CFO, Tony Riter, VP of IR. So they're gonna give a couple prepared remarks, then we're gonna dive into Q&A. I don't follow the company, so all the help you all can give me would be great and having awesome questions. So I have the iPad right here, so you can use the placards in front of you or the cards in front of you. Send me a question, and we'll make sure everything gets incorporated. So with that, please, Sara.
Thank you, Mike, and good afternoon, everyone. Thanks, Mike, for having us here, regardless of whether you cover us or not.
I lent myself, like, an opening for that, didn't I?
You did.
Yeah.
You did.
I did.
So I'll just jump right in before we get into the Q&A side of this, and just share with you a little bit about, you know, nVent for a couple minutes here. So nVent, we're a leader in connection and protection, and we help build a more sustainable and electrified world. We have three different segments with strong brands and leading positions, particularly in North America. We have very strong margins that convert over into a strong free cash flow conversion. If you look off to the right here, those are our 2022 financials, a little bit dated, but what I will say is that we're expected to do... There's a little bit of a mic issue. Can you hear me?
Can you hear?
We hear you.
All right. I will speak into this mic. And so from a financial statements for 2022, you see there strong, organic growth along with strong earnings. And for 2023, we expect to deliver double-digit sales, including the impact of ECM acquisition, as well as TEXA acquisition, along with another year of strong double-digit earnings growth. And so our strategy has been consistent since we spun roughly over five years ago, just executing on different elements of our strategy, with really a four-pronged growth pillar approach. One would be really laser-focused on increasing the mix of high-growth verticals. The second thing being new products. You know, our vitality when we spun was in the mid-teens, and now it sits at 20%, with new products contributing meaningfully to the top line. Global growth.
As you saw previously in the chart, we're still predominantly a North America business, but we see significant growth opportunities, particularly in Europe, as we expand that product portfolio offering. Last, but certainly not least, is acquisitions. Since we spun a little bit over five years ago, we've completed six acquisitions to date, with our largest acquisition that we just completed here in May with ECM Industries. So as it relates to electrification of everything, this has really been something that we've been talking about for several years now. If we start with what we see from a macro and secular trend standpoint, we're really excited about what it means from an infrastructure standpoint. If you saw on the first slide, infrastructure overall now sits at roughly 25% of our sales.
That was in the teens when we spun. And when we think about the $1.3 trillion of legislation funding that is combined with U.S. and Europe and translate that to what we believe that means for higher demand for our products at nVent, we see potential sales opportunities of roughly $250 million-$500 million over a 5-year+, you know, time horizon. And then if you look at what AI is driving demand more and more for our data solutions business, you know, along with energy transition, there's a lot of positive momentum when we think about, you know, these secular trends. If you think about percentage of our overall revenue, we estimate that greater than 60% of our overall revenue is exposed to these secular trends around digitalization, sustainability, electrification.
More specifically, under that infrastructure vertical is data solutions that have grown consistently double digits since spin, and we believe we're well on track to hit $500 million of sales in 2024. Then maybe just a point on acquisitions. I talked about completing six acquisitions since spin. We had to participate in a large space, $75 billion. It's very fragmented, so when we think about the runway and opportunity we have for future M&A, it's significant. And more specifically, for 2023, with the two acquisitions that we completed here in Q2, we believe that that will contribute a meaningful nine points to sales in 2023, with meaningful carryover into 2024. So to wrap it up, maybe a couple things I would leave you here with before getting into the Q&A.
One is, while we would characterize the environment overall as mixed, we are executing well within our strategy. And so when you think about the contribution of revenue from new products being three points year to date, when you think about the acquisitions that we completed contributing meaningfully to the top line, executing on, well on price as well as productivity to drive margin expansion this year, we think that's all culminating into another year of strong overall top-line growth, as well as double-digit earnings growth, and believe that we're well positioned with the electrification, sustainability, and digitalization trends into the future. And so with that as a quick overview, I'll hand it over to Mike, and I'm not sure how we're gonna do the mic thing here, but-
This one's on.
Okay.
So what we're gonna do is, one, compliment you on the nice adjustment to the mic change there,
Excellent.
