nVent Electric plc (NVT) Earnings Call Transcript & Summary

Great. Well, thank you, everyone, for joining. My name is Julian Mitchell. And it's my pleasure to have for our fireside chat this morning, nVent Corporation. We have Beth Wozniak, CEO; and also Sara Zawoyski, CFO. [Operator Instructions] So I think with that, I'll hand over to Beth for some introductory remarks before our Q&A.

Julian, thank you. Well, I just wanted to share 2020 was a tough year for everyone. And I think what it showed for us at nVent is our ability to execute very well. And I say that because through every quarter, we improved our sales sequentially. We also managed our decrementals well. And I think our cash generation was at record-level performance. So our first priority was our employees and safety, but then it was to ensure that we could serve our customers; and third, to emerge stronger. So on that front, I think we showed strong execution, continued improvement. But we also continued to invest in growth. We talked a lot about, as the economy recovers, emerging stronger. We had a record number of new products launched. We had record performance in terms of our digital launches. And we have coming up an Investor Day on March 3. And as we think about where we're headed as nVent, it's really focusing our portfolio around this trend of the electrification of everything. And so from that standpoint, with its automation, with 5G, with data centers, whether it's the grid build-out, a lot of our products are pointed towards that electrical infrastructure. So we think our future looks bright. Now as we come into this year, still a lot of challenges, and we're just -- still uncertainty. But at the point, our long-term prospects, we feel very good about with this electrification of everything. So Julian, that's just a few comments that I wanted to start with, and over to you for questions.

Beth, so -- yes, you mentioned that electrification aspect. Maybe give us any impression of what impact that could have on the kind of broad end market or addressable market growth rates for nVent, the next 5, 10 years versus perhaps what you had seen in those end market growth rates pre-COVID or over the last 5 or 10 years? How much of a step-up do you think investors could expect?

Our view in a normal environment, and we're not there yet, right, is that we want to be growing 1% to 2% above GDP, and we think that's very possible given these electrification trends. If you think about Enclosures where we were very industrial focused, but now we started investing in data networking solutions, saw that double-digit growth over the last couple of years pre-pandemic. But everything -- and with our Eldon acquisition, everything needs an enclosure. And so you're seeing whether it's automation in factories, you're seeing the rail and transportation system, you're seeing the build-out of 5G, so that all plays into the need for enclosures. Similarly, if I just chose another segment, our EFS segment, we have 2 aspects there. We do a lot around cable management in commercial or data and networking applications. And if you think about a building, the need -- we manage data and power. Well, the need to manage data and power in a building and a warehouse has increased significantly, requiring more of our products. The other part of our Electrical & Fastening Solutions business is around what we do with protection around grounding or bonding. We play strongly in utilities there as we start to see, whether it's renewable energy, all that conversion of solar or wind when we think about just automation. So our portfolio is really geared to all these trends around all of our infrastructure becoming electrified.

Perfect. And I suppose one aspect that's getting particular attention in recent days, partly the extreme weather and also some commentary from the new administration, is around grid upgrades or revamps domestically in the U.S. Maybe help remind us sort of what are nVent's core products and strengths in that utility realm? And how optimistic you are on the prospects on that utility piece?

Yes. All of our segments play in utilities, most strongly is our Electrical & Fastening Solutions. So we do everything from connections to grounding and bonding, to surge protection, to enclosures that are supporting any -- whether it's substation build-out or anything that needs to house the electronics. We have ground rods that are obviously a part of that. We have applications of our heat trace that's been used in utilities. So it's an area for us that we already have a strength, but we think we're going to continue to build out along with any of that other electrical infrastructure.

Perfect. And those are sort of some major end market drivers. When we're thinking about nVent's own ability to drive maybe market share gains within the addressable market, what are the areas, whether it's end market verticals, geographic regions where you're most optimistic that we can see over the next 2 to 3 years, some of those market share gains come through?

