Good morning, everyone, and welcome to the nVent Investor Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. If you would like to ask a question, please press star and one at that time. To withdraw your questions, you may press star and two. Please also note today's event is being recorded. I'd like to turn the conference call over to Tony Riter, Vice President of Investor Relations. Please go ahead.
Thank you, Jamie. Good morning, everyone. We appreciate your participation today to discuss this morning's announcement that we entered into an agreement to acquire ECM Industries. On the call with me today are Beth Wozniak, nVent's Chief Executive Officer, and Sara Zawoyski, our Chief Financial Officer. Beth and Sara will make some formal comments, and then we'll take your questions. Please note that today's press release and slide presentation accompanying this call are posted on our investor relations website at nvent.com. References to non-GAAP financials are reconciled in the appendix of the presentation. Please take a moment to read the forward-looking statement on slide two. During today's conference call, we will make certain forward-looking statements that reflect our current views about the acquisition of ECM Industries and nVent's future performance and financial results.
These statements are based on certain assumptions and expectations of future events that are subject to risks and uncertainties, such as the risks outlined in today's press release and nVent's filing with the Securities and Exchange Commission. Actual results could differ materially from anticipated results. Finally, we will not be making any comments or taking questions regarding nVent's 1st quarter results or expectations for the quarter and full year. As a reminder, our most recent comments regarding Q1 in 2023 were during our Investor Date on March 7th. With that, please turn to slide 3, and I will now turn the call over to Beth.
Thank you, Tony. Good morning, everyone, thank you for joining us. I'm excited to share with you additional details regarding our announcement this morning to acquire ECM Industries. ECM Industries is a leading provider of high-value electrical connectors, tools and test instruments, and cable management. ECM complements nVent's electrical power connection and grounding solutions portfolio within our Electrical & Fastening Solutions further positions nVent with the electrification of everything. Their broad offering of critical electrical products adds to our connect and protect portfolio. Their solutions are used in high-growth verticals, including commercial solutions, power utilities, data centers, and renewables. ECM will add over $400 million in sales is expected to be margin accretive to nVent. We expect the transaction to close in Q2. ECM's portfolio is one we've had our eye on for a while.
We believe it is a great fit and will drive further growth and long-term value creation for nVent. On slide four, you can see our strategy, which has remained consistent. We continue to execute on the core elements, focusing on high-growth verticals, new products, global expansion, and acquisitions. We've had great success with the four acquisitions we have done since then. Combined, these acquisitions totaled approximately $300 million of revenue last year and grew faster than overall nVent. Each deal also exceeded the weighted average cost of capital within two to three years of closing, our primary financial deal metric. Please turn to slide five, I will provide some additional background on ECM. ECM has a diverse connectivity product offering for mission-critical applications that will add to our nVent connect and protect portfolio.
Headquartered in New Berlin, Wisconsin, ECM has a portfolio of industry-leading brands with a legacy dating back over 125 years. ECM offers a variety of products across electrical categories that focus on connection, tools and test instruments, and cable management. It has a strong track record of innovation and long-standing customer and channel relationships. Almost all of ECM sales are in North America. ECM will combine with our Electrical & Fastening Solutions. With ECM, we will have a more complete power connection and grounding solutions portfolio. ECM will provide us with a complementary offering of mechanical and compression connectors. This extends our portfolio beyond exothermic connectors, grounding solutions, and power conductors. We will be able to offer a broad range of solutions to meet various customer needs across commercial, industrial, and infrastructure, from power utilities to data centers, renewables, energy storage, and more.
With the electrification of everything, reliable power and power connections are critical to help ensure resiliency and safety. Today, nVent is a leader in cable management, providing electrical contractors with a wide range of labor-saving solutions. ECM will extend our offerings with tools, test instruments, and cable management devices that are essential products used on job sites every day. The combination will allow us to better serve our customers with an expanded portfolio. ECM's complementary portfolio, strong brands, and long-standing customer and channel relationships will be a great combination with nVent. As you can see on slide six, ECM is aligned to our high-growth vertical strategy with the electrification of everything. Commercial and resi represents the largest vertical for ECM, followed by infrastructure and then industrial. Electrification trends are driving demand for ECM solutions.
These include grid modernization, EV infrastructure build-out, 5G, smart buildings, IoT, data centers, sustainability, and a connected home. Together, nVent and ECM will help to build a more sustainable and electrified world. Turning to slide seven, we have had a consistent framework to assess acquisitions, and we believe ECM checks all the boxes. Our framework starts with finding companies with great products aligned to high-growth verticals. ECM is a leader in power connections and aligned with the electrification of everything megatrends. Next is the ability to scale. With nVent's strong electrical distribution partnerships globally, we will be able to expand access to ECM's product portfolio. Over the last several years, we've invested in vertical sales and marketing teams to drive demand creation. These teams will have the ability to promote, specify, and drive pull-through of ECM's products.
