nVent Electric plc (NVT) Earnings Call Transcript & Summary

Good morning. We'll get the industrial track running here at the Wolfe Conference -- Wolfe Industrials and Transport Conference Day 2. We're going to kick off with nVent, and we're very pleased to have Beth Wozniak, CEO; and Sara Zawoyski, CFO of nVent. So Beth is going to provide some prepared remarks, and then we'll get into Q&A. So Beth, over to you.

All right. Thank you. So I just wanted to do a little introduction to nVent, and we're about a $2.5 billion company. You can see last year, we grew 23%, rebounding from the COVID year. Our nice performance in terms of our return on sales at just under 18%, and we grew our adjusted EPS 31%. So a very strong year, strong free cash flow conversion. What we do is we protect and connect. We have 3 segments, most of our business within North America. So plenty of opportunity for us to grow globally. And as I -- as we talked about on our earnings call, our first quarter performance, our momentum from 2021 continues. And we're seeing not only just price that we're realizing in a highly inflationary environment, but we're also seeing really good volume growth. And I'll talk to that later because I think it speaks to where we're positioned with the electrification of everything. When we spun as a company -- and our birthday was May 1. So we're just 4 years old and having gone through 2 years of COVID, we put in place a strategy to how do we really grow with secular trends. And so we focus on high-growth verticals, data centers, industrial automation, renewables. And we really have done work to position new products and innovation to expand our position there as well as growing globally and acquisitions and partnerships, and I think that's even strengthened our portfolio. And then, of course, that comes with all good execution. How do we become more digital? How do we drive productivity, velocity, all of those things? So our strategy has been really working for us, and we keep working on the tactics there. And so we used this chart at our earnings day, and I think it's just a great example to share how our portfolio has changed. When we look at these mega trends, everything is becoming more electrical, more digital, more automated and that requires more of our components. When we started as a new company, as we looked at data centers or data solutions, it was less than $100 million of our portfolio. Last year, it was over $220 million. So it's growing greater than 20%, and we keep adding to it. We've carved out a great position, differentiated in liquid cooling, which is very important. We've added PDUs to our portfolio. So we've done acquisitions. We've done organic product development, and we're seeing just great growth. And the need for data isn't going to slow down anytime soon. Then if you think about power utilities, renewable energy, everything becoming more electric. Even within North America, the infrastructure bill, which isn't even -- we're not even going to see that money flow until next year. So we look forward to trends there, but our acquisition of Vynckier positioning us into solar power. What we've done with new products in our Electrical & Fastening Solutions segment, we're seeing nice growth there, which we think we're going to see many years as we go forward. And the other areas for us, just example, smart buildings. We always say this. What we do in a building is we do some connectivity, whether it's we support cables, but power and data infrastructure and just think of any building. There's more devices that require more of our products and solutions. And what we also do very well is labor-saving solutions, and we all know about labor constraints. So we're very excited about how these trends roll forward because we just think we've strengthened our portfolio and you see it in the growth that we're realizing, and we see the future very bright. And lastly, just industrial automation. As we see onshore and reshoring, the problems with labor, everything needs to get automated or digitized and everything needs an enclosure, as I always like to say. So our portfolio is very different than where we were 4 years ago. We've strengthened it. We see the growth of new products, and we're just very excited about the electrification of everything. So strong execution in Q1. We raised our guidance. We feel very positive about the outlook for the year. Lots of challenges, of course, with supply chain, but we think we're navigating that well. And we believe we're deploying capital to drive growth as our priority. And lastly, electrification of everything, I can't say that enough, just how well nVent is positioned for the future and our future is bright. And that ends my formal remarks.

Great. Thanks, Beth. That really was 3 minutes. [indiscernible] us at 3 minutes, it's 10 minutes. So that's great. So let's kick off with the electrification of everything, because that's a great moniker. But it's a big debate with investors is how much of the strength we're seeing right now is a COVID rebound, if you will? And how much is the emergence of a secular trend? I'm just wondering what gives you confidence that some of the strength we've seen today is maybe the thin end of this electrification trend?

Yes. I think the reason we have confidence as we look at where we're growing, and we look at new applications. So I talked about liquid cooling, for instance, in data centers or if we think about customers that are looking to automate their factories, that's very different than where we were pre-COVID. And I think that's driven by supply chain challenges or labor constraints. So we look at our growth. We know it's faster than the overall growth in those segments and know that we're performing because of how we've positioned our commercial teams and our new products and applications.

