ECM Industries, LLC (NVT) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to the nVent Investor Conference Call. [Operator Instructions] Please also note today's event is being recorded. I'd like to turn the conference call over to Tony Riter, Vice President of Investor Relations. Please go ahead.

Thank you, Jamie, and good morning, everyone. We appreciate your participation today to discuss this morning's announcement that we entered into an agreement to acquire ECM Industries. On the call with me today are Beth Wozniak, nVent's Chief Executive Officer; and Sara Zawoyski, our Chief Financial Officer. Beth and Sara will make some formal comments, and then we'll take your questions. Please note that today's press release and slide presentation accompanying this call are posted on our Investor Relations website at nvent.com. References to non-GAAP financials are reconciled in the appendix of the presentation. Please take a moment to read the forward-looking statement on Slide 2. During today's conference call, we will make certain forward-looking statements that reflect our current views about the acquisition of ECM Industries and nVent's future performance and financial results. These statements are based on certain assumptions and expectations of future events that are subject to risks and uncertainties, such as the risks outlined in today's press release and nVent's filings with the Securities and Exchange Commission. Actual results could differ materially from anticipated results. Finally, we will not be making any comments or taking questions regarding nVent's first quarter results or expectations for the quarter and full year. As a reminder, our most recent comments regarding Q1 in 2023 were during our Investor Day on March 7. With that, please turn to Slide 3, and I will now turn the call over to Beth.

Thank you, Tony. Good morning, everyone, and thank you for joining us. I'm excited to share with you additional details regarding our announcement this morning to acquire ECM Industries. ECM Industries is a leading provider of high-value electrical connectors, tools and test instruments and cable management. ECM complements nVent's electrical power connection and grounding solutions portfolio within our Electrical & Fastening segment and further positions nVent with the electrification of everything. Their broad offering of critical electrical products adds to our connect and protect portfolio. Their solutions are used in high-growth verticals, including commercial solutions, power utilities, data centers and renewables. ECM will add over $400 million in sales and is expected to be margin accretive to nVent. We expect the transaction to close in Q2. ECM's portfolio is one we've had our eye on for a while. We believe it is a great fit and will drive further growth and long-term value creation for nVent. On Slide 4, you can see our strategy, which has remained consistent. We continue to execute on the core elements, focusing on high-growth verticals, new products, global expansion and acquisitions. We've had great success with the 4 acquisitions we have done since then. Combined, these acquisitions totaled approximately $300 million of revenue last year and grew faster than overall nVent. Each deal also exceeded the weighted average cost of capital within 2 to 3 years of closing, our primary financial deal metric. Please turn to Slide 5, and I will provide some additional background on ECM. ECM has a diverse connectivity product offering for mission-critical applications that will add to our nVent Connect and Protect portfolio. Headquartered in New Berlin, Wisconsin. ECM has a portfolio of industry-leading brands with a legacy dating back over 125 years. ECM offers a variety of products across electrical categories that focus on connection, tools and test instruments and cable management. It is a strong track record of innovation and long-standing customer and channel relationships. Almost all of ECM sales are in North America. ECM will combine with our Electrical & Fastening segment. With ECM, we will have a more complete power connection and grounding solutions portfolio. ECM will provide us with a complementary offering of mechanical and compression connectors. This extends our portfolio beyond exothermic connectors, grounding solutions and power conductors. We will be able to offer a broad range of solutions to meet various customer needs across commercial, industrial and infrastructure from power utilities to data centers, renewables, energy storage and more. With the electrification of everything, reliable power and power connections are critical to help ensure resiliency and safety. Today, nVent is a leader in cable management, providing electrical contractors with a wide range of labor-saving solutions. ECM will extend our offerings with tool, test instruments and cable management devices that are essential products used on job sites every day. The combination will allow us to better serve our customers with an expanded portfolio. Overall, ECM's complementary portfolio, strong brands and long-standing customer and channel relationships will be a great combination with nVent. As you can see on Slide 6, ECM is aligned to our high-growth vertical strategy with the electrification of everything. Commercial and resi represents the largest vertical for ECM followed by infrastructure and then industrial. Electrification trends are driving demand for ECM solutions. These include grid modernization, EV infrastructure build-out, 5G, smart buildings, IoT, data centers, sustainability and the connected home. Together, nVent and ECM will help to build a more sustainable and electrified world. Turning to Slide 7. We have had a consistent framework to assess acquisitions, and we believe ECM checks all the boxes. Our framework starts with finding companies with great products aligned to high-growth verticals. ECM is a leader in power connection and aligned with the electrification of everything megatrends. Next is the ability to scale. With nVent's strong electrical distribution partnerships globally, we will be able to expand access to ECM's product portfolio. Over the last several years, we've invested in vertical sales and marketing teams to drive demand creation. These teams will have the ability to promote, specify and drive pull-through of ECM's products. And ECM provides invent with access to channels and new customers through retail and new distribution areas where we have had limited exposure today. The last piece of this framework is investing for growth. First, we believe we can grow ECM sales outside of North America with our global reach and footprint. Second, we will invest in digital marketing capabilities for ECM to be able to expand globally and access more customers. Lastly, ECM will bring us additional manufacturing and sourcing capabilities and expanded manufacturing footprint, allowing us to in-source some components. We are confident these investments will drive both growth and cost synergies. In summary, ECM is a great fit with nVent. We're excited about the growth potential and the long-term value creation. I will now turn the call over to Sara for some detail on the transaction. Sara, please go ahead.

