Hubbell Inc (HUBB) 2018 Q1 法說會逐字稿

Good morning. My name is Theresa, and I will be your conference operator today. At this time, I would like to welcome everyone to the first quarter 2018 results call. (Operator Instructions) Thank you. Ms. Maria Lee, you may begin your conference.

Thanks, Teresa. Good morning, everyone, and thanks for joining us. I'm joined today by our Chairman, President and Chief Executive Officer, Dave Nord; and our Senior Vice President and Chief Financial Officer, Bill Sperry. Hubbell announced its first quarter results for 2018 this morning. The press release and earnings slide materials have been posted to the Investors section of our website at www.hubbell.com.

Please note that 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 into this call.

In addition, 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 the earnings slide materials. Now let me turn the call over to Dave.

Okay. Thanks, Maria. Thanks, everybody, for joining us this morning. You see from our press release this morning, it's certainly been a busy quarter, but a productive one as well.

We've seen some strong top line results, but of course, the good news always has some offsets. And as we talked back in our Investor Day earlier in March, we've got the price/cost challenges that we're fighting through. But I think we see that more broadly in the market. And then the good news, we've got the tax tailwind benefiting us, and I think benefiting the overall economy.

And of course, the biggest level of activity in the quarter has certainly been the acquisition and the continued efforts in the integration of Aclara, certainly, the largest in our history. I think all of those of things certainly contribute to a challenge -- it's all good news, particularly on the Aclara side, but I think all of that activity certainly adds to the complexity of telling our story. And so we're going to try to work through that the best we can.

We've heard from you all on different topics, have had some discussions and we try to address a lot of those. Obviously, appreciate that input. But one of the things we also want to do is to make sure that we're not changing the rules every quarter and making it even more difficult to follow. So we try to maintain some consistency. So bear with us as we go through that.

You see that sales were up 16%, 3% of that is organic, and markets across all of our 5 major market segments expanded. We saw particular strength in the oil and gas, and hope that continues and -- with increase in oil prices. Certainly, that is what we would expect. We've also had some benefit from the long-awaited turnaround in heavy industrial, which you recall was still in decline in the back half of last year.

But while there's been some softness in pockets and broader market categories, specifically on the C&I lighting side, most notably, it's encouraging that we can finally see more general consistency in market growth to varying degrees, especially across some of our higher-margin businesses that we're hoping to begin to contribute more.

I've been out in the market recently, spending time with customers. And I think, certainly, the market is still positive across the board. And I think they all have an element of caution around the uncertainty of some of the trade discussions. But they're all still benefiting and seeing the benefit from tax reform, and so we think that'll continue to add value.

On the operating income side, on a reported basis, it was $100 million, which is a margin of 10%. Excluding Aclara's deal and acquisition-related costs, margin was 12.3%, 30 basis points lower than last year. Certainly not the directionally where we want to become, but considering what we've seen as the impact, at least in the early part of the year on price/cost, we're at least satisfied with that. Never happy, but we're satisfied.

The rise in material costs, especially steel, certainly had a significant impact in the quarter. You should know we're targeting offsetting material cost increases with price, but typically with a 3- to 6-month lag.

And I think we're getting price in certain key markets. The net impact of price and material cost increases in the quarter was 1.5 margin for us and it was a significant deal. But we certainly expect that to -- and Bill will cover that in more detail, but we certainly that the pricing actions we're taking will start to show the benefit as we progress and can certainly turn positive in the second half -- sometime in the second half of the year.

And I can tell you that while there's certain businesses -- a few of our businesses that might have been behind in pricing, I think we have found that in -- there's other parts of our business where we were ahead and others are now trying to catch up in some of those markets. Specifically, we've got some high material content markets where we were out early and no one seemed to follow. And then come 2 or 3 months later, some in the industry are then coming out with bigger increases and scrambling to catch up.

[Declined] everywhere; in some cases, we're ahead.

So on balance, I think we're in a good position, but certainly more to do. And I can tell you that all of our operating leaders are fighting for that each and every day. And I think the market is certainly expecting it, but always going to challenge any price increase. So we've got a lot of work to do to continue to put that through.

