nVent Electric plc (NYSE:NVT) Q4 2023 Earnings Call Transcript

nVent Electric plc (NYSE:NVT) Q4 2023 Earnings Call Transcript February 6, 2024

nVent Electric plc beats earnings expectations. Reported EPS is $1.51, expectations were $0.75. NVT isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

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

Tony Riter: Thank you, Chuck, and welcome to nVent’s fourth quarter 2023 earnings call. On the call with me are Beth Wozniak, our Chair and Chief Executive Officer; and Sara Zawoyski, Chief Financial Officer. They will provide details on our fourth quarter and full-year performance; and our outlook for 2024. 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.

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 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. 2023 was another outstanding year. Q4 was a record quarter with double-digit sales growth and adjusted EPS exceeding our guidance. This included margin expansion across every segment and robust free cash flow. For the full-year, we had strong growth and execution resulting in record sales, margins, earnings and cash flow. I am proud of our nVent team and everything we’ve accomplished. I’m very excited for 2024 with the trends of electrification, sustainability, and digitalization. We are well positioned for strong sales and profit growth, driven by our focus on high growth verticals, new products and acquisitions.

Slide 4 summarizes our Q4 and full-year performance. Fourth quarter sales were up 16%. On an organic basis, sales grew 2% on top of 15% a year-ago. Segment income grew an impressive 31% year-over-year with return on sales of 260 basis points. Adjusted EPS grew 18% on top of 32% a year-ago, and we generated $215 million of free cash flow up 19%. Looking at our vertical performance in the quarter, infrastructure led up low-double digits with strength in Data Solutions. Commercial resi grew low-single digits. Industrial declined mid-single digits impacted by channel inventory adjustments. Finally, energy was down low-single digits impacted by our exit from Russia. Turning to organic sales by geography. We saw growth across our key regions. North America grew low-single digits, and Europe was up slightly.

Asia-Pacific grew low-double digits with solid growth in China. Lastly, organic orders were slightly down in the quarter, reflecting the ongoing channel inventory adjustments. Importantly, sell out was positive. For the full-year, we had record sales of $3.3 billion, an increase of 12% and 3% organically. Segment income grew 38% with margins expanding more than 400 basis points. Adjusted EPS was up 28% on top of 22% in 2022. For the full-year, we had record free cash flow of $465 million growing 32%. Let me share a few more highlights. First, we launched 95 new products in 2023, and our new product vitality is now at 22%. New products contributed more than 2 points to our sales growth. We have great momentum in our innovation pipeline. Second, all of our key verticals grew organically in 2023, led by infrastructure, which includes Data Solutions, Power Utilities, and Renewables, to name a few.

Within infrastructure, Data Solutions now represents greater than $450 million in sales and grew over 20% in 2023. Finally, we completed two acquisitions last year, adding over $400 million in annualized sales that we are investing in to scale and drive growth. Looking at the macro trends, we expect electrification, sustainability, and digitalization to continue to drive demand. We anticipate government funding to flow this year more so in the back half. On our key verticals, we expect all to grow. Infrastructure is forecasted to have the strongest growth benefiting from investments with the electrification and digitalization trends. We expect continued strong growth for Data Solutions, particularly for our liquid cooling solutions given the acceleration of AI.

Industrial is forecasted to grow with investments in automation and reshoring. Overall, commercial is expected to grow modestly. The need for more labor-saving solutions as well as the increase in power and data infrastructure are expected to drive demand for our products. Residential is expected to remain soft. In Energy, we expect to see growth, particularly in the energy transition supported by decarbonization trends. Overall, I am proud of our nVent team and the record results we delivered in 2023. We continue to change the growth profile of nVent. We believe 2024 will be another year of strong growth and value creation. I will now turn the call over to Sara for details on our results as well as our 2024 outlook. Sara, please go ahead.

Sara Zawoyski: Thank you, Beth. I am pleased to share another quarter of double-digit sales and earnings growth, strong margin expansion and robust free cash flow. Let’s begin on Slide 5 with our fourth quarter results. Sales of $861 million were up 16% compared to last year, in line with guidance. Organic sales were up 2%, with price contributing 4 points to growth and volumes down 2 points. Acquisitions added a meaningful $99 million to sales or 13 points to growth. Foreign exchange was a 1 point tailwind. Fourth quarter segment income was $189 million, up 31% with incrementals of 37%. Return on sales was 22%, up 260 basis points year-over-year. Our performance was driven by positive price/cost, productivity and accretive return on sales from the ECM acquisition.

