Good morning, everyone, and welcome to the nVent Electric First Quarter 2023 Earnings Conference Call. At this time, I'd like to turn the floor over to Tony Riter, Vice President of Investor Relations. Please go ahead.

Thank you, and welcome to nVent's First Quarter 2023 Earnings Call. On the call with me are Beth Wozniak, our Chief Executive Officer; and Sara Zawoyski, our Chief Financial Officer. They will provide details on our first quarter performance, provide an outlook for the second 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 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 to the appendix of the presentation. We'll have time for questions after our prepared remarks. With that, please 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 first quarter results. We had a strong start to the year. We continue to advance our strategy with our focus on high-growth verticals, new products and geographic expansion. We delivered record first quarter sales, growing 7% with adjusted EPS up 34%. We had impressive year-over-year margin expansion and robust free cash flow. Our Enclosures and Electrical & Fastening segment sales grew double digits with the trends in the Electrification of Everything. In addition, we're excited to expand our connect and protect portfolio with the announcement to acquire ECM Industries. Overall, we are pleased with the strong start to the year and are raising our full year sales and adjusted EPS guidance. Now on to Slide 4 for a summary of our first quarter performance. First quarter sales were up 8% organically with all verticals growing. New products contributed approximately 3 points to our sales growth, and we launched 17 new products in the quarter. Segment income grew 34% year-over-year with return on sales up an impressive 410 basis points. Adjusted EPS grew 34%, and we generated $52 million of free cash flow compared to a $3 million usage a year ago. We're on track for another strong year. With our focus on the Electrification of Everything, we continue to have significant wins in our portfolio. In data solutions, we recently won a large contract with a semiconductor company for a new liquid cooling system for their data center. We also won a multimillion dollar contract for cable management solution with a hyperscale modular data center provider. On e-mobility, our ERIFLEX connections have been specified by European OEM leader in power solutions for EV chargers. And with the energy transition, we continue to have wins in LNG, clean fuels and carbon capture. We recently won several multimillion-dollar contracts for our heat tracing systems, providing reliability and optimization. Looking at our key verticals, all grew organically in the quarter. Infrastructure led the way up mid-teens, including data solutions growing 20% and power utilities up over 30%. Industrial grew high single digits with broad-based growth. Energy performed well, up mid-teens. And finally, commercial and residential grew low single digits. Turning to organic sales by geography. We continue to see broad-based growth in North America, up low double digits. Europe grew high single digits and Asia Pacific declined primarily due to a slow recovery in China. Lastly, orders in Q1 were flat year-over-year. Recall, a year ago we had 28% order growth in the first quarter. As we said at our Investor Day, orders were positive through February. However, March orders declined with our toughest monthly comparison from a year ago. In addition, our distribution partners were adjusting their inventories and destocking with improved supply chains. We expect this to continue into Q2. Importantly, customer demand and distributor sell-through remains strong. Looking ahead, we are raising our full year guidance, reflecting our strong start to the year. We expect electrification, sustainability and digitalization to drive demand. Specifically, we expect continued strength in infrastructure, including data solutions, power utilities and renewables. In industrial, with the trends of automation and onshoring and in energy with the energy transition. We expect commercial residential to slow. While our outlook is positive, we remain cautious due to the macroeconomic environment. Overall, I'm proud of our nVent team and how we continue to perform and deliver impressive results. We are on track for another strong year. I will now turn the call over to Sara for some detail on our first quarter results and our updated outlook for 2023. Sara, please go ahead.

