nVent Electric plc (NVT) Earnings Call Transcript & Summary

All right. Good morning, everybody. Welcome back to day 2 of the 10th Annual Laguna Conference. I'm Josh Pokrzywinski, Morgan Stanley's Electrical Equipment and Multi-Industry electrical analysts. Thanks for joining us this morning, and I'm also pleased to have on stage the team from nVent, Chief Financial Officer, Sara Zawoyski, and Investor Relations VP, Tony Riter. So everybody, thanks for joining us. Sara, Tony, thanks for joining us as well. Just before we kick off here, I do have to remind folks who are listening in the room and on the webcast that if you have any questions about our research disclosures, please visit the research disclosure website or reach out to your salesperson. With that, folks, thanks for joining us, Sara. If you wouldn't mind just kind of giving us the lay of the land here as we get started, what you're seeing out there and what nVent is focused on?

Thanks, Josh, for having us and a very early good morning to everyone here on the West Coast. And I thought maybe I would just start real quick just to brief sort of introduction in terms of nVent, who we are. So we're a $2.5 billion high-performance electrical company on our way in approaching $3 billion. We're a leader in connection and protection. We've got strong brands, leading positions, and we really have been executing a strategy around high-growth verticals, new products, global growth and acquisitions since our spin in 2018. And more importantly, we're really focused around and well positioned in this electrification of everything. And I think to wrap it up in terms of execution, I think we've done phenomenally well represented by our financial performance. In the first half of this year, we were up 24% on sales. Earnings grew 15%. And that was on top of strong double-digit growth last year and earnings up 31%. In terms of -- so what we're seeing in a macro environment, clearly, supply chain challenges continue, inflation, while maybe easing in part because it's still broad-based. And obviously, there's some geopolitical risk that we're all navigating but I would say that from an nVent perspective, we believe we're one of the best well-positioned companies within this electrification of everything secular trend. And you see that in terms of our performance. In Q2 alone, we continued that double-digit top line and order growth trend, and it was pretty broad base. All of our key verticals grew double digits, really led by infrastructure, and that's where you see data centers, power utilities, renewables. So that was up strong. Commercial and resi, we really saw strength in North America. And so that's leading there from a commercial perspective. And then in industrial, I would just say it was broad-based. I mean we see that material handling, we see it in industrial in terms of automation, and then last, energy, we do have roughly 8% of nVent sales within energy, and that was up as well as we're not only seeing the benefit from energy transition and how our Thermal Management product plays there, but also this increased focus around energy independence and resiliency as well.

Excellent. You touched on something there in a few places around inflation and then maybe some of the like disinflation you've seen recently. I've been fortunate enough to spend enough time in a few of the plants that are maybe a little bit off the radar for folks who don't get to Central Minnesota too often. But I see what goes on there, and there's certainly a lot of steel involved, right? And in this environment where, clearly, you guys have a lot of pricing power, you've taken a lot of price. It's kind of well deserved for the value proposition. As you start to see that peel back, how are you able to sort of price and decouple value from like, hey, there's a pile of steel here that, yes, we add a lot of value to, but we're still buying steel.

Yes. So I think it's really 2 things. One, I would say the value proposition and what we do around protection and connection. And I think the second piece is, while we are seeing pockets of inflation easing, for example, steel. We're also seeing broad-based inflation, like many other industrials in all the other areas, like energy and like logistics, like wage inflation, et cetera. So I think let me start with the first point here, in terms of that value proposition, and I think many people look at our products and they say, okay, I see steel versus seeing the critical value proposition that we offer to our customers. And so let me impact that a little bit. From a closure standpoint, when you think about what we do, we protect anything and everything electronic. And with that electronics that may cost thousands of dollars, but what ultimately it's doing is enabling the automation and the production of millions of dollars of output from a production standpoint. So really, our products provide that critical protection and it's ultimately a key part of producing millions of output. For example, on the Electrical & Fastening solutions, So we do fastening and connections in our Electrical & Fastening Solutions business. And when you think about there and what we do for the contractor, it's all about labor savings. And given some of the challenges from a labor shortage standpoint, it plays a critical role in solving that problem. I think the other thing in terms of kind of decoupling and focusing on the value proposition, especially in this environment, is delivery. And I think our teams have done an exceptional job of that. So even as some inflation might ease, I do think that the supply chain is going to continue to be challenging. We delivered 10 points of volume growth in the first half of this year. So I think that being able to deliver against the continuing challenging supply chain is key to that as well.

