Good day and welcome to the nVent Electric Second Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Mr. Tony Riter, Vice President of Investor Relations. Please go ahead, sir.

Thank you and welcome to nVent's second quarter 2023 earnings call. On the call with me are Beth Wozniak, our Chair and Chief Executive Officer; and Sara Zawoyski, our Chief Financial Officer. They will provide details on our second quarter performance, provide an outlook for the third quarter and an update to our full year 2023 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 the future risks and uncertainties, such as the risks outlined in today's press release and nVent's 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 nVent'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 just turn to Slide 3 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 strong second quarter results. We continue to execute on our strategy for growth with a focus on high-growth verticals, new products, acquisitions and geographic expansion. In the second quarter, we delivered record sales, up 10% and adjusted EPS up an impressive 35%. Our strong execution resulted in another quarter of robust margin expansion and free cash flow. Highlights for the quarter include the acquisition of ECM Industries, expanding our electrical power connection and grounding solutions portfolio. We also published our 2022 ESG report which highlighted significant progress on our goals around our People, Products and Planet pillars. Overall, we are very pleased with our strong first-half performance and are raising our full year sales and adjusted EPS guidance. Now on to Slide 4 for a summary of our second quarter performance. Sales in the quarter were up 4% organically on top of 21% a year ago, with all verticals growing, led by infrastructure. New products contributed approximately 3 points to sales growth. We've launched 33 new products in the first half and are on track to launch 50-plus for the full year. We closed on the ECM acquisition and are excited to welcome the team to nVent. In Q2, ECM added 7 points to sales and was accretive to overall nVent margins. Segment income grew 45% year-over-year, with return on sales up an impressive 540 basis points. Adjusted EPS grew 35% on top of 14% a year ago. We generated $62 million of free cash flow, up 29%. We are on track for another strong year. I am very proud of our results and the great work being done by our nVent team. I want to share some recent awards and recognition to…

Thank you, Beth. We had a strong second quarter with robust margin expansion and free cash flow. Let's turn to Slide 5 to review our second quarter results. Sales of $803 million were up 10% relative to last year, or up 4% organically. Price contributed more than 5 points to growth and volumes were down 2 points. ECM added $50 million in sales, or 7 points to growth. Second quarter segment income was $181 million, up 45%. Return on sales was 22.6%, up 540 basis points year-over-year. Our strong performance was driven by price costs, continued productivity improvements and favorable mix in the quarter. Price more than offset the impact from inflation of roughly $25 million. In addition, ECM contributed meaningfully to the quarter and was accretive to overall nVent return on sales. Q2 adjusted EPS was $0.77, up 35% and above the high end of our guidance range. This included a $0.02 contribution from the ECM acquisition. We generated robust free cash flow in the quarter of $62 million, up 29%. This includes higher CapEx investments for growth and capacity. Now please turn to Slide 6 for a discussion of our second quarter segment performance. Starting with Enclosures. Sales of $400 million increased 5% organically, with both price and volume contributing. Infrastructure led with continued strength in Data Solutions. Industrial was also a solid contributor, driven by the trends in automation. Geographically, North America led up high single digits. Enclosures second quarter segment income was $90 million, up 46%. Return on sales of 22.5% increased an impressive 630 basis points year-over-year, driven by price cost and productivity. We are expanding our Data Solutions business rapidly and stepping up investments in CapEx and OpEx in the second half to support our strong orders and future growth. Moving to Electrical &…

Thank you, Sara. Turning to Slide 11. I would like to share a few highlights on nVent. First, I would like to talk about our opportunity for Data Solutions. The acceleration of AI, greater data consumption, rising heat densities and growth in edge computing are all drivers of demand for our Data Solutions offerings, including liquid cooling. We view the total opportunity in Data Solutions to be approximately $10 billion, growing at roughly 10%. Our Data Solutions business was $375 million last year, growing 30% the last 2 years and we believe we are in a position to win and outgrow the industry. Today, only about 5% of data centers are liquid-cooled. When compared to conventional cooling, we believe liquid cooling is growing 3x faster and providing up to a 50% savings in energy. What differentiates us is our leading technical expertise, our innovative designs and our ability to manufacture at scale. We have been partnering with major data center players for many years, some going back pre-spin and have developed high-quality solutions. We provide a broad range of cooling offerings for both greenfield and retrofit. We are building out a portfolio of standard products to drive scale, broader adoption and access through distribution channels. To serve the increasing demand, we're making significant investments in the back half of the year and next year to expand our operations and capacity. We believe our Data Solutions business is well on its way to over $500 million. Moving to Slide 12. Last month, we published our latest ESG report and I'm proud of the meaningful progress we've made on our goals in our 3 pillars of People, Products and Planet. In our People pillar, we increased diverse representation in our employee population and continue to build on our programs to develop, recognize…

[Operator Instructions] And the first question will come from Julian Mitchell with Barclays.

