Q4 2023 Hubbell Inc Earnings Call
Participants
Daniel Joseph Innamorato; Director of IR; Hubbell Incorporated
Gerben W. Bakker; President, CEO & Chairman; Hubbell Incorporated
William R. Sperry; Executive VP & CFO; Hubbell Incorporated
Brett Logan Linzey; Executive Director; Mizuho Securities USA LLC, Research Division
Charles Stephen Tusa; MD; JPMorgan Chase & Co, Research Division
Christopher M. Snyder; Analyst; UBS Investment Bank, Research Division
Jeffrey Todd Sprague; Founder & Managing Partner; Vertical Research Partners, LLC
Joseph John O'Dea; Senior Equity Analyst; Wells Fargo Securities, LLC, Research Division
Julian C.H. Mitchell; Research Analyst; Barclays Bank PLC, Research Division
Nicholas Francis Amicucci; VP; TD Cowen, Research Division
Nigel Edward Coe; MD & Senior Research Analyst; Wolfe Research, LLC
Scott Graham; Senior Analyst; Seaport Research Partners
Thomas Allen Moll; MD & Equity Research Analyst; Stephens Inc., Research Division
Presentation
Operator
Good day, and thank you for standing by. Welcome to Hubbell's Fourth Quarter 2023 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 of Investor Relations. Please go ahead.
Daniel Joseph Innamorato
Thanks, Phoebe. Good morning, everyone, and thank you for joining us. Earlier this morning, we issued a press release announcing our results for the fourth quarter of 2023. The press release and slides are posted to the Investors section of our website at hubbell.com. I'm joined today by our Chairman, President and CEO, Gerben Bakker; 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 considered incorporated by reference to this call.
Additionally, comments may also include non-GAAP financial measures. Those measures are reconciled to the comparable GAAP measures and are included in the press release and slides. Now let me turn the call over to Gerben.
Gerben W. Bakker
Great. Good morning, and thank you for joining us to discuss Hubbell's Fourth quarter and full year 2023 results. Hubbell delivered a strong finish to an exceptional year. For the full year 2023, we achieved 9% sales growth, over 500 basis points of operating margin expansion and over 40% growth in operating profit and earnings per share. These results were driven not only by our strong positions in attractive markets but also by the consistent execution of our people and maintaining industry-leading service levels for our customers while driving price and productivity across our businesses.
Our strong financial performance also enabled us to invest back into our business in capacity, innovation and productivity initiatives. We invested $165 million in capital expenditures in 2023, almost double our investment levels from 2021. We are confident that these investments will drive future growth and productivity for our shareholders. And as we will describe in more detail later, we intend to grow profitably off of a strong multiyear base of performance.
Turning to the fourth quarter. We delivered strong growth and margin expansion in both segments. Notably, we also returned to year-over-year volume growth in Electrical Solutions. As we noted on our previous call in October, we were confident that the channel inventory management that we had seen earlier in the year had largely normalized. As a result, we saw stronger seasonal performance in the fourth quarter as well as continued strength across data centers and renewables verticals.
We also continued the trajectory of strong margin expansion in the Electrical segment, ending the year with adjusted operating margins of 16.6%. We continue to see structural margin expansion opportunities as we make progress in our strategy of competing collectively as an operating segment, and we plan to accelerate our restructuring investment in 2024 to drive long-term productivity.
In Utility Solutions, fourth quarter trends were largely consistent with the third quarter. Transmission markets were strong, and we continue to convert on past due backlog in Communications & Controls as supply chain conditions have improved. Utility distribution markets continue to be impacted by channel inventory normalization as anticipated, though we continue to see visible demand strength in 2024 and beyond.
Telcom markets were weak in the quarter. And while our long-term outlook here remains positive, we are taking a cautious initial view on 2024 until we have more visibility on timing of investments.
We also executed on 2 important portfolio actions in the quarter as we closed on the previously announced acquisition of Systems Control and announced a definitive agreement to sell our Residential Lighting business, which we expect to close in early February. These transactions reflect our ongoing strategy to create a focused portfolio strategically aligned around grid modernization and electrification. These transactions improved the long-term growth and margin profile of our portfolio, and we anticipate that they will be net accretive to 2024 adjusted earnings per share.
We will provide more details on our '24 outlook at the end of this call, but we remain confident that Hubbell is uniquely positioned in attractive markets and that we can build off the success of this last several years to drive profitable growth of this higher base of performance.
With that, let me turn it over to Bill to walk you through the details of the quarter.
