nVent Electric plc Ordinary Shares

Good day and thank you for standing by. Welcome to the InVent Q2 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference call is being recorded. If you require any further assistance, press star zero. I would now like to hand the conference over to your speaker today, J.C. Weigelt. Thank you. Please go ahead.

Thank you, Stephanie, and welcome everyone to INVENT's second quarter 2021 earnings call. I'm J.C. Weigelt, Vice President of Investor Relations, and on the call are Beth Wozniak, our Chief Executive Officer, and Sarah Zawieski, our Chief Financial Officer. Today, we will provide details on our second quarter performance and provide an outlook for the third quarter, as well as an update to our full year 2021 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 in-depth 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 can be found in the Investors section of Inven's website. References to non-GAAP financials are reconciled in the appendix of the presentation. We will have time for questions after our prepared remarks, and now I will turn the call over to Beth.

Thank you, JC, and good morning, everyone. It's great to be with you today to share our strong second quarter performance. I first want to thank our Invent team. Our people remain key to our success, focused on driving performance for our customers. Our teams are working tirelessly to meet strong global demand. I'm especially proud of our execution. We've done a tremendous job responding to increasing customer demand by ensuring strong product availability. This has allowed us to acquire new customers and grow our sales. Turning to slide three, titled Executive Summary. First, the safety and well-being of our employees remains our top priority and we continue to learn, adapt, and respond to this changing environment. We're executing well and seeing broad-based global growth driving our sales and earnings well ahead of guidance. We completed two acquisitions during the quarter, executing on our capital allocation strategy to invest in growth. The first was Venky A, which expands our enclosures portfolio more broadly into infrastructure. The second, CIS Global, strengthens our global position in data centers and networking solutions with advanced capabilities and technologies and power management. These acquisitions are aligned with the megatrend of the electrification of everything, are expected to be accretive this year, and generate attractive returns. We are again using full-year guidance, given our strong second quarter results, the positive impact from acquisitions, and an improved outlook supported by strong order growth. Orders grew 38% in the second quarter, outpacing sales, and we exited the quarter with record backlog. Our new adjusted EPS guidance represents a 9% increase from the midpoint of our previous guidance, which is a 16 cent improvement. I am confident in our ability to execute on this improved outlook. On slide four, sales during the quarter was $601 million, up 34% year over year, and about $60 million ahead of the second quarter in 2019. Return on sales was 18.3%, up 300 basis points, with incrementals of 27%, reflecting our strong execution. We generated $85 million in free cash flow, and our adjusted EPS of 50 cents was up 72% from the prior period. Both sales and adjusted EPS were well ahead of the guidance we provided in April. Our growth initiatives are delivering results with a focus on high growth verticals, new products, and digital, all supported by the electrification of everything. In addition, our ability to manage our supply chain has resulted in high product availability, which has allowed us to respond to strong customer demand. Overall, growth was broad-based across key verticals and geographies. Industrial growth accelerated, up approximately 35%. Commercial and residential had strong growth across all three segments. Infrastructure also grew double digits, and we expect this to accelerate in the back half driven by strong orders as well as our acquisitions. Energy continues to recover and saw nice growth this quarter. Geographically, we saw broad-based global growth with strong double-digit growth in Europe and North America. We are pleased with the progress we are making to grow our European distribution network, building upon the success we have had in North America. Our strategic distribution accounts grew more than 35% globally as we continue to position Invent as a strong strategic partner. On new products, we launched 14 this quarter, spanning all segments, and we remain on track to launch more than 50 new products this year. New product introductions contributed over a point of growth in the quarter. The most significant launch was our new Invent Raychem HTV heating cable. This cable offers superior levels of high power retention during a design life of more than three decades and meets stringent demands for maximum process integrity while protecting people, processes, and infrastructure. Our execution is playing a critical role with customer conversions as we continue to have better product availability. We believe better than many in the industry. I have been impressed by what a great job our teams are doing to keep up with demand for our high-runner standard products with minimal impact to our stated lead times. We believe this is a contributor to our strong orders growth. Overall, I'm pleased with our performance as we are building momentum and emerging stronger. I will now turn the call over to Sarah for some detail on our second quarter results and our updated outlook for 2021. Sarah, please go ahead. Thank