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

Thank you, Chuck, and welcome to nVent's fourth quarter 2023 earnings call. On the call with me are Beth Wozniak, our Chair and Chief Executive Officer; and Sara Zawoyski, Chief Financial Officer. They will provide details on our fourth quarter and full-year performance; and our outlook for 2024. 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 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 fourth quarter and full-year results. 2023 was another outstanding year. Q4 was a record quarter with double-digit sales growth and adjusted EPS exceeding our guidance. This included margin expansion across every segment and robust free cash flow. For the full-year, we had strong growth and execution resulting in record sales, margins, earnings and cash flow. I am proud of our nVent team and everything we've accomplished. I'm very excited for 2024 with the trends of electrification, sustainability, and digitalization. We are well positioned for strong sales and profit growth, driven by our focus on high growth verticals, new products and acquisitions. Slide 4 summarizes our Q4 and full-year performance. Fourth quarter sales were up 16%. On an organic basis, sales grew 2% on top of 15% a year ago. Segment income grew an impressive 31% year-over-year with return on sales of 260 basis points. Adjusted EPS grew 18% on top of 32% a year ago, and we generated $215 million of free cash flow up 19%. Looking at our vertical performance in the quarter, infrastructure led with low-double digits with strength in Data Solutions. Commercial residential grew low-single digits. Industrial declined mid-single digits impacted by channel inventory adjustments. Finally, energy was down low-single digits impacted by our exit from Russia. Turning to organic sales by geography. We saw growth across our key regions. North America grew low-single digits, and Europe was up slightly. Asia-Pacific grew low-double digits with solid growth in China. Lastly, organic orders were slightly down in the quarter, reflecting the ongoing channel inventory adjustments. Importantly, sell-out was positive. For the full-year, we had record sales of $3.3 billion, an increase of 12% and 3% organically. Segment income grew 38% with margins expanding more than 400 basis points. Adjusted EPS was up 28% on top of 22% in 2022. For the full-year, we had record free cash flow of $465 million growing 32%. Let me share a few more highlights. First, we launched 95 new products in 2023, and our new product vitality is now at 22%. New products contributed more than 2 points to our sales growth. We have great momentum in our innovation pipeline. Second, all of our key verticals grew organically in 2023, led by infrastructure, which includes Data Solutions, Power Utilities, and Renewables, to name a few. Within infrastructure, Data Solutions now represents greater than $450 million in sales and grew over 20% in 2023. Finally, we completed two acquisitions last year, adding over $400 million in annualized sales that we are investing in to scale and drive growth. Looking at the macro trends, we expect electrification, sustainability, and digitalization to continue to drive demand. We anticipate government funding to flow this year more so in the back half. On our key verticals, we expect all to grow. Infrastructure is forecasted to have the strongest growth benefiting from investments with the electrification and digitalization trends. We expect continued strong growth for Data Solutions, particularly for our liquid cooling solutions, given the acceleration of AI. Industrial is forecasted to grow with investments in automation and reshoring. Overall, commercial is expected to grow modestly. The need for more labor-saving solutions as well as the increase in power and data infrastructure are expected to drive demand for our products. Residential is expected to remain soft. In Energy, we expect to see growth, particularly in the energy transition supported by decarbonization trends. Overall, I am proud of our nVent team and the record results we delivered in 2023. We continue to change the growth profile of nVent. We believe 2024 will be another year of strong growth and value creation. I will now turn the call over to Sara for details on our results as well as our 2024 outlook. Sara, please go ahead.

