nVent Electric plc Ordinary Shares

Good day and welcome to the InventElectric third quarter 2024 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist for 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, this event is being recorded. Oh, now it's time to cover us over to Tony Ryder, Vice President of Investor Relations. Please go ahead.

Thank you, and welcome to Invent's third 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. They will provide details on our third quarter performance, an outlook for the fourth quarter, and an update to our full year 2024 outlook. Please take note. As a result of the previously announced agreement to sell the thermal management business, the company is reporting the results of this business as discontinued operations and has reclassified 2023 and 2024 results for all prior periods. In addition, guidance is now presented on a continued operations basis. All results referenced throughout this presentation are a continued operations basis unless otherwise stated. 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 events filing 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 investor section of MVIN'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. Please limit your questions to one and one follow-up. With that, please turn to slide three, and I'll 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 third quarter results. We continue to execute on our strategy for growth with a focus on high growth verticals, new products, and global expansion. In the third quarter, we delivered record sales up 9%, both on a continuing operations and total basis. Total adjusted earnings and cash flows were strong, coming in better than expected. And we continued to make investments to expand our data solutions business. Our portfolio transformation is underway with the announced sale of the thermal management business, and we expect the sale of the business to close by early 2025. Our most recent acquisition, Trachty, is off to a good start, growing sales strong double digits, and is a great new platform for Invent. We believe these portfolio moves will make InVent a more focused and higher growth electrical connection and protection leader, and further positions InVent with the electrification, sustainability, and digitalization trends. Now onto slide four for a summary of our third quarter performance. Bills in the quarter were up 1% organically, led by infrastructure. Year to date, new products have contributed over three points to sales growth and we've launched 77 new products. Adjusted operating income grew 4% year over year with return on sales down 120 basis points due to investments and mix. Adjusted EPS was 63 cents. We generated an impressive $143 million in free cash flow Up over 30%. We're on track for another strong year. Looking at sales performance across our key verticals, infrastructure led the way up low double digits organically, with data solutions growing double digits. Industrial was down low single digits. Commercial resi declined mid single digits with continued end market softness. Turning to organic sales by geography, North America was up low single digits, and Asia Pacific had strong broad-based growth. Europe declined low single digits. Lastly, organic orders in Q3 grew mid-single digits year over year. Looking ahead to Q4 from a vertical perspective, we expect infrastructure to have the strongest growth, particularly data solutions and power utilities. Industrial is expected to be flat, commercial resi to remain soft. In addition, macro uncertainty remains with the upcoming elections and interest rates, which has some distributors cautiously managing inventory. Overall, I'm very proud of our InvenTeam and how we continue to execute and deliver for our customers and shareholders while transforming the portfolio. We're on track for another strong year. I will now turn the call over to Sarah for further detail on our third quarter results and our updated outlook for 2024. Sarah, please go ahead. Thank you, Beth. We had a strong third quarter performance with both segments growing better than expected earnings, and record cash flow. Let's turn to slide five to review our results, which as a reminder, are all on a continuing operations basis. Sales of $782 million were up 9% relative to last year, or up 1% organically. Volumes contributed approximately two points to growth, and price was essentially flat. Acquisitions added $59 million to sales or eight points to growth, better than expected. Foreign exchange impact was neutral. Third quarter adjusted operating income was $168 million, up 4%. Return on sales was 21.5%, down 120 basis points year-over-year. This reflected tough prior year comps in corporate costs and electrical and fastening mix in higher investments this year. Inflation was roughly $25 million in the quarter. Q3 adjusted EPS was 63 cents, down 3% due to higher interest and taxes as expected. We generated outstanding free cash flow in the quarter of $143 million, up 33% or 18% of sales, reflecting strong working capital performance. Now please turn to slide six for a discussion of our third quarter segment performance. Starting with enclosures, the team delivered another excellent quarter. Sales of $477 million increased 16% and 1% organically. Acquisitions added 14 points to sales. The Trachte acquisition performed very well, with sales up strong double digits versus a year ago and a growing robust backlog. The integration is off to a great start. From a vertical perspective, infrastructure led, up double digits, with strength in data solutions in both power and cooling. Industrial and commercial resi each declined. Geographically, North America grew low single digits and Asia Pacific grew mid-teens, while Europe was down. Enclosure's third quarter segment income was an impressive $104 million, up 17%. Return on sales of 21.9% increased 20 basis points year over year, driven by strong execution. Productivity and higher margins from new products more than offset inflation and helped fund investments. Electrical and fastening returned to sales growth in the quarter. Sales of $305 million increased 1% organically. Growth was led by infrastructure, including power utilities up high single digits. In addition, industrial grew mid-single digits. Commercial resi remained soft. Geographically, organic sales in North America were flat, and Asia Pacific grew double digits while Europe was down. Electrical and fastening segment income was $93 million, down 5% year-over-year. Return on sales