nVent Electric plc Ordinary Shares

Good morning, and welcome to the NFAN Electric third quarter 2022 earnings conference call. All participants will be in listen-only mode. Should 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. Please note this event is being recorded. I'd now like to turn the conference over to Tony Reiter, Vice President of Investor Relations. Please go ahead.

Thank you, Jason. Welcome to Invent's third 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 will provide details on our third quarter performance, an outlook for the fourth 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. 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 investor section of M-BEN's website. References to non-GAAP financials are reconciled in the appendix of the presentation. We'll have time for questions after our prepared remarks. With that, please turn to slide three, and I will now turn the call over to Beth.

Thank you, Tony, and good morning, everyone. It's great to be with you today to share our outstanding third quarter performance. Our InvenTeam delivered exceptional results by serving our customers, responding to strong demand, and overcoming supply chain challenges. Our strategy to focus on high growth verticals, new products, global expansion, and acquisitions combined with strong execution continues to drive our success. We believe we are well positioned with the electrification of everything Megatrends. Our third quarter performance was a new record for both sales and adjusted EPS, and once again exceeded our guidance. This marked our sixth consecutive quarter with organic sales growth at or above 20%, demonstrating our growth strategy is working. Our return on sales improved both year over year and sequentially. Given our strong third quarter results and expectations for Q4, we are again raising our guidance for full year sales and adjusted earnings per share. Now on to slide four for a summary of our third quarter performance. Sales in the quarter were up 20% organically with double-digit growth in all segments and key verticals. Segment income was up 22% year over year, and return on sales up 90 basis points. Adjusted EPS was up an impressive 25%. We generated $126 million in free cash flow, up 17%. Overall, a great quarter. Orders grew high single digits, on top of 43% orders growth a year ago. We expected order growth to moderate given this comparison. We continue to have a robust backlog of strong double digits year over year that gives us confidence going forward. Let me share a few other highlights. New products added three points to sales growth. Year to date, we've launched 42 new products and expect to deliver 50 again this year. I'm very pleased with the progress we have made. We are launching more new products faster that are innovative and highly valued by our customers. We recently won a showstopper award at the National Electrical Contractors Association for one of our Invencati products. Looking at our key verticals, they all delivered strong double-digit organic growth. Infrastructure continued to lead the way, with strength in data solutions and power utilities. Commercial and residential grew strong double digits, driven by North America and Europe, Industrial continued its broad-based growth, given the strong trends in automation. And finally, energy continued to perform well, particularly in MRO. Looking at our organic sales performance by geography, we continued to see broad-based growth in North America, up 28%. Europe was up double digits in all segments. Developing regions declined high single digits, primarily due to China. In the quarter, we experienced COVID-related lockdowns in Qingdao, where we have our largest China manufacturing plant. Looking ahead, we are raising our full year sales and EPS guidance, reflecting our third quarter performance and expectations for Q4. Our orders and robust backlog give us confidence in Q4 and into next year. We're excited for the future with the electrification of everything. I will now turn the call over to Sarah for detail on our third 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 execution with double-digit sales growth, return on sales expansion, and improved free cash flow. Let's turn to slide five to review our third quarter results. Sales of $745 million were up 16 percent compared to last year, or 20 percent organically. Overall, sales growth was broad-based, with double-digit growth across all segments and key verticals. Volume continued to be strong, adding five points to growth, and price adding 15 points. Foreign exchange was a four-point headwind. Segment income was $144 million, up 22%, with return on sales of 19.3%, up 210 basis points sequentially, and improved 90 basis points year-over-year, all better than expected. Volume and price contributions more than offset the impact from roughly $55 million of inflationary cost pressures, supply chain inefficiencies, and FX headwinds. In addition, we continue to make investments in R&D, digital, and sales and marketing for growth and productivity. Q3 adjusted EPS was 66 cents, up 25% year-over-year. We generated $126 million of free cash flow in the quarter, up 17%. We are actively managing working capital while supporting robust demand in a challenging supply chain environment. We expect cash flow momentum to