Q3 2022 nVent Electric PLC Earnings Call
Good morning, and welcome to the NN fan Electric's third quarter 2022 earnings conference call.
All participants will be in listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero.
After today's presentation there'll be an opportunity to ask questions. Please note. This event is being recorded I would now like to turn the conference over to Tony writer, Vice President of Investor Relations. Please go ahead.
Thank you Jason and.
Welcome to invest third quarter 2022 earnings call.
On the call with me are Beth Wozniak, our Chief Executive Officer, and series of Whiskey, Our Chief Financial Officer.
And he will provide details on our third quarter performance.
And I'll look for the fourth quarter and update to our full year 2022 outlook.
Before we begin I'll 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 <unk> filings with the Securities and Exchange Commission.
Forward looking statements are made as of today.
The company undertakes no obligation to update publicly such statements to reflect subsequent events or circumstances.
Actual results could differ materially from anticipated results.
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 three 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 outstanding third quarter performance.
And that team delivered exceptional results in serving our customers responding to strong demand overcoming supply chain challenges.
Our strategy to focus on high growth vertical new products global expansion and acquisition combined with strong execution continues to drive our success.
We believe we are well positioned with the electrification of everything Megatrends.
Our third quarter performance was a new record for both sales and adjusted EPS and once again exceeded our guidance. This marked our sixth consecutive quarter with organic sales growth at or above 20% demonstrating our growth strategy is working.
Our return on sales improved both year over year and sequentially given our strong third quarter results and expectations for Q4, we are again, raising our guidance for full year sales and adjusted earnings per share.
Now onto slide four for a summary of our third quarter performance.
Sales in the quarter were up 20% organically with double digit growth in all segments and key verticals Sigma.
Segment income was up 22% year over year and return on sales up 90 basis points adjusted.
Adjusted EPS was up an impressive 25%.
We generated $126 million in free cash flow up 17% overall, a great quarter.
Orders grew high single digits on top of 43% orders growth a year ago, we expected order growth to moderate given this comparison, we continue to have a robust backlog up strong double digits year over year that gives us confidence going forward.
Let me share a few other highlights.
New products added three points to sales growth year to date, we've launched 42, new products and expect to deliver 50 again this year.
I'm very pleased with the progress we have made we are launching more new products faster that are innovative and highly valued by our customers. We recently won a Showstopper award at the National Electrical contractors Association for one of our embedded caddy products.
Looking at our key verticals. They all delivered strong double digit organic growth infrastructure continued to lead the way with strength in data solutions and power utilities commercial.
Commercial and residential grew strong double digits, driven by North America, and Europe Industrial continued its broad based growth given the strong trends in automation and finally energy continued to perform well, particularly in MRO.
Looking at our organic sales performance by geography, we continue to see broad based growth in North America up 28% Europe was up double digits in all segments developing regions declined high single digits, primarily due to China in.
In the quarter, we experienced COVID-19 related lockdowns in Qingdao, where we have our largest China manufacturing plant.
Looking ahead, we are raising our full year sales and EPS guidance, reflecting our third quarter performance and expectations for Q4, our orders and robust backlog give us confidence in Q4 and into next year. We're excited for the future with the electrification of everything I will now turn the call over to Sarah.
For detail on our third quarter results and our updated outlook for 2022 Sara. Please go ahead.
You bet I'm pleased to share with you another quarter of strong execution with double digit sales growth return on sales expansion and improved free cash flow.
Let's turn to slide five to review our third quarter results.
Sales of $745 million were up 16% compared to last year or 20% organically.
Overall sales growth was broad based with double digit growth across all segments and key verticals volte.
Volume contributed continued to be strong, adding five points to growth and price, adding 15 point.
Foreign exchange was a four point headwind.
Segment income was $144 million up 22% with return on sales of 19, 3% up 210 basis points sequentially and improved 90 basis points year over year, all better than expected.
Volume and price contribution more than offset the impact from roughly $55 million of inflationary cost pressures supply chain inefficiencies and FX headwind.