Okay. That's great. And then it seems that you've outperformed a lot of your electrical peers. I won't name any names, but certainly, you sort of cruised through last year without too many -- and you actually had volume growth unlike a lot of your actual kind of competitors. So maybe just talk about how you manage to navigate the supply chain snafus better than most?

Well, I think a couple of years ago, as we looked at -- we went through the trade and tariff force and we looked at our supply chain and said, how do we drive more resiliency there? And we really looked at what were we procuring from other regions, and we started to try and localize our supply chain. Certainly, for our Enclosures segment, we want to be able to build our product and source the material and build it in the region for the region that we're serving our customers. We've expanded and opened some new factories around the world. So that was a strategy that we had a couple of years ago, and we were executing on that even prior to when COVID hit. And I think we just did a very good job at looking at how do we strengthen our overall ability to serve our customers, including capital investments we made in our own plants to expand capacity.

Right. Maybe just to touch on that because -- maybe that's part of the story that's not well recognized as some of the capacity investments you've made. So maybe just talk about those and how they totaled through this year and how that helps you?

Yes. So we've done a couple of things. We've expanded into a new plant in China of -- be in China for China. We opened a new manufacturing facility that came with one of our acquisitions, and we opened it in Tucson to serve North American customers. We've added capital equipment and automation in some of our factories, whether that's in Anoka or whether that's in Solon, Ohio or Reynosa, Mexico. And we've expanded capability across Europe. So it's really a combination of some new plants where we needed capability and new equipment and automation equipment within the 4 walls of our factories.

Okay. I know China is quite small for you today, but maybe just -- it's a hot topic for lot of investors. So maybe just help us understand what's going on in China today in terms of the lockdowns, some of the logistics challenges you see there? And how do you view China longer term? Has your view on China changed maybe versus 2 years ago?

Well, I think our view on China is, first of all, it's fairly small for the nVent portfolio, but we want to be in China to serve China. So we've had our sales teams locked down. We don't manufacture anything in Shanghai. So the areas where we produce and manufacture products have not been subject to those lockdowns, but the supply chain constraints have had an impact there. So our view is we're in China to serve China. We're trying to regionalize what we do in North America for North America and in Europe for Europe. And I think our view is just strengthen that that's the right position to have, right, that you want to have supply chains. We talk a lot about Velocity. So you want to have supply chains that are very close to your customers. So we're not relying on the Chinese supply chain necessarily for the rest of the world.

Right. So as supply chains rebalance, doesn't sound like you've got a lot of work to do. It sounds like you're already there in terms of localizing your supply chains. But then as maybe your customer localized, that should be a benefit for you given that your North Americans -- you are very -- you are North American centric?

Yes. The way we think about it is we're strengthening our capability to serve customers no matter what region they're in. And I never like to say that we're done because we're thinking about opening -- well we are in the position of opening up a new factory in Southeast Asia, right? So as we keep looking at where do we need to be, where is the growth, how do we strengthen our ability to serve customers.

Yes. I should have mentioned, I'm going to kick off with questions as you can tell. But I will open up the floor to Q&A across you guys, so please get your questions ready. Pricing, again, probably the biggest surprise was the sheer strength of your pricing power through 2021. And I think last quarter, your pricing was, if I'm not mistaken, 12%, 13% in that zone. Are we now at the sort of the peak of pricing at this point? Do we now start to see deceleration from here? Are you still going through price increases? And if -- and I don't think we will for a moment, go into a deflation environment, but if we do see some pullback in commodity prices, how much of that price has to be given back to the customer base?

I'll let Sara go through pricing.

Yes. So I think that pricing strength that we saw in 2021 and just that solid price cost execution does speak to the value proposition, right, that we're bringing to the customers. And I think all segments, we did a tremendous job of managing that price cost equation. We've got this model, right, that says price plus productivity needs to offset inflation and help fund investments. And that's sort of our guiding compass and what each one of our segments are driving towards. As we look at this year, we did start off the year strong. I mean our pricing was 11 points this year. That was on the heels of 12 points in Q4. We are estimating that price this year is roughly 6 points, but that's really more from the standpoint of beginning to kind of lap those strong price increases in the back half. Similar to last year, and we had inflation, we look at total inflation. We've always looked at not just material, but total inflation, that includes labor, freight, energy costs. But that price cost really kind of balanced to neutral last year, and we're again looking to do that this year even -- and even more inflationary environment. We do expect that to be more positive here in the back half, just based on sort of the pricing actions and kind of what we're lapping from an inflationary perspective. But we continue to execute well from a price/cost perspective. And I think it just, again, comes back to the strong value proposition we have as well as the fact that 2/3 of our revenue go through distribution. So we've got a very grooved process by way of -- on the pricing execution side.

