nVent Electric plc (NVT) Earnings Call Transcript & Summary

Good day, and welcome to the nVent Electric Second Quarter 2016 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Tony Riter, Vice President of Investor Relations. Please go ahead.

Thank you, and welcome to nVent's Second Quarter 2026 Earnings Call. On the call with me are Beth Wozniak, our Chair and Chief Executive Officer; and Gary Corona, our Chief Financial Officer. Today, we'll provide details on our second quarter performance and outlook for the third quarter and update to our full year outlook. All results referenced throughout the presentation are on a continuing operation basis unless otherwise stated. Before we begin, I'll remind you that any statements made about the company's anticipated financial results are forward-looking statements subject to future risks and uncertainties, such as the risks outlined in today's press release and nVent's filings with the Securities and Exchange Commission. Forward-looking statements are made as of today, and the company undertakes no obligation to update publicly such statements to reflect subsequent events or circumstances. Actual results could differ materially from anticipated results. Today's webcast is accompanied by a presentation, which you can find in the Investors section of nVent's website. References to non-GAAP financials are reconciled in the appendix of the presentation. We'll have time for your questions after prepared remarks. With that, please turn to Slide 3, and I will now turn the call over to Beth.

Good morning, everyone. I am pleased to share with you our outstanding second quarter results and cover some key business highlights. We had another tremendous quarter with record sales and earnings, well ahead of our guidance. The better-than-expected sales were primarily driven by the infrastructure vertical, led by data centers, along with stronger demand in our short-cycle business. This was our fourth consecutive quarter with sales of more than $1 billion, including systems protection sales of more than $1 billion for the first time. Our data center business grew across the portfolio in both the gray and white spaces. We had outstanding growth in liquid cooling, cable management and engineered buildings. We are winning with a wide range of customers from hyperscalers to neo clouds, multi-tenants and also through our distribution partners. We have been investing in new products and our supply chain to be able to scale and respond to customer demand. Today, we announced another new location for further capacity expansion, which I will discuss shortly. In Q2, for total invent, we continue to have strong orders and backlog. Organic orders growth was broad-based, up low double digits. In addition, backlog remained healthy at $2.5 billion, giving us visibility through the year and into 2027. As we have previously discussed, data center orders tend to be large and lumpy impacting growth rates quarter-to-quarter. In fact, we've had strong data center orders thus far in Q3. Our free cash flow and balance sheet are strong and our disciplined capital allocation is focused on growth and returning cash to shareholders for continued value creation. We are significantly raising our full year sales and EPS guidance to reflect our outstanding second quarter and expected broad-based growth including continuing momentum in AI data centers. Now on to Slide 4, for a summary of our second quarter performance. Sales were up 53% and 47% organically, led by the infrastructure vertical. New products contributed over 30 points to our sales growth, and we launched 14 new products in the quarter. The EPG acquisition continued to exceed expectations, growing sales strong double digits year-over-year. Adjusted operating income grew 61% year-over-year with return on sales of nearly 22%. Adjusted EPS grew 69% and free cash flow grew 125% year-over-year. Looking at our key verticals. Sales grew across all verticals. Infrastructure led the way with organic sales more than doubling, driven by outstanding growth in data centers and double-digit growth in power utilities. Commercial resi grew high single digits and industrial was up low single digits. Turning to organic sales by geography, all geographies grew, led by the Americas, growing very strong double digits. Europe was up mid-single digits and Asia Pacific grew double digits. Looking ahead, we believe infrastructure represents our largest long-term growth opportunity, driven by the powerful secular trends of electrification, sustainability and digitalization. We expect the infrastructure vertical to deliver strong double-digit growth this year, supported by accelerating AI-related data center capital investment. Within infrastructure, data centers remains our most significant growth opportunity. We also see substantial opportunity in power utilities where increasing electricity demand grid modernization and the growing power requirement of AI data centers are creating meaningful long-term tailwinds. Turning to industrial and commercial resi, we expect each to grow mid-single digits for the year with improving demand trends in our short-cycle business. Moving to Slide 5. Our portfolio transformation to become a more focused, higher growth electrical connection and protection company is showing up in our results. We have intentionally increased our exposure to the high-growth infrastructure vertical through both organic investments and M&A. Infrastructure made up 12% of sales at spin, expanded to 45% last year and was nearly 60% in the first half of this year. We have been significantly investing in our data center and power utilities businesses, which are rapidly growing and more capacity is needed to meet customer demand. Overall, I am proud of our event team and how hard everyone is working to deliver these results and support our customers. We are on track for another strong year. This wraps up my opening remarks. I will now turn the call over to Gary for further details on our second quarter results as well as our updated outlook. Gary, please go ahead.

