Hubbell Inc (HUBB) 2022 Q4 法說會逐字稿

Good day, and thank you for standing by. Welcome to the Fourth Quarter 2022 Hubbell Incorporated. Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, 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 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 consider it incorporated by reference into this call. Additionally, comments may also include non-GAAP financial measures. Those measures are reconciled to the comparable GAAP measures that are included in the press release and slides.

Now let me turn the call over to Gerben.

Great. Good morning, everyone, and thank you for joining us to discuss Hubbell's fourth quarter and full year 2022 results. 2022 was a strong year for Hubbell. 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 Hubbell 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 is what has led to a highly successful 2022 for all of our key stakeholders.

Looking ahead, we believe that Hubbell'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 constraint.

In Electrical Solutions, orders and volumes softened in the fourth quarter as customers actively managed inventories and cash flow into year-end. 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, easing 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.

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 Hubbell 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 1 point from acquisition.

We look at our sales performance through a few different lenses here. The first is against prior year. This double-digit growth against double-digit growth in 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 were 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 2 points to 16%. And when we look at the incremental drop-through on the growth, you see about mid-30s drop-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 and our customers adding to their structural solutions and having the sticking price is really helping us as inflation is continuing to affect us in the nonmaterial and value-added places. And when we talk 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-op side, we had some headwind 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 used 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 more than explains the CapEx increase that Gerben described. So the OCF side here is quite healthy, and we're being quite intentional on making these investments in order to position Hubbell for the future to be successful.

Page 6. We'll switch to breaking the fourth quarter down between our 2 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 continued to add to the backlog in the fourth quarter.

You'll see that the T&D components, the historical Hubbell 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 our utilities continue to turn to us with these critical needs and 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 2 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 recognized the commercial resolution. This was stemming from a legacy dispute that preceded Hubbell'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, 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 3 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 plants 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 in 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, data centers, renewables and telecom. And the balance being more exposed to the to the nonres 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. In 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 are below what's going out the door.

We believe that the way the channels incentives are structured, whether on the volume side, those incentives may have maxed out or on the cash flow 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 tailwind is 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 it'd 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 Hubbell team, really required to counter inflation as well as those inefficiencies. And the fourth trend was instrument, acquisitions, CapEx and inventory, all sources of investment.

On the acquisition side, we closed on 3 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 data center exposure, and we added a nice bolt-on to our Burndy grounding business and connector 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 in the yellow call-out box at the bottom 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 at a high rate in response to the need to modernize their grid and respond to renewable needs. We're starting the year with a highly visible backlog. And in addition, we've got some support for funding from the policy side here.

And we've outlined a way where we believe that the IIJA probably gives us a lift of 1 point or 2 above what otherwise the markets would give us. So we're anticipating the utility markets giving us mid-single-digits 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 there in a point of contraction right now. We'll continue to be in '23, we believe, consumers dealing with high mortgage rate, high interest rates affecting demand there.

Usually nonres 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 data centers, renewables and telecom as well as some of the enclosures we sell as connectors 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 will happen second half in the nonres 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 2 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 1 point of contribution from productivity. And this cost pie, you'll see we've disaggregated into 2 halves, the material and the nonmaterial half. On the right, in the blue section, the nonmaterial, 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, we're anticipating there to be benefits and tailwinds as there's deflation in the raws. But our component buy 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 Hubbell 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 3-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 result in about $15 million incremental operating expense that we would add another $10 million or so of innovation expense.

And I know those of you who joined us for our Investor Day saw some of those innovation ideas, and we continue to be encouraged by early results, but for us to get impact 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 net it out in our typical waterfall format that you're used to seeing.

Great. Thanks, Bill. And as you said, let me summarize it here on Page 3 (sic) [Page 13]. Hubbell 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 2 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 acquisition 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 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 nonrepeat other income from the C&I Lighting divestiture. Overall, our 2023 outlook represents a continuation of the strong fundamental performance that Hubbell demonstrated in 2022.

With leading positions in attractive markets underpinned by grid modernization and electrification megatrends as well as a growing track record of consistent operational execution, I am confident that Hubbell is well positioned to continue in delivering differentiated results for our shareholders over the near and long term.