ECM provides nVent with access to channels and new customers through retail and new distribution areas where we have had limited exposure today. The last piece of this framework is investing for growth. First, we believe we can grow ECM sales outside of North America with our global reach and footprint. Second, we will invest in digital marketing capabilities for ECM to be able to expand globally and access more customers. Lastly, ECM will bring us additional manufacturing and sourcing capabilities and expanded manufacturing footprint, allowing us to in-source some components. We are confident these investments will drive both growth and cost synergies. In summary, ECM is a great fit with nVent. We're excited about the growth potential and the long-term value creation. I will now turn the call over to Sara for some detail on the transaction. Sara, please go ahead.
Thank you, Beth. Please turn to slide eight, where I will summarize the financial highlights of the transaction. We intend to acquire ECM for $1.1 billion, subject to customary adjustments. ECM's sales were $415 million, with adjusted EBITDA of $104 million for the trailing twelve months ending in February. This implies a multiple of approximately 10.6x of ECM's adjusted EBITDA. We expect ECM's adjusted EBITDA margins of 25% to be accretive to overall nVent margins. We expect cost synergies of $10 million-$15 million by year three, and we anticipate potential upside from revenue synergies and investments we will make to drive additional ECM growth. The deal will be financed with existing cash on hand of approximately $200 million, along with the proceeds from new debt.
We have fully committed bridge financing in place with JP Morgan. On a pro forma basis, we forecast our net debt to adjusted EBITDA to be 2.8 times at closing. With our strong cash flow generation, we plan to de-lever quickly and be within our targeted range of 2- 2.5 times within the next 12months- 18 months. Our intent is to maintain investment-grade metrics. We expect the deal to be accretive to adjusted EPS of 2023, excluding purchase price accounting and one-time deal-related costs, and we expect it to be accretive in 2024 on a GAAP basis. Another couple items to note. We expect additional interest expense of approximately $60 million in the first year.
On taxes, it is important to note that we anticipate cash tax savings of over $50 million on a net present value basis related to the step-up. ECM's effective tax rate is expected to align to the U.S. rate to roughly 25%. Finally, we anticipate the transaction to close in the second quarter, subject to customary conditions, including regulatory approvals. In summary, we are excited about this acquisition and the value we expect it to create for our customers, employees, and our shareholders. ECM is a great company, and we look forward to welcoming their employees once the transaction is closed. With that, I will now turn the call over to the operator to begin Q&A.
Ladies and gentlemen, at this time, we'll begin the question-and-answer session. Once again, to ask a question, you may press star and then one using a touch-tone telephone. If you are using a speakerphone, we do ask that you please pick up your handset prior to pressing the keys to ensure the best sound quality. To withdraw your questions, you may press star and two. Again, that is star and then one to join the question queue. Our first question today comes from Julian Mitchell from Barclays. Please go ahead with your question.
Hi, good morning, and congratulations on the transaction. Maybe just a first question would be around if you could sort of flesh out for ECM Industries what the recent organic sales growth rate has been, and also, I guess the 20% or so that's tools and test instruments. Help us understand kind of how large the pre-existing nVent business is in that area, please.
I'll maybe begin on the financial performance, Julian. Just to give you a little bit of color there, ECM has grown double digits in the last couple of years, and really that reflects the strong benefits they're also seeing in the electrification of everything, and we continue to see great growth potential going forward. From a margin performance standpoint, I would just start by saying, you know, just from an absolute margin, you know, standpoint at 25%, EBITDA margins, you can see that it's a very well-run company. Over the last couple of years, there's really been a focus around operational efficiencies and execution, including expanding capacity, you know, in Mexico. I would characterize their overall margin performance good. We continue to see, you know, a path forward for expansion going forward, including those cost synergies.
To your question on tools and test instruments, and particularly where EFS play and in these type of areas, we really have negligible tools and test instruments. This is a whole expanded category for us that serves the same contractors that we serve today.
That's helpful. Thank you. If you could help expand, I suppose, on the kind of route to market, if you like, of ECM, you know, any overlaps on kind of distribution or, you know, end customer exposures. I wondered if you had how much of ECM Industries sales are kind of greenfield versus replacement.