continue in the fourth quarter, reflecting our seasonal strength and working capital improvements. Now please turn to slide six for discussion of our third quarter segment performance, where you will see continued sales momentum and strong margin performance. Starting with enclosures, sales of $388 million increased 20% organically, with both volume and price contributing. Sales growth was broad-based across all verticals, led by infrastructure and industrial. Geographically, North America led, followed by Europe. Overall, orders were up double digits year-over-year. Enclosure's third quarter segment income was $72 million, up 27%. Return on sales improved 230 basis points sequentially and was up 170 basis points year-over-year to 18.5%. Improved execution and price realization offset the impact of inflation and continued supply chain inefficiencies. Recall this business was most impacted by inflation and supply chain challenges and we pointed to Ross improvement in the back half of the year. We expect return on sales performance to continue to improve year over year in Q4 due to price cost and improved productivity. Now moving to electrical and fastening, sales of $209 million increased 28% organically, with both volume and price contributing. All verticals grew strong double digits, led by infrastructure with power utilities up over 50%. Geographically, all regions grew, led by North America. Borders were up double digits in the quarter. Electrical and fastening segment income was $61 million, up 26%. Return on sales was 29.1%, up 50 basis points relative to last year on strong execution and price offsetting inflation and supply chain headwinds. We continue to invest in new products and vertical teams to drive growth and support our customers. Turning to thermal management. Sales of $148 million grew 13% organically, with both volume and price contributing. All verticals grew double digits, led by industrial, with particular strength in chemicals. High-margin industrial MRO demand continued to be robust for the sixth consecutive quarter. Geographically, North America was strongest, with growth in MRO, chemicals, and clean fuels. Europe saw strength in industrial, offset by the impact of Russia. China was down due to supply chain challenges and customer delays from COVID lockdowns. Overall, orders were flat in Q3, largely reflecting what impacted sales. We continued to see solid order and quote activity for longer cycle projects. Thermal management segment income was up 14% to $36 million. Return on sales expanded 140 basis points year-over-year to 24.2%, driven by improved price cost and positive mixed contribution from industrial MRO. Moving to slide seven, it's titled balance sheet and cash flow. We ended the quarter with a cash balance of $194 million. We focused on working capital improvements in Q3 and generated $126 million in free cash flow. Also, we exercised our delayed draw option on our $200 million term loan and ended the quarter with $600 million available in our revolver. We believe our healthy balance sheet provides us with ample capacity to invest in the business and execute on our growth strategy. Slide 8 provides a summary of our capital allocation priorities. We continued to prioritize growth while maintaining a strong liquidity position. We ended the third quarter with a net debt to adjusted EBITDA ratio of 1.7 times, just below the low end of our target range of 2 to 2.5. Year-to-date, we have returned $96 million to shareholders, including a competitive dividend and share repurchases. We believe our strong liquidity and robust cash flow position us well to continue to invest, execute on M&A, and deliver attractive shareholder returns. Moving to slide nine, you will see our updated 2022 full-year outlook. Our year-to-date performance has been strong, with sales up 21% and adjusted earnings per share up 18%. As Beth highlighted earlier, we are again raising our full year sales and earnings outlook. For organic sales growth, we now expect a range of 18 to 19% versus our prior guidance of 15 to 17% for the year. Adjusted EPS is expected to be in the range of $2.30 to $2.32 versus our prior guidance of $2.17 to $2.23. This new guidance reflects adjusted EPS growth of 17% to 18% on top of the 31% growth last year. For free cash flow, we now expect conversion to be approximately 90% at the low end of our prior range due to higher working capital to support our strong sales growth. A few other full-year call-outs. We now expect a four-point FX headwind to the top line Corporate cost expectations have moved up slightly to roughly $85 million, and we now expect capex of approximately $50 million at the low end of our prior range. Looking at our fourth quarter outlook on slide 10, we expect reported sales to be up 4% to 6%, and organic sales to be up 9% to 11%, with an FX headwind of about 5%. We expect both volume and price to contribute. Our orders and backlog give us confidence in Q4 and into next year. An adjusted EPS is expected to be between 56 and 58 cents. Wrapping up, we continue to execute well with strong sales growth, ROS expansion, and improved free cash flow. I am pleased with our performance and believe we are well positioned for another great year. This concludes my remarks and I will now turn the call back over to Beth. Thank you, Sarah.

