nVent Electric plc Ordinary Shares

Ladies and gentlemen, thank you for standing by and welcome to the Invent Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker 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 is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, J.C. Weigelt. Thank you. Please go ahead.

Thank you, Natalia, and welcome, everyone, to Inven's third 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 Zawoisky, our Chief Financial Officer. Today, we will provide details on our third quarter performance and an outlook for our fourth quarter, as well as an updated 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-vent 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 Investor section of Invent'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. 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 third quarter results, another outstanding quarter for Invent. This is a challenging time for companies across the globe and I'm very proud of how our team has responded. They've been executing at a high level and living our customer first value. Our team has been flexible, adaptive, and innovative in responding to unprecedented demand. Many distribution partners have shared with us that our performance stands out. We believe our 26% sales growth during the quarter speaks to how well we are executing on our strategy of driving sales in fast growth verticals, winning with new innovative products, and expanding globally. Equally important has been the execution of our digital transformation and supply chain strategy. We've worked to develop stronger regional supply chains, invested in capacity in our factories, and developed strategic supplier relationships. We believe our results are reflective of the actions we have taken over the last several years. We are continuing to drive supply chain resiliency with dual sourcing capabilities, more digital systems and automation in our factories, and building flexible capacity. Overall, we are pleased with the progress and the results. Turning to slide three. Sales of $643 million were up 26% and approximately 15% ahead of the third quarter of 2019. Adjusted EPS of 53 cents was above our guidance and ahead of 2019 levels. We generated robust free cash flow at $108 million for the quarter and $233 million year to date, a $53 million increase versus last year. Our third quarter results were solid and we continue to execute well. Our orders were up an impressive 43%. We have confidence in our growth trajectory given our strong orders and record backlog. As a result, we are raising full year guidance for the third time this year. We now expect full year sales to grow 19 to 20% and adjusted ETFs to grow 28% at the midpoint of guidance. Breaking down our performance in the third quarter, we continue to see positive results from our growth initiatives. We saw strong growth with our channel partners outside of North America. New products added about a point to our growth rate. We launched 11 new products this quarter and are on track to deliver 50 new products this year. Our acquisitions performed well and were additive to the overall event growth rate. Our digital efforts are supporting growth, improving the customer experience, and driving efficiencies across our business. Looking across the verticals where we play, we continue to see broad-based growth. The industrial vertical was up strong double digits organically, with particular strength in material handling, automotive, and chemical. As expected, infrastructure sales accelerated with contributions from data centers and networking solutions, power utilities and rail. In commercial and residential, our thermal management segment continued to see high demand for fire rated wiring and floor heating solutions. And electrical and fastening grew nicely in all regions. Energy was also up with growth in thermal management. Geographically, growth continued to be broad-based with all regions growing double digits. North America grew organically in the high teens with particular strength in enclosures. Europe grew approximately 20% led by electrical and fastening. And developing regions grew by more than 50% with strong performance from thermal management. We believe that Invent is one of the best positioned companies to benefit from the megatrend around the electrification of everything. Our products and solutions are instrumental in the connection and protection of electrical systems, making them more resilient. Our enclosures, for example, are critical in industrial automation to protect systems and data. As we see the trend toward more automation, we believe the demand for our enclosures will increase. Our most recent acquisitions have provided us with enclosures that are targeted at fast-growing applications like solar and 5G. Our new power distribution portfolio extends our capability in data centers and networking solutions, from heat management to now include power management. For electrical and fastening, the trend towards smarter buildings requires more power and data connections, which will increase the need for our offerings and expand our content. With the move towards more electric vehicles, the infrastructure built out requires both enclosures and our electrical fastening solutions which provide flexible, reliable, and