Good morning, everyone. Next up on stage, we have the team from nVent, Chief Financial Officer Sara Zawoyski, Tony Riter, Investor Relations. Team, thanks for joining us. A lot of exciting things going on in your end markets. I hear this data center stuff's pretty cool, so we'll touch on that. But maybe, Sara, just to start us off here, you know, what are you guys focused on? What are you seeing out there? And then we'll dive into some questions, if that works.
Yeah. Thank you, Josh. Thanks for having us, and good morning, everyone. I'll just maybe start with a couple key highlights for nVent. nVent, we're a leader in the connection and protection in the electrical space. We're fast approaching $3 billion in sales, and we've had a very positive earnings trajectory. When you think about the secular trends around sustainability, digitalization, and some of the infrastructure investments, we see that all driving demand for our products. When you think about our growth strategy, that has been consistent since we spun back in April of 2018, you know, really centered around increasing those high-growth verticals, increasing new products, global growth, as well as M&A. There's some exciting things happening there on the M&A front in high-growth verticals.
Infrastructure, specifically, because of data solutions and the massive amount of growth we've seen there since then, that now accounts for over 25% of nVent sales, where that was back in the teens as we spun. I think the second thing maybe to point out is the M&A. We've acquired and just kind of wrapped up and closed out, our sixth acquisition since spin, and we've done two, completed two in the last four months, and one of those has been our largest acquisition with ECM Industries. And so we think with the combination of that strong execution on that organic growth side of the house, as well as the strong execution on M&A, it really is changing that growth projectile, you know, for, for nVent.
So we believe we're well-positioned, you know, as it relates to these macro trends around sustainability, digitalization, as well as the infrastructure investments. So with that, I'll pass it back to you, Josh-
Excellent.
For the Q&A.
Yeah, maybe just to start off on the macro side, obviously, dynamic environment, you know, certainly some regional color in places like Europe and Asia. Inventory levels are moving around for some folks. Anything that you would point out that stands out or you're particularly focused on, you know, in terms of call it near-term demand trends or customer behavior?
Yeah. So I'll start out with maybe just kind of painting the picture from the vertical side of the house. So when we think about infrastructure, like I said, that's now over 25% of our sales, and data solutions, that actually grew... infrastructure grew 10% for us in Q2, so strong double-digit growth. And when we think about, you know, data solutions, for us, that really revolves around being a systems provider to data centers. So it's the enclosures, it's the cooling, it's the power, and really focused on liquid cooling. And so that's where we're seeing that exponential growth.
When we think about industrial, that's roughly 40% of our sales, and we see strong underlying secular trends there, whether it be industrial automation, as well as onshoring, reshoring, as well as the manufacturing construction that's happening here in North America to meet those Build America, Buy America requirements, so strong growth underlying there as well. Commercial resi, a little bit different. You know, we did say coming into this year that we expect that to be softer. That's roughly 30% of our sales. But if you break that apart, there's an element of that commercial and resi infrastructure, particularly in the electrical and fastening solutions business, that is really driven by power and data infrastructure.
So when you think of, you know, anything that has to be digitized, whether it's in a building, whether it's in a material handling center, whether it's in retail office, as things are upgraded, building solutions are upgraded, the computer programming is updated, you're putting in more cables and more infrastructure that needs to be managed, and that's driving demand for our products. And I think the last thing I would touch upon is the energy. It's a smaller piece, you know, for us here at nVent, but excited about that energy transition and what that means in terms of opportunity for our heat tracing. The one thing I would call out, and we talked a little bit about this on our Q1 call and our Q2 call, and that is the inventory level adjustments, you know, that we're seeing with our distributors.
So 2/3 of nVent revenues go through distribution. And so with that, you know, as that supply chain and lead times improved, and I like to use the example of our nVent products, there were some cases where typically our lead time to our customers was two days, but it was, you know, 12 weeks, and that's much, much improved, you know, as that supply chain, you know, normalized. And so with that, we expected coming into this year, as that supply chain improved, you know, so would that show up in that ordering patterns, you know, of our distributors. And so we are seeing some of that as we came into Q2. We saw it a little bit in Q1 in commercial resi. We saw a bit more of it in industrial and commercial resi here in Q2, and we expect that to continue here in Q3.