Please turn to slide 11. At Invent, we are building a more sustainable and electrified world. With the macro trends of the electrification of everything and the increasing importance of sustainability, we are seeing increased demand for our products and solutions. As the world moves through the energy transition, we see investments being made in infrastructure, renewables, energy storage, and electric transportation. We believe we're well positioned to grow with these secular trends. At Invenz, we connect and protect. Our products and solutions have strong value propositions tied to sustainability and electrification. These include energy efficiency, electrical resiliency, labor savings, safety, reliability, and serviceability. To bring that to life, let me share a few examples. Our data center liquid cooling solutions are more energy efficient when compared with traditional air cooling. They can remove heat at the source more effectively and improve the power usage effectiveness by up to 30%. When it comes to electrical connections, our Invent Aeroflex Flexbus can reduce the installation time and cost up to 50% and 20% respectively. It is safer and easier to use, more reliable and customizable. This new product has applications across many high growth verticals from data centers to energy storage to e-mobility. We believe investing in sustainability and electrification is critical. In addition to the strong value propositions of our products, we are committed to developing them in a responsible manner with a focus on eco-friendly materials, lower environmental impact and end user safety. By 2025, we expect greater than 90% of our new product introduction funnel to have a positive impact in at least one of these categories. When it comes to acquisitions, our focus is on companies positioned to grow with the electrification of everything. We've strengthened our portfolio in data solutions, industrial automation, and renewables. We've added more than $200 million in annual revenue since spin. These acquisitions have grown 30% year to date, outperforming and growing faster than overall invent. Wrapping up on slide 12, we had an outstanding quarter with sales and adjusted EPS exceeding our guidance. And for the full year, we expect double digit sales and EPS growth. Looking ahead to 2023, let me share with you some initial thoughts. While the macro environment is uncertain and supply chain challenges persist, we believe the electrical secular tailwinds position as well to outperform GDP. We expect the investments in infrastructure and the energy transition will drive demand for our products and solutions. We believe next year will still be an inflationary environment, and we've consistently shown we can manage price-cost effectively. We will continue to invest in capacity and productivity to deliver for our customers. Our digital transformation journey will accelerate with the goal of making it easier for our customers to do business with us. We expect our momentum in new products and innovation to further enhance our position in high growth verticals and be a strong contributor to growth. I'm excited about our future and believe we're well positioned for the electrification of everything. With that, I will now turn the call over to the operator to start Q&A.

Thank you. We'll now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we'll pause momentarily to assemble our roster. Our first question comes from Joe Ritchie from Goldman Sachs. Please go ahead.

Thanks. Good morning, everyone, and nice quarter.

Good morning, and thanks, Joe.

Yeah, so a bit of an odd question to start off, but there was a big acquisition that was announced yesterday. Stock was down double digits, I think partly because of the leverage that the company was taking on. And so I know, Beth, in your opening remarks, you mentioned M&A and your focus on the electrification of everything. But I'm just really curious, just in this environment, how are you thinking about the size of acquisitions that are potentially in your pipeline and the type of deals you would do and the type of leverage that you'd maybe take on in this environment?

Yeah, you know, our M&A pipeline is very robust. And I think a couple of things. You never quite control the timing, and we've proven to be very disciplined in terms of our targets and how they strategically fit. I think one thing I would say is we have a strong balance sheet and cash flow position, which we think gives us optionality. And I'd also say this. We have demonstrated such strong execution and integration of our acquisition targets, and as I mentioned, better than our overall event performance. But that gives me confidence that we could do a larger deal than the ones that we've had. But of course, you know, we're going to remain disciplined and certainly, you know, we have our models that we ensure that, you know, we can meet all those targets and hurdles.

Okay. Great. That's helpful. And then I guess you did provide some commentary on 2023. There is some concern that non-residential investment activity is going to follow residential. Doesn't seem like you're seeing the signs of that across your portfolio. And so maybe just provide a little bit more color on how you're thinking about your end markets as you head into 2023.

