nVent Electric plc (NVT) Earnings Call Transcript & Summary

All right. I think we're ready to move on to the next fireside chat. Very pleased to have nVent here with us today. We've got Sara Zawoyski, who is Chief Financial Officer; as well as Tony Riter, who runs the Investor Relations group. Nice to see you, guys.

Thanks, Joe.

Thanks for coming. So why don't we kick it off? Sara, I just spent some time with you at Super Compute a few weeks ago. Look, it was clear that you guys were really excited about the different innovations that you had for the next-generation NVIDIA chips. Just maybe just talk a little bit about what you're excited about in that business, tell us what you're doing to try to differentiate from other liquid cooling players.

Yes. Appreciate that, and thanks for having us, Joe, here. Just maybe to frame it, infrastructure with our portfolio transformation is now roughly 1/3 of our sales, of which data solutions is the biggest portion of that. And if you look at that data solutions business that now we expect to be greater than $575 million this year, liquid cooling plays a big, important part in that. And if you look at our liquid cooling offering, we believe we are a leader in the space. It really comes from a differentiated standpoint with that deep application expertise that we've really been building upon for the last 5 or 6 years. We believe we have one of the largest installed bases of liquid cooling in that multigenerational design. I think the second piece would just be that broad offering, whether it be the in-row, in-rack CDUs to the heat exchangers to the manifolds, the racks, we have that broader solution offering. And I think the third piece I would say is just that collaboration more broadly, whether it be with the chip manufacturers or the ODMs, really giving us that insight to where that next design may come so that's informing our overall product road map. And last, but certainly not least, is our global supply chain. That's something that we've been working on for quite some time, and that's critically important because it really is about having the product available, but importantly, the resiliency of that supply chain and the ability to scale. And so I'd probably wrap it up by saying as I think about nVent and the differentiated offering we really bring, it's more in that design architecture because this is still a relatively new space. And when you think about that, it's really about the broader cooling design architecture to ensure that you get that resiliency and the optimization that you're looking for and that everything is working together in its most resilient form overall.

That's super helpful. Look, I -- space is fascinating, right? And there's been a lot of movement in the space as well. I mean you had Vertiv bought CoolTera, Schneider bought Motivair. You've now have -- Flextronics just bought JetCooling -- like JetCool. Like there's a lot of partnerships or acquisitions that are occurring in the space. As you think about your own scale, I mean, do you have the right scale to compete with those players or even like private players that are very well funded? How do you think about your own business relative to the competition and how that's emerging?

Yes. Well, I would start by saying that this market today in terms of data centers, we believe that liquid cooling as a portion of that overall cooling of data centers is roughly 5% of that today. But we expect in the next 5 years, that's going to be 20% plus, right, in terms of that overall opportunity. So we believe it's rapidly growing. And it's a big market that has a lot of demand that's probably, at this point, outstripping the supply portion of it. And again, we believe that nVent is very well positioned within this space with that deep application expertise. And Joe, I think you know this as well. I mean it's something that we've been talking about for quite some time, and it's been a big part of our overall growth over the last 5 years. And maybe the last point I would make, and we have invested meaningfully in this space, particularly as it relates to capacity. So we began to free up some capacity last year as we moved some of our product lines out to make space within our facility there in Minnesota and then more recently in this last quarter, really brought online some additional capacity. So collectively, it's roughly 4x the capability and the capacity that we had a year or 2 ago. So that's going to help as we think about growth going into the future. When we think about that next wave of investment into 2025, really looking at building out our testing capabilities. We already believe we have a state-of-the-art testing capability there in our Minnesota plant, in particular, and building out that capacity as well as continuing to invest on the R&D side.

That's great. Are there -- so it's great to hear that you're -- you've already ramped your capacity. Are you seeing any constraints right now within the supply chain in terms of being able to deliver products faster?

Look, I think that putting on that capacity is a good start. And I would say that supply chain overall has been a continued focus of ours. And we spent a lot of time in building up our supply base so that they can scale as rapidly as we're scaling and importantly, being able to service that overall demand.

Okay. Last question on liquid cooling for now, but -- or maybe the data center business. So a lot of folks that we spoke to at Super Compute were expecting their data center business to be a better or faster-growing business in 2025 versus 2024. We know that you're targeting like roughly $575 million plus. I know there's a plus in there. So good growth this year. How are things setting up for 2025? Are you still -- are you expecting 2025 to be a faster-growing year than this year?

