nVent Electric plc (NVT) Earnings Call Transcript & Summary

Good afternoon, everyone, and thanks for tuning in today to Deutsche Bank's Global Industrials & Materials Summit. Hope everyone is staying safe and healthy. For anyone that doesn't know me, I'm Nicole DeBlase. I'm the lead analyst covering the electrical equipment and multi-industry space at DB. This afternoon, I'm very excited to be joined by nVent's leadership team, including Beth Wozniak, CEO; and Sara Zawoyski, CFO. Prior to becoming CEO in 2017, Beth served as SVP and President of Pentair's Electrical segment and as President of Pentair's Flow & Filtration global business unit. And before joining Pentair, Beth held several leadership roles at Honeywell and AlliedSignal. Sara was named to the role of CFO last year, prior to which she served as nVent's SVP of Finance and Treasury. J.C. Weigelt also joins us today. He heads up Investor Relations for the company, for those who don't know him. So I believe Beth is going to kick it off with a few opening remarks. And after that, we'll dive into the fireside chat. If any investors in the audience have questions, please do submit them via the box on the webcast screen or you can also e-mail me directly if that's easier. And with that, I'll go ahead and turn it over to Beth.

Nicole, thank you. So just a couple of slides that I thought I would share today. So if we turn to Slide 2, of course, is our forward-looking statements, and I won't go through that. Slide 3. Just to share with you, we are a $2.2 billion company. Our return on sales is about 19.3%. Enclosures is our largest segment, and we recently did an acquisition there. So it's almost about half of our business, with Electrical & Fastening Solutions and Thermal both evenly split there. And the verticals that we serve, I just wanted to reiterate that because I know there's always lots of questions around what's going to happen in different end markets. So industrial is our largest segment that we serve. But in there, I would just say there's a lot of different things that we put into industrial, whether that's food and beverage, whether that's automotive, whether it's factory floor automation. Commercial -- resi/comm next, it's mostly commercial, a little bit resi in Thermal. And then infrastructure and energy. And you can see, in terms of our makeup of our business, we're about 2/3 in North America. So global growth is a priority for us. Turning to the next slide, Slide 4. Our mission, and I think what is somewhat unique about our portfolio, is all around connection and protection. And so when we think about the longer-term trends in the electrical space where we play, we believe they're very favorable, simply because you see the trend to electrify everything, whether that's transportation system, whether that's the need for more data and networking solutions and 5G, whether that's the industrial Internet of Things. The second trend we see is just increased safety and security. And now that's even playing out in a pandemic and a coast -- this idea of noncontact labor-saving solutions, it really plays there. And that's the third point here that we believe that we can continue to create value, and it's been one of our tenets in some of our products that we provide labor-saving solutions. And so these trends -- and we also see labor shortages, which is in need for labor-saving solutions. These trends for the long term set up this portfolio well. And when you think about what we do with Enclosures, anything that is electrical needs to get protected, and an enclosure is protecting electronics and data everywhere. And I mentioned the Eldon acquisition that we just completed last year, which is going well and on track. We now have a full portfolio to serve any solution around the world, and we're ahead of schedule with our Eldon integration, making sure that we're able to produce that product and manufacture it in North America and in Asia. That's what we're working on currently. So our ability to meet any requirement, whether it's data and networking solutions, whether it's a food and beverage processing plant, whether it's in a automotive plant, whether it's outside of 5G application, everything needs to be protected with an enclosure, and we're able to do that with all of our solutions. Our Thermal Management business, it connects and protects for safety and security. So whether that are self-regulating heat trace cable that can protect a pipeline or whether it's protection for an icing system or whether it's finding safety and security through fire-rated wiring, which is an alternate construction method, or whether it's heating hot water pipes in a high-rise building to provide energy efficiency and lead points, that we're connecting and protecting their safety and security. And our third portfolio around Electrical & Fastening Solutions, here, we have a history of innovation and labor-saving connections. And we've built upon a great portfolio with our lead brand being CADDY into applications like seismic and now with our WBT acquisition more into data and networking systems. But we're taking it further with prefab solutions, which has been growing nicely. And we think in this COVID noncontact world, that's going to grow even further. So across all of these portfolios, with our next chart on our strategy, what we're really trying to do here is accelerate the growth of those portfolios with One nVent. And that simply means, how do we look at digital capability? How do we look at our channels, our verticals? How do we scale what we do in our back office? And that's been key to our strategy as we go forward. And even as we go forward with some key priorities in this difficult time, our focus on attractive verticals remains the same. Now there may be some verticals that get more focus, whether it's factory automation, whether it's, again, extending more into data and networking solutions in 5G. And our view is to be positioned to serve the growth in those areas. Similarly, on innovation and our connected solutions, this is an area where we launched a record number of products in Q1, 11 new products. We have 10 for this next quarter. We're doing it more creatively with virtual training solutions and shipping products to our customers in advance. But we're not stopping here, and we believe this is so important for us to emerge stronger. And then as I mentioned earlier, we have this opportunity to grow globally, and we've seen growth return in China. Productivity and velocity is key for us to expand our margins. And velocity, we believe, is key for us to serve customers. The fact that our manufacturing sites remained open for the most part, including Mexico, we know that we have found new customers and our supply chains were not disrupted. So our velocity to respond has allowed us to find those new customers, and we want to retain those new customers for the future. And then, of course, acquisitions, and I mentioned Eldon and WBT. And I think while we have a very fragmented space that we play in, there are lots of opportunities. And I think as we start to exit this pandemic, we'll be in a position that we can continue to do bolt-on M&A. In the last chart here, Chart #6, is we put in place these 3 priorities. That doesn't mean our strategy, it's still intact. But we want to focus, first, on the safety and well-being of our employees, and I think that has served us very well. In a survey that we did recently, 97% of our employees that responded to the survey felt that we were keeping them safe. And I think that's a large part why we've remained operational all of our factories. Our second, to make sure we continue business operations to serve our customers, support critical infrastructure. And our third, to emerge a stronger company. And so by that, it's the point I made about, we have not paused on launching new products. On the digital side, we're accelerating what we do. We've adopted the agile methodology and program management framework. And we're finding our channel partners and customers are looking to drive more digital sales, and we're accelerating what we do there. And on the cost side, we're ensuring that we have a combination of both temporary and structural cost actions so that we can manage to some key decrementals. But when growth returns, we have the labor and the workforce and the capacity to be able to respond. So that's just a high-level overview of events and what our priorities are. And Nicole, I'll turn it over to you for questions.