William R. Sperry
Thanks very much, Gerb, and good morning, everybody. Thank you for joining us. I'm pleased to have the chance to discuss with you our financial performance in the fourth quarter, which was very strong, capping a strong year and frankly, a strong 2 years. I'm going to start my comments on Page 4 of the slides that I hope you found.
So the trends have been in place, really, for the last year and longer strong sales growth and operating profit growth, including margin expansion, being driven by strong markets as well as strong pricing and strong cash flow is resulting. And those fundamental trends are obviously continuing here in the fourth quarter.
So we reported $1.35 billion of sales, 10% growth, 2% of that comes from acquisitions, 8% is organic. The Utility segment, a little bit stronger than Electrical. But as Gerben noted, quite important for Electrical volumes to return to growth as a sign that the inventory in the channel is normalized on that side of the house.
Interesting [truly] sequentially, the fourth quarter seasonally stronger than is typical. So we think that's a good sign. On the operating profit margin side, you see 19.4%, 3 points of expansion really being driven by price cost and productivity and creating some source of funding for investments that Gerben had described.
Earnings per share at $3.69, a 40% increase to prior year, and $284 million in free cash flow, helping to fund our CapEx and acquisition investments.
So let's double-click on that on Page 5 and go one layer deeper. So the 10% sales we said was 8% organic. That was comprised of mid-single digits of price. We think that's good evidence of our quality of service and our brand positioning and low single digits of volume and welcome, as I said, the return to Electrical volume growth. The 2% coming from acquisitions were all on the Utility side, and we'll talk about those more when we get to the Utility page.
On the upper right, operating profit up 34% to $262 million. The margin expansion of 3 points really being driven by price as well as materials which continued to provide a tailwind as they had for each quarter in 2023. So the inflation that we're experiencing is more on the wage and transportation side, that's where we're focusing a lot of productivity efforts, as well as we're absorbing there some operational productivity investment going on.
On the lower left, you see earnings per share up 42%, a slightly higher growth rate than the operating profit. So below the line, we benefited from some tax rate favorability. And on the free cash flow side, you see $284 million, nearly a 60% increase. And for the full year, we generated over $700 million of cash flow and that supported a CapEx of around $165 million, which really helped drive some footprint restructuring, productivity and capacity investing.
So let's unpack the enterprise into the 2 segments, and we'll start with Utilities on Page 6, and you'll see another excellent quarter from our utility team, double-digit sales growth and 40% operating profit growth. 13% sales growth is comprised of 9% organic and 4% from acquisitions. The acquisitions to remind everybody included EIG, which was our second quarter of ownership there, Balestro and Systems Control. Systems Control was closed in the middle of December, so didn't contribute much yet. And we are reporting both Balestro and Systems Control in our T&D components and EIG is in the Comms & Control side. We'll talk more about acquisitions in a minute and the last few years plus this year.
As we think about the 9% organic growth, you'll see that it was skewed towards the Communications & Control side. If I start with Transmission & Distribution components, you'll see organic, it was at 1%, where volume was a drag on price. And if we look inside the components, Substation and Transmission continued to be very strong.
Distribution components, we continue to work through our second quarter of channel inventory management. I think as we had mentioned before, our electrical side had experienced that quicker and sooner earlier really than utility side. So we've emerged on the electrical side still in -- on the distribution side.
And then Telcom has been weak a function of some overstocked inventories as well as potential demand impacts from a combination of high interest rates and some customers who are waiting for stimulus dollars to kick off their projects.
You see on the Communications & Controls, surging growth there, we've got both the Aclara and Beckwith businesses there. On the Aclara side, the chips supply chain opening up has really allowed them to satisfy some existing backlog. And so we see some great growth there. Also to remind there was -- we have an easy compare there as last year, we had a commercial settlement that was a contra sales item.
And Beckwith as well, which makes protective relays and controls, up double digits in sales. So very strong top line performance by the segment and even better on the OP side, a growth of 40% (sic) [41%] to $174 million, over 21% margins. And the price cost story is the same volume growth contributing and we continue to make investments.
So from a full year, this is obviously all fourth quarter performance just at the bottom of the page, a full year comment on profit growth of about 60%. So congratulations to Greg and his team on just a really outstanding year.
On Page 7, we've got the Electrical segment. And you see mid-single-digit sales growth with 2 points of margin expansion, strong performance from the electrical team. And of that 6% sales growth, it's comprised of about half of that is price and half volume. Net volume, as we said, we thought in October that the channel inventories would be normalized and rebalanced and that did occur in the fourth quarter, which is good news.
