Hello, and welcome to the nVent Electric Third Quarter 2023 Earnings Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, today's event is being recorded. I would now like to turn the conference over to Tony Riter, Vice President of Investor Relations. Please go ahead, sir.

Thank you, and welcome to nVent's third 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 third quarter performance; provide an outlook for the fourth 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 turn to Slide 3, and I will turn the call over to Beth.

Thank you, Tony, and good morning, everyone. It's great to be with you today to share our record third quarter results. I'm very pleased with our execution in the quarter. We had exceptionally strong income growth, ROS expansion, and robust free cash flow. We continued to execute on our strategy, focused on high growth verticals, new products, acquisitions, and geographic expansion. We believe we are well-positioned with the Electrification of Everything. In the third quarter, we had record sales up 15% with the addition of ECM and TEXA Industries. Adjusted EPS was up an impressive 27%. The acquisitions performed well and are great additions to nVent. Overall, we are very pleased with our Q3 performance. We had strong execution despite a mixed environment, which I will comment on shortly. Now, on to Slide 4, for a summary of our third quarter performance. Organic sales in the quarter were up slightly on top of 20% a year ago. We continued to see channel inventory adjustments, resulting in lower than expected organic sales. Organic orders were positive in the quarter growing low-single-digits. Segment income was up 40% year-over-year, and return on sales up an impressive 420 basis points. Adjusted EPS grew 27% on top of 25% a year ago, and we generated $136 million of free cash flow, up 8%. Let me touch on a few highlights for the quarter. New products contributed approximately 2 points to sales growth, and we are well ahead of our goal of launching over 50 new products for the year. Turning to acquisitions. We're excited to have the ECM and TEXA team as part of nVent. These acquisitions have strong product portfolios, which we believe further position us with the Electrification of Everything in high growth verticals globally. In Q3, they added 14 points to sales and delivered better than expected income. With ECM, we are executing on our plan to globalize its portfolio. In particular, we are working on the certifications to expand the ILSCO power connection offering for Europe and Asia Pacific. We are making progress with our distribution partners to expand coverage; in addition, we are working on pulling our nVent products through some of the ECM channels. With TEXA, we are executing on our plan to position its industrial cooling portfolio alongside our enclosures through our European distribution channels. Similarly, we are executing on the product roadmap to expand the portfolio to North America. We believe there is significant potential for global growth and expansion with both acquisitions starting next year. I would also like to share a couple of awards that we recently received. nVent was named as one of Fortune's Best Workplaces in Manufacturing & Production. We were also named as one of Newsweek's America's Greenest Companies. Finally, we were awarded the IMARK Supplier of the Year for ILSCO part of ECM, which highlights the strength of that product portfolio. Looking at our vertical performance in the quarter, overall, we saw a mixed environment. Organic sales were led by industrial and commercial residential, each growing low-single-digits in the quarter. While industrial is growing, the rate of growth is slowing. In commercial, we saw pockets of growth. Infrastructure declined low-single-digits, largely in Electrical & Fastening solutions due to customers and channel partners adjusting their inventories as our supply chain improved. Data Solutions continue to grow double-digits. We're making good progress on expanding our footprint and capacity to meet growing demand for liquid cooling driven by the acceleration of AI. We remain confident in the growth of the infrastructure vertical with the Electrification of Everything and legislative funding expected to ramp in 2024. Finally, energy was flat in the quarter, but with the energy transition, we are seeing positive order trends. Turning to organic sales by geography. We continue to see growth led by North America up low-single-digits. Europe declined low-single-digits, primarily due to our wind down in Russia and Asia Pacific declined primarily due to China. Looking ahead, we are updating our sales expectations and raising our full-year adjusted EPS guidance. This reflects our view on a continued mixed environment. Importantly, it also reflects our confidence in our ability to execute, be it our acquisitions, new products, pricing, productivity and cash, we believe are all strengths for us. We expect electrification, sustainability, and digitalization to continue to drive demand. Specifically, we expect strength in infrastructure, in Data Solutions, in industrial, with the trends of automation and onshoring and in energy with the energy transition. We continue to expect the commercial renting vertical to have pockets of strength. Overall, I'm very proud of our nVent team and our execution. I will now turn the call over to Sara for some detail on our third quarter results and our updated outlook for 2023. Sara, please go ahead.

