nVent Electric plc (NVT) Earnings Call Transcript & Summary

Good morning, everyone. My name is Mike Halloran, an analyst here with Baird, and we're pleased to welcome nVent with us today. Joining us today, Beth Wozniak, CEO; Sara Zawoyski, the CFO; and J.C. also hopped on, on the IR side and other hats. So our presentation today is going to be pretty normal. Beth is going to give some prepared remarks, and then we're going to dive right into the Q&A session. [Operator Instructions] With that, Beth, please, the floor is yours.

Thank you, Michael. Well, just to introduce nVent, if we go to the very next slide, we talk about being a company that's focused on electrical products and solutions. And what we do is we connect and protect. So 3 segments, Enclosures being our largest, followed by Electrical & Fastening and Thermal Management. When we look at electrical opportunities, we have a very strong industrial base, but we see this infrastructure as an area of a lot of growth. And when we look at the composition of our business, we're fairly North American-centric, and that's one of our growth strategies. So that's overall who we are. We just announced our Q3 earnings, very outstanding quarter for us. Our sales were up 26% year-over-year. Our EPS was up 18%, very strong margins, very strong cash flow. And we have momentum. Our orders were up 40%. And I really do think we're doing a fairly good job managing our supply chain to be able to deliver for our customers. Now what I'm really excited about, if we go to the next slide, is just where things are headed. And we talked about this in our Investor Day, that everything is becoming electrified. And I think you see these trends of technology, connectivity, ESG, sustainability, a growing population in middle class, investments in infrastructure; all of that is driving growth in some of these key verticals that you see listed there in the middle. And we're excited about that because we provide products and solutions that support all of that infrastructure, all of that technology, automation. It's how we've been positioning and growing our business with acquisitions and new product development. So we believe we're really poised for some long-term growth here as a result. Our strategy since we spun as a new company has been really to, how do we scale what we do, whether it's digital platforms or our partnerships with the channel, we call that One nVent. But our growth areas really we invested even through the pandemic. And as I talked about those high-growth verticals, an area like data centers where we've really invested with acquisitions and new products -- speaking of new products, they're driving over 1 point of growth. We're going to do over 50 new products this year. We did 50 new products last year. And globally, our growth rates are actually higher outside North America. So it says the investments we're making there are paying off. I want to point out, we've done 4 acquisitions since we became a new public company. And those acquisitions, we've actually seen the growth rates higher than what we've seen in our core business. And again, it's because we've really ensured that they're positioned in those areas of electrification, data centers, industrial automation growth, et cetera. Underpinning all that is just driving digital, being efficient with our working capital, and we talk about productivity and velocity. So in closing, we're so excited about this electrification of everything because we're one of the best-positioned companies for success here and for growth. Another quarter for us this year of our sales and EPS exceeding guidance, we have great margins and cash flow and plenty of runway. We're executing well on those growth initiatives. Our capital allocation is focused on growth. And at full year, we're expecting double-digit sales and EPS growth. So really, we talked about last year, we wanted to emerge stronger, and we believe we have done that, and we're now really positioned to grow with the electrification of everything. And that concludes my formal remarks.

Great. Thanks, Beth. So what really stuck out to me in the prepared remarks and looking through the release was how well you seemed to be managing the supply chain on a relative basis. Maybe talk about what's unique to your processes or your products or how you're attacking what is a challenging environment that sets up what seems to be some nice differentiation there.

I would say there's a couple of things. When we first became a new public company, we really looked at our supply chains and wanted to regionalize them. And that was important for our ability to respond quickly to customers. We talk a lot about velocity. So the regional supply chains where most of the materials and suppliers and our manufacturing is done within a region, allows us to respond. I think that's one thing. Second, we started to have scenario planning a year ago saying, we're going to come out of this pandemic, and we're going to start to see demand recover; are we positioned for it? And so we invested in capacity in our factories. We looked at our supply base and dual sourcing, things like that. And then I would say another area for us is our digital transformation, take our Enclosures portfolio, we really focused -- and our EFS portfolio -- to guide customers to more standard products through some of our digital configurators where we had strong product availability versus more custom solutions. And I think that approach, that digital approach in how we designed our supply chains, has allowed us to grow and really respond to customer demand. And I think of having 26% growth and delivering on that really speaks to that ability.