Thanks very much and good morning, everyone. Maybe just a first question around the orders, trends and what you're seeing in kind of distributor and channel partner behavior. So I think you said orders were up low-single-digit in Q2. Just wondered what you're expecting for the third quarter in terms of the order intake. And how would you characterize the state of the destocking right now? Is it sort of episodic? Every few months, it comes in and out? And then how do you assess the aggregate state of sort of inventories? I realize you set across a vast array of distributors. But yes, your comfort levels on where inventories sit versus sell-through today.

Okay. Well, Julian, first, 1 of the things I want to say is that, as we expected in Q2, we expected inventory adjustments to occur. And 1 of the positive points is that when we continue to look at distributor sell-through, we're positive. And so we think that some of those actions took place in Q2. And some actions, I think, will continue in Q3. As we go forward, we think that we're going to see growth with respect to infrastructure. A lot of the infrastructure bill and Inflation Reduction Act is going to drive growth in areas such as utilities and renewables and those other areas. So we think the outlook for that is very positive. And the other comment I would just make with respect to orders is that we've seen increasing orders in Data Solutions, particularly for our liquid cooling solutions and we see that accelerating.

That's helpful. And then just my follow-up would be -- trying to understand a little bit better, how you're thinking about the second half, sort of split in organic sales between price and volumes. In the second quarter, volume was down 2, I think and price was up 5. So in terms of your second half guide, are we thinking about sort of price exiting the year at 1 or 2 points and volumes staying in that sort of flat to down territory?

Yes. So I would say that -- a couple of things. One is we do expect positive price each quarter. I think that's important, given the fact that we continue to see 2023 as an inflationary environment. In Q3, embedded in that organic guide of up 1% to 3%, we do see that predominantly price. And I think a big piece of that is just reflective of some of those inventory-level adjustments continuing to happen in the third quarter as well as Thermal Management. And Thermal Management, specifically in relation to some of that commercial/resi softness but also the wind down in that Russia business is more acute there in that Q3 and Q4 time frame. It's having roughly a 4-point impact on Thermal Management there in the back half and that winds that down to roughly 0 Russia sales as we go into 2024. I would say that from a Q4 perspective, we do expect things to ramp a bit from a volume and overall growth standpoint. And the biggest contributor there is just going to be the -- what we see in the data solutions space. And Beth talked a little bit about that order book building, the funnel of opportunities building and we're really focused on making those investments here in Q3 and Q4 to capture that growth.

The next question will come from Deane Dray with RBC Capital Markets.

I'd like to stick with the liquid cooling if we could. We did a deep dive report this quarter on the whole market. And what I find fascinating is that nVent has such a first-mover advantage in direct-to-ship cooling. And remarkably, most of your competition are start-ups. So what's your expectation competitively with so many other start-ups in the space? Do you expect to see consolidation? I like seeing you're adding capacity in this. Do you need to add any new technologies in this side? From our perspective, immersion and rear-door heat exchanges are probably less efficient. So I would rather see you in direct-to-ship. But just how do you see the industry playing out in terms of consolidation and where and how do you need to add either capacity or technologies in the space?

Well, Deane, thank you for the question. And so we are very excited about liquid cooling. And as you know, we have been doing liquid cooling even before we spun in some industrial applications. And over the years have developed great relationships with data center providers. And I would say it takes time. The test cycle and scaling manufacturing and the quality and the requirements that you have, it takes time to build that out. And we feel that we have done that for several years now and in fact, are in test with many new customers as well as seeing accelerating order growth. One of the things that I would say is in addition to our manufacturing expertise is we understand that cooling loop. And so there's various different technologies, whether you are retrofitting or greenfield and also depending on who the provider is, sometimes, they want to have some of those technologies themselves. I think the good news is that we have partnerships across various -- of those areas as well as a strong product portfolio ourselves. As I mentioned, data centers are only roughly cooled by liquid cooling 5%. That's kind of where we're at today. So I think there's plenty of room for growth. And I think you're going to see us continue to strengthen and build out our product portfolio, including a standard set of offerings so we can have more broader adoption as well as many more partnerships and end customers. So I think there's plenty of opportunity for growth. And it may take a while before we see some consolidation because there's various cooling technologies and they all have a role right now.