- and then also put it on my hand, so the arthritis doesn't kick in. You know, I'm getting old. All right, let's just... You know, you touched on it a little bit at the end there, mixed macro environment. Maybe talk about what you mean by that, where are the strengths, where are the weaknesses, and kind of puts and takes as we head into next year?
... Yeah, so maybe I'll start off with the strengths and what we're seeing from a secular trend standpoint. So I'll start with industrial. It's our largest segment. It continued to grow in Q3, and we still see strong growth overall in terms of industrial automation, reshoring, onshoring. So we still see strength in the industrial setting. I think the one thing I would add to that, too, is in manufacturing construction, which sits largely under that industrial vertical for us, but a little bit on the commercial side as well. So we see that overall as very strong. While infrastructure was down for us in the quarter, you know, we still see continued strong growth from an outlook perspective.
What we saw there was a little bit of that mixed environment that I referred to, is one, Data Solutions continued to grow strong double digits in the quarter. But offsetting that was, you know, a bit of a dip, if you will, or decline in infrastructure in our Electrical and Fastening Solutions business. And this is where it fit more squarely under that utilities, and we saw that supply chain get healthier a little bit later than industrial as well as commercial resi. We saw those channel level inventory adjustments and those customer inventory adjustments happening and impacting that. But nothing's changed in terms of our long-term view of infrastructure providing significant growth into the future. Commercial resi, it was up for us in the quarter, but again, I would say mixed across the segments.
So it was up strong double digits in Enclosures, up in Electrical and Fastening Solutions, which really speaks to the power and data infrastructure, as well as the labor savings applications of those products within that electrical and fastening solutions business. So strong there. Where we saw declines, and continuing really from the first half, was in our Thermal Management commercial resi business. So this is a little bit less ubiquitous as some of what we see in electrical, and fastening, and enclosures, and more centered around underfloor heating, de-icing in a commercial setting or fire-rated wiring, which we're seeing some of that softness. Energy, I would say, was flat overall, but encouraging in the quarter, we saw Thermal Management orders up mid-teens in the quarter, really reflecting, mainly the uptick we saw in orders around energy transition projects.
So to summarize it, I would say those secular trends we still see well intact and strong, and some of those accelerating heading into 2024 around data solutions, AI, as well as energy transition. And then we see some mixed elements around commercial resi, not all parts of that are growing, as well as industrial growing, but slowing from that first half, that growth rates that we saw.
Maybe you could talk a little about then how the destocking side of things is there. Where is it most prevalent? Where are we in the destock journey? And then question came through of how are you able to distinguish between what's destocking versus maybe just incremental weakness from a demand perspective in some of those areas?
Yeah. So let me start off with the channel inventory level adjustments. You know, we expected that at some point, as the supply chain improved, we were gonna see those inventory level adjustments and those buffer inventory requirements, you know, come down. And I would say that it improved a little bit quicker and faster than what we expected. We saw a little bit of that at the tail end of Q1, saw it in earnest in Q2, and expected that to continue here into Q3. And more generally speaking, we expect that to continue into Q4, but at a lesser rate of what we saw in Q3. Some of our distributors are saying, "Look, you're at the turn level where we want you to be," and other distributors, it's taken them a little bit longer, you know, to work through their inventory.
So that is impacting, I think, our overall volume levels in the current year, and it's to be expected because even as we look at our own, you know, lead times for our products, I'll give you one example, you know, more specifically, that we had a 26-week lead time, for example, for our ground rods, and now it's back to next day. And so as you move those lead times, materially in that form, you're gonna have, you know, an adjustment, if you will, to that ordering and those inventory level adjustments. In terms of your question, Mike, in terms of, you know, how can we tell in terms of what's inventory level adjustments versus what's that end market demand? A couple different things that we look at.
You know, one, I would say, you know, we're out there talking to our customers and talking to our contractors, and that's giving him some insights to, you know, what's working and what's not working. I think the second piece is looking at sell-through through the channel. And what I would call that sell-through is, while it was literally, you know, increasing here in the first half, it reflected a little bit more of that mixed environment. So not all elements or all end markets were up. So when we talked about a little bit more of that mixed environment, you know, by end market, you know, commercial resi, industrial, we see that a little bit more through the sell-through of our distributors as well.
