...The clock is ticking, so let's make a start. We're gonna restart with nVent. Very pleased to welcome Sara Zawoyski back to the back to the Wolfe conference. Thanks for being here, Sara, and also Tony Riter, our Head of Investor Relations. Actually, I should have mentioned Sara, soon to be interim president of the Enclosures segment as well. So you wear two hats right now. But Sara, thanks for being here. I know you've got a short pitch to go through, so please, over to you.
Yeah. Thank you, Nigel, and appreciate you having us here at Wolfe today, and good morning to everyone. I just have some quick prepared remarks, and then I'll hand it back over to Nigel for some Q&A. Maybe just a quick overview of nVent first. So we are a $3.3 billion electrical company. We are a leader in the connection and protection space, and we believe we are very well positioned around the trends of electrification, sustainability, and digitalization. You see our financial performance here on the top right of the slide. We recently announced our Q1 performance, where we grew sales reported up 18%, organic sales up 5%, earnings per share up 15%, and free cash flow up 41% year-over-year. So again, we continue to execute well and deliver that performance.
Maybe a couple other call-outs from a vertical standpoint, we're really focused on high growth verticals. Our infrastructure sales now have grown over a quarter of our overall revenue mix. That's up from roughly mid-teens when we spun back in 2018. And from a geographic standpoint, predominantly North America, but still see good growth opportunities to grow share outside of North America. Our strategy remains consistent, and there's really four pillars to our overall growth strategy. One, laser focused on high growth verticals. Two, would be new products. New products actually contributed over three points to growth here in Q1 for nVent. And third would be global growth. You know, again, predominantly a North America business, but see growth opportunities to grow, especially in Europe. And then M&A. M&A has been a core part of our overall growth strategy, as well as capital allocation.
We completed our sixth deal last year, and still getting the benefits of that from that rollover inorganic benefit, you know, here in 2024. As it relates to that growth strategy, high growth verticals, again, has been a pillar of that overall growth, and specifically Data Solutions. This Data Solutions business was roughly $100 million when we spun back in 2018, and through an inorganic focus as well as organic focus, we expect that to grow to over $500 million here in 2024. Importantly, as part of that Data Solutions business, roughly a half of those sales are in liquid cooling and power, which are really an elevated growth of that overall Data Solutions.
I think the last point I would make here is that we are also adding capacity because of the meaningful demand and growth outlook we see within liquid cooling specifically. The last point I'll just touch upon is we recently also issued our sustainability report. We're really proud of the progress we're making, we're making across our three pillars: people, product, and planet, and it really is an integral part of our overall strategy here at nVent. We also added two new goals, one around eliminating all single-use plastics, and then the other around planet, water consumption reduction goal.
You know, so to wrap it up, you know, before I hand it off to Nigel for the Q&A, I would just say we're continuing to build on the strong performance of a year ago here at nVent, both from a top-line perspective as well as operating profit growth and cash flow, and we believe we're well positioned for another great year with the electrification, sustainability, and digitalization trends.
Great. Thanks, Sara. That's a great way to set the table. I promised myself I wasn't gonna lead off with a Data Solutions or liquid cooling question, but here we are. You mentioned 50% of the Data Solutions is cooling and power. That - obviously, that proportion's gone higher over the past year. I think it's 40%, if I'm not mistaken. And I think you mentioned liquid cooling and power. I mean, I understand there's other things in there aside from liquid cooling, like rear door cooling, et cetera. Just wanna confirm that.
Yeah, so that has risen by 10%. You know, from back in 2022, when we talked about that Data Solutions business, it was roughly 40% cooling plus power. Now it's 50%, and that really has risen really on the heels of strong, very strong growth on the liquid cooling side. But we also believe, you know, power will also be a part of that future growth going forward. Why we call out these two specifically is, one, it's a sizable portion of that overall Data Solutions sales, but, two, we see an elevated growth rate in cooling as well as power.
I think you've said in the past that the cooling and power portion of that 50% is roughly similar. Is that still the case?
That will vary over time-
Yeah
... you know, just based on the overall growth rate, because over the last year, year and a half, we have seen more significant growth on that liquid cooling overall.
Sure. Okay. A couple more things from the slides that piqued my interest. You mentioned global growth and opportunity to gain share outside of North America a couple of times. So what is the opportunity set? Because I think, you know, we always assume that it's really tough to compete against ABB, Legrand, Siemens in European markets. But what is the opportunity set for nVent to gain share and actually expand faster than North America in these overseas markets?
