nVent Electric plc (NVT) Earnings Call Transcript & Summary

Perfect. Well, let's get underway. It's my pleasure to have from nVent, Beth Wozniak, Chief Executive Officer; and also Tony Riter, who joined recently in Investor Relations. And some of you might know Tony from 3M. So welcome both of you. And Beth, I think you have a couple of prepared remarks to kick off, and then we'll go into Q&A.

Okay. Thank you. Thank you. It's nice to be here. Well, I just wanted to say, I think as we close the year, we finished strong as nVent. We're now a $2.5 billion company. We had 23% growth, 31% EPS growth and greater than 100% cash flow conversion. So it's one of those years with a lot of challenges, but I think that we ended well. I think what we're most excited about as we go forward is just how the world is electrifying and how we've done a lot of work to change the growth trajectory of our portfolio. And so we'd like to talk about the electrification of everything. And I always say, if you think about everywhere that we're driving this technology shift, if you think about our portfolio, so whether it's data centers and where we're positioned with enclosures and liquid cooling; if you think about renewable energy and we play in that space to drive electrical resiliency; smart infrastructure; smart buildings; electrical vehicles, all of these trends, I think, are going to create a longer cycle for us to see this technology shift and we're positioned very well. We've had a strategy since we became a new company, and I always like to say this, that our strategy has been working, and we just keep executing on more elements here. And we're particularly focused on how do we scale what we do, how do we drive focus on high-growth verticals, become more global. A lot of work that we're very proud of. We continue to invest in new products and digital even as we went through the pandemic. And then just becoming a company that really executes well. And I think we proved that over the course of the last year. And so we use this one example in our Earnings Day pitch, just to say, when we started, we put some focus on data and networking solutions, it was less than $100 million in sales. We ended the year with it being over $220 million. We've had some acquisitions in here, and it doesn't fully represent our last acquisition of CIS Global, but we've really built a lot of great capability. It's an area that we grew double digits before the pandemic, and I think we're going to continue to see this grow and emerge. And it's very exciting because we think we've got some technology leadership positions here as well. So just very high level. In summary, I think we exited the year with very strong momentum. We had 24% organic growth in Q4. So as we exited the year, very strong orders growth. And I think we've shown that we're deploying capital to drive growth and attractive returns. We talked about some of our recent M&A exceeding our financial expectations in a short period of time. We're going to continue to do that. And we think as the world becomes more electrified, we're really well positioned.

Great. So thanks very much, Beth, for that introduction. Maybe starting where you left off, you talked about the extraordinary growth exiting last year. Maybe any flavor as to how sort of the first quarter started out? What are you seeing in terms of orders and revenue progression?

Yes. We guided to have a strong Q1 with that double-digit growth rate. And I think our orders supported that. And I'd say we've continued to see that strength on the order front. A little supply chain challenges are there and coming off of Omicron, right, where we had a lot of absenteeism, but I think we're back, getting better on the labor front, but I think we're seeing momentum carry us through the first quarter.

Perfect. And I suppose it's somewhat unusual here. Most companies at this conference, it's sort of second half acceleration in demand. They're embedding your own guidance, partly because of the sheer pace of the growth exiting last year. You're embedding a deceleration in the second half. So maybe just talk about sort of the thinking behind that. How much is comps? How much is -- any kind of macro caution?

Well, we are -- as we indicated, our first quarter, we expect to have really strong growth. And I think even though there are supply chain challenges, we think the order strength is there and what we foresee we can navigate through that. And it really is a matter of the last couple of years, it's been hard to predict, right? Even today, it's been hard to predict. So as we get into the back half of the year, it's more of the dynamic of our comps. So as I mentioned, we had 24% orders, organic orders -- or sorry, organic growth. That's a difficult comp, right, in any year. So I think that was our view that we'll see some stronger growth in the first half and then we'll see where the world ends up as we get to the back half, but it is that comp point.

Perfect. And how do you cope with supply chain issues, getting enough procurement from suppliers? You had low double-digit volume growth in Q4. So it looked as if you're managing the supply chain very, very well. Maybe help us understand sort of how that's played out? And was that a blip? Or you think no, that the supply chain management has remained good sort of into this year?

