nVent Electric plc (NYSE:NVT) Q2 2023 Earnings Call Transcript

nVent Electric plc (NYSE:NVT) Q2 2023 Earnings Call Transcript July 28, 2023

nVent Electric plc misses on earnings expectations. Reported EPS is $0.57 EPS, expectations were $0.68.

Operator: Good day and welcome to the nVent Electric Second Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Mr. Tony Riter, Vice President of Investor Relations. Please go ahead, sir.

Tony Riter: Thank you and welcome to nVent’s second 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 second quarter performance, provide an outlook for the third 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 the 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 will have time for questions after our prepared remarks. With that, please just turn to Slide 3 and I will now 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 strong second quarter results. We continue to execute on our strategy for growth with a focus on high-growth verticals, new products, acquisitions and geographic expansion. In the second quarter, we delivered record sales, up 10% and adjusted EPS up an impressive 35%. Our strong execution resulted in another quarter of robust margin expansion and free cash flow. Highlights for the quarter include the acquisition of ECM Industries, expanding our electrical power connection and grounding solutions portfolio. We also published our 2022 ESG report which highlighted significant progress on our goals around our People, Products and Planet pillars.

Overall, we are very pleased with our strong first-half performance and are raising our full year sales and adjusted EPS guidance. Now on to Slide 4 for a summary of our second quarter performance. Sales in the quarter were up 4% organically on top of 21% a year ago, with all verticals growing, led by infrastructure. New products contributed approximately 3 points to sales growth. We’ve launched 33 new products in the first half and are on track to launch 50-plus for the full year. We closed on the ECM acquisition and are excited to welcome the team to nVent. In Q2, ECM added 7 points to sales and was accretive to overall nVent margins. Segment income grew 45% year-over-year, with return on sales up an impressive 540 basis points. Adjusted EPS grew 35% on top of 14% a year ago.

We generated $62 million of free cash flow, up 29%. We are on track for another strong year. I am very proud of our results and the great work being done by our nVent team. I want to share some recent awards and recognition to highlight this. nVent was named a top 10 data solutions provider by CIO Applications for the second year in a row. This recognition is for companies at the forefront of providing data center solutions and transforming businesses. We also were named by the Minneapolis St. Paul Business Journal as the 2023 Large Manufacturer of the Year. Based on our contributions to the regional economy and community, this award recognized our performance, innovation and manufacturing excellence. And nVent is 1 of 4 finalists in the mid-cap category for the 2023 Diversity, Equity and Inclusion Award by the National Association of Corporate Directors.

This award recognizes forward-thinking boards that leverage the power of DE&I to enhance their governance, create long-term value and build innovative and inclusive workplaces and boardrooms. Looking at performance across our key verticals, all grew organic sales in the quarter. Infrastructure led the way, up 10%, including Data Solutions growing double digits and Power Utilities up over 40%. Industrial and Energy each grew low single digits and commercial and resi was also positive. Turning to organic sales by geography. We continue to see broad-based growth in North America, up high single digits. Europe declined low single digits, primarily due to our wind-down in Russia and Asia Pacific declined due to a slow recovery in China. Lastly, organic orders in Q2 grew low single digits year-over-year on top of high-teens orders growth a year ago.

As expected, we saw distributors adjusting their inventories in Q2, with improving supply chains and lead times. Importantly, we continue to see positive distributor sell-through. Looking ahead, I am excited for both the ECM acquisition and TEXA acquisition which we just announced and how they further position nVent with the Electrification of Everything. We are raising our full year guidance, reflecting our strong first half and the addition of our 2 acquisitions. We expect electrification, sustainability and digitalization to drive demand. Specifically, we expect continued strength in infrastructure, including data solutions, power utilities and renewables, in industrial with the trends of automation in onshoring and in energy with the energy transition.

We continue to expect the commercial/resi vertical to be soft. Lastly, artificial intelligence is driving demand for our liquid cooling solutions, leading us to increase investments in the back half of the year to drive future growth in our Data Solutions business. Overall, I am very proud of our nVent team and how we continue to execute and deliver for our customers and shareholders. We’re on track for another strong year. I will now turn the call over to Sara for some detail on our second quarter results and our updated outlook for 2023. Sara, please go ahead.

Sara Zawoyski: Thank you, Beth. We had a strong second quarter with robust margin expansion and free cash flow. Let’s turn to Slide 5 to review our second quarter results. Sales of $803 million were up 10% relative to last year, or up 4% organically. Price contributed more than 5 points to growth and volumes were down 2 points. ECM added $50 million in sales, or 7 points to growth. Second quarter segment income was $181 million, up 45%. Return on sales was 22.6%, up 540 basis points year-over-year. Our strong performance was driven by price costs, continued productivity improvements and favorable mix in the quarter. Price more than offset the impact from inflation of roughly $25 million. In addition, ECM contributed meaningfully to the quarter and was accretive to overall nVent return on sales.