Got it. There's a few things in there I want to pick up, but I want to kind of continue on this price cost out for just a minute more. You mentioned that yesterday, you're starting to see the metals come in, there's still kind of this broader inflationary backdrop. If you net those together, are you going to see or do you expect to see a period of sort of net deflation? Or when you add all that up, do you think you'll still need some price as you look out over kind of the forecast horizon for how you can see your inputs?

Yes. I mean I think if you look at any of the CPI indexes, whether it's U.S. or whether it's global, I mean it's all pointing to inflation as we head forward. And so that's why we're going to continue as a company, keep an eye on where those inflationary pressures are headed and then importantly, look to price to help offset that. And I think, again, going back to the strong value proposition, the new products that we're innovating against as well as our delivery, it really positions us well. I think the last point I would make is, in the last 2 years, 2021 and on track to do it in 2022, even with these inflationary pressures, we've been able to again manage that off with price, again, coming down to delivering new products and importantly, the critical value proposition that our products bring.

Excellent. On that 10 points of volume, I mean, I think that's pretty high relative to most industrials who have been bottlenecked and may have not even grown volumes over the past year. It's all been priced. I would think for nVent, some of that is there's just not as much electronics content and maybe there's help out from that. But how do you think that benchmarks maybe versus your industry or what you can glean about competitors? Because it seems really impressive but it's also kind of a different context than maybe some of the other folks were used to.

Yes. And I think that's a good point. We don't have some of the exposure to electronics that some do. We do have it in pockets, and it is -- and it continues to be a challenging environment. But I would say that our ability to deliver and convert that backlog to volume for our customers, is really hinged upon the supply chain that we've been working on in the last couple of years. And our supply chain is largely in region for region. So I think that helped out a lot. I think the other thing the team did a tremendous job doing really going back to Q4 of last year is setting up some flex capacity. So it's working with outside partners. And as we need additional capacity, ensuring that we've got qualified suppliers that we can flex with as we need to. I really like that because it's variable as things so we can kind of dial that up and dial that less so. But I think that enabled us to outperform on the delivery side. I think the other piece I would just come back to is electrification of everything. I do think that, that has really shown some nice growth and particularly on the infrastructure side as well.

Got it. So a couple more things I want to pick up off of that and maybe electrification is the best place to start. I think not a ton of the product carry current, if I'm remembering it right, where do you see your role in that? And sort of how do you measure that within the business? It seems pretty powerful, everyone who's in the electrical space has clearly noticed, clearly getting a benefit from it. How does that flow through for nVent?