And this price/cost headwind impact, we're fortunate because we were able to mitigate some of that with the tailwinds that we have from a lot of the cost-reduction actions that we've been taking over the last 3 years, as well as ongoing cost controls in the short term to try to mitigate some of that impact. So bottom line, execution on improving that margin, particularly around price and productivity is a priority for us.

Earnings per share on a reported basis was $1.05. This includes $0.34 of Aclara-related deal cost and acquisition-related costs. I say that specifically because, obviously, Aclara has some other impacts within the Power segment, and Bill will talk about that later. It also includes -- those results also includes $0.12 of intangible asset amortization from acquisitions other than Aclara. So you can put those together and come up with what the total amortization is, but we're specifically focusing on an adjusted basis to address Aclara's deal's activity. And of course, our earnings per share in the quarter also benefited from a lower tax rate.

Back on Aclara, the integration's going well and it's on track after the first 2 months. It's -- with all the activity, we sometimes forget that it's only been 2 months because it's certainly a lot of work to integrate a significant acquisition for us. The business is performing as expected, strong sales growth and continued positive customer feedback.

I was just out at IEEE in Denver last week. I know some of you are out there as well. Hopefully, you had a chance to see the Hubbell booth. You could see it firsthand how significant our presence is in the utilities space. And more importantly, hopefully, you could see how integrated and the effect of One Hubbell, where you could see within the Hubbell booth, the BURNDY product offerings right next to the Aclara product offerings. The high-voltage product offerings. And all that comes to play in that space.

But specifically, when I think about Aclara and what I was hearing consistently from participants at IEEE was a very positive reaction. And in fact, a lot of the good Hubbell channel partners and customers are keenly interested in how they can add that to their portfolio, which is exactly part of the strategy -- confirms the strategy for the acquisition. So we think that's really very positive.

We're also seeing results in working together. More examples of One Hubbell outside of acquisitions. One example of this is, in the quarter, we won a utility order for a submersible pump con -- bus connector that had specific design and delivery requirements. The product, in order to do that, was made by one of our businesses within the Construction and Energy business. And of course, that's in our Electrical segment. But it's sold by the Power Systems team.

A really nice win for a coordinated effort grid across the businesses with guys Gerben like running the Power business and Rodd running the Construction and Energy business, really working together to make sure we can provide the solution to an important customer.

You also probably saw our board approved a quarterly dividend of $0.77 per share last week. That's important because it's -- I hope you recognize it demonstrates our continued focus on shareholder return and the need to drive cash generation and our commitment to effective deployment of capital. We're able to repatriate about $180 million of cash and began to pay down debt as expected.

I'll say though, if you see a results, our free cash flow in the quarter was disappointing. It's typically our lowest quarter, and this year is additionally dampened by some onetime items. The timing of collections, certainly some tax payments and payments around Aclara. But still, if you look at the results and our working capital performance, certainly has a lot of room to improve. So that's the other area that we are keenly focused on, and the result, we expect free cash flow will be greater than net income for the year.

So with that overview, let me turn it over to Bill to go through some more of the specifics of the quarter, and then I'll come back and talk about our outlook.

Thanks very much, Dave. Good to be with you, everybody. Just to highlight what Dave was saying, really 4 trends in the quarter that are going to be woven into our performance here. One, end market strength; two, the commodity inflation that's coming with that market strength; three is the benefit of tax reform; and four is the Aclara, the new acquisition. So all 4 of those trends you're going to see everywhere in our results.

And Dave really gave you the results on Page 3, so I'm going to start on Page 4 of the slide material that Maria referenced at the beginning of the call. And you'll see our first quarter sales of $991 million, a 16% increase over prior year, 13% of that coming from acquisitions. And we can be quick to forget that that's not all Aclara, so Aclara is about 11 points of that. There's another 2 points coming from previously executed acquisitions earlier in 2017.