... Well, I'll, I'll start with a couple things. So one is, it started with our Eldon acquisition, and that really gave us the beachhead of that enclosures business to bolt onto things like cooling from an attachment rate, and build out our electrical and fastening solutions, you know, options, or, or opportunities as well. So I think that was really the start of it. Number 2, you know, our share position in Europe is lower than that of North America, but we believe over time, by building upon that beachhead of enclosures and working those attachment rates, and importantly, working our global strategic partnerships with those big distributors like Rexel, like Sonepar, that we can incrementally, you know, grow that business over time.
And lastly, I would say, and we talked about this a little bit on our Q1 call, we're not immune to the overall, you know, end market dynamics in Europe, but we believe we can continue to grow faster than the overall, market because of these opportunities that we see within that strategic distribution, you know, accounts, as well as bringing, you know, more products and more innovation across that nVent electrical portfolio.
Okay. And then you also talk about partnerships, so M&A and partnerships in the slides. I'm not really aware of any big strategic partnerships you have in play today, but, I might be wrong there, but do you see that as a role going forward, you know, more partnerships?
Yeah. I think partnerships have played, you know, a role in that overall nVent portfolio. A couple of them within that cooling, you know, data center space, and we would continue to look to partnerships to augment that, you know, capability, whether it be from an emerging technology, you know, perspective, whether it be a go-to-market, you know, partnership, in terms of servicing that overall, you know, broader opportunity that we see. I would say acquisitions have played a bigger role in our overall growth profile of nVent, but continue to see partnerships playing an important role as well.
Great. Maybe you can touch on sort of what you're seeing out there from a trading perspective. You know, great news to see the sales growth turn positive last quarter. Sorry, volume growth turn positive last quarter.
Mm-hmm.
Sales growth has been positive for some time. But I think the guide assumes this quarter, 3%-5% core growth. Maybe just talk about what you're seeing across the businesses, and, you know, are we seeing-
Mm-hmm
... some lift from easier comps, et cetera?
Yeah. So I'll start out with maybe what we delivered there in Q1, which is 5% organic growth. Our Q2 guide was 3%-5% organic growth, and I'll maybe give a segment view and then a vertical view.
Sure.
From a segment perspective, we continue to expect enclosures to deliver strong growth, just not quite at the 11% organic growth that they delivered in Q1, and that simply has to do with customer program timing as it relates to data solutions. So still expect enclosures to deliver, you know, high single-digit growth here in Q2. And then from a thermal management perspective, we expect that to turn to growth here in Q2. We'll largely have the impact of the Russia exit behind us here as we enter into Q2, and importantly, we're seeing that energy transition opportunity build within our order book and within backlog. So expect that to turn to growth here in Q2, as well as in the back half, really helped by that energy transition.
Electrical and Fastening Solutions, we expect that to be down here in Q2, similar to what we saw in Q1, and that really relates to some of the infrastructure headwinds that we saw in Q1. Within that infrastructure bucket, it's really two things. One would just be utility. The utilities, as that sort of, the inventory, I would say, normalizes through the distributors as well as those end customers. But they're also seeing some headwinds as it relates to telecom. I think the other thing I would just note on the Electrical and Fastening Solutions, they're also comping some difficult comparisons in Q1 and Q2, where that utility business was up, like, 40%, you know, last year as well.
That, in combination, we think Q2 will be another down quarter for EFS, but getting back to growth here in the back half as we work through those comps.
Okay. And would it be fair to say that right now it's just utility and telecom where you're seeing the big inventory headwinds?
Uh, yes
... across the portfolio?
Yes, 'cause I think largely, outside of that, we believe that channel inventory is largely normalized, overall.
Okay. But if we look at utility and look at the sell-through of your products into the actual customers, so taking away that, that distributor impact, are we still seeing healthy growth in that market?
Yeah, I think overall, we continue to see utility as a high-growth vertical for us, and it has been in the past. I think right now we're just kind of working through that supply chain inventory normalization, and once we work through that, you know, we expect that to be another strong, high-growth vertical for us, as it frankly has been in the past. And just to keep that into perspective, overall, utilities, you know, sits at roughly $100 million of our overall $3.3 billion revenue.
Yeah. Yeah, broadly small. That's fair. So ECM, I think we're lapping the one-year anniversary pretty much now, actually-
Mm-hmm. Yes
... if I'm not mistaken. End of May, wasn't it?
Yes.
So it's turning organic as we speak. So how has ECM been performing from a top-line perspective? How's it tracking versus plan? And what sort of influence does that have on organic performance in the back half of the year?