Thank you, Beth. Please turn to Slide 8, where I will summarize the financial highlights of the transaction. We intend to acquire ECM for $1.1 billion, subject to customary adjustments. ECM sales were $415 million with adjusted EBITDA of $104 million for the trailing 12 months ending in February. This implies a multiple of approximately 10.6x of ECM's adjusted EBITDA. We expect ECM's adjusted EBITDA margins of 25% to be accretive to overall nVent margins. We expect cost synergies of $10 million to $15 million by year 3, and we anticipate potential upside from revenue synergies and investments we will make to drive additional ECM growth. The deal will be financed with existing cash on hand of approximately $200 million, along with the proceeds from new debt. We have fully committed bridge financing in place with JPMorgan. On a pro forma basis, we forecast our net debt to adjusted EBITDA to be 2.8x at closing. With our strong cash flow generation, we plan to delever quickly and be within our targeted range of 2 to 2.5x within the next 12 to 18 months. Our intent is to maintain investment-grade metrics. We expect the deal to be accretive to adjusted EPS of 2023, excluding purchase price accounting and onetime deal-related costs, and we expect it to be accretive in 2024 on a GAAP basis. Another couple of items to note. We expect additional interest expense of approximately $60 million in the first year. And on taxes, it is important to note that we anticipate cash tax savings of over $50 million on a net present value basis related to the step-up. ECM's effective tax rate is expected to align to the U.S. rate to roughly 25%. Finally, we anticipate the transaction to close in the second quarter, subject to customary conditions, including regulatory approvals. In summary, we are excited about this acquisition and the value we expect it to create for customers, employees and our shareholders. ECM is a great company, and we look forward to welcoming their employees once the transaction is closed. And with that, I will now turn the call over to the operator to begin Q&A.

[Operator Instructions] Our first question today comes from Julian Mitchell from Barclays.

Congratulations on the transaction. Maybe just a first question would be around if you could sort of flesh out for ECM Industries, what the recent organic sales growth rate has been? And also, I guess, the 20% or so that's tools and test instruments. Help us understand kind of how large the pre-existing nVent business is in that area, please?

I'll maybe begin on the financial performance, Julian. So just to give you a little bit of color there. ECM has grown double digits in the last couple of years. And really, that reflects the strong benefits they're also seeing in electrification of everything, and we continue to see great growth potential going forward. And then from a margin performance standpoint, I would just start by saying just from an absolute margin standpoint at 25% EBITDA margins. You can see that it's a very well-run company. Over the last couple of years, there's really been a focus around operational efficiencies and execution, including expanding capacity in Mexico. So I would characterize their overall margin performance is good. And again, we continue to see a path forward for expansion going forward, including those cost synergies.

And to your question on tools and test instruments and particularly where EFS play and in these type of areas, we really have negligible tools and test instruments. So this is a whole expanded category for us that serves the same contractors that we serve today.