The volume came from some important verticals. Data centers was a big one. Recall last year, we bought PCX, which is performing really strongly serving that segment. Burndy as well as serving that segment. Burndy is also benefiting from the renewable vertical and a little bit of U.S. reshoring on the industrial side. So some favorable trends there, allowing for that volume growth.
And on the profit side, you see 20% (sic) [23%] growth, 2 points of margin expansion as operating profit reached $88 million, again, the price cost really helping as well as the return to volume growth. And full year comment I'll make on Electrical like I did on the Utility side. We saw 20% growth in operating profit in the segment with 2.5 points of margin expansion. So I think a very successful year for the Electrical and looking forward to Mark Mikes and his team continuing to push the segment to compete collectively where we think there's more growth and more margin available to us there.
I mentioned that I wanted to talk about the portfolio management. And on Page 8, we've laid out the last few years of activity, just to remind ourselves of our intentions here. And I'll start with the divestitures where we have 3 companies divested in a fourth under definitive agreement that we're hoping to close in early February. And you see those businesses netted us $500 million of proceeds, and our intention here is to make sure we're investing in higher growth, higher margin businesses.
And you'll see that, that $500 million we rolled into $1.7 billion of acquisitions, numbering about 10 over the last few years. And you can see in the large blue bubble of T&D components, where we added Cantega, Ripley, Armorcast, Balestro. And in the yellow bubble there of Connection & Bonding adding connector products. So those very intentionally adding businesses to our high-margin, high-growth areas as well as in specific growth verticals like Substation Systems, like Grid Automation, Datacenter, PCX, I mentioned and Wireless Communications of Acceltex.
So, we think we are enhancing the growth and margin profile of the company. I didn't want to pause because of Systems Controls recent closing as well as its size, on the impact on capital structure. So that was $1.1 billion purchase price that we funded with some cash as well as some CPE and a term loan A provided by our supportive bank group. The result of that is a flexible and prepayable capital structure, which we think gives us some optionality and results in very manageable debt levels of 1.8x debt-to-EBITDA on a net debt basis around [1.5x]. So we feel like that were improving the portfolio. And I'll talk about the specific impacts of the acquisitions on our guidance in another couple of pages.
So as we switch to outlook, let's start on Page 10 with the markets, and then we'll talk about how those markets roll through our earnings expectations. So, we've got the Utility segment on the left, Electrical segment on the right. You can see the different pieces of the pie here. Starting with electrical distribution, they've been in the [really] 2 quarters now of managing their inventories relative to the backlog.
And we think that's normalizing quickly and expecting a healthy mid-single-digit growth rate there. Transmission, Substation and Distribution Automation, which is up around noon on the pie. We think those are both high single digits, meters and gas in the mid-single digits, and Gerben talked about Telcom, having a very cautious outlook waiting for orders to restart there.
I will just comment, that's a short-term outlook. We do have very attractive medium- and long-term outlook for Telcom. So the result on the utility side is a mid-single-digit growth rate. On the electrical, you see nets out at 3% to 4%, so low to mid. I think the industrial outlook, you see both light and heavy is low to mid-single digits. We have mid-single-digit growth rates in our verticals. And I think nonres, we maybe have a bit of caution at flat to low single digits.
So a constructive market outlook for 2024, and let's go to Page 11 and see how that rolls through our earnings outlook.
So you see the organic of 3% to 5% in our sales growth, combined with 5% net from M&A, one going out, one coming in to create 8% to 10% sales growth. That generates a 10% growth in operating profit. Results in 6% earnings and free cash flow at about 90% of net income affording a continued increase in CapEx.
And let's just walk through the bridge to give you a feel for it. So we're under contract to sell Residential Lighting that will lose $20 million of OP, Systems Control, EIG and Balestro will be adding about $90 million. So you can see almost $1 coming from those before we pay the interest expense, which we have over on the right.
We had for organic 3% to 5%, so we've comprised that of 2% to 4% volume and 1 point of price, which is in the next column, that's providing a nice list. And we have continued investment, particularly on the Electrical segment side, as we compete collectively there and continue to consolidate the footprint under our restructuring program.
You see on the far right below OP, an increase in interest expense as a result of the borrowings that we outlined to close on Systems Control. And the result is about 6% earnings growth to the midpoint of $16.25. You see some modeling considerations listed there. And I might just add another one on seasonality for those of you who are modeling. We're anticipating 2024 being quite normal seasonality for the first and fourth quarters being a little bit below the second and third quarters, which are seasonally stronger. And that just compares to last year where the first quarter was very strong in contributing to the full year.
