nVent Electric plc Ordinary Shares

Good day and welcome to the NVEN second quarter 2024 earnings conference call. All participants will be in lesson-only mode. Should you need assistance, please signal a conference specialist by pressing the Start key followed by 0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press Start then 1 on your telephone keypad. To withdraw your question, please press Start then 2. Please note, this event is being recorded. I would now like to turn the conference over to Tony Ryder, Vice President, Investor Relations. Please go ahead.

Thank you, and welcome to Invent's second quarter 2024 earnings call. On the call with me are Beth Wozniak, our Chair and Chief Executive Officer, and Sarah Zawoisky, our Chief Financial Officer. Today, we'll provide details on our second quarter performance, an outlook for the third quarter, and an update to our full year 2024 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 advance filings with the Securities and Exchange Commission. Forward-looking statements are made as of today, and the company undertakes no obligation to update publicly such statements to reflect subsequent events or circumstances. Actual results could differ materially from anticipated results. Today's webcast is accompanied by a presentation, which you can find in the Investors section of M-BEN'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. With that, please turn to slide three, and I'll 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 strong second quarter results. We continue to execute on our strategy for growth with a focus on high growth verticals, new products, geographic expansion, and acquisitions. In the second quarter, we delivered record sales up 10% and adjusted EPS up 6%. Our strong execution resulted in another quarter of margin expansion, double-digit adjusted operating income growth, and robust free cash flow. Overall, we are pleased with our first half performance and are raising our full year sales guidance. Last week, we announced an agreement to sell our thermal management business. We also closed on the TRAC-D acquisition in July, marking our seventh acquisition for Invent. These moves are part of our portfolio transformation, which is making Invent a more focused and higher growth electrical connection, and protection leader. This further positions Invent with the electrification, sustainability, and digitalization trends. Now onto slide four for a summary of our second quarter performance. Sales in the quarter were up 4% organically, led by infrastructure and industrial. New products contributed over three points to sales growth, and we launched over 50 new products in the first half. Adjusted operating income grew 12% year over year with return on sales up 40 basis points on top of a 540 basis point improvement last year. Adjusted EPS grew 6% on top of 35% a year ago. We generated an impressive $112 million of free cash flow up over 80%. We are on track for another strong year. In addition, I am very proud of the numerous awards and recognitions we continue to receive. We were certified as a great place to work for the third consecutive year. We recently earned the designation of recognized employer in the 2024 VETS Indexes Employer Awards for our work supporting veterans and military families. And we're excited to share that INVENT earned a top score on the Disability Equality Index. We were recognized by Disability IN as the best place to work for disability inclusion in the United States. These awards are a reflection of the great work of our INVENT team members. Looking at performance across our key verticals, infrastructure led the way, up high single digits organically, with data solutions growing strong double digits. Industrial and energy each grew mid single digits. Commercial resi declined low single digits with continued end market softness. Turning to organic sales by geography, all key geographic regions grew, led by North America, up mid single digits. Europe grew modestly, led by thermal management, and Asia Pacific had strong broad-based growth. Lastly, organic orders in Q2 declined year over year due to timing of data solutions orders. Adjusting for this, orders grew low single digits. Importantly, in July, we saw significant orders in data solutions. Looking ahead, from a vertical perspective, we continue to expect infrastructure to have the strongest growth in 2024. We expect continued strength and data solutions in both power and cooling. Industrial, we also expect to be positive. Commercial remains soft, anticipating it to be flat with residential being down. In energy, we expect growth driven by the energy transition. For guidance, we are raising our full year sales outlook, reflecting our first half performance and the addition of Trachte. We are maintaining our full year organic sales range and the midpoint of our adjusted EPS range. Overall, I'm very proud of our InvenTeam and how we continue to execute and deliver for our customers and shareholders. We're on track for another strong