And how do you envision the supply chain headwinds playing out for you? Obviously, no one's got a crystal ball here. And so anyone who sits here and says, I know when supply chains are going to be fixed, that's probably not going to be accurate. But when you think about the fourth quarter, are you expecting a comparable type of impact? And then how are you envisioning things playing out as you look through next year?

Yes. I would say, we think about fourth quarter is going to be similar to third quarter in terms of just all the challenges. So I want to -- while we're managing it well, I don't want to say it's not without a lot of effort from our supply team. I believe we're still in this very strong inflationary environment. So we're working through that, managing that on the price side. But I do believe these challenges that everyone is speaking of, we're going to see them through the fourth quarter, but I believe we're going to manage them the same way we did in Q3.

And you brought up price there, obviously, strong price in the third quarter. Maybe talk about the pricing dynamics across your businesses. Competitively, it seems like a good environment to be pushing through price. How are you thinking about the price cost curve and your ability to maintain and hold on to those prices depending on what commodity and other inflation pressures do?

Okay, we'll go to Sara. Go ahead, yes.

Well, I mean I would start by saying, you're right, we got strong price in Q3, and that was really important given that inflationary environment. So price was up 9 points. We also had volume up 11 points, so combined for that 20% organic growth. And I would say it starts really with the strong brands and leading positions. I would say, secondarily, we always say we provide an outsized value to our customers, which certainly helps. So when you think about many of our products are going to be a low cost on that overall bill of materials, and we're providing outsized value in terms of protecting very expensive electronics and electrical equipment that is responsible for millions of output. We're responsible for putting in that data infrastructure. So we provide that outsized value to our customer. I think a couple of other points here, too; certainly, it helps, as Beth outlined, we were delivering for our customers. And so being able to deliver, right, helps in terms of that price realization. I think the other thing, too, is that just reminding folks that 2/3 of our revenue goes through distribution. And we have a very good process for passing along that price through distribution. You mentioned kind of how do we think about it in terms of holding on to it or that stickiness. If we look back to history, it does suggest that we hold on to this, and we believe that would continue to be the case. Some of it, no doubt, as inflation abates, a bit of pricing abates, too. But largely, we would expect to hold on to that price. I think across all the segments, we've done a tremendous job of executing multiple prices across the year. And then with our locking strategy in our metals, it really allows us to have good visibility so that we're front-footed from the price plus productivity offsetting that inflation.

So you're -- it seems like you're doing a decent job on the price cost curve. Incrementals probably slightly pressured here in the short term. But my guess is that's more a function of just you're adding price, you may be getting a little bit but you're still adding a lot of price, and you don't necessarily get the same incremental margin on that price. So maybe help understand how that margin progression works out. Or maybe the better way to think about it, and we'll talk about orders and revenue in a sec, but underlying demand is good. What -- when do you think you can get back to that more normal incremental you guys have talked about into that -- in that mid-30 range?

Yes. So I'd start by reiterating that is -- I mean if you look at the strong margin profile across every one of our segments, right, it points to that 30% plus incrementals. And if you look back to history, right, that's where we've been as well. In this time, right, we've got 2 things that are just by pure math pressuring that ROS in those incrementals. Price cost. So even while we were price cost positive in Q3 and expect to be again in Q4, and that's all-in cost, that's raw material, that's wage and logistics, it's still going to compress, right, those incrementals and margins. The other piece is these temporary costs year-over-year, and we sort of circled that for Q3, that was a 230 basis point impact on the ROS side. And I think the third thing is just the supply chain, as Beth talked about. And we don't necessarily have a crystal ball of exactly when that's going to abate, but we are making those trade up decisions every day to say, what are we going to go invest in to ensure that we can deliver for our customers and we believe that that's enabling us to win share. So from an overall margin standpoint, I think it's going to really -- I think the price cost, right, or I would say, the inflationary environment because we're going to stay front footed on the price cost side, that inflationary environment and that supply chain challenges, I think those are going to dictate in terms of how soon we can get back to that incremental and that ROS expansion that we've been able to deliver pre these supply chain pressures in these unprecedented inflationary environments. My guess is that that's still going to be a pressure point in that first half of next year and then looking for a better incremental in that back half.