Yes. I mean this has been an area that since we spun, we said one of the things we want to do to change the growth trajectory of the growth profile of nVent is to focus on higher growth verticals and really centered around this electrification of everything. And the 4 key buckets there for us is going to be data solutions, power utilities and renewable what we call like smarter buildings as well as industrial automation. And we think that the secular kind of mega trends there are very strong. And so when you think about data solutions as an example, and what we bring to our customers, it's all about Enclosures and we've added cooling, and we've added power distribution. So a lot of what we've been doing in this electrification of everything space and spin is focusing on organic capital dollars going in these spaces, but also inorganically. And when you think about data solutions and getting to kind of the outperformance side of things, that business has grown from less than $100 million in 2018 to exiting last year at $220 million and on our way to $300 million. Now some of that is through acquisitions, but a lot of that, too, is focusing on where we believe the outsized growth is even within this fast-growing space. Give you an example is cooling. So in this cooling continuum of data centers, 90% to 95% of that happens via air. But the remaining is through liquid. And that is a very rapidly growing part of the cooling space within data centers, in part because of what it enables by way of energy efficiency. It can provide up to 30% better efficiency from an energy perspective. So data solutions is a big area that we're focused on in terms of electrification, everything when you think of everything data, everything technology and where that's headed. Power Utilities and renewables is another area, not as big as data solutions. But when you think of everything that's happening with the grid and the grid needing to be more and more resilient with everything happening on the renewable side and connecting to that grid. One of the key things that we do in our Electrical & Fastening solutions business is grounding and bonding, a key part of enabling and building out that resiliency. The other piece on the renewables front, we just made a recent acquisition in the last year with nonmetallic enclosures, that's even growing faster than the overall metallic enclosures in part because it plays in places like solar. And then the third and fourth bucket is smart buildings, and it doesn't necessarily take a new building to need the Electrical & Fastening solutions products. You just need a building that's bringing more electronics and more data computing to that building, and that's driving that space. And then you've got industrial automation. I really think that, that's something that is going to hit an inflection point if it already hasn't, given the challenges everyone on the manufacturing is seeing on the labor side of the equation. So I always look at what we're doing within our own 4 walls of manufacturing and we're putting added emphasis on the automation side, and we provide a key solution from an Enclosures perspective for our customers in industrial automation side. So these are sort of the 4 big buckets that sort of connect with this electrification of everything. And it's something that since spin from now, we've really provided an outsized focus on this in these higher growth verticals and then obviously playing a role in the trajectory of nVent going forward.

So within that, is it a focus more on kind of the commercial outreach? Or do the products themselves need to change? Because I think in a lot of cases for electrification, yes, you have this end node, that's an EV charger or something or a solar panel, but all the gear along the way sort of doesn't really care what it's being up -- being attached to or it just needs more of it. Where do you see nVent's role in that? Are you having to retweak the model? Or is a lot of this kind of core to what you're already doing?

Well, a lot of the products play directly into that space. And then we're continuing to innovate, broaden, look at the adjacencies in terms of what other solutions can we offer. I think one thing that nVent is doing to evolve in this space is putting in vertical market teams that are very focused even in these new emerging spaces like battery storage, for example, and that's really a model that has proven very well because that's what we did with Data Solutions. We put a business development vertical market team that's laser-focused on that end customer. And that's enabling us to ensure that we're close to where that demand is being generated and getting to those end customers because that value chain or go-to-market model has many different players as part of that.

Is that a new competitive set as well? Or are you bumping a lot of the same folks you would elsewhere?

In terms of the electrification of everything. In some cases, it's a new competitive set. And I would also tell you that from a cooling perspective, for example, we think that we're in that leading area around liquid cooling, for example.

Got it. And then the other thing that you sort of touched on that I think is sort of an interesting point here is on nearshoring. So you guys are sort of proof that you can have a high-margin business made in America. Do you see yourselves as or do you see from your customers' perspective, a benefit from that coming in? I mean we've heard a lot about it. Obviously, there's some big flash areas like semiconductors and pharma and parts of the auto supply chain. But -- what are you guys seeing from your perspective? And is that something that drives the business? I'm thinking of like HOFFMAN in particular, we're probably being a good beneficiary of that?

Yes. I mean, I think it starts with building a more resilient supply chain. And I do think that nearshoring, onshoring clearly is an element of that. And I think we're going to continue to see those trends. And it's a critical part of how we think about it as well from a manufacturing standpoint, but also from a supplier perspective. I also think, though, that there's equally exciting trends and important trends for us, even within our own 4 walls around more and more automation. Because if I think of supply chain resiliency, I think having a tight kind of in-region supply chain is critical to that. And I think that's -- we've seen that benefit in terms of us being able to deliver, I think, exceptionally well for our customers. But I also think it doesn't necessarily sell for some of the labor challenges. And I do think that, that is not something that's going to go away next quarter. I think that's a challenge that we're going to need to solve for here. And so while we're working that each and every day with our manufacturing teams, we're also working kind of the near-term efforts there in terms of accelerate in some of our automation efforts as well.

And is the automation effort more of a function of kind of labor scarcity? Or is there some other productivity or technology tipping point that we hit where like this is the next kind of the logical next step?