With that, let me turn it over to Q&A.

(Operator Instructions) Our first question comes from Jeff Sprague with Vertical Research Partners.

A couple of 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 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 are presenting a year, like it's incremental, but I just wonder your confidence in that and whether or not it's just replacing other investment or using government stimulus to spend what was going to be spend -- be spent regardless?

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 1 point or 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.

And then just on the capacity 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 address the concern that maybe it's the wrong time to have the capacity? And how do you see the capacity being used? Or what bottlenecks it might be uncorking for you?

Yes. I think it's important that it is 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're -- 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.

Yes. And maybe, Jeff, I can provide a little bit of addition to what Bill said. Specifically, he's referring to our utility enclosures in the utility business. But this is a business that -- and these are closures not 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 the visibility 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 we will serve our shareholders well long term.

And then just one last one for me, if I could. Could you just elaborate a little bit more what happened with Aclara in the quarter. I guess I tend to think of a "commercial resolution" being a cost item, not a revenue item. But the way you're laying it out here is some kind of adjustment to revenues or headwinds to revenues. So I don't 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?

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 Instructions) Our next question comes from Steve Tusa with JPMorgan.

So can you just 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, been in about 5 this morning, but any color on kind of that first half to second half price?

No, it's -- you're right on the 2, 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, too. And so, really, how it nets, it does net a little more favorable early and 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.

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

No.

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?

Where you see the most price pressure?

Yes. Where would you expect. You're not seeing it today. I don't think anybody is 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?

Yes. My guess is it would show up maybe on our Electrical side and maybe some of the more -- first of all, resi products, you're sort of seeing contracting demand there with commercial that would maybe the most cyclical responsive to that. Some of the more rough in Electrical, that might be where we'll be paying a lot of attention, Steve.

Yes. And I think it's less about the certain product lines are going to see more cost of fund. I think that's pretty spread, and especially with the chart that Bill shows the raw material is 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, that could put then additional pressure. And that would be in the -- more in the Electrical side than the utility.

As always, all these 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 just say, it's great. So we appreciate it.

(Operator Instructions) Our next question comes from Tommy Moll with Stephens.

Also, really appreciate the price/cost productivity slide you provided with all the details, especially because now we get to keep asking you about it.

That's how we knew you would.

But jokes aside here, the pie chart is very helpful, and you called out 2, and the larger 2 of the components there 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 2 points of 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? You're facing more than [3] quarters of your cost is inflationary, they're not going to see that as much. How do you get confident you can hold?

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.

I appreciate that, Bill. As a follow-up here on the Electrical Solutions end market visibility you provided, it sounds very similar to the early peek 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...

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-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 3-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 2 offsets 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 Instructions) Our next question comes from Josh Pokrzywinski with Morgan Stanley.

So not to look a gift horse in the mouth with the IIJA disclosure there, 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?

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.

Got it. That's helpful. And then, Bill, your comment there on the destock and then the order rebound, it seems like a lot of that is maybe washed out. But any more detail you could give on kind of portfolio breadth that was impacted and sort of order of magnitude on size? Was it like a 5-point correction on inventory or like a 20 that came down sharply and then came right back up?

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's driven by -- when promise dates were extended, they had customers who want a material. 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 will 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 it going to be something a little more sharp or reactionary? And I think through the fourth quarter and now through 1 month in the third -- the first quarter of the new year, that feels -- it just feels manageable. So the breadth 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 Instructions) Our next question comes from Brett Linzey with Mizuho.

I just want to come back to the communications controls business, so down 10% driven by chip supply. Could you just talk 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?

Yes. Let me provide some comments and maybe Bill will fill in as well. But chip availability has been the [utility's yield] throughout the pandemic, and we're all aware of that. So we pretty early on realized that this wasn't going to be a short-term turnaround. So to your point of redesign, we've been very active in that. As a matter of fact, it's what you've taken a good part of the engineering resources of Aclara 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'll be able in the second quarter to substitute chips. And that's part of the reason we believe that even if the supply chain still is challenged, 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 certainly -- I've learned a lot about chips over the last year, but the memory chips, those kind 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 ones that have been still more challenged from our supply perspective. We do anticipate that to improve 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.