Yes. But it certainly seems the message on EBIT or EBITDA dollars is pretty constructive, because a lot of the challenge is more math-oriented. And then yes, you have some supply chain and incremental costs that you have to lay on top of it, but it seems like the EBITDA messaging on a dollar basis is constructive, though.

Absolutely. I think I'd like to give the example of Enclosures where we had 28% income growth. Yes, we had some ROS contraction in the quarter of Q3, but nonetheless, I think that team has done an excellent job of converting those orders to sales and growing those income dollars.

So let's switch gears a little bit to the order, the backlog side of the business. Just simplistically, Beth, you mentioned 40% orders. Maybe talk about the drivers and maybe more importantly, the sustainability of that type of momentum. Obviously, 40% order growth would be lovely to continue into perpetuity, but the momentum behind it I think is what people are more interested in versus a lot of the...

Yes. Well, when we had our earnings call, we did share that October looked very much like Q3. So we're seeing strong momentum continue. And remember, even the prior quarter, we had 37% orders growth. So -- and I think what we're seeing are, one, a lot of the growth initiatives in a lot of these areas where we're seeing infrastructure or data centers, investments are being made, and we've positioned our portfolio there. And my proof points there are just whether it's data centers or whether it's growing globally, the areas where we wanted to have a focus, we're seeing -- or our acquisitions are performing stronger than what our core growth is. I think this is going to continue. We'll see as we get in -- one thing we would say is there are some orders that are being placed to give us more visibility because customers and OEMs want us to. So where they might have ordered over a 3- to 6-month window, maybe they're giving us another quarter in -- for some OEMs. Again, a lot goes through our distribution channels. So that tends to turn quickly. So I do think we're seeing some of that play out. But as we go into 2022 with the infrastructure bill, but with just, as I laid out, the shift in technology that we're seeing I think is going to play out to have strong growth in 2022.

So a couple of things in there. One, you mentioned an elongating essentially backlog visibility. The sense we've gotten from most of the companies we deal with that is that this really isn't a double ordering scenario. It's far more -- people want to make sure they can line up...

Exactly.

That core basis to meet their time lines. Is that something similar to what you're seeing?

Yes, it is. And I think that our customers want to ensure that we see their demand so that we're placing orders on our suppliers so that we can shore up the supply chain. So that's exactly what we're seeing.

And the inventory then from a channel perspective, I'm guessing it's still pretty lean.

I would say that it's turning in terms of we're seeing what we sell in is turning and meeting those sales going out. So there isn't any significant stock up or anything like that because there's a strong demand for it.

Yes. No, that makes sense. And when you think about the backlog here, obviously, we just talked about how it's stretched. Any nuance by segments? Anything that you would point to within your various pieces?

No. I would say, again, where we see some of that backlog, it's -- tends to be more of our OEM customers than it tends to be through distributors, but we're seeing it across all 3 segments where we have nice strong backlog increases.

And how do you manage the backlog in an aggressive inflationary market like this? Obviously, you're putting through a lot of price -- backlog and pricing dynamics don't always match.

Yes.

So are you managing how much you're putting in backlog? Are you making sure there's price escalation? Are you going back and repricing the backlog? Or are you just making sure that the customer relationships stayed pretty firm through the process and balancing the whole thing?

Yes. Generally, the way that works, so if we're getting some longer-term orders placed on us, we reprice that in the backlog because the time that converts and that hits, the inflation levels may be very different. And that's typically how it's positioned or built into those contracts. And in some cases, we do have escalators as well.

Yes. That makes sense. Maybe go a little bit higher level here. We're 18 months removed from the bottom, healthy demand trend across the board, good momentum. How are you looking at the cumulative cycle from here? You've got some different pieces. And so the cycle dynamics are going to vary depending on what business you're looking at. But I'd love to hear your high-level thoughts on whether you think we can see a little bit stronger industrial cycle this time around than maybe what we saw the previous 10 years, which from a margin cycle, less volume cycle.