Thank you, Beth. I am pleased to share another quarter of double-digit sales and earnings growth, strong margin expansion and robust free cash flow. Let's begin on Slide 5 with our fourth quarter results. Sales of $861 million were up 16% compared to last year, in line with guidance. Organic sales were up 2%, with price contributing 4 points to growth and volumes down 2 points. Acquisitions added a meaningful $99 million to sales or 13 points to growth. Foreign exchange was a 1 point tailwind. Fourth quarter segment income was $189 million, up 31% with incrementals of 37%. Return on sales was 22%, up 260 basis points year-over-year. Our performance was driven by positive price/cost, productivity and accretive return on sales from the ECM acquisition. Price more than offset the impact from inflation of just over $20 million. Q4 adjusted EPS was $0.78, up 18% and above our guidance range. Acquisitions contributed $0.06 in the quarter. We generated robust free cash flow of $215 million, up 19% year-over-year. This included higher CapEx investments for growth and capacity. Now please turn to Slide 6 for a discussion of our fourth quarter segment performance. Starting with Enclosures, sales of $402 million increased 7%. The TEXA acquisition contributed 2 points to sales. Organically, sales increased over 4% with solid price and positive volume. Infrastructure grew more than 20% with continued strength in Data Solutions. Commercial residential grew in the quarter with strength in North America. And geographically, North America led up mid-single digits. Europe and China also grew. Enclosures fourth quarter segment income was $85 million, up 17%. Return on sales of 21.1% increased 190 basis points year-over-year, driven by productivity and price cost. For the full-year, ROS expanded an impressive 460 basis points. Moving to Electrical & Fastening. Sales of $288 million increased 49%. The ECM acquisition contributed 48 points to sales growth. Organic sales were flat with positive price and volumes down modestly. Industrial and Commercial residential grew in the quarter. This was offset by a decline in infrastructure due to channel inventory adjustments that continued from Q3. Geographically, organic sales growth declined slightly in North America, while Europe was up low-single digits. Electrical & Fastening segment income was $85 million, up 60%. Return on sales was 29.6%, up 210 basis points compared to last year on favorable mix and productivity. Turning to Thermal Management. Sales of $171 million were down 2% organically. The Russia wind-down impact was approximately 5 points to growth. Overall, volumes were down with price contributing 5 points. The decline in sales was driven by commercial residential and industrial. Important to note, commercial residential improved sequentially, and industrial MRO was up double digits. In addition, backlog grew year-over-year and energy transition represents nearly a third of the project backlog. Thermal Management segment income of $44 million was flat year-over-year. Return on sales of 25.9% was up 20 basis points year-over-year due to price cost and productivity. Let's turn to Slide 7 for a recap of our full-year 2023 results. We ended the year with record sales of $3.3 billion, up 12% or 3% organically. Segment income grew 38% to $721 million, all segments expanded return on sales. Overall, return on sales expanded an impressive 410 basis points to 22.1%. Adjusted EPS for the full-year was $3.06, up 28% and acquisitions contributed $0.16 to the year, exceeding our initial expectations. And free cash flow was $465 million, up 32% with 90% conversion of adjusted net income. In summary, 2023 was an outstanding year. On Slide 8, titled Balance Sheet and Cash flow, you will see we exited the year with $185 million of cash on hand and $600 million available on our revolver. Our debt stands at just under $1.8 billion, and we have paid down nearly $200 million post acquisitions. We believe our healthy balance sheet and strong cash generation provides us with ample capacity to invest in the business and execute on our growth strategy. Turning to Slide 9, where we will outline our capital allocation priorities. We continue to prioritize growth and execute a balanced, disciplined approach to capital allocation to deliver great returns. We have invested $71 million in CapEx in 2023, up 55%. This includes new factories and a new distribution center, which will help unlock opportunities where we have constraints. We returned $178 million to shareholders in 2023, including share repurchases of $61 million, and we recently increased our quarterly dividend by 9%. We exited the year with a net debt to adjusted EBITDA ratio of 2.1x, well within our targeted range. This is a testament to our strong cash flow generation. We are well positioned for capital deployment in 2024 as we execute on our growth strategy and deliver attractive shareholder returns. Moving to Slide 10 and our 2024 outlook. We expect reported sales growth of 8% to 10%, with organic growth in the range of 3% to 5%. This assumes positive price and strong volume growth. Acquisitions are expected to contribute approximately 5 points to growth. We expect normal seasonality through the year. Our outlook for full-year adjusted EPS is $3.17 to $3.27, which represents growth of 4% to 7%. This includes an $0.11 or 4 percentage point negative impact to EPS related to changes in global tax standards that went into effect January 1. A few important items to note for the year. First, we expect segment income to grow 8% to 11% for the year. This reflects positive price plus productivity more than offsetting inflation. In addition, we plan to invest in capacity, new products and digital to accelerate growth and productivity. Second, we expect free cash flow conversion in the range of 95% to 100%, or over $500 million. This reflects higher CapEx investments and improvements in working capital. And third, we expect our adjusted tax rate to be approximately 23% versus 19.5% in 2023. This reflects a 2.5 point rate impact from the change in global tax standards. The remaining rate increase relates to our income mix and includes a full-year of ECM. Importantly, we expect to offset a meaningful amount of the cash tax impact of the change in global tax standards. A few additional 2024 assumptions include higher net interest expense of approximately $90 million; shares of approximately 168 million, corporate costs of approximately $95 million and CapEx of $85 million to $90 million. Moving to Slide 11 and our first quarter outlook. We expect organic sales growth in the range of 2% to 4% and year-over-year margin expansion. For earnings per share, we expect adjusted EPS in the range of $0.72 to $0.74, up 7% to 10% year-over-year. This includes a $0.04 negative impact from a higher tax rate, including approximately $0.03 from the change in global tax standards. Wrapping up, our team delivered an outstanding 2023, and I believe we are well positioned for another great year. With that, please turn to Slide 12, and I will now turn the call back over to Beth.