So we think a very constructive year in front of us. We feel well positioned, we're happy to have the return in volumes, and we're happy to have made some portfolio net addition to continue to push profitable growth at Hubbell.
And with that, I'd like to turn it back to Gerb.
Gerben W. Bakker
Great. Thank you, Bill. And before we turn it over to Q&A, I think it's helpful on the last page to look at our 2023 performance and '24 outlook in a longer-term context. The results we delivered for shareholders, not only in 2023, but over the last few years have been very strong. Most notably, we have doubled our adjusted operating profit and adjusted earnings per share over a 3-year period, while growing sales at double-digit CAGR and expanded adjusted operating margins from the mid-teens to over 20%.
We have also doubled our capital expenditures over the last 3 years to further differentiate our service levels to customers and support attractive long-term growth expectations. As grid modernization and electrification drives the need for more reliable, resilient and renewable energy infrastructure, Hubbell is uniquely positioned with the right people, solutions and strategy to meet the evolving needs of our customers and deliver continued value to our shareholders.
I'm extremely proud of our over 18,000 employees whose hard work and dedication have enabled us to achieve a new baseline of performance. And I am confident that we will build off of this success with continued attractive profitable growth in '24 and beyond.
We look forward to hosting an Investor Day later this year on June 4, where we will provide more details on our long-term strategy with updated financial targets. With that, let's turn the call over to Q&A.
Question and Answer Session
Operator
(Operator Instructions). And our first question comes from Stephen Tusa of JPMorgan.
Charles Stephen Tusa
Can we just get a little more color on the bridge maybe what you're expecting on price costs? And then any segment margin color for the year and how you expect that to trend seasonally?
William R. Sperry
Yes. So price cost, we've got as flat, Steve. We have effectively 1 point of rollover on price embedded in there, which we're using effectively to offset commodity inflation. And then we've got a productivity program that we think can help offset nonmaterial inflation in places like transportation, wages and things like that. So it's quite a flat expectation. And I think the way segments -- I think, as a result of that PCP assumption, our margins by segment are reasonably flat-ish. And I'd say that applies to both segments, I would say, Steve.
Charles Stephen Tusa
Does the ish on utility kind of skew one way or the other, positive or negative-ish?
Gerben W. Bakker
Yes. I'd say flat. What I should think about...
Charles Stephen Tusa
Okay. Okay. Great.
Gerben W. Bakker
Maybe the 2 moving pieces on that, I'll give you. If you think about the addition of Systems Control, that's actually a little bit dilutive to margin, even though it's -- we've provided those numbers and a very attractive addition. And if you think about volume, it's a little bit accretive. And if you take the net of those with PCP flat, it's roughly flat.
If you look at -- maybe a little bit of color on the electrical because the electrical, I think it's a slight expansion but that is with a pretty good step-up on restructuring. So if you take that out, it's actually a nicer expansion of that. And then Bill referred to it earlier, the opportunity still in that segment as they work through organizing that better competing collectively, there is more room for margin expansion there.
Operator
And our next question comes from Jeffrey Sprague of Vertical Research.
Jeffrey Todd Sprague
Just a little more color on the utility margins. Just also thinking about the Comms Aclara business. Not sure where the margins are at in that business, but that feels like it's a friction point also, to some degree, from a mix standpoint. So wonder if you can address that, I guess, Gerben, you said flattish. So you're powering through all that, but still, we'll have some context on the mix effect of Aclara. And can you just give us a little color on how much Telcom was down in 2023? I guess we're looking for a weak 2024, but we do have sort of, at least, a half a weakness in the base here for 2023, I believe.
William R. Sperry
Yes. So maybe let's start with utility margins first. And I would say for Aclara, you're right to say their margins are below the Transmission and Distribution component margins largely because of the amount of R&D investing that we're doing working on developing the next-gen comms package. So I would say in '23, particularly in this fourth quarter, where you saw them outgrowing, I would -- I think where you're going, does that create a mix drag and it did in the fourth quarter.
I think growth rates next year, we maybe anticipate more balanced, Jeff. So I don't think we'll have a big mix effect in utility margins in '24. And your second question was on Telcom.
Gerben W. Bakker
Yes, maybe provide a little context there, Jeff. And we really saw that slowing down towards the latter part of the year, particularly the fourth quarter, more specifically, was down 20%. The first quarter, we still expect that to be down double digits. And what happened early in the year, we were still working through a lot of backlog in that, which kind of shielded us a little bit. So we certainly expect, after the first quarter, probably the second quarter still to be down and then we expect it to rebound in the second half of some of that stimulus funding freeze up.