Understood. That's a helpful update. Maybe diving right into the meat of it on the data center side, obviously, very topical at multiple levels of the market, but maybe distinguish, if you can, how your offerings in liquid cooling maybe differ from some of the other opportunities out there or other solutions providers. We've had a lot of the HVAC guys on stage. Everyone seems delighted with the opportunities in front of them. It's not apparent that all these things are necessarily competing with each other, maybe just filling different roles.
Yeah.
But anything that you would point out in terms of where you're focused in the data center or technology milestones? It's, it's sort of deliberately open-ended, but how do you see this ecosystem evolving as you talk to, you know, presumably, you know, customers like NVIDIA?
Yeah. Maybe I'll start out by saying that we've been focused on this liquid cooling space for decades, you know, first in the industrial space. It was really pre-spin, pre-spin, where we took that liquid cooling expertise and really looked at the data centers. And with that, we began to work with the hyperscalers on one of their most difficult, you know, problems, and that is cooling within the data centers. And so from there, you know, at spin, our data solutions, you know, business was roughly $100 million. Last year, it was $375 million. Some of that through inorganic, but a lot of that through that steady double-digit organic growth.
When we look at that $375 million, roughly 40% of that sits in that liquid cooling and power space, and that's growing 3x that of the market. And when we think about liquid cooling and what nVent does, and what makes us different is, one, it's that technical and application expertise. In many cases, the systems that we provided, that's the enclosures, the rack, the cooling distribution unit, as well as whatever cooling continuum that hyperscaler wants, you have to have the technical and the application expertise to be able to put that system together. And in many cases, that prototyping and that testing can happen over a course of a year or two. So it's a long cycle working directly with that hyperscaler.
The other thing I would mention, too, that is really important is a lot of the liquid cooling technology are startups, and they don't necessarily have the scale, you know, to manufacture nor put the complete system together. I think that's something that uniquely, you know, nVent can bring to the table. We talked a little bit about this on our Q2 call, that we're also excited about the Generative AI and what that's doing in terms of accelerating and incrementally increasing the data center growth, and particularly the focus on liquid cooling, because we like to share that in this data center space still 95% of it is air-cooled today. Only 5% is liquid cooling.
That liquid cooling is growing exponentially faster than the air, and that's because in this newer space around generative AI and the new chips, it requires, you know, the liquid cooling in terms of the density that it is and the energy efficiency that it provides.
Understanding, just building off of what you said in terms of a lot of the other folks in this space are more startups, may not have the real manufacturing capability, certainly not the scale. I'm assuming that it provides you a huge advantage just to lead out in front and say, "Hey, we can deliver this." But are there also technology milestones that yourselves or other folks out there need to meet to sort of rise to what Generative AI needs? Like, is the technology available today, or is there still some iteration that needs to take place?
Well, I think the technology is going to continue to develop around liquid cooling. I mean, right now, there's, you know, various aspects of what that cooling looks like, whether it's direct to chip, whether it's immersion, whether it's rear door cooling, and I think those various cooling options are going to continue to evolve. As we think about it from an nVent perspective and really looking to provide the full, you know, system solution for the hyperscalers, or multi-tenants, et cetera, you know, we're looking to be an expert of regardless of what that cooling technology looks like, you know, providing that cooling distribution unit, which is kind of controlling all of those cooling elements and putting it into, you know, that system solution for that hyperscaler, and then scaling, you know, with that hyperscaler as they grow.
Is there an opportunity for consolidation there, or would consolidation be healthy in that space where maybe there's still some, I don't know, road technologies that could be brought into the fold or improved upon for folks that are either, you know, capital constrained or just don't have the expertise to ramp? Is that, is that a role that nVent could play, should play?
You know, I think into the future, you could see that, you know, there would be, you know, more consolidation or vertical integration. At this stage, I think we're focused on being able to be experts across that cooling continuum, and providing that technical expertise, working directly with those hyperscalers on solving their co-cooling problems, and then being able to, you know, provide that, that full system solution for them.