space-saving benefits. With everything being connected, our thermal management control solutions are positioned to provide enhanced monitoring for protection and safety. We believe our Invent portfolio is well positioned with global investments in infrastructure, such as electrical grid modernization, renewable energy, and energy storage. The trend towards the electrification of everything will drive more demand for our products and solutions. We set a goal to emerge stronger, and we're excited about the momentum we are seeing in our business. We expect to finish the year strong. I will now turn the call over to Sarah for more detail on our third quarter results and our updated outlook for 2021. Sarah, please go ahead. Thank you, Beth. I'm pleased to share another quarter of strong Inven results. Let's turn to slide four to review third quarter performance. Sales of $643 million was a 26% increase relative to last year, or 20% organically. Volume was a big contributor to this growth, adding 11 points, while price added 9 points. Segment income was up 17%, with return on sales of 18.4%, in line with the second quarter. Strong volume and price contributions helped offset the impact from the sequential step-up in inflation, temporary costs feathering back in, and a challenging supply chain. a testament to our team's execution. Price played a significant role in offsetting higher total inflation of $45 million in the third quarter. Supply chain challenges resulted in additional cost pressures, including labor and logistics. And as expected, one-time 2020 cost action impacted the year-over-year return on sales by approximately 230 basis points. Adjusted EPS of 53 cents was up 18% to last year and above our guidance range of 45 to 48 cents. Free cash flow of $108 million was favorable relative to last year, even with the working capital investments that come with growth. We continue to track well above 2019 levels on sales, EPS, and cash flow. Slide five showcases our segment performance, where you'll see the momentum we saw in the first half continue into the third quarter. Enclosures had sales of $335 million, an increase of 37%, or 25% organically. Growth was broad-based, with all geographies and verticals up double digits. And our acquisitions performed well. Similar to last year, orders were particularly strong, driven by industrial and infrastructure demand. Enclosure segment income increased 28% and return on sales of 16.8% was down 120 basis points. With significant demand, we saw increased costs related to a very tight supply chain and higher overall inflation. We were able to partially offset these headwinds with solid price execution of approximately nine points. The team has done a tremendous job of managing the supply chain, and importantly, converting orders to sales. Electrical and fastening sales of $169 million increased 14% organically, with broad-based growth and particular strength in Europe. Another bright spot was our low-voltage power connection portfolio, which grew 40%. Electrical and fastening segment income was up 19%, and return on sales was 28.6%, was up 100 basis points relative to last year. Price added more than 10 points, offsetting higher total inflation. Thermal management grew 16% organically with sales of $138 million driven by commercial and residential as well as industrial. We continued to be encouraged by the recovery in industrial MRO, which was up strong double digits for the second consecutive quarter. Thermal management segment income was up 24% and return on sales expanded 100 basis points to 22.8%. driven by volume and the positive contribution from the industrial MRO. Overall, we are pleased with another quarter of strong performance across all three segments. On slide six, you'll see we ended the quarter with a cash balance of $46 million. We paid back approximately $120 million on our revolver, leaving $520 million available. During the quarter, we amended and extended our senior credit facility to 2026, which included an increase to the term loan facility with a delayed draw option. Slide seven gives an update on our capital allocation strategy. We continue to prioritize growth while maintaining investment grade metrics. As a reminder, we completed two acquisitions in the second quarter with Vinci and CIS Global. We ended the third quarter with a net debt to adjusted EBITDA ratio at two times at the low end of our targeted range of two to two and a half times. Our balance sheet remains in a position of strength. And coupled with robust cash generation, we aim to deliver double-digit returns to our capital allocation strategy. You'll see our updated 2021 outlook on slide eight. Given our performance and strong order trends, we are again raising our full-year guidance. We now expect sales growth of 19 to 20%. Organically, this translates into expected 14 to 15% sales growth versus our prior guidance of 10 to 13%. Our adjusted EPS guidance is now expected to be in the range of $1.91 to $1.94 versus our prior guide of $1.84 to $1.90. This new guidance reflects 28% earnings growth versus 2020 at the midpoint and 8% above 2019. On free cash flow, we are pleased with our performance year to date at $233 million, which is $53 million ahead of last year. We are on track to deliver another year of strong cash