nVent Electric plc [NVT] Conference call transcript for 2023 q1
2023-04-28 14:34:05
Fiscal: 2023 q1
Operator: Good morning, everyone, and welcome to the nVent Electric First Quarter 2023 Earnings Conference Call. [Operator Instructions]. And at this time, I'd like to turn the floor over to Tony Riter, Vice President of Investor Relations. Sir, please go ahead.
Tony Riter: Thank you, and welcome to nVent's First Quarter 2023 Earnings Call. On the call with me are Beth Wozniak, our Chief Executive Officer; and Sara Zawoyski, our Chief Financial Officer. They will provide details on our first quarter performance, provide an outlook for the second quarter and an update to our full year 2023 outlook. Before we begin, let me remind you that any statements made about the company's anticipated financial results are forward-looking statements subject to future risks and uncertainties, such as the risks outlined in today's press release and nVent's filings with the Securities and Exchange Commission. Forward-looking statements are made as of today, and the company undertakes no obligation to update publicly such statements to reflect subsequent events or circumstances. Actual results could differ materially from anticipated results. Today's webcast is accompanied by a presentation, which you can find in the Investors section of nVent's website. References to non-GAAP financials are reconciled to the appendix of the presentation. We'll have time for questions after our prepared remarks. With that, please turn to Slide 3, and I will now turn the call over to Beth.
Beth Wozniak: Thank you, Tony, and good morning, everyone. It's great to be with you today to share our first quarter results. We had a strong start to the year. We continue to advance our strategy with our focus on high-growth verticals, new products and geographic expansion. We delivered record first quarter sales, growing 7% with adjusted EPS up 34%. We had impressive year-over-year margin expansion and robust free cash flow. Our Enclosures and Electrical & Fastening segment sales grew double digits with the trends in the Electrification of Everything. In addition, we're excited to expand our connect and protect portfolio with the announcement to acquire ECM Industries. Overall, we are pleased with the strong start to the year and are raising our full year sales and adjusted EPS guidance. Now on to Slide 4 for a summary of our first quarter performance. First quarter sales were up 8% organically with all verticals growing. New products contributed approximately 3 points to our sales growth, and we launched 17 new products in the quarter. Segment income grew 34% year-over-year with return on sales up an impressive 410 basis points. Adjusted EPS grew 34%, and we generated $52 million of free cash flow compared to a $3 million usage a year ago. We're on track for another strong year. With our focus on the Electrification of Everything, we continue to have significant wins in our portfolio. In data solutions, we recently won a large contract with a semiconductor company for a new liquid cooling system for their data center. We also won a multimillion dollar contract for cable management solution with a hyperscale modular data center provider. On e-mobility, our ERIFLEX connections have been specified by European OEM leader in power solutions for EV chargers. And with the energy transition, we continue to have wins in LNG, clean fuels and carbon capture. We recently won several multimillion-dollar contracts for our heat tracing systems, providing reliability and optimization. Looking at our key verticals, all grew organically in the quarter. Infrastructure led the way up mid-teens, including data solutions growing 20% and power utilities up over 30%. Industrial grew high single digits with broad-based growth. Energy performed well, up mid-teens. And finally, commercial and residential grew low single digits. Turning to organic sales by geography. We continue to see broad-based growth in North America, up low double digits. Europe grew high single digits and Asia Pacific declined primarily due to a slow recovery in China. Lastly, orders in Q1 were flat year-over-year. Recall, a year ago we had 28% order growth in the first quarter. As we said at our Investor Day, orders were positive through February. However, March orders declined with our toughest monthly comparison from a year ago. In addition, our distribution partners were adjusting their inventories and destocking with improved supply chains. We expect this to continue into Q2. Importantly, customer demand and distributor sell-through remains strong. Looking ahead, we are raising our full year guidance, reflecting our strong start to the year. We expect electrification, sustainability and digitalization to drive demand. Specifically, we expect continued strength in infrastructure, including data solutions, power utilities and renewables. In industrial, with the trends of automation and onshoring and in energy with the energy transition. We expect commercial resi to slow. While our outlook is positive, we remain cautious due to the macroeconomic environment, overall, I'm proud of our nVent team and how we continue to perform and deliver impressive results. We are on track for another strong year. I will now turn the call over to Sara for some detail on our first quarter results and our updated outlook for 2023. Sara, please go ahead.