That's really helpful. And just as a follow-up, 1 of the data points you provided this morning on Power Utilities being up more than 40%. Could you just share with us what was going on there? Is that a comp issue? I note that that's also 1 of the areas that could benefit and should benefit from liquid cooling along with edge computing and energy storage and so forth. So what's going on in Power Utilities?

Well, I think in Power Utilities, it really is just the strength of the infrastructure build-out in our portfolio. And so we -- not a comp issue. We had strong growth there last year. We continue to add new products into that area. And as we go forward, we think about how liquid cooling, especially around energy storage or battery management, has a role to play there. And I think those are solutions that will come into play in the future. But overall, we just see that's part of the strength in the infrastructure build-out and in part to the execution by our team with our supply chains.

The next question will come from Jeff Hammond with KeyBanc Capital Markets.

So I really wanted to just cover kind of the margin sustainability in Enclosures and EFS into the second half. It looks like by our math, margin stepped down a point. Maybe you can speak to how ECM plays into that? It just seems like the margin step down maybe more than we would have thought. And particularly given Thermal kind of seasonally steps up.

Yes. So Jeff, let me take that one. I would say, first, we expect again, another quarter of margin expansion in Q3 from a year-over-year perspective. And that really is reflective of continued good price cost management as well as productivity. A couple of things maybe to point out from an overall ROS perspective. I'll start from a segment standpoint. We expect Enclosures to again be the largest driver of that year-over-year margin improvement on price cost and productivity. And we do expect in Q3 underlying margin expansion in Electrical & Fastening. And you're right to point out that ECM, while it's accretive to overall nVent, as expected, it is dilutive to that EFS margin. So that's in part what you're seeing. Thermal, we expect that margin performance to be a bit more flattish from a Q3 perspective. Bit more reflective of what's going on in the top line versus anything else but they continue to work good price cost actions as well as just overall cost actions to work that to margin expansion for the full year. Maybe 2 other things I would just point out from a sequential standpoint, Jeff, is one, we are investing incrementally in Data Solutions in Q3 and Q4. So overall, you're seeing that kind of fold in, if you will, to that Enclosures margins as well as to the overall nVent margins when you look at Q2 to Q3. And I think the other thing I would just point out is that price cost narrowing. This is nothing new. This is something that we expected coming into the year. So we're seeing that play out in the back half versus first half. And we do expect a bit of a sequential uptick in metals, specifically in Q3 from where we're at in those favorable first-half positions just based on our lock strategy.

Okay. Very helpful, Sara, thanks. Just back on liquid cooling, we've been getting a ton of questions, as I'm sure you are. Just wondering if you could put a finer point on kind of the size of the business today within that Data Solutions. What that business has been growing at relative to the 30% growth in Data Solutions overall. And then how it impacts margin mix. And then maybe just speak to the specific investments you're looking at in terms of capacity.

Well, back at our Investor Day, we talked about our Data Solutions business being $375 million in sales and 40% of that being cooling and power. And certainly, our liquid cooling business is 1 of the fastest-growing parts of that business. And so this is why the takeaway on that 1 chart is we expect to be over a $500 million business. We're well on our way. And we've had strong double-digit growth. So I think as we continue to invest in expansion and we see the acceleration of orders, it's going to become a more significant piece overall of what we do in Data Solutions.

And maybe just to add. I think you asked a question, Jeff, on margin. We see it generally in line with our overall Enclosures margin. It's something that we can be -- improve that going forward. I think just here in the back half, as we significantly invest around the OpEx as well as what's going on in terms of the CapEx side of the equation, that's what's impacting kind of here in the back half. But we see that as great returns in terms of the investments we're going to make to deliver on the top line as well as the margin and the drop-through.

And then just the CapEx investments, I think you were moving some stuff around and creating some capacity. Can you just speak to that?

Yes. So our initial Phase 1 of this is we opened a new manufacturing facility in Mexico and really some of our -- expanded some of our core Enclosures products there so that we could optimize our Anoka facility which is here just outside of Minneapolis, so that we could expand our liquid cooling capacity, some of our lab capability, engineering capability. There's other facilities across the U.S. that were also expanding for some of those core product offerings. So the CapEx is really helping us invest to further scale and support the testing requirements, the addition of new customers so we can really accelerate as the market accelerates.

The next question will come from Joe Ritchie with Goldman Sachs.

