nVent Electric plc Q2 FY2023 Earnings Call

Good day and welcome to the nVent Electric Second Quarter 2023 Earnings Conference Call. 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 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 highlight this. nVent was named a top 10 data solutions provider by CIO Applications for the second year in a row. This recognition is for companies at the forefront of providing data center solutions and transforming businesses. We also were named by the Minneapolis St. Paul Business Journal as the 2023 Large Manufacturer of the Year. Based on our contributions to the regional economy and community, this award recognized our performance, innovation, and manufacturing excellence. And nVent is 1 of 4 finalists in the mid-cap category for the 2023 Diversity, Equity, and Inclusion Award by the National Association of Corporate Directors. This award recognizes forward-thinking boards that leverage the power of DE&I to enhance their governance, create long-term value, and build innovative and inclusive workplaces and boardrooms. Looking at performance across our key verticals, all grew organic sales in the quarter. Infrastructure led the way, up 10%, including Data Solutions growing double digits and Power Utilities up over 40%. Industrial and Energy each grew low single digits and commercial and residential was also positive. Turning to organic sales by geography. We continue to see broad-based growth in North America, up high single digits. Europe declined low single digits, primarily due to our wind-down in Russia and Asia Pacific declined due to a slow recovery in China. Lastly, organic orders in Q2 grew low single digits year-over-year on top of high-teens orders growth a year ago. As expected, we saw distributors adjusting their inventories in Q2, with improving supply chains and lead times. Importantly, we continue to see positive distributor sell-through. Looking ahead, I am excited for both the ECM acquisition and TEXA acquisition which we just announced and how they further position nVent with the Electrification of Everything. We are raising our full year guidance, reflecting our strong first half and the addition of our 2 acquisitions. 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 continue to expect the commercial/residential vertical to be soft. Lastly, artificial intelligence is driving demand for our liquid cooling solutions, leading us to increase investments in the back half of the year to drive future growth in our Data Solutions business. Overall, I am very proud of our nVent team 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 Sara for some detail on our second quarter results and our updated outlook for 2023. Sara, please go ahead.

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 & Fastening. Sales of $267 million increased 33%, with the ECM acquisition contributing 25 points to sales. Organic growth was 8%, driven by strong price. All verticals grew, led by Infrastructure up low double digits, with strength in Power Utilities and Data Solutions. Commercial/residential grew mid-single digits. Geographically, sales growth was led by North America and Europe. Electrical & Fastening segment income was $86 million, up 47%. Return on sales was a notable 32.4%, up 310 basis points relative to last year on price cost and favorable mix. Turning to Thermal Management; sales of $136 million were down 5% organically. Price contributed 4 points to growth, while volumes were negative. The decline was driven by commercial/residential and Industrial both declining high single digits, partially offset by infrastructure and energy. Industrial MRO demand remains solid. Geographically, North America was flat with declines in China and Europe, including our wind down in Russia. Notably, orders were up mid-single digits and backlog grew sequentially. Thermal Management segment income of $29 million was up 1% and return on sales of 21% was up 160 basis points year-over-year on strong execution. On Slide 7, titled Balance Sheet and Cash Flow, we ended the quarter with $139 million of cash on hand and $500 million available on our revolver. We added approximately $900 million in debt to our balance sheet in the quarter to finance the ECM acquisition. 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 strong position to continue to invest in growth, return cash to shareholders, and deliver great returns. We had strong free cash flow in the quarter, with the first half growing more than 150% compared to a year ago. We exited Q2 with a net debt to adjusted EBITDA ratio of 2.8x. With our strong cash flow generation, we believe we are on track to get back to our targeted range of 2x to 2.5x. In the first half of the year, we've returned approximately $73 million to shareholders, including dividends and share repurchases. So moving to Slide 9; we are raising full year reported sales and adjusted EPS guidance, reflecting our strong first half performance and the impact of acquisitions. Reported sales growth is now expected to be in the range of 13% to 15% versus our prior guidance of 4% to 6%. We continue to expect organic sales to grow 4% to 6%. We now expect adjusted EPS to be in the range of $2.85 to $2.91, up 19% to 21% versus our original guidance of $2.65 to $2.73. This new guidance reflects our strong first half, increased investments in Data Solutions and $0.08 to $0.10 for acquisitions. A couple of modeling assumptions to note. First, acquisitions are expected to add approximately 9 points to sales growth in the year. Second, with acquisitions, full year net interest expense is now expected to be approximately $80 million, and depreciation and amortization are expected to be approximately $140 million. Third, we now expect our tax rate to be 19.5% versus 18.5% due to geographical mix and the ECM acquisition. And lastly, we are raising our CapEx expectations of $15 million to a range of $70 million to $75 million to reflect the impact of acquisitions and investments to expand capacity for our Data Solutions business. Looking at our third quarter outlook on Slide 10. We expect reported sales to grow 16% to 18%, with acquisitions contributing approximately 14 points to sales. Organic sales are expected to be up 1% to 3%. We expect adjusted EPS to be between $0.72 and $0.74 which at the midpoint reflects 11% growth relative to last year. Wrapping up, I am pleased with our second quarter performance. We delivered robust margins and cash flow and are well positioned for another great year. This concludes my remarks and I will now turn the call over to Beth.