Understood. Maybe pivoting to some of the other pieces of the business. You know, you, you talked about, you know, some of the, the distinguishing, you know, kind of demand between the industrial markets versus the, the commercial and resi. On the sort of traditional CRE side, are you seeing, you know, that slowdown show up in the business? Or are there other things on the right, you know, retrofit? Yeah, obviously, there's certain verticals like data center that are stronger. Any verticals that we should be particularly mindful of as just being particularly important to nVent?
Yeah, I mean, I think the infrastructure continues to be, you know, one of the key verticals that we focus on. And I'll go back to maybe our growth strategy, where we're focused on high-growth verticals, new products, global growth, and, and M&A. And, you know, a big part of, you know, where we're focused is improving, that growth trajectory of nVent. And you see that, you know, over the last three or four years, growing 18%, 20%. Now, part of that is price, but a lot of that is volume as well, and that's really that focus on focusing on these higher growth verticals. When you think about enclosures, it's ubiquitous. You know, anything that's electrical or electronics, you know, needs to be enclosed.
But where we're focusing, you know, those capital allocation dollars as well as, you know, business development dollars, R&D, are in these higher growth verticals, you know, like infrastructure. So some of the areas that we're really focused on is going to be data solutions that we've talked about. Power utilities, that's another place where it's roughly $100 million of sales for us, but growing in those strong double digits, that also sits in infrastructure. And on the industrial side, you know, it really is focusing on the industrial automation. We often like to say that, you know, our product is lower on that overall bill of material, but importantly, provides an outsized, you know, value to that end customer.
If you think about an automation line, you know, with all those electronics and electrical equipment that needs to be protected, we're low on that value, but the value that we provide to that end customer in terms of protecting, you know, hundreds of millions of process dollars that flow through, I think that's an important aspect of when you think about the nVent products and the value that we provide to those customers.
Right. Cost of failure just being way higher than the cost of the product. Maybe going across either, you know, the key end markets or, you know, geographies, however it sort of fits best. But if I think about nVent having done fairly well versus most industrial peers over the last, call it 18, 24 months, I think supply chain was something you navigated better in particular. Obviously, a lot of price in the business, similar to some of your peers. Are there areas that if I were to just isolate volume and look back to, say, pre-pandemic, where things are still depressed, still have an opportunity to kind of ramp up? And maybe how would you characterize, you know, volume levels cyclically right now, just given that price has been, you know, such a needle mover?
Yeah. We still believe there's plenty of volume there to be had because of these secular trends and how nVent is positioned. You know, I would say if you look at Q2, it was more price than it was volume, and I think that really is more reflective of what we view as to be temporary on these inventory level adjustments. You know, but when we think about where that volume opportunity sits, I would say first and foremost in that infrastructure space, as well as in industrial. And what I would also tell you that, you know, we're sort of constrained as we sit here today.
While we've been investing in supply chain, and I do believe we've done a really good job over the last couple of years delivering, you know, for our customers and delivering volume in 2021 and 2022, it really is about, as we look out ahead over the next 12, you know, 24 months, investing in further capacity around data solutions. We're really you know, we talked about that a lot on our Q2 call, that with this acceleration of AI, you know, we're finding that we need to build these units faster for our hyperscaler customers, as well as new customers that are coming on board, and really focused on that. And that's kind of showing up on the OpEx side, you know, and the CapEx side, you know, building out that capacity, you know, for further growth.
Understood. Maybe pivoting over to another mega trend that I know you participate in, with electrification. How do you see that manifesting itself across the business? Where is that most powerful? Is policy a meaningful driver of that from your perspective, and anything out there that you're paying close attention to?
Yeah, I mean, maybe I'll start on the policy side. You know, as we looked at what's happening on the government infrastructure spend flow, it's roughly $1.3 trillion. But if you look at those categories and match that up to where nVent plays today, you know, we believe there's roughly $250 million-$500 million of opportunity there, based on that fund flow and based on the categories for which we play. Now, that's over a five to 10-year period. We do believe that by the end of this year, we'll be starting to see that in earnest.
You know, our customers are coming to us and saying, "Okay, you know, how does this, you know, meet these requirements, and where do you manufacture, and, how can we capture this growth, that we see from an end market standpoint?" So that's something that we're excited about, and I don't even think that's, really, you know, yet we've seen it in earnest. That's still largely in front of us, and that has a long tail, you know, to that. When you talk about electrification and digitalization, maybe let me give you a couple examples here where this plays for nVent. With more and more of the world being electrified, that is requiring, you know, a better, more resilient grid. And so that's creating demand for our grounding and bonding products, and electrical and fastening.