Thank you, Beth. We had a solid quarter with robust margin expansion and free cash flow. Let's turn to Slide 5 to review our third quarter results. Sales of $859 million were up 15% relative to last year. Organically, sales were up slightly with price contributing 4 points to growth and volumes down 3 points. Acquisitions added a meaningful $104 million in sales, or 14 points to growth. Third quarter segment income was $202 million, up 40%. Return on sales was an impressive 23.5%, up 420 basis points year-over-year. Our strong performance was driven by continued productivity improvements and accretive return on sales from the ECM acquisition. In addition, price more than offset the impact from inflation of just over $20 million. Q3 adjusted EPS was $0.84, up 27% and above the high end of the guidance range. This included a better than expected $0.08 contribution from the ECM acquisition. We generated robust free cash flow in the quarter of $136 million, up 8%. This included higher CapEx investments for growth and capacity. Now please turn to Slide 6 for a discussion of our third quarter segment performance. Starting with Enclosures, sales of $413 million increased 6%. The TEXA acquisition contributed 1.5 points to sales. Organically sales were up 4% with solid price and volumes slightly down. Commercial residential was up low-double-digits with strength in North America. Infrastructure and industrial were each up with continued strength in Data Solutions and positive growth in industrial automation. Geographically, North America led up mid-single-digits, while Europe was flat and China was down. Enclosures' third quarter segment income was $89 million, up 24%. Return on sales of 21.7% increased 320 basis points year-over-year, driven by price cost and productivity. This includes our increased investments in our Data Solutions business and expects this to ramp in Q4 and into 2024. Moving to Electrical & Fastening, sales of $302 million increased 45%. The ECM acquisition contributed 47 points to sales growth, further scaling our highest margin segment. Organic growth declined 4%, mainly driven by infrastructure that stemmed from channel and customer inventory reductions. This was partially offset by low-single-digit organic growth in commercial residential, which has grown each quarter this year. Geographically, sales growth declined low-single-digits in North America and mid-single-digits in Europe. Notably, orders were up low-single-digits. Electrical & Fastening segment income was $98 million, up 61%. Return on sales was a notable 32.3%, up 320 basis points relative to last year on solid price costs, favorable mix, and productivity. Turning to Thermal Management, sales of $144 million were down 3% organically; price contributed 3 points to growth, while volumes were negative. The decline was driven by commercial residential down low-double-digits, partially offset by energy. Industrial MRO demand remained solid. Geographically, North America was up low-single-digits. China grew double-digits while Europe declined, including our wind down in Russia. Notably, orders were up mid-teens driven by energy transition projects and backlog grew year-over-year and sequentially. Thermal Management segment income of $35 million was down 3%. Return on sales of 24.2% was flat year-over-year due to lower volumes and mix. On Slide 7, titled Balance Sheet and Cash Flow, we ended the quarter with $113 million of cash on hand and $600 million available on our revolver. We believe our healthy balance sheet provides us with ample capacity to invest in the business and execute on our growth strategy. As you can see on the slide, we have invested nearly $50 million in CapEx year-to-date, up nearly 60% versus a year ago. Turning to Slide 8, where we 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 a strong free cash flow in the quarter and year-to-date growing 46% compared to a year ago. We exited Q3 with a net debt to adjusted EBITDA ratio of 2.4x back within our targeted range of 2x to 2.5x, well ahead of our expectations after the ECM acquisition. This is a testament to our strong cash flow generation and ECM performance. Year-to-date, we have returned $103 million to shareholders, including dividends and share repurchases. Moving to Slide 9, for our updated full-year outlook. We are updating our reported and organic sales forecast to reflect the mixed environment and expected channel inventory adjustment. Reported sales growth is now expected to be in the range of 12% to 13% versus our prior guidance of 13% to 15%. This reflects full-year organic growth of 3% to 4% versus our prior guidance of 4% to 6%. We continue to expect acquisitions to contribute approximately 9 points to sales growth. We are raising our adjusted EPS guidance to a range of $3.01 to $3.03, up 25% to 26% versus our prior guidance of $2.85 to $2.91. This new guidance reflects our year-to-date performance, continued strong execution, and better acquisition performance. We now expect acquisitions to contribute approximately $0.15 to adjusted EPS versus our previous expectation of $0.08 to $0.10. Looking at our fourth quarter outlook on Slide 10, we expect reported sales to grow 15% to 17% with acquisitions contributing approximately 13 points to sales. Organic sales are expected to be up 1% to 3%. We expect adjusted EPS to be between $0.73 and $0.75, which at the mid-point reflects 12% growth relative to last year. Wrapping up, we delivered another quarter of robust margin expansion and cash flow and are well-positioned for another great year.