Thanks, Beth. That was really helpful overview. So I think business trends are at the top of investors' minds in the current environment. Most companies that we've spoken with understandably have the view that April was the demand trough. And you guys, on your first quarter call, you provided pretty helpful color around April trends. Now that we're in the early stages of June, would it be possible for you to characterize how May trended? And any color you can give us by end market or business would also be really helpful.

Okay. Well, as we said in April, we expected this quarter to be the toughest quarter, and that was simply because countries were shut down in Europe, states were shut down. And in addition, one of the things that is continuing through the quarter is our distributor partners had said to us in their -- in the face of uncertainty, and everyone is ensuring that they're managing their liquidity and their cash that there was -- that they had intended to do some destocking around inventory. And so that's a trend that we know. There's always an overcorrection to it, both on the downside and upside, but we knew that, that was going to continue through this quarter. So I would say, we still expect this to be the toughest month. Orders in April were faring a little bit better than sales. But it's still very choppy. We still see that destocking occurring. And I think we'll -- as we get into Q3, that's when we expect things to start to improve because it takes some time for that restocking to occur.

Got it. And then thinking about the destocking activity that you're seeing in the channel right now, would you say that once we exit the second quarter, it's highly probable that inventory levels will be closer to end-user demand, assuming that we don't take another leg down?

I don't know if they're going to be -- I think there's still going to be caution, but I think the inventory levels are going to improve. And given that we're still -- there's still uncertainty around what Q3 will look like, I think it improves whether we're fully -- inventory levels are back to where they need to be, I think we don't know at this time.

Okay. That's totally understood. And then I guess for the benefit of the audience, like, did you guys start to see the destocking activity create an impact? Was this like a COVID issue? Or is this continued relative to inventory destocking activity in 2019?

Well, we did see some destocking activity occurring with just industrial short-cycle weakness, which we had spoken about earlier, but there was a marked change as we got into March, and we started to see the pandemic hit. And so most of what we have seen, I would say, through this quarter and in the early weeks of March was a reaction to the pandemic, job sites being shut down, states being shut down. So that's really the most significant impact that we've seen is due to COVID-19.

Got it. Okay. Thanks for clarifying. That's helpful. And then on the same topic, has nVent faced any notable supply chain disruptions in the past few months? And in particular, we've heard companies talk about Mexico and India becoming the most, I guess, sustained supply chain issues. Maybe you could comment a little bit on any disruptions you're seeing there?