Yes. I think it is different. And so I go back to how we look at these trends, and I think we're at a different point. And I think it's this technology shift. And you see all kinds of other constraints that are driving towards this electrification. So just take industrial. Every company today is talking about labor shortages. They're also talking about having stronger regional domestic supply chains. In order to do that, you have to invest in automation. Well, for us, we have a lot of products, Enclosures, our Fastening Solutions that are all geared towards industrial automation. When you think about just data and networking solutions, when you think about where we're trying to get more to the grid or more sustainable technologies or electric vehicles, these are trends that are longer-term trends where we're seeing investment. And these are -- that investment is going to take a while for it to, I think, really flow. So I think we're going to see some longer-term growth that's more sustainable than we might have seen in cycles of the past. And I think it just goes back to, again, where we're at in terms of the electrification of everything. Automation is here. We're seeing changeover in industries with different energy sources, all of that is going to play out. So we're very excited about it. And that's kind of how we position this portfolio to really win with those trends.

Makes sense. A couple of questions here that I got from the audience. First, from a competitive perspective, how would you describe the environment, the various environments you play in? And any areas you're seeing any signs of more acute competitive pressures than normal?

I think when I look at how our portfolio is performing, and I really believe that we're performing well, and the -- and from a standpoint of we're able to deliver. And I hear that from our distribution partners that we're doing such a better job than other electrical suppliers and competitors. And I think that's allowed us to win and gain new customers as a result. So we feel good about that. Other -- really, what we're seeing right now, it's more who can fulfill the demand. Do you have the right solution? Can you provide that value? And can you fulfill the demand? That's where we're seeing the most competitive pressure. And I think we keep continuing to invest in new products and digital technologies that just further strengthen our ability to compete.

And then another one from the audience. Thoughts on the recently announced infrastructure bill, what type of impact that can have on your portfolio?

Yes. I mean, one, we're very excited about the infrastructure bill passing because when you look at all those categories of investment, it all plays to the nVent portfolio. And there's billions of dollars that are going to be invested in everything from 5G and telecommunications to EV charging stations, to renewable energy, to hardening the grid. All of those things, right? We're going to see smarter buildings. It just -- all of those areas are where we play. And we look at our vertical mix and infrastructure and just see between industrial and infrastructure, even commercial with more power and data and buildings, billions of dollars of investment. I think the ability to be able to respond through the supply chain is going to be pretty critical as we go forward.

That makes sense. So let's talk capital allocation for a little bit. Maybe just start high level and level set. How are you thinking about the balance between organic and organic investments at this point? And on the inorganic side, shareholder returns versus M&A?

Well, let me just start by saying we've had a consistent capital allocation strategy. And as we've always stated, we want to invest in growth. And so even through 2021 and this year, we've prioritized that investment in new products and in digital investments. And this year, we completed 2 acquisitions. So we have return metrics that we want to make, but we're going to have a consistent investment in our core business, new products, making sure our factories have the capacity. And then we're going to -- we compete in a very fragmented environment. We think there's still lots of opportunities for us to find good M&A that further strengthens this portfolio. So that's been our core priority.

So how does that funnel look? How does the M&A side look? Obviously, you just mentioned 2 nice acquisitions in the second quarter. Thoughts on the pricing environment, the opportunity environment and how actually you think that funnel looks.

We have a really rich funnel. And I would say -- we always say that we play in a $60 billion space, and it's very fragmented. And I think we see a long runway to do M&A, and we'll have plenty of M&A opportunities in 2022 and beyond. And I think it's -- we've executed well. I'm very proud of how we've integrated and executed. I think that gives me confidence that we could even do larger deals. And so I believe you're going to continue to see us do some M&A over the next several years.

And any particular focal points or themes that I should be thinking about on what you're trying to layer on?