Yes. I think it remains -- I think -- it's not without a lot of hard work, but I think it remains good. And the reason we were able to perform last year is because over the last several years, we really talked about supply chain resiliency. We did a lot of work to invest in our supply chain to regionalize our supply, so we don't have product shipping around all over the world. We did a lot to invest in capacity. We did a lot of work on our planning systems to give visibility, and I think that really paid off for us. So as we sit here today -- again, it's not without challenges, but I think certainly on the metals front, we see that we've got good line of sight there. I think electronics for everyone are still somewhat of a challenge. But we believe we're going to have some strong execution that that's going to carry us forward in this year.

Perfect. And then when you look at the sort of demand side of things, nVent's own inventories are quite high relative to history. That's a common theme across, I think, almost every company here. How confident are you when you look at customers and channel partners that their inventories are also low and you haven't had too much kind of early stocking or double ordering that kind of phenomenon.

Now one of the things we do is we get a chance to look at -- for our larger distribution partners, we get to look at their sellout and we look at our sell-in. And I frequently have conversations even this week just to see how business is going. And what we see is that we're not seeing any huge inventory build. In fact, we're being asked, can we supply more to support what that end demand is. So I think we're matching those levels at this point. And so we -- I wouldn't say that we've seen significant inventory buildup anywhere at this point.

Great. And then you mentioned at the beginning, the sort of theme of electrification and the drivers there. I suppose if I look at overall organic growth guide for the year and back out price, there isn't huge volume growth dialed in. And so partly, as you said, it reflects what's been a very uneven macro environment. So I think it's very sensible to give that cautious volume guidance. And so everyone might ask, is there -- are you seeing that electrification boosting the volumes yet? Or it's more a sort of a medium-term driver, not yet particularly evident this year?

Well, I think we started to see -- I mean we've certainly seen that in areas like data centers. We're starting to see things like 5G rollout. When we look at the infrastructure bill, we believe that's going to play more into 2023. And I would say we're planting the seeds now around areas as we look at electrical vehicles and electrical charging and some of the renewables that we're working to get specked in or we're working to get positioned for those things as they come on. So I think we've got some growth now, and I think we're going to see that continue to build as that infrastructure spend happens. And I think it's going to be a longer cycle for us as this -- as we all electrify.

And then if we're thinking about that's the end market growth, nVent's market share, maybe pre the spin, was fairly static. I think there's been a lot of emphasis on new product introduction since the spin out. Maybe help us understand kind of how satisfied you are with that progress. What are some of the areas where the company is taking share?

Yes. We continue to invest all through the pandemic. We thought that was really critical, both in new products and in our digital transformation. And when I look at -- one of our measures of success is we look at our new product totality. And we've consistently seen that improve from when we started as a new company to where we are at about 18% today. And that's revenue generated from products in the last 5 years. So that's saying that we're creating products that we're seeing 1.5 points, frankly, of growth there. So we want to continue to do that. And I think that is helping us in our ability to execute on the supply chain to gain positions. And we talked about, for example, even on the M&A front, when we acquired our Eldon acquisition and our IEC portfolio, we're now able to get a global specified position because we're able to supply a product and solution around the world to a global OEM. So we look at what we're doing through distribution and the positions we've taken there and just the strong demand. We feel good that on multiple fronts, we're expanding our portfolio and getting great positions.

And I think one facet of that share gain has been sort of revamping the IoT and digitized offering at the company. What are some of the products that you think have made the most impact on the customer side or your market share from that sort of digital and upgrading element?

Yes. I think it's a couple of ways. One is maybe not so much -- what I'm going to start with is more around the customer experience. We've done a lot to create a better way to find our data digitally as well as configure price quote tools on our websites that guide a customer to a solution that we can rapidly deliver. And that has really made a difference. So when you create a digital customer experience, it helps customers know what products they're able to meet their needs and acquire quickly. So that's one aspect. Then we've invested in digital in terms of just some of our control solutions, in our Thermal Management business. We've had tremendous growth on the commercial side and everything that we do in Thermal has a controls capability. And then when I think about some of the things where we're going around our data center solutions and some of our capability there on liquid cooling, in particular, and even getting into power distribution and some monitoring, I think all of those things are foundations for us that we're going to build upon.

