nVent Electric plc Ordinary Shares

Welcome to the NBENT Electric second quarter 2022 earnings conference call. All participants will be in listen-only mode. If 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. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note that this event is being recorded. I'd like to turn the conference over to Mr. Tony Ritter, Vice President, Investor Relations. Please go ahead.

Thank you, Nick, and welcome to Inven's second quarter 2022 earnings call. On the call with me are Beth Wozniak, our Chief Executive Officer, and Sarah Zawoisky, our Chief Financial Officer. Today, we'll provide details on our second quarter performance, provide an outlook for the third quarter, and an update to our full year 2022 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 advance filings with the Securities 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 material from anticipated results. Today's webcast is accompanied by a presentation, which you can find in the investor section of NBED's website. References to non-GAAP financials are reconciled in the appendix of the presentation. We'll have time for questions after prepared remarks. With that, please turn to slide three, and I'll now turn the call over to them.

Thank you, Tony, and good morning, everyone. It's great to be with you today to share our outstanding second quarter performance. Our InvenTeam has done a tremendous job serving our customers, responding to strong demand, and overcoming supply chain challenges. Our second quarter performance once again exceeded our guidance on sales and earnings. Our strategy to focus on high growth verticals, new products, and global expansion, combined with strong execution, were key to our success. We delivered record sales in Q2, growing 21%, with broad-based growth and strong contribution from both price and volume. Orders grew double digits in the second quarter, and we exited with a solid backlog. Our ROC improved 130 basis points sequentially. Our Q2 EPS grew 14%. Given our strong second quarter results, we are again raising full-year sales and adjusted EPS guidance. Now onto slide four for a summary of our second quarter performance. Sales in the quarter were up 21% organically with double digit growth in each segment and vertical. This was well ahead of our Q2 guidance driven by both price and volume. Our results continue to show we are winning and executing well. New products added three points to our growth and we're on track to deliver 50 new products again this year. We generated $48 million in free cash flow and our adjusted EPS of 57 cents was up 14% from the prior year. Overall growth was broad-based across our key verticals, each organically growing double digits. Infrastructure led the way with continued strength in data solutions and power utilities. Commercial and residential grew double digits driven by North America and Europe. Industrial continues its broad-based growth, particularly in material handling, automotive, food and beverage, and chemical. And finally, in energy, we continue to see a nice recovery, particularly in MRO. A driving factor in our strong results continues to be our focus on the electrification of everything. We believe we are one of the best positioned companies to grow with this secular megatrend. Looking at our geographical sales performance, we continue to see the strongest growth in North America, up nearly 30% in each of the segments. Europe was up high single digits and developing regions declined slightly. Looking ahead, we are raising our full-year sales and APS guidance, reflecting our second quarter performance. Our ongoing strength, strong orders, and backlog gives us confidence in the rest of the year. While our outlook remains positive, we continue to be cautious given the macro uncertainties and ongoing supply chain challenges. We remain confident in our ability to execute and deliver for our customers and shareholders. I will now turn the call over to Sarah for some detail on our second quarter results and our updated outlook for 2022. Sarah, please go ahead. Thank you, Beth. I'm pleased to share with you another quarter of strong performance with both sales and adjusted EPS above the high end of our guidance. Let's turn to slide five to review our second quarter results. Sales of $728 million were up 21% relative to last year on both a recorded and organic basis. Volume was strong, adding nine points to growth with price contributing 12 points. Acquisitions added another four points which was offset by a four-point FX headwind. Segment income was $125 million, up 14% on strong sales growth. Return on sales improved sequentially to 17.2%. While down 110 basis points year over year, the performance improved compared to Q1, as it indicated it would in April. Price offset total inflation of approximately $65 million in the quarter. In addition, we continue to make investments in R&D, digital, and sales and marketing to support our customers and fuel future growth and productivity. Q2 adjusted EPS was 57 cents, up 14%. We generated $48 million of free cash flow in the quarter and