Okay. And then when you talk about price/cost, just to clarify, you're wrapping in your raw materials, logistics, labor into that equation?

All inflation, yes.

Right. Yes, because a lot of companies just selectively include certain buckets of inflation. So that's good to know. Enclosures, I think you're a little bit underwater in 1Q on price/cost. Maybe just talk about how you see that pathway back on neutrality for Enclosures?

Yes. Go ahead.

Yes. That was our -- from the perspective of that was our most challenged segment. It's the most labor -- it uses more labor than our other segments and it's tough to get labor. So huge labor inflation and over time. And also, if you think about what we do in our portfolio from a freight standpoint, shipping and closures is more challenging than shipping a fastening solution. And it really was the strong demand that we saw with just inefficiencies in our ability to work through such strong backlog in orders. So we see that getting better as we go through the year just as we're able to get better productivity in the factory, manage some of the labor turnover. Some of those other areas is how we see that getting better.

So it's important to know that this is not a pricing issue per se. This is more a labor productivity issue than anything else?

As well as just the supply chain challenges, right, of freight and just other inputs like that.

Right. Why don't we head out to the audience for questions. There's probably a mic somewhere. So just raise your hands if you've got any questions. Going once. Going twice. No. We've got a pretty shy audience here. Supply chain. So again, just touching back on the fact that you've done a better job on most of -- managing supply chain. Where do you see the challenges today? What needs to get better to really -- and maybe just expand that into what are the gating factors on converting this backlog -- you've got a very strong backlog. I think you're assuming that the back book conversion improves in the back half of the year. What needs to happen to get that to come through?

Yes. I would start by saying we believe we've navigated the supply chain challenges well. And what we hear from our channel partners, what we hear from customers is that we're doing relatively well in terms of servicing that customer. And what we find is, as we do well on the delivery front, we get more orders. So that's a good thing. But it continues to be challenging. And I would say the biggest challenge we see is really on the labor side. So getting team members into our factories, into our DCs and then when we get them in, it's training and ensuring that we can get them as productive right, as the rest of the team while servicing really ramped demand and volume. And so that's where some of the challenges come by way of the P&L and some of the supply chain inefficiencies that we're seeing. When we think about improving that going forward, we're doing some interesting and creative things in terms of really focusing on that hourly workforce. We're looking at different shift dynamics. We're looking at different conversions of temporary to perm. We're looking at different ways and creative ways we can train our team members within our factories and DCs. So that's really our #1 focus. Material availability, I think, is always going to be kind of fits and starts. So our supply team -- we often say our SIOP process was monthly, quarterly. Now it's weekly, daily, and it has been for quite some time. But again, I think the team is keeping a good pulse on that side of the equation. Electronics, that continues to be a challenge for us, but it's not as big of a piece of our overall buy and revenue dependency as maybe some of the other folks. So those are probably the 2 areas, labor and electronics. But as we look at Q2 and the back half, when we talked about this, we do expect kind of that productivity to begin to get better as we continue to focus on these efforts about just driving that productivity within our factories. At the same time, we've made some trade-offs. We do believe that getting that backlog converted to sales. And I think we've done that really well through last year and continue to do that in Q1 and delivering for our customers, even if it's costing us a bit more here in the short term, like Beth talked about and how that's showing up in Enclosures, we think that that's really kind of creating some stickiness with some existing customers and new customers. So we think it's a good trade-off and return longer term.

I want to come back to the market share stickiness in a second, but let me just hone in on labor and electronics. We're hearing from some of the larger companies that the decommitments happening almost on a weekly basis from the supply. Are you seeing -- I don't want to curse this, but are you seeing more consistency in supply at this point relative to maybe 3 months ago?

I would -- on the electronics side, I would say no.

Is it worse?

Not worse, just the same.

Okay, better. But for you, it's not as big an issue as for some of the companies?

Correct.

Correct.

That's fair to say that. Is there anything you can do to mitigate that? I mean is it the case of just how they go out in the spot market and buy more spot from distributors?

It's some of that. It's also looking at alternative components. And in some cases, in our Thermal Management business, we've been able to look at older products or different -- having multiple things that we can offer to our customers. Maybe it's not the latest and greatest controls, but it's another version so that we can still support the system.

I see. I see. So it's a daily...