That's helpful. And if you could help expand I suppose, on the kind of route to market, if you like, of ECM. Any overlaps on kind of distribution or end customer exposures. And I wondered if you had how much of ECM Industries sales are kind of greenfield versus replacement?

So when we look at the breakdown of their channels and others, about 55% is going through distribution. And when we look at that, as I mentioned, they're not global. And so we have stronger global partnerships. But even across the landscape of electrical distribution, we believe that is a great opportunity to get further penetration of those products across electrical distribution. And then they have about 30% that goes through some specialty channels and retail where we believe we can pull through some of the nVent's products. And then there's around 15% that goes through OEMs. And these would be similar OEMs that we deal with as well. So Julian, sorry, the second part of that question, could you just repeat it?

Oh, sure. It was just -- if you had a sense like how much of ECM's revenue was kind of into greenfield or new projects as opposed to replacement aftermarket, brownfield, all of that?

No, I'm not sure we have all that number broken out, but we do know there is a good sizable portion of what we would call MRO or kind of replacement consumables. And that's because a lot of the things that are bought to be used on the job site are either consumed or left on the job site. So there is a portion of that. And I think as we get into it, we'll quantify that further. So -- but that is an important part of this business.

And our next question comes from Nigel Coe from Wolfe Research.

Yes, Merger Monday is good. So you called out the 10% to 15%. Maybe just -- if you can just maybe dive into that a little bit more where you see the major contributors to that cost potential? And then are there any -- it sounds like there's been some significant investments in the business, but are there any investment requirements, R&D, NPI to accelerate growth here?

So I'll maybe start with the cost synergy side. So from a cost synergy perspective, we see it in that $10 million to $15 million range by year 3. A couple of things. The biggest piece of that is just going to be on the procurement side, particularly around materials and metals. We also see some savings as it relates to freight costs. And I think the third bucket I would say is just in-sourcing. They've got some great, for example, aluminum extrusion capability that as we look at that, we believe that can provide some nice efficiencies as well as just good for a customer lead time managing our supply chain perspective. The only other comment I would make is that it does include also some ongoing, I would say, IT investments that we would be making digital investments simply to align to our overall programs and platforms as well. So that's a bit netted in that number, if you will.

And I would say from a -- we believe we've got a great global vertical sales and marketing network that we can really plug in ECM into so -- and scale that. On the R&D side, as we want to take some of their products global, we'll be making some investments in some certification. So we'll have some investment there as well.

Okay. That's great. And then I think you called out $50 million of interest. I just want to clarify that's an annualized number, it certainly feels that way. And then on the tax rate, you mentioned 25% for ECM. So that mixes up the nVent rate by what a point or so overall.

You're correct. That's about the rough math from a rate perspective. Our interest, correct, that $60 million is an annualized number. And then I just wanted to call from a cash tax perspective, we are expecting meaningful savings there that I alluded to in that greater than $50 million net present value range.

Our next question comes from Jeff Sprague from Vertical Research.

Maybe just a little background on how this came together. It does look like a great fit at a pretty reasonable price here. I see they bought -- just bought ILSCO in 2020. I wonder if you were involved in the hunt for that transaction at the time. But maybe just a little bit of background on how the 2 parties came together and is this a group of folks that you've known for a while.

Well, Jeff, you're right to point out ILSCO because when we look at our Connections -- Power Connections portfolio, ILSCO is a company that we had our eye on. But as you can remember, we weren't doing large deals at that time. And also, we were just coming out of a pandemic. And so we missed that opportunity. But we had been in contact with the ECM folks and for a couple of years prior to when they decided to this transaction to come about. So we've known them. This was a portfolio that we'd actually looked at other opportunities, even we looked organically could we develop a full range of connectors, which would have been a lot of investment and taking a lot of time. So this has been something on our radar for a while, and we were pleased that we were able to make this all happen. And I think we're in a good position to execute on this deal given just the integration track record we've built over the last several years.

And you noted the -- maybe the implicit opportunity to pick some of these products globally. But even though some of this stuff looks I'll just say relatively basic in some respect. I mean, is this stuff that can be ported over into IEC markets? Or this is all sort of NEMA equipment, and it would be, I don't know, just a heavier lift to maybe internationalize the sales here.