you, Beth. I'm pleased to share with you another quarter of great performance with sales and adjusted EPS exceeding our expectations and strong free cash flows. Let's turn to slide five to review second quarter performance. Sales of $601 million were up 34% relative to last year, or 29% organically. Volume was a big contributor to this growth, adding 23 points, while price added almost six points. price played a significant role in offsetting inflation during the quarter given our strong volume and price realization we were able to expand margins 300 basis points year over year to 18.3 adjusted eps of 50 cents increased 72 percent and was above our guidance range of 36 to 40 cents Free cash flow of $85 million was 11% above prior year, even with working capital investments that come with growth. Turning to our segment performance on slide six, I am pleased to report that all segments were above 2019 sales levels and expanded margins in the quarter. Enclosures had sales of $300 million, an increase of 31% organically. This growth was broad-based with a significant acceleration in the industrial vertical. Eldon continues to be a standout, helping drive global growth with our expanded IEC portfolio. Borders were particularly strong in this segment. Enclosure's segment income increased 90%, with return on sales expanding 500 basis points to 17.9%. price and productivity more than offset inflation during the quarter, with strong contribution from higher sales volume. Within electrical and fastening, sales of $169 million increased 24% organically, demonstrating the continued strength and resiliency of this portfolio. Its largest vertical, commercial, was up approximately 30% in the quarter, Both power utilities and data centers and networking solutions contributed strong double-digit growth. Global sales continued to perform well across all regions, especially Europe. Electrical and fasting segment income was up 41% and return on sales of 28.9% was up 260 basis points relative to last year. Price added seven points to growth and helped offset higher year-over-year inflation. Thermal management grew 30% organically with sales of $132 million, driven mainly by commercial and residential and industrial projects. Notably, industrial MRO returned to growth in the quarter and continues to trend positively. Thermal management segment income was up 73%, and return on sales expanded 390 basis points, driven by higher sales volume, and we are starting to see a positive mixed impact with return of industrial MRO. On slide seven, you'll see we ended the quarter with a cash balance of $102 million. On our revolver, we drew $200 million to fund the CIS global acquisition, leaving $400 million available. continue to be pleased with the progress we are making on our working capital goals. Slide 8 gives an update on our capital allocation. We ended the second quarter with a net debt to adjusted EBITDA ratio at 2.3 times, in line with our target range of 2 to 2.5 times. We continue to execute on our capital allocation strategy and prioritizing growth We believe that two acquisitions completed in the quarter can generate solid returns, as have Eldon and WBT, both of which are trending well above in-vent growth rates this year and tracking nicely above 10% returns in year two. Over the past eight quarters, we have added over 200 million of annualized revenue via acquisitions centered around the electrification of everything. And we are excited about scaling these businesses and generating strong returns. We believe our strong balance sheet and cash generation puts us in a good position to continue to invest in growth and execute on our M&A strategy. You'll see our 2021 outlook on slide nine. We are raising full year guidance for the following reasons. First is our terrific second quarter performance. Second, our order book and backlog give us confidence in our continued growth. Orders outpaced sales in the quarter up 38%. Third, we believe our strong operational performance and ability to serve increased demand is a competitive advantage in this environment. And last, this updated guidance reflects the added benefit of acquisitions, which is approximately two points in sales for the full year. Our updated guidance also includes higher inflation, along with increasing costs and investments related to the surge in demand and stronger recovery. As a reminder, we took a number of temporary cost actions last year, totaling roughly $30 million. And we expect these to feather back in at a higher rate in the second half of 2021 versus first half. Additionally, our guidance takes into account some of the supply chain inefficiencies that come with rapid growth. And lastly, we are making additional investments to our workforce, digital, and supply chain capacity, all of which we believe will help future growth. Let me take a moment to discuss inflation, and specifically how we are managing price costs. We are expecting another meaningful uptick in inflation in the back half, including raw materials, labor, and logistics. Specifically, we are modeling approximately $40 million of inflation in both the third and fourth quarters, which compares to roughly $30 million in the second quarter. We expect pricing to largely offset inflation with an updated outlook of over five points of price this year. We managed through these headwinds in the second quarter and believe our pricing actions, strong volume, and operational execution can help deliver solid margins in the second half of the year. All in, our margins in the second half are expected to be slightly less than the first half margins of roughly 18%. To