In addition, we continue to make investments in R&D digital and sales and marketing for growth and productivity.
Q3, adjusted EPS was <unk> 66 cents up 25% year over year, we generated $126 million of free cash flow in the quarter up 17%.
We are actively managing working capital, while supporting robust demand in a challenging supply chain environment.
We expect cash flow and then mentioned to continue in the fourth quarter, reflecting our seasonal strength and working capital improvement.
Now please turn to slide six for a discussion of our third quarter segment performance, where you will see continued sales momentum and strong margin performance star.
Starting with enclosures sales of $388 million increased 20% organically with both volume and price contributing <unk>.
Sales growth was broad based across all verticals led by infrastructure and industrial.
Geographically North America led followed by Europe overall orders were up double digits year over year.
Enclosures third quarter segment income was $72 million up 27% return on sales improved 230 basis points sequentially and was up 170 basis points year over year to 18, 5% improve.
Improved execution and price realization offset the impact of inflation and continued supply chain inefficiencies.
Recall this business was most impacted by inflation and supply chain challenges and we've pointed to vast improvement in the back half of the year.
We expect return on sales performance to continue to improve year over year in Q4, due to price cost and improved productivity.
Now moving to electrical <unk> fastening sales of $209 million increased 28% organically with both volume and price contributing.
All verticals grew strong double digits led by infrastructure with power utilities up over 50%.
Geographically all regions grew led by North America.
<unk> were up double digits in the quarter.
Electrical <unk> fastening segment income was $61 million up 26% return on sales was 29, 1%.
50 basis points relative to last year on strong execution and price offsetting inflation and supply chain headwinds.
We continue to invest in new products and vertical teams to drive growth and support our customers.
Turning to thermal management sales of $148 million grew 13% organically with both volume and price contributing.
All verticals grew double digits led by industrial with particular strength in chemicals.
High margin industrial MRO demand continues to be robust for the sixth consecutive quarter.
Geographically North America was strong with growth in MRO chemicals and clean fuels.
Europe saw strength in industrial.
That by the impact of Russia.
China was down due to China was down due to supply chain challenges and customer delays from Covid lockdowns.
Overall orders were flat in Q3, largely reflecting what we weren't impacted sales, we continued to see solid order and quote activity for longer cycle projects.
Thermal management segment income was up 14% to $36 million return on sales expanded 140 basis points year over year to 24, 2% driven by improved price cost and positive mix contribution from industrial MRO.
Moving to slide seven titled balance sheet, and cash flow, we ended the quarter with a cash balance of $194 million, we focused on working capital improvements in Q3 and generated $126 million in free cash flow.
Also we exercised our delayed draw option on our $200 million term loan and ended the quarter with $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.
Slide eight provides a summary of our capital allocation prior priorities, we continue to prioritize growth, while maintaining a strong liquidity position.
We ended the third quarter with a net debt to adjusted EBITDA ratio of one seven times just below the low end of our target range of two to two and a half.
Year to date, we have returned $96 million to shareholders, including a competitive dividend and share repurchases. We believe our strong liquidity and robust cash flow position us well to continue to invest execute on M&A and deliver attractive shareholder returns.
Moving to slide nine you will see our updated 2022 full year outlook our year to date performance has been strong with sales up 21% and adjusted earnings per share up 18% as Beth highlighted earlier, we are again, raising our full year sales and earn.
<unk> outlook.
For organic sales growth, we now expect a range of 18% to 19% versus our prior guidance of 15% to 17% for the year.
Adjusted EPS is expected to be in the range of $2 30.
To $2.32 versus our prior guidance of $2.17 to $2.23.
This new guidance reflects adjusted EPS growth of 17% to 18% on top of the 31% growth last year.
For free cash flow, we now expect conversion to be approximately 90% at the low end of our prior range due to higher working capital to support our strong sales growth.
A few other full year callouts, we now expect a four point FX headwind to the top line.
Corporate cost expectations have moved up slightly to roughly $85 million and we now expect capex of approximately $50 million at the low end of our prior range.