Perfect. And then maybe the sort of the other end of the spectrum of sort of ESG and what have you in technology, oil and gas used to be a bigger part of your business. It's still, I think, a high single-digit share of total sales, mostly in Thermal. You're guiding for fairly muted growth there this year. Just trying to understand, is that just pure conservatism? Is it something around deliberately stepping back in the market to be more selective on projects and activity? Kind of what underpins that, what looks from the outside, like a very, very low guide?

Yes. One of the things we've always been able to note is that certainly on the energy side, a longer-cycle business. And so we know even with areas like our industrial MRO has been improving quarter-over-quarter, but it takes a couple of years to get back to the level that we were prepandemic. And so I think it's just the rate at which we see some of those investments. We have strategically shifted our portfolio to be more diversified, particularly in Thermal Management. We want to make sure that those projects that we are pursuing have a good installed base because we like to get that aftermarket and that MRO. But I would say we just -- we're seeing that progress, although I'd tell you that our quoting and order activity is all very good, but we were just expecting that to be a longer recovery, and we'll see how the year plays out. Things are very dynamic and changing.

Yes. And Thermal in general, I guess, when you think about the portfolio, someone who look -- does a basic sum of the parts, they'll see where Thermon trades in the public market. And it's obviously a discount to where your electrical peers are trading. So how do we think about Thermon's place in the business overall? What are you kind of expecting and hoping for in that business in the medium term?

Yes. I think we turned the corner in that business last year to see some just nice, consistent growth and margin expansion. And I think our Q4 results in that business kind of indicate that. So we're expecting to see that business continue to have growth and margin expansion. It's an area for us where we tried to diversify it as commercial and other areas. As you know, from across the portfolio, a lot of our M&A investments have really been focused on where we think there's going to be higher growth in that core electrical. So we've definitely prioritized some of our capital allocation there. And I think that's what you could expect us to continue to do. But I think Thermal will continue to tick up and be nicely accretive to us.

And how do you see the sort of the mix of business there? It's been a lot of hard work, I think, getting that industrial MRO share up, maybe being very selective in the oil and gas part of it. So do you sort of like the balance of activity at Thermal today when you look at end markets and project versus MRO?

Well, I would say that we're -- there's more we can do in terms of just -- we've got a couple of key growth initiatives there, how we continue to expand out, some of the new product portfolio that we've developed there. And I think there's more position that we can take in that commercial industrial space. And there's -- with a -- we've got a really large installed base. And as we're upgrading controls capability, that presents an opportunity for us, and that's a very high-margin business. So I think the direction that we've been going on in our growth initiatives, you can see that we've really been diversifying it. And I think that's going to be very -- some nice, high-margin business for us as we go forward.

Perfect. And then maybe switching to the sort of profitability level. A lot of companies here, it's a tough first half on price cost and supply chain, better second half when you're looking at kind of year-on-year margin trajectories. So just remind us kind of how is nVent thinking about those margin pressures? How quickly do they ease and then push you back into a sort of normal operating leverage in the back half?

So we're not inconsistent with everyone else, we're the same. We see the first half still having some of the supply chain challenges and inefficiencies. We've been doing a fairly good job in terms of price/cost and realizing those price and volume. But with labor challenges, with just tremendous growth, we've been fairly inefficient, right, in having to serve that. And I think we continue to see some of that into the first half of this year, but getting better as we go forward. We think we start to see just metals getting better in terms of pricing. We hope to see that some of the freight and labor and other things work themselves through. And so we should see sequentially margins improve across the company.

And so far, I suppose when you look at Q1 and aspects like absenteeism or supply chain issues, is there a sense in which those are sort of plateauing versus late last year when they seem to be getting worse?

I think we're getting better, but we haven't been able to call it. There's no playbook for a pandemic, right? But from January, it's definitely gotten better. I'd still say labor is still a challenge. We all have a war on talent. Certainly, as we look at metals, which we buy a lot of, certainly, we see that's been better to manage and still some challenges on the electronic side. But I think in general, we're managing through those and see some improvement.

Got it. And then you talked about costs in metals and there's a logistics aspect, even a labor aspect as well. Your pricing -- the gross price has been extremely strong, low double digit in Q4. When we look beyond near-term cost inflation, maybe to when it starts to ease, who knows, sometime next year, how quickly -- what would we expect nVent's pricing to do? Because certainly, the low double-digit tailwind sort of stands out versus a lot of the other company's peer. Just people sort of wonder, okay, after this, then what? Like do you drop a lot more than others? How does that play out?