And just to remind everybody, we had made an investment in the natural gas distribution space, some smaller acquisitions within Power Systems, notably in telecom hardware space as well as extending our Bushing product line. As well as iDevice, which is a real leap forward for us in terms of IoT, R&D work that underlines a lot of our new product developments. So there's actually a lot of acquisition previous to Aclara. And a lot of that's also rolling off after Q1, so you'll see really the balance of the year being dominated just really by the Power Systems deals.

So beyond the acquisitions, you have our end markets. It's good to see a page like Page 4 with such consistent green on it, but quite a consistent positive market backdrop for Hubbell. On the nonres side, the ABI data is supportive, the starts data is favorable, and so still green arrows there in nonres. In Electrical Transmission & Distribution, you continue to see the IOU's CapEx analysis suggests supportive activity there.

On the Transmission side, the projects are really dominated by small and midsize projects. On the Distribution side, a lot of

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spending, again small projects. Industrial for us, again, you did see the ISM data, manufacturing production data, positive.

As David highlighted, for us, the real switch there is seeing heavy convert from shrinking, really, through most of '17 to now growing. That's very good news for us given its margin contribution, maybe a little late versus other peers of ours that you're looking at. But nonetheless, good news in the quarter for us, for heavy.

The oil and gas story continues to be a positive. On the oil side, you see commodity price firming, obviously, with land-based activity continuing to drive growth for us. And the natural gas distribution side, still very strong demand for that infrastructure product there. And on the resi side, household formation continuing to drive growth on the single-family side. So quite a consistent organic market backdrop for Hubbell there in the first quarter.

On Page 5, you see operating income. And we show the adjustments here that Dave had referenced of, the transaction cost for Aclara as well as their acquisition-related accounting. So that $122 million relates to the 12.3 points of margin, the 30 basis point decline that Dave highlighted. And essentially, we've got the 1.5 points of material cost headwind to overcome, as well as the acquisitions bringing, additionally, a drag as they are coming on at lower margin than average. So you're overcoming both of those with the productivity and nearly overcoming all of it to 30 basis point decline.

Page 6, we show our earnings per diluted share. And you can see the $1.13 last year. And again, we're showing the adjusted of $1.39, which, again, excludes the onetime transaction cost for Aclara as well as the acquisition-related accounting. The $0.26 of improvement from the $1.13 to the $1.39 is really a $0.05 coming from Aclara as well as the balance being essentially split between tax tailwind as well as a legacy operations. So you see that $0.26 tailwind there.

As well, you see from the -- on the right-hand bar, the $1.39 down to the $1.05 as reported, those $0.34 is really split between the transaction expense and the amortization, a little bit more towards the amortization than the transaction expense. So that -- there's a lot of movement there between those adjustments, but hopefully, you see that clarity.

And just a comment on the taxes, the tailwind there, we were about 29.7% last year, down to 21.1% this year. So a big part of that coming from the tax reform and a little bit better from discrete items as well. So that 21.1% below the level we have forecast for the whole year.

Page 7, we talked about the Electrical segment. And you can see a 5% growth rate to $618 million. Organic markets providing 3% of that growth. Nonres and res both helping drive that growth. But also, the oil side, the gas side and the industrial side all really starting to pick up and helping us on the mix side and providing attractive margins in those product markets.

On the operating income side, you see a healthy increase from 9% OP to 9.9%. I think -- and certainly that 90 basis points of margin expansion absorbing more than 2 points between the commodity cost headwinds as well as the investment in IoT R&D capability. And so you really can see the impact of Lighting stabilizing its cost structure through this quarter and really helping get some of those inefficiencies we have last year out and helping lift the segment operating income margins quite a bit.

Page 8, we talk about Power segment, and it's going to be worth just a second to go through this. Power tends to be a Steady Eddie. And you see quite of movement here, so it's worth some discussion. So you see our sales grew from $265 million to $373 million, 41% increase driven by acquisitions. The base organic market growing at about 3%. A decent level of growth there. And so important to look at the operating income side, where you see, again, all the Aclara adjustments.