Thank you, Beth. We had another excellent quarter, exceeding our guidance with record sales and EPS. Let's turn to Slide 6 to review our results. Sales of $1.471 billion were up 53% compared to last year. Organically, sales grew 47%, well ahead of our guidance driven by very strong data center sales. Acquisitions added $52 million to sales or 5 points to growth. Sales from EPG after May 1st became part of our organic growth. Foreign exchange was nearly a 1 point tailwind. Adjusted operating income was $323 million, up 61%. Return on sales came in ahead of expectations at 21.9%, up 110 basis points versus last year. Price plus productivity offset inflation of more than $50 million, including more than $30 million in tariff impact. We also continued to make investments for growth in data centers and power utilities. We had record earnings well ahead of the high end of our guidance, driven by exceptional sales growth and execution by the team. Adjusted EPS grew 69% year-over-year to $1.45. We generated very strong cash flow of $167 million, up 125% year-over-year. Now please turn to Slide 7 for a discussion on the second quarter segment performance. Starting with Systems Protection. Sales of $1.072 billion increased 70%. The EPG acquisition contributed 7 points to sales and has performed well. This was system protection's first 1 billion dollar quarter. Organically, sales grew 62%, led by the infrastructure vertical, which more than doubled due to continued strength in data centers. Industrial and commercial resi were each flattish in the quarter. Geographically, Americas grew very strong double digits, while Europe was up mid-single digits. Asia Pacific grew double digits in the quarter. Second quarter segment income was $248 million, up 81%. Return on sales of 23.2% and increased 150 basis points year-over-year on strong volume and productivity. Moving to Electrical Connections. Sales of $399 million increased 21%. Organic sales were up 18%, and the EPG acquisition contributed 2 points to sales. Growth was broad-based across all verticals and geographies. From a vertical perspective, infrastructure and industrial each grew strong double digits. Commercial resi was up low teens Geographically, sales were up high teens in the Americas. Europe was up low double digits and Asia Pacific grew double digits. Segment income was $109 million, up 15% versus last year. Return on sales of 27.3% was down 140 basis points year-over-year. The margin performance was impacted by inflation and mix, partially offset by improving price and volume. Importantly, margins improved sequentially back into the high 20s. Turning to the balance sheet and cash flow on Slide 8. We ended the quarter with $256 million of cash on hand and $600 million available on our revolver, putting us in a strong liquidity position. Our debt stands at $1.5 billion after paying down nearly $70 million of our prepayable term loan in the quarter. Our healthy balance sheet and strong liquidity position gives us financial flexibility to support our disciplined capital allocation strategy. Turning to Slide 9 on capital allocation, where we outline how we deploy capital to drive growth and sustain financial outperformance. Our framework has been consistent and is centered on disciplined growth investments and rigorous execution of our M&A strategy while maintaining the balance sheet flexibility to consistently return capital to shareholders. Our capital allocation priority is growth, and that starts with reinvesting in the business by funding capacity expansion, innovation and the capabilities required to win in high-growth verticals. This year, we continue to expect to invest approximately $130 million in CapEx, up 40%. We spent nearly $60 million in the first half, up over 50% versus last year. Most of this increased investment is for new capacity to support growth in data centers, power utilities and supply chain resiliency. Through the first half of the year, we returned $118 million to shareholders, including share repurchases of $50 million and we have increased our quarterly dividend by 5% compared to last year. We exited the quarter with net leverage of 1.2x, well below our target range of 2 to 2.5x, providing ample flexibility to invest in growth and acquisitions. Overall, our disciplined capital allocation approach positions us to prioritize growth and create long-term shareholder value. Moving to Slide 10. As Beth shared earlier, we are significantly raising our full year sales and EPS guidance again due to our strong performance in Q2 and momentum across our portfolio. We now forecast reported sales growth of 37% to 39%, up from 26% to 28% previously. We are significantly increasing our organic sales growth guidance. We now expect to grow 32% to 34% versus our prior guidance of $21 million to 23%. We are raising our full year adjusted EPS range to $5 to $5.10 versus our original guidance of $4.45 and to $4.55. At the midpoint, adjusted EPS is expected to grow 50% versus last year. Our tariff impact is expected to be approximately $100 million, up from $80 million previously. Largely, this is driven by our significantly higher volume growth. We continue to expect to offset the impact of inflation, including tariffs through pricing, supply chain productivity and operational mitigating actions. For free cash flow, we still expect conversion of 90% to 95%. Looking at our third quarter outlook on Slide 11, we forecast reported and organic sales growth of 32% to 35%. Pricing is expected to offset the impact of inflation, including tariffs. We also expect to continue to invest in growth, particularly in data centers and power utilities. We expect adjusted EPS to be between $1.35 and $1.38, which at the midpoint reflects 50% growth compared to last year. Wrapping up, our nVent team delivered exceptional sales and earnings performance in the first half of the year. growing sales by over 50% and adjusted EPS by over 65%. As we turn to the second half, we are well positioned for another outstanding year. I will now turn the call back over to Beth.