Thank you, Sara. Please turn to Slide 11. At nVent, we are building a more sustainable and electrified world. The trends in electrification, digitalization, and sustainability are driving secular demand for our products and solutions. I'm confident about the future given the macro trends and our strategy with our focus on high growth verticals, new products, and acquisitions. Starting with macro trends. We believe the $1.3 trillion in U.S. and European legislative funding for infrastructure has the potential to add between $250 million to $500 million in nVent sales over the next five plus years. Looking at the trend of digitalization. Artificial intelligence is driving demand for our liquid cooling solutions, leading us to increase investments to expand our product portfolio and capacity to drive future growth. Looking at sustainability, we are seeing the energy transition gain traction. Notably, our third quarter project orders were up double-digits in our Thermal Management segment. Next is our focus on high growth verticals and new products. As we shared at our Investor Day, more than 60% of our sales are exposed to secular trends. Some of the high growth verticals we are focused on include industrial automation, data solutions, power utilities, renewables, and the energy transition. For example, we expect our Data Solutions business to continue to grow double-digits and reach over $500 million in sales next year. By the way, we look forward to hosting investors at the Supercompute Trade Show in Denver next month, where we will showcase our innovative portfolio, including our liquid cooling solutions. Turning to new products. We have seen significant growth. We have improved our new product introduction process, increasing velocity and time to revenue. Year-to-date, new products have contributed 3 points to sales growth, and we have launched 64 new products way ahead of our expectations. Lastly, on acquisitions, we play in a highly fragmented $75 billion space. We see tremendous opportunities to continue to grow and expand with our acquisition framework. Recall, we look for differentiated product portfolios in high growth verticals that we can invest in and scale to strengthen our position with the Electrification of Everything. This year, we expect the ECM and TEXA acquisitions to add approximately 9 points to sales. We have a strong track record of deals exceeding our weighted average cost of capital in two to three years. In summary, we expect to continue to execute on value creating deals with our active funnel and strong balance sheet. We are excited about the Electrification of Everything. Wrapping up on Slide 12. We had a strong quarter with record sales and adjusted EPS. We expect 2023 to be another year of double-digit sales and adjusted EPS growth. While the current environment is mixed, our execution has been strong. We are driving growth with new products, we are executing well on acquisitions, we are expanding margins with price and productivity, and we are delivering robust cash flow. We are within our target leverage ratio in less than two quarters after completing our largest acquisition ever. The ECM and TEXA acquisitions have been meaningful additions to nVent and are performing well. We are excited about the growth and scale of our combined portfolios. I'm very proud of how well our team is performing. Looking ahead to 2024, we believe we are well-positioned with electrification, sustainability, and digitalization trends. We believe the legislative funding and investments in infrastructure will start to flow. We expect to see the continued acceleration of artificial intelligence and the energy transition, and we expect the sales synergies from our acquisitions to begin to layer in. We are excited for our future. Our future is bright. With that, I will now turn the call over to the operator to start Q&A.