When we look at the breakdown of their channels and others, you know, about 55% is going through distribution. When we look at that, you know, as I mentioned, they're not global, we have stronger global partnerships. Even across the landscape of electrical distribution, we believe that is a great opportunity to get further penetration of those products across electrical distribution. They have, about 30% that goes through some specialty channels and retail, where we believe we can pull through some of nVent's products. There's, you know, around 15% that goes through OEMs, and these would be similar OEMs that we deal with as well. Julian, sorry, the second part of that question, could you just repeat it?
Sure. It was just, if you had a sense like how much of ECM's revenue was kind of into greenfield or new projects as opposed to, you know, replacement, aftermarket, brownfield, all of that.
No, I'm not sure we have, you know, all that number broken out, but we do know there is, you know, a good sizable portion of what we would call MRO or kind of replacement consumables. That's because a lot of the things that are bought to be used on the job site are, you know, either consumed or left on the job site. There is a portion of that, and I think as we get into it, you know, we'll quantify that further. But that is an important part of this business.
Great. Thank you.
Our next question comes from Nigel Coe from Wolfe Research. Please go ahead with your question.
Thanks. Good morning.
Good morning.
So-
Good morning.
Merger Monday. It's good. You called out the 10 to 15. Maybe just, you know, if we can just maybe dive into that a little bit more, you know, where you see, you know, the major contributors to that, that, cost potential? You know, are there any, you know, it sounds like there's been some significant investment, in the business but, you know, are there any investment requirements, you know, R&D, you know, NPI to accelerate growth here?
I'll maybe start with the cost synergy side. From a cost synergy perspective, we see it in that $10 million-$15 million range by year three. A couple things. The biggest piece of that is just gonna be on the procurement side, particularly around materials and metals. We also see some savings as it relates to freight costs. I think the third bucket I would say is just insourcing. They've got some great, for example, aluminum extrusion capability that as we look at that, we believe that can provide some nice efficiencies as well as just good for a, you know, customer lead time managing our supply chain perspective.
The only other comment I would make is that it does include also some ongoing, I would say, IT investments that we would be making, digital investments, simply to align to our overall programs and platforms as well. That's a bit netted in that number, if you will.
I would say from a, you know, we believe we've got a great global vertical sales and marketing network that we can really plug in ECM into, so, you know, and scale that. On the R&D side, as we wanna take some of their products global, we'll be making some investments and some certifications. We'll have some investment there as well.
Okay. That's great. Then, I think you called out $60 million of interest. I just wanna clarify that's an annualized number, so it feels that way. Then on the tax rates, you mentioned 25% for ECM. That mixes up the nVent rate by what, a point or so, overall?
That's correct. That's about the rough math from a rate perspective. On interest, correct, that $60 million is an annualized number. I just wanted to call out from a cash tax perspective, we are expecting, you know, meaningful savings there that I alluded to in that greater than $50 million net present value range.
Great. Okay, I'll leave it there. Thanks a lot.
Our next question comes from Jeff Sprague from Vertical Research. Please go ahead with your question.
Thank you. Good morning.
Good morning.
Good morning. Hey, maybe just a little background on how this came together. You know, it does look like a great fit at a pretty reasonable price here. I see they just bought ILSCO in 2020. Wonder if you were involved in the hunt for that transaction at the time. Maybe just a little bit of background on how the two parties came together, and is this a group of folks that you've known for a while?
Well, Jeff, you're right to point out ILSCO, because when we look at our connections, power connections portfolio, ILSCO is a company that we had our eye on. As you can remember, we weren't doing large deals at that time, also we were just coming out of a pandemic, so we missed that opportunity. We had been in contact with the ECM folks and, you know, for a couple of years prior to when they decided this transaction to come about. We've known them. This was, you know, this was a portfolio that we'd actually looked at other opportunities. Even we looked organically, could we develop a full range of connectors, which would have been a lot of investment and taken a lot of time.
This has been something on our radar for a while, and, you know, we were pleased that we were able to, you know, make this all happen and think we're in a good position to execute on this deal, given just, you know, the integration track record we've built over the last several years.
You noted the, maybe the implicit opportunity to, you know, take some of these products globally. You know, even though some of this stuff looks, I'll just say, relatively basic in some respect, I mean, is this stuff that can be ported over into IEC markets, or this is all sort of NEMA equipment and it would be a, I don't know, just a heavier lift to maybe internationalize the sales here?
There's work we have to do to meet the certification requirements for IEC versus, say, UL. We believe that that's, you know, something that we're capable of doing, you know, within a year timeframe and, you know, some earlier, some later. Absolutely, that's the path that we will take.