Thank you, Sara. Since then, we have been executing on our strategy to drive growth and differentiated performance. Our strong financial track record demonstrates our strategy is working. High-growth verticals, new products and innovation plus global growth and acquisitions are key pillars of our growth strategy. As a result, we've had outstanding growth going from $2 billion in sales to well over $3 billion last year. We have also delivered tremendous returns with segment income and adjusted EPS more than doubling since 2020. And we have generated approximately $1.5 billion in free cash flow. At our Investor Day last year, we laid out medium-term targets and have made significant progress. In the first year, we have already achieved our margin expansion target. We also have meaningfully exceeded our acquisition contribution and earnings per share growth, and we believe we have plenty of runway ahead of us. Please turn to Slide 13. We are building a strong track record. We have industry-leading products and solutions, and we are well positioned with strong secular tailwinds. We expect the government funding for infrastructure to flow this year and contribute to our growth over the next five-plus years. We see significant growth opportunities with the electrification of everything, in particular, the acceleration of AI and the need for liquid cooling. We expect our Data Solutions business to continue to grow double digits in 2024 to beyond $500 million in sales and we are building a pipeline for future growth. In addition, we are well positioned for the energy transition, from decarbonization to renewables, to power utilities. And with the acquisitions of ECM Industries and TEXA Industries, we have opportunities to grow these portfolios, expanding into high-growth verticals like energy storage as well as scaling through our channels, and growing globally. When it comes to new products, our innovation engine has never been stronger. We expect new products to add more than 2 points to sales growth and be margin accretive to overall nVent. Finally, we are creating value through capital allocation. We see ample opportunity to grow via acquisitions. We play in a highly fragmented $90 billion connect and protect space. Our acquisition framework serves as a flywheel to accelerate growth. We have a healthy pipeline and a good track record of strong returns. In addition, we are returning cash to shareholders and recently raised the quarterly dividend by 9%. We are confident we can continue to build on our strong track record and deliver for our customers and shareholders. Moving to Slide 14. Key to our success has been our people and culture and making nVent a Great Place to Work. We are focused on delivering for our customers, and having a positive impact on our communities. As we build a more sustainable and electrified world, ESG has been core to our strategy. On this slide, you can see numerous awards and recognition that we have received. I will comment on a few of these. Recently, we were awarded a Gold Sustainability Rating from EcoVadis, placing us in the top 3% of companies assessed in our industry and in the 93rd percentile of all companies assessed. We were also recognized as one of America's greenest companies by Newsweek, and we were named for the first time to the Fortune Best Workplaces in manufacturing and production list. These are just a few of the many awards and recognitions that we have received. I'm extremely proud of our nVent team and everything we have accomplished and there is more to do. Wrapping up on Slide 15. 2023 was another year of outstanding performance for nVent. We delivered double-digit sales and earnings growth. We are well positioned with the electrification of everything, sustainability and digitalization trends, and we expect 2024 to be another year of strong sales and profit growth with robust cash flow. Our future is bright. With that, I will now turn the call over to the operator to start Q&A.

Thank you. We will now begin the question-and-answer session. The first question will come from Joe Ritchie with Goldman Sachs. Please go ahead.