I think, you know, as we initially head into 2023, as I mentioned, we think infrastructure is going to continue to be very strong. And that's really because of the investments that are being made. It's the change with the energy transition. So all of those trends, we believe, are favorable. As we look at industrial, you know, we see that we have a really strong backlog there, particularly in our enclosures business. And there's a lot of focus on industrial automation and reshoring or just The fact that everyone has had so many labor constraints and challenges, and so we think going into next year with our backlogs, we believe we'll have some strength there. I think on the commercial and residential, residential is not a big piece of our portfolio, and certainly we've seen that slower. On the commercial side, if you look at where we have the most of our business in our electrical and fastening solutions, A lot of what we do in commercial is related to power and data infrastructure. So anytime that you are retrofitting a building or looking to have more content, you think of a hotel room and all the different outlets and plugs and things like that, it drives for more of our solutions. So we continue to keep innovating. We come out with new products that are labor savings. Given the labor shortage in the contractor market, that also plays well to our strengths. And then finally, energy, we think that we'll see some continued strength there just because of energy and dependency, the switch to clean fuels, biofuels, et cetera. And we've seen good project and quote activity in our thermal management business.

Well, sounds good. Thanks, guys.

Thank you.

The next question comes from Julian Mitchell from Barclays. Please go ahead.

Hi, good morning. Good morning. Maybe I just wanted to switch the focus to the near term a little bit. So just for your fourth quarter revenue guide, I guess two parts to it. One is that I think your guide implies sales are down mid-single digit sequentially, and normally they're flattish in Q4. So I understand there's a bit of an FX there. sequential headwind, but is there anything else going on like shipping days or something like that to be aware of? And then when we look year on year at organic sales, I think you said you should get volume growth in Q4. So maybe just frame how much pricing is stepping down from that very big tailwind in Q3.

Okay, good. Let me first start, Julian, with just how we thought about the quarter. And so one of the things for us as we looked at our orders and our backlog, but we also were cautious with not knowing what our distribution channel partners would do with their inventory positions. And remember, there's a significant portion of our business that is really short cycle. And while demand is still very strong and the output through our channel partners is strong, you know, Our thinking there is that they may tend to modify their inventory positions as we go out of this fourth quarter. We don't know, but that was one of our views in just being cautious on how we looked at Q4.

And I think, Jillian, the other maybe thing to add to that on the sequential side is, you know, what Beth said, and then you flagged it, I mean, currency. Currency is playing a piece of that in terms of that downtick. I think the other piece is Russia. It's having kind of that oversized impact on Q4. And then from an overall standpoint, I mean, that 9 to 11%, as we said in our prepared remarks, includes both an expectation of volume and price. Obviously, it's going to be a bit more skewed to price, but still modest volume. And keep in mind that we're lapping 24% growth of a year ago where we saw double-digit volume and double-digit price. So that step down on price is more of a factor of what we're lapping a year ago than anything else.

That's very helpful. Thank you. And just a very quick follow-up. On the sort of fourth quarter margins, are we thinking enclosures leads the year-on-year increase? you know, EFS flattish and then thermal maybe down?

Well, here's what I would say. You know, Q4, we do expect another strong margin performance and good incrementals. We would expect it to look, you know, a little bit more normal in terms of that sequential downtick in ROS, but significantly better than what we saw in Q3 to Q4 a year ago. really based on better price cost and productivity. And then from a margin perspective, I guess I would characterize it like this. We would expect enclosures, you know, to be the largest driver of that year-on-year margin improvement and see more kind of modest margin performance to plat and EFS and thermal. I mean, it's really more of a function of the strength of that margin performance of a year ago than anything else.

Great. Thank you. The next question comes from Dean Dre from RBC Capital Markets. Please go ahead.

Thank you. Good morning, everyone. Good morning. Impressive performance here. Maybe I start with geographies. For Europe, just given all the anxiety about the potential slowdown, you're not seeing it in your headline numbers here today from third quarter. But anything, changes at the margin, quote, activity? And then similarly for China, you called out the COVID shutdown. Are you expecting to recoup that in the fourth quarter? And can you size that for us?

Okay. So starting with Europe, as we mentioned, our European performance continued to be strong. The one area, of course, where was a negative impact for us is just Russia, right? And that's largely in our thermal management business. So that was the impact that we saw. But otherwise, Europe continues to perform well for us. When you look at China, and remember, China's only mid-single digits in terms of our overall portfolio, so it's not significant. And we were really impacted. And, you know, these COVID lockdowns vary by region. And our plant was impacted in the quarter in Q3. So we're working to recover from that. And I expect we're going to see some improved performance there in Q4. And on our thermal management business, it's also just some timing there. So I think we're going to see that turn around as we progress through the quarter.