We usually -- as we looked at over the years are able to manage that pricing because we're doing a couple of things. One, we're continuing to look at how do we add value for our customers, coming out with new products. We typically want to go -- have about 1 point of price every year. And so -- and there's ways that we continue to by delivering, by delivering faster, all of those things, try and maintain those price levels. And typically, we have through these cycles been able to do that.

So the assumption should be, once cost inflation eases, you can get a pretty good margin tailwind for some period at least. And then I think you've talked about the sort of over 20% margin aspiration firm-wide. I suppose it looks -- it's a couple of points out from where you are now because of inflation, but versus pre-COVID levels, you got to sort of 19-plus, I think. So maybe help us understand that 20% plus, why wouldn't it be on the plus side once cost inflation normalizes, particularly given new products, there's some reinvestment headwind, but you'll probably get a gross margin payback within 3 years or so?

Yes. Well, that's -- I mean 2 of our businesses are in that 20% range already, and Thermal is actually improving and getting stronger from where it was. And it really is our Enclosures business. Now here's a business that we've made a lot of investment in a couple of new factories. We're going to invest in another new factor over the course of the year. But I do think we're going to see that Enclosures business -- because it got hit really hard with such strong demand, we're going to see that margin improve. And I think over time, we're going to see that in the 20% range as well. It hasn't been a normal environment yet though.

And when you think about sort of R&D requirements, I think you've talked about adding up to 1 point of R&D to sales maybe. Should we expect that to be fairly kind of gradual? And how are you thinking about sort of organic versus inorganic M&A? I think the discipline has been there on deals, and it's sort of kind of faster just to buy the technology of...

Yes. so we have, I think, a very disciplined approach there. And so yes, we're continuing to increase in R&D both for our new products, but we've also made investments in digital, in capabilities. And so that also had a priority. And I think we've done a good job of showing that we're getting higher vitality as a measure, but also even our cycle time to get new products out. So I feel that's another efficiency measure so that we're increasing our investment and getting new products out faster, also good. But then we look at are there areas where it would take the time for us to develop a new capability, would we be better off finding a portfolio? And everything we've done in our terms of our acquisitions has been a new product portfolio capability that would have taken us a longer time to develop. And we have a very disciplined financial metrics to how we look at that. And I'm really pleased to say all those deals have been performing really well. So you can expect us because we always say it's a very fragmented space that we think that investing in inorganic growth is also a part of our playbook where we think we can derive great value.

And how about kind of looking at it geographically? I know in electrical markets, it's hard to win share in countries where you've got a very small presence that the route to market and brand are kind of huge barriers to entry. At the same time, it's relatively easy for you to bulk up in high-growth regions because your starting point is kind of low, so there's catch-up room. Maybe the update on that. There are lots of good assets to buy, to get the emerging market presence up and what are you doing sort of organically with your own CapEx, for example, and footprint?

Yes. I mean I think we look at -- I mean our Eldon acquisition was a great example of a strength in our portfolio in Europe and then having a standard and a platform that we could take around the world, into India and other places like that. I think with our CIS Global acquisition, also a business that brought us some capability for North America, but also for Asia. So that's part of how we look at it. It's just, is it a great product capability and position that we can build upon? And one of the things I would say is we have a good footprint around the world with our own manufacturing capability, we have really strength with that distribution channel. So one of the things we certainly can do in Europe as a great example is, once we can add to the portfolio, our ability to expand our presence through the channel and get more access that these companies when they were on their own couldn't do is one of the things that also accelerates our growth. And I think to your point, there's -- we always say that we're now a $2.5 billion company in a $60 billion space. So it is really fragmented. And we don't always control the timing, but we have a good pipeline. And I think we would expect that we can continue to do a couple of deals as we did last year. And I'd say we have the confidence in terms of our ability to integrate -- acquire and integrate something even larger than what we've done previously, given our track record.

And the stock has got a little bit cheaper recently as is kind of everyone here. Should we still expect M&A to be a clear priority versus buybacks?

Yes. Yes.

