nVent Electric plc (NVT) Earnings Call Transcript & Summary

Stepping out to industrial double header is nVent. And with on stage is Sara Zawoyski, CFO of nVent; and Tony Riter, Head of IR. So Sara, I know you've got some slides. So over to you.

Thanks, Nigel. Good morning, everyone. Happy to be here, and thanks, Nigel, for having us. I've just got a couple of slides here to kick things off. I would just start with a quick overview of nVent. So nVent, we are a leader in connection and protection. We've got leading positions, leading in North America as well as globally, strong brands, and importantly, we believe we're well positioned with the electrification of everything, the sustainability trends along with digitalization. We ended the year last year at $2.9 billion of sales. We will tip that $3 billion mark here in 2023 with our organic sales and the ECM acquisition that we just closed last week that I'll talk about in a moment. We delivered strong results and have been doing so for the last couple of years. We delivered organic growth last year in 2022 of 20% on top of 18% the year prior. You can see across the bottom here, we operate in 3 segments across a variety of verticals. Maybe one point out that I would make is that infrastructure as a percentage of sales is now roughly 1/4 of revenue sales for nVent, that was in the mid-teens when we spun. So that's been a really area of focus for us from a high-growth vertical standpoint. And from a geographic standpoint, we're large in North America. We believe that's a good place to be with global growth still ahead of us. From a macro trend perspective, we believe these macro trends provide positive tailwinds for nVent. When you think about sustainability and the investments in renewable, that's driving demand for our energy transition and heat tracing capabilities within our Thermal Management business, for example. When you think of electrification of everything, so anything electrical, anything electronic needs to be protected with enclosures. That's providing strong demand for our Enclosures business, but also in our Electrical & Fastening Solutions business as well from a low voltage protection connection with our ERIFLEX brands. Digitalization. When you think of everything that needs data, needs more data, more computing, generating more heat because it's in these more condensed spaces, that's providing great tailwinds for our Data Solutions business. That was roughly $100 million when we spun roughly 5 years ago, we celebrated our 5-year anniversary on May 1 of this year. Now that sits north of $370 million for us here, and that's been consistently growing double digits. And last but certainly not least is infrastructure. This also provides some nice tailwinds when you think of all the dollars going in to build out airports and roadways and rail and transit, anything that has electrical or electronic components, we play a role. So as the world is electrifying and changing, we believe it's providing more and more opportunities for nVent. Our strategy, it's been consistent since spin and we continue to alleviate -- execute on elements of this strategy, in particularly more and more revenue in these higher-growth verticals as well as acquisitions and partnerships. And we believe this -- execution of this growth strategy is really helping to change the growth trajectory of nVent from where we spun to where we've been over the last 3 years or so. High-growth vertical opportunities more specifically. When we look at these places where nVent plays, and this has been an area of focus for us organically and inorganically is increasing the revenue mix of these high-growth verticals. So when you think of industrial and specifically industrial solutions and the more and more need for industrial automation as well as onshoring, that's creating more demand for our products. Commercial resi, I always say you can't just look at the big bucket of commercial resi. You've got to look on what's in it and where our products are being applied. And specifically, when you think about smart buildings or power and data infrastructure, that's providing more demand for our products. Infrastructure, we talked about that a little bit as well as energy. Energy, while it's only 5% of our sales today, that's really transformed from where it was 5 years ago. We see more and more opportunities ahead as it relates to energy transition. We believe that greater than 60% of our overall nVent revenue portfolio is exposed to these strong secular trends. The acquisition of ECM Industries. Again, this has played a pivotal part in our overall growth strategy for M&A -- for nVent as part of M&A. We announced the closing of ECM Industries. We couldn't be more excited to welcome the ECM team into nVent. It has a very strong complementary product fit. So when you think of what we do today in our Electrical & Fastening Solutions, for which this will be part of, we are all about exothermic connections and this broadens that connections to mechanical connections as well as compression connections. The other thing it does is we are very intimate with our contractors around our CADDY product. But today, we do not sell in tools and testing measurement. And so when you think of those on the site, on job requirements of what they need to have within their bag of tools, we think this is highly complementary to the CADDY products that we sell in today. Overall, you see here, it will add over $400 million of revenue to nVent on a pro forma basis. It's a highly profitable business, 25% EBITDA margins. That will be accretive to overall nVent and we're excited for what that does in terms of our overall electrical portfolio and exposure to some of these high-growth verticals. So I'll wrap it up before I send it -- hand it over to Nigel here to say that we had a strong year in 2022. We're off to a good start here in 2023, where we posted 8% organic growth and over 30% earnings growth year-over-year here in Q1 and expect to be on a good way here for another year of strong sales and margin expansion. Couldn't be more excited to have the ECM now formally into the fold of nVent. That growth and that trajectory is here in front of us and continue to believe that we're well positioned in the electrification of everything, sustainability and the digital trends that we see here today.