Great. Thank you. And then for Sarah, you tweaked free cash flow down for the year. And it sounds like it was all related to the higher working capital demands for this surge in ongoing strength on the industrial side. You didn't call out anything on supply chain. So are you still carrying buffer inventory? Is there an expectation that you would be able to work that down? And has the supply chain improved at all since last quarter?

Yes, I would say that free cash flow guide really is pointing to the low end of our previously guided range of that 90% in terms of conversion rate. And it simply is a function of the strong demand that we can usually see in the quarter amidst what is still a challenging supply chain. I think we see it getting modestly, gradually better, but it's still challenging. AR will naturally be higher with these higher sales, and we continue to invest in inventory to service our customers. And at the same time, we are surgically managing that working capital. Inventory was actually flat from Q2 to Q3. I think over the long term, nothing changes in terms of our cash conversion goals of getting to that 100%. We continue to see working capital as being a big opportunity. And I think, you know, prior to going into this year with this strong demand against the challenging supply chain, you know, we have a strong track record of converting at 100%, you know, including in 2021. You asked kind of on the supply chain front, I would say that We see improvements in terms of getting, you know, team members in the door into our factories and DCs from what we saw kind of in the first half of the year. But it still is taking time, you know, to get those team members trained on board and productive amidst what continues to be really strong volume output. Material availability, I would say, again, you know, better than where we started the first half, clearly better than what we're lapping here of a year ago. But there's still pockets. you know, where we're still challenged. So we're having to be very surgical and very, you know, focused in terms of, you know, where and how we're managing this working capital as we balance all the factors here.

That's real helpful. Thank you.

The next question comes from Nigel Coe from Wolf Research. Please go ahead.

Thank you. Good morning.

Morning.

Yeah. So going into enclosures, Obviously, we've seen some nice margin momentum through the year. It sounds like labor is the issue here more than supply chain. Is that fair to say? I'm just wondering if it's a labor issue, when would you expect to be at a more normalized productivity in closures? The second part of that would be as we go into 2023, obviously, assuming no recession, do you think there's a path to high-teens growth? for the full year in enclosures?

So let me just start with, yes, labor has been a challenge for us in many of our plants, including enclosures. And it's improving, but still a challenge. And I would also say materials, particularly when it comes to electronics, still is very challenging. But we're working our way both through that. And I would say on enclosures, you know, we're even looking at some more expanded capacity and looking at expanding our operations in Mexico just for the strong demand that we see, and we think that's prudent just, you know, strategic areas that we're investing in. We're not really, you know, giving any color yet as we go into 2023, but as I mentioned earlier and in my prepared remarks, I just think, you know, the backlog is strong for enclosures, and we think, We've got, you know, momentum with some of the infrastructure and industrial electrification trends that we see going forward into 2023.

Okay, that's great. And then in terms of thermal, obviously orders, I'm assuming there's some impact there from Russia, but just wondering if you can maybe size that. But more interested in the outlook, and you commented the current activity and project outlook looks pretty good there. So maybe just give us a bit more color in terms of what you see on the longer cycle side. And then perhaps just touch on Europe. You know, we're seeing a lot of, you know, news around pipelines, pipelines getting blown up, et cetera. How does that impact ENVENT in regions?

Well, so starting with Russia, yes. What we're seeing both in revenue and our orders in the thermal management business has been impacted by Russia. And we've always said that was our business most impacted there. What we're seeing in North America is a very strong growth in industrial MRO. We've talked about that for six consecutive quarters being very, very strong, and that's continuing. We've seen a lot of focus on things like clean energy and biofuels and carbon recapture, so some energy transition areas. But we think that the project orders and activity both in Europe and North America is strong. And I would say another area for us has been the focus in chemicals, and that has performed very well for us as we go forward. So with respect to the particular disruption that you talked about, that really hasn't been an area for us. It hasn't caused any issue, but we definitely are strategically looking at this energy resiliency, energy independency, energy transition, and making sure that we're well positioned globally to serve some of the changes in demand here. And I think that going into next year, we'll see some strength.