Q2 adjusted EPS was $0.77, up 35% and above the high end of our guidance range. This included a $0.02 contribution from the ECM acquisition. We generated robust free cash flow in the quarter of $62 million, up 29%. This includes higher CapEx investments for growth and capacity. Now please turn to Slide 6 for a discussion of our second quarter segment performance. Starting with Enclosures. Sales of $400 million increased 5% organically, with both price and volume contributing. Infrastructure led with continued strength in Data Solutions. Industrial was also a solid contributor, driven by the trends in automation. Geographically, North America led up high single digits. Enclosures second quarter segment income was $90 million, up 46%. Return on sales of 22.5% increased an impressive 630 basis points year-over-year, driven by price cost and productivity.

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We are expanding our Data Solutions business rapidly and stepping up investments in CapEx and OpEx in the second half to support our strong orders and future growth. Moving to Electrical & Fastening. Sales of $267 million increased 33%, with the ECM acquisition contributing 25 points to sales. Organic growth was 8%, driven by strong price. All verticals grew, led by Infrastructure up low double digits, with strength in Power Utilities and Data Solutions. Commercial/resi grew mid-single digits. Geographically, sales growth was led by North America and Europe. Electrical & Fastening segment income was $86 million, up 47%. Return on sales was a notable 32.4%, up 310 basis points relative to last year on price cost and favorable mix. Turning to Thermal Management; sales of $136 million were down 5% organically.

Price contributed 4 points to growth, while volumes were negative. The decline was driven by commercial/resi and Industrial both declining high single digits, partially offset by infrastructure and energy. Industrial MRO demand remains solid. Geographically, North America was flat with declines in China and Europe, including our wind down in Russia. Notably, orders were up mid-single digits and backlog grew sequentially. Thermal Management segment income of $29 million was up 1% and return on sales of 21% was up 160 basis points year-over-year on strong execution. On Slide 7, titled Balance Sheet and Cash Flow, we ended the quarter with $139 million of cash on hand and $500 million available on our revolver. We added approximately $900 million in debt to our balance sheet in the quarter to finance the ECM acquisition.

Turning to Slide 8, where we will 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 strong free cash flow in the quarter, with the first half growing more than 150% compared to a year ago. We exited Q2 with a net debt to adjusted EBITDA ratio of 2.8x. With our strong cash flow generation, we believe we are on track to get back to our targeted range of 2x to 2.5x. In the first half of the year, we’ve returned approximately $73 million to shareholders, including dividends and share repurchases. So moving to Slide 9; we are raising full year reported sales and adjusted EPS guidance, reflecting our strong first half performance and the impact of acquisitions.

Reported sales growth is now expected to be in the range of 13% to 15% versus our prior guidance of 4% to 6%. We continue to expect organic sales to grow 4% to 6%. We now expect adjusted EPS to be in the range of $2.85 to $2.91, up 19% to 21% versus our original guidance of $2.65 to $2.73. This new guidance reflects our strong first half, increased investments in Data Solutions and $0.08 to $0.10 for acquisitions. A couple of modeling assumptions to note. First, acquisitions are expected to add approximately 9 points to sales growth in the year. Second, with acquisitions, full year net interest expense is now expected to be approximately $80 million and depreciation and amortization are expected to be approximately $140 million. Third, we now expect our tax rate to be 19.5% versus 18.5% due to geographical mix and the ECM acquisition.

And lastly, we are raising our CapEx expectations of $15 million to a range of $70 million to $75 million to reflect the impact of acquisitions and investments to expand capacity for our Data Solutions business. Looking at our third quarter outlook on Slide 10. We expect reported sales to grow 16% to 18%, with acquisitions contributing approximately 14 points to sales. Organic sales are expected to be up 1% to 3%. We expect adjusted EPS to be between $0.72 and $0.74 which at the midpoint, reflects 11% growth relative to last year. Wrapping up, I am pleased with our second quarter performance. We delivered robust margins and cash flow and are well positioned for another great year. This concludes my remarks and I will now turn the call over to Beth.

Beth Wozniak: Thank you, Sara. Turning to Slide 11. I would like to share a few highlights on nVent. First, I would like to talk about our opportunity for Data Solutions. The acceleration of AI, greater data consumption, rising heat densities and growth in edge computing are all drivers of demand for our Data Solutions offerings, including liquid cooling. We view the total opportunity in Data Solutions to be approximately $10 billion, growing at roughly 10%. Our Data Solutions business was $375 million last year, growing 30% the last 2 years and we believe we are in a position to win and outgrow the industry. Today, only about 5% of data centers are liquid-cooled. When compared to conventional cooling, we believe liquid cooling is growing 3x faster and providing up to a 50% savings in energy.

What differentiates us is our leading technical expertise, our innovative designs and our ability to manufacture at scale. We have been partnering with major data center players for many years, some going back pre-spin and have developed high-quality solutions. We provide a broad range of cooling offerings for both greenfield and retrofit. We are building out a portfolio of standard products to drive scale, broader adoption and access through distribution channels. To serve the increasing demand, we’re making significant investments in the back half of the year and next year to expand our operations and capacity. We believe our Data Solutions business is well on its way to over $500 million. Moving to Slide 12. Last month, we published our latest ESG report and I’m proud of the meaningful progress we’ve made on our goals in our 3 pillars of People, Products and Planet.