Yeah. So overall, very excited about our ECM acquisition that we just did celebrate the one-year anniversary. Mid-May is when we acquired ECM, roughly a year ago, and continue to believe it has long-term, strategic, you know, growth trends here around the electrical space, predominantly. And when we think about some of the sales synergies that we never put in the model, but we always stay laser focused on as a team, it's twofold. One would be, you know, bringing some of that product around connections and connectors, and bringing that to Europe, because they had predominantly North America presence, so that would be part of some of that European growth into the future. But also looking at a channel and go-to-market.
They weren't, you know, in, you know, every big distributor, you know, from an overall product category perspective, so we're working those opportunities through. And we didn't necessarily have sort of a ready access to some of the retail space, The Home Depots, the Lowe's, et cetera. And it gives us a nice channel to, not all of our product, but there are some products for which we weren't reaching, you know, that particular contractor group, and thinking very strategically around how we think about that from a channel perspective. Overall, that ECM business, it was roughly half of that, a little bit over half of that, was sold through distribution, but it did have a portion of that through what I would call, you know, this retail sort of e-commerce space.
As you might imagine, that, that hasn't necessarily been growing as sort of that backdrop from a resi sort of commercial space. But over time, we would expect that to get back to growth, you know, along with executing on some of those sales synergies. From a cost synergy standpoint, we said by year 3, you know, in that $10-$15 million mark, we're making good progress there from a material, logistics, supply chain perspective. And then cash, cash tax synergies were the other big element here, where we expected roughly $6-$8 million annually, and, and we now expect that to be closer to $10 million annually from a cash tax savings perspective.
Okay, great. So let's move to data solutions, but before we do that, let's talk about your role as interim president of Enclosures. How much time do you think this is gonna absorb from your, I guess, your spare time, I guess? I mean, how much... I mean, I'm sure the CFO role is more than a full-time job, but kind of how much involvement do you expect to have as in this role?
Yeah, let me maybe give a little bit of a backdrop there. So we recently announced that Joe Ruzynski, the president of our Enclosures segment, will be leaving for a public company CEO opportunity. I've worked with Joe for over a decade, and so I'm pleased for him for the opportunity, and at the same time, you know, wish him well and sad to see him go. But I will tell you this: one, that business has a lot of great things working for it in terms of those secular trends, and including, what I would tell you, an exceptional leadership team. Some of you, and even Nigel, you might have met members of that Enclosures team at some of our... the Data Center World, the Supercompute, et cetera.
And so, you know, I'll be working very closely with Joe over the coming weeks, 'cause he, you know, he will be with us till the end of May, on what that transition looks like, and ensuring that we set up, you know, that Enclosures business for continued success. And I've got also a strong finance organization that we're... that's set up for, you know, continued success as well, even as I work, you know, both interim roles, here, or in an interim, president role, as I continue on in this CFO capacity. At the same time, you know, we're actively looking, you know, for that successor for that president-
Okay, great.
position.
So I'm sure everyone in the room wants to dig, dig in a bit deeper on your data center business and liquid cooling in particular. We certainly get a lot of questions about, you know, nVent's positioning in liquid cooling.
Mm-hmm.
I think you can probably back into the numbers, the pieces of the jigsaw you gave us, you can probably back into something close to, like, I don't know, $100 million or thereabouts, plus or minus, for liquid cooling specifically. Which I think would make you the number one supplier right now in that market. I mean, how do you assess? I mean, number one, is that correct? So do you think you are the largest provider in that market? And maybe just give us a little color on your market positioning right now.
Yeah. Well, we haven't, you know, sized it specifically for competitive reasons, but we do try to give you a framework of that sizing of cooling plus power as part of the Data Solutions. With that being said, we believe we are a leader in this space, and I would talk about maybe what we believe, you know, positions us to win and our areas of strength, and I really think it starts with that technical expertise. liquid cooling is something that we've been working on for over a decade, you know, by way of industrial applications, and I would say even, you know, right prior to spin is when we began to really think about that liquid cooling application within that data center space.
So that technical expertise and really solving those complex problems is something that we've been working on well before, you know, the Gen AI, you know, discussion. So that's number one. I think the number two thing I would say is the innovation and the broad continuum across that cooling portfolio that we really bring, you know, to the hyperscalers and to bring to that broader overall space. So whether it's air to liquid, liquid to air, you know, we're in there solving for those complex complex needs, and specific to those needs of that particular hyperscaler, which can differ, you know, depending on whether it's greenfield, retrofit, space requirements, you know, technology selections, et cetera.
