nVent Electric plc (NYSE:NVT) Q4 2022 Earnings Call Transcript

nVent Electric plc (NYSE:NVT) Q4 2022 Earnings Call Transcript February 7, 2023

Operator: Good morning and welcome to the nVent Electric Fourth Quarter 2022 Earnings Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. . Please note that 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.

Tony Riter: Thank you, and welcome to nVent’s fourth quarter 2022 earnings call. On the call with me are Beth Wozniak, our Chief Executive Officer; and Sara Zawoyski, our Chief Financial Officer. We will provide details on our fourth quarter and full-year performance, an outlook for the first quarter and full-year 2023. Before we begin, I will 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 questions after prepared remarks. I also want to add, that we look forward to hosting our next investor day, the morning of Tuesday, March 7 in New York City. With that, please turn to slide three, and I’ll 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 fourth quarter and full year results. 2022 was a record year for nVent with the fourth quarter marking our seventh consecutive quarter of double-digit organic growth. Our nVent team delivered exceptional results by serving our customers responding to strong demand and overcoming supply chain challenges. We successfully executed on our strategy, focusing on high growth verticals, new products, global expansion and acquisitions. As a result, full year sales grew an impressive 18% with adjusted EPS of 22%. This was another year of outstanding performance and value creation, and we’re well positioned to do it again in 2023. Slide four, summarizes our Q4 and full year performance.

Fourth quarter sales were up 15% organically with broad-based growth across all segments and verticals. Segment income grew an impressive 31% year-over-year with return on sales of 290 basis points. Adjusted EPS grew 32%, and we generated $180 million of free cash flow, up 77% Our fourth quarter results were terrific. Looking at our key verticals, all grew in the quarter. Industrial led the way up low double-digits with broad-based growth. Infrastructure had strong double-digit growth led by data solutions and power utilities. Energy performed well, up strong double-digits. And finally, commercial and residential grew mid single-digits driven by North America. Turning to organic sales by geography, we continue to see broad-based growth in North America, up strong double-digits.

Europe grew in all segments, up high single-digits. developing regions declined primarily due to COVID-related impacts in China. Lastly, orders in Q4 were flat year-over-year. Recall a year ago we had 37% orders growth, a tough comparisons. Also, as we discussed in our Q3 earnings call, we expected orders to moderate as distributors returned to seasonal destocking. Overall, our customer demand and distributors sell through remain strong. Orders in January have since increased and we continue to have a robust backlog. For the full year, we had record sales of $2.9 billion, an increase of 20% organically and segment income also grew 20%. Adjusted EPS was up 22% on top of 31% in 2021. For the full year, we generated over $350 million of free cash flow.

Let me share a few more highlights. First, we launched 59 new products and our new product vitality is now 20%. New products contributed approximately three points to our sales growth. Second, with our focus on high growth verticals, infrastructure is now approaching 25% of our sales, up from low teens at spit. Infrastructure includes data solutions, power utilities, renewables and e-mobility to name a few. All of these sub verticals are growing rapidly, and we continue to expand our portfolio and solutions in these areas. For example, data solutions now represents $375 million in sales, and grew over 35% in 2022. Lastly, we have added more than $300 million in annual sales from acquisitions since then. And in 2022, sales growth from acquisitions exceeded overall nVent growth.

While we did not complete any new acquisitions in 2022, we remain disciplined in our approach and built a very healthy pipeline of opportunities. We’ve had success when we acquire companies that have differentiated products and solutions that extend our position in high growth verticals. We’ve been able to rapidly scale them through our distribution channels, global reach and footprint. This approach has led to higher growth and we believe fantastic returns for our shareholders. We’re well-positioned with ample capacity to execute on M&A in 2023. Looking at the macro trends, we expect electrification, sustainability, and digitalization to continue to accelerate. We anticipate the investments from the Infrastructure Bill and Inflation Reduction Act will drive demand for our products and solutions.