So basically, the base business absorbed a couple of points of price/cost headwind. And so from that 20.8% operating profit margin last year, you see the base business operating in the 18s during the first quarter here.

In addition, there's another couple points from Aclara coming on at about half the margins here of last year's segment, and that creates another couple of points of drag. And then you have the costs and the accounting taking down to 10%. So it's really that price/cost that creates the top priority for Gerben going forward in terms of driving the price actions that Dave referred to and as we go forward to the balance of the year.

Page 10, we showed cash flow for the quarter. And you can see that we had some onetime items that related both to the Aclara transaction in terms of fees and expenses, as well as some tax reform payments on things that were expensed in the fourth quarter. And so excluding those items, we generated just a small amount of cash. As Dave said, we're looking to do better than that. You can see our -- on the depreciation and amortization side, an increase there as we do more deals. But the working capital side, you see strong increase in receivables. A big contributor to that is Aclara, who had strong sales in March. The quality of that receivable base, we believe, is very, very high. And you also see, at the current liability side, an increase of the use there.

On the payable side, it's an area, and as Dave referred to, an opportunity to improve where we think those payables should helping to finance our inventory and our growth as we grow the top line.

On the CapEx side, you can see an increase to $22 million. Aclara accounted for about $2 million of that. And that's a little bit lighter than what we had communicated to you at Investor Day. We had been talking about Aclara's pace based on all of the R&D spending that they were doing, where their CapEx could be up around the $30 million range. But as we spend more time inside the business and conforming the accounting with the way we have been doing our R&D spending, we're actually going to be expensing much more of that and capitalizing much less. And so that CapEx number will be less than we had communicated to you at Investor Day.

So it is an area of great focus for us. First quarter, usually, our seasonal low. Despite that seasonality and the onetime outflows, we still like to see that working capital performing tighter and become a stronger source of cash for us. And we anticipate that improving as we go throughout the year.

We also wanted to show on Page 10 EBITDA. We use this first at Investor Day back in March and got some favorable feedback from everyone that it's a helpful measure to help neutralize what's going on with taxes and interest and amortization. And so here, in a simple schedule, you can see 12% growth in EBITDA in the quarter from $132 million to $148 million, north of $16 million improvement. And I think we'll keep providing this for everybody, and we certainly use it internally. And the amount of generation here in the first quarter, consistent with the seasonal contributions to the goal as we had showed you at Investor Day of about $730 million of EBITDA for the year.

I was going to ask Maria to comment on the cap structure on Page 11.

Sure. Thanks, Bill. We ended the first quarter with $216 million of cash. Approximately 90% of this was held outside of the United States. The decrease in cash from year-end was because we repatriated about $180 million of international cash and used it to pay down commercial paper, which had increased from year-end as a result of borrowings for the Aclara acquisition in February. We ended Q1 with $149 million of CP outstanding.

There are a couple of new items related to financing the Aclara acquisition. We added a pre-payable, 5-year term loan A for $500 million as well as a fourth tranche of long-term debt. And as you can see, all of our long-term senior notes have attractive rates in the low to mid-3s.

So these additions, along with the higher CP, increased our debt-to-cap to 56% from 39% at year-end, reducing our leverage by paying down CP and the term loan is one of our capital allocation priorities. At the bottom of the page is our $750 million credit facility, and that backs our commercial paper, and it's fully available to us.

Let me turn it back over to Bill -- or Dave, sorry.

Okay. All right. It's okay. I'm going to just give some closing comments here. I think first, on our outlook. And if you look at the market, with 1 quarter completed. This year is, so far, shaping up pretty much as expected, although admittedly some of the material cost headwinds are greater than we anticipated. But the combination of positive markets and some of the other activity benefits of our cost-reduction actions are going to help to mitigate that. And we're working to get the price.

But I think if we -- as we look at the end markets, we think most of our end markets are still anticipated to perform at the levels that we have forecasted from the beginning of this year. Going around all in the 2% to 4% range. Nonres, may be a little bit lighter. The -- some of the indicators on that just suggests that it's not as robust, but still growing. And I think as we mentioned earlier, the upside that we're expecting a little bit more positive results is in the oil and gas, particularly with the price of oil increasing. So the good news is, continues to be a consistent growth across all of our end markets.