Jeffrey Todd Sprague
And Gerben, can you also just address kind of your ability on just kind of factory throughput here is the industry, particularly on the utility side, seem to want to compound out here at pretty healthy growth rates. Everything kind of buttoned up on the factory work you've been doing or there's more to do there? Maybe just a little bit of a skyline and what to expect on CapEx?
Gerben W. Bakker
Yes. I'd say more to do, Jeff. Some of those projects take time to get some of that equipment and online. So if you think about, for example, our Transmission and Substation markets, particularly strong last year and this coming year as well, as you saw. And that requires some capital that still needing to come online. Now I feel good about our ability to do that. We've done that very well over the last year. So that's going to support some of that growth that we have embedded in our guidance.
Jeffrey Todd Sprague
And then one last one. I'm sorry. If you're not done, go ahead. I just had one last whole follow-up, if I could.
Gerben W. Bakker
Please go.
Jeffrey Todd Sprague
I just want to kind of come back to the seasonality comment and everything. Totally get it, and that's sort of what I've been modeling. But given that -- given the margin comps in the beginning of the year in particular, are you expecting EPS to actually grow year-over-year in Q1?
William R. Sperry
Yes, I think that we just aren't -- we don't do EPS in the -- by the quarterly guide basis. I just would say I'd anticipate our Q1 earnings to be in line with contributing to the full year at our typical seasonality and more so than it did last year. So...
Operator
And our next question comes from Tommy Moll of Stephens.
Thomas Allen Moll
I wanted to start on the utility side of the business. It seems like for most of last year, it was more a discussion around availability rather than price. With that said, given some of the inventory destocking, particularly around distribution, has that conversation changed at all? Is price a bigger factor at this point?
William R. Sperry
I would not say so, Tommy, no.
Thomas Allen Moll
Good to hear it. I guess that then begs a follow-up where in your full year outlook, you contemplate, I think you said, Bill, a point of wraparound price, but you did highlight some uncertainty in certain pockets. What are those pockets you were referencing there?
William R. Sperry
Yes. So I think Telcom would be the first to see a market down. I think just puts a little pressure on that. And so that's really the most noteworthy one. I think other areas where things are overstocked can put a little pressure sometimes. So we -- we've had a very successful pricing tactic over the last really 2 years. And so it's something that we are, a, very focused on; b, are in very close conversations with our big customers.
Gerben and I happen to be visiting with a few of our largest customers over the course of the last couple of weeks and just your -- to your point, none of them are asking about price other than to make sure we're coordinated with them, give them enough time to implement price increases and let them manage that through their systems. But it's -- I've described price as of this moment, Tommy, is still quite constructive.
Gerben W. Bakker
And maybe to your point that there may be some headwinds, I'd also say that we built into the guidance to carry over, but we also announced price increases early this year. It's early to tell at this stage, only a few weeks in the stick rates, but again, the conversations that we're having are very positive to those taken hold. So we have levers against potential headwinds by taking price, too.
Operator
And our next question comes from Nigel Coe of Wolfe Research.
Nigel Edward Coe
So Bill, I just wanted to be a bit more specific, typical seasonality for 1Q, it looks like about 20% of the full year. Is that about the right zone for your math?
William R. Sperry
Yes, a little. I would have said 21%, if you asked me. Yes.
Nigel Edward Coe
Okay. That's great. And then just the electrical performance this quarter is obviously outstanding. The 6% organic growth pretty flat Q-over-Q in both revenues and margins. So is that mainly a channel impact you're seeing there? I know you called out strength and electrification and data center systems. I'm just curious in terms of the end market demand, what you saw during the quarter being specific there.
William R. Sperry
Yes, I'm not sure I'm getting at the essence of what you're asking. We did find that vertically data centers and renewables were both good that benefited our PCX business and our Burndy business. And I do think we saw from our big customers, if that's where you're pushing in areas where they had been managing their inventories, we saw return to growth in those as well. So I'm not sure if you're getting that customer behavior or end markets there. But we had a kind of a little bit of a mix of both.
Nigel Edward Coe
Yes. I mean it wasn't a straight question, I know. But do you think the channel impact was fairly neutral. So selling the seller pretty similar, but I guess that's sort of the answer to my question. But really then, when we think about the margin exit rate for 4Q into 2024, I know you've said flattish impact in '24, restructuring is picking up. So that's obviously a headwind in '24. But just curious about the lighting impact because that's coming out. So I think that, that would probably drive more of a bias toward expansion in electrical. So just curious if you agree with that.