That's great. Thanks, Beth.

The next question comes from Jeff Hammond from KeyBank Capital Markets. Please go ahead.

Hey, good morning.

Good morning.

So I just want to go back on productivity because it seems like the price-cost is getting better, but productivity still seems to be a challenge. And I'm just wondering...

know as you look into 23 how big of an opportunity that is if you can kind of you know catch up some of these supply chain and and labor issues you're talking about well i mean i would start from the standpoint of you know we've we've worked towards this um equation if you will that price plus productivity is going to more than offset right inflation and so I think we've managed that well over the last couple years. Productivity has been more of a headwind in the current environment, given some of these supply chain challenges. But we would expect that to continue to gradually improve. I mean, I think we saw modest improvement from Q2 to Q3. We expect that to continue into Q4. I think timing of when that overall supply chain environment will get back to more normal, I can't say that we have a particular view on that. What I would say is that we're really focused on doing something differently than what we've done before in terms of onboarding, in terms of training, in terms of ensuring that we've got the right level of automation in our factories. putting in capacity and investments as Beth alluded to earlier. So there's a lot that we're doing to drive that productivity improvement along with looking to see that gradually improve just from an overall environment perspective.

Okay, great. And then just to be clear on the 4Q guide, so you're building in some expectation for distributor destocking. Are you actually seeing Any evidence of that near term?

You know, it was a caution that we had, right? Not knowing, right? And I'd say that our, you know, demand, first of all, we always look at the demand and the throughput, our distributors, and that's very strong. So we're very pleased with that. And I think order patterns have generally been in line with what we've seen in Q3. So to this point, things look fine. But, you know, again, as we approach December, you know, you just don't know, right? So I think it's good for us just to have a cautious view there.

Yeah, absolutely. And then just, you know, there's been, you know, the magnitude of inflation has been pretty eye-popping. You know, but we're seeing some input costs come in on the material side. And I'm just wondering, you know, particularly on enclosures, how you're thinking about durability of kind of holding price should some of these lower input costs persist?

I think the thing to keep in mind is that even if we see some material price easing, we've got inflation in so many other areas. We have inflation in labor. We have inflation in freight. We have inflation in energy costs. So, you know, on balance, as I mentioned, we think next year is an inflationary environment, and we're going to continue to manage that price-cost equation as we go into next year. Okay.

Thanks so much. Thank you.

The next question comes from Jeff Sprague from Vertical Research. Please go ahead.

Hey, thanks.

Good morning, everyone.

Good morning.

Good morning. Hey, I was wondering if, just back to slide five, if we can just have a little bit more of a discussion of kind of the inflation, productivity, investment equation. And, you know, in particular, I'm sort of interested in how much of a productivity headwind you're fighting against some of these supply, you know, disruptions. But could you just kind of unpack that $74 million for us, and then I've got to follow up.

Yeah, so on that 74 million, you've got roughly 55 of that is going to be inflationary pressures. So that means, you know, you've got roughly 19, 20 million related to investments and productivity. Maybe a couple things I would call out there, Jeff, is on the investment side, and you can see it on the P&L, I mean, we're investing higher dollars in terms of R&D, sales and marketing, and digital that shows up in that SG&A line. And so that's a significant, you know, year-over-year investment that we're making that we believe you're seeing the returns already on that in terms of the new product contribution. and what we're doing around digital capabilities to service our customers and to drive productivity. I think the other piece of that, balance of that is gonna be on the productivity side, And that's a couple different things there. One would just be we're not yet seeing that supply chain efficiencies that we would expect with the volume leverage that we're seeing. I think that's marginally getting better from Q2 to Q3, and we would expect that to continue to get better as the quarters progress here and into next year, just as we get more productive in our factories, as we've talked about, and also put in some of the additional capacity. As we sit here today, I mean, we continue to have just strong demand, and so that means we're leveraging our global footprint, you know, maybe unlike what we would normally do in terms of very in-region, for-region approach. You know, we're flexing our capacity, engaging with some outside sourcing, you know, to help us service that demand. And that just has a cost component to it. But again, as we drive, you know, for greater efficiencies in our factories, as we put in that more and more automation, as we make some of those capacity investments, coupled with a backdrop of what we see as a gradually improving supply chain, we think that that's going to consistently improve, you know, as the quarters progress.