And when you think of, you know, this world being more and more digital, you know, and you think about the infrastructure that that's required, we've talked about data centers, and you need cooling and more liquid cooling in that more advanced, you know, chip scenario. But then you also, you know, need it from the standpoint of infrastructure that we talked about a bit in terms of, you know, you need more cables, and then you need more power and data infrastructure, and that requires and drives demand for electrical and fastening products.
Sort of the last mile kind of stuff?
Yes.
Understood. You touched on this a little bit, but, I'm wondering if there's a way to characterize... A lot of folks up on the stage, and, certainly for most of 2023, have talked about this big pipeline of mega projects that have kicked off or should kick off shortly. I would imagine in a lot of cases, maybe somewhat in EFSes maybe earlier, but most of the business is not, you know, day one of that mega project. It's not when the shovel hits the dirt. How long around in a process or a project does nVent start to show up, get the visibility, bid on jobs to the extent that there's bidding involved? How does that process work for you?
Yeah, I think it's gonna vary over time. But as I think about projects, maybe on the manufacturing, you know, construction or commercial construction side, or probably more so in thermal management, when you think about the energy transition and what's happening there in regards to the capacity that's being built or retrofitted for, you know, carbon capture, biofuels, hydrogen, et cetera, you know, that can take up to, you know, three to four quarters, you know, ish, in terms of depending on the project, of when that project comes into the pipeline, and then ultimately, maybe when that order, you know, hits nVent, you know, because where they're at in that overall cycle.
I would say we don't necessarily have a lot of what I would call mega projects, you know, in nVent, and so I'd maybe characterize them by more of, you know, projects and build-outs, and that's probably more relevant to that thermal management business and specifically energy transition. So I think we're beginning to see, you know, that order flow from an energy transition standpoint, and we're really excited about that, because when you think about heat tracing cables and the viscosity and the temperature range that's required within those processes, that's a perfect application for our heat tracing cables and expertise there. But that takes time in terms of ultimately when that shows up in the order book, and then ultimately when it shows up on the revenue side.
Understood. I guess, you know, maybe more near term than that then would be the pace of finalizing inventory, destocking. You mentioned a little bit in your remarks upfront, but when do you think we get back to normal on inventory? And any sense for what the wraparound or easy comp for that means when we're selling back to underlying demand?
Yeah. And, and I would just start by saying this is something that we anticipated, and, and we were talking about really even as we exited, last year, that this concept of, you know, orders growing 20%-30% because the lead time was so long, you know, would not last. And, and frankly, you know, it's, it's a good thing when you think about it from a supply chain normalization on a productivity side. So as these lead times... And we're working this even in-house, you know, with, with, with us, right, from a supply standpoint, as well as with our distributors, that as that lead times, you know, come to more normalized levels, and we're not normalized everywhere, there's still pockets of opportunity that we still have and we see more broadly, within the marketplace, but as that normalized, so would those orders.
And again, you know, as I said earlier, it's, you know, we saw that beginning in Q1. We saw it more in Q2, and, you know, expect that to continue here in Q3. I think the only other thing I would say is, you know, that is something that, you know, is a dynamic of this. We believe that supply chain normalization, you know, where we're really focused on over here, beyond kind of the visibility, and importantly, I would add, the positive sell-through that we're seeing through our distributors is really focused on that secular trend, those infrastructure growth. And I think the only other thing I would add that we really haven't talked about is the M&A acquisition.
So, you know, we said that that would add 9 points of growth for nVent, here in the current year, and that's really accounting, you know, a May and a July completed, you know, acquisition, and we're really excited about the sales synergies opportunities. From an M&A standpoint, you know, we do deals because of the commercial opportunities that we see and the growth trajectory, you know, of those businesses.
Understood. Maybe sticking with where you left off there on the M&A front. ECM, TEXA, I think suggest there's still not a lot of opportunity to consolidate in that space around electrification, digitization. What do you consider sort of the focus niches for nVent within that, or any obvious gaps that you see that you'd like to fill in?
