nVent Electric plc (NVT) Earnings Call Transcript & Summary

Great. Well, welcome, everyone, to the penultimate fireside chat. Next up, it's my pleasure to have here, Beth Wozniak, CEO of nVent; and also J.C. in Investor Relations. Both of them. Welcome, Beth.

I guess one question would be around -- it's been just under 2 years since the spin-out from Pentair. How do you assess -- what are the things that you're happy with about the organization today? What are the areas that you think, okay, we really have to set this up to sort of thrive or do even better as a stand-alone?

Yes. So when I look at the strategy that we laid out and just prior to spin and the things that we've been executing on, whether it was how we scale this portfolio that had largely come together through acquisitions, where we've put in some key vertical approaches like data and networking solutions, where we've consistently seen double-digit growth or whether it was scaling what we do through channel partners, all of those things. So I feel very good that some of these key initiatives that we've put in place, that we focused on, we've seen the results and the returns. Now some of that got offset by industrial short-cycle weakness in our Thermal business with these projects, but largely, those initiatives have proven that they're working, and we're going to continue to accelerate those and expand upon them. The other thing I would say is, when we first spun as a new company, we've talked about, we had a lot of operational inefficiencies in our enclosures business, we had some factory transitions in distribution. Our EFS business, we were struggling operationally. And I now look 18 months later, those operational issues are really behind us. And I think you see that in our execution, where you look at our margin performance in Q4, which was a difficult quarter, our ability to drive and preserve and protect margins, I think we demonstrated that. Cash has been great, so that's a hallmark for us. And I think what we're also very happy with is how we were able to do our acquisitions. So very thoughtful. The Eldon acquisition off to a great start. We just announced, in the last several weeks, a smaller acquisition of a company, WBT, that fits into our data and networking solutions and will extend our CADDY business. So we think that there's great value there and synergies. So overall, I think those things are working. And what I would say is we just got to keep focused on driving organic growth, right? We're demonstrating great cash and margins. And keep finding that we can diversify our portfolio, both globally and into these key growth verticals and launching all these new products this year. Growth is our #1 target.

And on the Spark operating system, maybe talk about how -- what's different about that? And how is that developed, again, in the last couple of years? What have you found that, no, it's not about direct that it's still fully applicable right now for the company?

Yes. I mean it's very applicable for us. And our management system has 5 elements, and we like the name Spark versus having some acronym that just -- so it's a great word because you want to spark growth and energize people, and it means a lot to us. So when we launched that, let me start with people. I think this is an area where the culture that we're creating at nVent that we're a performance company focused on results, but we really care about people, and there is a war on talent. So when I look at our retention rate and how we're developing people and employee resource groups, and I think that the talent we've attracted as well that that bodes very well for us, and we just got to keep on that. When I look at the other elements of growth, we, this year, have a Chief Growth Officer, and we're really focused on sales and marketing excellence. And this is that market-backed, customer-backed thinking doing a lot here for us on that journey where I think we can get even better as a company. And then the next element there is around lean, and we were always very good from our parent company at lean. But expanding that lean enterprise thinking, thinking about digital in combination with lean. As we look at velocity, another element of Spark, they all work together, and I think it's -- that's really fundamental, and we're building on that. When I think about digital, we now have a Chief Technology Officer, responsible for new products and digital transformation. And this is an area that we've invested in and are going to continue to invest, and I really think we're going to start to see tremendous progress. We've already launched digital programs around HOFFMAN Express, HOFFMAN on Demand, for example. We're -- we've digitized a lot of our product information, but it's that whole customer experience end-to-end that we are really working at, ensuring that customers can search, select, configure, price quote. Getting better at data analytics to help us understand the areas of operational inefficiency or better insights to customers. This is a long journey. So we're -- I'm pleased where we're at, but we know we've got a long way to go. And velocity to us is, it's now in our language. We talk about everything. If we can serve customers with velocity. If we can -- working capital is a big focus for us and our new CFO, Sara. We talk about that in terms of velocity. So we think that to win today in the environment we're in, speed and velocity are a differentiator. So our management system is really important for us, and I think everyone's embraced it, and we're on a journey to drive performance improvements as a result.

Good. And then on the aspect of people, there has been a lot of upgrading, as you -- so I guess, 2 questions on that. One is, if you have a team in place now and maybe give us a sense of how much churn or hires have there been at the sort of upper echelons of the company? And also more narrowly, M&A, I think, is becoming more important to the company. How well sourced and staffed, scaled is the M&A capability or team of the company?

Okay. Well, let me answer that in 2 parts. I feel this year, we have the executive leadership team in place. And we just didn't have a technology officer before, so that was a new hire. We had a succession transition with Sara, and she's been -- she's very operationally focused and didn't miss a beat, and I think is driving some new performance areas for us, as we've discussed. Having a Chief Growth Officer, it's a role that when we spun, we had, but we had to replace that role, just some circumstances as the other individual left. I feel that the leadership team is in place. An interesting fact is when we looked at the senior leaders in our organization, so going down multiple levels, our retention rate -- or our turnover there has been low, it's been 3x lower than what we see in just the general turnover that you have in a company. And I think that speaks to the vision and the strategy and the culture that we're building. So a lot of talent have been attracted and want to stay to be part of driving success in nVent. So that's going to be a differentiator for us. When I think about -- and we had to make some changes, as you know, operationally, right? Where we had nonperforming areas, and I feel we've done that. So I really think that we've got a strong leadership team in place as we go forward. Now when it comes to M&A, this is an area -- in our first year as a new company, we said, look, we're -- we got a lot to do. We're not going to do any M&A. So our team spent a lot of time looking at all the acquisitions we've done previously, best practices, what worked, where our playbook is up to date. When we did the Eldon acquisition, we had a balance of experienced people in the business, but strong functional leaders in -- mostly in Europe that we could pull upon, that we were able to train. And as we now are on to our second acquisition, we've already taken that playbook and said, here it is with some early lessons learned. And again, we looked at dedicating people who were knowledgeable in our company processes and the businesses that we're in to make up those integration teams. So we have a very rigorous process by which we're reviewing on a 30, 60, 90, 180, like very regular check-ins. And I think we've got the capability. And one thing I've said is we're not going to do acquisitions at a pace that we're not ready to execute and integrate on them because it's really important for us to overdeliver and exceed expectations on these acquisitions. So we feel good about the talent that we have in place, and you're going to see us pace acquisitions as we go forward.