Thank you, Beth. Let's begin on Slide 5 with our first quarter results. We are off to a strong start to the year with outstanding margin performance and robust free cash flow. Sales of $741 million were up 7% relative to last year or 8% organically. Volumes were up modestly compared to last year on top of 13% a year ago, and price added 8 points to growth. Foreign exchange was a 2-point headwind. First quarter segment income was $148 million, up 34%. Return on sales was 20%, up 410 basis points year-over-year. Better price-cost and positive productivity drove the outperformance versus our expectations. Price more than offset the impact from inflation of roughly $30 million. Our supply chain continued to improve, resulting in sequential and year-over-year productivity improvement. Q1 adjusted EPS was $0.67, up 34% and above the high end of our guidance range. We generated robust free cash flow in the quarter of $52 million compared to a usage of $3 million a year ago, reflecting our strong operational performance. This also includes significant CapEx investments for growth and capacity. Now please turn to Slide 6 for a discussion of our first quarter segment performance. Starting with Enclosures. Sales of $391 million increased 11% organically, with both price and volume contributing. Sales growth was broad-based with all verticals growing, industrial-led, driven by continued trends in automation. Infrastructure was also a standout contributor with continued strength in data solutions up 20%. Geographically, North America led, up double digits, followed by Europe. Enclosures first quarter segment income was $82 million, up 64%. Return on sales of 21.1% increased an impressive 710 basis points year-over-year, driven by strong execution. We also continue to see margin improvements from our simplification efforts. We are investing in added capacity and expansion of our data solutions business and expect this to ramp in Q2 and second half. Moving to Electrical & Fastening. Sales of $206 million increased 11% organically, driven by strong price. All verticals grew with commercial up modestly and infrastructure up over 20% organically with strength in power utilities and data solutions. Geographically, sales growth was led by North America and Europe. Electrical & Fastening segment income was $61 million, up 30%. Return on sales was a notable 29.8%, up 470 basis points relative to last year on strong execution. Turning to Thermal Management. Sales of $144 million were flat organically. Price contributed 4 points to growth, while volumes were negative. Energy and infrastructure both grew double digits organically with a solid pipeline of energy transition projects in LNG, biofuels, hydrogen and carbon capture. Industrial MRO demand remained strong. Commercial and residential declined with residential down double digits. Geographically, growth was led by North America with declines in China. Thermal Management segment income of $31 million was down 5%. Return on sales of 21.5% was down 40 basis points year-over-year, primarily due to mix. On Slide 7, titled Balance Sheet and Cash Flow, we ended the quarter with $303 million of cash on hand and $600 million available on our revolver. This week, we announced our financing for the pending ECM Industries acquisition, including pricing $500 million of 10-year senior notes and a new prepayable $300 million term loan facility. The balance will be funded through a combination of cash on hand and our existing revolver. So turning to Slide 8, where we will outline our capital allocation priorities. We believe our robust balance sheet and cash generation puts us in a great position to continue to invest in growth, return cash to shareholders and deliver great returns. We exited Q1 with a net debt to adjusted EBITDA ratio of 1.3x. On a pro forma basis, we forecast our net debt to adjusted EBITDA to now be 2.7x at the closing of the ECM acquisition. With our strong cash flow generation, we plan to delever quickly and be within our targeted range of 2 to 2.5x within the next 12 to 18 months. In the quarter, we returned approximately $44 million to shareholders including dividends and $15 million of share repurchases. Moving to Slide 9. We are raising our full year guidance, reflecting our strong performance. We continue to expect organic sales to grow 4% to 6%. We now expect adjusted EPS to be in the range of $2.65 to $2.73, up 10% to 14% versus our original guidance of $2.51 to $2.61. This new guidance reflects the strong start to the year, solid price-cost execution and better productivity. It also continues to reflect the uncertainties in the second half. It's important to note that our guidance does not yet include the impact of ECM Industries. We expect ECM's adjusted EBITDA margins of 25% to be accretive to overall nVent margins, and we expect cost synergies of $10 million to $15 million by year 3 with benefits starting in 2024. We continue to expect the deal to be accretive to adjusted EPS in 2023 excluding purchase price accounting and one-time deal-related costs. A couple of modeling assumptions to note. First, foreign exchange is expected to have a neutral impact to sales versus a previous 1-point headwind. And second, we now expect our tax rate to be approximately 18.5%. Looking at our second quarter outlook on Slide 10, we expect organic sales to be up 3% to 5%. We expect our distribution partners to continue to adjust their inventories and destock with improved supply chains. We expect adjusted EPS to be between $0.66 and $0.68, which at the midpoint reflects 18% growth relative to last year. Wrapping up, I'm pleased with our first quarter performance. We delivered strong margins, robust cash flow and are well positioned for another great year. This concludes my remarks, and I will now turn the call back over to Beth.