Turning to Page 13, specifically on the outlook. So that end market growth translates in -- combined with acquisitions, translates into top line growth of 15% to 20%, which are big numbers for us by historical standards. The end market embedded in that is in the 2% to 4% range. The acquisitions add about 15%, and then our new product development and focus on technology is going to drive some modest market outperformance.

All of that leading to us maintaining our original guidance on diluted earnings per share of $6.10 to $6.50 reported. And on an adjusted basis, $6.95 to $7.35. That adjusted excludes the Aclara acquisition-related and transaction cost, but it includes our legacy intangible asset amortization of about $0.50. And as Bill mentioned, I mentioned earlier, we're working and we expect to deliver free cash of greater than net income.

So I think when you -- when I think about in sum, we're benefiting from U.S. Tax Reform, lower taxes, ability to repatriate cash, pay down debt. And even after 2 months or so of completing the largest transaction in our history, we're even more excited about prospects of what we can offer to our customers.

The outlook has a lot of moving pieces, but the objectives for this year are very clear for us. Capitalizing on the market growth, which is there and we need to make sure we take full advantage of that. Getting price, which we are doing. And it's easier with differentiated products, it's harder in some of the commodity space or more competitive environment, but we're getting price and we expect to continue to get price.

Spending appropriately on the actions that will support long-term growth. We got to make sure that we're continuing to invest in the future. Obviously, generating cash to pay down debt, but also to reinvest in the business. And then, obviously, integrating Aclara effectively.

So I think there's a lot of things going on. We certainly are focused in those key areas. And I think we -- the team and I laid out our vision for 2020 back in March at Investor Day, with sales growth at twice the market over the next few years. We certainly have line of sight to high single-digit earnings growth in the base business, and then you add Aclara's contribution to that. I'm quite confident we're doing the right things to make this vision a reality, and it starts with this year's performance, which we expect to be a very strong basis for that ongoing vision.

So with that, let me open it up to questions.

(Operator Instructions) And your first question comes from Christopher Glynn with Oppenheimer.

The -- you talked about the Lighting margins being up. That certainly looks pretty good in the context of the industry. Just wondering if you expect to be able to continue that through the balance of the year?

Chris, it's really driven by cost management. From the volume side, Lighting was down about 3%, with about 1 point of price contributing to that from the sales perspective. So it's really coming off the backs of more effective cost structure, which, yes, is -- continues throughout the year. So hitting our plans and our guidance is not dependent on big volume, it's dependent on us controlling those costs, which we feel much better about than we did last year.

I also think, Chris, there's an element of, really, more price discipline. And some of that being just what business you're going after, the other -- and some of that even goes to a focus on those businesses and those product offerings where we have a differentiated advantage. Because obviously, as I mentioned earlier, those are the areas across our entire portfolio, not just in Lighting, where you have more ability to get price to offset some of the cost headwinds. And naturally, those are higher-margin businesses, too. So that's another area of focus within the Lighting business that we see.

Sounds good. And then if we look, very wide angle lens, at Electrical margin, in 2011 to '14, you did 14% to 15% margin. And that was before the oil and gas crash, but it was also before you had a pretty intensive restructuring program. So I'm just wondering if there are any kind of barriers to ultimately returning to those types of levels for Electrical.

Yes. I think that the role that the oil and gas business played in contributing to that is important. And so they're obviously not back at that level. As we come back, we're seeing more land-based rigs rather than the Deepwater. We're seeing more diverse, i.e., less pure oil for Harsh & Hazardous. So I do think that, Chris, I could see as we go forward, as Harsh & Hazardous volumes come back, that their margins could be a little bit lower than the peak in that era that you're describing. And at the same time, our goal would be to find productivity and other things to get back to those levels. So those are good motivating benchmarks for us to get back to them.

And your next question comes from the line of Steve Tusa with JPMorgan.