William R. Sperry
I do agree they were sort of at double digits versus what you see is a better margin at the segment. So I do agree.
Nigel Edward Coe
And then setting the sellout?
William R. Sperry
Yes, it's pretty consistent in the quarter, Nigel.
Operator
And our next question comes from Julian Mitchell of Barclays.
Julian C.H. Mitchell
Maybe just trying to understand and fully comprehend that you don't give sort of detailed quarterly guidance, but you've got the 4% organic growth guide for the year in revenue. And you have the color around a weak start to the year in Telcom, a bit of extra utility destock and maybe the last drags of nonresi electrical destock. So all of that seems to suggest a stronger second half organic growth rate. Just wondered how much of an improvement year-on-year are you dialing in through the year as we go to get to that 4% for the year as a whole?
William R. Sperry
Yes, Julian, first of all, welcome to the call. Nice to have you. And I would say that the utility destock we'll see, but we could -- if you -- we could be at the point of kind of having be done with that as well. And I would say on the electrical side, we feel more confident that we are. Your Telcom point is right. I think we do anticipate a weaker start.
And as you think about -- you're sort of introducing sequential seasonality and how that's going to look VPY compare. And I think what -- on the VPY basis, some of the second half compares because of the destocking could actually be a little bit easier. For example, first quarter last year was actually quite strong. And I think seasonality-wise, we upped our investments at the second half of last year as those wrap around that creates a more consistent and easier second half.
So I think as those things net against each other, that's kind of how we're getting to a more typical seasonal year. Even though I hear you, there's obviously puts and takes and forces that work here.
Gerben W. Bakker
And maybe, Julian, I'll provide maybe a little more context on that. And you're right to point out there's still some headwinds. But one way to look at it, and I realize it's an early data point, but as we look at how we're starting off the year and we look at our order balance and trends here in January, it's actually supportive to what Bill is somewhat hesitantly saying that we could be exiting our destocking, it's constructive. As I'd say, early read into the year is that it's constructive to kind of this profile of seasonal guidance.
Julian C.H. Mitchell
And then just a quick follow-up. That Slide 10, the nonresidential vertical within Electrical, the flat to plus low single guide for the year. You understand fully on the channel stocking largely having run its course. But maybe just the market outlook, you used that word uncertain. Just any sort of color you could put around that, what you're seeing in different verticals in that nonresi bucket?
William R. Sperry
I just think maybe the pressure on office, just feels like it puts a little bit less certainty. I mean it's quite a constructive pie. So I guess by, I think, less certainty puts you in still a growth position. But it just -- I think the institutional side, probably be stronger, but maybe some of that office could be weaker. So I think there's that mix effect just puts it in the low growth rather than the rest of the pie, which is more medium growth.
Operator
One moment for our next question. And our next question comes from Brett Linzey of Mizuho.
Brett Logan Linzey
I wanted to come back to the investments, and you talked about some of the carryover in the first half. Just wanted to clarify, are these embedded within the volume portion of the bridge and separate from the footprint. Just trying to understand if you could quantify the investment versus restructuring and what those paybacks might look like.
William R. Sperry
Yes. So if last year, it was an investment that continues, i.e., if you added head count, it would show up, yes, in margins, in volume. So as we step things up in areas last year, for example, like new product development or people to work on productivity initiatives that would wrap around a higher cost wouldn't be a new investment, right? It would show up as you're saying, Brett, in March of that volume.
Brett Logan Linzey
And then anything you can share in terms of the paybacks on these footprints is something embedded this year? Or is that a little bit longer term?
William R. Sperry
Yes. I think the new -- I think there's order of magnitude, another $10 million of R&R in that bucket that will be invested this year. It's of a footprint nature. And I think the paybacks are that we have good ROICs on that. The paybacks tend to be in the 3-ish year range. And so we're sort of investing today in those cases with benefits that probably start a year or 2 from now.
Gerben W. Bakker
Maybe the other thing that I would say is embedded in some of those improvements will drive a higher level of productivity that's embedded in our guidance. So when you look at the construct of flat price cost productivity, it has a higher level of productivity and a higher level of inflation in it to offset it. So that's where some of those investments are going.