Yes. I think that the labor shortage is accelerating it. But no doubt, automation has always been sort of on our road map and is a critical part of driving productivity as well as increased capacity. And we see that in proof cases, right, where we brought in automation. We're just looking to further accelerate that. And I would add one other thing, too, as well, Josh, and it's really around the digital capabilities within our manufacturing sites. And what we're doing there is really working towards a more paperless factory, more real-time digital dashboards and even bringing more of a digital capability to our logistics side of the business as well.

Is there sort of a payback that you target? I mean, I imagine these projects kind of hit your desk as the CFO, what is sort of the return profile that you're looking for when someone says, I want to automate this line or this process?

Yes. I mean we spend a lot of time on capital deployment at nVent, both organically and inorganically. And clearly, some of these productivity initiatives have a pretty good feedback -- a good payback. I think the challenge continues to be, you got to prioritize it because you also have to have the people amidst delivering on that 10 points of volume growth to go execute on that. But the productivity and automation and digital paybacks are fast.

Got it. And then on the growth side, just coming back to that, how do you benchmark yourself sort of versus the market or versus peers? Like we talked about it, it sounds like a good number, certainly versus folks who do different stuff, but how do you kind of measure that in market? And how do you think you're faring versus your competition there?

Well, we listened to what our customers say, and when our customers are telling us that we're performing very well relative to our competition. In terms of what we look at when we look at external market data, inputs as well as just kind of how those peers are doing. But the biggest and an important input for us is how our customers are telling us -- we are doing as well as our channel partners. And I do think if we think of -- I'll just take the first half of this year with sales up 24%. I think importantly, you mentioned it earlier, a really good balance between volumes, adding over 10 points and price. We feel really good about that. And I think it comes down to 2 things, this electrification of everything and this broad base strength that we're seeing across the verticals. And I think the second piece is the execution. So the execution of our ability to work the price/cost equation but importantly, being able to deliver for our customers.

Is there like a product family that's really the virtuous end of 80/20 on this, where it's really driving a lot of the growth relative to what you've seen? Or is it kind of dispersed across the various lines of business?

Well, I mean, in Q2, all of our verticals actually grew double digits, that was fantastic. But I would say that infrastructure led the way. And that, again, includes data centers, renewables, power utilities, and that's been a key focus of ours around how do we continue to build up sales for nVent and our focus around these high-growth verticals and with infrastructure being one of them. I think this is an interesting data point back in 2020, that infrastructure as a percentage of sales is in the high teens. And now we're trending closer into that 23% on our way to 25% of sales. So -- and we believe with all the infrastructure spend ultimately coming through over the next handful of years, coupled with what we're already seeing in that space around technology, connectivity, the investments around infrastructure that, that should be a really nice growth factor for us going forward.

And I would imagine kind of the fiscal efforts around infrastructure and then IRA are probably nice tailwinds as well. Anything in there that particularly catches your eye or this is just kind of all a rising tide for you guys?

Well, I would say if you look what's in that act and specifically translate that back to nVent. I mean there's a lot in there around infrastructure and what we're doing. So we just see it being additive and incremental to already what we're seeing in sort of what I would call the private sector in terms of tailwinds and secular tailwinds there. And then we'll expect to see even more of that in terms of, I would say, more accelerated of what we see today versus anything necessarily new per se.

Got it. And then just on the Thermal side, we haven't talked about that as much. I know there's been maybe a bit of a de-emphasis around kind of the mega projects in oil and gas. But how has kind of this current environment maybe post Ukraine or intra Ukraine influence that? Are you starting to see more activity there? How customers maybe respond to this spike different than in other cycles?