year. I will now turn the call over to Sarah for further detail on our second quarter results and our updated outlook for 2024. Sarah, please go ahead. Thank you, Beth. We had a strong second quarter with record sales, margin expansion, and robust free cash flow. Let's turn to slide five to review our results. Record sales of $888 million were up 10% relative to last year or up 4% organically. Volumes contributed four points to growth and price was essentially flat. Acquisitions added $52 million to sales or six points to growth. Foreign exchange was a slight headwind. Second quarter adjusted operating income was $202 million, up 12%, with incrementals of 27%. Return on sales was 23%, up 40 basis points year over year. Inflation was roughly $25 million in the quarter. Q2 adjusted EPS was 82 cents, up 6%, and in line with our guidance. This included a two cent contribution from the ECM acquisition. We generated impressive free cash flow in the quarter of $112 million, up 81%, reflecting our strong operational performance. Now please turn to slide six for discussion of our second quarter segment performance. Starting with enclosures, the team delivered another outstanding quarter. Sales of $441 million increased 10% The TEXTA acquisition added two points to sales. Organically, sales increased 9%. This included over 10% volume growth with price slightly down. From a vertical perspective, infrastructure led up double digits with strength in data solutions in both power and cooling. We also saw growth in commercial and industrial. Geographically, North America led up low double digits. Enclosure's second quarter segment income was $104 million, up 15%. Return on sales of 23.5% increased 100 basis points year-over-year, driven by strong growth and execution. This was on top of a 630 basis point improvement a year ago. Moving to electrical and fastening, sales of $299 million increased 12%. The ECM acquisition contributed 17 points to sales growth and as of mid-May is in our organic results. Organic sales were down 5%, reflecting positive price and lower volumes. As expected, infrastructure declined due to customer and channel inventory normalization and a strong prior year comparison. Commercial resi was down due to softer commercial and ECM resi sales. Geographically, organic sales declined in North America and Europe, while Asia Pacific was up. Electrical and fastening segment income was $92 million, up 7% year-over-year. Return on sales was a solid 30.9%, down 150 basis points mainly due to lower volumes and sales mix. Turning to thermal management, sales of $141 million were up 4% organically, Price and volume each contributed two points. Growth was led by industrial with continued strength in MRO. In addition, backlog grew year-over-year and sequentially, with energy transition now representing nearly half of the project backlog. Geographically, growth was led by Europe and Asia Pacific. Thermal management segment income of $28 million was down 2%. Return on sales of 19.9% was down 110 basis points year-over-year, impacted mainly by sales mix due to projects. On slide seven, titled balance sheet and cash flow, we had a strong free cash flow in the quarter, delivering $187 million year-to-date. We ended the quarter with $270 million of cash on hand and $600 million available on our revolver. In mid-July, we drew on a new term loan and a revolver to fund the $695 million TRACTI acquisition. Turning to slide 8, where we outline our capital allocation priorities. Growth remains our first priority, both organic and inorganic, with a balanced and disciplined approach to capital allocation to deliver strong returns. We are increasing investments in new capacity and liquid cooling to support the growing backlog in 2025 and beyond. On inorganic for Trachte, we expect full year sales of approximately $250 million, return on sales of roughly 20%, and over $5 million of run rate cost synergies. Like our prior deals, we expect Trachte to exceed our weighted average cost of capital by year three. And lastly, we have returned $64 million in dividends in the first half to shareholders. Our balance sheet is in good shape, cash flow is strong, and we expect to have nearly $2 billion available for capital deployment in 2025 from cash generated and anticipated net proceeds from the thermal management sale. Moving to slide nine and our full year outlook. With our solid first half performance and the TRAXI acquisition, we are raising full-year reported sales growth guidance to 11 to 13% versus 8 to 10% previously. We continue to expect organic growth in the range of 3 to 5%, including positive price and strong volume for the year. And we now expect acquisitions to contribute approximately eight points to growth. We are maintaining the midpoint of our adjusted EPS range. by narrowing the range to $3.23 to $3.29 up 6% to 8% versus our prior guidance of $3.22 to $3.30. A couple of updated modeling assumptions to note. First, adjusted operating income is expected to be up 13% to 15% versus 10% to 12% previously. Full-year