I guess just a follow-up. I imagine there's a lot of labor underutilization, factory inefficiencies 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 their earnings power could be as part of the Aclara recovery?

Yes. I maybe talk more generally into efficiency in the factories. And certainly, this business felt it, although to this business, there's also a component of contract manufacturing that happens to a certain extent then we're shielded. But in our business, in general, that's absolutely a right comment to make that with all the disruption, it's driven more inefficient factor. And I would say if '22 was all about pricing and managing price cost productivity, '23 will continue to be there, but a high focus of us in returning to higher productivity in our footprint.

Our next question comes from Nigel Coe with Wolfe Research.

Just want to go back to the commercial resolution of Aclara. Did I hear that right, Bill, it came through as a price concession, so that impacted the headline price in utilities?

Yes. Yes.

Okay. That brings that. And I'm sizing that about $20 million, $25 million. Is that in the right zone?

No, that's too high.

Too high. But that would have impacted EBIT as well. So that was both revenue and EBIT impact, correct?

Correct.

Okay. Great. Okay. Those are my clarification questions and then moving on to my real questions. So on the inventory, did you see that hitting primarily within residential products? Or was it much more sort of generalized inventory clearance?

Yes. I would say much more generalized. So utility, which has had very impressive growth, but we invested in utility inventory, too, right? So trying to -- we still don't 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 skews -- at this point, if you looked at our year-end balance sheet, it skews raw versus finished good or WIP, and maybe that's obvious because if it was finished, we would have shipped it. But -- so that still has to work its way through the factories and get converted. And so, that's kind of part of what Gerben is 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.

Right. Okay. And then just a quick one on below line items. I mean, pension, any kind of big swings on pension? And I think there's some TSA income rolling off this year. So any impact there would be helpful.

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

(Operator Instructions) Our next question comes from Christopher Glynn with Oppenheimer.

Just curious your thoughts on the acquisition pipeline. A couple of 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?

Yes. So I would say, Chris, the pipeline is equal opportunity. So 2 of the 3 deals we closed in '22 were electrical. So I would not think about it being exclusively utility.

If you thought about activity, doing the $180 million in '22, for me, is slightly disappointing. I would have rather had a [fourth] and get us into the mid-2s 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.

Great. 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 guide post to your margin already than historically?

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 2 factors, I'd say. And I do think we've been operating with backlog such that maybe you see less of that weather impact maybe. But the days are there. And on the electrical side has less backlog than the utility side right now. So I think the biggest sequential factor continues to be price/cost tailwinds and contributions from that, that help lift margins.

(Operator Instructions) Our next question comes from Chris Snyder with UBS.

So guidance puts electrical at low single-digit organic growth in 2023, so flat to up versus the 1% in Q4. And with price fading, we think the guidance for volumes to increase from here. Is this solely the result of moving past this customer inventory digestion period? Or is something else driving volumes higher from this point?

Yes. I mean I think that sequential fact from the fourth quarter. I do think the fourth quarter is a little distorted by that. There 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, when you go kind of buy in market, we're anticipating resi contracting significantly, that's creating ultimately a drag. We think those blue markets that line up that are -- 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 nonres and industrial, we see industrial being in slightly probably stronger shape and the nonres 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.

No. Yes, I really, really appreciate that color and obviously, a tough macro. But -- so I guess just to follow-up. Does the (technical difficulty) incremental (technical difficulty) for 2023. I'm sorry, I'm hearing background noise. And then also anything to worry about on data center or telecom, some other companies have kind of flagged some slowdown concerns there?

Yes. I mean I think when you talk about data centers, you think about the 2 segments of that market, the mega centers and being run by the FANGs and 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 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 data centers outside the mega, all these colos, I think there's probably going to be demand at that part of it. So it could be maybe a reshaping of mix inside of data centers. And -- so I do think your question is important to figure out what net effect it has, but I think we're still anticipating growth out of both of those.

And maybe to your second part, is there further destocking? We would say 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 projects. 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 certainly performed relatively well through it. But we would say there's still probably some destocking in the early part of '23.

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

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

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