nVent Electric plc (NYSE:NVT) Q3 2023 Earnings Call Transcript

nVent Electric plc (NYSE:NVT) Q3 2023 Earnings Call Transcript October 27, 2023

Operator: Hello, and welcome to the nVent Electric Third Quarter 2023 Earnings Call. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note, today's event is being recorded. I would now like to turn the conference over to Tony Riter, Vice President of Investor Relations. Please go ahead, sir.

Tony Riter: Thank you, and welcome to nVent's third quarter 2023 earnings call. On the call with me are Beth Wozniak, our Chair and Chief Executive Officer; and Sara Zawoyski, our Chief Financial Officer. They will provide details on our third quarter performance; provide an outlook for the fourth quarter and an update to our full-year 2023 outlook. Before we begin, let me 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.

An engineer standing in front of a detailed control panel with the logo of the electric utility in the background, highlighting the innovation and technical expertise of the company.

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 will have time for questions after our prepared remarks. With that, please turn to Slide 3, and I will turn the call over to Beth.

Beth Wozniak: Thank you, Tony, and good morning, everyone. It's great to be with you today to share our record third quarter results. I'm very pleased with our execution in the quarter. We had exceptionally strong income growth, ROS expansion, and robust free cash flow. We continued to execute on our strategy, focused on high growth verticals, new products, acquisitions, and geographic expansion. We believe we are well-positioned with the Electrification of Everything. In the third quarter, we had record sales up 15% with the addition of ECM and TEXA Industries. Adjusted EPS was up an impressive 27%. The acquisitions performed well and are great additions to nVent. Overall, we are very pleased with our Q3 performance. We had strong execution despite a mixed environment, which I will comment on shortly.

Now, on to Slide 4, for a summary of our third quarter performance. Organic sales in the quarter were up slightly on top of 20% a year ago. We continued to see channel inventory adjustments, resulting in lower than expected organic sales. Organic orders were positive in the quarter growing low-single-digits. Segment income was up 40% year-over-year, and return on sales up an impressive 420 basis points. Adjusted EPS grew 27% on top of 25% a year ago, and we generated $136 million of free cash flow, up 8%. Let me touch on a few highlights for the quarter. New products contributed approximately 2 points to sales growth, and we are well ahead of our goal of launching over 50 new products for the year. Turning to acquisitions. We're excited to have the ECM and TEXA team as part of nVent.

These acquisitions have strong product portfolios, which we believe further position us with the Electrification of Everything in high growth verticals globally. In Q3, they added 14 points to sales and delivered better than expected income. With ECM, we are executing on our plan to globalize its portfolio. In particular, we are working on the certifications to expand the ILSCO power connection offering for Europe and Asia Pacific. We are making progress with our distribution partners to expand coverage; in addition, we are working on pulling our nVent products through some of the ECM channels. With TEXA, we are executing on our plan to position its industrial cooling portfolio alongside our enclosures through our European distribution channels.

Similarly, we are executing on the product roadmap to expand the portfolio to North America. We believe there is significant potential for global growth and expansion with both acquisitions starting next year. I would also like to share a couple of awards that we recently received. nVent was named as one of Fortune's Best Workplaces in Manufacturing & Production. We were also named as one of Newsweek's America's Greenest Companies. Finally, we were awarded the IMARK Supplier of the Year for ILSCO part of ECM, which highlights the strength of that product portfolio. Looking at our vertical performance in the quarter, overall, we saw a mixed environment. Organic sales were led by industrial and commercial resi, each growing low-single-digits in the quarter.

While industrial is growing, the rate of growth is slowing. In commercial, we saw pockets of growth. Infrastructure declined low-single-digits, largely in Electrical & Fastening solutions due to customers and channel partners adjusting their inventories as our supply chain improved. Data Solutions continue to grow double-digits. We're making good progress on expanding our footprint and capacity to meet growing demand for liquid cooling driven by the acceleration of AI. We remain confident in the growth of the infrastructure vertical with the Electrification of Everything and legislative funding expected to ramp in 2024. Finally, energy was flat in the quarter, but with the energy transition, we are seeing positive order trends. Turning to organic sales by geography.