Looking at our fourth quarter outlook on Slide 10, we expect reported sales to be up 4% to 6% and organic sales to be up 9% to 11% with an FX headwind of about 5%.
We expect both volume and price to contribute.
Our orders and backlog give us confidence in Q4 and into next year and adjusted EPS is expected to be between 56 and 58 cents.
Wrapping up we continue to execute well with strong sales growth Ros expansion and improved free cash flow.
I'm pleased with our performance and believe we are well positioned for another great year.
This concludes my remarks, and I will now turn the call back over to Beth.
Thank you Sara please turn to slide 11.
And in that we are building a more sustainable and electrified world.
With the macro trends of the electrification of everything and the increasing importance of sustainability, we are seeing increased demand for our products and solutions.
As the world moves through the energy transition, we see investments being made in infrastructure renewables energy storage and electric transportation.
We believe we're well positioned to grow with these secular trends.
And events, we connect and protect our products and solutions have strong value propositions tied to sustainability in electrification.
These include energy efficiency, electrical resiliency labor savings safety reliability and serviceability.
To bring that to life, let me share a few examples.
Our data center liquid cooling solutions are more energy efficient when compared with traditional air cooling.
They can remove heat at the source more effectively and improve the power usage effectiveness by up to 30%.
When it comes to electrical connections or invent era flex flex bus can reduce the installation time and cost up to 50, and 20% respectively. It is safer and easier to use more reliable and customizable.
This new product has applications across many high growth verticals from Datacenters to energy storage to E mobility.
We believe investing in sustainability and electrification is critical in.
In addition to the strong value propositions of our products, we are committed to developing them in a responsible manner with a focus on eco friendly materials, lower environmental impact and end user safety by.
By 2025, we expect greater than 90% of our new product introduction funnel to have a positive impact and at least one of these categories.
When it comes to acquisitions, our focus is on companies positioned to grow with the electrification of everything.
We've strengthened our portfolio in data solutions industrial automation and renewables, we've added more than $200 million in annual revenues since spin.
These acquisitions have grown 30% year to date outperforming and growing faster than overall in that.
Wrapping up on slide 12, we had an outstanding quarter with sales and adjusted EPS exceeding our guidance and for the full year, we expect double digit sales and EPS growth.
Looking ahead to 2023, let me share with you. Some initial thoughts while the macro environment is uncertain and supply chain challenges persist. We believe the electrical secular tailwind has positioned us well to outperform GDP.
We expect the investments in infrastructure and the energy transition will drive demand for our products and solutions.
We believe next year will still be an inflationary environment and we've consistently shown we can manage price cost effectively.
We will continue to invest in capacity and productivity to deliver for our customers.
Our digital transformation journey will accelerate with the goal of making it easier for our customers to do business with us.
We expect our momentum in new products and innovation to further enhance our position in high growth verticals and be a strong contributor to growth.
I'm excited about our future and believe we're well positioned for the electrification of everything 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 to ask a question you May Press Star then one on your Touchtone phone for using a speakerphone. Please pick up your handset before pressing the keys.
Your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Yeah.
Our first question comes from Joe Ritchie from Goldman Sachs. Please go ahead.
Thanks, Good morning, everyone and nice quarter.
Good morning, and thanks, Joe.
Yeah. So.
Bit of an odd question to start off but there was there was a big.
Big acquisition that was announced yesterday.
Mark was down double digits.
I think partly because of the leverage that the company was taking on and so I know Beth in your in your opening remarks, you mentioned M&A and your focus on the electrification of everything but I'm just really curious if in this environment.
How are you thinking about the size of acquisitions that you are yes.
Lee in your pipeline and the type of deals you would do and the type of leverage that you would maybe take on in this environment.
Yeah, well you know our M&A pipeline is very robust and I think a couple of things you never quite control the timing and you know we've proven to be very disciplined in terms of our targets and how they strategically if that I think one thing I would say is we have a strong balance sheet and cash.