. Great. Sara, I've got a few questions, but again, you guys are smarter. So if you go in the topics that we're not covering on stage, put your hand up and we'll cover that. So Sara, ECM, you kind of raised revenue guidance on the stage here, like $3 billion plus now for this year. I guess, mathematically, that's true. How do we think about accretion? I'm thinking about accretion this year. Obviously, you're not raising guidance. But just mathematically, it seems like $0.20, $0.25 of cash accretion from ECM. But what are the offsets to that? What about the integration expenses, et cetera, you might be absorbing? In the first 6 [ months ]...

Yes. So we talked a little bit about kind of the pieces before, but I'll help kind of work the math component of it. So getting right to the punch line, we think that on an adjusted EPS basis, we expect ECM Industries to add roughly $0.08 to $0.10 to earnings this year. What that includes is that's a highly profitable business that is folding into the mix of nVent. Offsetting that, we have the higher interest expense. We said that, that was an estimate roughly $60 million on an annualized basis. And we would also expect a slightly higher tax rate. So the tax rate here because it's largely North American would float in at roughly 25%. So that will provide a bit of an upward pressure to the overall nVent tax rate. We would also expect to have some of our investments flow in. And 2 specific areas because where we see a lot of the synergies is not just on the cost side in that 3-year run rate that we talked about in $10 million to $15 million, but the sales synergies. So to get started on that, we really got to think about what does the opportunity look like to take these products globally, and that will require some investments from a spec perspective to take these products globally across because the business today in ECM is predominantly North America.

Yes. And so ECM also brings in some interesting handheld test and measurement metering devices, connections, obviously, as you mentioned, connectors. What is the ability to maybe grow these verticals in -- and I think to connectors, I mean, that's a very fragmented market. I mean what's your desire to maybe grow in those areas?

Yes. It's significant. I think it's a couple fold. So you mentioned both from a product set, it's highly complementary to our connectors that we have today that we have very intimate relationships with our contractors, so it gives us great insights to provide more innovative products. We also bring a very strong distribution channel presence. While ECM is roughly 55% sales sold through distribution, nVent is roughly 2/3. And when you look at nVent, we have a very strong position across our preferred distribution channels. We're typically in the top 10 here in the U.S. and the top 15 more globally. So one of the areas that we are excited about is to take these products and be able to sell them more broadly through distribution, not just here in North America, but more globally. The other area is really on the tools and handheld test and measurement side. Again, we've got great relationships with our distribution partners. But again, we have these contractor loyalty groups. And when we think about providing needed product for them on the job site, CADDY, cable management, et cetera. This is a natural expansion within their tool bag of opportunities. So we see it an extension of the products that we offer today. We see opportunities to grow that through channel. We actually also see opportunities to take some of the nVent products and take it into channels that we may not be as strong and present in today. For example, in specialty retail and e-commerce. So the areas that we're excited about is not just the complementary product coming into fold, but the sales synergies and opportunities we see ahead.