Price more than offset the impact from inflation of just over $20 million. Q4 adjusted EPS was $0.78, up 18% and above our guidance range. Acquisitions contributed $0.06 in the quarter. We generated robust free cash flow of $215 million, up 19% year-over-year. This included higher CapEx investments for growth and capacity. Now please turn to Slide 6 for a discussion of our fourth quarter segment performance. Starting with Enclosures, sales of $402 million increased 7%. The TEXA acquisition contributed 2 points to sales. Organically, sales increased over 4% with solid price and positive volume. Infrastructure grew more than 20% with continued strength in Data Solutions. Commercial resi grew in the quarter with strength in North America. And geographically, North America led up mid-single digits.

Europe and China also grew. Enclosures fourth quarter segment income was $85 million, up 17%. Return on sales of 21.1% increased 190 basis points year-over-year, driven by productivity and price cost. For the full-year, ROS expanded an impressive 460 basis points. Moving to Electrical & Fastening. Sales of $288 million increased 49%. The ECM acquisition contributed 48 points to sales growth. Organic sales were flat with positive price and volumes down modestly. Industrial and Commercial resi grew in the quarter. This was offset by a decline in infrastructure due to channel inventory adjustments that continued from Q3. Geographically, organic sales growth declined slightly in North America, while Europe was up low-single digits. Electrical & Fastening segment income was $85 million, up 60%.

Return on sales was 29.6%, up 210 basis points compared to last year on favorable mix and productivity. Turning to Thermal Management. Sales of $171 million were down 2% organically. The Russia wind-down impact was approximately 5 points to growth. Overall, volumes were down with price contributing 5 points. The decline in sales was driven by commercial resi and industrial. Important to note, commercial resi improved sequentially, and industrial MRO was up double digits. In addition, backlog grew year-over-year and energy transition represents nearly a third of the project backlog. Thermal Management segment income of $44 million was flat year-over-year. Return on sales of 25.9% was up 20 basis points year-over-year due to price cost and productivity.

Let’s turn to Slide 7 for a recap of our full-year 2023 results. We ended the year with record sales of $3.3 billion, up 12% or 3% organically. Segment income grew 38% to $721 million, all segments expanded return on sales. Overall, return on sales expanded an impressive 410 basis points to 22.1%. Adjusted EPS for the full-year was $3.06, up 28% and acquisitions contributed $0.16 to the year, exceeding our initial expectations. And free cash flow was $465 million, up 32% with 90% conversion of adjusted net income. In summary, 2023 was an outstanding year. On Slide 8, titled Balance Sheet and Cash flow, you will see we exited the year with $185 million of cash on hand and $600 million available on our revolver. Our debt stands at just under $1.8 billion, and we have paid down nearly $200 million post acquisitions.

We believe our healthy balance sheet and strong cash generation provides us with ample capacity to invest in the business and execute on our growth strategy. Turning to Slide 9, where we will outline our capital allocation priorities. We continue to prioritize growth and execute a balanced, disciplined approach to capital allocation to deliver great returns. We have invested $71 million in CapEx in 2023, up 55%. This includes new factories and a new distribution center, which will help unlock opportunities where we have constraints. We returned $178 million to shareholders in 2023, including share repurchases of $61 million, and we recently increased our quarterly dividend 9%. We exited the year with a net debt to adjusted EBITDA ratio of 2.1x, well within our targeted range.

This is a testament to our strong cash flow generation. We are well positioned for capital deployment in 2024 as we execute on our growth strategy and deliver attractive shareholder returns. Moving to Slide 10 and our 2024 outlook. We expect reported sales growth of 8% to 10%, with organic growth in the range of 3% to 5%. This assumes positive price and strong volume growth. Acquisitions are expected to contribute approximately 5 points to growth. We expect normal seasonality through the year. Our outlook for full-year adjusted EPS is $3.17 to $3.27, which represents growth of 4% to 7%. This includes an $0.11 or 4 percentage point negative impact to EPS related to changes in global tax standards that went into effect January 1. A few important items to note for the year.

First, we expect segment income to grow 8% to 11% for the year. This reflects positive price plus productivity more than offsetting inflation. In addition, we plan to invest in capacity, new products and digital to accelerate growth and productivity. Second, we expect free cash flow conversion in the range of 95% to 100%, or over $500 million. This reflects higher CapEx investments and improvements in working capital. And third, we expect our adjusted tax rate to be approximately 23% versus 19.5% in 2023. This reflects a 2.5 point rate impact from the change in global tax standards. The remaining rate increase relates to our income mix and includes a full-year of ECM. Importantly, we expect to offset a meaningful amount of the cash tax impact of the change in global tax standards.