Thank you, Sara. Turning to Slide 11. Since we became a new company, we put in place a strategy that has been working. We continue to execute on the core elements, focusing on high-growth verticals, new products, global expansion and acquisitions. We recently announced an agreement to acquire ECM Industries. We've had great success with the 4 acquisitions we've done, totaling approximately $300 million of revenue last year and growing faster than overall nVent. Each deal exceeded the weighted average cost of capital within 2 to 3 years of closing our primary financial deal metric. We believe we will create great value with ECM Industries. Turning to Slide 12. ECM is a great strategic fit with tremendous growth potential. ECM complements nVent's electrical power connection and grounding solutions portfolio within our Electrical & Fastening segment. It will extend our cable management offerings with complementary labor-saving solutions and will add tools and testing instruments to our portfolio. In addition, ECM further positions nVent with the Electrification of Everything in high-growth verticals such as commercial solutions, power utilities, data centers and renewables. Overall, we believe ECM's complementary portfolio, strong brand and long-standing customer and channel relationships will be a great combination with nVent. ECM is expected to add over $400 million in sales and be margin accretive to nVent. We expect to close the transaction in Q2 and are working our detailed integration plan with a dedicated team. We have received a lot of positive comments on the potential of the combined companies from employees, customers and partners. We look forward to welcoming the ECM team to nVent. Wrapping up on Slide 13. We're off to a strong start to the year and have increased our full year guidance. We're well positioned with the Electrification of Everything, sustainability and digitalization trends. We are excited to add ECM Industries to our portfolio. I'm very proud of the team's performance. Our future is bright. With that, I will now turn the call over to the operator to start Q&A.

And we have a question from Julian Mitchell from Barclays.

I just wanted to start off by saying that the orders for the first quarter were relatively flat year-on-year, mainly due to tough comparisons in March and some destocking. Could you provide a bit more detail on any noteworthy trends in end markets or geographies that impacted those orders, and share any insights on April? I understand that April can be a slower month within the context of Q2 overall, but how does this month compare to March, for example?

We faced a challenging comparison for orders in March. However, discussions with our distribution partners over the past few months revealed that they are quite confident in supply chain lead times, which has led them to reduce some of their inventory levels. In terms of March, daily orders resembled February, but the tough comparison impacted us. Looking ahead to April, we’re still witnessing a decline in orders, particularly through our major distribution partners. One area that has been slower is APAC, especially in China.

That's very helpful. And then...

But Julian, I want to make the point that even though orders are down, we see good sell-through of our product and good demand from our end customers. So what we're largely seeing through the distribution channels is just the rightsizing of their inventory.

That's very helpful. My follow-up is about looking at the year from a top-down perspective. Your guidance suggests you're targeting a high $0.60 per quarter number. You achieved this in Q4 and Q1, and you're guiding for the same in Q2. Does your full year guidance imply you will maintain around $0.67 to $0.68 per quarter throughout the second half? I'm curious if I'm understanding this correctly regarding the division of Q3 and Q4 having similar sequential EPS. Also, it’s somewhat uncommon for nVent and industrial companies to report the same earnings and sales consistently each quarter; typically, this fluctuates. What are your thoughts on the current environment in this regard? It seems like you're experiencing a sideways movement in sales and earnings, and I wanted to confirm if that's accurate and how you anticipate it changing moving forward.