Thank you, Gary. Please turn to Slide 12. We have been working on liquid cooling in data centers for over a decade. Three years ago, we executed our first significant expansion for liquid cooling increasing our footprint to support the AI data center buildout. That expansion was not enough to keep up with the accelerating demand. So we added another facility at the beginning of this year in Blaine, Minnesota, effectively doubling our capacity. This new facility is near to our Anoka campus, and that proximity has allowed us to use the infrastructure, resources and expertise nearby to quickly scale. . We opened the blame site within approximately 100 working days from when we signed the lease. This site is progressing ahead of our expectations and will continue to ramp through this year. Now as we look ahead, given the strong orders, backlog and visibility we have with our customers on liquid cooling demand, this expansion is not going to be enough. Thus today, we have announced a third facility expansion in Minnesota that is of similar size to the Blaine location and nearby, which we are calling Blaine 2. This facility is expected to open in the first half of 2027. We expect our total data center sales to be more than $2 billion in 2026 and more than double last year's sales. Wrapping up on Slide 13, we had another tremendous quarter with record sales and EPS. Our portfolio transformation and the AI data center build-out are accelerating our growth. We expect another record year and have significantly raised our full year sales and EPS guidance. We believe we are well positioned with the electrification, sustainability and digitalization trends. Our future is bright. With that, I will now turn the call over to the operator to start Q&A.

Our first question comes from Deane Dray with RBC Capital Markets.

I realize there's lots of focus on the continued hypergrowth and your data center business, but I was hoping we could start off walking through the -- your industrial short-cycle businesses and electrical connections. I mean, the 18% organic was 3x bigger than what we had been modeling for. So Beth, I was hoping you could take us through, are we seeing an inflection year? How broad-based is that? And just to make sure we're level set. Were there any kind of thing unusual that got booked this quarter, any one-timers that would have skewed that organic growth rate higher?

Deane, thank you for the question. As the quarter progressed, we saw strong orders and as I mentioned in my prepared remarks, we saw growth across every vertical and every geography. And we were -- our orders were very strong through our distribution partners, which is where we see a lot of that short-cycle industrial growth. So really, it was just a nice inflection point. And as you stated, our electrical connections business, which has a lot of short-cycle business performed very well to execute on those orders. And there was nothing unusual..

All right, go ahead -- all right. That's great to hear. And then the second question, and I know you guys hinted pretty strongly that there was more capacity expansion coming at your Analyst Day. So seeing the announcement today makes sense. A couple of questions. How do you land on -- I think it's a 60% increase in capacity, and where does this take you in terms of your current kind of order funnel, does it take you into 2028? And just -- and then Gary, how are you managing the -- as you ramp each new line just in terms of the margin impact. So there's not too much pressure on the incrementals. I know a lot of work goes into that.

Well, Deane, as we look at the demand and as we look at what our customers and the visibility that we have there and as we are launching also our modular platform in fall time frame, we knew that we needed to expand our capacity, and we're looking out. So as you know, our Blaine facility, Blaine 1 that is coming on in line right now is still ramping through this year and into 2027. So as we looked at that, we knew with the demand that we're seeing that we needed to ramp another facility because it takes time to get them online. And we do believe that, that takes us through '27 and into '28 at this time.

Deane, and just to pick up on the margins, as we have said consistently, we expect to continue to invest to support the infrastructure vertical to serve the backlog that Beth talked about. That's all embedded in our guide, which is assuming mid-20s incrementals in the second half.

Congrats to the team. .

Our next question comes from Jeff Sprague with Vertical Research.