Hey, good morning everyone and congrats on a nice end to the year.

Thank you.

Thank you, Joe.

Hey. Let's just start off with the cadence. It's interesting that the first quarter is expected to be up 7% to 10% from an EPS standpoint yet, if the growth rate is modestly below what you're forecasting for the year. So it can't help us think that there's some conservatism baked into the guide. But just any thoughts around the stronger start to the year and kind of expectations through the remainder of the year?

Yes. Maybe, Joe, a couple of big things to note. One would just be Q1 does have the benefit of the carryover from the ECM acquisition. So you're seeing that in the acquisition contribution from a top-line perspective, 13 points – and obviously, that's dropping down from an earnings per share standpoint. I think the other thing maybe to factor in is we guide to that 2% to 4% organic growth in Q1 versus that full-year of 3% to 5% is that we are going to be lapping some of that channel inventory level adjustments beginning in Q2 and beyond. And I think the other piece, too, if you look at that from a segment standpoint, EFS has some strong double-digit laps here in Q1 and Q2. So early start to the year, but we feel good about our 2% to 4% growth here in Q1. And I think one other thing, Joe, I would point out is that Q1 is our last lap, if you will, of the impact of that Russia exit. It was roughly 5 points to Thermal Management in Q4. We expect that to be roughly 4 points to Thermal here in Q1.

Got it. That's clear and helpful. I guess maybe it's a good segue also to what you're seeing from an inventory perspective, to your point, I think we've been 10 months into this destocking phase and volumes still exited the year negative. And so just expectations for volumes ultimately turning positive in 2024. And then if you could provide any color on what price is embedded into that organic guide for 2024, that would be helpful, too?

Yes. Joe, let me start. When we ended Q4, we saw there were some continued inventory adjustments, but importantly, sell-through was positive. And as we enter 2024, we expect the build on inventory to be slow as we go forward in the year, and remember, as Sara pointed out, in Q2, that's when we really start to lap some of those inventory adjustments. And our view this year is with all the secular tailwinds, we believe we'll have strong volume growth, and I'll let Sara comment on pricing.

Yes. So from a price volume perspective, we do expect positive price in 2024. It will just contribute to a smaller piece of that overall growth because volume will be a bigger contributor of that. I think that's in the backdrop of inflation. We still expect it to be another inflationary year here in 2024, particularly as it relates to wage and labor rates. And maybe one other point I would just say is that guidance of positive price does take into account some carryover as well as realization from pricing actions that we've already communicated.

Helpful. Thank you very much.

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

Thanks. Good morning everyone. Thanks for the question.

Good morning.

Good morning.

Good morning. I was hoping we could maybe get a bit more granular on the Data Solutions. Maybe kind of how that tracked during the fourth quarter? I know it's double digits, strong double digits. But more importantly outlook for 2024, I mean double digits is obviously a very wide range. But just curious if it's closer to the 20% and 10%, any color there. And maybe just quotably, what you're seeing in liquid cooling, is that becoming a more material tailwind as we go forward?

Yes. So on our Data Solutions business, I think when we say strong double digits, at the higher end of those double digits and the lower end of those double digits as you've commented. And really, that is the traction that we have, I would just say, with not only liquid cooling, some of our WBT acquisition as well, and the key thing, as we've talked about, is the acceleration of AI. And so we're continuing to work with several hyperscale customers on accelerating liquid cooling solutions as well as through some of our standard product offerings with our cooling distribution unit and some of our rear door heat exchangers, having those products served through our distribution channels and all of that effort is ramping. And so we see a funnel of activity that takes us into 2025. So our view is, as you start to see those more powerful GPU chips, and it's not only in data centers, eventually, as we look at edge computing, you're going to see this proliferation of these type of components that need to be liquid cooled. And so we feel that liquid cooling has applications even beyond Data Solutions. But we're very positive on our – what the outlook is for this year and going several years into the future.

Okay. So strong double digits implies obviously closer to 20%, okay. And then just obviously, the plan has flattish margins. And so I'm just wondering, Sara, maybe if there's anything we need to consider from a first half versus second half? And how does that outlook look across the segments?