Yes. Great. Moving back to 1Q. Very strong performance, good -- really good quarter, excellent margins. A little bit of noise around orders, a little bit of noise around maybe some inventory patterns in the channel. Maybe just recap on what you saw and maybe how that's progressing as we go through the second quarter.

Yes. So orders -- so I'll start off by saying it was a strong quarter for us. Organic growth of 8%, earnings grew 34%. Orders were flat. And we had anticipated that the pace of orders would not sustain as the supply chain improved. So we were lapping Q1 of a year ago, 28% order growth. In many cases, because the supply chain and lead times, and frankly, our lead times of our own products were elongated because of the challenges we are seeing in supply chain. So what we were seeing from our customers is that some people that were ordering typically 3 months ahead were ordering 6 months ahead. And so we had anticipated that as the supply chain would gradually improve, those order rates would come more in line. Now with that being said, I would say that more broadly speaking, we saw that supply chain improve a bit quicker than what we would anticipate. You actually saw that coming through for nVent from a financial performance on the productivity side. But with that, you saw the ordering rates come down because 2/3 of our revenue goes through distribution and with those distributors, looking at those lead times going from sometimes quarters to months or months to weeks, they were going to adjust that ordering pattern to adjust their inventory levels. And so that's what we saw in March. And what we expect to see here in the second quarter, and that was reflected in our Q2 guidance. Now with all that being said, and we said this on our Q1 earnings call, the end demand and sell-through, looking at the data points from our distribution channels was strong. And so we continued to see that end market, end demand strong. But the ordering rates, we would expect that as the supply chain improves and lapping the 30% orders of a year ago, that those ordering rates year-over-year would be adjusted as the distributors adjust their inventory levels.

So if they're moving from sort of a -- they move from a 3-month cadence to a 6-month cadence going back towards the 3-month cadence. So should we expect this to be maybe a 1-quarter and done adjustment process? Or are we talking about the maybe something a bit longer?

Yes. We estimated it was really kind of the first half of this year. So we saw it on the tail end of Q1 and into Q2 is what we would expect. Just based on what we see from an end demand standpoint as well as those inventory levels overall.

Okay. And the 3% to 5%, you mentioned the sell-through is very, very healthy. So the 3% to 5%, how much roughly would that inventory headwind be costing you? Is it a point, 2 points?

I don't think we've quantified it per se, but I would say coming off of a Q1 being more in that 8% range, I mean, you can see the impact going from kind of that 3% to 5% range year-over-year from an organic growth standpoint. So clearly, it's coming into the fold, not only from an order standpoint, but we do see that baked in a bit here in Q2 from a revenue standpoint. I think the last point I would make [ because ] we get some questions as well on our Q1 call on this is just backlog. So we don't tend to be kind of a heavy backlog business. But no doubt, we're carrying more backlog than what we would customarily carry. And that was roughly flattish from Q4 to Q1. I would say that we're largely healthy from a past due perspective but still have pockets of areas that we're not satisfied with. And we know we've got to make these capacity investments going forward, particularly around Enclosures to ensure that we can get those delivery levels up and service our customers well.

Sure. You mentioned, obviously, sell-through very healthy. I think you called out residential [ shock horror ] is weak. Any other pockets of weakness you want to call out? I mean, are we starting to see any softening in parts of the commercial construction market, industrial markets? And anything else you'd call out?