We continue to see growth led by North America up low-single-digits. Europe declined low-single-digits, primarily due to our wind down in Russia and Asia Pacific declined primarily due to China. Looking ahead, we are updating our sales expectations and raising our full-year adjusted EPS guidance. This reflects our view on a continued mixed environment. Importantly, it also reflects our confidence in our ability to execute, be it our acquisitions, new products, pricing, productivity and cash, we believe are all strengths for us. We expect electrification, sustainability, and digitalization to continue to drive demand. Specifically, we expect strength in infrastructure, in Data Solutions, in industrial, with the trends of automation and onshoring and in energy with the energy transition.

We continue to expect the commercial renting vertical to have pockets of strength. Overall, I'm very proud of our nVent team and our execution. I will now turn the call over to Sara for some detail on our third quarter results and our updated outlook for 2023. Sara, please go ahead.

Sara Zawoyski: Thank you, Beth. We had a solid quarter with robust margin expansion and free cash flow. Let's turn to Slide 5 to review our third quarter results. Sales of $859 million were up 15% relative to last year. Organically, sales were up slightly with price contributing 4 points to growth and volumes down 3 points. Acquisitions added a meaningful $104 million in sales, or 14 points to growth. Third quarter segment income was $202 million, up 40%. Return on sales was an impressive 23.5%, up 420 basis points year-over-year. Our strong performance was driven by continued productivity improvements and accretive return on sales from the ECM acquisition. In addition, price more than offset the impact from inflation of just over $20 million.

Q3 adjusted EPS was $0.84, up 27% and above the high end of the guidance range. This included a better than expected $0.08 contribution from the ECM acquisition. We generated robust free cash flow in the quarter of $136 million, up 8%. This included higher CapEx investments for growth and capacity. Now please turn to Slide 6 for a discussion of our third quarter segment performance. Starting with Enclosures, sales of $413 million increased 6%. The TEXA acquisition contributed 1.5 points to sales. Organically sales were up 4% with solid price and volumes slightly down. Commercial resi was up low-double-digits with strength in North America. Infrastructure and industrial were each up with continued strength in Data Solutions and positive growth in industrial automation.

Geographically, North America led up mid-single-digits, while Europe was flat and China was down. Enclosures third quarter segment income was $89 million, up 24%. Return on sales of 21.7% increased 320 basis points year-over-year, driven by price cost and productivity. This includes our increased investments in our Data Solutions business and expects this to ramp in Q4 and into 2024. Moving to Electrical & Fastening, sales of $302 million increased 45%. The ECM acquisition contributed 47 points to sales growth, further scaling our highest margin segment. Organic growth declined 4%, mainly driven by infrastructure that stemmed from channel and customer inventory reductions. This was partially offset by low-single-digit organic growth in commercial resi, which has grown each quarter this year.

Geographically, sales growth declined low-single-digits in North America and mid-single-digits in Europe. Notably, orders were up low-single-digits. Electrical & Fastening segment income was $98 million, up 61%. Return on sales was a notable 32.3%, up 320 basis points relative to last year on solid price costs, favorable mix and productivity. Turning to Thermal Management, sales of $144 million were down 3% organically; price contributed 3 points to growth, while volumes were negative. The decline was driven by commercial resi down low-double-digits, partially offset by energy. Industrial MRO demand remained solid. Geographically, North America was up low-single-digits. China grew double-digits while Europe declined, including our wind down in Russia.

Notably, orders were up mid-teens driven by energy transition projects and backlog grew year-over-year and sequentially. Thermal Management segment income of $35 million was down 3%. Return on sales of 24.2% was flat year-over-year due to lower volumes and mix. On Slide 7, titled Balance Sheet and Cash Flow, we ended the quarter with $113 million of cash on hand and $600 million available on our revolver. We believe our healthy balance sheet provides us with ample capacity to invest in the business and execute on our growth strategy. As you can see on the slide, we have invested nearly $50 million in CapEx year-to-date, up nearly 60% versus a year ago. Turning to Slide 8, where we outline our capital allocation priorities. We believe our robust balance sheet and cash generation puts us in a strong position to continue to invest in growth, return cash to shareholders and deliver great returns.

