nVent Electric plc (NVT) Earnings Call Transcript & Summary

The clock is ticking. So let's make a start. We're going to restart with nVent, very pleased to welcome Sara Zawoyski back to the Wolfe Conference. Thanks for being here, Sara, and also Tony Riter, Head of Investor Relations. Actually, I should have mentioned Sara soon to be interim president of the Enclosures segment as well. So you're wearing 2 hats right now. But Sara, thanks for being here. I know you've got a short pitch to go through, so please, over to you.

Yes. Thank you, Nigel, and I appreciate you having us here at Wolfe today, and good morning to everyone. I just have some quick prepared remarks, and then I'll hand it back over to Nigel for some Q&A. Maybe just a quick overview of nVent first. So we are a $3.3 billion electrical company. We are a leader in the connection and protection space. And we believe we are very well positioned around the trends of electrification, sustainability and digitalization. You see our financial performance here on the top right of the slide. We recently announced our Q1 performance where we grew, sales reported up 18%, organic sales up 5%, earnings per share up 15% and free cash flow up 41% year-over-year. So again, we continue to execute well and deliver that performance. Maybe a couple of other callouts from a vertical standpoint. We're really focused on high-growth verticals. Our infrastructure sales now have grown over 1/4 of our overall revenue mix. That's up from roughly mid-teens when we spun back in 2018. And from a geographic standpoint, predominantly North America, but still see good growth opportunities to grow share outside of North America. Our strategy remains consistent, and there's really 4 pillars to our overall growth strategy: One, laser focused on high-growth verticals; two would be new products. New products actually contributed over 3 points to growth here in Q1 for nVent; and third would be global growth, again, predominantly a North America business, but see growth opportunities to grow, especially in Europe; and then M&A. M&A has been a core part of our overall growth strategy as well as capital allocation. We completed our sixth deal last year and still getting the benefit of that from that rollover inorganic benefit here in 2024. As it relates to that growth strategy, high-growth verticals again has been a pillar of that overall growth and specifically data solutions. This data solutions business was roughly $100 million when we spun back in 2018. And through an inorganic focus as well as organic focus, we expect that to grow to over $0.5 billion here in 2024. And importantly, as part of that data solutions business, roughly half of those sales are in liquid cooling and power, which are really an elevated growth of that overall data solutions. I think the last point I would make here is that we are also adding capacity because of the meaningful demand and growth outlook we see within liquid cooling specifically. And the last point I'll just touch upon is, we recently also issued our sustainability report. We're really proud of the progress we're making across our 3 pillars. People, product and planet. And it really is an integral part of our overall strategy here at nVent. We also added 2 new goals, one around eliminating all single-use plastics and then the other around planet, water consumption reduction goal. So to wrap it up, before I hand it off to Nigel for the Q&A, I would just say we'll continue to build on the strong performance of a year ago here at nVent, both from a top line perspective as well as operating profit growth and cash flow, and we believe we're well positioned for another great year with the electrification, sustainability and digitalization trends.

Great. Thanks, Sara. That's a great way to set the table. I promised myself I wasn't going to lead off with a data solutions or a liquid cooling question, but here we are. You mentioned 50% of the data solutions is cooling and power. Obviously, that proportion has gone higher for the past year. I think it's 40%, if I'm not mistaken. And I think you mentioned liquid cooling and power. I understand there's other things in there aside from liquid cooling like backdoor cooling, et cetera. Just want to confirm that.

Yes. So that has risen by 10%. Back in 2022, when we talked about that data solutions business, it was roughly 40%, cooling plus power. Now it's 50%. And that really has risen, really on the heels of very strong growth on the liquid cooling side, but we also believe power will also be a part of that future growth going forward. Why we call out these 2 specifically is, one, it's a sizable portion of that overall data solution sales. But two, we see an elevated growth rate in cooling as well as power.

And I think you've said in the past that the cooling and power portion of that 50% is roughly similar. Is that still the case?

That will vary over time just based on the overall growth rate because over the last 1 to 1.5 years, we have seen more significant growth on that liquid cooling overall.

Sure. Okay. A couple more things from the slides that peaked my interest. You mentioned global growth and opportunity to gain share outside of North America a couple of times. So what is the opportunity set? Because I think we always assume that it's really tough to compete against ABB, Legrand, Siemens in European markets. But what is the opportunity set for nVent to gain share and actually expand faster than North America in these overseas markets?