Yes. I would say that there's – let me start here. From a first half, second half, it does include a bit more muted margin expansion here in the second half. And a couple of things we've even talked about in the context of our last quarter earnings. One is just the phase in an investment. We're going to continue to invest behind the great growth that we see in Data Solutions and particularly in liquid cooling and also in new products, and you see that providing great returns from a top-line perspective. So that will phase in over the course of the year. I think one specific thing I would call out is we've talked about bringing online some additional capacity in liquid cooling specifically, and that gets sort of commissioned, if you will, kind of midpoint of the year. So there's some ramp-up costs associated with that, that we'll see here in the back half. I think the last point I would just say we are beginning to lap some of those mix benefits that we've talked about the last couple of quarters in EFS and ECM. And so with those all included, if you look at it, it's still saying good organic growth, good profit growth, but we are going to see a bit more of a muted margin expansion in the back half of the year versus the first half. Maybe I would just end by it's still early in the year. So it reflects that perspective as well.

Great. Thank you.

The next question will come from Julian Mitchell with Barclays. Please go ahead.

Hi, good morning. So I just wanted to explore perhaps a sort of price volume element a little bit more on the topline. So is it sort of fair to say that the overall organic growth guide total company is sort of split 50-50 price versus volume? And then is it fair to say that your guide is sort of embedding volumes outside of Data Solutions are kind of flattish in 2024?

So we would expect, Julian, more volume than price this year. So we would expect volume to be more than half versus where price is. And again, we're going to continue to manage that price plus productivity more than offsetting inflation investments to be sure. And then from a volume perspective outside of Data Solutions, I think we talked a bit about this in our prepared remarks, but we do anticipate industrial growing with some of those positive reshoring and automation trends as well as commercial residential. Commercial residential has been strong for us and Enclosures and also a little bit more muted on the EFS side, but overall, I see growth in energy with the energy transition plus commercial residential and some of the industrial as well. So we do expect volume to be a stronger contributor to that overall organic topline of 3% to 5%.

That's great. Thank you. And just a follow-up around the segment sort of organic growth expectations for the year. Are we sort of thinking that Enclosures kind of lead the growth for the year as a whole as it did exiting 2023? And for Thermal Management, are we kind of assuming that can turn positive for the rest of the year after Q1 because you get through that last sort of Russia headwind?

Yes, that's exactly right. So we expect the stronger growth to be in Enclosures, but we expect EFS and Thermal both to have positive growth and volume growth in 2024.

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

Thank you. Good morning, everyone.

Good morning.

Good morning.

Hey. Can we circle back on the Data Solutions business and particularly the capacity expansion in liquid cooling? Can you size for us how much capacity you will have put in place? You said it would be commissioned mid-year, but size for us. And it sounds like most of that is rear door heat exchangers, that's really where the industry has the most immediate need and it's the fastest to retrofit. But is that fair that most of that is rear door heat exchangers?

Well, Dean, I would – so to start with your question of the capacity, as you know, we opened up a new factory in Mexico and – as well as we opened a new distribution center here in Minnesota. And what that did is it allowed us to expand capacity in our Anoka facility. And effectively, we will have double the capacity that we have. We're also using some of our other plants globally around the world to increase our content on liquid cooling overall. So I would say we've got strong growth with some of our hyperscalers in some of those solutions. And I would say that we're also seeing our cooling distribution unit grow as well as the rear door heat exchanger. So we've got multiple fronts of where we're driving an expanded portfolio and growth.

Right. That's a great opportunity. And then just second question. I guess you can take a victory lap on the new product introductions because that's almost double what your typical 50 new products goal each year. Is this a new standard? And just where does that take your vitality index?

Well, I – thank you. We're really excited about new products. It's really important. And it's probably not so much the number as it is just the impact, right, in terms of – and we measure that with revenue as well as vitality. We're on track to get to that 25%, which is what we set out as our midterm target at our Investor Day. And one of the things I would say is we've got more and more focus on velocity through our whole process, and that's one of the reasons that you're seeing us launch more products and faster and also our focus on platforms that allows us to configure off platforms. And those are a couple of the things that are really helping us drive our growth. But it's really important, and we focus on new products in these high-growth verticals like liquid cooling, and we focus on margin accretion as well.

Thank you.

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

Hey. Good morning, everyone.

