nVent Electric plc (NVT) Earnings Call Transcript & Summary

So being here, it's my pleasure to have next, nVent's, Sara Zawoyski, Chief Financial Officer; Tony Riter in Investor Relations. So thanks very much, both of you, Sara and Tony for being here. I think, Sara, you've got a couple of comments to make. So please go ahead, and then we'll get into Q&A.

Great. Thanks, Julian, for having us, and good morning, everyone. Just got a couple of quick highlights here on nVent. First, nVent, we are a leader in connection and protection in the electrical space. We believe we're well positioned amongst the secular trends, sustainability, digitalization and electrification. Just a couple of quick highlights on our full year 2023 results, which we're very proud of. Another record year for nVent from a financial performance standpoint. Sales reaching $3.3 billion, up 12%. That's on top of 18% a year ago. Strong return on sales both from an absolute basis as well as from a year-over-year margin expansion, all boiling into an earnings per share, up 28%, and that's on top of 22% of a year ago. We generate a lot of cash at nVent and cash flow reached $465 million in 2023, up 32%. And importantly there, we also invested meaningfully in our CapEx. That was up over 50% in the context of 2023. Maybe just a quick highlight on the bottom verticals, Infrastructure is now 25% of their sales in our key growth strategies around high-growth verticals that was in sort of that mid-teens when we first spun in 2018, and now it's roughly 1/4 of our revenues. From a strategy standpoint, this has been consistent since we spun back in 2018, really centered around 4 growth levers. Relentless focus on high-growth verticals, a lot of focus around new products and new product innovation. Our vitality now sits at 22%, and we see new products adding roughly 2 points a year to our top line growth. Global growth, we're predominantly a North America business, but we continue to see opportunities for us to go faster than the market outside of the U.S. specifically. And then acquisitions. We've completed now 6 acquisitions since then, 2 in the last year in 2023, including our largest acquisition yet, ECM Industries. And lastly, from a strong value creation, we're really focused on creating net value for our customers, for investors. And you see here across it starts with that strong financial track record. We have industry-leading positions across the segments and the categories for which we play, and again, we believe we're very well positioned with these strong secular trends I mentioned, but also around infrastructure with infrastructure now being 25% of our overall revenue, including the government funding, which we believe will continue to ramp here in the back half. And lastly, we continue to see a big opportunity. We're a $3.3 billion company in a $90 billion space that's fragmented, and we're going to continue to pursue that M&A that fits within our M&A flywheel to continue that value creation. So just to sum it up, 2023 was a record year for nVent, and we believe that we're well positioned for another year during 2024, of strong sales growth, strong earnings growth, and we believe our future is bright. So, thank you.

Fantastic. Thanks very much, Sara. So maybe first off on sort of the near term, I think last year, particularly sort of second quarter onwards, you had some destocking elements, channel partners, I think inventory and so forth. Where do you think we are in that process? I think you've guided for some volume growth in the current quarter. So it suggests your past -- that destock largely, just sort of the conviction level around that [Technical Difficulty].

Yes. So we guided to organic growth in that 2% to 4% range here in Q1. And that channel-level inventory adjustments, we really saw that again in earnest, I would say, in Q2 of a year ago, back in Q3 and saw a blip in Q4, and we believe that channel inventory is largely stabilized. And why we saw that channel level inventory adjustments is really in regard to that supply chain. So we had some parts in our products that had lead times of 26 weeks, that in a more normalized environment was 1 to 2 weeks. So with those lead time adjustments as we collected those channel level inventory would also adjust accordingly. So as we sit here today, we believe that those channel-level -- channel inventory level adjustments are largely behind us. Our backlog was up year-over-year in Enclosures as well as Thermal Management, and we continue to see infrastructure being a strong vector of growth for us here in 2024.

Fantastic. And I think that most companies at this conference are sort of guiding for that, whatever you want to call it, back-end loaded year or acceleration in year-on-year growth as you move through 2024. nVent is I think unusual and it's not really following the financial plan for this year, it sort of steady-ish growth even as the comps get easier. So maybe help us understand, I guess, why do you think [indiscernible] we don't get that better year-on-year uptick in the second half? Is it just [indiscernible] something around pricing, any sort of broad thoughts on that?

Yes. So I would say for our Q1 guide, that's organic growth in that 2% to 4% range, while the full year guide is 3% to 5%. So there is some acceleration from a Q1 perspective to a full year perspective. But I would say it's early in the year. If we just do now [Technical Difficulty] as you can see, Infrastructure being a strong vector of growth. Industrial, again, we continue to expect to see growth as well in that vertical, largely driven by the reshoring trends. Commercial/Resi is where we expect to see more modest growth. Modest growth in Commercial side and then expect that growth to be [indiscernible]. So we do expect some acceleration from 2% to 4%, [Technical Difficulty], full year of 3% to 5%. And again, I would say it's early in the year.