In our People pillar, we increased diverse representation in our employee population and continue to build on our programs to develop, recognize and support our employees. We believe our culture and our people are a differentiator for nVent. We were certified again as a Great Place to Work and received the highest recognition by 50/50 Women on Boards. In our Products pillar, we continue to build on our efforts to deliver innovative products that make a positive ESG impact in 1 or more of our 3 ESG categories: eco-friendly materials; eco-friendly designs; and end user safety. 76% of the products in our new product pipeline at the end of 2022 met at least 1 of these criteria. In our Planet pillar, we reduced our Scope 1 and Scope 2 greenhouse gas emissions and increased our renewable energy consumption to 13%.

We remain focused on environmental stewardship, achieving our planet goals, investing in renewable energy, reducing water consumption and reducing and diverting waste. We will continue to build on the progress we’ve made across our People, Products and Planet pillars. At nVent, we are building a more sustainable and electrified world. Turning to Slide 13. We continue to execute on our strategy for growth which includes acquisitions and have now completed 6 deals since spin. We expect a lot of future value creation from these acquisitions and continue to have a strong pipeline of opportunities. Our acquisition framework starts with finding companies that have great products aligned to high-growth verticals with the ability to scale and invest for growth.

The ECM and TEXA acquisitions squarely fit this framework. ECM is a leader in power connections and grounding solutions, tools and test instruments and cable management. ECM closed in May and is off to a good start. We have a dedicated team leading our efforts to execute our integration playbook. We are excited for the TEXA acquisition that closed a few weeks ago and is now part of our Enclosures segment. TEXA, much like our Eldon acquisition in 2019, has an innovative product portfolio which we plan to expand through our distribution channels and globally. TEXA provides innovative industrial air conditioners and chillers. With increasing heat loads, cooling is critical inside an enclosure to ensure performance and uptime. Combined with our expertise in liquid cooling, TEXA strengthens our ability to provide global cooling solutions in demanding environments such as industrial automation and energy storage.

Both acquisitions are a great fit for nVent, expanding our Connect and Protect portfolio. We believe they have significant growth potential and long-term value creation with the Electrification of Everything. Wrapping up on Slide 14. We had another strong quarter with record sales and adjusted EPS. We completed 2 acquisitions and have made significant progress on our ESG goals. We are raising our guidance and expect another year of strong sales and EPS growth. 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.

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Q&A Session

Operator: [Operator Instructions] And the first question will come from Julian Mitchell with Barclays.

Julian Mitchell: Thanks very much and good morning, everyone. Maybe just a first question around the orders, trends and what you’re seeing in kind of distributor and channel partner behavior. So I think you said orders were up low-single-digit in Q2. Just wondered what you’re expecting for the third quarter in terms of the order intake. And how would you characterize the state of the destocking right now? Is it sort of episodic? Every few months, it comes in and out? And then how do you assess the aggregate state of sort of inventories? I realize you set across a vast array of distributors. But yes, your comfort levels on where inventories sit versus sell-through today.

Beth Wozniak: Okay. Well, Julian, first, 1 of the things I want to say is that, as we expected in Q2, we expected inventory adjustments to occur. And 1 of the positive points is that when we continue to look at distributor sell-through, we’re positive. And so we think that some of those actions took place in Q2. And some actions, I think, will continue in Q3. As we go forward, we think that we’re going to see growth with respect to infrastructure. A lot of the infrastructure bill and Inflation Reduction Act is going to drive growth in areas such as utilities and renewables and those other areas. So we think the outlook for that is very positive. And the other comment I would just make with respect to orders is that we’ve seen increasing orders in Data Solutions, particularly for our liquid cooling solutions and we see that accelerating.

Julian Mitchell: That’s helpful. And then just my follow-up would be — trying to understand a little bit better, how you’re thinking about the second half, sort of split in organic sales between price and volumes. In the second quarter, volume was down 2, I think and price was up 5. So in terms of your second half guide, are we thinking about sort of price exiting the year at 1 or 2 points and volumes staying in that sort of flat to down territory?

Sara Zawoyski: Yes. So I would say that — a couple of things. One is we do expect positive price each quarter. I think that’s important, given the fact that we continue to see 2023 as an inflationary environment. In Q3, embedded in that organic guide of up 1% to 3%, we do see that predominantly price. And I think a big piece of that is just reflective of some of those inventory-level adjustments continuing to happen in the third quarter as well as Thermal Management. And Thermal Management, specifically in relation to some of that commercial/resi softness but also the wind down in that Russia business is more acute there in that Q3 and Q4 time frame. It’s having roughly a 4-point impact on Thermal Management there in the back half and that winds that down to roughly 0 Russia sales as we go into 2024.

I would say that from a Q4 perspective, we do expect things to ramp a bit from a volume and overall growth standpoint. And the biggest contributor there is just going to be the — what we see in the data solutions space. And Beth talked a little bit about that order book building, the funnel of opportunities building and we’re really focused on making those investments here in Q3 and Q4 to capture that growth.

Operator: The next question will come from Deane Dray with RBC Capital Markets.