Yes. Thank you. At this time, we will begin the question-and-answer session. And today's first question comes from Jeff Sprague with Vertical Research.

Thank you. Good morning. Hope everybody is well.

Good morning.

Hey, could we just kind of touch on the channels a little bit here, a little bit more detail on the call? So we're kind of a year into kind of channel inventory liquidations at this point, right? And just kind of wonder your confidence in kind of parsing what actually is normalization versus maybe just kind of eroding fundamentals underneath the surface, kind of deteriorating here as we go.

I think we started to see some of this activity taking place earlier in the year as supply chains improved, and that continued, and we expected it to continue in Q3. And I would say some of our channel partners have done that and some are still continuing. So it's somewhat mixed. And I think early on we saw some of the slowness in commercial residential, and so we saw some of that activity taking place there. Then we've started to see industrial slowing. I would say sell-through has been slowing as well, but I think it is some end markets are choppy, so we're seeing some slowness there, but then we also see some positives. In some places, we've seen commercial be very positive. Our nVent CADDY portfolio has seen some nice growth over the last several quarters. I think it's really mixed, Jeff, in what we're seeing. And I do think with supply chains improving, that's been one of the big drivers of the adjustment.

And you did note orders were positive in EFS and Thermal. How did they perform in Enclosures? And is there a particular additional inventory issue that you're working through there?

Yes. On the Enclosures side, they were down, and some of that is what we saw in industrial slowing, but again puts and takes there; infrastructure and data solutions were very strong. So some of it is inventory adjustments and some of it is some industrial areas starting to slow.

And maybe just last one, just your confidence on the continued ability to kind of price in a kind of we'll just call it flat volume environment.

Well, I think you've seen every quarter that we've had strong pricing, although we said it was going to slow as we progressed through the year. Just because of how we started to lap some of our price increases. We're continuing to do some price increases where we think that makes sense. For example, we've had some price increases in Europe and I think as we look into next year, we still expect that we will be positive when it comes to price.

Thank you. And the next question comes from Nigel Coe with Wolfe Research.

I want to start with a question that you may not answer, but I appreciate your consideration of the 2024 environment. We have adjustments in our channels, some are strengthening while others are weakening, and we are well into that process. Therefore, we might see some favorable comparisons in the channel heading into 2024. I'm particularly interested in the backlog build at TM and the support from Data Solutions. How are you viewing the growth prospects for next year? While you are clearly investing in certain aspects of the business, what type of environment are you anticipating for 2024?

Well, look, we're confident in 2024 being a solid growth year for us. And when we think about, as I was saying in some of my concluding remarks, first, you have some of this infrastructure spending starting to actually ramp in 2024. And we can see that because of some things that we're quoting on. So we know that that money will start to flow and have an impact into 2024. Second, we look at some of the order rates that we have in Data Solutions, which has given us the confidence to make those significant investments and build out more capacity. So in that case, we've got good visibility, especially with some of the hyperscale and where we're involved with this AI, which is driving the demand for liquid cooling. Third, when you take a look at our Thermal Management business, we see those orders increasing. So we talked about double-digit orders growth and in particular around that energy transition. And we've seen some nice wins, whether it's on renewables or carbon capture. So we're seeing funding going into that energy transition. So I think that the channel inventory adjustments this year have been one of those things a little bit out of our control, but everything that we've been working on, new products, we will have more new products this year than we've had in the last couple, and that's always been a great driver for growth for us. And I just want to add, of course, we have the two acquisitions, and those sales synergies that we've been working on will start to begin in 2024. So all of that, I believe sets us up for a solid growth year next year.

And maybe one other thing, Nigel, just to add from a modeling standpoint too, this year at an nVent level, the impact of our wind down of the Russia business was roughly 1 point of headwind on the top-line. And while we will see a little bit of a rollover in that in Q1 in Thermal, it will have a negligible impact from a year-over-year perspective going into next year. So we won't have that headwind either.

