nVent Electric plc (NVT) Earnings Call Transcript & Summary

All right. It looks like we're ready to kick it off. Next on the agenda, we have nVent. Really excited to have both Beth Wozniak, who is the CEO of nVent; as well as Joe Ruzynski, who is the President of Enclosures. Beth is going to start with a few prepared comments, and then we'll get into the Q&A.

All right. Thank you. All right. Just a couple of things about nVent. We're -- I would say this, we're almost a $3 billion company. On May 1, we celebrated our fifth birthday as a new company. Last year, a great growth year, 20% growth on top of 18% the year before. Earnings per share up 22% on top of 31%. So I don't know how many years I get to use those numbers. But what we do is we're an electrical products company. And as the world is electrifying, we connect and protect. And those are critical things as we go forward. And if you look at our business, we have 3 segments predominantly in North America. About 70% -- 69% of our business is in North America. So all of that presents opportunity. I think the key thing when we think about the world around us is that the world is becoming more sustainable and more electrified. And for us, our products are critical and essential to that infrastructure. So when you think about the grid that needs to be built out, when you think about decarbonization, when you think about renewables, whether it's grounding, bonding, enclosures or thermal management, all of that is involved in these trends. On top of that, everything is becoming digital. A lot of excitement around ChatGPT. For us, we see that just accelerating what we're doing in our data solutions business. And then, of course, there's all the infrastructure investments and some of that is yet to come. So when you look at this, we think that the opportunity for us from some of the infrastructure and the IRA bills is somewhere between $250 million to $500 million over time. But it presents tremendous opportunity. I always like to say that we had a strategy that we put forth when we became a new company, and we just keep executing on the tactics. For us, that focus on high-growth verticals has been really critical. When you look at our portfolio infrastructure, which was in the teens, is now 25% of our portfolio sales, and that's what's growing significantly. New products last year added 3 points of growth. And over the -- over our journey, our vitality has increased to about 20%. And of course, acquisitions have added $300 million. They've been growing faster than our core nVent growth last year. We just announced the ECM acquisition and many other things that we're doing to just strengthen the business. So when we think about how is our portfolio positioned and more resilient, we think 60% of it is tied to these secular trends where there is this infrastructure build-out, where there is smarter solutions, where there is an energy transition. Our portfolio here is just going to grow with all the shifts that we're seeing. And then the last key thing I just wanted to talk about is we announced about a month ago, our acquisition of ECM Industries. This is a great fit with our portfolio. It's going to bring us about $400 million in revenue. And what it does is it builds out our power connection and grounding solutions portfolio. Again, essential products in the build-out of electrical infrastructure. It provides us tools and test instruments that are used on the job site every day, and it strengthens us in these high-growth verticals. So we're very excited. We expect that to close in Q2, and to be as successful on the integration path as we've been with our other deals. And so lastly, last year was an outstanding year for us. We're setting up for a strong 2023. And we're well positioned with these trends in electrification, sustainability and digitalization. All right.

Thank you, Beth. That was great. And congrats. I mean the growth rates have been amazing. It seems like the portfolio is well positioned. You guys are investing. It is interesting. You mentioned 60% of your portfolio has been growing at like a 15% CAGR over the last 3 years. How sustainable do you think that is just given what you're seeing, either that's from a secular opportunity, legislative opportunity? Versus -- like how susceptible is that potentially to like a cyclical downturn as well?

Yes. I think -- I don't think we're going to continue to see those 15% growth rates, right? We just gave out our long-term projections. Mid-single-digit growth rates is what we anticipate. But I think we see it. The shift in -- we just see the growth in data centers, for example. We see all the electrical infrastructure. So I think we see that we're going to have good growth. And some of that investment from the bills is yet to come. So there's going to be some areas perhaps that slow, but I think we're going to see in that infrastructure area some strong resiliency.

Yes. And so you mentioned $250 million to $500 million in incremental sales from some of the legislative funding. $1.3 trillion is a big number.

It is, yes.

Right. As you think about maybe the timing or the pacing of that funding or any hurdles you have to clear, how are you thinking about when that starts to impact your business and your ability to actually see some of the sales to $250 million to $500 million?