Yes. Here is -- this is one of the things that I think I've been very proud of our team on is that we had talked previously, we have very regional supply chains, right, when we were having our discussions on tariffs, for example. But because of the fact that we saw the impact of COVID-19 in China first, we adopted a lot of the safety protocols in China across our plants. And so we were never shut down in Mexico. And I think in the early phase, in Mexico, we might have seen some attendance drop off, but we were able to get that back up. And this has in part helped us serve new customers because we've been operational. And Mexico is one of our largest plants. So really, we did not -- we saw minimal disruption there because we've never shut down our factory and it's running. In India, there was a period of time for which our plant was shut down, but it's really back up and running. And India for us is a plant that mostly serves the India market for us, which today is a small market. So I would just share globally, our plants have -- are all operational with minimal disruption, and I think that's part of our focus on continuing to serve customers and emerge stronger and the fact that we've been able to respond to new customers when other suppliers have been down.

Got it. That's definitely quite an achievement. And I guess one question that I've been starting to get from investors more frequently is, as we think through things that companies are having to do, added safety measures related to COVID as employees come back to work, so social distancing in the plant, maybe running more shifts, purchasing PPE. I think there is a concern that, that could weigh on margins as we move into recovery mode. I guess, what comments would you make? What would your answer be to that question?

I think it just depends on the level of disruption. I think we're starting to get some good protocols in place how to -- and safety protocols so that we minimize impact, right? We have contained areas. One of the things about how we manufacture, if you think about an enclosure or you think about stamping machines for our fastening solutions, there's a lot of social distancing. So by -- the manufacturing activity that we do, by virtue of the fact that we've got large machines, there's separation. So we're able to contain things. So even where we've had an incident, we've been very quickly able to isolate the area and respond to cleaning it and still be able to run the rest of the plant. I think we -- early on, as we started to see just attendance issues because there sometimes was confusion when the plants were -- when a state was in a stay-at-home order, and we might not have had full attendance for those first couple of days, we saw some impacts to that. But I think as we go forward, we're starting to be able to manage more effectively. So in this quarter, I think absolutely, there's some inefficiencies in there. But as we go forward, I think it's very manageable for us.

Okay. Understood. And then maybe shifting to the cost savings you guys outlined on your 1Q conference call, I think the number is $50 million. How would you characterize the split between what's temporary versus what could be considered more structural in nature?

I'll let Sara...

Nicole, this is Sara. Yes. So we're driving to, as you alluded, to the $50 million of cost savings. And really, that's intentional in terms of allowing us to manage to these decrementals while also preserving some of the investments for future growth, and it's also balanced. It's important for us to look at, from a structural standpoint, those end markets that we feel like are going to be challenged for a longer period of time versus more temporary actions to enable us to be ready for when and how that recovery comes back. So from a structural standpoint, roughly $30 million of that $50 million of cost reductions is more structural. Half of that really relates to our carryover of cost savings from our actions that we took in the back half of last year, really getting ahead of some of that industrial short-cycle weakness that we saw. The other half of that structural cost reductions really focus more around Thermal Management, Enclosures, with that oil and gas and some of the industrial weakness that we're seeing in those end markets. That leaves roughly $20 million related to more of the temporary cost actions, and that's really going to be across enterprise and across the businesses. And that really includes things like reduction in discretionary spend, reduction in T&E spend, things like payroll reductions for our leadership team members, along with furloughs. So those are examples. And I would say too that a lot of those temporary cost actions are geared towards Q2 with the view that this being our toughest quarter. And we'll assess as we go based on when and how that demand comes back and continue to be agile and flexible from a cost management perspective.

Okay. Sara, that's helpful. And then taking that a step further, clearly, there's still a lot of, I guess, a complete lack of visibility into what the recovery looks like, the shape that it might take. So let's say we do enter more like a W or a U-shaped recovery, would you -- what would be your next course of action? Are there more cost savings, whether it be temporary or structural that nVent could take to try to manage decrementals to your target levels?