On verticals, we expect industrials to see continued growth with investments in automation and supply chain resiliency. Infrastructure will benefit from investments with the electrification trends in power utilities, renewables and e-mobility. We expect continued strong growth with our portfolio and liquid cooling for data centers, given the energy efficiency benefits. Overall, commercial is expected to slow. However, the need for more labor saving solutions will drive demand for our products as well as growth in power and data infrastructure. Residential is expected to be soft, but represents less than 5% of our portfolio. In energy, we expect to see continued growth with MRO, and projects supported by decarbonization with LNG, clean fuels and carbon capture.

While supply chains remain challenging, we do expect them to gradually improve. We also expect an inflationary environment. We have shown we are able to manage price cost positive. We are confident we can continue to perform. Overall, I am proud of our nVent team and the record results we delivered in 2022. We continue to change the growth profile of the company focusing on higher growth verticals tied to longer-term secular trends. We believe 2023 will be another year of strong growth and value creation. I will now turn the call over to Sara for some details on our results as well as our 2023 outlook. Sara, please go ahead.

Sara Zawoyski: Thank you, Beth. I’m pleased to share another quarter of great execution with double-digit sales growth, strong return on sales expansion, double-digit EPS growth and robust free cash flow. Let’s begin on slide five with our fourth quarter results. Sales of $742 million were up 11% compared to last year, or 15%. organically. Overall, sales grew across all segments and verticals. volumes were up modestly compared to last year, and price added 15 points to growth. Foreign exchange was a four-point headwind. Fourth quarter segment income was $144 million, up 31% with strong incrementals of 47%. Return on sales was 19.4%, up 290 basis points year-over-year. Better price cost and sequential productivity improvements drove the strong outperformance versus our expectations.

Price contributions more than offset the impact from inflation of roughly $40 million and continued supply chain inefficiencies. In addition, we continue to make investments in R&D, digital and sales and marketing for growth and productivity. Q4 adjusted EPS with $0.66, up 32% and above the high end of our guidance range. On cash, we delivered significant working capital improvements in the quarter, resulting in $180 million of free cash flow, up 77% year-over-year. Now, please turn to slide six for discussion of our fourth quarter segment performance, where you will see continued sales strength across all three businesses. Starting with enclosures, sales of $376 million increased 17% organically with both price and volume contributing. Sales growth was broad-based across all verticals led by industrial.

Copyright: kadmy / 123RF Stock Photo

Infrastructure also grew nicely with data solutions up approximately 30%. Geographically North America led followed by Europe. Enclosures fourth quarter segment income was $72 million, up 67% return. Return on sales of 19.2%, increased an impressive 620 basis points year-over-year, driven by strong execution and catching up on price cost. For the full year, ROS expanded 80 basis points to 17%. Moving to electrical and fastening. Sales of $194 million increased 16% organically with strong price contribution, while volume was down slightly. Sales growth was led by infrastructure with power utilities up over 50%. Geographically, all regions grew led by North America. Electrical and fastening segment income was $53 million, up 18%. Return on sales was 27.5%, up 120 basis points compared to last year on solid execution and price costs.

This marks the fourth consecutive year of ROS expansion for electrical and fastening. Turning to thermal management. Sales of $172 million grew 9% organically, with both volume and price contributing. All verticals grew led by industrial with particular strength in chemical. Geographically, North America lead with MRO and large projects, while Europe grew modestly impacted by Russia and commercial resi headwinds. Thermal management segment income of $44 million was up 1%. Return on sales of 25.7% was down to 70 basis points year-over-year. This decline was due to higher project sales mix and R&D investments. Now turn to slide seven for recap of our full year 2022 results. We ended the year with record sales of $2.9 billion, up 18% or 20% organically.

Segment income grew 20% to $524 million, and return on sales expanded 30 basis points to 18%. Adjusted EPS for the full year was $2.40, up 22%. And free cash flow was $351 million, up 5% with 87% conversion of adjusted net income. A few call outs for the year. First, volume contributed six points to sales growth. Second, all segments grew organic sales, double-digits and expanded margins. Third, we have consistently demonstrated our ability to manage price cost. This is a testament to the strength of our portfolio and the solutions we provide to our customers. And lastly, acquisitions added two points to sales. In summary 2022 was an outstanding year. On slide eight titled balance sheet and cash flow, you will see we exited the year with $298 million of cash on hand and $600 million available on our revolver.