Position, which we think gives us optionality and I'd also say that we have demonstrated such strong execution and integration of our acquisition targets and as I mentioned better than our overall in that performance that gives me confidence than we could do a larger deal than the ones that we've had.
But of course, you know we're going to remain disciplined and certainly you know we have our models that we ensure that we can meet all of those targets and hurdles.
Okay, Great. That's helpful. And then I guess you did you did provide some commentary on 2023.
Yes, there is some concern that.
Nonresidential investment activity is going to follow residential doesn't seem like you're seeing the signs of that across your portfolio and so maybe you can maybe just provide a little bit more color.
And how you're thinking about your end markets as you head into 2023.
I think and you know as we initially head into 2023 as I mentioned, we think infrastructure is going to continue to be very strong and that's really because of the investments that are being made its the change with the energy transition.
So all of those trends, we believe are favorable as we look at industrial you know, we see that we have a really strong backlog there, particularly in our enclosures business and Theres a lot of focus on industrial automation and and reassuring or just.
The fact that everyone has had so many labor constraints and challenges and so we think going into next year with our backlogs. You know we believe we will have some strength there I think on the commercial I'm, sorry, commercial and residential residential is not a big piece of our portfolio and certainly you know we've seen that slower on the commercial side. If you look at where we.
The most of our business in our electrical and fastening solutions a lot of what we do in commercial is related to power and data infrastructure. So anytime that you are retrofitting a building or looking you know to have more content you'd think of a hotel room in all the different outlets and plugs and things.
That it drives for more of our solutions. So we continue to keep innovating we come out with new products that are labor savings given the labor shortage in the contractor market that also plays well to our strength and then finally energy we think that we'll see some continued strength there just because of.
Energy independency, the switch to clean fuels, biofuels et cetera, and we've seen good project and quote activity and our thermal management business.
Sounds good thanks, guys.
Thank you.
The next question comes from Julian Mitchell from Barclays. Please go ahead.
Hi, good morning.
Maybe just good morning, maybe I just wanted to.
Switch the focus to the near term a little bit so just for the fourth quarter revenue guide.
I guess two parts to it one is that I think you'll guide implies sales are down mid single digit sequentially.
Normally the flattish in Q4, so I understand there's a bit of an ethics.
Sequential headwind, but is there anything else going on like shipping days or something like that to be aware rolls and then.
When we look year on year in organic sales.
I think you said you should get volume growth in Q4, so maybe just frame how much pricing is stepping down from that very big tailwind in Q3.
Okay. Good let me first start Julien with just you know how we thought about the quarter and so one of the things for us as we looked at our orders in our backlog, but we also we're cautious we're not knowing what our distribution channel partners would do with their inventory positions and remember there's a significant portion of our business that is.
Really short cycle and while demand is still very strong and the output through our channel partners are strong.
No.
I'm thinking there is that they may tend to modify their inventory positions as we go out of this fourth quarter, we don't know, but that was one of the our views and just being cautious on how we looked at Q4.
And I think Julien the other maybe thing to add to that on the sequential side as you know what Beth said and then you you flagged it means currency currency is paying a piece of that in terms of that.
Downtick I think the other piece is Russia is having kind of an oversized impact on Q4, and then from a overall standpoint, I mean at 9% to 11% as we said in our prepared remarks includes both an expectation of volume and price, obviously is going to be a bit more skewed to price, but still modest volume and keep in mind that were.
A lapping 24% growth a year ago, where we saw double digit volume and double digit price. So that step down on price is more of a more of a factor of what we're lapping a year ago than anything else.
That's very helpful. Thank you and just a very quick follow up.
On the sort of fourth quarter margins, we think enclosures bleeds the the year on year increase E. S. S flattish and then and then thermal maybe down.
Yeah, well, here's what I would say you know Q4, we do expect another strong margin performance and get good Incrementals, we would expect it to look a little bit more normal in terms of that sequential downtick in Ross, but significantly better than what we saw in Q3 to Q4 <unk>.
Year ago, really based on better price cost and productivity and then from a margin perspective, I guess I would characterize it like this we would expect enclosures you know to be the largest driver of that year on year margin improvement and see more kind of modest margin performance to flatten the F. S.