Sara Zawoyski: Thank you, Beth. Let's begin on Slide 5 with our first quarter results. We are off to a strong start to the year with outstanding margin performance and robust free cash flow. Sales of $741 million were up 7% relative to last year or 8% organically. Volumes were up modestly compared to last year on top of 13% a year ago, and price added 8 points to growth. Foreign exchange was a 2-point headwind. First quarter segment income was $148 million, up 34%. Return on sales was 20%, up 410 basis points year-over-year. Better price-cost and positive productivity drove the outperformance versus our expectations. Price more than offset the impact from inflation of roughly $30 million. Our supply chain continued to improve, resulting in sequential and year-over-year productivity improvement. Q1 adjusted EPS was $0.67, up 34% and above the high end of our guidance range. We generated robust free cash flow in the quarter of $52 million compared to a usage of $3 million a year ago, reflecting our strong operational performance. This also includes significant CapEx investments for growth and capacity. Now please turn to Slide 6 for a discussion of our first quarter segment performance. Starting with Enclosures. Sales of $391 million increased 11% organically, with both price and volume contributing. Sales growth was broad-based with all verticals growing, industrial-led, driven by continued trends in automation. Infrastructure was also a standout contributor with continued strength in data solutions up 20%. Geographically, North America led, up double digits, followed by Europe. Enclosures first quarter segment income was $82 million, up 64%. Return on sales of 21.1% increased an impressive 710 basis points year-over-year, driven by strong execution. We also continue to see margin improvements from our simplification efforts. We are investing in added capacity and expansion of our data solutions business and expect this to ramp in Q2 and second half. Moving to Electrical & Fastening. Sales of $206 million increased 11% organically, driven by strong price. All verticals grew with commercial up modestly and infrastructure up over 20% organically with strength in power utilities and data solutions. Geographically, sales growth was led by North America and Europe. Electrical & Fastening segment income was $61 million, up 30%. Return on sales was a notable 29.8%, up 470 basis points relative to last year on strong execution. Turning to Thermal Management. Sales of $144 million were flat organically. Price contributed 4 points to growth, while volumes were negative. Energy and infrastructure both grew double digits organically with a solid pipeline of energy transition projects in LNG, biofuels, hydrogen and carbon capture. Industrial MRO demand remained strong. Commercial and residential declined with residential down double digits. Geographically, growth was led by North America with declines in China. Thermal Management segment income of $31 million was down 5%. Return on sales of 21.5% was down 40 basis points year-over-year, primarily due to mix. On Slide 7, titled Balance Sheet and Cash Flow, we ended the quarter with $303 million of cash on hand and $600 million available on our revolver. This week, we announced our financing for the pending ECM Industries acquisition, including pricing $500 million of 10-year senior notes and a new prepayable $300 million term loan facility. The balance will be funded through a combination of cash on hand and our existing revolver. So turning to Slide 8, where we will outline our capital allocation priorities. We believe our robust balance sheet and cash generation puts us in a great position to continue to invest in growth, return cash to shareholders and deliver great returns. We exited Q1 with a net debt to adjusted EBITDA ratio of 1.3x. On a pro forma basis, we forecast our net debt to adjusted EBITDA to now be 2.7x at the closing of the ECM acquisition. With our strong cash flow generation, we plan to delever quickly and be within our targeted range of 2 to 2.5x within the next 12 to 18 months. In the quarter, we returned approximately $44 million to shareholders including dividends and $15 million of share repurchases. Moving to Slide 9. We are raising our full year guidance, reflecting our strong performance. We continue to expect organic sales to grow 4% to 6%. We now expect adjusted EPS to be in the range of $2.65 to $2.73, up 10% to 14% versus our original guidance of $2.51 to $2.61. This new guidance reflects the strong start to the year, solid price-cost execution and better productivity. It also continues to reflect