A few additional 2024 assumptions include higher net interest expense of approximately $90 million; shares of approximately 168 million, corporate costs of approximately $95 million and CapEx of $85 million to $90 million. Moving to Slide 11 and our first quarter outlook. We expect organic sales growth in the range of 2% to 4% and year-over-year margin expansion. For earnings per share, we expect adjusted EPS in the range of $0.72 to $0.74, up 7% to 10% year-over-year. This includes a $0.04 negative impact from a higher tax rate, including approximately $0.03 from the change in global tax standards. Wrapping up, our team delivered an [outstanding] 2023, and I believe we are well positioned for another great year. With that, please turn to Slide 12, and I will now turn the call back over to Beth.

Beth Wozniak: Thank you, Sara. Since then, we have been executing on our strategy to drive growth and differentiated performance. Our strong financial track record demonstrates our strategy is working. High-growth verticals, new products and innovation plus global growth and acquisitions are key pillars of our growth strategy. As a result, we’ve had outstanding growth going from $2 billion in sales to well over $3 billion last year. We have also delivered tremendous returns with segment income and adjusted EPS more than doubling since 2020. And we have generated approximately $1.5 billion in free cash flow. At our Investor Day last year, we laid out medium-term targets and have made significant progress. In the first year, we have already achieved our margin expansion target.

We also have meaningfully exceeded our acquisition contribution and earnings per share growth, and we believe we have plenty of runway ahead of us. Please turn to Slide 13. We are building a strong track record. We have industry-leading products and solutions, and we are well positioned with strong secular tailwinds. We expect the government funding for infrastructure to flow this year and contribute to our growth over the next five-plus years. We see significant growth opportunities with the electrification of everything, in particular, the acceleration of AI and the need for liquid cooling. We expect our Data Solutions business to continue to grow double digits in 2024 to beyond $500 million in sales and we are building a pipeline for future growth.

In addition, we are well positioned for the energy transition, from decarbonization to renewables, to power utilities. And with the acquisitions of ECM Industries and TEXA Industries, we have opportunities to grow these portfolios, expanding into high-growth verticals like energy storage as well as scaling through our channels, and growing globally. When it comes to new products, our innovation engine has never been stronger. We expect new products to add more than 2 points to sales growth and be margin accretive to overall nVent. Finally, we are creating value through capital allocation. We see ample opportunity to grow via acquisitions. We play in a highly fragmented $90 billion connect and protect space. Our acquisition framework serves as a flywheel to accelerate growth.

We have a healthy pipeline and a good track record of strong returns. In addition, we are returning cash to shareholders and recently raised the quarterly dividend by 9%. We are confident we can continue to build on our strong track record and deliver for our customers and shareholders. Moving to Slide 14. Key to our success has been our people and culture and making nVent a Great Place to Work. We are focused on delivering for our customers, and having a positive impact on our communities. As we build a more sustainable and electrified world, ESG has been core to our strategy. On this slide, you can see numerous awards and recognition that we have received. I will comment on a few of these. Recently, we were awarded a Gold Sustainability Rating from EcoVadis, placing us in the top 3% of companies assessed in our industry and in the 93rd percentile of all companies assessed.

We were also recognized as one of America’s greenest companies by Newsweek, and we were named for the first time to the Fortune Best Workplaces in manufacturing and production list. These are just a few of the many awards and recognitions that we have received. I’m extremely proud of our nVent team and everything we have accomplished and there is more to do. Wrapping up on Slide 15. 2023 was another year of outstanding performance for nVent. We delivered double-digit sales and earnings growth. We are well positioned with the electrification of everything, sustainability and digitalization trends, and we expect 2024 to be another year of strong sales and profit growth with robust cash flow. Our future is bright. With that, I will now turn the call over to the operator to start Q&A.

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] And the first question will come from Joe Ritchie with Goldman Sachs. Please go ahead.

Joseph Ritchie: Hey, good morning everyone and congrats on a nice end to the year.

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Q&A Session

Beth Wozniak: Thank you.

Sara Zawoyski: Thank you, Joe.

Joseph Ritchie: Hey. Let’s just start off with the cadence. It’s interesting that the first quarter is expected to be up 7% to 10% from an EPS standpoint yet, if the growth rate is modestly below what you’re forecasting for the year. So it can’t help us think that there’s some conservatism baked into the guide. But just any thoughts around the stronger start to the year and kind of expectations through the remainder of the year?