Our balance sheet and financial position have never been stronger. Turning to slide nine, we continue to prioritize growth and execute a balanced disciplined approach to capital allocation. In 2022, we returned $183 million to shareholders, including a competitive dividend and share repurchases of $66 million. We exited with a net debt to adjusted EBIT ratio of 1.4 times. We believe we have ample capacity and strong cash flows to execute on our growth strategy, including M&A and deliver attractive shareholder returns. Moving to slide 10, our 2023 outlook. We expect organic sales growth in the range of 4% to 6%. This assumes low single digit volume growth, and roughly three points of price. While we expect sales growth and positive price each quarter, growth is expected to be stronger in the first half given a robust backlog and pricing carryover.

This also reflects macroeconomic uncertainties. Our outlook for full year adjusted EPS is $2.51 to $2.61, which represents growth of 5% to 9%. A few important items to note. First, we expect price plus productivity to more than offset persistent inflation. Second, we anticipate stronger year-over-year margin performance in the first half given comparisons, and favorable price cost. And third, we will continue to invest in new products, digital and capacity for growth. Lastly, we expect free cash flow conversion of approximately 95%. This reflects higher CapEx investments in constrained areas. We continue to expect strong underlying working capital improvements. A few 2023 below the line item assumptions we’d like to call out include higher net interest expense of approximately $40 million due to higher rates on our variable rate debt, a tax rate range of 18% to 18.5% and shares of approximately 168 million.

Additionally, we anticipate corporate costs of approximately $95 million and CapEx of $55 million to $60 million. Moving to slide 11 and our first quarter outlook. We expect organic sales growth in the range of 5% to 7%. We anticipate another quarter of strong margin performance. For earnings per share, we expect adjusted EPS in the range of $0.56 to $0.58 up 12% to 16% year-over-year. In closing, our team delivered another year of outstanding results in 2022. And I believe we are well-positioned for another strong year. With that, I will now turn the call back over to Beth.

Beth Wozniak: Thank you, Sara. Turning to slide 12, I want to spend a few moments recognizing the great work of our nVent team. Over the course of the year, our ability to respond to strong demand and overcome supply chain challenges was appreciated by our customers. While, we still have a few challenging areas, our distributor partners placed us in the top performing suppliers when it came to delivery and quality. As you can see on the slide, we’re highlighting a few of the many recognitions we received for our commitment and partnership to our customer success. These recognitions weren’t just about product delivery, these extended to innovation and safety, performance measures we value in nVent. Another area of recognition is our EFG performance.

EFG is at the center of our strategy as we build a more electrified and sustainable world. We’ve made significant progress in our sustainability commitments. For the second consecutive year, we were again awarded a Silver Sustainability Rating from Ecovadis. Our overall score improved placing us in the top 9% of companies assessed in our industry, and the 85th percentile of all companies assessed. Key to our success is our focus on our people and culture, which we believe to be a differentiator. We have made inclusion and diversity a priority for us to create a great workplace. I’m very proud that our board of directors is 70% diverse, and we were recognized by 50-50 women on boards. Also, we are certified as a best place to work. Our people are our priority and strength.

And we are committed to building a culture of inclusion that allows every employee to thrive and contribute to our success. Turning to slide 13, I look forward to our upcoming Investor Day next month, and sharing how nVent is building a more sustainable and electrified world. Wrapping up on slide 14, 2022 was another year of outstanding performance for nVent delivering differentiated value for our customers and shareholders. We are well-positioned with the electrification of everything, sustainability and digitalization trends. And we expect 2023 to be another strong year of financial performance. 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: Thank you. We will now begin the question and answer session. We ask that you please limit yourself to one question and one follow up. If you have additional questions, you may re-enter the question queue. At this time, we will pause momentarily to assemble our roster. And the first question will be from Jeff Sprague from Vertical Research. Please go ahead.