the uncertainties in the second half. It's important to note that our guidance does not yet include the impact of ECM Industries. We expect ECM's adjusted EBITDA margins of 25% to be accretive to overall nVent margins. and we expect cost synergies of $10 million to $15 million by year 3 with benefits starting in 2024. We continue to expect the deal to be accretive to adjusted EPS in 2023 excluding purchase price accounting and onetime deal-related costs. A couple of modeling assumptions to note. First, foreign exchange is expected to have a neutral impact to sales versus a previous 1-point headwind. And second, we now expect our tax rate to be approximately 18.5%. Looking at our second quarter outlook on Slide 10, we expect organic sales to be up 3% to 5%. We expect our distribution partners to continue to adjust their inventories and destock with improved supply chains. We expect adjusted EPS to be between $0.66 and $0.68, which at the midpoint reflects 18% growth relative to last year. Wrapping up, I'm pleased with our first quarter performance. We delivered strong margins, robust cash flow and are well positioned for another great year. This concludes my remarks, and I will now turn the call back over to Beth.
Beth Wozniak: Thank you, Sara. Turning to Slide 11. Since we became a new company, we put in place a strategy that has been working. We continue to execute on the core elements, focusing on high-growth verticals, new products, global expansion and acquisitions. We recently announced an agreement to acquire ECM Industries. We've had great success with the 4 acquisitions we've done, totaling approximately $300 million of revenue last year and growing faster than overall nVent. Each deal exceeded the weighted average cost of capital within 2, 3 years of closing our primary financial deal metric. We believe we will create great value with ECM Industries. Turning to Slide 12. ECM is a great strategic fit with tremendous growth potential. ECM complements nVent's electrical power connection and grounding solutions portfolio within our Electrical & Fastening segment. It will extend our cable management offerings with complementary labor-saving solutions and will add tools and testing instruments to our portfolio. In addition, ECM further positions nVent with the Electrification of Everything in high-growth verticals such as commercial solutions, power utilities, data centers and renewables. Overall, we believe ECM's complementary portfolio, strong brand and long-standing customer and channel relationships will be a great combination with nVent. ECM is expected to add over $400 million in sales and be margin accretive to nVent. We expect to close the transaction in Q2 and are working our detailed integration plan with a dedicated team. We have received a lot of positive comments on the potential of the combined companies from employees, customers and partners. We look forward to welcoming the ECM team to nVent. Wrapping up on Slide 13. We're off to a strong start to the year and have increased our full year guidance. We're well positioned with the Electrification of Everything, sustainability and digitalization trends. We are excited to add ECM Industries to our portfolio. I'm very proud of the team's performance. Our future is bright. With that, I will now turn the call over to the operator to start Q&A.
Operator: [Operator Instructions]. And we have a question from Julian Mitchell from Barclays.
Operator: And our next question does come from Deane Dray from RBC Capital Markets.
Operator: And our next question comes from Joe Ritchie from Goldman Sachs.
Operator: And our next question comes from Jeff Sprague from Vertical Research.
Operator: And our next question comes from Nigel Coe from Wolfe Research.
Operator: Our next question comes from Jeff Hammond from KeyBanc Capital Markets.
Operator: [Operator Instructions]. Our next question comes from Scott Graham from Loop.
Operator: And 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.
Beth Wozniak: Well, thank you for joining us today. I'm very proud of the performance we delivered in the first quarter. We will continue to focus on delivering for our customers, employees and shareholders executing on our growth strategy. We believe nVent is a top-tier high-performance electrical company, well positioned for the Electrification of Everything, sustainability and digitalization trends. Thanks again for joining us. This concludes the call.
Operator: Ladies and gentlemen, today's conference call has concluded. We do thank you for joining today's presentation. Have a great rest of the day. You may now disconnect.