Yes. So Julian, this is Sara. I'll take that one. So I would say it's fair to say that from a normal seasonality perspective for nVent, we would typically see slightly more EPS in the back half versus the first half. But I would say consistent with the assumptions coming into this year and for the guidance that we gave in February was that our EPS was a little bit more first half versus second half. I think a couple of those things that we pointed out, and we continue to point out here would be, one, we would expect more positive price-cost here in the first half in part due to the carryover of a lot of the pricing actions that we took in 2022. I think the second piece would just be the good backlog and visibility we entered into the year for. And I think the second half, I would just characterize it as simply being the macro uncertainties. So really nothing has changed in our guidance from that standpoint from where we were at in February to where we sit here today. I think it's just early in the year, and we'll see how that unfolds. But our view is that there's nothing that's been more meaningfully positive or negative. And we're balancing all the other smaller puts and takes to it to have that back half of the year remain relatively unchanged.

And our next question does come from Deane Dray from RBC Capital Markets.

You hear me okay, this time?

Yes. We can.

Yes.

All right. It's been quite a month for you with the Analyst Meeting, ECM, and the positive pre-announcement, and I imagine Tony hasn’t had a moment to relax. My first question is about the Enclosures margins, which are up 710 basis points. You mentioned it was due to execution, but could you provide more detail on how much of that was due to pricing? Were there any specific factors that contributed to this increase or any one-time events that might have inflated that figure? And how sustainable is this improvement?

Yes. So I would say, Deane, nothing to call out in terms of kind of one-time in nature. I would say we're very pleased with the Enclosures margin performance, and we began to see that really in Q4. I think from a year-over-year perspective, just remember that, that business had a slower start in terms of kind of that price-cost and productivity equation, and they were really working hard, ramping volume up like 13 points. So there's a lot of costs involved last year to be able to deliver for our customers against a big backdrop of supply chain challenges. So I would say in the context of Q1, their price was 9 points, and we're really pleased to see volume just over 2 points. So they had a nice contribution of both price and cost. I think the other thing I would point out is productivity. And that would be for broadly across nVent. But for sure, on the Enclosures side is that we probably saw that productivity improve at a bit of a better rate than what we would have expected coming into the year. We are always calling for maybe a more gradual supply chain improvement. We still see a very tight labor market, but we do see it getting better overall. So that margin performance really has a better price-cost equation to it and some good productivity. In terms of how we think about that in Q2 and the back half, we see it easing a bit. That 21.1% is a great absolute return on sales for a couple of different reasons, one of which I pointed out in my prepared remarks, we are expecting to increase some investments there. We've talked about the new capacity coming online. Some of that has some pay-go expense to that, but also building out our data solutions business as well. I think the other thing is just wage inflation will more broadly drop into our Q2 numbers here and into the back half.

I want to follow up on Beth's comment about the destocking we're experiencing, which is a trend across the sector. We believe this is part of the normalization of the supply chain, as lead times are decreasing and less buffer stock is necessary. Can you explain the dynamics behind this? You've mentioned that sell-through remains strong, so this destocking shouldn't be seen negatively. Can you provide any quantification on this? How long do you anticipate it will last, and any insights from the distributors would be appreciated.

Okay. Deane, I think you said it, it really is that. As we've come into this year, we've seen it ourselves, and our distribution partners have seen it from many of their other suppliers as well, but the supply chain is in much better shape. Therefore, they don't have the need to carry as much inventory because they have the confidence in their suppliers, including us. And so they were simply counting on our lead times, right? That they're taking actions to reduce their inventory. And we started to see that in Q1, and we're seeing that through Q2. And that's really the conversation that I've had with many of them is that they wanted to get their inventory in a better position or just feeling confident in the supply chain. And I think we're going to see that into Q2. We'll have to see where the back half of the year is with the macro uncertainties, but that's reflected in our guide for our Q2 performance.

Great. That's exactly what I was looking for.

Yes. And just to point out, as I made to Julian, what we're really pleased with is when we look at their sell-through and our results of our sales through them, it's strong customer demand.

And our next question comes from Joe Ritchie from Goldman Sachs.

So I hate to harp on the destocking, but I do have one follow-up. I'm curious, are you seeing it broad-based across the portfolio? Is it mostly in EFS and thermal? Like any other color you can give on where you're seeing it would be helpful.

Yes. I think it's generally very broad-based. We even see it in our Enclosures segment as you think about just the overall supply chain. So when these distributors look at where they're carrying inventory and a year ago, they were just trying to get as much inventory as they could to serve customers. So we really do see it across our entire portfolio.