Good morning.

I wonder if we could just come back to the tax. We've seen a lot of companies talking about the friction from the global minimum tax movement and some of these things going around. But this uptick is a lot more significant than we're seeing at others. Maybe just a little more color on kind of the what, the why and the how and where we've moved to here and do you think we're kind of sticky at this rate now?

So Jeff, I would say that 23% really captures where we are at today. But no doubt, we continue to work our tax planning as we always do. And that 23% tax rate really is two things. One, it does encompass and roll in the impacts of that global tax standard change, effective Jan 1, and that was really 2.5 point rate increase and that's at $0.11. The other roughly 1 point really relates to two things: higher North America income and really rolling in that impact of ECM. When we expected some of that as well to kind of carry over into 2024 here. I think there's a couple of things I said in my prepared remarks here, but I think it's worthy of just noting again is we expect to meaningfully offset the cash tax impact of this higher rate related to that global tax standard. And as we were working kind of the final element of our tax planning, we really prioritized the cash flow element of things so the cash taxes, which is adding a bit to our overall tax rate. But all-in-all, in 2024, we expect those cash taxes to be meaningful lower – meaningfully lower than that overall tax rate.

Great. Understood. And then just on the Data Solutions vertical. It sounds like it came in at roughly $500 million given your kind of $550 million comment for 2024. But can you just kind of confirm that where we finished and any other color kind of power versus cooling inside that number?

So Jeff, we finished the year over $450 million, and we said we're well on our way to be over $500 million this year. And I think as we see our growth, certainly, liquid cooling is increasing in terms of the percentage of that overall revenue as we just see that continue to accelerate. And we're going to see liquid cooling solutions proliferate into other areas like energy storage or edge devices and industrial over time as well. So we see a nice trajectory and future growth there.

Okay. Great. I thought you said $550 million for 2024. My bad. Thank you. That’s all from me.

Your next question will come from Jeff Hammond with KeyBanc Capital Markets. Please go ahead.

Hey. Good morning, everyone.

Good morning.

Good morning, Jeff.

Just on the order rates. I think you said down slightly. I don't know what were kind of the trends through the quarter or if there are any segments that grew or maybe more of an outlier within that?

The Q4 always as we get through the end of the year and distributors are looking at their inventory position. I mean, I don't know that there's any trend there. I would just comment that we actually did see EFS orders positive in the quarter.

Okay. And then would you expect those orders to kind of reaccelerate once you get through this destock? It sounds like you think it's done.

I think the word I would say is that they're slowly going to adjust and build. So I made the comment that we saw positive sell-through, and so what we do expect is that over time, we're going to see inventory levels build, but I wouldn't call that an acceleration, I'd say that they'll slowly improve.

Okay. And then ECM, I had – came in a little bit light versus my model. I didn't know if that was some slowness or seasonality of the business or any other timing issues?

Yes, Jeff, I think that's basically just seasonality. It was right where we had expected it to be. We talked a little bit about this last quarter that while it is seeing some of the residential headwinds, the distribution part of that business continues to grow, and it did so in Q4 as well. So you can think about that ECM business from a seasonality standpoint to look a lot like the EFS business.

Okay. Thanks a lot.

The next question will come from Brian Drab with William Blair. Please go ahead.

Hey. Hi, good morning. Thanks for taking my questions. I was wondering first on the Thermal business. Did you see any impact from warmer weather, especially in some of the industrial applications in Canada?

I would say we actually saw our product sales in the quarter improve and increase. So – and some of that is just inventory levels were down in the channels. And when there were pockets of cold weather, we saw product sales increase. So nothing to call out or note there, really.

Okay. And so that's not affecting your outlook really for the Thermal business in terms of the MRO in those colder regions seeing – so warmer weather isn't really a trend that you're seeing a concern in the near term in that business?

Not in the near term. And I think one of the things as we talk about the energy transition, it actually takes more content, more controlling elements because you're trying to maintain a temperature. And so remember, our Thermal business isn't just about heating – freeze protection, it's also about maintaining process temperature. And so we actually see that the energy transition with decarbonization and LNG, and clean fuels and biofuels, that there's a great opportunity in front of us.