Great. Thanks, Sara. So obviously 4Q embeds a pretty significant step down in margin, so I hope you get into that on the call. But I did want to just dig into the M&A contribution of $0.15 for the year because that's obviously a nice pickup. $0.08 in the quarter I think implies maybe $0.05 in the fourth quarter, you wanting to some integration and investment spending in the back half of the year. Just wondering if maybe some of that's pushing out to the right. I guess the question is what's driving the upside for the M&A cushion?

Yes, I believe it's a combination of factors. As we integrate ECM into nVent, the team is performing exceptionally well in terms of pricing and cost management. They are also demonstrating strong productivity and effective cost control. Additionally, we are experiencing some beneficial mix effects. This business operates primarily through distribution, but we are also seeing growth in OEM and retail e-commerce, which is positively impacting our mix. Looking ahead to Q4 in comparison to Q3, we need to consider some normal seasonality in this business, similar to our EPS guidance. We will also start ramping up investments to position ourselves effectively for the sales synergies that Beth mentioned. This will involve digital investments, sales and marketing initiatives, engineering investments, and more. We are genuinely excited about the opportunities this will bring for us next year.

Thank you. And the next question comes from Deane Dray with RBC Capital Markets.

Hey, we'd like to talk a bit here about Data Solutions investment that you're making. You talked about it last quarter; I was hoping you could size for us. I think you've told us the CapEx, but how much capacity are you adding in liquid cooling and when does that come online? And we'll probably hear more about this at Supercompute, but just give us a sense of your customer concentration looks like all the hyperscale guys are the ones who've moved the fastest into this space. How broadly do you think the customer base extends in what timeframe?

We have been expanding our capacity by opening a new plant in Mexico, which allows us to increase our capacity at our Minnesota campus for liquid cooling. However, we realized that this expansion alone was insufficient, so we are relocating distribution to a new center to further enhance our capacity. We anticipate that we will at least double our capacity for liquid cooling. Additionally, we are developing more standard offerings that can be distributed through channels and cater to enterprise accounts that prefer ready-to-go solutions instead of custom ones. Some of these products will be showcased at the Supercompute Trade Show, allowing us to present our full range of capabilities. It typically takes a couple of years to collaborate with a client to get their systems certified, and we have been working on this for several years. We expect new customers to start coming online, which is part of what will drive our growth next year. We believe there is significant potential in liquid cooling due to advancements in chip technology and energy efficiency, indicating its importance for the future.

That's fabulous. Let me go back to a couple points that Nigel was asking about on ECM. Can you separate for us how much of the cost synergies you've captured so far? And it sounds like most of the revenue synergies are still in front that certification to take products into Europe and Asia that still happens, but it sounded like some of Enclosures business might be selling some of ECM as well. Maybe that timeframe is earlier. So where do you stand on cost synergies and timeframe for revenue?

Well, I'll start with the cost synergies. So I would say, Deane, we're off to a great start from a cost synergy standpoint. If you recall, we estimated roughly $10 million to $15 million by year three. And some of that execution in the quarter is really a faster than expected realization of some of those cost synergies. Whether it's looking at some of our freight parcel rates combining kind of the overall insurance programs, I think the team is doing a nice job of finding those synergies early. And so we're well on track to achieve that $10 million to $15 million of cost synergies. I think the other thing I would just point out too, we've talked about this and it shows up really in our cash flow numbers is we are also on track and seeing the cash tax synergies as well of roughly $6 million to $8 million per year across that 10 to 15-year kind of amortization period, so the cost and the tax synergies are well on track. And on the revenue synergies, I would say they're still in front of us. But what we've been working on, we said we're going to expand the ECM products through our distribution channels. And so we've been engaged in those discussions. I mentioned that, and I think we'll start to see that layer in as we go next year. Similarly, we've been looking at some of the unique channels that ECM had and what products from our portfolio can we bring through their channel. So again, those discussions are underway and I think we're trying to certify the product, obviously for global distribution that takes a little bit longer because you've got to get those certifications and there are some different modifications we make to the product. So I think going into 2024 is when we start to see those synergies start to layer in.