And Beth, it's almost 4 years, I think, since the demerger from Pentair. There's clearly been a huge amount of progress made on operations, supply chain, pricing initiatives. What are some of the main kind of outstanding or work-in-progress type initiatives that you're still sort of pushing in the organization?

Well, as we kind of laid out our strategy, there's always more work to do, right? We still believe that there's still investments to be made in our digital capability and getting better at data and analytics work that we're doing, I would say, this year, particularly in our own factories and driving just more automation, more digitization. We think that helps us with capacity and optimization. So those are investments we still want to make. Even though I would say a hallmark of our company has been our greater than 100% cash flow conversion, as you know, Sara has been leading a lot of our work on our working capital initiatives because we think we also have opportunity there. And then I would say, we continue to work on just our global reach, right? So some of the investments that we've made. In the last quarter, we opened a new facility in China. We're going to be expanding this year a little bit into Southeast Asia. So all of these things, I think, are just different elements of our strategy that we're continuing to build on. And then, of course, building -- positioning ourselves further in that growth with the electrification of everything, building out more capability there.

And how have you found that kind of expansion? You mentioned the push more into China or in Southeast Asia. I think when you look at peers historically, comparing their sort of domestic electrical profitability with international, whether it's a U.S.-based or a European peer, there is quite a large difference as they look to build up scale. So how have you found the sort of pricing and profitability as you've been geographically expanding...

Yes. Until you get to scale, sometimes it takes -- it's not at the same margin rate. But one of the things we've also found is it also depends on if we're -- the verticals where we want to play, so choosing those verticals, so we may go into a region and not compete in the same areas that we would do in, say, Europe or North America. And where there's a higher value place on protection capabilities or specification, then we find we're able to have a stronger margin profile. So that's part of it that as we expand, we're very thoughtful about what those verticals are, where we want to build our capability.

I'd say this one last aspect is that a lot of companies, understandably, given the volatility in recent years of demand, trying to put more of a focus on recurring revenue, some kind of contractual service, if that's possible. How should we think about that aftermarket exposure and then efforts maybe to smooth out that volatility?

Yes. So in our business, our Thermal business is where we really put that effort on that installed base because we have a very large installed base. And so we've been going after more upgrade programs as our new controls capabilities and service opportunities as well. In our other businesses because they tend to be more repeat purchase than they are an aftermarket and enclosure really doesn't wear out, so -- if you think about it. But you wanted to have provided that a great experience for the customer, a great offering that when they go to implement their next system or if it's on, in the case of our EFS business, that the experience for that contract or a systems integrator, has been so good, the value of that product, that they're really loyal to the brand to drive that repeat purchase. And then it's just making sure we're positioned and distributed everywhere, so the product is available, and it drives just that comfort level. And the fact that it's available, the brand stands for itself, and that's typically how we've seen that and just continue to see our products grow.

But since nVent occupies a very interesting layer in the global electrical equipment market. You have these sort of global diversified, very large, the Eaton's, Schneider's, ABBs and so forth, Siemens. Then you've got the very local regional players, say, like an Eldon. So even sort of somewhere in between, maybe capture for us sort of what does that mean strategically for you in terms of the pace at which you want to acquire? Do you see any disadvantage from being relatively small? Or no, it's better to be in a niche, given what you can do on pricing and so forth.

I think we have found ourselves in a position where we have enough scale because when you look at how we're represented in the electrical distributors in North America, we're a top 10 supplier. One of them or top 5. When we get into Europe, we're top 15 to 20%. So we're one of the big players. And I think the size of our company, we're very nimble and we can move very fast. And I think we're very good at the core products where we play. So we've kind of differentiated ourselves there. But as we go forward, I think our industry continues to consolidate, so there's a lot of small companies, and it's driven by the fact that not everyone can invest in digital capabilities, which we all have to have digital capabilities to be able to sell or interact with customers. But I also think, in this last year, smaller companies were not as nimble or able to manage their supply chains. They just did not have the ability to get access to whether it was metals or components. And I think we were in a great position to do that. So we are -- so I consider ourselves one of the larger players, and I just think that there's -- we have a lot of opportunity from the advantages that we've gained this year just to continue with that momentum.

Perfect. Well, I'm afraid we're out of time. Thanks so much, Beth and Tony for coming down.

Thank you very much.

Thank you very much. Thanks a lot.

Thank you.