So I would frame it this way. We talked about infrastructure, of which data solutions is the largest portion of that overall infrastructure vertical sales. And we continue to believe that infrastructure will grow the fastest for nVent as we look at the overall vertical mix. I think maybe the second piece I would say is our data solutions business has been growing rapidly since we spun. If you look at over the course of the last 5 years, that data solutions business overall has grown in that 20% CAGR range. So it's something that we've been in this space for quite some time. Again, we feel very good and proud about that installed base and continue to see this growing as we move forward.

So let's talk about the other parts of the business that haven't been growing, which has been a lot of like the short-cycle industrial businesses. You talked about, I think on the most recent call, how distributor inventories were -- where folks were managing inventory still like fairly cautiously. I know we're only a month removed from the election, but are you starting to see any changes in activity because we've gotten through the election, there's some certainty now? Are you seeing any pickup on the short-cycle side?

Yes. So as we came into Q4, we talked about a couple of things, right? There were some overhang uncertainties with the election. And I would say that's largely behind us, but there are still things that are to be sorted out there in terms of what that means. I would say from an interest rate perspective, that still tends to be pretty sticky in terms of where that sits. But more specifically, we said heading into the quarter, we do expect our distributors to manage those inventory levels tightly here as we exit the year. And so that's kind of how we were framing that Q4 time frame. Now with that being said, we did also point to positive orders in Q3. So that was a positive across the segments and expect as we roll into next year that we would expect industrial and commercial/resi to be more positive.

Great. We'll double-click on that in a second. But just staying on the election, a lot of discussion around tariffs. I don't recall it having a meaningful impact to your business last time around. At the same time, you guys were spinning off last time around that this occurred. So like, what's your expectation on any tariff implications? And then if tariffs are inherently inflationary, is that potentially a positive to your business?

So I would start by saying we always work the scenario planning at nVent. So that's something that we continue to do and will continue to do. From an overall tariff standpoint, if you look at back at that 2018 time frame, our exposure was relatively low at that point in time. And it really pointed to today we're -- and even back then, we were largely a North American business. Number two, we really have had an in-region, for-region strategy. And I would say since then, and even through COVID, this accelerated this work and our focus is really focusing on that supply chain resiliency, working that dual-sourcing strategy and again, furthering that in-region, for-region strategy. So if those tariffs were to come into effect in terms of incremental to what there is today, we would continue to manage that as we would have in the past whether it be through mitigating that risk through our continued supply chain efforts or looking at things like price to help offset those tariff implications.

So manageable?

We would continue to manage it.

Okay. The -- maybe a longer-term question. So you talked about the data solutions business being or the infrastructure business being a very fast-growing business, your best-growing business in the last several years. Recall at the Investor Day, there was a lot of discussion also around the grid modernization opportunity. I think you called out a potential $250 million to $500 million incremental benefit from that. Maybe just get us up to date, how has that -- have you progressed along that initiative? Have you started to see some benefit from that? And where are we today?

Yes. So I'd probably begin to frame it just by going back to the infrastructure vertical and that being now roughly 1/3 of our sales. I think when we spun back in 2018, that infrastructure sales vertical was in sort of the teens. So it's meaningfully changed, and that's both from the organic as well as the inorganic focus. As we think about the infrastructure spending and some of the secular trends around the electrification of everything, sustainability, digitalization, we still believe those secular trends are well intact. And when we think about the infrastructure spending and some of those mega projects, we're beginning to see that I think in earnest, whether it be in the data center space specifically. And we've seen that in part in some of the construction infrastructure build-out, if you will. With that being said, we still believe that, that's largely in front of us in terms of overall mega project and infrastructure spend and the benefits that we'll see not just here in North America, but also in Europe. So I would say those secular trends continue, and we continue to see the opportunity within overall infrastructure.

So that takes us into 2025, right? Because we've talked about the mega project activity here in the U.S. It's been substantial. There's been a lot of projects that have broken ground, also fully recognized in the way that you sell. Your Enclosures typically are later cycle. It's like once you've gotten the guts of the facilities built like you're about to start investing on the factory floor, and that's typically when you see your orders start inflecting. So as you start -- as -- since sitting on the eve of 2025, how do you think about that opportunity and whether you will start to actually see a meaningful benefit from that in '25? And then also, as you kind of think about an initial framework for '25, how does your initial framework for '25 compare to what you've laid out from a long-term perspective?