In thermal I mean, it's really more of a function of the strength of that margin performance of a year ago than anything else.
Great. Thank you.
The next question comes from Deane Dray from RBC capital markets. Please go ahead. Thank.
Thank you and good morning, everyone.
Hey impressive performance here, maybe I'll start with geographies.
For Europe , just given all the anxiety about the potential slowdown you're not seeing it in your headline numbers here today from third quarter, but anything changes at the margin and quote activity and then similarly for China, you called out the Covid shut down.
Are you expecting to recoup that and the fourth quarter or anything of size that for us.
Okay. So starting with Europe I'm, you know as we've mentioned our Europe European performance continued to be strong. The one area of course, where was a negative impact for US is just Russia right and that's largely in our thermal management business. So that was the impact that we saw but otherwise Europe continues to perform.
Well for us when you look at China, and remember China's only mid single digits in terms of our overall portfolio. So it's not significant and we weren't really impacted and you know these COVID-19 lockdowns vary by region and what our plan was impacted in the quarter in Q3, So we're working to recover from.
And I expect we're going to see some improved performance there in Q4 and on our thermal management business. It's also just some timing there. So I think we're going to see that turn around you know as we progressed through the quarter.
Great. Thank you and then for Sarah on the you tweaked free cash flow down through the year and it sounds like it was all related to the higher working capital demands for this this surgeon and an ongoing strength on the industrial side.
You didn't call out anything on supply chain. So are you still carrying buffer inventories or an expectation that you would be able to.
Work that down and has a supply chain improved at all since last quarter.
Yeah, So I would see that free cash flow guide really is pointing to the low end of our previously guided range of that 90% in terms of conversion and it is simply as a function of the strong demand that we can use to see in the quarter you know and that's what what is still a challenging supply chain I think we see it getting modestly gradually better.
But it's still challenging air will naturally be higher with these higher sales and you know we continue to invest in inventory to service our customers and at the same time. We are you know surgically managing that working capital inventory was actually flat from Q2 to Q3, So I think over the long term nothing changes.
In terms of our cash conversion goals of getting to 100%. We continued to see working capital as being a big opportunity and I think you know prior to going into this year with a strong demand against a challenging supply chain. We have a strong track record of converting at 100% you know, including in 2020, one you're asking.
On the supply chain front.
I would say that we see improvements in terms of getting you know team members in the door into our factories in D. C is from what we saw kind of in the first half of the year, but it still is taking time to get those team members trained on board and productive and that's what continues to be really strong volume output.
Material availability I would say again, you know better than where we started the first half clearly better than what we're lapping here of a year ago, but there's still pockets you know where where we're still challenged so we're having to be very surgical and very are you know focused in terms of where and how we're managing this working.
Capital as we balance all the all the factors here.
That's real helpful. Thank you.
The next question comes from Nigel Coe from Wolfe Research. Please go ahead.
Thank you good morning.
Yeah, Hum going into enclosures.
Excuse me, obviously, we've seen some some nice margin momentum through the year.
It sounds like labor is the issue here more than supply chain is that is that fair to say and I'm. Just wondering if it's a labor issue when would you expect to be sort of at a more normalized productivity in enclosures and then so the second part of that would be you know as we go into 2023, obviously.
Seeming no recession, but what do you think there's a path to high teens for the full year in enclosures.
So let me just start with Oh, Yes labor has been a challenge for us in many of our plants, including enclosures, and it's improving but still a challenge and I would also say materials, particularly when it comes to our electronics still is very challenging.
But we're working our way both through that and I would say on enclosures. You know, we're even looking at some more expanded capacity and looking at expanding our operations in Mexico just for the the strong demand that we see and we think that's prudent just you know strategic areas that we're investing in them. We're not really you know.
Giving any color yet as we go into 2020, three but as I mentioned earlier and in my prepared remarks I. Just think you know the backlog is strong for enclosures and we think.
Got you know momentum with some of the infrastructure and industrial electrification trends that we see going forward into 2023.