Thank you. See you in Denver.

Very good. Thanks, Deane.

Thank you. And the next question comes from Julian Mitchell with Barclays.

And thanks a lot. And maybe just a margin question first off. So it looks like the fourth quarter guide you're embedding, I think sort of flattish revenue sequentially at sort of 860-ish or something, but the operating margin is down 250 basis points to 300 basis points. So just wondered if that was roughly correct and understood you often have seasonally down margins in Q4 sequentially, but if there was any particular aspect driving them this time or it's just conservatism.

No, if you recall, Julian, there's a seasonality to that Q3 to Q4 margin that has consistently played out historically. So when you think about it, some of it's just going to be the mix of the business in terms of Enclosures and EFS versus Thermal. And I think the other piece I would point to is just the acceleration on the investment front from an EPS perspective. So we talked about that in our prepared remarks. A big piece of that is going to be on the Data Solutions investment side of things. So nothing in there beyond really that historical seasonal EPS pattern as well. I think the other thing I would point to just from an EPS perspective, it doesn't necessarily show up on the wrong side of the equation because that's overall accretive is just going to be ECM. We do believe that ECM will have less of a contribution, still stronger than what we expected initially. But again, that's just that added seasonality element to it.

That's helpful. Thank you. And then, just a second question around the top-line. Should we assume that orders improvement in EFS translates into sales quickly say in Q4 as sales growing again in EFS? More broadly heard the comments around destocking. Are you seeing any kind of project delays in commercial or industrial? And then that's feeding through to distributors selling into those projects, starting to pull back on their orders to suppliers such as yourself?

One area I would highlight is ground rods, which are utilized in utilities, telecommunications, and construction. We experienced very long lead times in this sector over the past couple of years, extending for months, but now we're back in stock and the lead times have shortened to weeks. We observed that our channel partners and even end customers had built up inventory during that time. This reflects one of the impacts we've seen in EFS. While we anticipate growth in this category due to increased electrification, we've noticed that in some accounts, certain end customers are waiting on other components that we don't produce, which has delayed some projects. That's just one example, but overall, we're mainly seeing an inventory adjustment. Go ahead, Sara.

Yes. And then just from a Q4 sales perspective, we do expect to see modest growth in EFS in Q4. So if you just take a step back and look at that organic growth of 1% to 3%, we expect Enclosures to lead, expect modest growth in EFS, and then expect Thermal to continue to be down with some of those trends continuing on commercial residential. And that Russia impact and just to characterize that a little bit, that Russia impact specifically on that Thermal Management business is roughly 5 points in Q4.

Thank you. And the next question comes from Joe Ritchie with Goldman Sachs.

Hey, can we start by discussing EFS margins? I know there’s an acquisition in progress. Considering the negative organic growth, the EBITDA margins are now above 30%, even above 32%. What is the outlook for these margins moving forward? I understand that a decrease is anticipated in the fourth quarter.

Yes. I would say that the team has done an outstanding job managing the price and cost balance. We are starting to see productivity increase as we anticipated heading into the second half of the year. Another factor affecting our Q3 numbers is the revenue mix I mentioned earlier; it has not been as consistent as we typically expect, which contributes to the over 32 percent return on sales for that quarter. Looking ahead in Electrical & Fastening, and similarly in Enclosures, we continue to identify significant margin expansion opportunities tied to increased volume and new products. These new products generally have higher margins due to the value we deliver to our customers and our excellence in supply chain management. While we are improving productivity within our operations, we have yet to reach our normal productivity levels, so there is still considerable potential for growth. We are also implementing initiatives like transportation optimization, lean automation, and product family simplification. Alongside these efforts, we are achieving leverage in SG&A, which is contributing to ongoing margin improvements in Electrical & Fastening Solutions and the broader segments including Enclosures and Thermal. Additionally, the transition from Q3 to Q4 will also involve the increased investments planned for the ECM acquisition, which will begin to intensify in Q4 and continue into next year.