was a solid 30.4%, down 190 basis points, mainly due to tough comps from mix. On slide seven, titled balance sheet and cash flow, we ended the quarter with $137 million of cash on hand and $600 million available in our revolver. Free cash flow is exceptionally strong in the quarter. Year to date, free cash flow of $277 million was up nearly 50% versus a year ago. The fourth quarter is historically our highest cash flow quarter, and we expect continued improvements in working capital. Turning to slide eight, where we outline our capital allocation priorities. We will continue to take a balanced and disciplined approach to capital allocation to deliver strong returns. Growth remains our first priority, both organic and inorganic. In the quarter, we expanded our footprint to increase our liquid cooling capability 4X and support our growing backlog. We completed the acquisition of Tracti, providing a new growth platform. And we have returned $195 million year-to-date to shareholders, including $100 million in share repurchases in the third quarter. Looking ahead, we expect to have a significant optionality for further capital deployment with the sale of the thermal management business, and strong cash flow generation. Moving to slide 9 and our full year outlook on a continuing operations basis. We are updating our full year guidance to reflect the thermal management business moving to discontinued operations and narrowing the range with one quarter to go. For the full year, reported sales are expected to grow approximately up roughly 3%. Acquisitions are expected to contribute approximately 10 points to sales growth and FX is expected to be neutral. Our outlook for full year adjusted EPS is $2.49 to $2.51 which represents growth of 7 to 8%. This includes an 8 cent or 3 percentage point negative impact EPS related to changes in the global tax standards. A few important items to note for the year. First, we expect adjusted operating income to grow 15 to 16 percent. This reflects price and productivity offsetting inflation. In addition, we are making investments in capacity, new products, and digital to accelerate growth and productivity. Second, We are well on track to generate over $400 million of free cash flow with conversion in the range of 95% to 100%. Third, corporate costs are now expected to be approximately $110 million. This includes indirect costs of approximately $15 million previously allocated to the thermal management business. Work is already underway to address these costs. A few additional 2024 assumptions include a tax rate of approximately 23%, net interest expense of approximately $105 million, shares of approximately $168 million, and capex of approximately $80 million. We expect full year 2024 to be another year of strong sales, profit, and cash flow. Moving to slide 10, and our fourth quarter outlook. We expect reported sales to grow 11 to 13% with acquisitions contributing approximately nine points to sales. Organic sales are expected to be up one to 3% with both segments growing. We expect adjusted EPS to be between 58 and 60 cents, up five to 9% year on year. Wrapping up, I am pleased with our third quarter performance and believe we are well positioned heading into 2025. This concludes my remarks and I will turn the call back over to Beth. Thank you, Sarah. Turning to slide 11, let me give you an update on our data solutions business and liquid cooling in particular. As you know, we are a leader in liquid cooling for data centers and have been offering solutions for many years across the cooling continuum. Our differentiation is based on our deep application expertise and our innovative multi-generational design. We continue to expand our product portfolio to serve data center customers across hyperscale, enterprise, multi-tenant, and our distribution partners. Our high-density liquid cooling portfolio includes rack and row coolant distribution units and various manifolds. Our advanced cooling solutions are specifically designed to manage the substantial heat output of cutting-edge AI infrastructure, helping to drive optimal performance and longevity. We are well positioned to support the expansion of AI capabilities, driving innovation and efficiency in high-performance computing environments. We are currently engaged with NVIDIA in the design of liquid cooling products, solutions, and architectures that meet the needs for the GB200, NVL72, and its follow-on next-generation platforms. We will be showcasing our NVIDIA reference design solutions at Super Compute in a few weeks. We are also actively engaged with other chip manufacturers to understand future cooling requirements. In addition to investing in new products, we are expanding capacity in our facilities, building out our advanced lab and testing capabilities, and partnering with our suppliers to ensure they can rapidly scale with us. We continue to see high demand for our data solutions products in cooling, power, and cable management, and now expect 2024 data solution sales to exceed $575 million. We believe we are well positioned to win in this rapidly growing space. Please turn to slide 12. Over the last few years, we have demonstrated our growth strategy is working with strong execution, delivering robust sales and adjusted operating income and earnings per share. Looking ahead to 2025, we are undergoing a portfolio transformation, which we believe will make us a more focused, higher growth electrical connection and protection company. Over 70% of our portfolio is exposed to the secular trends of electrification, sustainability, and digitalization. Infrastructure now represents approximately a third of our portfolio and is expected to grow the most next year. We are well positioned in data solutions and power utilities with robust backlogs. Our outlook for industrial and commercial resi is more positive. New products, again, are expected to be a key driver of our growth. Finally, as part of our portfolio transformation, we have a very healthy M&A pipeline and project nearly $2 billion in available capital to deploy from the thermal management sale and our robust free cash flow generation. In summary, we expect 2025 to be a strong growth year. Wrapping up on slide 13, we had another strong quarter of operational performance, including record cash flow. Our portfolio transformation is underway. We are well-positioned to grow with the electrification, sustainability, and digitalization trends, and our future is bright. With that, I will now turn the call over to the operator to start Q&A.