Fair enough. And I think pricing your electrical [indiscernible] in general for outsized price tailwinds across the board, every electric supply globally we've seen that for a couple of years now. So a lot of [Technical Difficulty] investors around what is the normalization of price looked like, you go to 50 bps more pre-COVID, does it go negative, does it stay high because of lead times in certain product categories. Sort of what's your assessment of the pricing your ability for nVent for the sort of year ahead?

Yes. I would start by saying we do expect 2024 to be another inflationary year, largely driven by labor rates wages. So that's our starting point. Number two, I think our teams have done a tremendous job of managing that price cost inflation, especially over the last couple of years. And I think it starts with being excellent on our customer deliveries as well as having a strong value proposition, along with great innovation. I think that, coupled with 2/3 of the revenue goes for distribution, that we're going to continue to execute and execute well on the price side of the equation. So again, our guidance this 2024 really embeds positive vibes, but we do expect volume to be a bigger contributor to that overall organic growth.

Yes. And did they sort of, whether it's on verticals, maybe it just goes with sort of the volume growth assumption in each vertical, but areas we should think about sort of stronger or less strong price across the whole nVent portfolio? Or is it more regional in nature? Any thoughts on that?

I would say there's nothing necessarily to call out specifically. We talked a little bit about this on our earnings call that positive price view has some of the carryover effects as well as some of the pricing that we would have already communicated to the customers. And where it's going to vary, that does cover across the regions as well as the product categories.

Perfect. And as I was looking into the sort of company itself now in a bit more detail, NVIDIA had numbers overnight, so we should probably start with the Data Solutions exposure. Maybe just remind people the sort of scale of that business in 2023, how much of that is liquid cooling as opposed to other products? And maybe just I think worth reminding people, what are the products in the data center that is sort of most strong in terms of customer supply.

Yes. Let me try to frame first that Data Solutions business for us. So in [Technical Difficulty] over $450 million, and we expect here in 2024 for it to be over $500 million. And this compares to when we first spun for it being roughly around $100 million. So we're really excited about the Data Solutions, it's been growing for us, organically, strong double digits. It's also a place where we've done multiple acquisitions to really broaden out that product portfolio. And maybe just to touch on this a bit, Julian, as you articulated, is just help explain some of those product sets. When we think about that Data Solutions business, well over 40% of that is really going to be centered around liquid cooling and power distribution units. We believe that to be growing some of the fastest from a product category standpoint and especially liquid cooling as part of that overall data solution. But we also have other parts of that business like cable management trays, leak detection, that's also growing nicely overall. So we're really excited about the data solutions growth in that potential. We've more recently discussed doubling our liquid cooling capacity, that should be coming online more the middle part of this year. And really believe that nVent is well positioned when you think of the years that we've been sort of honing our technical expertise around solving those types of problems for those hyperscalers as well as the ability to [Technical Difficulty] standpoint and do that very quickly, along with the innovation that we bring in terms of how to best solve across that cooling continuum in those data centers.

And on the sort of customer side of it, is there any hyperscale versus colo versus the old on-prem? Any sense of kind of where nVent is strongest or has the highest penetration as you will ask about dollar content per square footage in a data center. Any sort of color around that from the customer standpoint?

Yes. We don't necessarily look at it from a dollar per data center per se because this is new rapidly growing technology use in the data center space. So as we think about it, it really is more around the next gen of chips that are here and upon us, because of AI and the level of computing and the requirement, that heat dissipation is requiring more and more liquid cooling. And so we're really focused on and where we're seeing a lot of the growth sitting here today is with those hyperscalers from a rapid adoption standpoint. And so we're focused on growing with these hyperscalers, expanding those programs and importantly, developing those liquid cooling solutions that are somewhat unique to each one of those hyperscalers. Now over time, and what we're also focused on is taking that know-how around that liquid cooling technology and really expanding that to a more standard or modular offering because our belief is that, that will transcend and move into more of those colos, more of those maybe smaller edge computing type construction and setup and expand that over time in those standard offerings as well as some of those adjacencies beyond the large data centers and hyperscalers.

Perfect. And the liquid cooling aspect, and as you said, it's a fairly nascent technology in recent years. I'm sure the competitor set and what you're seeing from investment from rivals is sort of flexing a lot at the moment. How do you characterize sort of nVent's competitive strength in liquid cooling? Any sense of -- I imagine it's a very fragmented market, maybe just how you see traditional kind of competitive dynamics.