Got it. That's helpful, Sara. And I guess maybe piggybacking on Julian's question around commercial. It's interesting, I mean, if you take a look at the starts data, it's been pretty tough over the last several months, and then you look at the performance of each of your different businesses and depending on the business, commercial residential has been growing or not growing. And just it's kind of hard to square it all. And so maybe just kind of give us a little bit more insight as to why potentially commercial residential might be holding up a little bit better in EFS and in Thermal, if there's anything you could add there.

Yes. I believe it relates to our product portfolio. Our nVent CADDY brand focuses on supporting power and data infrastructure, which is relevant for any type of construction or renovation. Everything is becoming smarter, necessitating more power and data in buildings, hospitals, and various industrial projects. We have significantly invested in new products within that line, with our new product vitality nearing 20%, up from single digits when we acquired EFS. We are introducing seismic solutions and other developments that make that portfolio widely applicable. In contrast, our commercial portfolio in Thermal isn't as broadly applicable since we're focused on specific solutions like free switch protection, underfloor heating, and hot water heat tracing. This difference in application likely explains the varying performance we are observing.

And maybe one of the things to add just to the Thermal Management business has more of the residential aspects as well, impacting that from a growth rate perspective.

Yes, that detail is very helpful and appreciated. As a follow-up, should we interpret the commercial starts data and what it ultimately signifies for your business?

We have areas of growth, particularly in general construction. Industrial construction is driving growth for some of our products, fueled by significant investments in new battery plants and similar initiatives. At times, it may appear more aligned with commercial sectors, even though it is linked to industrial construction. This is another factor contributing to our growth.

Thank you. And the next question comes from Vlad Bystricky with Citigroup.

I wanted to ask about the recent rise in interest rates and what feedback you are getting from your channel partners regarding how the increased cost of funding their inventory is affecting their approach to the destock cycle. Do you see any risk that the destocking could go further than in past cycles due to their higher financing costs?

They are not very clear about their thoughts on this, but it is certainly one of the factors they are considering. We believe this has influenced their decisions throughout the year as they assess their cost of capital and inventory. With improvements in supply chains, there are various factors at play, but we definitely believe this has been a significant aspect of what has occurred in 2023.

Okay. That's helpful. And then, just maybe you mentioned, I think in Thermal, China, low-double-digits growth. So can you just talk about specifically what's driving that in China versus not a great overall backdrop in the region? And how you're thinking about sort of sustainability of good growth in China for Thermal?

Well, one of the things I would say with our business in China, we've got a lot of project-type based business, and so some of that could be on the chemical side or on the energy side. And that's where over the last little while, we've been working on projects and orders and started to see some of that growth there on that industrial side for us.

Great. That's really helpful. Thanks. I'll get back into queue.

Thank you.

Thank you. And the next question comes from Jeff Hammond with KeyBanc Capital Markets.

Maybe just to go out to organic growth a different way, it looks like you lowered your guide from four to six to three to four. I'm just wondering if that's simply kind of the destocking effects or if there's anything else that's driving that change.

That's basically it. As we've noted, some of our channel partners have completed their inventory adjustments, while others have indicated they will continue this into Q4. Given that situation and the fluctuations, our outlook was that we would see improvements from Q3 to Q4, but we adjusted our expectations downward because the inventory adjustments will persist into the fourth quarter.

Okay. Great. And then just on liquid cooling, it seems like a lot of other companies are talking about liquid cooling and maybe just update us on competitive landscape, emerging competitors. I don't know if these products are maybe complementary or different or if you're seeing kind of new competition and new capacity investments.