Sara Zawoyski: Yes. Maybe, Joe, a couple of big things to note. One would just be Q1 does have the benefit of the carryover the ECM acquisition. So you’re seeing that in the acquisition contribution from a topline perspective, 13 points – and obviously, that’s dropping down from an earnings per share standpoint. I think the other thing maybe to factor in is we guide to that 2% to 4% organic growth in Q1 versus that full-year of 3% to 5% is that we are going to be lapping some of that channel inventory level adjustments beginning in Q2 and beyond. And I think the other piece, too, if you look at that from a segment standpoint, EFS has some strong double-digit laps here in Q1 and Q2. So early start to the year, but we feel good about our 2% to 4% growth here in Q1.

And I think one other thing, Joe, I would point out is that Q1 is our last lap, if you will, of the impact of that Russia exit. It was roughly 5 points to Thermal Management in Q4. We expect that to be roughly 4 points to Thermal here in Q1.

Joseph Ritchie: Got it. That’s clear and helpful. I guess maybe it’s a good segue also to what you’re seeing from an inventory perspective, to your point, I think we’ve been 10 months into this destocking phase and volumes still exited the year negative. And so just expectations for volumes ultimately turning positive in 2024. And then if you could provide any color on what price is embedded into that organic guide for 2024, that would be helpful, too?

Beth Wozniak: Yes. Joe, let me start. When we ended Q4, we saw there were some continued inventory adjustments, but importantly, sell-through was positive. And as we enter 2024, we expect the build on inventory to be slow as we go forward in the year, and remember, as Sara pointed out, in Q2, that’s when we really start to lap some of those inventory adjustments. And our view this year is with all the secular tailwinds, we believe we’ll have strong volume growth, and I’ll let Sara comment on pricing.

Sara Zawoyski: Yes. So from a price volume perspective, we do expect positive price in 2024. It will just contribute to a smaller piece of that overall growth because volume will be a bigger contributor of that. I think that’s in the backdrop of inflation. We still expect it to be another inflationary year here in 2024, particularly as it relates to wage and labor rates. And maybe one other point I would just say is that guidance of positive price does take into account some carryover as well as realization from pricing actions that we’ve already communicated.

Joseph Ritchie: Helpful. Thank you very much.

Operator: The next question will come from Nigel Coe with Wolfe Research. Please go ahead.

Nigel Coe: Thanks. Good morning everyone. Thanks for the question.

Sara Zawoyski: Good morning.

Beth Wozniak: Good morning.

Nigel Coe: Good morning. I was hoping we could maybe get a bit more granular on the Data Solutions. Maybe kind of how that tracked during the fourth quarter? I know it’s double digits, strong double digits. But more importantly outlook for 2024, I mean double digits is obviously a very wide range. But just curious if it’s closer to the 20% and 10%, any color there. And maybe just quotably, what you’re seeing in liquid cooling, is that becoming a more material tailwind as we go forward?

Beth Wozniak: Yes. So on our Data Solutions business, I think when we say strong double digits, at the higher end of those double digits and the lower end of those double digits as you’ve commented. And really, that is the traction that we have, I would just say, with not only liquid cooling, some of our WBT acquisition as well, and the key thing, as we’ve talked about, is the acceleration of AI. And so we’re continuing to work with several hyperscale customers on accelerating liquid cooling solutions as well as through some of our standard product offerings with our cooling distribution unit and some of our rear door heat exchangers, having those products served through our distribution channels and all of that effort is ramping.

And so we see a funnel of activity that takes us into 2025. So our view is, as you start to see those more powerful GPU chips, and it’s not only in data centers, eventually, as we look at edge computing, you’re going to see this proliferation of these type of components that need to be liquid cooled. And so we feel that liquid cooling has applications even beyond Data Solutions. But we’re very positive on our – what the outlook is for this year and going several years into the future.

Nigel Coe: Okay. So strong double digits implies obviously closer to 20%, okay. And then just obviously, the plan has flattish margins. And so I’m just wondering, Sara, maybe if there’s anything we need to consider from a first half versus second half? And how does that outlook look across the segments?

Sara Zawoyski: Yes. I would say that there’s – let me start here. From a first half, second half, it does include a bit more muted margin expansion here in the second half. And a couple of things we’ve even talked about in the context of our last quarter earnings. One is just the phase in an investment. We’re going to continue to invest behind the great growth that we see in Data Solutions and particularly in liquid cooling and also in new products, and you see that providing great returns from a topline perspective. So that will phase in over the course of the year. I think one specific thing I would call out is we’ve talked about bringing online some additional capacity in liquid cooling specifically, and that gets sort of commissioned, if you will, kind of midpoint of the year.