So as we talked about on our Q3 call, and we began to kind of frame up 2025, I would begin by saying we're still working through those plans. But as we begin to frame up 2025, we expect strong growth next year. And I think I would start by saying infrastructure, we expect that to continue to grow the fastest. When you look at that infrastructure bucket, data solutions is the largest piece of that. But then you also have power utilities. And with our Trachte acquisition that we completed earlier this year, that essentially more than doubled our exposure to power utilities. So we expect strong growth there. And in both of those businesses, they tend to be more backlog businesses. So we've got good visibility as we head into 2025. And then if you look at the other verticals, industrial being our largest, clearly, that's being impacted this year and more importantly, here in Q4 that we just talked about in terms of the management of those inventory levels, if you will. But we would expect that to inflect to be positive in 2025. And then from a commercial/resi standpoint, we came into this year expecting that vertical to be challenging, and that's proven to be the case. And as we go into next year, we will have the opportunity to execute on some of those sales synergies with the ECM acquisition that we did back in 2023, but also expect that to be more positive in 2025 as well.

That all sounds good. So I mean, look, in the context of the long-term framework is 4% to 6% organic. It sounds like you at least -- you think you can at least do that type of growth next year?

We haven't framed 2025 guidance yet.

I'm just trying to understand what strong means.

Yes. But again, we expect 2025 should shape up to be a strong year for us. I mean some of those things that are more of a headwind for us that I don't think are unique to nVent, one is Europe. That's been more challenging overall from a macroeconomic backdrop. We're still predominantly a North America company, but are not immune to some of those macro challenges. In some of the areas of industrial like automotive, we expect to be continuing to be challenging heading into next year. But again, overall, we expect positive growth in industrial and commercial and resi and continue to expect infrastructure to lead overall from a growth perspective.

Yes. Pricing has been a hot topic this year. Just saw pricing turn positive this quarter. And I know that the way you guys look at your pricing algo is maybe slightly different than others. Maybe first discuss that for folks that aren't as familiar with it. And then is there a way to think about pricing into next year?

Yes. So pricing was kind of flattish for us here in the quarter. As we look to 2025, we do expect price to be positive. But as we look at it overall from a growth perspective, we expect again next year to be more volume-driven than price. We like to frame it more from an overall margin perspective because price does play and has historically played and will play an important role in overall managing that margin equation. And we like to say that price plus productivity will work to offset inflation and then help fund some of our investments. And as we think about that overall equation heading into next year, new price -- or new products, which you said, Joe, are an important part of managing and delivering that margin accretion. That doesn't get counted in the price equation because that's a real rigid calculation that basically said it's got to be the same product last year to this year, and it squeezes out that price incremental. But again, as we think about more broadly managing that margin expectation, it really is about price plus productivity offsetting that inflation, new products and volume leverage being a key attribute of that margin expansion. And then also our operational excellence. There's been great improvement in that productivity bar, if you will, for nVent this year as we worked past some of those challenges in that post-COVID recovery, where there was a lot of ramp and inefficiencies within that ramp. But as we think about 2025 and beyond, really, it's continuing to build upon that operational excellence, Lean enterprise, driving that core productivity within our factories and material productivity overall as well.

Helpful. You kind of think about the margins, like there's a lot of stuff going on in Enclosures, right? And so we can talk through some of the key points. And I'm talking about start-up costs. You've got investments in liquid cooling. You've got to track the acquisition coming through. Just help kind of frame what the key margin levers are going to be for both the Enclosures business and the EFS business going forward?

Yes. So I think the Enclosures business has done a great job of managing that margin equation and expanding margins over the last couple of years. And as we think about 2025, it's no different than some of those drivers that I talked about as we think about just managing the margin equation overall, continuing to get good leverage on that overall volume growth, new products continuing to be accretive to the overall margin profile, and that's for EFS and Enclosures as well and then that operational excellence. I think some things to keep in mind, especially for Enclosures, is one, we have said that Trachte is modestly dilutive overall. But again, we see great growth prospects from Trachte, so really additive to the top and bottom line from a year-over-year growth standpoint. And then I would also say that data solutions. So data solutions is the majority of that sits within the Enclosures business. And we continue to see significant opportunity within that space. That also requires a different investment profile as well. We talked a lot about the capacity that we've built out by way of square footage. As we think about going into 2025, it's really focusing on building up and out our testing capabilities. We believe we've got one of the best state-of-the-art testing capabilities today, but it's putting additional capacity to that and then also continuing to invest in engineering and R&D as well.