net interest is now expected to be approximately $110 million versus $90 million previously, both reflecting the impact of the Trachte acquisition. For clarity, we have left thermal management in our full-year and Q3 outlook due to the recent signing of the sale agreement and timing of regulatory approvals. We expect to move thermal management to discontinued operations when recording our Q3 earnings results. and plan to recast our historical financials and guidance at that time. For modeling purposes, we expect thermal management's 2024 growth to be in line with overall invent organic sales guide, margins to expand, and tax rate of approximately 23%. Turning to our third quarter outlook on slide 10, we expect reported sales to grow eight to 10% with acquisitions contributing approximately six points to sales. Organic sales are expected to be up two to four percent. This reflects more modest growth in enclosures and electrical and fastening turning positive. We expect adjusted EPS to be between 80 and 82 cents, which includes increased investments in data solutions as we bring new capacity online and make investments in engineering and R&D as we have previously discussed. Wrapping up, I am pleased with our second quarter performance and believe we are well positioned for another strong year. This concludes my remarks and I will now turn the call back over to Beth. Thank you, Sarah. Turning to slide 11. Our strategy has remained consistent. and we are executing on the core elements focused on high-growth verticals, new products, global expansion, and acquisitions. As part of our strategy, we are transforming to higher-growth verticals, which includes the acquisition of Trachte. And we believe the announced sale of the thermal management business will make us a more focused and higher-growth company. Moving to slide 12, I'd like to give more detail about the planned sale of the thermal management business. Last Thursday, we announced that we entered into a definitive agreement to sell thermal management for $1.7 billion, subject to customary adjustments. This transaction is expected to close by early 2025, and we plan to deploy the net proceeds from the sale to acquisitions and share repurchases. We believe this is a positive move for both thermal management and InVent. thermal management is a great business with a strong team and the sale will enable thermal to further build on its leading positions and differentiated solutions. To drive growth across its verticals and expand with the energy transition for invent the cell represents a significant step consistent with our ongoing strategy. to becoming a higher growth and more focused electrical connection and protection leader while positioned with the megatrends of electrification, sustainability, and digitalization. Turning to slide 13, we recently closed on our acquisition of Trachte, a leading manufacturer of custom engineered control building solutions designed to protect critical infrastructure assets. If you look at the pictures on the chart, these control buildings are essentially larger enclosures, and within them are even more enclosures and other products that Invent provides. The demand for control houses is increasing, with an aging electrical infrastructure that needs upgrading, a need to expand the overall grid, the move to more renewable energy, and the increase in data centers. The addition of Trachte further strengthens our solutions in high growth verticals with approximately 85% of its sales in power utilities, data centers, and renewables. The business has been growing strong double digits with a robust backlog, giving us visibility into 2025. This is a great strategic fit for Invent and provides us with a new platform that we can build on with significant growth potential. On slide 14, you'll see an overview of Invent's portfolio transformation since the company was formed in 2018. Our acquisition framework starts with finding companies that have great products aligned to high growth verticals with the ability to scale and invest for growth. We have acquired seven companies to date, adding more than $850 million to sales. We have a strong acquisition track record. With the Trachte and Thermal portfolio moves We're expecting our exposure to secular trends to be more than 70% compared to 60% two years ago. Infrastructure is expected to be about one-third of our sales. This transformation positions us for higher growth and long-term value creation. We are building a more sustainable and electrified world. Wrapping up on slide 15. We had another strong quarter with record sales, margin expansion, and robust cash flow. We continue to execute well on our strategy as we transform our portfolio to have a greater emphasis on infrastructure and secular trends. We are raising our full year sales guidance and adjusted operating income. We believe we're well positioned with the electrification, sustainability, and digitalization trends. Our future is bright. With that, I will now turn the call over to the operator to start Q&A.