Got to add some to my columns here that fit all this organic growth. Just thinking about the ramp here. I mean looking at systems protection, I think we have 8 or 10 quarters now of sequential revenue growth sort of this bow wave of activity has come through. It appears to guide sort of levels out here, though, but maybe even the guide is for a little bit down revenue sequentially in Q3 and more so in Q4. Isn't the seasonality of the business sort of being ironed out by this level of activity or perhaps there's something going on with how you stage new production. Could you just address that, please? .

Sure, Jeff. This is Gary. I'll start off and just mentioned, we expect a good organic growth in the second half and in the third quarter, certainly. We guided 32% to 35% in the third quarter. And keep in mind, we're going to be lapping 20% organic and 50% EPS growth in the second half. Last quarter, we talked about mid-30s 2-year stack growth and actually, in the third quarter, we're going to significantly accelerate 50% in Q3 at the midpoint versus 46% growth in the first half. So we're seeing nice acceleration. So I understand your question, but we really feel like the team is delivering and delivering nice momentum.

But is there any particular internal or external supply chain issue that might hold back kind of the sequential trajectory in Q3 versus Q2? .

I think, Jeff, this is just our planning, and we're being very prudent because as you know, as we ramp capacity, we're having to add in equipment. We're having added labor. We're having to make sure that our suppliers can respond. Certainly, in Q2, we were managing those things, and it worked out more favorable in terms of the growth that we saw. But as we look forward, we're just being prudent. And as we ramp up two new facilities, we want to ensure that we're putting the right -- doing all the right planning.

And then maybe just a follow-on. I think we talked about this a little bit before, but could you just maybe address the kind of service opportunity that is being created or should be being created on the back end of all this installed base growth that you're capturing here, kind of the opportunity set there? Are you seeing traction in that regard?

So yes, as we designed our product portfolio in liquid cooling, we always designed it with modularity in mind so that parts could be hot swappable. And as we are also investing in a service capability to support the products. And as we move and see our growth from hyperscalers to other less sophisticated customers, let's say, we have that ability to help commission, install and provide that service. So that is building as we go. And certainly, as we launch in the fall time frame here, our new modular portfolio, that is a big element for us to support that portfolio, which we see will be very broad-based in terms of its appeal to the customer set.

Our next question comes from Nigel Coe with Wolfe Research.

So Beth, I hate to be the annoying analyst asking the question about orders, but I know they're lumpy, so we get it. But is there anything around just the cadence of product launches and the capacity ramp that pushed orders around a little bit here and made them perhaps a bit lumpier. And I'm thinking of obviously, it's about the modular product launches, et cetera. So anything around those factors driving a bit more lumpiness in orders?

No, not really. I would say we have seen this over the last several years that these orders come in at various times and usually they're large. And as I commented through Q3 year-to-date, we've seen very strong orders. So this is just normal in terms of these large orders that drop in.

I get it. No, that's good. I just wanted to just double check on that. And then, obviously, really good news on the Blaine 2 facility. Can you maybe just bring us up to speed in terms of where we are on the production ramp in Blaine 1, what's the capacity utilization? And where do you think it will be by the end of the year. And I'm just kind of amazed that you're not seeing any capacity headwinds or supply chain bottlenecks, unlike a lot of your competitors and peers in data center systems. Maybe just touch on where you are right now in your supply chain, et cetera.

Okay. Well, as you know, when you're ramping up, it's not just our capacity, it's also ensuring that our suppliers' capacity is also expanding. So as we've ramped our own facilities, we've continued to work with our supply base to ensure that they're reading and that's a lot of work. And as I think about our Blaine 1 facility, it's come online faster than we expected, but still ramping through the course of this year and into 2027. So it is starting to contribute, but we expect more -- stronger contributions from that facility as we go into '27. .

Our next question comes from Joe Ritchie with Goldman Sachs. .

So obviously, incredibly good results and demand remains really healthy. your backlog is now kind of sitting at $2.5 billion like basically kind of flattish, maybe down a little bit sequentially. And I'm just curious, like with the capacity ramp that you have coming and what you see in your pipeline, is this kind of like the right backlog level for you going forward? Do you expect backlog to continue to increase from here? I know that you have a really tough comp, obviously, in the third quarter. Just any comments around that would be helpful.

Yes. I mean I think it's around the right level. I mean it's hard to say because, again, when you get these lumpy orders that come in, that can increase the backlog, but we're trying to turn it as well because it is important as we have a backlog that we're responding to the demand from our customers. So we worked hard in Q2 to really execute on that backlog because we know it's important to have good lead times for our customers. So is my answer to that question that, that's around the right level?