There's work we have to do to meet the certification requirements for IEC versus a UL. But we believe that that's something that we're capable of doing within a year time frame and some earlier, some later. But absolutely, that's the path that we will take.

Our next question comes from Jeff Hammond from KeyBanc Capital Markets.

So just a couple of questions. One, maybe just expand on the specialty retail channel. Is that DIY or something else? And then I think you mentioned some res, maybe what's the res exposure?

Well, yes, let me just talk about some of those channels. So yes, there is some retail, but there's also some other specialty type of distributors where we nVent hasn't played. And one of the things that we're excited about from this opportunity is that we know that for nVent that there is a set of contractors that we haven't necessarily been able to serve very effectively. So this is going to open the door to us because they're very strong at e-commerce. They have this ability to do 1 PO, 1 shipment. That's not something that's on our radar for nVent or certainly not there. So they've built this great capabilities around e-commerce. And I think that's going to allow us to pull through nVent offerings to a whole segment that we had just expanded segment that we had not been able to successfully go after. And then, Jeff, what was the second part of your question?

Resi. Resi mix.

Resi. It's hard for us right now to kind of break all of that out. I would say commercial resi combined is just over 60%. And this is some of the work that we'll do when you go through distribution, you have to -- we'll have to spend some time to look at the end sales and how that aligns to our vertical breakout, but I would say commercial resi is just over 60% combined.

Okay. Great. And then one of the hallmarks of EFS is really the whole labor savings component. You do a great job of highlighting that. I'm just wondering where ECM is on that? How much of a focus is and if that's something you can really drive within their product category?

I think that's an opportunity for us. I mean, certainly, they have great products. And one of the things we also like is they have products that create great value for their customer base that is a low cost on the bill of material, which is similar to us, nice margin profile similar to us. So I think this is an opportunity for us to really look at how can we further drive labor-saving solutions. And when you look at even test instruments and tools, that same concept applies. How do you support the contractor that they can get on and off the job site really quickly. So we're excited about that potential as we combine ECM and nVent.

Okay. Great. And then if I could just sneak one more in. Is there much margin differential between the 3 groups of products?

No, I would say that overall, all 3 product groups have strong margin profile getting to that overall ECM strong EBITDA margin profile.

And our next question comes from Deane Dray from RBC Capital Markets.

Thank you. I'll add my congrats. And there are a number of brands here that I'm familiar with, like Gardner Bender that was previously owned within the -- our sector. So these are really strong brands. So I like seeing that. The question is, where is ECM on their digital journey? How much of their product line has already been digitized. I know that was a big lift for you all over the past couple of years. Where are they on that spectrum? And how much additional work might that entail?

Well, I would say they've been on a journey and made some good investments. So when I talk about the fact that they have this ability to have 1 PO, 1 shipment, they've done a lot to be able to manage their business effectively there, including some of their warehousing. So that, we think, is very capable. And that's an area that we want to explore from an nVent standpoint. The area where we think we want to invest further in digital marketing as we look at how we sell an expanded portfolio even globally, making sure you've got digital translations and all that product information. So those are going to be some of the investments that we need to make -- to continue to make on the journey that both nVent is on and ECM.

Got it. And then could you comment on the test and measurement business. So we're familiar with the multimeter sector, but it's a reasonably sizable piece of this transaction. Are there adjacencies that you're interested in? And it makes sense that you're now in electrical test and measurement, but what else might you be looking at?

Well, I think it starts with this, Deane, is that the electrical contractor is a key segment for us. And so anything that we can do that really expands that share of wallet or that allows the contractor to serve to, as I said before, get on and off the job site. So just -- we think it's a good fit, and I think there's more for us to learn here, but we like it because it's very synergistic with what we do.

Great. And then just last one. Can you -- and I might have missed this, but what's the presence in the big box distributors? And where you stand in terms of your latest line review and taking share, adding -- losing share. Anything that you can comment on?

Well, I don't know that I can comment all on that, but I can comment on, they are in all of the major retailers, big box. I mean they've got over 20-plus-year relationships. So these are long-standing and I think they're very well positioned, and I'll just leave it at that.

That's great. And just let you know, I did buy some of their weatherproof connectors this weekend. So I'm a big fan of that product. I appreciate it.

Excellent. That's excellent.