I just wanted to maybe get a little bit more clarification on Julian's question on the destocking. So I think, Beth, last quarter, you guys had mentioned that it was really broadly impacting your business. And then this quarter, it seems like it's been a little bit more so on the commercial and resi side but I clearly don't want to put words in your mouth. I'm just -- maybe just talk about like where you're seeing it across your businesses today and then like your confidence that you'll get through most of it in the upcoming quarter.

Well, I think as we said, distributors were adjusting their inventories for 2 reasons. One, you just take a look at lead times coming in and supply chain challenges. And second, I just want to emphasize again, our sell-through to the distributors has been positive. And so as we've seen where the supply chain has improved or where areas have been softer like commercial/resi, that's where we saw some of that adjustments take place. But even now, as you start to see more so with industrial, we're seeing some of those adjustments take place there as well. And I would say areas where their strength continues to be infrastructure. And we think this is going to play out as expected. And again, we're very -- we feel very confident because of the positive sell-through that we see at our distributors.

Got it. That makes a lot of sense. And then I know AI and liquid cooling is going to be a hot topic for a long period of time. I guess just 2 quick questions there. In terms of the R&D investments that you're making, maybe I missed it but how much are you stepping up R&D for the remainder of the year? And then specifically, in what type of applications? And then my second question, is there a way to maybe parse out your -- I don't know, whether it's your content for data center and whether -- how that's going to be changing over time given recent developments?

Well, I guess I would say -- first of all, the investments that we're making in CapEx and OpEx, those investments are both in R&D, in operations and just across the board. I mean, we're investing in that business across all functions, just as we see the growth and opportunity. So -- and what we're doing specifically when we think about R&D is we -- I mentioned how we were building out a more standard portfolio that would allow us to scale some of the capability and scalable products through distribution. So that's how we think about all of those investments, to support the current customers, new customers, the testing required for these solutions, sometimes it takes a year, as well as developing these standard products. So it's really all of that. And when -- and again, as we mentioned, we think there's various cooling solutions. So whether it's greenfield or retrofit, whether it's hyperscale or enterprise, there's a suite of -- there's a suite of products that we're working on developing.

The next question will come from Jeff Sprague with Vertical Research.

I wonder if you could just elaborate a little bit on kind of what you are seeing in resi and commercial. And obviously, you're really not that big in resi, right? But I guess the question is a little bit more commercial. Sounds like it's primarily in the Thermal business. But maybe if you could again just drill down a little bit on what you're seeing and kind of the top line trajectory in that part of the business.

So our resi business is predominantly -- is Thermal and we've seen that be softer, right and expect that to continue. On the commercial side, commercial is across all of our businesses, a little bit softer in Thermal. But I would say we were positive in our Enclosures. Overall as nVent, we were positive in commercial, particularly in EFS and Enclosures, for that matter. So as we go forward, we think where commercial is strongest in our EFS business because of our labor-saving solutions, because of the focus that we have around more power and data infrastructure, we expect that to trend positive for us. And again, it's different applications. We look at industrial construction as an area that's very strong, right which is driving demand for our EFS and our Enclosures products.

And then just on the kind of the topic of volume, right? Because they're not alone here, printing top lines that are mostly or even more than all price. I think the difference, though, as I look at it, you guys had very strong volume growth in '21 and '22 and many in my group didn't. So the comps are different. But really, the essence of my question is, as we look forward into '24 and '25 and kind of assume the economy is clicking along here okay, how are you capacitized to be able to drive volume growth looking forward? Obviously, you talked about CapEx and data solutions. But I'm just wondering kind of the state of your capacity and the ability to kind of facilitate volume growth across the portfolio.

Well, over the last couple of years, Jeff, we've continued to look at our supply chains to make them more resilient. And so we've done a couple of things. We've done some expansions with some new plants. And we've talked about that over the last couple of years. So Mexico is 1 of the latest areas but we also expanded in Thailand, for example. We have also invested in new automation and new CapEx for both our EFS business as well as Enclosures so that we could improve throughput. And so we feel we're in a good position. I would say the biggest -- I mean, we're going to continue to invest in digitization and automation. That's just an ongoing part of our strategy. But I think the real focus just because of the significance we're going to see in liquid cooling is where a lot of our investment is going.