Yes. I mean I would characterize it as very strong. This is something, and Julian, you know this, that we've been working on and talking about for years. We've got over a decade of experience in the liquid cooling technology. Not necessarily as it relates to data centers, but more on the telecom space, IT, telecom space. And so this was something natural for us to bring that expertise, build upon that expertise and really help solve the tougher hyperscaler data center problem. So when we think about our competitive positioning, if you will, we believe it to be very strong, in part because we have over a decade of knowledge within this liquid cooling space but also that practical expertise in that problem solving that we've now been working with prototypes and building up lab capabilities and building up our manufacturing supply chain now for -- going on roughly 4 to 5 years, typically more to this data center space and really building upon that innovation as well as that manufacturing scale capability.

Perfect. And let me think about your product suite within the data center, kind of you are interested in broadening it out. We think with what you have now, liquid cooling, power management, cable trays distribution with the data center, there's enough there in terms of share gain potential market growth.

Yes. Look, I would say that the product set and solution that we have today really builds around enclosures, liquid cooling, cooling technology capabilities, power distribution, but also cable management protection. So we believe that's a very strong suite of products and solutions. But we're always going to look for -- as things progress, are there additional things that we can be building out, capabilities, product sets, et cetera, to build upon that. And over the last 3 or 4 years, part of our asset strategy has been further building out our Data Solutions offering, with power distribution units that was part of our CIS Global acquisition, the cable management, which is part of our WBT acquisitions around fuel emission that was specifically geared towards the data center vertical.

And maybe stepping away from just data centers. But I think you're one of the very few companies who a year ago, you tried to size kind of stimulus tailwinds across U.S. as well as Europe. How is that sort of playing out versus [indiscernible] out of Investor Day? Do we see an acceleration in tailwinds or is there a lot more of a steady state...

Yes. So as we looked at that $1.3 trillion of funds and filling that -- those categories towards those funds were flowing to our product categories, we estimated that roughly $250 million to $500 million over the next 5 plus years really benefits nVent creating demand for our products. And that runs anywhere from clean energy, solar, wind, biofuels as it relates to electric transportation, as it relates to infrastructure in terms of building airport roads, seeing that really benefits some of our Electrical & Fastening Solutions business. So we believe that, in addition to these secular trends that we've been really focused on even prior to this funding around sustainability, electrification and digitalization. When we think about it from a fund flow perspective, it's flowing, but these things take time. And we really think that begins to ramp really in the back half of this year and into next and see that as creating additional demand for our overall products.

Perfect. And then I think one other push sort of top line wise from the company in recent years has been get the emerging markets exposure up, reinvest in that a little bit more versus the prior initiative structure? And what's the progress on that? And how do we think about profitability levels in that business versus the sort of North America mix?

Yes. Today, we still said, it's predominantly a North America company with roughly over 70% of our revenues here in North America. When we buy a great company like ECM Industries, which is from North America, obviously, that adds there. But yes, I would say that Europe today is just roughly $650 million of our overall nVent sales, and we continue to see that as a great growth opportunity for nVent and we believe we can go faster than the overall market. And we think about it in the context of adding products to that -- Texa Industries is a great example of that. We just purchased an industrial cooling company in Europe. When we look at our enclosures and the attachment rate to those industrial cooling units, we have plenty of runway to go in Europe when we compare to that to the same framework here in the U.S. is just one example. So we're going to continue to look at Europe as a key growth reason for us. But really focused on those high-growth verticals where we believe we can win and really expanding that product portfolio and continuing to grow via that One nVent distribution channel strategy overall. And from a margin standpoint, it's going to vary by agent, by product category, but nothing real meaningful to call out there.

And then on that point on margins overall, I guess a couple of things to say. One is you're running ahead in 2 of the 3 divisions of the 2025 margin plan, you already passed that in a way. And then to your sort of financial framework for this, it doesn't seem to embed much in the way of margin expansion. So maybe just kind of frame those 2 things, is that just conservatism, is it helping too as well the margins have moved up so much there is less room to grow, reinvestment needs. Any of those main drivers when you think about margins this year? And then where do they go afterwards?