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% in 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 and support our employees. We believe our culture and our people are a differentiator for nVent. We were certified again as a Great Place to Work and received the highest recognition by 50/50 Women on Boards. In our Products pillar, we continue to build on our efforts to deliver innovative products that make a positive ESG impact in 1 or more of our 3 ESG categories: eco-friendly materials; eco-friendly designs; and end-user safety. 76% of the products in our new product pipeline at the end of 2022 met at least 1 of these criteria. In our Planet pillar, we reduced our Scope 1 and Scope 2 greenhouse gas emissions and increased our renewable energy consumption to 13%. We remain focused on environmental stewardship, achieving our planet goals, investing in renewable energy, reducing water consumption, and reducing and diverting waste. We will continue to build on the progress we've made across our People, Products, and Planet pillars. At nVent, we are building a more sustainable and electrified world. Turning to Slide 13. We continue to execute on our strategy for growth which includes acquisitions and have now completed 6 deals since spin. We expect a lot of future value creation from these acquisitions and continue to have a strong pipeline of opportunities. 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. The ECM and TEXA acquisitions squarely fit this framework. ECM is a leader in power connections and grounding solutions, tools and test instruments, and cable management. ECM closed in May and is off to a good start. We have a dedicated team leading our efforts to execute our integration playbook. We are excited for the TEXA acquisition that closed a few weeks ago and is now part of our Enclosures segment. TEXA, much like our Eldon acquisition in 2019, has an innovative product portfolio which we plan to expand through our distribution channels and globally. TEXA provides innovative industrial air conditioners and chillers. With increasing heat loads, cooling is critical inside an enclosure to ensure performance and uptime. Combined with our expertise in liquid cooling, TEXA strengthens our ability to provide global cooling solutions in demanding environments such as industrial automation and energy storage. Both acquisitions are a great fit for nVent, expanding our Connect and Protect portfolio. We believe they have significant growth potential and long-term value creation with the Electrification of Everything. Wrapping up on Slide 14. We had another strong quarter with record sales and adjusted EPS. We completed 2 acquisitions and have made significant progress on our ESG goals. We are raising our guidance and expect another year of strong sales and EPS growth. We believe we are 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.

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, one of the things I want to say is that, as we expected in Q2, we expected inventory adjustments to occur. And one 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 regarding 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. My follow-up question is about your perspective on the second half, specifically regarding the breakdown of organic sales between price and volume. In the second quarter, volume decreased by 2 while price increased by 5. For your guidance in the second half, are you anticipating that price will end the year at around 1 or 2 points, with volumes remaining relatively flat or declining?

Yes. I would say a couple of things. We do expect positive price each quarter, which is important as we continue to see 2023 as an inflationary environment. In the third quarter, our organic guidance of up 1% to 3% is primarily driven by price. A significant part of this is related to ongoing inventory-level adjustments in the third quarter, as well as factors in Thermal Management. Specifically, the softness in the commercial and residential sectors and the winding down of the Russia business have a noticeable impact, particularly in the third and fourth quarters. This is estimated to reduce Thermal Management by about 4 points in the latter half of the year, leading to essentially no sales from Russia as we approach 2024. Looking at the fourth quarter, we anticipate an increase in volume and overall growth, with the main contributor being the data solutions area. Beth mentioned the building order book and growing opportunities, and we are focused on making investments in the third and fourth quarters to seize 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 on 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?