Yes. fair enough. And look, it's great to see you guys turning the backlog and really impressive growth. I guess my second question is just around like the electrical connections margins. I know that you guys have been dealing with some like inflationary pressures as well. Growth is really good in the segment. Just -- how do we think about kind of like the trajectory of the margin going forward and whether you're going to be able to kind of expand those margins? .

Joe, I'll take this. This is Gary. The first comment I'll make is about the great growth, both on the top line and the bottom line, mid-teens profit growth for EC is a tremendous contributor to our performance. And on the margin front, we did see a significant sequential step-up and we expect margins to continue to improve as the pricing and productivity actions that we talked about last quarter take hold. And again, that's going to be in those high 20s in line with what we discussed as that segment continues to deliver really nice growth on the top and bottom line for nVent.

Our next question comes from Jacob Levinson with Melius.

I think you mentioned there was a pretty strong tailwind in the distribution channel. Can you give us a sense of maybe inventory has got a little too low over the last couple of years? And just how much of that is maybe an inventory restock versus real underlying sell-through demand?

Well, we look at both the sell-in and sell-out from our distributors, and it's actually been well balanced. So the positive note is that they're seeing strong sell-through. So we actually think it's very healthy, and it's real demand that we're seeing, and that's the short-cycle strength. .

Okay. Fair enough. And just on the utility side, I'm not sure if you mentioned how much that market grew in the quarter, but -- yes, that would be helpful to know for one. And us, how do you balance the demand in that space with data center because I know there's not a lot of overlap with some of those products, particularly with the acquisitions that you did recently.

Well, yes, power utilities grew double digits for us in the quarter. So it was very strong growth. And as we look at our whole portfolio, again, I've commented before, we intentionally have shifted to data centers and power utilities. And certainly, as we look at opportunities, we want to ensure that we're serving our core customers, and so we make rodent decisions if there has to be trade-offs. But in some cases, we have separate facilities or depending on the product line, liquid cooling is in separate facilities from where we're doing some of our power utility business. But it's overall part of our planning to ensure that we looked far enough out talking to our customers and ensuring we can execute on all that customer demand.

Our next question comes from Jeff Hammond with KeyBanc Capital Markets.

Beth, could we count on 100 days to get Blame 2 opened? Or is that too aggressive? .

I think that's too aggressive. I mean we are like running flat out. So I don't think we can have that repeat performance.

All right. All right. It's good to talk about electrical connections again. I know you mentioned a lot about the short cycle, but I'm just wondering if this step-up in acceleration, like how sustainable do you think it is? And then just, Gary, on the mart -- you had some price cost issues, nice recovery there. Or kind of -- are we -- where we want to be? Or is there more kind of price or cost recovery into the second half? I guess how should margin look on EC as we go forward?

On electrical connections growth, one of the things that we've really focused on is ensuring that our product portfolio, which is positioned well in -- we have cable management, for example, that is used in data centers and there's a lot of construction that goes on in the gray space of data centers, so we've done a lot of work to ensure that our sales teams and our portfolio is positioned there. So we feel very good about that. And again, the growth was broad-based across electrical connections. And like what we do overall in nVent, we continue to come out with new products that -- and we also have added capacity for some of those core lines in electrical connections as well you'd be able to really perform and execute on all that growth. So we feel good about the trajectory of that business. And I'll let Gary respond to the second part of that question.

Yes, Jeff. As I mentioned earlier, we're really pleased with the profit contribution to nVent delivering mid-teens is certainly far higher than they've contributed previously. On the margin front, we saw the progress that we expected in the quarter, and we expect to see continued progress as that pricing fully takes hold. And one of the things I would mention is, keep in mind, we've got some acquisition contribution in that business as well. We love that business in the high 20s, and that's where that's where I expect it to be this year.

And then just two quick ones on liquid cooling. One, just feedback -- early feedback on your modular product offering and uptake, and then just if you could level set us on the $2 billion revenue for 2026 data center, what you think the mix of liquid cooling versus other is.

So our modular platform is going to launch later this fall. And the interest is very high with a broad set of customers and -- so we feel very confident about our new product offering and the growth that it's going to provide us. On the $2 billion, certainly, we haven't broken that down yet, but it's a significant contribution coming from liquid cooling. .

I would just say we have not based broad-based impact on data centers from our portfolio, and it's really nice to see that growth contribution. As Beth talked about, the infrastructure vertical is a significant part of our business.