Got it. That's helpful, Beth. As I think about the rest of the year, price cost started off incredibly strongly. I'm curious about the EFS, as you're close to 30% margins now. It seems like volumes may have turned at least slightly negative. I'm trying to understand the dynamics of price costs as we move through the year and whether you expect to implement additional pricing from here.

Well, Joe, I want to emphasize that we're committed to staying vigilant in managing the price-cost equation as we have over the past few years. We entered this year with the intention to manage prices to counteract inflation and expect productivity to turn positive, as we observed in Q1, continuing throughout the year. From a pricing perspective, we initially anticipated pricing to be around 3 points embedded in our overall guidance. However, we now expect it to be closer to 4 points due to the effective realization of our pricing actions. This positions us favorably in terms of the price-cost dynamic while enabling productivity to remain positive. In terms of how this will evolve, we expect the price-cost spread to narrow from Q1 into Q2 and throughout the latter half of the year. As we begin to compare against last year's pricing actions, we anticipate the contribution from pricing to ease, resulting in a gradual narrowing of the price-cost equation as we progress through the year.

And our next question comes from Jeff Sprague from Vertical Research.

Nice on the quick pending close on ECM. I just wonder if you could give us a sense of how much accretion we should expect here in kind of the sub 6 months of the year? I can easily come up with $0.20 to $0.25 on an annualized basis, but I don't know if half of that in the first year when you're digesting is a reasonable way to think about it. So just maybe so none of us go crazy with our models here. Maybe you could frame up what would be reasonable to expect?

Yes, I would say that half is probably a bit high, Jeff. But we'll provide more details after we close. A couple of things to consider are that the interest rate from all the financing we arranged this week still feels like roughly $60 million is the right number. We expect taxes to have about a 1-point impact on nVent. In terms of cost synergies, it might be helpful to elaborate a bit more. From the $10 million to $15 million run rate we anticipate in year 3, most of that won’t materialize until 2024 because we'll be making investments in digital initiatives and R&D. We're going to start these investments in the first 12 months. Therefore, we'll need to make some investments to achieve the expected synergies ahead of when these cost synergies become evident. Lastly, I would note the seasonality; Q4 typically looks quite similar to our EFS seasonality, which is generally lighter in Q4.

I’d like to revisit the topic of channel destocking from a different perspective. When you mention strong sell-through, can you provide a percentage to quantify what that looks like and whether there is volume associated with it? We have seen two consecutive quarters without volume growth, which is partly due to comparisons from last year. Are we at a stage where, with an improving supply chain, you have the capacity to increase volume in the system, and is the system responsive to that increase? Alternatively, do we still have good demand, but are higher prices limiting volume, given that consumers have limited spending power? It seems there are multiple factors at play here.

Yes, let me start by saying that we always examine our distribution partners and their overall revenue reporting, whether in the U.S., Canada, or elsewhere. Then we assess our performance in relation to theirs. Generally, we are performing at their level, meaning our sales align with their reported regional sales and, in some instances, exceed them. We also notice volume growth, although it seems that price may be influencing volume more than actual demand. We are pleased when our distributor sales match or even surpass their sales.

And our next question comes from Nigel Coe from Wolfe Research.

So it seems like the destocking comments are causing a bit of concern here. So any kind of sense on where channel inventories are right now for your products and how long this process could continue for? And did you comment that this is primarily North America or outside North America?

Yes. It's primarily in North America. Remember, two-thirds of our products go through distribution, much of which is outside North America. I would say this started in the first quarter, and we anticipate it will continue into the second quarter. We expect to see some macro uncertainties in the second half, but we believe this trend will largely persist through the second quarter.