Yeah. So maybe I would start by seeing it less as sort of a, you know, a consolidation play and more about how do we, you know, add great products, you know, to the nVent portfolio for which we can grow in these high-growth verticals and scale through distribution. And that M&A flywheel, if you will, has really enabled us in our past acquisitions, you know, to get to value faster and importantly, you know, exceed that weighted average cost of capital before that two to three -year time horizon, for which, you know, that's one of our important financial metrics that we look at as we look at deals overall.
So you know, it's less about kind of the consolidation and really more looking at these great products, you know, in these high-growth verticals that we can scale, you know, overall. I think ECM Industries, again, it's over $400 million of revenue. It's accretive to nVent margins, and not to EFS margins, but we think over time, you know, we can get there, and importantly, generates a lot of cash. And what it does from a sales perspective is a couple different things. One, it does sort of round out, you know, our grounding and bonding offerings, you know, in that space. Importantly, it provides tools and test and measurement to our contractors.
We already have a great suite of products and fastening with our CADDY business, and it just adds a whole another suite of products, you know, to service those contractors, and we're all about labor savings, you know, with our contractors. I think the other piece too is we believe we can take that product, especially the ILSCO brand, more through distribution. Again, 2/3 of our revenue goes through distribution. We're already a top 10 supplier within that distribution space, especially here in North America. And we're great at, you know, adding more and offering more products, you know, to those distribution channel partners.
Understood. I'd like to pivot over to margins if we can. How should we think about margin progression here? And not to do the famous sell side 14-part question, but there are a lot of moving pieces. There's, you know, investment in some of the areas for growth, M&A, which, you know, may have, you know, kind of short-term dilution, probably a lot more inflation this next cycle than what we were used to the last 10 years. But how should we think about, especially in the context of price cost was really good last quarter. What's the margin trend line from here? Where, where should we think about the potential for where the business can go?
Yeah, I would just start by saying our margin performance has been very strong, you know, this year. We outlined in our Investor Day earlier this year, our path to margin expansion, really three-pronged. One is growth and new products. You know, we're really focused on providing that outsized value to customers, and that's reflective in that, new product, product margin profile. You know, two would be supply chain excellence, and this is something that while we've done an exceptional job delivering for our customers and, really driving that volume growth over the last couple of years, it has, cost us in, you know, from an efficiency standpoint on that productivity line. And so we're, really focused on turning that productivity positive.
We began to see that in Q2, and we would expect that in the back half of the year going into next year. The third piece is just functional excellence. You know, we're doing a lot around, you know, automation, and really streamlining, you know, our activities, you know, to make sure that we can get, you know, great leverage on that overall growth. So as we think about that kind of margin performance in the long term, you know, we still believe there's margin expansion going forward, you know, as we focus on those three areas. I would just say that, you know, as we look at kind of what we outlined, you know, there in Investor Day, we're already making fantastic progress in a couple of our segments, especially electrical, fastening, and enclosures.
Maybe the one thing I would call out as we look here in the back half, you know, we would expect, you know, some of those, you know, margin performances to reflect some of the investments that we're making, especially in enclosures that we talked about in our Q2 call, but believe those have great, you know, medium and, and longer-term returns, you know, as we look at the data solutions growth going forward.
Understood. How should we think structurally about just higher inflation for the business? I guess the premise is this: nVent's pricing power is far stickier than that of your inputs. Things like steel can kind of go up and down and obviously have more, you know, commodity exposures. But, I would imagine your price to customers and the value proposition sort of informed that, "Hey, a price is a price. We don't give that back overnight." Does that create a higher trend line for margins if we are just in higher inflation? Is that generally something you'd regard as good for the business?
Well, I would say it maybe this way: our teams have done an excellent job of managing that price-cost equation, you know, especially in the last couple of years, where we've seen significant inflation, and that's really across the board as I look at the three segments. And I do think, you know, one, it's the execution that we have, you know, 2/3 of our revenue going through distribution, so we've had some strong execution from a pricing standpoint. But I do think it goes back, you know, to the value proposition and, you know, the strength of our brands and the value we provide to our customers that allows us, you know, to manage that price-cost equation very well.
Understood. I think we're coming up on time, Sara. I really appreciate the time. Great to see you. Enjoyed the discussion, and best of luck with Mayer.
Thank you.