And our next question comes from Joe Ritchie from Goldman Sachs.

Congratulations. I guess my first -- okay, so my first question is just around the way we're talking about distribution. Do they -- does this business sell 100% or distribution? And then also curious, just from a pricing standpoint, what did their pricing look like last year?

Well, let me answer the first. So 55% goes through sort of the electrical distributors, some of the same ones that nVent has, maybe not all the ones that nVent has, so that's a great opportunity. And then about the next 30-some percent goes through the specialty distribution, e-commerce and retail, and then the remaining 15% would be OEM direct type business.

Okay. Cool. And then pricing last year? How much pricing did they put through?

Well, we can't really comment on the pricing side, but here's what I would say, Joe, just if you look at their strong margin profile overall being at 25% EBITDA margins just shows that they've got strong execution on the operational side and just more broadly.

Okay. And then maybe just a quick follow-up. And I know that sometimes going through the due diligence process, like there's only so much you can actually see. I'm just curious like how much were you able to really do diligence the control procedures they have in place from a pricing standpoint, the investments that they need to make. Just any either qualitative or quantitative comments carry around that would be helpful.

Well, I would just say from an overall due diligence standpoint, I mean, we've got an extensive due diligence playbook that we've really executed beginning with our first acquisition upon spend at Eldon. So we feel very good about the thoroughness of our due diligence process, and we think that, that sets us up for a strong start here.

Okay. Great. And congrats again.

Thank you.

[Operator Instructions] Our next question comes from David Silver from CL King.

Yes. I had a question, I guess, about the margins. So ECM is at 25%, as you mentioned, adjusted EBITDA margin. And your EFS segment is a little bit higher than that. And I'm just wondering, is there any reason why, let's say, over a couple year period following full integration, why the margin profile of ECM couldn't match or exceed what you're currently generating from EFS. In other words, are the products, channels, markets from your perspective, roughly have similar margin potential? Or are there some differences in either the products or the market structures that they serve?

Yes. I mean I would just start by saying, look, ECM, we believe, is a well-run company. I mean, it's delivered great growth, and it's got really strong EBITDA margins. We do see margin expansion opportunities over time. And I think the first start of that, right, is going to be working these kind of combined cost synergies that we talked about. So as we look ahead, we believe we've got great growth potential on the top side as well as continued margin expansion going forward. And these are things that we can get into more upon closing the business as well as we begin to talk about projections, et cetera.

Okay. Another question, I think, for Sara, but you did articulate the significant cash tax savings that will result from the combination. I'm just wondering in what you're acquiring. Are there any other assets, maybe or other aspects beyond the purchase price and the EBITDA we should consider? In other words, are there -- is there spare land you could sell? Is there, I don't know, some contracts that you think can be redone in relatively normal course of business. So just areas of hidden value or divestible assets that we should think about?

No, I think we highlighted those on the call. With the tax cash savings, that's a positive. We've got, we believe, good line of sight to these cost synergies. And what I might add is just we also see ECM as a good cash generator, reflective of their strong margins and relatively asset-light model similar to nVent.

Okay. And then just maybe last question about integration strategy. But the -- would you say that the majority of the management will have some operating role? Or would you say this is -- they're going to hand you the keys and you expect nVent's current management to be running all or virtually all of the acquired business?

Well, look, whenever we acquire a business, we always look to keep the best of the best talent, many leaders that we've acquired have gone on to take on bigger roles in nVent. So as we go through this, there's an integration process. We'll look to see who are the key leaders and we'll look to integrate this within EFS and there may be some -- we want to keep key talent. That's always the way that we do this, and we work a good transition process because we want to make sure that we're still growing the business. We're still executing and we're still managing customers. So I feel good about the approach we've done over the last 4 deals and we'll apply that here as well.

And ladies and gentlemen, with that, we'll be concluding today's question-and-answer session. I'd like to turn the floor back over to Beth Wozniak for any closing remarks.

Thank you. To wrap up, the addition of ECM is exciting for our future, and we're confident it will deliver tremendous value for our customers, employees and shareholders. Our future is bright. Thank you for joining us, and have a great day.

And ladies and gentlemen, with that, we'll conclude today's conference call. We do thank you for attending today's presentation. You may now disconnect your lines.