So how do you weave pricing into that, the conversation? You know, a couple of questions came through here about how are you managing the price, and what is the mixed environment, and how do you feel about price? Anything competitively that we should be worried about, not worried about? Maybe just run through some of those dynamics.
Yeah. I mean, I would, I would start by saying I think we've done, you know, across our three businesses, an excellent job of managing that price-cost equation. Clearly, we've saw some meaningful inflation, you know, over the last couple years, and across all three segments, you know, we've managed that price, you know, cost equation well. And I think there's a couple different things. One, I think it begins with having really strong brands and leading positions. Two, we prioritize servicing our customers, because, you know, it's one thing to, you know, publish list price increases, but it's another thing to realize that, and it does take, you know, a focus on the customer service level to help make that happen. I think the other thing I would point to is, the level of innovation.
Even, you know, as things were challenging in COVID, we stuck to our CapEx and stuck to our R&D budgets and making sure that we were prioritizing that new product and innovation. I think all of those elements, you know, help ensure that we can manage that price-cost equation well and realize that. Clearly, as inflation eases, we wouldn't expect, you know, that level of pricing or the number of price increases to duplicate going forward, as we've seen over the last two or three years. But we're gonna continue to need to be vigilant from managing that price-cost equation, because we do continue to see it as an inflationary year, even into 2024, mainly related to wage and labor inflation that's driving that.
I think the last point I would make, you know, while productivity, frankly, in the prior several years, has been more of a headwind for us, you know, we see that turning to a tailwind, in the current year as that supply chain challenges begin to ease and things improve. With that being said, I do continue to see, and expect productivity to play a larger part in our overall-
Mm
... margin expansion heading into next year. And sometimes I get the question: Well, you know, where are you at in terms of, you know, getting back to pre-COVID productivity levels? And I would still submit that we've got plenty of runway to go. Because if you look at what's driving a lot of that productivity improvements, you know, this year, in part, it's not, you know, duplicating some of the challenges and logistics costs and inefficiencies that we had last year, you know, but we're still have room to go in terms of getting four wall kinda earned hour productivity and efficiencies within our overall, you know, productivity within our plants and logistics and DCs.
If you look pre-COVID, you know, and you think about what next year brings, most people are talking about something around the level of normalized pricing, right? What would you guys have called normalized pricing historically? 1-2 points per year pull a little bit to the bottom line, something more volatile year- to- year? I mean, how would you typically think about what normal is?
Yeah, I mean, I think if you look, you know, back pre-COVID, you know, at the, electrical, you know, businesses', kind of pricing normalized environment, what that looks like, I think it's fair to say, and it's in that 1%-2% range, depending on where that inflationary environment sits.
But-
And maybe one thing to add to that, Mike, too, you know, we've always said, and it's an equation that every one of our, you know, businesses has to, has to work towards, is price plus productivity helps offset total inflation, including wage and labor inflation, as well as funding investments to get to that margin expansion. And so that's where that productivity, you know, really ramping this year and heading into 2024, will play an increasing more role within that margin expansion.
And then the last one that's loosely tied to pricing here, any formidable competitors coming out of China or other emerging markets that you guys are worried about?
Look, I would say that we're always gonna be on our toes and vigilant, you know, from a competitive landscape. So I would say nothing new to point out from a competitive landscape. And I think it comes back to, you know, what differentiates nVent is we're, you know, leading in our categories, strong brands, and really, it's that quality and that outsized value that we believe we provide to our customers. Really, that mission-critical protection on the enclosure side, liquid cooling solutions and data centers, and that labor savings, kind of innovation that we bring to contractors on the commercial, just to give you some, some examples.
A couple questions here on this. One, maybe talk about what the liquid cooling solutions you have for data centers are, what the drivers, and why you're so excited about it. I'll just start there, and then I'll layer on the second question if it doesn't get covered in the first.
Okay. Well, let me maybe step back and give,
Exactly, yeah.