Through Q2, it doesn't appear that there's a significant amount of inventory in the channel. I appreciate that. Regarding the second quarter, Julian provided a detailed overview by quarter. If we focus on the margins for the second quarter, it looks like there may be a decline of around 50 basis points compared to Q1. Corporate expenses were notably high in Q1, so if those return to a normal rate, that could account for about 50 basis points. It seems you're indicating a margin compression of about a point versus the first quarter. Is my understanding correct? Additionally, what factors are contributing to the lower margins at the segment level, especially since we typically expect margins to increase compared to Q1? Any insights into this would be appreciated.

Yes. So I think if you kind of back up to kind of the income and margin profile based on that Q2 guide, I think you'd probably see return on sales similar to where we were at in Q1. And I think that that's clearly on higher sales, right, given the seasonality, we do have that sequential uptick from a sales perspective. But that similar margin and what I would say similar EPS probably has 2 things reflected in that from a sequential standpoint. One would just be the wage inflation sort of dropping in, if you will, more broadly here in Q2 as well as some of the investments flowing in that we talked about. And I think the last thing I would just say is just that price cost narrows. But overall, again, another good quarter of growing at 3% to 5% organic and another meaningful growth from an EPS year-over-year perspective overall.

Great. And then just a quick one. Residential headwinds in thermal. Can you just remind us how much of that business is residential?

Yes. So residential is roughly 10% of the Thermal sales, but on an nVent level, that translates to roughly 3% of sales, so it's small.

Our next question comes from Jeff Hammond from KeyBanc Capital Markets.

Just on commercial construction vertical, I guess, clearly, some kind of heightened concerns around this bank crisis, tightening lending standards, et cetera. Just as you kind of zero in on that vertical, how are you thinking about potential for slowing in risk there, particularly on the side?

Yes. We observe the same indices as everyone else, like the ABI, and they indicate a slowdown. Typically, this serves as an indicator for us about 6 months to a year ahead when we analyze our stock and flow business in CADDY. We do anticipate a slowdown. While demand from distributors remains strong, the ongoing destocking may be connected to that. We had previously mentioned at the start of the year that we expect commercial residential to experience a slowdown.

Could you provide an update on the backlog? Are there signs that you're beginning to address some of it as things start to normalize?

Our EFS business typically does not function as a backlog business. In the past, we had a backlog that we've been reducing. We often describe that business as functioning in a stock and flow manner, and it turns over frequently. Regarding Enclosures, as we expand our data solutions business, we have created some backlog. While we are still addressing backlog on the industrial side of Enclosures, we are also accumulating some backlog in data solutions, which has grown by 20%. We are making progress in reducing backlog on the industrial and Enclosures sides. In our Thermal Management business, backlog is relatively stable or declining, but we are experiencing significant orders and quoting activity related to energy transition projects, which indicates a promising trend for future growth.

Our next question comes from Scott Graham from Loop.

Another impressive report. While we were aware of some details beforehand, it's still encouraging to see it documented. I have a couple of questions that aren't related to destocking. First, could you provide the pricing details for the other two segments? Second, regarding the 20% increase in the data center, are there new customers contributing to that? Also, with the investments you're making, do you think this growth is sustainable for the year?

Let me begin, and then I'll hand it over to Sara for insights on pricing. As we have mentioned regarding our data solutions, one of our key differentiators where we see substantial growth opportunities is in liquid cooling. Much of the current discussion revolves around artificial intelligence, and as we examine the necessary computing power and the new chips being developed, they require liquid cooling to operate. This is essential for running data centers and contributes to energy efficiency. We are witnessing a transition from traditional air cooling to advanced liquid cooling, signaling a significant technological shift. We highlighted this at our Investor Day, where we expressed our belief in the considerable growth potential ahead of us as a result.

And Scott, just to maybe round up the pricing question. So we talked about Enclosures being 9 points. Electrical & Fastening, their price was roughly 11 points. And then we had in our prepared remarks, Thermal at roughly 4 points.

Well, thank you for joining us today. I'm very proud of the performance we delivered in the first quarter. We will continue to focus on delivering for our customers, employees and shareholders executing on our growth strategy. 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.

Ladies and gentlemen, today's conference call has concluded. We do thank you for joining today's presentation. Have a great rest of the day. You may now disconnect.