Yes, it is. yes.

Much basically isn't that.

Yes.

And then we tend not to focus -- we haven't focused so much on labor in the past, but labor has been a real challenge for manufacturing companies. Again, just mark-to-market where we were 3, 6 months ago, how do you feel about the situation on labor right now? I know there's been a lot of inflation on wages, but maybe just talk about retention and productivity and how that's trending?

I think it's gotten better. And so as Sara mentioned, we've done some things to improve the employee experience as well as being creative as much as -- it's hard to create a hybrid flexible workforce. You can do that with professionals. But we're recognizing that some people want part-time work. Some people want weekend work. Some people want shift work. So providing that flexibility to our workforce and different strategies there as well as really creating a great onboarding experience. So we're doing some things there to be creative. The flip side here on the labor side, when we talk about our own portfolio, especially on our EFS portfolio, which is all about labor savings, it's just we're driving more acceleration there so we can get more labor-saving solutions to support our customers. So we're managing that on both sides, I think.

Market share gains, you've clearly gained share in the channel. How do you feel about to keep retaining that share as your competitors maybe next year, they get beyond their challenges, how confident do you feel that you can keep this scheme, the share you gained?

Yes, we feel very confident about that for a couple of reasons. One, I would say, in many cases, where we've gone out with new products and capabilities, right. So we're offering something that has differentiated value to our customers. Second, as we just think about -- we started by saying 2/3 of our products go through distribution and the world of distribution is consolidating and becoming more digital and distributors want to have fewer but more strategic partners who can make those commitments in digital capabilities. So I think all of the things that we're doing there are creating value for our customers, value for our distribution partner. And I think we've won some new accounts that we are confident we're going to retain as we go forward.

So you think the WESCO [indiscernible] consolidation, there's been others, but you think that's been helpful to you?

Yes. Yes. And more -- a lot more to come there, too.

Okay. Pricing. Again, the question is how much of this spectacle price you've had goes back? I think we touched this before, but you're confident that even with these larger buyers that they're not going to demand price concessions from U.S. as onshore rollover?

I think where we see it right now, we typically have been able to hold price and increase. Our mantra used to be we want to get a point of price every year, right. It used to be that. So we were always looking to gain price. When we launch new products, we drive them to higher margins and value as a result of savings that we're providing to our customers. I think we're seeing so many other inflationary elements beyond just, say, commodity metals that all factors in. So we believe that we're going to be able to have -- be very -- and our brands and our value, we think we're going to be able to hold on to most of that price.

Okay. So your footprint is very commercial construction, infrastructure, industrial-focused, obviously, data centers communication is very important. Seems like you're relatively well positioned from a maybe a consumer recession perspective. You don't really touch the consumer directly. So it seems like you're quite well protected. I think one maybe end market that we struggle with, certainly is trying to understand what the project outlook is for energy, for the film business, the project business. How do you see that playing out over the next 2 or 3 years? It feels like high oil prices should be good, but just from your perspective?

Yes. It's not only high oil prices, but I think it's that energy independence or security that we're seeing. And so as a result of where we are now, we believe that we're now back into a very -- a growth cycle. I think I said that a year ago, as we started to see the MRO rebound, and it is a longer cycle business. It's -- energy is 8% of our portfolio. So it's not significant anymore, but we believe that we're in a period where we're going to see investments being made in different places around the world, given the Russia-Ukraine conflict. And so we think our thermal business is well positioned to take advantage of that growth.

And then we're now lapping -- we fully lapped now the impact of the Texas storms in 1Q of '21. There were some thoughts that perhaps that might lead to thermal solutions in markets that [traditionally] haven't had that. Did that come through?

It did. So one of the things that we've set forth is a really formalized approach to how we drive energy or how we do audits, right, to find out weaknesses in the manufacturing process capability. It's also led us to look at how we can offer more life cycle services. So as a result of the Texas freeze, we did see some immediate business and some that carry through. And I think we're continuing to see momentum there as we go forward because everyone's looking for resiliency.

Yes. Absolutely. Okay. You inherited this portfolio to some degree from Pentair. Do we love every business that we have? And obviously, don't name names or anything, but is there any portfolio work to be done here?

Here's what I would say. There's always things you love and other things that you would say, we can do better. And so we're always making those trade-offs, and there's product lines that we've exited and there's other areas where we've overly invested more because we see the growth trends. So I think you're never done optimizing the portfolio. And you see that in our M&A strategy as we add on places and where we invest.