Okay. Yes. Sorry, if I was dwelling on that point a little bit, just one of your main competitors talked a lot about that recently. And so I just wanted to get a sense for if that was impacting you. And then the last question for me is, could you comment at all on the gross margin trajectory for the year and whether any of the capacity additions that you're putting in place might have any – put any ups and downs into the forecast for gross margin 2024? Thank you.

Yes. So we talked about that a bit earlier, meaning from a margin perspective, we believe it's going to be stronger in the first half versus the second half in part you're going to have ECM rolling in here incrementally and that is accretive to the overall nVent margins. But in the back half, we expect that to be a bit more muted with those phased-in investments, R&D, new products, as well as in our high-growth verticals, including, as you just alluded to, some of those ramp-up costs as we put some of our new capacity lines into commission, if you will. And I think the other thing just to keep in mind, and again, this is consistent with what we called out in the last quarter or two, we did have some mix benefits in the EFS and ECM businesses that we'll be getting to lap. But all in, expect good topline growth as well as good profit growth.

Understood. Okay. Thanks for taking my question.

The next question will come from Vlad Bystricky with Citigroup. Please go ahead.

Good morning. Thanks for taking my call.

Good morning, Vlad.

Good morning.

So I just wanted to ask, I think you mentioned in your comments that you saw APAC up low double digits with solid growth in China. So – and obviously, we've seen sort of growing returns around the China macro outlook. So can you just talk about what was really behind that strength that you saw and how you're thinking about the outlook for China going forward?

Well, first of all, remember, China represents less than 5% of our sales. So it's not significant. And over the last several years, we've really focused on the high-growth verticals in China. And so therefore, that's where we think we can win and be competitive. And so we saw some growth in both our Enclosures segment where we focus on areas like transportation or Data Solutions. And we saw some growth in our Thermal Management business with some of our focus on key projects, in particular, chemical. So I think for us, it's really been knowing where the growth is and ensuring that we are very focused on those key high-growth verticals. But overall, it's not a significant portion of our portfolio.

Understood. And that's helpful color. And then just on the capital allocation front, with net leverage now sort of back down toward the lower end of your target range, can you just talk about how you're thinking about the potential for sizable incremental M&A and sort of your capacity from a management perspective as you're still integrating ECM and TEXA to do larger M&A?

So I think from a standpoint of – we've now done six deals as a company. And I think we've got a good track record of driving both growth and returns, and we have a framework that we've shared at our Investor Day about how we think about great portfolios and our view is we're – we think about our ability to execute as well. But over the course of the year, we would expect that we're going to have the opportunity to pursue some M&A and you never quite control the timing of when M&A happens. But as we always think about it, we want to make sure that they're the right strategic deals that we have the ability to execute and the ability to scale those opportunities and generate the returns.

Great. Thanks for the color.

The next question will come from Scott Graham with Loop. Please go ahead.

Hi. Good morning. First of all, congratulations on another terrific quarter, great execution. I wanted to take the last question, maybe the next step. If we go to the high end of your target leverage, it seems like you will have this year another $1 billion to be able to deploy, again, at the high end. And I'm just – and that does not include what you get back in EBITDA, right? So that's just the one pass. I'm just wondering, is your pipeline – what does it look like? Which of the areas maybe of the company? Maybe you can share with us where it's a little bit stronger? And $1 billion in capacity would mean that you can kind of do this year, which you did last year. Is that possible?

I would say our pipeline is very strong. And as you know, you have to cultivate relationships because sometimes we're doing deals where we know of those companies. Sometimes it's an auction process. So we feel very good in terms of our pipeline and the opportunity to pursue a deal or two like we did last year. And one of the things that we've said is it has to be a great product portfolio in a high-growth vertical. So what you've seen us do in the last couple of years, we've done some deals that are focused around Data Solutions. We've done some deals that have given us a portfolio around cooling that we can expand into areas like industrial and energy storage. So overall, we just think high-growth vertical focus, great product portfolio that we can scale and that we have the ability to execute. So again, acquisitions have been a key part of our growth strategy.

Understood. I just was also wondering within that Sara, does ECM pose any restrictions on that segment for M&A?

So I'll answer that. So I think from the standpoint of whenever we do a deal, we think about our ability to execute. And we think about that by segment, we think about that by geography. So at the time – when those opportunities arise, that will be part of our consideration.