flow. with cash conversion of adjusted net income expected to be at or above 100%. This updated full year guidance reflects double digit sales and earnings growth versus prior year and all above 2019 levels. So looking at our fourth quarter outlook on slide nine, we expect reported sales to increase 13 to 16% and organic sales to be up 9 to 12%. This represents a continuation of broad-based growth, reflecting our strong orders and backlog. We expect acquisitions to add approximately four points to sales. Adjusted EPS in the fourth quarter is expected to be between 45 and 48 cents. Let me provide a bit more color on our fourth quarter outlook, first on sales. Orders in the third quarter were up 43% with orders outpacing sales and backlog up double digits across all three segments. This gives us confidence in Q4 growth and into next year. We expect industrial and infrastructure verticals to remain robust, which should benefit all of our segments and particularly enclosures. On margins, we continue to expect a modest decline in return on sales versus prior year, as implied in our previous guidance. The biggest drivers of margin in the fourth quarter are expected to be the following. First, our guidance takes into account increasing costs related to a very tight supply chain. Second, we expect higher inflation to be offset by pricing with overall positive price costs in the quarter. We lapped the end of our one-time temporary 2020 cost action. All in, we are modeling return on sales in the fourth quarter to be between 17% and 18%, with segment income expected to grow nicely year over year as we continue to manage these headwinds with pricing actions, strong volume, and operational execution. To summarize, I am pleased with our performance And we believe we are well positioned for a very strong year. With that, I will turn the call back over to Beth. Thank you, Sarah. Turning to slide 10, I want to highlight the reasons why we're excited about M&A. We have completed four acquisitions, adding more than $200 million in annualized revenue since spin. We believe there are further opportunities that can broaden and strengthen our portfolio, building upon our leading positions while delivering attractive returns. As a reminder, we compete in an attractive $60 billion space that is highly fragmented. We are focused on the electrification of everything megatrend, and each acquisition to date fits squarely within this trend. We've added new product portfolios that expand our presence globally. We've increased our capabilities with broader solutions for infrastructure verticals like data and networking solutions and solar, and also strengthened our offerings in commercial and industrial. As we look at new opportunities, we want to expand in high-growth verticals with portfolios that extend what we do in connection and protection. We have a rich funnel and are excited about the opportunity to generate attractive returns with M&A. Year-to-date, Eldon and WBT performed well with strong double-digit sales growth. We completed the acquisition of Vinci A and CIS Global in the second quarter, so while it remains early, we are encouraged with the integration efforts and the growth synergies that we have identified with these two acquisitions. From a financial perspective, we target a return greater than our cost of capital in two to three years and have already achieved that hurdle with Eldon and WBT. We are building a strong track record of integration and are accelerating our growth with M&A. We believe we can continue to create value with acquisitions and are excited about the opportunities within our funnel. Wrapping up on slide 11, we had another outstanding quarter. with strong results achieved during a very challenging time. We continue to see elevated order trends across the business and are sitting on record backlogs. Like many other companies, we are facing supply chain challenges with material shortages, labor constraints, and a highly inflationary environment. Our execution has been tremendous. One example I'm proud to share amidst this challenging environment Is the opening of our new factory in China further expanding our global capacity? At Invenz, we're adapting and finding new ways to partner with suppliers, channel partners, and customers to find solutions to meet their needs. We believe these efforts are differentiating Invenz. We continue to invest and execute on our growth initiatives. New product sales added over a point to sales growth in the quarter, We continue to expand globally and build out our commercial teams focused on high-growth verticals, as well as strengthen our regional supply chains. Our digital transformation is well underway, and we continue to launch new platforms to improve the customer experience, as well as digitize our back office to drive productivity and insights. In summary, we believe our future is bright, and we see the electrification of everything driving more demand for our products and solutions. While some near-term challenges remain, we are executing at a high level. We are expecting a strong year of double-digit sales and earnings growth and believe these third quarter results demonstrate we are making Invent a high-performance electrical company. With that, I will now turn the call over to the operator to start Q&A.