And then just on the question of capacity, it sounds like it's mostly labor, but your capital spending actually is a little on the low end of what you were previously thinking. Do you need kind of a significant bump in brick and mortar here to continue to grow at this pace? You're actually posting better volume growth than a lot of companies we cover, right? We're seeing a lot of organic growth out there and from a lot of companies it's price and not volume, but you've got both working. So just wondering, you know, how much more you can kind of squeeze out of the existing footprint with, you know, without maybe a material increase in your capital spending.

You know, we've been able to manage our CapEx spending fairly consistently, you Having said that, for the last couple of years, we've always been able to make investments and expansions. So this year, we expanded in a factory in Thailand. As we're going into next year, we're going to expand in Mexico. And what that enables us to do is to strengthen our regional strategy, as well as, as we look at some of these areas for infrastructure growth, we believe that we do need to add some more lines to give us that capacity that maybe is constraining some volume growth today. Jeff, we believe we can manage that within, you know, our current investment plans that we have.

And maybe just one little nit, just surprised that chemicals is so strong. I'm sure it isn't lost on you that just about every chemical company in the world is like imploding from an earnings standpoint. I mean, is there, you know, kind of something unusual or unique that's going on that's, you know, giving you strength in that particular business at this point in time?

I don't know, Jeff, that I would say that there's anything unique there in particular. You know, one of the things, as we've talked about, some conversion of, you know, petrochemical to some of these clean fuels or biofuels isn't for us. They require more maintenance or, you know, to maintain a temperature to allow flow. So, in some cases, it requires more content from us, for example, and I see that, you supporting some of our growth. So, you know, that would be maybe the one thing I could point to. But, you know, for us, it's just been an area where our value propositions and our capabilities have just, you know, played well.

Great. Thank you. Again, if you have a question, please press star, then one. The next question comes from Scott Graham from Loop. Please go ahead.

Hi. Good morning, and congratulations on Really just an outstanding quarter. I wanted to maybe drill down a little bit further into the impact of higher commercial loan rates and let's say your commercial buildings market, which is a pretty big market for you guys. Obviously, we all get the whole secular smart building thing. Improving efficiency goes without saying. I'm just wondering, though, if you thought through whether, you know, in a higher rate environment, you know, perhaps some of that activity slows, maybe that market turns into more break and fix next year. You thought through that?

Yeah, I mean, I think that's right. You know, you see, I mean, certainly you've seen the interest rates. Again, we're not really in resi, but you see it starting there with home builders right now. And I do think, you know, on the commercial side, We would expect to see that flow and and our view is you know we're so Broad-based in terms of the different types of buildings warehouses data centers Etc that we support with our products and offerings and they also particularly with our EFS portfolio a lot of what we're driving our labor-saving solutions and Power in data infrastructure is where we play. So the content, we think, is key. So, you know, our view is we keep coming up with new products that are labor savings that can be extended across medical or institutional or, you know, that... We believe we're still going to, you know, manage to grow and outperform just because of the value propositions that we have. But, you know, certainly commercial is going to slow from where it has been in 2022. Okay.

I'm happy to hear you contemplate that because it seems like it kind of has to a little bit, right? At least pause. The other... I wanted to ask you about was, you know, sort of the cadence of orders in the quarter, you know, obviously continues to be, you know, very strong, but that also includes some pricing, fair amount of pricing. So I'm just wondering really two things on orders, what the sort of cadence was each month, year over year, and, you know, into October if possible, and are the order volumes up as well?

Well, I think, you know, the one thing I would say as we look at the quarter, and just, you know, keep in mind that, you know, August is a big holiday period in, you know, in Europe. So, you know, when we look at the quarter overall, I don't think there was any, I mean, it was fairly consistent, right? And as we've gone into this fourth quarter, it's fairly consistent. So there hasn't been any particular trend one way or another, just, you know, strong order growth. And of course, it is both volume and price that we're seeing.

Volume and price. All right, good to hear that. Thank you. I appreciate it.

Thank you.