Yes. I think we think it's going to be slow, but it's -- and it's going to take over several years. And we've gone back and looked at other bills and how the spend got to the states. I mean it's a long process. So I think we're going to see just some steady investment that could be 5-plus years. And that's fine, right? Because our ability -- I think one of the challenges we still see are labor constraints. And so the ability even of the states and the different contractors and the projects to get executed, there's going to be constraints around labor. So I think towards the back half, we start to see some of the money flow through the states.

Okay. Great. And you mentioned data centers. Joe, great to have you on stage with us as well. So why don't we bring you into the conversation? It's been a great growth area for you guys. You highlighted at the Investor Day still kind of like early stages on liquid cooling. Maybe just talk to us about what you're seeing from a trend perspective in that end market, it's a market that investors are very focused on today, and what you see as your opportunity there.

Yes. So the history of nVent and specifically our segment has been on system protection. And I think we had the opportunity to take it in a few different directions because of the ubiquity of every system, every electronic connection, every intelligence system needs some level of protection. So data centers was kind of a logical evolution for our company. And about 3 or 4 years ago, we started to realize that we had really a great set of products to address that data center market, so managing not only the system itself, but managing the heat, which is the most critical part of the data center as well as the power. So we've made some acquisitions in this space. We've made some partnerships. And really, from a data center standpoint, what we were really excited about 3 or 4 years ago just continues. And if you look at some of the trends driving the explosion of data, I think 2 that we're most excited about. One is data analytics and AI. And maybe I'm sure you'll talk a lot about that over the next 2 days. But really, with AI comes more computing, more heat and the need to cool it. So that liquid cooling becomes critical. And what we're finding in that space -- we've made some investments. And I was listening to the last conversation with Richard at Dover. We need to continue to make more because you find these areas that the market needs, and we continue to do it. So we see that trend continuing. We see heat and the need to cool that being the major driver. And we're excited about that opportunity in the next few years. The other thing in addition to AI, supercomputing, et cetera, is just 5G. And we really haven't seen 5G kind of lead into computing at the point of where it's needed in an airport, in a building like this, et cetera. But it's coming. And I think that's an opportunity for us to miniaturize and standardize, which is something that I think we've demonstrated in the past.

Joe, that's super helpful. So I think you guys have said that only maybe 5% of data centers today have now gone on to use liquid cooling. What really helps maybe expediate that adoption? And what are your conversations like with your customers today on your liquid cooling capability?

Yes. I think -- so 2 things. To your -- to the first question, what is going to make the need for liquid cooling ramp and ramp quickly, it's simply that the next generation of chips have to be liquid cooled. It's really not an option. So if you want to be able to manage the most intensive processing, and AI is obviously an example everyone knows about, you can't use old chip technology. So those chips are basically being manufactured and ready to be put in that liquid cooling infrastructure, and we see that speeding up and going faster. I think the second thing and where -- we've had the opportunity to grow and to kind of raise our presence in a very quick manner, is that we not only have the IP. We've got a lot of really smart people that have helped to build these systems and solutions. But what our customers like about us when we talk about this is our ability to scale. So just in my segment, we've got 16 factories around the world, and a number of those factories can produce this product. And to have that flexibility -- and some of that capacity is transitioning from maybe older technology and older products. We're repurposing it to make sure that we can meet the needs of our customers today. And I think where any new technology -- the technology is great. Being able to scale it comes right on its heels, and we think we're well positioned for that.

Yes. That makes sense. And so, Beth, you mentioned earlier, 3 points of your growth coming from the investments that you're making. You can talk about it maybe more broadly across the portfolio. And Joe, if you want to touch on specifically in the Enclosures area where you're focusing your investments on that would be helpful.

Yes. So as we think about new products, we always look at, is this a product that is differentiated, margin accretive tied to a high-growth vertical. And that's really how we've been able to scale our vitality from where it was low teens up to around 20%. And then it's really the whole -- we think about how we -- when we launch new products, that we launched them through our channels with digital collateral. We think about the entire end-to-end process. And the other amazing thing is that we've taken 20% to 30% of our cycle time out of that whole new product introduction process just as we think about Velocity. And it's important because we're a products and solutions business. And we want to keep investing there in bringing great products to market because it helps us with our growth, and it helps us grow faster in these high-growth verticals.