I'll turn it to the audience in a second for questions. But maybe just following that point around the investment you're making into data solutions or liquid cooling. What is the kind of like R&D as a percentage of sales look like relative to the whole portfolio? And then I think I recall like some -- you were getting some customer-funded R&D as well for testing. Is that still happening or you guys -- are you guys spending most of your own capital to improve your testing?

Look, I would say that we have invested a lot of capital in regards to building out our capacity in terms of data solutions. And we talked about that in the course of this year as well as last year. As we think about some of our relationships with the hyperscalers and some of the programs and opportunities we have, some of that does take the form of them investing in various forms to help set up that structure and that capacity as we think about the programs in that next generation, and we would expect that to happen in a continued form. And what was your other question, Joe?

Yes. No. So just relative to the rest of the portfolio, like how high is like the R&D?

Yes. So it is going to be a higher investment profile by way of R&D. If you just zoom out for a moment, we have stated that from an R&D as a percentage of sales that our goal is to ultimately get closer to that 3%. If you look at the R&D dollars even this year, they're meaningfully over where they were last year. And as the top line grows both organically and inorganically in that double-digit form, our R&D as a percentage of sales has also ticked up. So we're really focused on as we think about spending those R&D dollars, making sure that we're spending it in its most efficient form as well because some of the other things that we look at is time to launch and sort of the efficiency of those R&D dollars, making sure that those R&D dollars are spent on things that can scale as well as improve the margin profile of nVent as well.

Turning to the audience to see if there's any questions or I can keep going. Okay. I'll keep going. So can we talk about Trachte? So Trachte, I think you guys had strong double-digit growth, if I recall correctly, this past quarter. Tell us a little bit about how that acquisition is going and whether this is -- is this a potential opportunity for any type of platform that you can build out off of Trachte? Just any thoughts around that would be helpful.

Yes. As we brought Trachte into the portfolio, we have framed it as this nice platform to continue to build from. So as I shared earlier, this essentially doubled our exposure to power utilities. Trachte is essentially providing e-houses or control building solutions. So it's essentially a larger enclosure that houses things like relay panels and switchgears. And we've seen tremendous growth. We closed on this roughly in July of this year. And it also gives us some nice visibility because it tends to be a bit more of a backlog business. So as we look at that backlog, it's got some nice visibility as it relates to visibility going into 2025. So when we think about the synergies here is, one, if you look inside the control building, you'll often find nVent products like CADDY and HOFFMAN, so there's some synergies there. And we also see it as an opportunity to leverage some of the channel and distribution that we have as well in terms of getting to some of those places by way of reach from a control building perspective. So we're excited about Trachte and the growth it brings as well as the platform it provides that we can continue to build from.

So good natural question. Well, actually, on Trachte specifically, you mentioned it was dilutive today to the portfolio margins. Is there an opportunity to get those margins to be more like the broader Enclosures portfolio?

Yes.

Okay.

Yes.

And is there a time frame that you're expecting to achieve that?

No, we haven't provided a time frame, but I would say it's modestly dilutive, right? And again, if you look at the level of incremental growth it's going to provide from a sales perspective as well as from an income perspective, and again, it's something that, over time, really focused on the Lean enterprise aspect of things to be able to drive that margin improvement overall. So it's that volume leverage and again, bringing Lean and the end-to-end process focus that we're bringing to that business to be able to address the margin side of it as well.

So you're in the process of divesting the thermal business with an expectation, I think, that's supposed to be done next quarter, early 2025. About $2 billion in net proceeds, seems to be a nice, enviable position to have right now. What are you thinking in terms of how you're going to deploy that capital?

Yes. So we expect that thermal divestiture to close by early 2025. And we've said that we would have nearly $2 billion of capital to go deploy, and that really is a combination of 2 things: one, the net proceeds that are roughly expected to be $1.4 billion, but also the underlying strength of our cash flow that we generate. And when we think about that from a capital deployment prioritization, it's sort of unchanged. We continue to see growth as the top priority for us. That's both organic, so continuing to invest in things like data solutions because we believe there's a great opportunity with a great return there, but also inorganically. And again, we've completed 7 acquisitions since then. And as we think about putting those capital dollars to use from an M&A standpoint, we believe we've got a great pipeline of opportunities. We really have a strategic framework that we look at, and it begins by looking at companies with great products, something that gives us additional good exposure to these high-growth verticals. And the third one is really important because there's probably lots of companies that tick the box on those first 2, but really looking at companies that we can bring into the portfolio and scale and that fit with nVent. And I think with the combination of those 3 things along with the financial discipline that we continue to have, and that is exceeding that weighted average cost of capital in that 2- to 3-year mark, we believe that the M&A transactions that we've done thus far have really helped prove the value that, that can bring by way of shareholder value creation as well.