We've been engaged in this for quite some time, particularly with leading customers. Over the past five years, we've developed solutions to optimize our manufacturing supply chain, which are now gaining momentum. Testing these solutions typically takes two years, and while some startups are emerging, achieving scale in manufacturing is a gradual process. I believe we're positioned well and are accelerating our efforts. There's a heightened interest in our offerings, especially with the rise of AI, and we're broadening our reach from providing solutions mainly for hyperscalers to also targeting distribution channels and enterprise accounts. Over the coming years, we expect to see significant adoption. We're cultivating several partnerships, whether it's in components like coal plates or immersion systems, and we have a diverse portfolio that includes liquid to air and liquid to liquid solutions. I foresee strong growth in this area and believe we've made a solid start.

Great. Just last one on ECM, I think when you announced the deal, I think the margin structure was kind of in line with the overall nVent may be well below EFS, but it sounds like maybe it's coming in a lot higher. And do we need to kind of adjust our expectations for kind of margin contribution from that.

Certainly. From the start, we indicated that ECM would enhance nVent overall, while the margin profile of EFS might initially be slightly dilutive. However, I believe that the ECM margin profile will improve due to a couple of factors. First, as growth accelerates, we expect the margin profile to return more closely to previous levels. Second, we will continue to focus on our cost synergies, which should increase over time. Additionally, we need to consider our investment strategy. Currently, we are seeing strong execution from our team with effective price and cost management, alongside some early cost synergies. As you look forward to Q4 and into next year, it's important to keep in mind the increased investments we plan to make to further boost our top line and take advantage of sales synergies.

Thank you. And the next question comes from Scott Graham with Seaport Research.

Hey, good morning, all, and very nice strength and never get tired of saying that with you people.

Thank you, Scott.

So Beth, just to maybe ask you to elaborate your comment on 2024; when you said growth, do you mean organic or earnings or both?

Well, I was specifically talking about overall growth, but I mean both. We expect to grow organically, inorganically, obviously with these acquisitions, and to grow EPS.

Thank you. Sara, is the decrease in incremental margin from the third to the fourth quarter due to the positive price/cost gap reaching its peak in the third quarter and then narrowing a bit in the fourth quarter?

Well, here's what I would say, there's nothing different in terms of price/cost performance first half, second half. We came into the second half expecting that to narrow. At the same time, though, Scott, I would say the productivity is ramping. I think one thing to keep in mind is if you look at the cadence of last year, Q4 was our best return on sales expansion that we had last year, roughly 300 basis points, and that's when it began to kind of turn when some of our pricing actions were coming into play. And so it's one of our most difficult comps, I think Enclosures expanded return on sales for like, over 600 basis points in the quarter. So I would just come back to in Q4, if you look at it just from a year-over-year standpoint, despite the difficult comp, we're planning on growing organically. We've got a good line of sight to another quarter of margin expansion across nVent, and then you roll in the positive impact of acquisitions. So it's coming up to a really nice kind of year-over-year earnings per share as we end the year.

Got it. Thank you. Last one, if you don't mind. Just wanted to understand your capital allocation thinking, given the sort of the higher for longer mantra that we continue to hear from the Fed. Does that slow things down for you guys? I know you've got the great opportunity. Understand that, get that just that, are you thinking that maybe you have to pause a little bit here, or does your criteria get stricter? What's changing if anything, in that environment?

Well, look, I think we've always fundamentally been very strategic and disciplined in how we look at our capital allocation. And we've always said first, we want to support growth. And so you've seen that in the M&A that we've done in the investments in new products, digital, expansion, right, for Data Solutions, pay a competitive dividend and make sure we offset dilution. And I think that still remains our position. And as we look at things like growth, we're always looking for good returns and that we can execute within our framework. So I don't think it's giving us any different perspective in how we think about our priorities.

Thank you. This concludes the question-and-answer session. Now I would like to return the call to Beth Wozniak for any closing comments.

Thank you for joining us today. I'm very pleased with our performance in Q3. 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.

Thank you. And as mentioned, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.