that about $20 million – $25 million. Is that in right zone?

Bill Sperry : No, that’s too high.

Nigel Coe: Too high. But that would have impacted EBITDA as well. So that was both revenue and EBITDA impact, correct?

Bill Sperry : Correct.

Nigel Coe: Okay, great. Okay, this is my clarification questions. And then moving on to my real questions. So on the inventory, did you see that hidden primarily within residential products? Or was it much more sort of generalized immunity clearance?

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

Nigel Coe: Right. Okay. And then just a quick one on below line item, I mean, pension in any kind of big swings on pension, and I think there’s some TFA income rolling off this year. So in any impact there would be helpful.

Bill Sperry : Yes. So both of those you saw when Gerben walks through the waterfall, we’ve got this red bar at the end. So the nonrecurrence of the PSA is part of it and the pension, while we’ve benefited from our liabilities going down with higher interest rates, the gap between return. expected return on assets and discount rates it has narrowed and so that creates a cost headwind for next year, that’s its pension that is not cash, but it does create an income statement headwind for us and that other.

Operator: Our next question comes from Christopher Glynn with Oppenheimer.

Christopher Glynn: Thanks. Good morning, guys. Just curious your thoughts on the acquisition pipeline, couple angles, anything in electrical or focused pretty much on utility and part of the thought there is maybe more premium on the utility side deals, but obviously, you can add lots of value. And also, should we be thinking exclusively along the lines of the typical bolt-on sizes?

Gerben Bakker: Yes, so I would say, Chris, the pipeline is equal opportunity. So two of the three deals we closed in €˜22 are electrical. So I would not think about it being exclusively utility. If you thought about activity doing 180, in €˜22, for me is slightly disappointing I would have rather had a fourth you get us into the mid twos as an annual kind of investment rate. And so we’ve got the cash to keep doing that. And I think the year was a little challenged for us in getting, I think, sellers to accept sort of the uncertainty of the macro. And so I think it was a little harder to get buyers and sellers to agree, at the end of the day. So we had a couple that we thought maybe could get done that ultimately didn’t. And so we’re looking to be more active.

The pipeline, though, is supportive of that activity level. But you’re asking about is the size going to be more typical traditional historical levels? I would say, yes. But I would think about there being opportunities in both electrical and utility, Chris.

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

Gerben Bakker: No, I mean, look, I think the seasonality can be driven by fewer days in the fourth quarter. And then if the weather prevents construction, right. Those are the two factors, I’d say. And I do think we’ve been operating with backlogs such that maybe you’d see less than that weather impact, maybe, but the days are there. And the electrical side has less backlog than the utility side right now. So I think the biggest sequential factor continues to be price costs tailwinds and contributions from that help lift that helpless margins.

Operator: Our next question comes from Chris Snyder with UBS.

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

Bill Sperry : Yes, I mean, I think that’s a sequential fact from the fourth quarter. Do you think the fourth quarter is a little distorted by that? They’re very well could be destocking throughout €˜23, though, as well. Hopefully, that’s kind of measured. But I think that if you just look year-over-year and you go kind of high-end market, we’re anticipating resi contracting significantly. That’s creating ultimately a drag. We think those blue markets that line up, that we think are going to be quite resilient to a consumer led recession and some of the inflation and interest rate problems that consumers are having. We think those are a little more secularly driven right now and then the balance of non res and industrial we see industrial being in slightly probably stronger shape and the non res being a little more, maybe quick to follow resi.

And so, I think we have kind of a range like that Chris of kind of confidence. And that’s you’ll hear us maybe be a little bit more confident in the first half a little more visibility and a little more uncertainty in the second half, I think.

Chris Snyder: No, yes, I really appreciate that color. And obviously a tough macro. But I guess just the follow up — incremental — for €˜23, I’m sorry, hearing background noise, and then also anything to worry about on datacenter or telecom. Some other companies have kind of flagged some slowdown concerns there. Thank you.

Gerben Bakker: Yes, but I think when you talk about datacenters, you think about the two segments of that market, the mega centers and being run by the fangs in the big tech world. And you certainly see them reacting with headcount reductions, for example. And could that lead to some slowing of growth on the capital side? I think it’s, that’s possible, and it could, I think, the telecom side, we still see the build out. So we’re still, I’d say, in the medium term, we’re both — we’re very bullish on both of those factors. Even though I do agree that there could be because the second side of datacenters, outside of the mega, all these colos, I think there’s probably going to be demand at that part of it. So could be maybe a reshaping of mix inside of datacenters. And so I do think your questions important to figure out what net effect it has, but I think we’re still anticipating growth out of both of those.

Bill Sperry : Yes, and maybe to your second part of is there further destocking? We would say that there probably is, especially if you look at sales, that some of our distributor partners are still struggling with getting supply. So they have a lot of the materials they need for project, they’re missing something. And when that comes in, that will naturally cause inventories to come down a little bit further, we believe our products are less exposed to that because we’ve certainly performed relatively well through it, but we would say there’s still probably some destocking in the early part of €˜23.

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

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

Operator: Thank you. This concludes today’s conference call. Thank you for participating. You may now disconnect.