Well, I'll start with a couple of things. So one, is, it started with our Eldon acquisition. And that really gave us the beachhead of that Enclosures business to bolt on to things like cooling from an attachment rate and build out our electrical and fastening solutions opportunities as well. So I think that was really the start of it. Number two, our share position in Europe is lower than that of North America, but we believe, over time, by building upon that beachhead of enclosures and working those attachment rates. And importantly, work on our global strategic partnerships with those big distributors like Rexel, like a Sonepar, that we can incrementally grow that business over time. And lastly, I would say, and we talked about this a little bit on our Q1 call. We're not immune to the overall end market dynamics in Europe, but we believe we can continue to grow faster than the overall market because of these opportunities that we see within that strategic distribution accounts as well as bringing more products and more innovation across that nVent electrical portfolio.

Okay. And then you also talk about partnerships, so M&A and partnerships in the slides. I'm not really aware of any big strategic partnerships you have in play today, but I might be wrong there. But do you see that as a role going forward? More partnerships?

Yes. I think partnerships have played a role in that overall nVent portfolio, a couple of them within that cooling data center space. And we would continue to look to partnerships to augment that capability, whether it be from an emerging technology perspective, whether it be a go-to-market partnership in terms of servicing that overall broader opportunity that we see. I would say acquisitions have played a bigger role in our overall growth profile of nVent, but continue to see partnerships playing an important role as well.

Great. Maybe you can touch on sort of what you're seeing out there from a trading perspective. Great news to see the sales growth turning positive last quarter -- sorry, volume growth turning positive last quarter. Sales growth has been positive for some time. But I think the guide assumes this quarter, 3% to 5% core growth. Maybe just talk about what you're seeing across the businesses. And are we seeing some lift from easier comps, et cetera?

Yes. So I'll start out with maybe what we delivered there in Q1, which is 5% organic growth. our Q2 guide was 3% to 5% organic growth. And I'll maybe give a segment view and then a vertical view. From a segment perspective, we continue to expect Enclosures to deliver strong growth, just not quite at the 11% organic growth that they delivered in Q1. And that simply has to do with customer program timing as it relates to data solutions. So still expecting Enclosures to deliver high single-digit growth here in Q2. And then from a thermal management perspective, we expect that to turn to growth here in Q2. We'll largely have the impact of the Russia exit behind us here as we enter into Q2. And importantly, we're seeing that energy transition opportunity build within our order book and within backlog. So expect that to turn to growth here in Q2 as well as in the back half, really helped by that energy transition. Electrical & Fastening Solutions. We expect that to be down here in Q2, similar to what we saw in Q1, and that really relates to some of the infrastructure headwinds that we saw in Q1. And within that infrastructure bucket, it's really 2 things. One, would just be the utilities as that sort of the inventory, I would say, normalizes through the distributors as well as those end customers, but they're also seeing some headwinds as it relates to telecom. I think the other thing I would just note on the Electrical & Fastening Solutions, they're also comping some difficult comparisons in Q1 and Q2, where that utility business was up like 40% last year as well. So that in combination, we think Q2 will be another down quarter for EFS, but getting back to growth here in the back half as we work through those comps.

Okay. Would it be fair to say that right now, it's just utility and telecom is where you're seeing the big inventory headwinds?

Yes. Yes, because I think largely outside of that, we believe that channel inventory is largely normalized overall.

Okay. But if we look at utility and look at the sell-through of your products into the actual customers, but taking away that distributor impact, are we still seeing healthy growth in that market?

Yes. I think overall, we continue to see utility as a high-growth vertical for us, and it has been in the past. I think right now, we're just kind of working through that supply chain inventory normalization. And once we work through that, we expect that to be another strong high-growth vertical for us, as it frankly has been in the past. And just to keep that into perspective, overall, utilities sits at roughly $100 million of our overall $3.3 billion revenue.

Yes, broadly small, that's fair. So ECM, I think we're lapping the 1-year anniversary pretty much now actually as it was taken end of May, wasn't that?

Yes.

It was turning organic as we speak. So how is ECM been performing from a top line perspective? How is it tracking versus plan? What sort of influence does that have on organic performance in the back half of the year?