Yeah, there. The bigger picture in terms of Data Solutions, right, of which liquid cooling solutions is part of, and we've characterized that, just to frame it from a financial standpoint, that's roughly $375 million of sales in 2022. That started out at roughly $100 million when we spun back in 2018, and we think we're well on track for that Data Solutions business to be $500 million plus in 2024. Now, a big part of that, you know, business and that growth, because that's sort of consistently grown at double digits since spin, and we've been additive to that on an inorganic basis as well, has been the liquid cooling solutions. This goes back, you know, roughly a decade, you know, with several industrial liquid cooling, you know, solutions that we were working towards.
Maybe a year or so prior to spin, we were looking at data centers specifically, and how do we provide differentiated value in this space, and liquid cooling solutions is which when we began to work kind of in earnest, roughly five or six years ago, with some of the hyperscalers. And so with that liquid cooling solutions, we work across the cooling continuum, so whether it's cold plate, immersion, air to liquid, liquid to liquid, we work across that total continuum. And importantly, what we do is put that cooling solution together, design, develop, and manufacture the manifolds, the cooling distributions, and work the air to liquid, liquid to liquid, cooling, you know, solutions, and be able to solve for that particular hyperscaler's needs, you know, from design to production....
That life cycle, if you will, from design to production, can take 1-2 years. So it's a process. And where we think we differentiate from that liquid cooling solution standpoint is really technology, expertise, and ability to scale, and manufacture. There are, and it continues to be, an ever-evolving environment, but in many cases, some companies don't have that scale and capacity that we're investing in, and also that deep technology and application expertise.
The follow-up then is, how do you think about the growth profile over the next 3-4 years, and what's the entitled margin target, or how do you think about the margin progression?
On Data Solutions specifically?
On liquid cooling solutions, specifically for data centers, is how the question was worded.
Okay. Well, I would say that, you know, Data Solutions in its totality has grown strong double digits organically, you know, since then, and we would expect that to continue, and specifically with Liquid Cooling Solutions, we see that accelerating with AI. And so what we talked about is, you know, we had plans to increase capacity, but those plans were probably a year or two out. With what's going on in AI, we're seeing an accelerated demand, you know, for our Liquid Cooling Solutions.
And so with that, earlier we talked about expanding, you know, production in Mexico, and that's allowing us to then increase the way we think about our liquid cooling solutions, transitioning out of a distribution center in our campus there in Minnesota, freeing up some space that allows us to roughly, you know, double our liquid cooling solutions capacity. So I think maybe to answer that, you know, more succinctly, is we expect that double-digit growth to continue, liquid cooling solutions to be a big part of that, and we do see that accelerating with what we're seeing in AI, and that increasing demand for cooling and for an energy-efficient means to cool, and with that chip technology that goes alongside AI.
Well, it makes a lot of sense, and, you know, one of the questions here also is, talk about the secular drivers. In the presentation, you talked about 60% plus of the organization tied to secular thematics. You just touched on the data center side. Maybe also give some similar thought on the factory automation piece. How do you see underlying fundamentals today, momentum, but then also, how do you play in that thematic over time?
Yeah, so we continue to see that, what I'll call industrial automation, reshoring, onshoring, you know, continue to be a positive tailwind for us and incorporated under that kind of secular trend of greater than 60% of our revenue exposed to that. We believe it's been a big part of our growth, especially from a manufacturing, you know, construction side, number one and number two, as labor, you know, continues to be, and we expect will continue to be, just a general overall constraint, it increases the importance of continuing to move and invest in overall industrial automation. So we believe that's, you know, one big element, you know, of that, you know, overall secular trend. I think the other things I would point out, Mark, Mike, would be a couple things. One is the Data Solutions which-
Mm-hmm
... we talked about. And then, another piece would be on the Energy Transition. We haven't talked about that as much. We talked about that in our Investor Day earlier this year, but we hadn't necessarily seen that come to fruition by way of the order intake. And in this last quarter, we began to see that with mid-teens orders year-over-year in our Thermal Management business, largely being driven by that Energy Transition and those Energy Transition projects.
Makes sense. Maybe you can talk a little bit about capital allocation. You know, obviously, you're funding everything that's got that return profile internally, the right growth profile. Externally, you'd have done some transactions. How do you feel about what that landscape looks like today? How aggressive you're willing to go after the right targets? Just any context.