You didn't say buyback, right? So a lot of companies, whenever they do big divestitures like this will immediately try to offset some of the dilution via an ASR or a buyback, et cetera. It sounds like you guys are certainly looking a little bit further out on the longer-term growth opportunities. Am I characterizing that correctly? And at what point would you maybe get more opportunistic on a share buyback?

Yes. Look, as we announced the divestiture of Thermal Management, we did talk about M&A being our first priority, but also looking to share repurchases. So it really is going to depend upon the timing from an M&A standpoint. And I would just -- if I zoomed back for a moment, returning cash to shareholders continues to play an important role in our overall capital allocation strategy. Dividends play an important role within that, but also share repurchases. And I think I'd point out, too, that even in Q3 here, we repurchased shares roughly $100 million, which gets us to offset that dilution and then a little bit some as well. So again, our first priority as we think about those proceeds is going to be to put that to M&A, which we believe is going to provide great returns to shareholders, but would also look to share repurchases based on timing and otherwise.

Yes. So we talked about Trachte and that being potentially a platform to build off of. A couple of questions. Is it fair to say that when you're looking at M&A, it all kind of has to fall within this electrification of everything strategy that you guys have across the portfolio? And then secondly, outside of Trachte, are there other areas within the portfolio that make a lot of sense to build off of based on what you currently -- how you're currently going to market today?

Yes. So I think if you look, I think the past acquisitions that we have done are a good indication that we're going to focus on those areas that are well aligned with these high-growth verticals and these secular trends around electrification of everything, around digitalization and sustainability because that kind of fits within that M&A framework that we've overall talked about. So I think that's a good indication of how we think about that from an M&A focus and an M&A framework standpoint.

Got it. I want to go back to just some of the conversation, and I think you did a good job already just kind of framing out the initial thoughts into 2025 from an end market standpoint. I'd just tell you in a lot of the conversations that we have, particularly around the EFS segment, there's some concern around the commercial trends this year and how starts data have been coming down all throughout 2024, ultimately, what that means for 2025. As you think about this business specifically, is this -- from an end market standpoint, is this the biggest risk heading into next year? Or how do you think about your own portfolio itself into that end market?

Yes. Well, I would share this. When you think about -- I would say you got to kind of double-click into anything that's commercial/resi and better understand what it means. And when you look at that commercial/resi business within Electrical & Fastening Solutions, I would say 2 things. One is the driver behind that really is power and data infrastructure. So if you have a renovation within a building or you're upgrading the automation within a building, in many cases, you're going to find our products, nVent products and Electrical & Fastening Solutions products. So that's a key driver within that commercial and resi business. And I think the second piece, I would say, is the labor savings aspect of things, and that hasn't changed, and I think that's going to continue to be a challenge. And so when you think about particularly our CADDY products that fit squarely within that commercial contractor space, it's all about saving time on the job for our contractors. And I think that, that's going to continue to be a driver of that overall product set. So -- and I think the second piece I would offer up would just be it does begin to be an easier lap next year in terms of the year-over-year comparison as well.

Sure. One last question for me. So you talked about some of the higher-growth verticals or higher-growth opportunities within your own business today being data solutions, this Trachte acquisition that you just did, which also tends to be longer cycle, more of a backlog-centric business. Is that -- is this where the portfolio is moving, do you think? If we looked at nVent 3 to 5 years from now, are we going to have a longer cycle, more resilient portfolio? Or is it just very specific to those -- that piece of the business today?

Well, I would say that the first lens we're going to bring to it is more of the high-growth vertical focus in these secular trends. I would say that within this space of data solutions as well as power utilities, it does also bring some nice, longer-cycle backlog business that gives us some good visibility as well. It also gives us exposure, though, to those high-growth verticals. And that's probably the first lens that we bring to it as well.

Okay. Sara, unless there's any other -- if you want to leave us with any comments, happy to kind of give the floor back to you.

No, I appreciate the opportunity today, Joe, to chat with you. And maybe I would leave you with a couple of thoughts. One, we feel great about the performance this year as well as since spin for nVent and are excited about the future. Given the portfolio transformation, we've accumulated by way of M&A roughly $850 million of sales since we've spun. And with the thermal divestiture here as we head into 2025, really positions us with a more focused, higher-growth electrical company going forward.

Thank you, Sara. Thanks, Tony.

You, too.

Thank you.

Good to have you.