How do you assess the overall environment today on M&A, I mean in terms of valuations? And how tempted [indiscernible] laterally for other end markets? Now that, as you've say, you've got -- been out there for 2 years stand-alone but running pretty smoothly now in the base business. So there's a management bandwidth room to expand as well.

Well, we've always said this, that we're a $2.3 billion company in a $60 billion space. That's the portion of the electrical market that we play in, and it's highly fragmented. Where we play specifically in our Electrical/Fastening Solutions business, it's very fragmented. Lots of smaller players. So we've always said we were going to do bolt-on acquisitions just because we felt that there was plenty of room and opportunity for roll up there. And so as we go forward, that's -- the company is $25 million to $100 million, I think that's where you're going to see us continue to focus versus saying a fourth leg or anything like that. I mean it really is in the spaces that we know where we believe that we really can have multiple levers to drive growth. Our most recent acquisition, albeit a smaller company, extends our capability into data and networking solutions. Very innovative in terms of their new product development, which is a natural extension of what we do in CADDY. But we also see opportunities to expand in industrial with the HOFFMAN brand and to really take that portfolio through our distribution channels where they didn't play. So you look at -- there's multiple opportunities there. And as far as executing on synergies, these are businesses that we know, so we can both grow them and get cost synergies as well. And I think there's multiple opportunities there as we go forward that we can find companies that fit into our space and that are in reasonable multiple levels.

When nVent came out initially, maybe more of a weighting on share buyback for capital deployment. I think rightly, that's filtered to growth. Is that the way that we should think about the preponderance of excess cash is on M&A now, barring some macro-driven share price?

Yes. Our capital allocation strategy has always -- we laid out a framework, and we always said that our focus is to drive growth, right? And so that has always been the priority. And I do think, as we see these types of opportunities in M&A, those are the ones we are going to execute on. However, we do think that there are opportunities based on where the share price is to do -- and you saw it last year, where we had bought back about 5% of our shares, did our first acquisition. We generate a lot of cash, and I think you can expect that we're going to continue to do that. Certainly, M&A is a focus for us, but there will be opportunity to do share buybacks and now they'll be part of our plan as well.

And what sort of -- if you look out, say, 5 years, what average annual contribution do you think the total revenue growth could M&A -- If you look back in 5 years' time and say, yes, the M&A team, well -- what rough contribution to sales do you think...

When we look at the cash that we generate, I mean I think it's not unreasonable to think that there's somewhere between $75 million to $100 million of M&A revenue that we could acquire every year, and then we would expect that to grow -- that we'd accelerate that growth as we go forward.

Then maybe on organic growth, just update us sort of how you see the end markets right now. You did have a tough time, I think, late in Q4 in the U.S. market. Many, I think, peers in electrical equipment, same phenomenon. How do you assess the state of U.S. electrical right now? Is there a need for another step down of key stock? Or do you think all of that got cleared out 2 months ago?

Yes. We -- as we guided for the first quarter, we saw Q1 looking much like Q4. For us, we had commented on, we saw in December that it really -- we were in a position where there was that industrial short-cycle weakness in many of the channel partners. Not just in North America, but I would say Germany has been soft, for example, in Europe as well. They really just didn't want to take any more order -- take orders or inventory, and we expected that to flow through in Q1. And I think on the industrial side, that's pretty much the case. I think, for us, commercial still seems to be holding up. Our EFS business is our -- largely a commercial business, and it consistently grew 3% every quarter, and we think it's going to have a similar in that range as we look at 2020. So really, I think the softness that we're going to see is on that industrial side, and it's our Thermal Management business because, as we've said, we see that business more in the back half of the year getting back to growth, just how those -- the timing of those projects.

And how do you see, within Thermal, the pace of order intake? Last year was quite uneven for a lot of orders for nVent, but a lot of end markets that are project-driven. You had a lot of pushout, deferrals, CapEx going to the right. How do you assess the pace of kind of project with the order intake right now?

So for us, over the last several quarters, we've had both order and backlog growth. We expect that to be true also in -- as we look into the first quarter, first half. So for us, what that means is, while we never have complete control over how those projects get executed from the customer standpoint, we view the -- we view with confidence that we're going to see this business return to growth just because those projects will execute. And we tend to be on the late phases or late stages in many of those projects. So our view right now is it bodes well for us as we look at this year and into next year.

And on Thermal, I think people are often -- it's because of the history there, often nervous about the degree of visibility or line of sight on revenues there. How much -- if it's possible to characterize it, how much of the year's sales in Thermal do you think you have a good grasp on because of, say, where the backlog is as of today?