Yes. I think it is some of those electrical infrastructure markets that we're going to see growing. And so we believe we're well positioned there. We've done a lot around alignment of our commercial teams, our marketing and sales teams, to really how do we drive demand at the end user level, get spec'd in, in some cases? How do we support our channel partners and continue to take share? How do we build loyalty programs with contractors as we launch new products? So I think we're really ensuring that we're positioned well. The second, I would say, is around new products. This -- as I mentioned, it was a record year. And we can see it even in 2020 where we've had contractor conversions because we've launched new products. With the addition of our Eldon IEC portfolio, we're able to serve global OEMs who wanted to have one specification around the world. And with that portfolio, we've been able to work on some OEM conversions, right, which will be future growth for us. So new products. And then from the standpoint of just continuing to expand what we do globally, I mentioned Eldon, but for us, it's really looking at how -- we've done a lot around channels in North America, doing the same thing in Europe because we have a great portfolio. So how do we ensure that as One nVent, we're able to build those relationships out. So we saw -- we've started to see some momentum in Europe, right, on the orders side as a result of that. So global growth is the other key area. And that's really been our strategy, high-growth verticals, win with new products, and how do we expand globally.

Perfect. And then on the digital aspect, I'm sure we'll hear a lot more on March 3 about digital and what nVent is doing on that front. I think you'd mentioned that last year was also the last 12 months have been important in the progress there. What are the sort of 1 or 2 areas within that strategy that you'd call out, realize it's very early days, what do you think can have the most traction?

Yes. I think the area we've had the most traction is around the -- we think of it as our go-to-market or the customer journey. And I don't think any company today can just be -- cannot consider themselves a digital company because as equally as important, and we have great brands and great products, but you have to have a great customer experience. So we've done a lot around investing in our websites; making sure our digital product information is available, whether it's on our websites or through our channel partners because that's their ability to sell those products; how you search; how you configure price quotes. So if you were looking at some of our Enclosures' websites, you would find that you can go online, and you can have a guided configured process to select a product and see that's in stock. We can guide you to what's available now in stock at some of our channel partners. We've invested in things like instant quotes so we can respond to you very quickly. That makes that whole buying process for a customer or an OEM easier. And I would say, beyond that, there's been a lot of digital marketing in this virtual world, how do we do digital market -- how do we do digital training. We've been training national contractors with -- and so all of this builds that ability to support and serve. Then there's a lot of things we're doing in our back office, whether it's our sales and marketing tools and linking them, whether it's investing more in our factories around the ability to extract data and help us be more predictive. We've been building an intelligent platform that allows us with every different system that we have to be able to extract that data. And I think there's more to come because the power of data, well, is so important. And so we're driving productivity, we're driving the customer experience, and we're just improving how we operate. So more to come, but that's just a flavor of some of the things we've been working on.

Perfect. And we get a lot of questions from investors around -- more conversations around infrastructure stimulus domestically. The grid, we mentioned, was one part of that, but there's a lot more to it. How effectively do you think nVent would be positioned to benefit from any kind of domestic push in that direction? Do you have a sort of targeted approach ready if you start to see some larger projects kind of break loose and get fresh funding?

Yes. Our view is 2 things: one, ensuring we have the right products. Now we've been serving many of these industries. And so you think about whether -- even renewables. So it's the grid, whether it's renewables, whether it's the move towards e-mobility or energy storage. So we've been positioning our products and creating new products over the last couple of years since then. Then I mentioned how we've done demand creation, and we've looked at our sales organization that we have a team that is driving specification and we have a team that's supporting our channel partners and just creating awareness by training installers and contractors. So our view is, as there is stimulus or there is a shift or a move there, is we think about it on multiple levels, having the right product, having the right demand creation, having the right support network to be positioned well. And on all of those fronts, we feel very good, and whether that's in the U.S. or whether that's in Europe, where there's also a very strong green push.

One question we sometimes get asked about the revenue mix is that geographic aspect. The Eldon deal was a very big step to building out the European footprint. Beyond sort of North America and Europe, maybe help us understand what are nVent's aspirations to grow? Do you see a number of attractive acquisition targets in those high-growth or emerging regions? Maybe just some of the ambitions there.

Yes. Two things, both organic and inorganic. So we built out a new factory in India, which is sort of an area for us, and that's an area where we've really strengthened what we do, talk about electrical around rail and transit on the electrification side. We're expanding into a new factory in China this year, which is also to -- again, to better support those markets. When you think about the Eldon acquisition, that IEC portfolio, they also were positioned in India. So now we're also -- this year, we took that portfolio, and we started to manufacture it in North America last year. Now we're going to start to manufacture that portfolio in China. So our manufacturing footprint and that acquisition of Eldon, and they had some position globally, but we're now able to accelerate that, as an example. So I think we're making investments in new products, localizing them in places like China. We're expanding our commercial teams, and we're also looking at some acquisitions that can give us a stronger global position.