Yes. So overall, very excited about our ECM acquisition that we just did celebrate the 1-year anniversary, mid-May is when we acquired ECM roughly a year ago and continue to believe it has long-term strategic growth trends here around the electrical space predominantly. And when we think about some of the sales synergies that we never put in the model, but we always stay laser-focused on as a team, it's twofold. One would be bringing some of that product around connections and connectors and bringing that to Europe because they had predominantly North America presence. So that would be part of some of that European growth into the future. but also looking at a channel and go-to-market. They weren't in every big distributor from an overall product category perspective. So we're working those opportunities through. And we didn't necessarily have sort of a ready access to some of the retail space, the Home Depots, the Lowe's, et cetera. And it gives us a nice channel to not all of our products, but there are some products for which we weren't reaching that particular contractor group and thinking very strategically around how we think about that from a channel perspective. Overall, that ECM business, it was roughly half of that -- a little bit over half of that was sold through distribution, but it did have a portion of that through what I would call this retail sort of e-commerce space. As you might imagine, that hasn't necessarily been growing as sort of that backdrop from a resi sort of commercial space. But over time, we would expect that to get back to growth along with executing on some of those sales synergies. From a cost synergy standpoint, we said by year 3 in that $10 million to $15 million mark, we're making good progress there from a material, logistics, supply chain perspective. And then cash tax synergies with the other big element here, we expected roughly $6 million to $8 million annually, and we now expect that to be closer to $10 million annually from a cash tax savings perspective.

Okay. Great. So let's move to Data Solutions. But before we do that, let's talk about your role as interim president of Enclosures. How much time do you think this is going to absorb from your spare time, I guess, I mean, how much -- sure, the CFO role is more than a full-time job, but kind of -- how much involvement do you expect to have in this role?

Yes. Let me maybe get a little bit of a backdrop there. So we recently announced that Joe Ruzynski, the President of our Enclosures segment will be relieving for a public company CEO opportunity. I've worked with Joe for over a decade. And so I'm pleased for him for the opportunity and at the same time, wish him well and sad to see him go. But I will tell you this. One, that business has a lot of great things working for it in terms of those secular trends and including what I would tell you, an exceptional leadership team. Some of you, and even Nigel, you might have met members of that Enclosures team at some of our -- the data center world, the super compute, et cetera. And so I'll be working very closely with Joe over the coming weeks because he will be with us until the end of May. On what that transition likes -- what that transition looks like and ensuring that we set up that Enclosures business for continued success. And I've got also a strong finance organization that set up for continued success as well, even as I work both interim roles here -- or in the interim president role as I continue on in the CFO capacity. At the same time, we're actively looking for that successor for that President's position.

So I'm sure everyone in room wants to dig in a bit deeper on your data center business and liquid cooling in particular. We certainly get a lot of questions about nVent's positioning in liquid cooling. I think you can probably back into -- the kind of the pieces of the jigsaw you gave us, you can probably back into something close to like, I don't know, $100 million or thereabouts, plus or minus, for liquid cooling specifically, which I think would make you the #1 supplier right now in that market. I mean, how do you assess -- I mean, number one, is that correct? Do you think you are the largest provider in that market? And maybe just give us a little color on your market positioning right now?

Yes. Well, we haven't sized it specifically for competitive revisions, but we do try to give you a framework of that sizing of cooling plus power as part of the data solutions. With that being said, we believe we are a leader in this space. And I would talk about maybe -- what we believe positions us to win and our areas of strength. And I really think it starts with that technical expertise. Liquid cooling is something that we've been working on for over a decade by way of industrial applications. And I would say even right prior to spin is when we began to really think about that liquid cooling application within that data center space. So that technical expertise and really solving those complex problems is something that we've been working on well before the GenAI discussion. So that's number one. I think the number two thing I would say is the innovation and the broad continuum across that cooling portfolio that we really bring to the hyperscalers and to bring to that broader overall space. So whether it's air to liquid, liquid to air, we're in there solving for those complex needs and specific to those needs of that particular hyperscaler, which can differ depending on whether it's greenfield, retrofit, space requirements, technology selections, et cetera. And I think the last thing I would say is just the ability to manufacture and scale. And that means much beyond just putting in square footage because you also have to ensure that you've got the supply chain kind of end-to-end developed and that ability to scale and scale in a very resilient in a high-quality way. And so those things take time overall.