Thank you for the question, Deane. We're very excited about liquid cooling. We've been involved in liquid cooling even before we entered some industrial applications and have developed strong relationships with data center providers over the years. Building out our capabilities takes time, especially regarding testing cycles, scaling manufacturing, and meeting quality requirements. We believe we've effectively developed these aspects over several years and are currently testing with many new customers, seeing an increase in order growth. Beyond our manufacturing expertise, we're familiar with the cooling loop, which varies by application—whether retrofitting or greenfield—and is sometimes influenced by the provider's preferences for certain technologies. Fortunately, we have partnerships in various areas along with a solid product portfolio. Currently, liquid cooling accounts for only around 5% of data centers, indicating significant potential for growth. We plan to enhance and expand our product offerings, including standardized options to encourage broader adoption and foster more partnerships and end customers. There is ample opportunity for growth, although it might take time for consolidation to occur due to the variety of cooling technologies, each playing a role in the current landscape.

That's really helpful. And just as a follow-up, one 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 one 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. It's 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 as 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. It's 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 those 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 one of the fastest-growing parts of that business. And so this is why the takeaway on that one 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.

I’d like to add to your question about margin, Jeff. We see it generally in line with our overall Enclosures margin. There is room for improvement moving forward. In the second half of the year, our significant investments in operating expenses and capital expenses are impacting our margins. However, we anticipate great returns from these investments, which will help us enhance our revenue and margin performance. Yes. So our initial Phase 1 of this is we opened a new manufacturing facility in Mexico and really 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 are other facilities across the U.S. that we are 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 would like to request some clarification on Julian's question regarding the destocking. Last quarter, Beth, you mentioned that it was having a broad impact on your business. However, this quarter, it appears to be more significant in the commercial and residential sectors. I don't want to misrepresent your views, so could you discuss where you are currently observing this across your businesses and your confidence in navigating through most of it in the next 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/residential, 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. We think this is going to play out as expected. And again, we feel very confident because of the positive sell-through that we see at our distributors.

Got it. That makes a lot of sense. I know AI and liquid cooling will be important topics for a long time. I have two quick questions. First, how much are you increasing R&D investments for the rest of the year, and in what specific applications? Secondly, can you clarify how your content for data centers may change over time in light of recent developments?

I would say that our investments in CapEx and OpEx are focused across all functions, including R&D and operations, as we recognize the growth and opportunities ahead. In terms of R&D, we are building a more standardized portfolio to help us scale our capabilities and products through distribution. These investments are aimed at supporting both current and new customers, the testing needed for these solutions—which can sometimes take a year—and the development of these standard products. We believe there are various cooling solutions available, whether they are for greenfield or retrofit applications, and whether for hyperscale or enterprise use, and we're actively working on a range of products in this area.

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 residential and commercial. And obviously, you're really not that big in residential, 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 residential business is predominantly in 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. Over the past few years, we've been focused on enhancing the resilience of our supply chains. We've made several expansions with new plants, including recent developments in Mexico and Thailand. Additionally, we've invested in new automation and capital expenditures for both our EFS and Enclosures businesses to improve our throughput. We feel confident in our position. Moving forward, we will maintain our focus on investing in digitization and automation as part of our ongoing strategy. However, a significant portion of our investment will be directed towards liquid cooling due to its growing importance.

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?

Let me begin by saying that we are very pleased with the ECM acquisition as we are 60 days in. This portfolio enhances our power connections and grounding solutions, which is complementary to our existing offerings. We see an opportunity to leverage our distribution channel to globalize these products, although it will take some time. Additionally, we believe there are essential products that contractors use daily, which align well with our tools and test instruments along with our nVent CADDY portfolio. We anticipate opportunities in specialty and retail channels to promote our core nVent products. Overall, we are optimistic about the growth synergies, and I'll let Sara discuss the cost aspects. One key lesson we've learned is that entering a new business often reveals supply chain challenges. Addressing the supplier issues and capacity constraints is our top priority, and we are committed to resolving these challenges with our experienced team to drive capacity and accelerate our growth.

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.

Yes, when we observe positive sell-through, it indicates favorable volume. As mentioned earlier, the adjustments we are seeing are related to the recovery of various supply chains and specific vertical markets. Initially, we noticed softness and inventory adjustments primarily in the commercial and residential sectors, followed by some impacts in industrial areas. This trend reflects the overall improvements in supplier and supply chain lead times. We experienced this in Q2 and anticipate some continuation into Q3. However, with the infrastructure bill and an increase in electrification investments, we expect to see strength in these areas and a ramp-up as we move into the latter 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.