I think the last thing I would say is just the ability to manufacture and scale, and that means much beyond just putting in square footage. Because you also have to ensure that you've got the supply chain, kind of end to end, you know, developed, and that ability to scale and scale in a very resilient and in high quality way, and so those things take time overall.
And then maybe just talk about how, you know, nVent goes to market. So are you going directly to the hyperscalers, or do you go via an integrator? And then, how closely do you work with the chip manufacturers on the next-generation of product evolution?
Yeah. So I would say that just in that broader ecosystem around liquid cooling, you know, we're working, you know, across that ecosystem. And that's important because we wanna be able to understand and see what's around the corner, you know, while we solve for today's cooling, you know, challenges within a data center overall. Then I would also tell you that, you know, across the Data Solutions, you know, those Data Solutions products, whether it be Enclosures, cable management, power, liquid cooling, get served both direct to those hyperscalers as well as, you know, through an integrator or a channel. But I would say predominantly sitting here today, a lot of that liquid cooling is going, and we're working directly with those hyperscalers. So it's kind of engineering team to engineering team.
Because of the chip and the technology advancement that's working at such a quick pace, and the requirement to really, you know, problem-solve what those cooling needs are, you know, for each one of those, you know, end customers.
Okay. Now, you're increasing capacity by 4X. Normally we'd be worried about overcapacity. I think we're more worried about undercapacity with this 4X increase. I mean, do you think that's enough to satisfy the demand you see out there, a 4X increase in capacity?
Look, I, you know, time will tell. I think from a... Here's how we think about it. That capacity really takes us through 2026. I think that the speed of bringing capacity on, which again, is square footage, but it's also engineering, it's also the capability that's critical in that end-to-end life cycle testing. So as we think about that capacity, it's more than just the square footage, but it's also the people, the capability, the lab, the testing. And we think that from a data solutions standpoint, specifically to liquid cooling, we've got good visibility out into 2025, and we believe that this capacity, you know, could take us out, you know, through the end of 2026. But time will tell in terms of what additional capacity and CapEx and investment we need to make.
I think what I would tell you is that, you know, we've been making, you know, capacity investments, people investments, really over the last five years, and we're gonna continue to do so to ensure that we stay, in that, you know, you know, in a leading position as it relates to leading, liquid cooling and overall data solutions.
Would you say the labor ramp is the biggest challenge, satisfying that 4X increase, as opposed to the square footage?
Yeah, I think there's I think the people side of it, you know. But again, I think the team is working through that well. And I would say just the broader supply chain element of it is critically important as well.
Okay, great. Any questions from the audience? Yeah, back here, please.
Yeah, so it's when we say power, it really is the smart power distribution units. And that largely comes from one of our acquisitions that we made called CIS Global, and it predominantly services that data center space. So when you think of, you know, managing that power supply within that data center and doing it in a very efficient way, that's what we do in terms of the smart power distribution units.
Any more questions? Do you think that there's opportunities to grow this inorganically as well? I mean, obviously, the organic path is fantastic, but is there an opportunity to grow this inorganically as well?
Yes, and I think it has in the past. Because as you think about six of those acquisitions that we did, many of those have been in that data center, data solution space. CIS Global, that we just talked about in terms of those intelligent power distribution units, is one of those, as well as wire basket trays, so WBT. That's essentially providing a very efficient labor savings solution to building out the cable management, you know, within a data center.
As we just step back and think about, you know, M&A, we've got a pretty developed flywheel, if you will, that helps inform where we put those M&A dollars, and it really starts with high-growth vertical focus, which again, would include something like a data solutions, but also great, you know, differentiated products, and then importantly, something that we believe at nVent we can really scale, you know, given our product and our footprint, and our channel dynamics.
Okay, great. I want to touch on the portfolio, now. There was, there was some press reports on your... I think it was the cable heating business, up for review or whatever. But I know you can't comment on, on anything like that, but, just maybe philosophically, how you think about the portfolio here for nVent's. You know, is, is there an active portfolio review going on? Should we expect a more focused nVent going forward? Just any, any comments on that?
Well, as you suggest, you know, we can't make any comments, and we don't, by way of our public company policy, to speculate or to comment on speculation or rumors. But I will say this: you know, that Thermal Management business is a great business, and one that we've really repositioned, you know, with energy transition, and you see that growing in that order book and in that overall backlog. You know, I would also say that we've always, and will continue to, you know, look at our portfolio and continue to transform and evolve. I think a good example of, you know, what Enclosures looked like five or ten years ago is not what it looks like today in terms of building out that system protection beyond enclosures and including things like cooling as well as power.