The next question comes from David Silver from CL King. Please go ahead.

Yeah, hi. Good morning. Thank you. Good morning. Yeah, I'm going way down my list of potential questions here. First question, and this will just take a few seconds, but broadly speaking, I guess I'm interested in your thoughts about the vitality index or new product sales. But more to the point, last couple of years, you've kind of set internal targets for new product introductions, I think at around 50. And your company has been growing, as you pointed out, at a pretty healthy clip. and you are sharpening your focus on those high-growth verticals. So is it a reasonable surmise on my part to think that 50 is moving from kind of the target or the ceiling to kind of the floor on your new product introduction efforts? And secondly, maybe just a comment about going to market with new products may be, You know, the last 12 months, you would probably say we were emerging or recovering from a downturn. Maybe over the next 12 months, globally, we'll be entering an economic slowdown. So just maybe some thoughts about new product introduction pace and any changes or shifts in how you go to market, you know, should the global economy enter a slower patch. Thank you.

Yeah, well, I think with new products, this is an area where I think we've had really tremendous performance. And it really is a cross-functional approach, right, that we think about what is the market opportunity, how do we differentiate, and then how do we launch through our supply chain and through our channel partners. So you are correct to say over the last couple of years, you know, we've been able to launch about 50 new products. And keep in mind our portfolio has everything from, you know, a fastening product all the way up to a connected control solution or a liquid cooling solution. So there, you know, we have differences in terms of the the cycle time to create those new products. So will that number go up? It could, but I think 50 is a good number for us. What we look to see is that the impact in terms of our cycle time, the revenue dollars, margin, all of those things, which is why we're seeing our vitality increase. And I would say from a launch standpoint, You know, I think we've gotten much more effective in the commercialization because launching a new product effectively these days means that you have all the digital assets in place, not just that you launch a new product. And I think we've gotten really good with our channel partners and with our end users to engage them in our process so that we launch very effectively and have inventory on hand, et cetera, so that the time to revenue recognition from these new products is a lot faster. So let's say we go into next year and things are slower. I don't think that changes our approach because we're basing our new products on creating value and whether it's labor savings or whether it's liquid cooling, which is energy efficiency. And I spoke to the need for electrification and sustainability. I think we're gonna continue to see a strong impact of new products on our overall growth.

Okay, great. This next question, I guess I'm looking at slide 11 in the lower right-hand corner where you list many of your recent acquisitions. I believe it was three percentage points of your growth this quarter came from M&A or inorganic sources. When I look at that list, I was just wondering if you may comment on which of those acquisitions you think are contributing kind of at above the company average or maybe a little bit below. And in particular, I'm thinking proportionately. I mean, I understand there's all different sized companies in there, but which would you say are maybe punching above your weight or have been a positive surprise relative to expectations. And, you know, maybe if there's one or two that are lagging, that would be helpful as well.

Well, David, just to clarify, we had said that new products had driven three points of growth. That was a three-point comment. We've said these acquisitions have been growing at a rate of 30% year-to-date. And so recall, overall invent has grown at 20%. So our acquisitions are all outperforming our overall invent growth rate. And so what I would point to here is more from a, if you look at CIS Global and WBT, these acquisitions have been focused on data solutions, data centers. So one of that, you know, infrastructure areas. When I look at our Vinci acquisition, it's been focused on renewables and places like solar. So we're seeing growth there. And we think about Eldon focused on global growth and industrial automation. So they really are all have all outperformed the models that we put in place, and I just use that to show that when we've done acquisitions, we know how to focus on high-growth verticals, integrate them into our business, and make them successful through our vertical and channel approach.

Okay, thank you. I see I got a little confused there. The numbers didn't quite add up, but anyway, that was my mistake. Thank you for clarifying that. Appreciate the insight.

Thank you.

This concludes our question and answer session. I would like to turn the conference back over to Beth Wozniak for any closing remarks.

Thank you. And thank you for all of us joining us today. We're very proud of the outstanding performance we have delivered. We will continue to execute on our strategy to make Invent a top-tier, high-performance electrical company, delivering for our people, our customers, and our shareholders. We believe Invent is well-positioned for the trends in electrification and sustainability. Our future is bright. Thanks again for joining us. This concludes the call.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.