Yes. So in our Thermal Management business, one of the key things we do there is heat tracing. So we provide heat tracing solutions to a wide variety of industrial energy and even commercial customers. And maybe I would rephrase it a bit, it's what we're focused on in Thermal Management our projects within industrial and energy that have high product content because we want to be able to serve those customers through MRO, right, as maintenance is required and needed. So we think that's where we can provide the best value to our customers to really focus on that high product content. In terms of what we're seeing in the geopolitical side of things, I mean, clearly, that has put an increased focus on energy resiliency and energy independence. And what we're seeing in our Thermal Management business is really as that MRO recovers, and we're really on kind of year 2 of that recovery post 2020. That's accelerating given some of the customers wanting to increase output or get things started again with that focus on energy independence and resiliency. I think the other trends that we see that Thermal Management plays nicely in is more of a focus on LNG. So it was already a good alternative. And again, with this more focus on resiliency, we're seeing an additive focus there. So more growth. Now where Thermal Management plays as they play later in the project cycle. So it will show up a little bit later, if you will, in terms of the order book and the revenue conversion. I think the other area is in biofuels, cleaner fuel. And again, when you think of the feedstock materials and the need to keep temperatures in a very narrow range, that's exactly what our RAYCHEM heat tracing solution does. So there's a lot of, I think, trends there that play nicely to our Thermal Management business.

Are those verticals, LNG and biofuel sort of good mix relative to the base of the business?

Yes. Yes.

Then I want to shift over to kind of this unusual environment that yourselves and a lot of other folks are in where it's not really a backlog business in most cases, but you have a lot of backlog. You had a lot of order visibility. How would you characterize sort of the customer psychology now in terms of how far out they're willing to go, how they're treating things like inventory. Just for example, I think there's some ERP systems out there for folks where they would say inventories are low, keep ordering. But like that ERP system can't see how much is on order? Like how do you guys sort of scrub the backlog and kind of look at that complexion?

Yes. So no doubt, backlog is strong year-over-year even despite our ability to deliver for our customers and get out the volume growth double digits during the first half. And I would say that orders too in Q2 were strong, double digits, but there is a view here that 2 things. One is, as the supply chain gradually gets better, that ordering buying behavior, if you will, will change. And I also often reconcile it back to kind of how we're thinking about things. For example, if we were ordering 6 months out because we felt like we need to give that supplier that type of visibility. And we wanted to make sure that we had that order in place. Now as the supply chain and material availability doesn't sort of solve entirely, but again, gradually gets better maybe you're going to order now 4 months in advance, 3 months in advance. So I don't know whether we're back to normal in terms of that lead way, if you will. But I do think we're beginning to see that. I think the other piece is these ordering rates that just were high, just given what the supply chain dynamic was that we're going to see that begin to normalize. The 40% order growth we saw in Q4 is not sustainable. And so I do think that there is going to be a change in ordering behaviors, if you will, as you see that supply chain begin to normalize. It's still going to be challenging, given some of the disruptions obviously, still challenging on the labor front, but the material availability seems to be sorting itself out and just a little bit more focused in pockets, if you will. And I think that's going to inform some of the ordering, buying behavior.

Got it. Any sort of special attention you're paying in the year-end, I think about most of the companies that are here probably behind on free cash generation as a function of working capital. We're getting down to the point where if you want to make a decision to start liquidating things in the year-end, we're kind of in that sweet spot now. Is that how you're thinking about it internally? And then any signs from your customers around things like inventory or cancellations that would say maybe they have the same idea?

Yes. So I would say free cash flow -- I would start by this, nVent, one of our hallmarks is free cash flow strength and our ability to convert 100% plus of net income to cash. And we still feel like we've got plenty of opportunity in terms of runway for working capital improvements as we look ahead. This year, in particular, especially given the strong demand we've seen especially given the volume that we're focused on delivering for our customers, that conversion has been tough, largely because of the strong demand against the supply chain disruption. And so as we think about it here in the back half and if some of that supply chain begins to ease a bit in terms of challenges still there, no doubt, but ease a bit, we're focused on where do we need to invest on the inventory side? And where do we need to maybe get into those ERPs and look at things a little bit differently because things are getting a bit better on that front. So no doubt, free cash flow conversion is challenging, I think, this year because of the demand, because of the supply chain. But I also do believe that if things are -- as things begin to gradually get better, we, channel partners, et cetera, are going to focus on that. Now with that being said, and I think this is more indicative of just the continued strength in the demand environment, we haven't seen the cancellations. And so I think people are just going to look at their ordering in that smart intentional way to say where do we need to order more or where do we need to make some adjustments.

Excellent. Sara, Tony, I really appreciate you guys joining us and back in person here, and thanks to everybody in the room for your attention. We'll leave it there.

Thank you.