Yes. I was at the T&D show, sorry I missed you. And I don't know, I got the sense that the pricing was a little bit slower to come. But you sound very confident on that front. Is there something -- is something I'm missing? Did you guys -- are there different pockets -- are there more specific pockets of your business that you're seeing better price put through than maybe I would've picked up at the show talking to, like, perhaps transformer guys or some of the other guys that are there? Just to put a little more color on the confidence. Because you guys are typically conservative and you don't go out and kind of say stuff that you're not really seeing on the ground level. So I do trust what you're saying, I'm just curious as to what may be the difference is.

Well, I guess the -- we could start with slow is a relative term. You might have expectations of timing that's different than ours, so my confidence is based on what we're seeing. In some cases, it's signs that, one, the actions that we're taking to the signs of acceptability. Not necessarily on the utilities side. I mean, utilities side has certainly put more pressure as the utilities are under pressure from a cost standpoint, particularly on the OEM -- O&M side, but even on the capital side. So I don't think that what you heard at the show is necessarily out of line with what we're dealing with. When we talk about pricing, I think it's certainly -- I can be more bullish on the C&I side. We're getting some of that. The utilities side has got a little more challenge in it. I mean -- and I'll remind you that from our business, I think you guys used to give Gerben a little hard time over the last year, because for a number of years he was saying that it's coming, and we've been able to hold price in a commodity-weaker environment. Well, the commodities turn and the utilities remember that in some cases. So it's a tougher battle but I think -- we also believe that there's -- we have a little bit of advantage versus for example, a transformer market, where it's a much bigger spend. So a lot more price sensitivity versus some of our component products that are critical and lower element of project costs. So it gives us a little bit more flexibility. But don't get me wrong, the utilities are still pushing back as much as they can.

Okay. Okay. That makes some sense. In the Electrical channel, what are the degree of price increases? I mean, obviously, I know [Invent] Was out there talking about -- that they're on enclosure side, obviously, so a little bit different. But they're talking about, obviously, kind of a mid-single-digit type of thing that they are putting through. I mean, is that the kind of magnitude that all you guys are looking at on the Electrical side of the equation?

On average, I'd say that's true, somewhere in the 4% to 6% on average. I mean, we have pockets still that are working on 8% to 10% if it's got a lot of higher material content, which sounds bad. But it is what it is. But I would say, on average, it's on the mid-single digit.

Okay. And then one last one. The -- and I probably should ask this at the Investor Day. But the Aclara CapEx that you guys are running this year, and I think you said next year as well. I mean, is that something that you know is kind of builds up here in the next couple of years and then fades over time? Is this kind of a not necessarily onetime but more lumpy, and so that could -- that kind of fades out into the kind of later in the decade kind of 2020 time period? I believe it was like $15 million to $20 million of CapEx.

Yes, I think it starts, Steve, with the R&D effort, right? So we had showed you our R&D spending sort of in the 10% of sales kind of range based on last year's sales and the amount of R&D that's going on there. So that's obviously significantly higher than a typical Hubbell business. We then -- there's a question of how much of that you expense versus how much you capitalize. And I think we're going to end up expensing a little bit more than they have historically done. But nonetheless, I think what happens is that $50 million does not grow. But what happens is, your sales grow and so your percentage of R&D comes down, is I think how we're imagining out playing out over the next few years.

Okay. On the CapEx side as well?

Yes. So CapEx then is -- becomes a function of how much of that R&D you'd capitalized, which would not be growing; and then how much is on the PP&E side, which would not be growing at anything beyond just replacement stuff and the need to grow, yes.

And your next question comes from the line of Rich Kwas with Wells Fargo Securities.

On Aclara, anything on seasonality we should be thinking about as we go through the rest of the year in terms of contributions?

Yes. I think we do expect some seasonality, Rich. Similar seasonality to what Hubbell experiences, namely, that second quarter and then especially third being the stronger areas of both volume as well as margins for them. As I said, when we were together, we had been planning that their margins would be mid-teens. And I think after reviewing some of this R&D that Steve was just talking about, we'll expense a little more. So we think their margins will come down to lower double digits. And -- but they only were operating kind of at double digits in the first quarter, so we do anticipate seeing their volumes and margins pick up in the second and third quarter.