Great. I'll leave it there. Thank you.
Our next question comes from Jeff Hammond from KeyBanc Capital Markets. Please go ahead with your question.
Hey, good morning.
Good morning.
Just a couple of questions. One, maybe just expand on this specialty retail channel. Is that DIY or something else? I think you mentioned some res maybe. What's the res exposure?
Yeah, let me just talk about some of those channels. Yes, there is some retail, but there's also some other specialty type of distributors where, you know, we and nVent hadn't played. One of the things that we're excited about from this opportunity is that we know that for nVent, that there is a set of contractors that we haven't necessarily been able to serve, you know, very effectively. This is going to open the door to us because they're very strong at e-commerce. They have this ability to do one PO, one shipment. That's not something that, you know, that's on our radar for nVent, but we're certainly not there.
They've built this great capabilities around e-commerce, and I think that's going to allow us to pull through nVent's offerings to, a whole segment that we had just, you know, expanded segment that we had not been able to successfully go after. Jeff, what was the second part of your question?
resi mix.
Resi. It's hard for us right now to kind of break all of that out. I would say, you know, commercial resi combined is just over 60%. This is some of the work that we'll do. You know, when you go through distribution, we'll have to spend some time to look at the end sales and how that aligns to our vertical, you know, breakout. I would say commercial resi is just over 60, combined.
Okay, great. One of the hallmarks of EFS is really the whole labor savings component. You do a great job of highlighting that. I'm just wondering where ECM is on that, how much of a focus is, and if that's something you can really drive within their product category?
I think that's an opportunity for us. I mean, certainly they have great products. One of the things we also like is they have, you know, products that create great value for their customer base that is a low cost on the bill of material, which is similar to us. Nice margin profile, similar to us. I think this is an opportunity for us to really look at how can we further drive labor saving solutions. When you look at even test instruments and tools, that same concept applies. You know, how do you support the contractor that they can get on and off the job site really quickly. We're excited about that potential as we combine ECM and nVent.
Okay, great. If I could just sneak one more in, is there much margin differential between the three groups of products?
No, I would say that overall, all three, you know, product groups have strong margin profile, you know, getting to that overall, you know, ECM strong EBITDA margin profile.
Okay, thanks.
Our next question comes from Deane Dray from RBC Capital Markets. Please go ahead with your question.
Thank you. Good morning, everyone. I'll add my congrats. There are a number of brands here that I'm familiar with, like Gardner Bender that was previously owned within our sector. These are, I think, really strong brands, so I like seeing that. The question is, where is ECM on their digital journey? How much of their product line has already been digitized? I know that was a big lift for you all for the past couple of years. Where are they on that spectrum, and how much additional work might that entail?
I would say they've been on a journey and made some good investments. When I talk about the fact that they have this ability to have 1 PO, 1 shipment, you know, they've done a lot to be able to manage their business effectively there, including some of their warehousing. That we think is very capable and, you know, that's an area that we want to explore from an nVent standpoint. The area where we think we wanna invest is further in digital marketing as we look at how we sell an expanded portfolio even globally, making sure you've got you know, digital translations and all that product information. Those are going to be some of the investments that we need to make to continue to make on the journey that both nVent is on and ECM.
Got it. Then could you comment on the test and measurement business? We're familiar with the multimeter sector, but it's a reasonably sizable piece of this transaction. Is there, you know, are there adjacencies that you're interested in? You know, it makes sense that you're now in electrical test and measurement, but what else might you be looking at?
Well, I think it starts with this, Deane, is that, you know, the electrical contractor is a key segment for us. Anything that we can do that really expands, you know, that share of wallet or that allows the contractor to serve, you know, to, as I said before, get on and off the job site. Just, you know, we think it's a good fit, and I think there's more for us to learn here. We like it because it's very synergistic with what we do.
Great. Then just last one. Can you, and I might have missed this, but what's the presence in the big box distributors? If, and where do you stand in terms of your latest line review and taking share, adding, losing share? Anything that you can comment on?
I don't know that I can comment all on that, but I can comment on they are in all of the, you know, major retailers, big box. I mean, they've got over 20+ year relationships. These are longstanding, and I think, you know, they're very well positioned, and I'll just leave it at that.
That's great. I'll just let you know I did buy some of their weatherproof connectors this weekend. I'm a big fan of that product. I appreciate it. Thank you.
Excellent. That's excellent.
Our next question comes from Joe Ritchie from Goldman Sachs. Please go ahead with your question.
Thanks. Good morning, everyone, and congratulations.
Good morning, Joe.