improvement from Q1. This is lower than prior year, mainly due to higher inventories to address supply chain issues and support robust demand. We expect momentum in cash flow in the second half, reflecting our seasonal strength and working capital improvements. All in, higher volume and price cost improvements drove the better than expected results in Q2. Now please turn to slide six for discussion of our second quarter segment performance. Starting with enclosures, sales of $381 million increased 27%. Organically, the segment grew 23% with another quarter of strong contribution from both volume and price. Sales growth was broad-based across all verticals with strength in infrastructure, particularly data solutions. Geographically, all regions grew double digits year-over-year led by North America. Acquisitions also contributed to perform exceptionally well, adding eight points to growth, with a standout performance in CIF Global up over 35%. For enclosures, orders were up strong double digits in the quarter, similar to sales growth. Enclosures' second quarter segment income was $62 million, up 15%, driven by another quarter of tremendous volume growth. Return on sales was down year over year, however, improved 220 basis points sequentially to 16.2%. This performance mainly reflects improving price costs. Global supply chain challenges have eased a bit, but remain a headwind to productivity. In addition, we continue to invest in growth and capacity to position us well for the future. We expect return on sales performance to continue to improve sequentially with better price costs and improved productivity. Moving to electrical and fastening, sales of $201 million increased 22% organically with strength across all verticals led by commercial. Geographically, North America led the way with strong double-digit growth. Borders outpaced sales again in Q2. Pricing remained strong, demonstrating the value our labor-saving products provide to our customers. Volume in the quarter was impacted by supply chain constraints. However, our improved output in June, coupled with strong orders and backlogs, give us confidence in the second half. Electrical and fastening segment income was $59 million, up 20%. Return on sales was 29.3%. up 40 basis points relative to last year. Price offset higher than expected inflation, and we continue to invest to support our customers and drive growth. Now turning to thermal management, sales of $146 million grew 15% organically, driven by strength and industrial. High-margin industrial MRO growth continued to be robust for the fifth consecutive quarter, up mid-teens. Geographically, North America and Europe were both up strong double digits. Overall orders were up low single digits impacted by China lockdowns and Russia. We continue to see robust orders for longer cycle projects. Thermal management segment income was up 14% to $28 million. Return on sales expanded 50 basis points year over year to 19.4% driven by volume, and positive mixed contribution from industrial MRO. On slide seven, titled balance sheet and cash flow, we ended the quarter with a cash balance of $56 million. We also have an additional $442 million available in our revolver. Our healthy balance sheet provides us with ample capacity. Turning to our capital allocation priorities on slide eight, we exited Q2 with a net debt to adjusted EBITDA ratio of two times. at the low end of our target range of two to two and a half. We believe our robust balance sheet and cash generation puts us in a great position to invest in growth and execute on our M&A strategy. Year to date, we returned $67 million to shareholders, including a competitive dividend and share repurchases. We expect to continue to deploy capital to drive growth and deliver attractive returns for shareholders. Now moving to slide 9, titled 2022 Invent Outlook, we are off to a strong start with sales up 24% and adjusted earnings per share up 15% in the first half. As Beth highlighted earlier, we are raising our full year sales and earnings outlook. This reflects our strong first half performance and higher pricing assumptions partially offset by greater FX and inflationary headwinds. A couple other key points to call out. While we saw a gradual improvement in the supply chain through the quarter, we expect challenges to persist. For the year, we expect pricing plus productivity to offset inflation. We will continue to invest to support our customers, and we now expect corporate costs of roughly $80 million mainly to higher investments and inflation. For organic growth, we now expect a range of 15 to 17% versus our prior guidance of 11 to 13% for the year. Adjusted EPS is expected to be in the range of $2.17 to $2.23 versus our prior guidance of $2.14 to $2.22. This new guidance reflects earnings growth of 11 to 14%. on top of the 31% EBS growth in 2021. For free cash flow, we now expect conversion of adjusted net income in the range of 90% to 100% due to higher working capital to support our strong sales growth and backlog amidst a challenging supply chain. We are watching the macro environment closely, which