Yeah. So I would start by saying our capital allocation priorities remain consistent. We continue to believe that, you know, growth is a great way to deliver strong returns to shareholders. So that continues to be our top priority, both organic and inorganic. So from an organic side, you see that by way of R&D being up 18% year- to- date, and we believe that that's, you know, providing good value by way of that new product revenue contribution of three points year- to- date. The second piece would just be capital expenditures, which, in part, is being driven up by way of the data solutions investments. And we're running year to date and kind of expect for the full year for that to be up roughly 50%-60%.
Now, part of that is that ECM Industries is rolling into that CapEx number, but the other part of it is Data Solutions. From an M&A standpoint, you know, as I talked about, we just did, you know, two of our acquisitions this year. One, our largest acquisition in May with ECM Industries, and continue to see and have a very active, you know, funnel of M&A opportunities. We always like to say that, you know, we're a $3 billion-plus company in a $75 billion-dollar space, so it's big, it's fragmented, and we believe we've, you know, proven with the six deals that we've done, that it's really well-aligned with our strategy, and we can create, you know, outsized value with that.
Maybe the other thing I would point out is, while ECM Industries was our largest acquisition, not even five months, you know, post completing that acquisition, we're back down from 2.8 times, upon acquiring that company, to 2.4 times in terms of leverage, net debt to EBITDA. So it just shows strength of the cash flow, strength of the EBITDA coming into the portfolio, and frankly, our ability to have further optionality as we look into the future.
You know, thank you for that, and I know you haven't given any guidance or anything on 2024, but maybe how are you thinking about your end market trends as you move into 2024, your ability to grow, and what you characterize as a mixed environment?
Yeah. So it's early, but I would say just some early thoughts around, you know, 2024. You know, one, I think we expect that largely this channel level inventory adjustments would be, you know, behind us. But I think, you know, as we think about next year, some things that I would point out: one, that legislative funding that I talked about earlier. We're seeing that in pockets or examples of some wins that we can look at across our segments, but we believe that that money really begins to flow in earnest in 2024. You know, we've talked about, you know, infrastructure and data solutions specifically, and some of the accelerating trends that we're seeing there, particularly with liquid cooling solutions.
I would say energy, while it's been kind of flattish, you know, for us this year, we believe that those energy transition trends are growing, you know, and increasing heading into next year. And I think the last thing I would point out is the sales synergies with the acquisitions that we've completed this year. ECM Industries, you know, in terms of annualized revenues, that adds over $400 million of sales to nVent, so it's meaningful in sort of absolute dollars. But as we think about, you know, the power of the combination of our two portfolios, nVent and ECM Industries, we get really excited about those sales synergies. One is taking their ILSCO electrical power connection product portfolio and putting that more broadly through distribution.
You know, two, would be taking that portfolio and expanding it globally. You know, clearly, there's work we're working on and underway in regards to, you know, getting those certifications and those requirements. And the third would be even looking at some of the nVent product portfolio and putting that through some of the ECM channels that we're not as strong in, you know, today. So those are some of the positives. I think, you know, commercial resi, we'll see in terms-
Yeah
... of kind of where that heads, and again, it's a very mixed, you know, pluses and minuses for us across the various portfolio. You know, but overall, we believe, you know, we'll have solid growth in 2024 because of these, some of these factors.
A follow-up question on Data Solutions from the audience: How do you look at the competitive dynamics within the data solution side of things? Are there other large competitors? Are folks trying to enter the space? How do you think about those dynamics?
Look, I think it's a very high growth, attractive space, so, you know, we're not suggesting for a moment that that competitive environment is gonna stand still. But as we think about, you know, where we're positioned, we think we're positioned very strongly because of those things I talked about earlier: our deep technical expertise, the application expertise in terms of just overall cooling, you know, as well as our ability to scale and have capacity. So we believe...
You know, I think maybe the other thing I would add in that liquid cooling solution space, Mike, is, you know, as we think about solving the hyperscalers' needs, we're also looking at how do we take that liquid cooling expertise and apply that in a more standardized way, you know, through channel as well as into industrial cooling, and also thinking about, you know, how that transcends into things like enterprise, energy storage, and edge computing. All things that are gonna need, you know, different ways, more energy-efficient ways, you know, to cool as we increasingly have more data computing and high densities.
Great. Well, please join me in thanking the nVent team for their time today.