Yes. So I'll have to revisit some of those medium, longer-term margins, because we do believe, over the longer term, there's plenty of runway for continued margin expansion. Really, I would start with growth, innovating new products with higher margins, which we're focused on as well as just secular trends accelerating the growth, and we typically get very good incrementals from an overall drop. So growth is going to play a role in that. I think supply chain excellence will play a big role. When you think about the last 2 to 3 years, productivity overall has been challenging against a very challenging supply chain backdrop, and even if that productivity improved for us in 2023, a lot of that was driven by material productivity, logistics productivity, but when we look at just that core overall productivity, we still have plenty of runway of improvement here ahead of us. We need to get back to, I would say, more normalized pre-2019 levels would be in terms of productivity overall. On the current year, we do expect more modest margin expansion. A big piece of that is just the level of investments in new products, which -- that's going to ramp over the course of the year. But also specifically, which I mentioned earlier, is just our liquid cooling's added capacity. And while we believe that to be temporary, we do expect the impact here as we bring on that new capacity and ramp that volume over time, and we think that's going to impact in part those Enclosures margins. Maybe one other thing to call out is just we had a couple of quarters there, but what I would say, uneven EFS margin. So we had a mix help there that we're going to lap. And while ECM is additive and accretive to overall nVent margins, it does dilute that very high-margin business EFS as well. So overall, we believe some runway for continued margin expansion at nVent, but key here in 2024, a bit more modest margin expansion given the level of investment.

And on the sort of cash flow front, you mentioned very good cash flow last year that will continue, I'm sure, this year. The uses of cash, nVent's done a number of acquisitions, so spend generally seems to have gone very, very well, larger or smaller. So as we think about that and just the growth of the company, should we expect sort of larger acquisitions perhaps on what you've done in the past? Or will it remain a mix?

I mean, I think we're looking at both big and small type of, I would say, medium side from an M&A standpoint. We've done 6 acquisitions since then. We did 2 in 2023. ECM is our largest. But I always like to point out, while we levered up to 2.8x at the time of the acquisition, which was May of last year, by the time we exited the year, we were back down to 2.1x. And I think that just shows, number one, the strength of the underlying nVent free cash flow but also the type of deals we do and the EBITDA that holds with that acquisition. So we're going to continue to look at M&A as a key growth strategy and priority for nVent. And like I said, it's a $90 billion fragmented space. And we believe there's slightly more opportunities out there and believe our funnel is in very good shape.

Given how much your own margins have gone up in recent years, does that create any sort of aging factor where you're cautious about the main acquisitions with much lower margins than the base or not really because with cost synergies you can get those margins up quickly, you think?

Look, I think we've -- the M&A framework that we use as we look at companies is, one, it's got to have great products, great technologies. That's give or take. And then two, has to have exposure to these high-growth verticals, as we think about just continuing to strengthen and elevate and in many places our acquisitions that we've acquired over the last 4 years, 5 years since then, they're growing at even elevated growth rates than the broader nVent portfolio. And the last thing is the requirements and ability to scale, and that's very important because it could have great products and in a high growth region or vertical. But if we can't get it [Technical Difficulty], it doesn't fit our overall criteria. So even something like an Eldon, that was our first acquisition that we did that didn't have maybe the margins of our Enclosures segment, we said, you know what, we have a belief that we can get it there, scaling that product set. So that's going to come into that equation, whether it be cost synergy or whether it be on the commercial sales synergy side, we have to have that view of the ability to scale. And sometimes that is going to be that road map to get those elevated margins overall.

And I suppose, again, to your point, the market is very fragmented so there's a lot of room to keep doing smaller deals to push your scale up and expand the TAM.

Yes. Yes, we like -- I think ECM is a great example that we can do larger deals. And we're very focused on the execution side. We had a dedicated and continued to have a dedicated integration team there to ensure that we're executing on the business financials as well as on all the important integration activities starting with our people and our customers.

Last one quickly, just you've been running at mid-single digit annual sales contribution from acquisitions in the last 5 years, any reason that run rate doesn't continue?

Yes. We laid out in our Investor Day, a greater than 1 point contribution from acquisitions, Julian, as you point out, we've been running ahead of that. And it really isn't a matter of the size of the opportunity that we see because we continue to see a big opportunity to continue to create value, both from a growth and return perspective for shareholders via acquisitions. I think the one factor there is just always the timing. That's something we don't necessarily control, but continue to see M&A as a big growth driver for nVent going forward.

Fantastic. Well, I think now we'll switch to the audience response survey questions. So if you could grab those gray boxes. First question around ownership of the stock. So a mix of no and overweights. Number two is around sort of general disposition towards nVent right now. Very positive. Third one is around through-cycle earnings growth versus a sort of multi-industry average. Generally above peers. Fourth question is around excess cash usage. So generally bolt-on M&A, it's very consistent. Next question is around the sort of valuation of the stock and kind of year 1 PE. Sort of high teens to 20x. And then the last question is sort of what's the main gating factor or reason why someone doesn't own more shares. So mix of organic growth and margins. So fantastic.

Thank you.

Well, thanks so much, Sara and Tony, for being here. Thank you.

Thank you.

Thanks a lot.