Yes. So we wish we had that crystal ball. But I think that's why the scenario planning that we did with leaders really across the organization beginning as early as last year is so critical. Went through the scenarios of what would it look like down 10%, down 20%, down 30% environment? And importantly, what are the cost actions and decisions we would make as a team, not just at the enterprise level, but at the segment level and the plant leader level. So importantly, that the teams have their game plan. These are tough decisions, no doubt, to make and to execute on, but we're aligned across the actions and the game plan that we have across these scenarios. I think you're going to see us be cautious on the temporary and from the discretionary spend. Even to your point, a W may suggest that things come back a bit and then revert back based on a resurgent here of COVID-19. And so we're going to continue to be very cautious and intentional in terms of some of these discretionary spend type actions. And then we're continuing to look on the structural cost actions as well. Just in terms of how might we get work done differently going forward because I think there's some important learnings for us all in this more virtual world of how productive we can be in more of a virtual setting with less T&E than maybe what we've had done in the past. So we're going to continue to look at extending temporary actions or looking at continued ways to be more efficient in servicing our customers as we move forward as well as to manage within those decrementals.

Okay. That's really helpful. And maybe one more question on this topic, and then we'll kind of move on to some more fun stuff, not just about COVID-19 impact. So you guys, I think you talked about 40% decremental as kind of the second half target. Is the expectation that if we do see that 2Q is the bottom and we start to see improvement from a top line perspective in the second half of the year, that 40% decremental number could start to improve? Or is that normally the decrementals that you would see throughout the entire downturn period?

Yes. We would expect those decrementals to improve. I mean in part, with a view that Q2 would be our toughest quarter, right, we would expect things to get better in the second half. Again, don't have a crystal ball, but that's why these scenario plans are so critical for us. And then secondarily, in Q1 and even in Q2, we're not at full run rate on some of these structural cost actions. So we would expect those to fully fold in, if you will, in Q3. And -- but it's a combination of things getting a bit better in the second half. And then importantly, the structural cost actions coming into fuller run rate.

Got it. That makes total sense. Okay. So maybe shifting to some of the top line outlook. Data centers have been a clear area of outperformance throughout this downturn. Can -- Beth, maybe you can kind of remind us of just your data center exposure as it stands now? And how quickly it's been growing in recent years before COVID started? And then we've heard from some companies that data center activity has actually remained pretty robust through the downturn. So I would love to hear your perspective on that as well.

Yes. Our data center business is now approaching about $150 million. And that was a strategy we put in place to focus on, it is a vertical across all of our 3 segments. And we've grown at double digits since then. Now as we started to see the impact of COVID, we've seen some nice orders growth, but there's a delay and we're going to recognize that revenue. And if you think about just COVID shutdown any on-site installation, so whether it's a school or whether it's just in a commercial building, we're just starting to get office workers back in. And we know our employees in nVent. Anyways, they're like, well, let's be careful about visitors coming in. So what we expect is that over the course of the summer and into Q3, the ability for our system integrators or for some of those installations to occur is going to start to pick up. But that's just one of these dynamics with not having visitors or contractors allowed on site. So we're very bullish still on this space, and we think it's going to continue to grow. In fact, we know the demands, whether it was telehealth or kids at home or everyone working from home, that the infrastructure is going to grow. And we believe we're well positioned, and our recent acquisition, WBT, is just a further extension of our capability within our basket tray into that data and networking space.

Got it. That's really helpful. And then in the data center space, does nVent have exposure skewed one way towards enterprise hyperscale or edge? Or are you kind of more agnostic about the project type?

Yes. I mean we're pretty well balanced. And this is the one thing about our portfolio is that we can sell you, if you just want to a CADDY J-Hook or if you just want a rack for a data room that's like a closet in a commercial building, we can provide that, and that's typically through a distributor. But we work with some of the hyperscale guys as well, and we'll work on solutions with our liquid cooling capability. So part of what we've been building out is to ensure that we can serve customers from the largest through the system integrators to just providing components from a -- through distribution. So for us, it's pretty balanced across all of it, and we know we got room to expand in serving customers in all parts of the value chain globally.

Got it. Okay. That's helpful. And then maybe shifting to commercial construction. This is an area where I think investors are becoming a lot more concerned about the potential for just maybe some slower activity with respect to new projects coming into the backlog, just given the later cycle nature of the market, potential structural changes in a post-COVID world. How are you guys thinking about the commercial construction cycle maybe over like the medium term?