Yes. Maybe I would add to that in addition -- and this has been, I think, a big change for nVent in the last few is getting new products to market faster. And maybe just to add to what I mentioned before about scalability, new factory in Thailand, new factory in India, new factory in Tucson here in the U.S. But those factories are really built to support the new products, new technologies and to be able to scale them quickly. So I've been fortunate to have good support from a capital standpoint, but it makes it easier when the markets are growing, the customers are asking for it, and we have the products to be able to scale. So...

Yes, that's great to hear. And so maybe just -- so we've been talking a lot about the long term and the investments that you're making. Just maybe from a near-term perspective, there was some commentary this quarter around destocking that you're seeing across your businesses. I'll just open it up. Can you just maybe clarify some of those comments?

Yes. So I think when you think a year ago, when supply chains were very disrupted and there was all kinds of constraints and labor shortages, I think our distributors and customers and lead times were pushed out, we're trying to order as much product as they could. And as we've gotten our lead times and as supply chain disruptions have diminished, our lead times have shortened. And so that automatically creates a new trigger point for a distributor to destock or just adjust their inventory because you've got shorter lead times. And so I think that's what we expected we would see it starting at the end of Q4 as supply chains improved, and I think that's an ongoing adjustment to those inventory levels as lead times get better.

So you mentioned when we were sitting here before the presentation started that you're meeting with your distributors in the coming weeks. I guess maybe what's the confidence level that we're going to -- you'll be through the destock in the next quarter or so? I just want to make sure that this isn't something that kind of lingers for several quarters.

The key thing is when we look at our sell-through because we're able to look at our sell-in and sell-through, the distributors, the end customer demand and our sales through have been very strong. So the demand is there, which is very positive. And that's what we continue to hear from our partners is that customer demand remains strong.

Great. Okay. So the segue, just given everything that's happened over the last several weeks with SVB and bank financing. I'm sure you're looking closely at your portfolio as well. It sounds like you're not seeing a real drop-off in demand today. But are there parts of your portfolio where you're already maybe considering taking actions? And what are you looking for in terms of leading indicators as to whether a potential credit tightness is going to -- is actually going to impact you?

And we talked about this on our earnings call. The area we certainly have seen some slowness in resi. Our thermal business has seen that. Commercial has started to slow. So we look at all of those indicators, I would say on the CADDY side of our portfolio, it's still been very strong. So we're just ensuring that we're positioned where growth is. So even if some commercial activity is going to be slower. There's a lot of industrial construction going on because there's new EV plants and there's new battery plants. And so we just need to make sure that we're positioned where we see that growth and that investment. So I think there's always offsets. That's the great thing about our portfolio is that it's so ubiquitous. And even if we start to see some more further slowing in resi, which is a small part of our portfolio, commercial that industrial side or that infrastructure side or even on remodel, if you need to have more data and power in any -- in a data -- for data solutions or in a warehouse, I mean, our products are really ubiquitous. So we just make sure we're focused on those growing areas.

So this might be a good segue to a question I get consistently from investors about you and about nVent is really around the competitive moat of the business. And so I'd love for you to address what you think is your competitive moat? And what allows you to be ubiquitous to serve market further growing?

So I'll talk about it from an event standpoint, I'll let Joe talk about it from his Enclosure side as well. And I think the key thing for us is that we have differentiated products if you think about our Electrical & Fastening Solutions portfolio, we typically are a leader in North America, and we have designed to have labor-saving solutions. And so that's not something that you can do unless you have intimate knowledge of how your customer installs these products and uses them on the job site. And so it's really that value that we have by creating time savings and protection and connection and safety. When I think about our Thermal Management business, where we are a leader, there's a lot of application expertise, and we're protecting millions of dollars of output and the certification levels that you have to get to in order to drive those controls. There's a lot of -- many years and decades of experience. So we feel really good about our moat in terms of just our understanding of applications. It's the position that we have with our brands and our channels. And I'll let Joe add on that further with Enclosures, where we are the leader in North America.

Yes. I think the comments on technology and IP certification, those are critical. Maybe just to add a few things. One is, I think we really spend a lot of time trying to serve customers how they want to be served. And one example of that is we're just talking about the distributors and our channel partners. They're critical to our success. And I would say the fact that we are comfortable in serving multichannel distributors, who is very -- are very important to us, but also working closely with big OEMs on technical projects where we can scale for them, too. So I think that ability to serve, in addition to having IP certification and really -- it really partnering at that application level. I think those are 2 critical things for us.