I guess my first question is just around, since we were talking about distribution. Does this business sell 100% through distribution? Also curious, just from a pricing standpoint, what did their pricing look like last year?
Let me answer the first. You know, 55% goes through sort of the electrical distributors, some of the, you know, the same ones that nVent has, maybe not all the ones that nVent has, so that's a great opportunity. About the next 30-some% goes through the specialty distribution, e-commerce, and retail. Then the remaining 15% would be OEM direct type business.
Okay, cool. Then pricing last year, how much pricing did they put through?
Well, can't really comment on the pricing side, but here's what I would say, Joe. Just if you look at their strong margin profile overall, being at 25% EBITDA margins, you know, shows that they've got, you know, strong execution on the operational side, and just more broadly.
Okay. Then maybe just quick follow-up, and I know that, sometimes, you know, going through the due diligence process, like there's only so much you can actually, you know, see. I'm just curious, like how much were you able to really due diligence, the control procedures they have in place from a pricing standpoint, the investments that they need to make? Just any, you know, either qualitative or quantitative comment, Carrie, around that would be helpful.
Well, I would just say from an overall due diligence standpoint, I mean, we've got an extensive due diligence playbook, you know, that we've really executed beginning with our first acquisition upon spin at Eldon. We feel very good about the thoroughness of our due diligence, you know, process, and we think that that sets us up for a strong start here.
Okay, great. Thanks, guys. Congrats again.
Thank you.
Once again, if you would like to ask a question, please press star and one. To withdraw your questions, you may press star and two. Our next question comes from David Silver from C.L. King. Please go ahead with your question.
Yeah, thank you.
I had a question, I guess, about the margins. ECM is at 25%, as you mentioned, adjusted EBITDA margin. Your EFS segment is a little bit higher, you know, than that. I'm just wondering, is there any reason why, let's say, over a couple year period following, you know, full integration, why the margin profile of ECM couldn't match or exceed, you know, what you're currently generating from EFS? In other words, are the products, channels, markets from your perspective, you know, roughly have similar margin potential or are there, you know, some differences in either the products or the market structures that they serve? Thank you.
I mean, I would just start by saying, you know, look, ECM, we believe is a well-run company. I mean, it's delivered great growth and it's got really strong, you know, EBITDA margins. You know, we do see, you know, margin expansion opportunities over time. I think, you know, the first start of that, right, is gonna be working these kind of combined cost synergies that we talked about. As we look ahead, you know, we believe, you know, we've got great growth potential on the top side as well as, you know, continued margin expansion going forward. These are things that we can get into more, you know, upon close of the business as well as we begin to talk about projections, et cetera.
Another question, I think for Sara, but you did articulate the significant, you know, cash tax savings that will result from the combination. I'm just wondering, in what you're acquiring, are there any other assets maybe or other aspects beyond the purchase price and the EBITDA we should consider? In other words, is there spare land you could sell? Is there, I don't know, some contracts that you think can be redone in relatively normal course of business? You know, just areas of hidden value or divestible assets that we should think about. Thank you.
No, I think we highlighted those on the call, you know, with the tax cash savings, that's a positive. We've got, we believe good line of sight, you know, to these cost synergies. What I might add is just, you know, we also see ECM as a good, you know, cash generator, you know, reflective of their strong margins and relatively a, you know, asset light model similar to nVent.
Okay. Just maybe last question about integration strategy. You know, the... Would you say that the majority of the management will have some operating role, or would you say this is, you know, they're gonna hand you the keys and, you know, you expect nVent's current management to be running all or virtually all of the acquired businesses? Thank you.
Well, look, whenever we acquire a business, we always look to keep the best of the best talent. Many leaders that we've acquired have gone on to take on bigger roles in nVent. As we go through this, there's an integration process. We'll look to see, you know, who are the key leaders, and we'll look to integrate this within EFS. And there may be some, you know, and as we wanna keep key talent. That's always the way that we do this, and we work a good transition process because we wanna make sure that we're still growing the business, we're still executing, and we're still managing customers. I feel good about the approach we've done over the last four deals, and we'll apply that here as well.
Great. Thank you very much.
Ladies and gentlemen, with that, we'll be concluding today's question and answer session. I'd like to turn the floor back over to Beth Wozniak for any closing remarks.
Thank you. To wrap up, the addition of ECM is exciting for our future, and we're confident it will deliver tremendous value for our customers, employees, and shareholders. Our future is bright. Thank you for joining us, and have a great day.
Ladies and gentlemen, with that, we'll conclude today's conference call. We do thank you for attending today's presentation. You may now disconnect your lines.