summarize, our full year outlook, we now expect sales growth of 15% to 18%. Organically, this translates into sales growth of 10% to 13% versus our prior guidance of 5% to 8%. We are raising and tightening our adjusted EPS guidance, which is now expected to be in the range of $1.84 to $1.90 versus our prior guide of $1.67 to $1.75. This new guidance reflects 25% earnings growth versus 2020 at the midpoint. From a segment perspective, we expect a stronger recovery in the industrial vertical to benefit our enclosure segment the most. Strength in industrial and infrastructure are expected to drive sales in our electrical and fastening segments with continued growth in commercial. For thermal management, industrial MRO continues to improve and should be a bigger contributor in the back half of the year, along with continued strength in commercial and residential. On free cash flow, we are at $126 million for the first half of the year, which is $50 million ahead of last year. We anticipate another year of strong cash flow with cash conversion of adjustment net income at or above 100%. This translates to roughly $315 million in free cash flow, a 9% increase versus our previous outlook. And lastly, we expect corporate costs to increase relative to our previous guidance by approximately $5 million, mainly due to higher compensation accruals related to our strong results. This updated guidance reflects double-digit sales, earnings, and cash flow growth, and all of them 2019 levels. Looking at our third quarter outlook on slide 10, we expect reported sales to increase 16% to 20% and organic sales to be up 10% to 13%. This represents a continuation of the broad-based growth we saw in the second quarter, as well as strong orders and backlog. We expect acquisitions to add approximately four points to sales growth, and we expect adjusted EPS in the third quarter to be between 45 and 48 cents. Wrapping up, I am pleased with our performance at the halfway point, and we are well positioned for a strong year. We are executing at a high level, demonstrating the strength of our team and our portfolio, and deploying capital to growth with great returns. It is certainly an exciting time at Invent. Now, I will turn the call back over to Beth. Thank you, Sarah. Turning to slide 11, I would like to cover two topics before turning to Q&A. First is our recent acquisition of CIS Global, which helps us accelerate our strategy in data centers and networking solutions, now totaling more than $200 million across our portfolio. CIS Global extends our protection capabilities, where we can now offer smart power management along with our high-performance cooling solutions, enclosures, and cable management. CIS Global is a leading provider of mission-critical power distribution units and server rack slides that have been growing double digits with attractive margins. Their 2020 sales were approximately $80 million, and this year we are expecting double-digit growth. With CIS Global, we can now provide our customers a greater breadth of solutions with an extended global reach. This is a highly scalable business and opens up a new $2 billion opportunity for us. The second topic is social responsibility. Slide 12 shows highlights from our recently published 2020 Social Responsibility Report. Our social responsibility efforts are centered on three areas, people, products, and planet. And for the first time, this report details our goals around these pillars. I'm very proud of the progress that we have made to date. Let me spend a moment on people. Last year, during the pandemic, our employee engagement scores improved across Invent, indicating we are listening and acting upon our employee feedback. Employee resource groups, or ERGs, are a key focus area at Invent and continue to expand. These ERGs are critical in connecting employees globally and helping to support our efforts on sustainability, recruitment, and inclusion and diversity. On that topic, I'm very proud that 60% of our board of directors are diverse, along with half of our executive team. Our focus on people and our culture are differentiators and are helping us to attract and retain talent. At InVent, our commitment to social responsibility and continuous improvement guides us towards a more sustainable future. I am proud of our accomplishments and the steps we've taken to strengthen this commitment. And I'm excited about the future we're creating and our role in social responsibility. Wrapping up on slide 13, we continue to see broad-based growth across verticals and geographies. As we look at our portfolio, we are excited by the tremendous growth opportunities around the electrification of everything. With our mission to connect and protect and the need for resiliency and electrical infrastructure, our solutions are critical and are in high demand. We are executing well on our strategy. New products are adding about a point of growth as we focus on higher performance solutions, labor efficiency, and global capabilities. Our digital efforts are improving the customer experience as well as making us more productive. Our M&A strategy is adding high-quality assets and strengthening our long-term growth profile. In summary, our future is bright. Our outlook for the year has improved, and we are executing at a high level, driving growth and strong results. With that, I will now turn the call over to the operator to start Q&A. At this time, if you would like to ask a question, please press star, then the number one on your telephone keypad. Again, that's star, then the number one to ask a question. Your first question comes from the line of Julian Mitchell.