And maybe, Jeff, maybe just to add a point to that. And I think Beth talked about in her prepared remarks, kind of what we were lapping in terms of growth of a year ago being in that 21% range. 9 points of that was volume. And so maybe a couple of points there to add too is we did see volume in Enclosures on top of double-digit volume growth of a year ago in Q2. I think the other encouraging piece is we saw Thermal Management order growth in the quarter as well. And I think maybe one other thing to keep in mind, right, as we talk about kind of those inventory-level adjustments with -- lead times, our lead times in improving along with just the backdrop of supply chain. Where that shows up and the top line is going to be on the volume side of the equation.

The next question will come from Nigel Coe with Wolfe Research.

So Beth, every time you mentioned AI and liquid cooling, the stock ticks higher, so keep it going, all right? So ECM, I think you've quantified a $0.08 to $0.10 for the full year and I think all of that comes in the second half of the year. So I just want to confirm that that's still the case. And does that come in pretty equal between 3Q and 4Q? And then maybe just talk about what kind of your impressions are as you've taken control of the business. I mean, has your perspective on the channel opportunities, synergies changed at all?

Well, let me start because we're very -- we're 60 days in and we're very pleased with the ECM acquisition. And as we said, when you look at that portfolio, it builds out our power connections and grounding solutions. So very complementary to what we do and we see opportunity there to be able to take those products through the strength of our distribution channel and globalize it. And that will take some time but we're working on it. One of the things I would say, there's other products that we believe are essential things that contractors use every day. So that's a great fit, the tools and test instruments, along with our nVent CADDY portfolio. And there are some channels there, specialty channels and retail channels where we believe that's going to be an opportunity for us to pull through some of our core nVent products. So I think we're very pleased as we look at some of those growth synergies and I'll let Sara talk about the cost side as well. But 1 thing I will say that we learned is when you get into a business, you find that they have supply chain challenges. And that is our first priority, is to make sure that we're addressing where they've got supplier issues or capacity constraints. And that's something we just need to work through. But we've got a great experienced team that we're working on that so that we address that so we can really drive capacity and accelerate our growth there.

And then just in terms of the EPS and the cost synergy part of the equation, we do continue to see the EPS contribution in this year being $0.08 to $0.10 on the EPS line for ECM. $0.02 of that came a bit early here in Q3. But the balance of that, we would expect that to be a reasonable assumption of that roughly kind of running through half and half, Q3 and Q4. From a cost synergy standpoint, we estimated roughly $10 million to $15 million by year 3. And as Beth said, even on the growth side, on the cost side, 60 days in, we have high conviction here and good visibility. And the teams have done an excellent job really executing even on some early wins here around looking at parcel rates, looking at efficiencies from an insurance program standpoint. We also have good line of sight to the cash tax synergies that we alluded to as well which is roughly $6 million to $8 million related to that step-up in amortization for the next 10 to 15 years.

Okay, that's great. And that's $0.02 in Q2, not Q3, right?

$0.02 in Q2, correct. The balance of that really being in that Q3, Q4 time frame.

Right, that's great. Obviously, volumes are a big kind of area for conversation right now. And you talked about the sell-through is positive. And I'm sure you mean volumes sell-through Is positive. So I wonder, maybe just a bit more color in terms of what you're seeing on sell-through. Any quantification you have on that by business would be great.

Well -- and to your point, yes, when we see that sell-through, that is positive volume. And I think as I mentioned earlier, when we look at -- it really -- what we're seeing is adjustments based on -- as different supply chains recovered or even in some of the vertical areas. So where we saw softness first or inventory adjustments was more around commercial/resi and then we started to see some industrial. But again, it's more of a reflection of overall supplier and supply chain lead times improving. And so as expected, we saw that happen in Q2, expect some of that to still occur in Q3. But as we start to see infrastructure bill, acceleration of a lot of the electrification investments, we expect strength there and things to ramp as we get through to the back half of the year.

Okay. Quick one on liquid cooling, if I can. This capacity expansion that you're investing in, does that allow you to what, double your sell-through there or triple it? I mean, any quantification on the capacity expansion will be great.

Well, I guess I would frame it up this way. I think what we're doing right now is Phase 1 in terms of what we see over the course of maybe the next 12 to 18 months of the capacity that we need and adding new customers. And I fully expect as we get into next year, we'll probably have to start looking at a Phase 2 just because of the growth rates that we're seeing.

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

Thank you for joining us today. I'm very proud of our performance in Q2. We will continue to focus on delivering for our customers, employees and shareholders by executing on our growth strategy. We have made great progress on our ESG goals. We believe nVent is a top-tier high-performance electrical company well positioned for the Electrification of Everything, sustainability and digitalization trends. 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.