Okay. If you were to do a big portfolio change and divest a large business, let's say. How confident would you be to redeploy that capital efficiently?
Well, I would just say our capital allocation priorities remain consistent. You know, we've said that our number one priority by way of capital allocation is growth, and both on the organic side as well as the inorganic side, and I do believe that that's really proven to have great returns from an overall shareholder perspective. You see that in the Data Solutions growth as well as the operating income that is provided, you know, but also things like our acquisitions, and you see the accretive nature that's had, not just from a margin growth profile perspective for ECM, but also the earnings per share that that's provided overall.
Great. Acquisitions, that's a great segue to the M&A funnel, the M&A pipeline. You've delivered the balance sheet very efficiently, post the ECM acquisition and Texa. How would you characterize the health of the pipeline right now, and what's your appetite to do a chunky deal in the next 6-12 months?
Yeah. Well, I'll start by, you know, M&A is a core pillar of our overall growth strategy. We often say that we're a, you know, 3+ billion-dollar company in a 90 billion-dollar space. So, and it's very fragmented when you look across, you know, the product categories that we play in, as well as those adjacencies. So we continue to believe that we've got, you know, a very good, you know, pipeline of M&A opportunity, and again, we're gonna look at that through that strategic lens that I talked about in terms of high growth verticals, great products, things that we can scale, but also look at the returns, you know, aspect of it, and making sure that it can fit, you know, within our overall return requirements as well.
So, we're gonna stay diligent, you know, from an M&A standpoint and believe that we've got a good, healthy, you know, pipeline of opportunities. The one thing that you can't control is just the timing of these things, but again, you know, very focused on both that inorganic as well as the organic investments to deliver that growth and those returns.
But moving on to your long-term targets, you know, I think it was March of last year, you put out the 4%-6% organic growth targets, you know, incremental margin target. That 4%-6%, based on the very robust backlog build we've seen in broad Electrification projects, obviously, the Data Solutions ramping, is it possible that 4%-6%, 4%-6% might be too low as a medium-term target?
You know what? We'd have to look at that over time. I would say as we think about, you know, that 4%-6% growth, it was framed in this context of, you know, infrastructure really being a quarter of our revenue, and that being a big driver of that overall, I would say, accelerated growth profile in nVent, and we saw that play out here in Q1, with infrastructure delivering low-teens growth overall, with data solutions being a big part of that. Now, as we sit here today, we still believe that industrial and commercial and resi will continue to grow, but more modest, you know, growth overall for commercial resi. Resi, we still haven't seen turn overall to growth. Again, it's a low single-digit as part of the overall revenue profile for nVent.
In commercial, there are positives there as it relates to power and data infrastructure. So as you think of cable management, you know, J-hooks, anything that relates to power or data that needs the infrastructure, that's gonna benefit overall, you know, our electrical and fastening solutions business. So I would say overall, Data Solutions strong, infrastructure vertical really being a big part of that overall growth profile, and then industrial, low to modest, you know, growth in commercial resi, as well. I would say that the energy transition is something in that Thermal Management business that we've begun to see really being additive from an order and backlog perspective, so we believe that would provide some nice, you know, future growth as well.
Obviously, you've exceeded your margin targets you laid out, early 2022 already. Are you confident that off this higher margin plateau, you can maintain 30%+ incremental margins going forward?
We do. We think that that 30%+ incrementals is very much so largely intact. There's a couple reasons for that. One, you know, with that volume growth comes great operating leverage. You know, two, we are laser-focused on new products, and with that new products, we also look at the margin profile and the scale of these new products, so that should continue to lift overall margins as well. I think the next big bucket is operational excellence. I think over the last two to three years, our supply chain team has done an incredible job of focusing on delivering for our customers, and we're gonna continue to work that continuous improvement going forward.
But that supply chain backdrop was challenging, and we didn't necessarily see what I know our businesses have been capable of and have done in the past, and that is this core, great productivity as it relates to material supply and in the four walls of our factory. We're beginning to see that now in Q4 as we exited last year, as well as into Q1, so that's gonna be also a big part of, you know, that continuous improvement and margin performance in that longer term.
Great. Well, Sara, it's a good place to stop the discussion. Thank you very much. That was a great discussion. Thanks for being here.