Okay. That's -- got it. That's a great segue to talk about investments. You've got a strategy to raise R&D to about 3% of sales, I believe. Just market-to-market in terms of where we are in that process? And what is the focus of your investments are today?

Yes. So it's taken us, I'd say, a little bit longer to get to that 3% investment. But at the same time, we've had more output and driven more impact in terms of 2 points of growth in the first quarter from R&D. So we actually are seeing great benefit and great value that we're creating. And we've made some trade-offs there because we've actually made some priorities on investing in digital, right. In some cases, instead of R&D into products, we've invested in digital capability. I think we're going to continue to do that. Our vitality is we want to get it to above 20%. We're very close where we are now. So we're achieving that goal and doing it very efficiently. But I think these are the things that are really helping us position to win and drive strong growth above GDP.

Okay. This is a slightly nerdy question, but when you've got a 10% benefit from price in your revenue number, is 3% still the right number? I mean, given the price and inflation impact, is that still the right number, 3%?

I'm going to say for now, we think it's still okay because we're not going to see this inflation long term, right? But I think if we step back and look at -- we wanted to get 1 point of growth from new products. We're seeing right now, too, in the environment. And we have very specific goals that we want to get to around digital that drives both growth and productivity for us. So I think we're making the right investments, and we're not going to stop. And we didn't stop during the COVID years either.

Yes. Because I think that's the point is we just think it's a great return. And I do think that through COVID, we didn't pull back on our CapEx. So a lot of our CapEx investments at that point in time are going to digital and new products. And I think we're beginning to see that readout. I think the other interesting thing too is the last couple of years, we've really focused on sort of our velocity. It's almost like our tech time in terms of time to new product. And so even with what's sort of similar or a bit higher dollars, not yet to that 3%, we're getting great return on those investments in those dollars.

Yes. One more time. Any questions out there? I guess no. The questions are so... Inventories, big topic of debate for investors. How do you view the state of inventories in your channels right now? Because we have seen -- if we just take say, West Coast inventories, they've got up a lot. So how do view do that?

I think inventories are up in -- at all our distribution partners. Some of that is just inflation, right, on that inventory. And I think in some cases, they are trying to ensure that they've got -- their customers are demanding that they've got inventory in place to be able to serve them and are putting longer-term orders on them. As we look at it, our input and our output of the distributors is matching and balanced, so that's good. But we do think that they are definitely trying to protect themselves by carrying some more inventory.

Yes. Okay. But the risk of a destock in the next year or so, do you think that's a risk?

I think we will see -- again, I don't think we're going to see these 20% growth rates. So I think at some point, we're going to start to see that pace slow down. But I think there's still so much backlog in the channels that it won't be a significant drop off. They'll just manage that over time.

I think you're right. Let's talk about capital location. We'll finish up with capital location. We've seen that 2 or 3, that's bolt-on deals in the last couple of years. Is there a desire to be more ambitious on M&A for the next? I mean, your plan is 1 point of growth from M&A each year, but is there an ambition to be more ambitious?

I think we can be more ambitious. And I say that simply because the deals that we've done, we've had great returns, great growth and we've shown that we have an integration playbook where we can execute. And that gives us confidence in where we sit with a very healthy balance sheet that if we saw the -- it starts with the right strategic deal. But if we saw an opportunity and it was sizable and it made sense for us, we have confidence in our ability to execute. So I think it's always a possibility.

Now Eldon seem like a small flag in a very big market. How do you manage to scale that business?

For a couple of areas, they brought a product portfolio and IEC specification North America is Nima. The rest of the world is IEC. They did not have access to channels and distribution, which we were able to brand the product Hoffman and bring it throughout our channel partners around the world. We've taken that portfolio. We're now manufacturing that in North America to serve customers in North America. Same thing in Asia. So we've been able to scale it by both expanding the manufacturing footprint and giving them access to accounts and distribution.

That's great. And then just remind us, Beth, what is the focus right now for your M&A dollars?

Yes. As we think about M&A, we start with electrification of everything. Does it build us out around connect and protect portfolio, you can see where we've added things around data solutions or around power utilities renewables. So we look at that and see what makes sense that we can also scale and bring it through our channels. So it's those things.

I think we're out of time. So unless there's any closing remarks, we can draw a line there.

Yes. We're just -- I mean, we're very excited about the future. And I think we've been demonstrating that we're executing well and growing well. So as I started, I think the future is bright for nVent.

Thanks, Beth. Thanks, Sara.

Thank you very much. Nigel.