We had a strong free cash flow in the quarter and year-to-date growing 46% compared to a year ago. We exited Q3 with a net debt to adjusted EBITDA ratio of 2.4x back within our targeted range of 2x to 2.5x, well ahead of our expectations after the ECM acquisition. This is a testament to our strong cash flow generation and ECM performance. Year-to-date, we have returned $103 million to shareholders, including dividends and share repurchases. Moving to Slide 9, for our updated full-year outlook. We are updating our reported and organic sales forecast to reflect the mixed environment and expected channel inventory adjustment. Reported sales growth is now expected to be in the range of 12% to 13% versus our prior guidance of 13% to 15%. This reflects full-year organic growth of 3% to 4% versus our prior guidance of 4% to 6%.

We continue to expect acquisitions to contribute approximately 9 points to sales growth. We are raising our adjusted EPS guidance to a range of $3.01 to $3.03, up 25% to 26% versus our prior guidance of $2.85 to $2.91. This new guidance reflects our year-to-date performance, continued strong execution and better acquisition performance. We now expect acquisitions to contribute approximately $0.15 to adjusted EPS versus our previous expectation of $0.08 to $0.10. Looking at our fourth quarter outlook on Slide 10, we expect reported sales to grow 15% to 17% with acquisitions contributing approximately 13 points to sales. Organic sales are expected to be up 1% to 3%. We expect adjusted EPS to be between $0.73 and $0.75, which at the mid-point reflects 12% growth relative to last year.

Wrapping up, we delivered another quarter of robust margin expansion and cash flow and are well-positioned for another great year. This concludes my remarks and I will now turn the call back over to Beth.

Beth Wozniak: Thank you, Sara. Please turn to Slide 11. At nVent, we are building a more sustainable and electrified world. The trends in electrification, digitalization, and sustainability are driving secular demand for our products and solutions. I'm confident about the future given the macro trends and our strategy with our focus on high growth verticals, new products and acquisitions. Starting with macro trends. We believe the $1.3 trillion in U.S. and European legislative funding for infrastructure has the potential to add between $250 million to $500 million in nVent sales over the next five plus years. Looking at the trend of digitalization. Artificial intelligence is driving demand for our liquid cooling solutions, leading us to increase investments to expand our product portfolio and capacity to drive future growth.

Looking at sustainability, we are seeing the energy transition gain traction. Notably, our third quarter project orders were up double-digits in our Thermal Management segment. Next is our focus on high growth verticals and new products. As we shared at our Investor Day, more than 60% of our sales are exposed to secular trends. Some of the high growth verticals we are focused on include industrial automation, data solutions, power utilities, renewables, and the energy transition. For example, we expect our Data Solutions business to continue to grow double-digits and reach over $500 million in sales next year. By the way, we look forward to hosting investors at the Supercompute Trade Show in Denver next month, where we will showcase our innovative portfolio, including our liquid cooling solutions.

Turning to new products. We have seen significant growth. We have improved our new product introduction process, increasing velocity and time to revenue. Year-to-date, new products have contributed 3 points to sales growth, and we have launched 64 new products way ahead of our expectations. Lastly, on acquisitions, we play in a highly fragmented $75 billion space. We see tremendous opportunities to continue to grow and expand with our acquisition framework. Recall, we look for differentiated product portfolios in high growth verticals that we can invest in and scale to strengthen our position with the Electrification of Everything. This year, we expect the ECM and TEXA acquisitions to add approximately 9 points to sales. We have a strong track record of deals exceeding our weighted average cost of capital in two to three years.

In summary, we expect to continue to execute on value creating deals with our active funnel and strong balance sheet. We are excited about the Electrification of Everything. Wrapping up on Slide 12. We had a strong quarter with record sales and adjusted EPS. We expect 2023 to be another year of double-digit sales and adjusted EPS growth. While the current environment is mixed, our execution has been strong. We are driving growth with new products, we are executing well on acquisitions, we are expanding margins with price and productivity, and we are delivering robust cash flow. We are within our target leverage ratio in less than two quarters after completing our largest acquisition ever. The ECM and TEXA acquisitions have been meaningful additions to nVent and are performing well.

We are excited about the growth and scale of our combined portfolios. I'm very proud of how well our team is performing. Looking ahead to 2024, we believe we are well-positioned with the electrification, sustainability, and digitalization trends. We believe the legislative funding and investments in infrastructure will start to flow. We expect to see the continued acceleration of artificial intelligence and the energy transition, and we expect the sales synergies from our acquisitions to begin to layer in. We are excited for our future. Our future is bright. With that, I will now turn the call over to the operator to start Q&A.

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