If you look at the deals that we've done, I think they're really characteristic of how we think about growth. So our Eldon acquisition gave us a global portfolio and strengthened our position to be able to have electrical enclosures to provide anywhere around the world. If you look at what we did with CIS Global or our WBT acquisition, that strengthened our portfolio in data and networking solutions and gave us new product categories that we could scale through our channels and globally. And our Vynckier acquisition provided a nonmetallic Enclosure portfolio, strengthened what we already had, but started to position us more stronger for 5G, for solar, for some of that alternative energy where those type of Enclosures play well. So I think that's characteristic that we're thinking about high-growth verticals, product portfolios that extend what we do and some global growth as well.

Let's talk about the organic investment side. One, how do you guys determine where you want to allocate your capital? Is it in an aggressive segmentation approach, maybe some other strategy? And then we'll talk about R&D next.

Okay. I'll let -- yes, I'll let Sara talk about how we think about our returns.

Yes. So I was just going to maybe build on that previous question that you had in terms of organic or inorganic. And I think we've proven it's both, right? And from an organic side, I think last year is a good indication of how we think about the value we can go create with these organic investments. Because while many folks were kind of pulling back on CapEx, we actually held steady from a capital expenditure standpoint, similar to what it was in 2019, really focused around 2 areas: one, around new products. So what can we do to accelerate on that new product side? And we're seeing that actually pay off from a return perspective in that providing 1 point of growth for us this year. And the second piece is really around digital investments. And we do have a portfolio council that says, okay, there's a lot we can do on the digital front, what makes sense to do first, second and third. And for every one of those digital investments, we have the KPIs and the value creators, right, that we talk about and track and ensure that we're hitting. So I think one, it's making sure that we're steady and firm, right, on those investments; and two, ensuring that we can get to those KPIs and those return metrics overall.

When you think about the new product introductions, it seems like a pretty consistent outlay, decent vitality. How would you frame how that's impacting the growth? And maybe to tie on what you were just talking about, Sara, the ability to be very targeted in the approach, how has that helped pursue some of these better growth areas, et cetera?

Well, when we think about new products, it's our ability to solve problems for customers. So whether that's providing a new controls capability in our Thermal Management, which is important for better monitoring and efficiencies, whether it's adding to our Fastening portfolio that allows us to provide labor savings where -- shortages of contractors, or whether it's just looking at areas where we really want to extend our position in data and networking solutions. And so how do we have a more breadth of offering that we can provide? So we look at it in multiple ways. So we start with what does the market need, are we solving a problem, is this new product going to be differentiated, is it something we scale through our channels, et cetera. And so those are all -- we will kill products in our new product process if we just don't think we have a differentiated solution. So we're very disciplined about that.

So I just got a question from the audience as well. Maybe just talk about your M&A process, how you go about discovering, sourcing, et cetera, and how you think it might be differentiated.

Okay. Well, from -- we start with an understanding of where do we think there's going to be higher growth, is there a gap in our portfolio or something that can extend what we do, and we identify those targets. And sometimes, we already have those relationships with those targets. Sometimes, those are things that banks might have brought to us or our distribution partners have pointed out to us. And then we evaluate, right? And we look to say, are we the right owner, is it synergistic, can we scale this? That's really important for us that if it's a product portfolio that we know that we can scale it, whether it's through our channels or our global presence, global manufacturing, et cetera. And then we're just -- we have a good due diligence process. And I would say what we've demonstrated is we're very good at the integration process. So not only do we identify the sales -- the cost synergies, but the sales synergies, and we have a very disciplined approach about how we execute on that, which is why all of our acquisitions that we've met the return metrics faster than what our models showed for us. So there's a lot of discipline there.

Great. Well, unfortunately, we're out of time. Thank you so much for the presentation today. It's super helpful. Hopefully, next year, we can do this in person.

Great.

Session one coming up next, the Oshkosh Corp. Session 2 is Pentair. Session 3 is Crown Holdings. Session 4 is Concrete Pumping Holdings. Session 5 is Johnson Controls. Session 6 is L3Harris. Appreciate the time. Really, really good job. Thank you.

Thanks, Mike.

Thanks, Mike.