Jeff Sprague: Good morning. Thank you.

Beth Wozniak: Good morning.

Jeff Sprague: Hey, just a couple – good morning. The price numbers obviously just continuing to jump off the page. Just thinking about the bridge. But I think in 2022, right, you said price offset all inflation. And I think for 2023, you said price plus productivity offsets inflation. I just wonder if you could put a finer point on that. Do you actually need to dip into productivity to fight inflation in 2023? It seems like in 2022, you actually were able to drop that productivity to the bottom line through some nice margin enhancement?

Beth Wozniak: Yes, I think, let me start with 2022. And 2022, price needed to offset inflation as well as some of the negative productivity we saw, just due to the supply chain inefficiencies. So in essence, it took us — cost us more to service our customers with the robust demand we were seeing and a strong volume growth. And so, as we walk in and 2023, we would expect price to offset cost. And we would expect productivity to turn to a positive. And that’s going to be more gradual in the context of throughout the year. And really what’s going to help me to that is just that supply chain improvement. But we’ve talked about this in our last call, we’re really focusing on those supply chain investments to help remove some of those areas that we’ve constrained in, as well as focus on productivity and the factories that provide that productivity improvement over the course of 2023.

Jeff Sprague: And maybe just a little bit of color on what you’re seeing in the channel. There was certainly some concern exiting Q3 that may be, we’d have some drawdown or distributors rebalancing, and the like, it doesn’t look like that happened to material degree, but maybe address that and kind of the health of the channel, as you look into the beginning of the year here?

Beth Wozniak: Yes. As we had discussed on our Q3 call, we expected to see some return to normal seasonal destocking. And I would say we did see that. As we progress through the quarter, we certainly saw a drop up in orders. However, what we did see was strong demand and sell-through from our distribution partners. So they were resetting some of their inventory levels. Now, as we turn to this year and January, we’ve seen those orders increase. And so I think there was some management of that inventory level, if you like, but they still are sharing with us that they’ve got good backlogs, good demand. And so, we believe we’re going to see that pick up here as we go through 2023.

Jeff Sprague: Right. Thanks for the color.

Beth Wozniak: Thank you.

Operator: And the next question will be from Nigel Coe from Wolfe. Please go ahead.

Unidentified Analyst: Hi. This is Bastion filling in for Nigel. So obviously, the 2023 fill on and 2022 price contribution was about 14%. And then my question is for 2023 price contribution expectation, do you expect any pockets of price kickbacks? And then maybe if you could touch on what you see on price realization on orders?

Beth Wozniak: Well, let me just start by talking about price. Our view is it’s still an inflationary environment. There’s still supply chain challenges, there’s inflated labor, energy costs, et cetera. And so, as we stated, an inflationary environment, so our aim is to hold our price. However, it’s not at the same level as we were last year, as s Sara shared with your assumption as we go forward.

Sara Zawoyski: Yes. so I think —

Unidentified Analyst: Alright. Thank you.

Sara Zawoyski: Yes. Maybe just one point to add to that, in terms of kind of that stickiness. I do think it is reflecting our ability to deliver and our ability to innovate for our customers. And then, maybe I’ll just expand a moment on the inflationary environment to give a bit of a color on that piece of it. Something to keep in mind is if you look at our total cost structure, that’s roughly $2.3 billion. That’s COGS as well as all of our operating expenses. And so, metals specifically are less than 20% of that overall cost structure. So while we are seeing some easing on the inflationary side, as it relates to metals, we’re seeing inflation and everything else. So as Beth alluded to, you’ve got components, you’ve got electrical electronics, labor, logistics, energy, professional services, that is where we’re seeing that inflationary pressure.

And so, like we’ve consistently demonstrated in 2021, in 2022, we’re going to consistently and keep front footed and manage that price cost equation going into 2023.

Unidentified Analyst: Great. Thank you. And then, my fourth question would be, how should we think about the sustainability of enclosure margin, since 4Q is typically weak margin quarter for enclosure? Would you expect the full year to be above the 19%, 20% range?