Joe has like 3,000 distribution points just in North America alone, and that's really hard for a small player to replicate.

Yes. That's a great data point. And Joe, I'm curious, when I think about your enclosures business, I think of it being predominantly distribution, what portion of that business actually sells direct to the OEMs?

Well, it's growing just in the nature of the business, especially as we grow globally, but we're still over 2/3 through distribution. So it's still in a really important part of our business. And one thing I would say, as we've gone down this path post-spin of building out these vertical teams, as Beth talked about, serving the best -- the most -- fastest growing market we're seeing that change in our channel partners as well. They're building that capability to make sure that they can serve fast-growing needs, not just going to the same customers, the same partners, the same applications. So we work with them to do that as well. So although I'd say, you see a little bit of a shift to partnering more with OEMs. That relationship with channel partners, they're getting more sophisticated as well using data, trying to understand and be predictive of their customers. So that whole market and channel is changing too.

Yes, it makes kind of sense. So one more question from me and then I'll turn it over to the audience as well in case there's any Q&A there. Price cost has just been -- this quarter, we saw an inflection across a variety of companies. The pricing that you guys have been putting through is probably best-in-class across our coverage. Number one, I guess, how concerned are you about now that commodities are deflating, potentially having to give back some price? And then how do you expect that equation to kind of progress as we -- as the year progresses?

I think we've shown that we're really able to manage pricing very well. And the fact that a lot of our products go through distribution, it's very -- we have a good way of changing prices. And last year, we did many price increases, right, just because we saw an inflationary environment. Where we are today, I think we're prepared to act if there is inflation. And even if we do see commodity metals decreasing, there's still so much inflation out there, right? Energy costs, labor inflation, right? Labor is still a shortage. And so from that standpoint, I think you're going to certainly see the spread between price cost diminish over the course of this year because a lot of our -- the strength of our pricing was really in that back half last year, right? So Q1, we have a really great run rate, but that spread, it's going to decrease as we go through the next couple of quarters. But if we see changes, we're prepared to act.

Okay. Maybe I'll turn it to the audience. Any questions from the audience at this point? All right. We'll keep going. So maybe just going back to that comment. When you talk about your distributors. I know you're meeting them in a few weeks. Have they started to push back at all in any of the pricing that you put through last year or even like early parts of this year?

Generally, distributors like price increases because it holds the value of their inventory versus if you reduce pricing. But I would say we're still in a -- there's still demand out there. And so from that standpoint, no, I'd say it's still very healthy in terms of just where we stand and everyone is still experiencing inflation.

So Joe, maybe turning it over to you. We talked about data centers. Talk to us a little bit more about your Industrial Solutions business and what you're excited about there, specifically? Like there's a lot of changes that are happening on the factory floor. How does that impact your business going forward?

Yes. And if you look from an industrial, that's a big part of our legacy and our history from a manufacturing standpoint, but data and analytics, robotics, factory automation, obviously, AI. I mean all of these things, just the way that companies manufacture is going to be different in the future than it is in the past. And we're no different. We're a large manufacturer. One of the things that you won't see on our shop floors that you saw even 5, 6, 7 years ago is big bundles of paper and other things that travel with products as they're getting built. So how you create workflow and do all of this electronically is critical. And it's important for us to -- as Beth talked about predictability, managing price costs, managing our inventory, being able to see that and do that all in line, the days of being able to run -- or having to run Excel spreadsheets and figure that out. So all of those things are really brought into that idea of smart factories. I think the other thing, just from a trend standpoint, that's important is we talked for years and years and years, and obviously, I've been a part of this business for a while, about reshoring and about new factories. But when you look at EVs, those are essentially new factories. When you look at solar, those are -- that's new business, new factories. When you look at data centers, a lot of the things that are being produced. So we're really seeing -- North America has been great, Canada, U.S. and Mexico, just a lot of investment. And those investments are new technologies, smart factories and still the need for our solutions to help build that infrastructure.

That makes sense. So maybe we'll switch gears and talk margins for a second. And Joe, why don't we start with you? So I think your long-term margin target is 19% to 20%. You put up over 21%, I think, in the first quarter. Why shouldn't 20-plus be the new baseline. And not to put you in a tough [indiscernible] sitting right next to you.