Brett Logan Linzey
Okay. Great. And then just a follow-up on the price expectations. So it sounds like no incremental actions embedded in the planning. I'd imagine you're seeing some raw nonmaterial inflation. Maybe just a little context as to maybe what that potential hedge could look like if you do see sticking on some of these actions that you are out in the marketplace with.
William R. Sperry
Yes. I mean, You'd be kind of maybe add a little bit about a speculative sensitivity analysis, right? So you could see each point of price gets us north obviously of $50 million of price. And if that's a lot of leverage if there's no corresponding inflation to that. Conversely, if you have to give a little, it equally as kind of this 100% sort of drop-through.
And so, as Gerben sort of outlined, I think we have because of the investments we made last year, we have a more ambitious productivity target level, and we certainly see some inflation on wage, transportation area as well as in kind of the material related areas. So I think getting the rigor that we need to focus on all of those levers to come out even ahead is sort of a -- it's an obsession. We review it really carefully every month at Gerben's and my level and keep continue to push enough initiatives to make sure we stay even or ahead.
Operator
And our next question comes from Joe O'Dea of Wells Fargo.
Joseph John O'Dea
First, I just wanted to focus on the 2024 bridge. And if we think about it, I guess, in 3 buckets with the organic piece, the M&A piece and then some of the restructuring, is it fair to think about a 25% incremental on the organic piece? And then on the M&A side of things, can you add any detail on what you think interest expense is in '24, just so we get that right in the model? And does that interest expense contemplate the deployment of resi lighting proceeds?
William R. Sperry
Yes. So I think we -- you could put in about $40 million of incremental interest expense. And I think the drop-through of 25% on volume is reasonable. I'd rather see that more like 30%, but somewhere in that high 20s is reasonable, I think.
Joseph John O'Dea
And the resi lighting proceeds?
William R. Sperry
Yes. So we've -- you see we have interest income there as a plus and interest expense as a minus. So we sort of built the construct that it's either cash that's going to earn or it's -- yes, it's going to be available to pay down. And I guess -- so I guess the one thing I'd say is it's explicit that we're not modeling in our guidance any new acquisitions. And so that would be incremental to this guide.
Joseph John O'Dea
Got it. And then on the electrical side, the -- can you size roughly what the destock headwind was to top line growth in '23? And so just kind of the non-repeat of that, what we should think about as that kind of contribution to the plus 3% to 4% for '24?
Daniel Joseph Innamorato
Yes. Overall, I'd say sell-through volumes were down kind of in the high single to low double digits most of the year. And I think sell-through was flattish to slightly up. So it got better in the fourth quarter. But overall, I think you can think about mid-single-digit impact on a full year basis.
Joseph John O'Dea
Okay. And then just a clarification that the fourth quarter 9% organic in utility, did you give the price and volume split of that?
William R. Sperry
Yes. The volume was negative, right? So the -- it aid into the price.
Volume is slightly positive, Joe, sorry.
Joseph John O'Dea
Volume is slightly positive?
Daniel Joseph Innamorato
Yes. You're asking for a whole of utility. Sorry, I thought you were talking about (inaudible).
Joseph John O'Dea
Yes, sorry. Just that 9% whole organic, so a slightly positive volume.
Operator
And our next question comes from Nicholas Amicucci of TD Cowen.
Nicholas Francis Amicucci
I just had a couple. I wanted to hone in on the Electrical Solutions segment. So obviously, going to benefit somewhat this year from the footprint optimization. Just wanted to see how much -- I mean, how much more headroom do you guys have from an optimization perspective within that segment?
William R. Sperry
Yes. I mean the -- I'd say that we still have projects that are, [this year, it] will be consolidating locations, so you'd be absorbing volume in existing locations. And then after you get the value, there's always the chance to keep putting in bigger, more scaled facilities. So you can answer your question with a very long perspective. But if you took it a little bit more narrowly, I'd say, in the next few years, we'd be at a stage where we'd be quite happy with the optimization process. You're probably never done, I guess, the point, but I think we go along into achieving sort of our desired goals in just a few years.
Nicholas Francis Amicucci
Sure. That's fair. Then I did want to touch upon too. So I think the guidance within the press release, it indicated about $1.60 of the amortization, that's in adjusted EPS. And so if you do the math, that's roughly $86 million for the year. We did just -- within utilities, I mean, I understand that there was a significant step-up in 4Q probably related to the Systems Control. But just wanted to get a better sense of kind of the timing of that amortization, and kind of the breakdown between Utilities and Electrical Solutions.