Yes. I think what we're going to see, at least over the medium term, is that -- we had a lot of job sites that were shut down. And so we expect that those are reopening. And so we're going to see those projects complete because typically, anything that is underway is going to get fitted out or finished out. And from our standpoint, the majority of our products are kind of in the wall, in the floor, in the ceiling. And so to complete a building without maybe having all the finishings done, you need those fasteners in the wall. So our view is that anything that's underway is going to pick up. And I think as we think about it further out, we think that there are some areas and some trends that will have strength and others weakness. Certainly, hospitality will be an area of weakness. But we think about -- we've already seen hospitals do some reconfiguration, and they're thinking about how to operate in this new COVID way. And so we believe there's going to be health care and other areas there that there will be some opportunities. Just data centers within a commercial building, we believe, is an opportunity. And then I guess I would make a comment that we started doing some prefab work a couple of years ago and have seen that grow in nice double digits simply because there weren't enough contractors or electricians, the labor savings side of things. And I think in this COVID world of, again, wanting to be on and off the job site less contact, I think we're going to see that trend of prefab solutions continue to grow. So that's an area where I think that we have some strength that we're going to continue to build out.

That's interesting. I haven't thought about that angle. And I guess when you think about the fact -- we've kind of done some work around this, too, like, looking vertical by vertical and where there could be structural impacts from COVID, both positive and negative, do you have a sense looking at your own revenues tied to nonresidential construction? If you have any big SKUs, like you're more exposed to health care, you're more exposed to office, or is it really hard to tell where the revenue is actually coming from?

Yes. We do get asked this question a lot. And I always have to share that, remember, what happens with our products is that a contractor or electrician will end up at a distributor and pick up everything they need, our fasteners along with other products. And we don't necessarily know what job site they're going to today because a significant portion of our commercial products is sold through distribution. So it's really hard for us to tell you where it's getting consumed. But what we try and do is make sure that our products are suitable for all different types of applications and support that with marketing materials. But then we're trying to think about where is the growth going to go and do we have solutions that fit those environments. So I can't answer that specifically by what type of commercial applications. But I can just share that we're thinking about where will growth go, health care, global growth for us is still an opportunity, prefab, and we think about those areas and just make sure we're positioned there.

Okay. Got it. That's helpful. And totally understood that it's hard to really tell completely like where the revenue is coming from. And then I guess -- I know we're running short on time. I'd like to try to squeeze in 2 more. So the first one is when we think about the impending recovery, so let's think optimistically for a little bit here, which businesses would you expect within your portfolio to see improvement first? And where would you expect there to be the largest delay in improving demand?

Well, I think it's going to start with some of that restocking activity, which benefits most our Enclosures and our EFS business, right? So that's where I would expect us to start to see some positive momentum there. Then I think we're going to see that data and networking solutions business, right, because we're going to start to see those projects executed. And I guess, I would say, when we think about our Enclosures business, which we -- with the Eldon acquisition, and Eldon, that portion of our business, which is predominantly in Europe, grew in Q1, right, in the backdrop of COVID and everything. I think our Enclosures business, just with where things are going to head around electrification of everything and factory automation, that we're going to be in a good position with Enclosures as things start to come out. And we always see Enclosures when it comes out of downturns, that there's a little bit of acceleration, I think that Enclosures is going to be positioned well for growth.

Okay. That all makes sense to me. And then last question is actually from an investor from the webcast. So given the amount of free cash flow you generate, if M&A is kind of on pause for now, would your strategy be to build cash? Or would you prefer to think about increasing return of cash to shareholders in the meantime?

Well, I think as we get through this year, I mean, one, we are -- we restated we are pausing buybacks, and we said we were holding the dividend. We're not continuing -- we're continuing. We're not slowing down when it comes to relationship building and working on those M&A targets. And right now, we've got Eldon and WBT that we're integrating, and we're very intentional. We want to ensure that we can execute. So we're not going to ever take anything on our plate that we can't execute well. But as we get into the back half of the year, I think we'll be in a position -- and presuming, right, we're starting to see momentum and stability in the end markets as we come out of this pandemic or assuming that we're in a V-shape recovery and not in a W, we may be in a position to do some more M&A coming out of the back half of the year. But if that's not in the cards, then I think we'll look at where we're at on our -- what's the most value? If there isn't growth investments that we can make organically and inorganically, then we'll ensure that we are returning cash to shareholders. So that's consistent with our capital allocation framework.

Got it. Very clear. Okay. And with that, I think we've expired all of our time. Beth and Sara, thank you so much for participating in the conference this year. We really appreciate your support. And also, thanks to everyone on the webcast who tuned in today.

Thanks, Nicole.

Thank you, Nicole.