Okay, that's great.
And then to the thermal obviously orders I'm, assuming there's some impact there from Russia, but I just was wondering.
If you could maybe size that.
Interested in the in your outlook and you you come to the quoting activity and unfortunate outlook looks pretty good. So maybe just give us a bit more color.
What you see on the longer cycle side, and then perhaps just touch on Europe , you know, we're seeing a lot of.
Do you use their own pipelines no problems getting blown up et cetera.
How does that impact and Vince in regions.
Well, yeah, so starting with Russia, yes, what we're seeing both in our revenue and our orders are in the thermal management business is has been impacted by Russia, and we've always said that was our business most impacted there.
What we're seeing in North America is a very strong growth in industrial MRO, we've talked about that for six consecutive quarters being very very strong and that's continuing we've seen a lot of focus on things like clean energy and Biofuels and carbon recapture says.
You know energy transition areas, but we think that the project orders and activity both in Europe , and North America is strong and I would say another area for US has been a focus in chemicals and that has performed very well for us as we go forward. So with respect with respect to the particular disruption that you talked about.
That really hasn't been an area for US you know it hasn't caused any issue, but we definitely are strategically looking at this energy resiliency energy independency energy transition and making sure that we're well positioned globally to serve some of the changes in demand here.
And I think that you know the going into next year.
We will see some strength.
Yeah, that's great. Thanks Beth.
The next question comes from Jeff Hammond from Keybanc capital markets. Please go ahead.
Hey, good morning.
Good morning.
So just wanted to go back on productivity because it seems like it you know the price cost is getting better but the productivity is still seems to be a challenge and I'm just wondering.
As you look into 'twenty three how big of an opportunity that is if you can kind of you know.
Catch up some of these supply chain and labor issues, you're talking about.
Yeah.
Well I mean, I would start from the standpoint of you know.
We've worked towards this equation, if you will that price plus productivity is going to more than offset rate inflation and so I think we've managed that well over the last couple of years productivity has been more of a headwind in the current environment given some of these supply chain challenges.
We would expect that to continue to gradually improve I mean, I think we saw modest improvement from Q2 to Q3, we expect that to continue into Q4, I think timing of when kind of that overall supply chain environment, we'll get back to more normal I can't say that we have a particular view on that.
But I would say is that you know, we're really focused on doing some things differently than what we've done before in terms of onboarding in terms of training them in terms of ensuring that we've got the right level of automation in our factories I'm, putting in capacity at and investments as Beth alluded to earlier.
So theres a lot that we're doing to drive that productivity improvement along with you know.
Looking to see that gradually improve just from an overall environment perspective.
Okay, Great and then just just to be clear on the on the Fork you got so you're you're building in some expectations for.
Distributor Destocking are you actually seeing any evidence of that.
Near term.
Hum.
You know it was a caution that we had right not knowing right and I'd say that are you know demand first of all we always look at the demand and the throughput our distributors and that's very strong. So we're very pleased with that.
And I think order patterns have generally been in line with what we've seen in Q3. So to this point things look fine, but you know again as we approach December you know you just don't know right. So I think it's good for US just to have a cautious view there.
Yeah absolutely.
And then just you know there's been you know the magnitude of inflation has been has been pretty eye popping.
We're seeing some some input costs come in on the material side and I'm, just wondering you know, particularly on enclosures.
Are you thinking about you know durability of kind of holding price sheets.
Should some of these lower input costs persist.
I think the thing to keep in mind is that even if we see some material price easing we've got inflation and so many other areas. We have inflation in labor, we have inflation and freight we have inflation in energy cost.
So you know on balance as I mentioned, we think next year is an inflationary environment and we you know we're going to continue to manage that price cost equation as we go into next year.
Okay.
Thanks, so much.
Thank you.
The next question comes from Jeff Sprague from vertical research. Please go ahead.
Hey, Thanks, good morning, everyone.
Hey, Good morning, Hey, I was wondering if just back to slide five if we can just have a little bit more of a discussion of kind of the inflation productivity investment equation.