Does that change the longer-term prospects for margin for the business that the accounting changed around expensing? I mean, can this be mid-teens to high teens? Or how should we think about it?

I don't think it materially changes our long-term view, no.

Okay. Bill, with the -- on Lighting, what was the margin rate? You exited the fourth quarter around 10%, if I recall correctly, did you duplicate that again this quarter?

Yes. It was -- the cost base is just performing much more in line, much more predictably, and so those kind of margins are where we are. As Dave said, I think we're finding that to even try to maintain share of commercial spending, you might have to chase with too much price. So I think we're choosing to forgo a little bit of that volume and let that cost structure perform and get the margins going better, which is what you're asking about. So that's been kind of a decided tactic of ours.

Okay. And then just level-setting on price/cost, the 200 bps on Power and then the 150 for the overall company. Is that just the commodity headwind or is that net price/cost? And then is the assumption that, that improves as we go out Q2, Q3, Q4? I mean, just so that we're all clear on that.

Yes. So for the whole company, the price that we pulled ex Lighting was offset by essentially what that point of Lighting gave away. So the net price/cost is essentially material cost, because pricing was flat overall. And yes, I would say that as the year goes on, we're anticipating that in the second half. And as part of, I think, underlying some of Steve's question too about does it get better, it gets better in the sense that it becomes more balanced in the back half. Especially as we exit the year, you think maybe you'll start to catch up. So that's the -- you can't -- with this much inflation, you can't catch up overnight, but you've got to be vigilant and really be disciplined about it. And so I think it this -- I think it'll take us the whole year to fight that battle.

And your next question comes from the line of Jeff Sprague with Vertical Research.

And just back on Power pricing in particular, Dave or Bill. Are you getting none currently? Or is there some positive price in the business?

Yes -- no, we are -- we have been getting price, Jeff, yes.

You have been, okay.

Yes.

And just to be clear on Aclara, can you just put a fine point on what you actually expect the ongoing amortization to be in the year?

Yes. So if you use the last page of the outlook, which is Page 14, you can see that we're anticipating Aclara contributing about $0.50 to the total. And that $0.35 of that -- well, the $0.85 is the add-back. So sorry, $0.35 is the combination of the transaction reported results. And then, Maria, within the reported, the amort versus the actual OP split for Jeff, do you...

Yes, sure. So the -- all of the intangible amortization, which includes the inventory step-up and the backlog revaluation, we would expect this year to be something around $45 million. So you can convert that into the -- say $45 million to $50 million. So it turns out to be somewhere between $0.60 and $0.70.

Okay. And then on cash flow, I think your comment, free cash flow greater than net income is relative to GAAP net income. But should we expect your free cash flow to be closer to the adjusted EPS? I mean, arguably, it could be even more than that with still $0.50 of noncash legacy intangibles in there. But you obviously have some working capital and other [going].

Yes. I think the way that we're looking at it, Jeff, and that's really why Dave gave you that $0.50 of legacy intangibles. So I think if you saw the $7.15, which we were guiding to on an adjusted basis, when you add those next $0.50 of legacy intangibles, you get up to about $7.65. And to us, that cash EPS is quite an important measure because we think free cash flow, even though we think of it as net income and percent, but there's an important relationship there. So our expectation would be this year, Jeff, on a run-rate basis, because we did have some abnormal first quarter outflows. But on a run-rate basis, we think you should be talking about kind of 110% of net income of free cash flow this year, which should translate into the mid-80s on that higher cash EPS of the $7.65. And then our strong focus would be on using working capital management to get more efficient there and get that conversion on the free cash flow basis higher in subsequent years. So I think that framework that you're talking about is important to how we, as a management, look at the free cash flow conversion equation.

And is there something specific you're doing on working capital to uncork it here? I mean, putting aside kind of some timing noise in the quarter, but what's going to change to drive working capital going forward?