Got it. Thank you. My last question is on the organic, and this is just sort of a question by vertical. I know you were sort of asked by segment earlier. I'm assuming that infrastructure will lead again with data center in there. I was just wondering if you might be able to rank the other three verticals and what your thinking is for organic this year.

Yes. So within that 3% to 5% organic growth, infrastructure by far will lead, we continue to see that growing strong double digits. Industrial, we also expect to see growth in the industrial really fueled by reshoring and some of these stronger secular trends. And commercial, we expect to see more modest growth in commercial residential being soft, you can kind of look at that as roughly flat. And then energy growing importantly with the energy transition, and we see some strong backlog, and we see that in a strong backlog of thermal management.

The next question will come from David Silver with CL King. Please go ahead.

Yes. Hi. Good morning. Thank you.

Good morning.

Good morning.

A couple of questions, and I hope I didn't miss this earlier, but I was hoping you did make several comments about the ECM acquisition. I'm not really sure I may have missed this, but did you provide kind of an accretion total for the time that it was part of your portfolio in 2023 or maybe for the fourth quarter? I recall you talked about the sales, the revenue growth impact, but wondering about that. And then maybe in terms of synergy capture, I mean, would it be reasonable to expect the first half of 2024 to have incremental accretion above and beyond what we saw in 2023? Thank you.

Yes. So David, we completed ECM acquisition mid-May, and that contributed $0.16 to EPS in 2023, so well above our initial estimations of that being $0.08 to $0.10. So strong contribution there. And obviously, we expect some carryover benefit in 2024. And think about that in that kind of $0.07 to $0.08 range here, benefiting mostly Q1, but some into Q2 as well.

Okay. Great. I have a question about your CapEx budget. So your company had a trend line CapEx of, I don't know, $40 million to $45 million for several years before 2023. And you're guiding to a number basically double that next year. And I'm mostly interested in the discretionary portion of that budget. But beyond, I guess, some liquid cooling, although I think a lot of the spend has been done already. But where should we think that the highest priorities for your – the discretionary portion of your 2024 CapEx spend is going to be directed. Thank you.

Well, maybe I would start by saying that higher CapEx really started in the context of 2023. So that CapEx grew over 40% – over 50% year-on-year really reflecting some folding of ECM, but really mostly investments in our capacity and capacity ahead of the great demand and visibility that we see in Data Solutions, but also new products as well as just underlying growth and productivity. So we go through a rigorous kind of capital prioritization process and look at prioritizing growth, and ensuring that we've got the right productivity. And more so if you look at kind of allocation of that capital this year versus where it's been in the past, more and more of that capital is being allocated towards growth. And we have strict returns, very focused on that return on invested capital in order to help us prioritize that overall. So you can think about elevated CapEx really in the context of first, capacity and second being new products, really third probably being new digital platforms really helping to enable that growth in productivity. And then from there, we rack and stack based on returns.

Okay. Very helpful. I'm going to sneak in one more, and I will stipulate that this question is probably impossible to answer precisely. But it's been mentioned, it has to do with tax policies and what we should think about when we're modeling maybe the out years for your company. So you are kind of indicating there is going to be a step up in kind of your permanent tax rate going forward. And again, I'm fudging the cash tax versus nominal rate. But the tax regime is getting a little tighter here. As you look out on the various issues, some of which you touched on here, would you think that there's going to be further incremental taxation issues to deal with, let's say, beyond 2024. In other words, should we pencil in a somewhat higher tax rate for 2025 and beyond? Thank you.

Yes. So I wouldn't begin to speculate on what future tax regulations may or may not come to fruition. I would just come back to kind of our tax planning. That change in global tax standards was one of the bigger tax changes that we've seen in quite some time. We did a lot of rigorous tax planning there, really prioritizing that cash flow aspect of things. And we're going to continue to work with evolving regulations and work that affected tax planning accordingly.

Okay. Very good. I appreciate the help. Thank you.

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 this morning. We are proud of our strong 2023 and believe the electrification of everything, sustainability and digitalization are driving demand for our products and solutions. We are excited for 2024. I am grateful for the outstanding work of our team to support our customers and execute on our growth strategy. 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.