Well, we called this out on our earnings call, but I would just say, overall, even coming into this year, we said we would expect overall commercial resi to slow. All combined, it still grew in Q1 up low single digits. So it slowed from that strong growth that we've been seeing over 2022 and the year prior. Now we saw Enclosures in EFS was stronger on the commercial side. They have less resi. Most of our resi business, which is only 3% of our nVent sales sits in Thermal Management. So that's where you were seeing more of the weakness is just on the resi side in Thermal Management and a bit of commercial on the Thermal Management business as well. Infrastructure, like I said, it's 25% of our sales now. That continues to grow strong from a double-digit standpoint, data solutions. That's been consistently a strong contributor of growth for overall nVent. Power utilities is another piece of that overall infrastructure business so overall, small. But I would say just broadly speaking, the industrial and commercial resi, where we see most of our distribution sales, if you will, that's where we expect to just see the order -- ordering patterns phenomena and that distributor inventory level adjustments bleed through, if you will.

So data centers. We -- I was with one of your competitors last week. And it's very clear that liquid cooling is going to be a pretty hot area. I mean, no pun intended. But remind us where you play in the data center? How big it is for you today? And kind of what you see, how would you frame the liquid cooling opportunity going forward?

Yes. So we're very bullish in data solutions. I mean it's been 100 million -- we started out as a new company when we spun in April 2018, it was roughly $100 million of sales. And I would say largely what we did in that space was enclosures and some cooling, but I would say more legacy cooling than more liquid cooling. And we've made a very intentional effort to focus capital allocation both organically as well as inorganically to build out that product offering, especially on the cooling side. So when you think of liquid cooling, it can be immersion cooling. It could be cooling in the back door, cooling distribution units, cooling directly at the chip, and we believe that in the new technology with the new chips, it's going to really require liquid cooling because when you think of more and more data being computed in more condensed spaces, cooling is a meaningful part of the overall equation. So we think nVent is well positioned in building out and carving out this space within this data solutions because of the broader suite of offering, not just the enclosures but especially the cooling side as well as power distribution. That came with the CIS Global Management acquisition that we did roughly 18 months ago as well as cable management that's in our Electrical & Fastening Solutions business.

Do you think this is mainly an organic strategy? Or is there room for more acquisitions here?

I think it's both. And it's been both for us since we spun. And again, it's been a strong contributor of our overall growth. Maybe one other interesting data point, if you look at just the data center space today from an installed basis. Roughly 95% of that installed base is cooled by way of air, but it can be very inefficient. And what's growing and growing exponentially is the liquid cooling part of it because what it can do by way of cooling and cooling more efficiently as well as getting more directly at the source. So it's an area that we're going to continue to invest in and focus on both organically and inorganically.

Okay. Great. I'm going to take one more question, then we'll see if there's any questions in the audience. But thermal, I just want to touch on the thermal quickly. How strategic is this to the vision of nVent going forward? Number one. And then number two, when we think about the performance in 1Q, we saw some headwinds. You talk about residential, but there's also some other headwinds there. How do those headwinds play out over the balance of the year?

Yes. I would say Thermal Management today, I mean, it's got great margins. It's got leading positions when you think of RAYCHEM and what it does in that heat tracing solution space and generates a lot of cash. We talked about energy transition upfront in terms of the mega trends. We believe that the thermal management business is well positioned to capture this opportunity in this growth and energy transition. So when you think that's anything that's process-based that has to be kept at narrow temperatures and a particular viscosity, that's where the heat tracing solution plays. And so it plays in LNG, biofuels, carbon capture, and we believe that growth is largely ahead of us. From a Q1 perspective, there's a couple of different plays -- things playing into the current environment for thermal management. One, we talked about commercial resi already. But I think the other piece I would point out is that this business is our most global business, and we're not yet seeing China to growth. And so that's maybe [ over sizably ], if you will, impacting thermal management versus the other businesses that are a bit smaller in that APAC region. And the other piece is just kind of winding down on the Russia side. So I think the global impact, not yet getting to growth on China, that will be a positive going forward as well as energy transition. From -- and the last point maybe I would make, Nigel, is from an M&A standpoint, we've always said that where we're going to allocate those M&A dollars is more so on the Enclosures and the Electrical & Fastening Solutions business. Just we believe that the scale that we have and the size of that opportunity, that's where the best returns will be overall for nVent and shareholders.