Yes. I think you're right about the noise in the quarter and receivables are the kind of thing -- our quality receivables is very high, collectability is often very high. So those do become the most timing sensitive, as you point out. So I think our opportunity is in inventory and in payables. In inventory, I think you all, at Investor Day, met Susan Huppertz. We've hired the new VP of Ops. And we're excited to be working with her and figuring out and developing ways to really get more focused and more disciplined around getting our inventory days down, while keeping our service up. And then on the payable side, becoming more -- I think, more disciplined too about how to optimize when you're taking advantage of a discount and when you still have some term days left. So when you see a quarter like ours where payables were used while inventories was a build, that's a good sign that I think we need to be more disciplined there, Jeff.

Yes. And just one last one for me. Dave mentioned a little bit, but any change in customer behavior now that you own Aclara as opposed to a private equity firm? Any change in discussion, backlog, pipeline, anything you'd point out?

Yes. I think we've seen evidence that the pipeline is growing. The feedback we've got from our customers has been favorable. I think what's been exciting for Dave and me to see is the cooperation at the front end of the house between Gerben's sales force and the Aclara folks. And really there's been a couple of examples some selling efforts, where we have been trying to sell our legacy hardware to some of their rural customers. And conversely, we've had some larger IOU conversations, where we've really helped open the door for their communications business. And in those cases where we've been getting our clients together with a broader suite of products, we've received good feedback. It's too early to say of any tangible, quantifiable impact of that, Jeff, but I'd say those early signs are good. And I think more towards the back of the house, it's been interesting watching the rest of our company get to know and understand what the technology inside the Aclara comms can do to how maybe that can help make other parts of Hubbell smart and communicating. And so I think you're at the very, very early days of seeing if 1 plus 1 equals more than 2. But the signs, I would say, are encouraging.

And your next question comes from the line of Joe Osha with JMP Securities.

Just a few from me. First, Maria and Bill, just to clarify. You'd mentioned that you have this $500 million prepayable paper. Are we -- should we expect, perhaps, not to see any buyback activity until at least some of that gets paid down? Some color there would be helpful.

Yes. I think that we continue to always evaluate uses of cash. But I think your -- and share repurchase could be a very viable use. But I think you're right to assume that priority-wise, on a kind of a 4-year glide path, we're looking to pay off that CP and that term loan. So that -- I think you're right to assume that.

Okay. The CP and the term loan over a 4-year glide path?

Yes. I mean, CP will be what serves as our overnight kind of funding source. So any -- at any quarter end, you might have some CP. But that's -- those are good gauges to think about how much free cash flow over the next 4 or 5 years we're looking to pay down.

Okay, great. And then secondly as regards, yet again, Lighting. Wondering if we can get a sense as to where the price -- pricing has really been less palatable versus where you've been more able to hold the line?

I think as David commented, for us to have 1% of price in the quarter is actually a better experience than we've been having. And I think it's -- there are some projects with some more commodity products that would lend itself to use price to go chase the volume. And I think it's -- if there's an opportunity for us here that we've shown in the quarter to be a little bit more selective about which products to (inaudible) there.

Sorry, I meant in terms of end market. I was just wondering it might -- sorry, I didn't ask the question well. In terms which end markets you're -- you find yourself being able to hold the line a little more. That's what I meant, sorry.

Well, yes, if you're saying between nonres and res, I think the pricing is a little bit firmer in resi than it is nonres, if that's what you mean. Sub-slicing nonres, I don't think it's -- I don't think you could generalize too easily.

Yes. And I think that, adding to that within the C&I markets, the challenge is in those projects and those offerings that are nonspecified or where our representation isn't as strong as competition, all right? So if we have good representations, we have strong representations in a market, whether it's a vertical or geographic, it's easier to maintain price than when you don't. And that's more how it plays out.

There are no further questions. At this time, I would like to turn the call back over to Ms. Maria Lee.

Okay, thank you. Thanks, everyone, for joining us. So that concludes today's call. And Steve and I will be available all day for questions.

Thank you, ladies and gentlemen, for your participation. You may now disconnect.