Perfect. And maybe switching to the profit outlook. There is a lot of investment underway at nVent, which, I think, investors definitely welcomed. Do you think it creates any kind of major headwind in the next year or 2 to margins? Or you can reinvest at kind of a steady rate as a proportion of sales? And maybe help us understand how comfortable you are with the efficiency of the R&D and sales? Do you think you're getting the real sort of payback on those that one would hope?

So when we look at R&D, I would say that we wanted to increase to -- we were at 2% -- below 2% around spin and got -- and wanted to get to 3%, and we said we were going to fund that from some of our G&A. Well, I would say, last year, just with the pandemic, we didn't quite make the increases we wanted to. Now having said that, our processes around just kind of thinking market back, driving velocity, we talk about that as our Spark Management System, we had a record number of new products. And we believe we're going to have about a point of sales and improve our vitality every year. So I would say we believe we can continue to invest here at a rate that we can sell fund. But even having said that, we were able to get more output out. And we're early days, we started to implement agile into our digital efforts, and it got adopted so quickly because of our lean culture, and we're really implementing agile, and it's a hybrid because agile is more software than hardware. But that is part of our efforts this year as well as improving the commercial launch process. So I believe that we're seeing our -- just our internal capability to execute really well that we're getting a lot of output from these investments. Digital is an area that over the last couple of years we've continued to increase our investment. And when it comes to sales and marketing, this was actually an area where we had to more or less redeploy and get and redistribute. Because I would say, in some cases, we had very fragmented rep networks, where we just didn't have the distribution coverage, and we talk a lot about One nVent where we can scale what we do. So we've actually become more efficient in sales and marketing and been able to redeploy to get higher revenue as a result of it. So I feel that our investment model, we've been able to manage it kind of within our financial framework that we've given forth, and we've actually seen great output as a result of what we've done in just our process efficiency.

Perfect. And I think if we think about incremental margins, maybe some headwind in the current year from input cost and cost inflation. So maybe give us an update on where we stand on that likely kind of scale of input cost or inflation headwind and then some of the measures that you're using to mitigate that?

Yes. So maybe I'll take that one, Julian. So maybe I would start from the standpoint of -- from an underlying incremental perspective, and over the course of time, we expect our portfolio to have incrementals in the 30% to 35%-plus range. That's really indicative of strength of our portfolio, leadership positions, the strong value position. But in the context of 2021, we do expect those incrementals to be more in the mid-20s range. A couple of things impacting that. One would be just these temporary costs folding back in. We talked about these temporary costs in the context of benefiting 2020 in roughly $30 million. That's not going to all come in day 1. A big chunk of that, for example, is really the T&E expense, for example. We don't expect that to kind of feather back in until Q2, maybe even Q3, Q4. So that will kind of feather in over time. So that's one of the headwinds impacting incrementals for this year. The second piece is really the price cost dynamic. I'll maybe start by saying, we talked about this a bit on an earnings call last week, is that in more inflationary times, we're confident in our ability to get price. We managed that inflation with a combination of price plus productivity. Clearly, we're seeing some more inflationary pressures as we exited the year. And we have reacted to that, taking some incremental pricing actions. So we feel that we're well positioned to manage that price cost equation. It's just by sort of math, as you add more inflation, you cover that by way of price in a more highly inflationary environment, that's going to impact the math on the incremental side of the equation. So I think maybe the one other thing I would point out, too, is we do expect to offset this inflation, some of these temporary costs with 2 other things. One, we expect to get good leverage on the volume. So that's going to be a positive for us. I think the other thing is we have good cost savings carry over from all the structural actions that we did in 2020. So those 2 things should help offset the inflationary environment that we see in combination with offsetting some of these temporary costs as well.

Perfect. And maybe, let's say, we do see cost inflation continue to increase as a headwind through the year. Does the company have a lot of sort of contingency measures lined up to offset those? Just trying to gauge sort of how agile or flexible the organization is. It's been a stand-alone entity for almost 3 years now. So is it kind of well set in that respect?