remains dynamic and uncertain. We continue to scenario plan and will be ready to respond as we have done in the past. Looking at our third quarter outlook on slide 10, we expect organic sales to be up 13 to 15% and adjusted EPS to be between 58 and 60 cents. At the midpoint, this reflects 11% earnings growth relative to last year. Wrapping up, I am pleased with our second quarter performance. We continue to execute well to meet strong customer demand and demonstrate our ability to manage price costs. Our acquisitions continue to generate great value for customers and shareholders. And importantly, we continue to invest in capacity and growth for the future. With a successful first half, we believe we're set up for another great year. This concludes my remarks, and I will now turn the call back over to Beth. Thank you, Sarah. Turning to slide 11, we've had a consistent strategy since we became a new company that has been driving our success. With the electrification of everything, we believe our growth strategy will continue to drive our performance. Our focus is on high growth verticals, new products and innovation, global growth, and partnerships. Turning to slide 12, let me provide some highlights of how we're executing on our strategy. Looking at the high growth vertical of data solutions, which includes data centers, networking, and communications, We expect sales to grow approximately 30% this year. This vertical now represents more than 10% of our overall Inven portfolio. We've grown our offerings from networking and server cabinets to liquid cooling solutions, power distribution units, and cable management. We've strengthened our portfolio with acquisition and technology partnerships. We've had many large multi-million dollar wins with key customers as a result of our differentiated offerings. Our liquid cooling solutions, for example, are more energy efficient and sustainable, reducing power consumption in a data center and improving reliability. New products and innovation is another key tenet of our strategy. Year to date, we've launched 20 new products on a path to 50 for the full year. New products have contributed three points to our overall sales growth in the first half. One of our new products, our Flexbus connection solution, enables up to 50% faster installation and can reduce total installation costs by 20% or more. We have found it to be safer and easier to install, highly reliable, and easy, easily customizable. This new product has applications across many high-growth verticals, from energy storage to e-mobility to data centers. We're seeing significant wins with this new product. On acquisitions and partnerships, I want to share that we recently announced an investment in a company called iZotope. We are collaborating to offer innovative precision emergent cooling solutions, expanding our cooling portfolio for data center and computing applications. We recently celebrated the one-year anniversary of our CIS global acquisition. With its innovative new products and technology and strong customer relations, it has grown over 35% in the first half. We are investing in this portfolio and have opened two new factories, including one in Thailand this quarter. This is key to our global expansion to increase capacity and serve more global data center customers. We're moving with velocity, and our results demonstrate that we are winning with our growth initiatives. Moving to slide 13, earlier this week, we published our 2021 ESG report. And I want to give you an update on our ESG progress. In the 2020 report, for the first time, we outlined goals in each of our three pillars, people, product, and planet. I'm pleased with the tremendous progress we've made in each of these three pillars. On people, we have made great strides in inclusion and diversity and our safety performance. I'm very proud to highlight 70% of Invent's board of directors are diverse. We believe our culture and our people are a differentiator for Invent, and we are now a great place to work certified company. On products, we have set new long-term goals. including increasing the number of new product introductions with positive ESG impacts. This aligns to our vision of developing innovative solutions that deliver efficiency, safety, and reduced resource consumption. On the planet, we've updated our goals to be more ambitious after making significant progress in 2021, reducing our Scope 1 and 2 CO2 emissions by 15%. Our new goal is to reduce scope 1 and 2 greenhouse gas emissions by 50% by 2030. With ESG at the center of our strategy, we are building a more electrified and sustainable world. And I'm excited about what the future holds for InVET. Wrapping up on slide 14, we delivered another strong quarter. We are executing well and winning with our growth strategy. and that gives us confidence in the future. We've made significant progress on our ESG commitment. We expect double-digit sales and EPS growth for the year, and believe we are well-positioned for the electrification of everything. Our future is bright. With that, I will now turn the call over to the operator to start Q&A.