William R. Sperry
Yes. So the -- so we've been running at $1 for a while. So the $0.60 that's new is all in utilities. So as you separate them. And when you think about the amortization, a lot of it is going to customer value and places that have quite a long by law, I mean, like 20 years. So it's a pretty stable run rate.
Operator
And our next question comes from Chris Snyder of UBS.
Christopher M. Snyder
I wanted to ask on utility margins. And specifically, I guess the expectation that an organic margins will be flattish for 2024. I know it's asking because you guys are exiting the year well below where you started and maybe M&A had a bit of a headwind in Q4, but it feels like organic, it's in Q4 down a good deal versus the first half. So is it fair to -- does the guide assume that utility organic margins are down year-on-year in the first half and then return to growth into the back half? Or should we expect them up year-on-year throughout the year?
William R. Sperry
Yes. I would assume they're kind of flattish through the -- like I don't think there's anything -- I think I'd look maybe at the shape of '23, because I know exactly what you're observing, right? You see a sequential step down in margins. Some of that is attributable to some spending, investing that we're doing. Some of it is attributable to the Aclara mix effect. Some of it is attributable to the fact that the volumes inside of Power Systems were going through their destocking work with our customer channel partners.
And so I think, again, we just see that, Chris, returning to a more normal shape. And so I think the volume piece of Power Systems becomes quite important to that, I think we see the mix with Aclara start to balance to equal more equal contributions. And so I think in a balanced world, we would expect margins in Q1 and Q4 to be below the margins in Q2 and Q3. And that, that shape in '24 should feel quite normal.
Christopher M. Snyder
I appreciate that. And then, just as a follow-up on utility margins. So I know they're always down sequentially into Q4, just lower revenue. This quarter came in quite a deal sharper than we expected. Is the company starting to feel the impact of higher metal prices? I know steel has been up a lot over the last 3, 4 months. Is that starting to come through in Q4 on those utility margins? Or is that still more of maybe a '24 dynamic?
William R. Sperry
Yes. I mean we certainly saw starting November, December steel move. And I would say the way that works through the supply chain, there's usually a couple of months lag on when we, as a LIFO company pay those most recent prices. So I think we'll feel those prices -- those costs, if you will, in the first quarter and maybe the mid- to end of the first quarter.
Operator
And our next question comes from Scott Graham of Seaport Research Partners.
Scott Graham
Just really the question I have is about the portfolio management slide. And particularly now with Systems Control in the fold, you have a couple of nice sized bubbles under which to acquire. What is the outlook there for -- what does the pipeline look like? I mean you've got a 1.4 net leverage is a really good number to work off of sort of what are your aspirations in '24, maybe even by telling us would you be disappointed without another good-sized deal this year?
William R. Sperry
Yes. It's an interesting way to phrase the question. I'd come at it from 2 perspectives. The first you already raised, which is we are very comfortable with our leverage levels. So we think, financially, we certainly can afford to invest in acquisitions. And I would say, secondly, is kind of the integration perspective, and we'd like to make sure that we have Systems Control well integrated. We've got a healthy amount of people kind of working together. It's off to a great start. Our customers are happy with it. It feels like a good cultural fit, but it still takes work to make sure that it's integrated and we don't want to have too many plates spinning.
So your question may be, well revisited 3 months from now. But I agree with you that strategically, we'd love to add businesses in the Northeast and financially northeast of this matrix of higher growth, higher margin. And yes, we feel we have capacity both in cash flow generation, we'll be up in the $800 million range this year, plus, as you pointed out, I think, balance sheet capacity. So we're -- so I think let's just revisit that question maybe in 3 months and see how we feel. But it's a good -- it's a good question.
Scott Graham
Well, fair enough. I guess I was just wondering also what the pipeline itself looks like and you can send people off a little bit.
William R. Sperry
Yes. There is a pretty decent pipeline, and there's quite a few things we're expecting to at least probe the market in the second half of the year. So that doesn't mean we'll buy any of those or they'll be attractive. But there is an interesting amount of what appears to be inventory may be coming to market.
Operator
At this time, I'd like to turn it back to Gerben Bakker for closing remarks.
Gerben W. Bakker
Great. Thank you. I appreciate all the questions, the quite robust time we put out for that in this call to focus on our outlook. Maybe I'll close by saying that I feel really good about the year and our ability to deliver on our commitments to you to drive profitable growth after a few years of really outperformance. So look forward to our Investor Day later in the year into our first quarter call. Let's talk about how we're doing so far this year. So, thanks much.
Operator
This concludes today's conference call. Thank you for participating, and you may now disconnect.