And.
In particular I'm sort of interested in.
How much of a productivity headwind you're fighting against some of these supply disruptions.
Disruptions, but could you just kind of unpack that $74 million for us and then I've got a follow up.
Yeah, so on that $74 million, you've got roughly 55 of that is gonna be inflationary pressures. So that means you know you've got you know roughly 19 20 million related to investments and productivity, maybe a couple of things I would call out there Jeff is on the investment side and you can see it on the P&L.
I mean, we are investing higher dollars in terms of R&D sales and marketing and digital that shows up in that SG&A line and so that's a significant you know year over year investment that we're making that we believe you're seeing the returns already on that in terms of the new product contribution and.
What we're doing around digital capabilities to service, our customers and to drive productivity and I think the other piece of that you know balance of that is going to be on the productivity side.
And then it's a couple of different things there one would just be you know, we're not yet seeing that supply chain efficiencies that we would expect with the volume leverage that we're seeing I think that's marginally getting better from Q2 to Q3, and we would expect that to continue to get better as you know as the quarters progress here and into next year.
Just as we get more productive in our factories as we've talked about and also put in you know some of the additional capacity.
As we sit here today I mean, we continue to have just strong demand and so that means we're leveraging our global footprint you know maybe unlike what we would normally do in terms of vary in region for region approach you know, we're flexing our capacity engaging with some some outside sourcing you know to help us service that demand and that just has a cost component to it.
But again as we drive them you know for greater efficiencies in our factories as we put in that more and more automation as we make some of those capacity investments and <unk>.
With a backdrop of what we see as a gradually improving supply chain, we think that that's going to consistently improve as the quarters progress.
And then just on the question of.
Capacity it sounds like it's mostly labor, but.
You know your capital spending actually a little on the low end of what you were previously thinking do you need.
You know kind of a significant bump in brick and mortar here to continue to grow at this pace you actually.
Hosting.
Better volume growth in a lot of companies recover right. We're seeing a lot of organic growth out there and put a lot of companies, it's price and not not volume, but you've got both working so just wondering.
How much more you can kind of squeeze out of the existing footprint.
You know without maybe a material increase in your capital spending you.
You know, we've been able to manage our capex spending for fairly consistently you know as a percentage overall and I think that's true how we think about 2020 three having said that for the last couple of years, we've always been able to make investments in expansion. So this year, we expanded in a factory in Thailand.
As we're going into next year, we're going to expand in Mexico, and what that enables us to do is to strengthen our regional strategy as well as as we look at some of these areas for infrastructure growth. We believe that we do need to add some more lines to give us that capacity that maybe it was constraining some volume growth today, but.
Jeff We we believe we can manage that within you know our current investment plans that we have.
And maybe just one little Nit.
I'm just surprised that chemicals are so strong I'm sure that isn't lost on you that just about every chemical company in the world is like imploding from an earnings standpoint, I mean is there you know kind of something unusual or unique that's going on that's.
Given your strength in that in that particular business at this point in time.
I don't know, Jeff that I would say that there's anything unique there in particular.
One of the things as we've talked about some conversion.
Petrochemical to some of these clean fuels or biofuels isn't for us they require more maintenance or you know I attempted to maintain a temperature to allow flow. So in some cases it requires more content from us for example, and I see that you know that's been supporting some of our growth.
So I you know that would be maybe the one thing I could point to but you know for us. It's just been an area, where our value propositions and our capabilities of just you know played well.
Great. Thank you.
Again, if you have a question. Please press Star then one.
The next question comes from Scott Graham from Loop. Please go ahead.
Yes, hi, good morning, and congratulations on really just an outstanding quarter.
They can do attitude.
I wanted to maybe drill down a little bit further into you know the impact.
You know higher commercial loan rates.
And let's say your either your commercial buildings market, which is a pretty big market for you guys and I you know.
Obviously, we all get the whole secular smart building thing.
Moving efficiency goes without saying I'm just wondering though.
You thought through weather.
You know in a higher rate environment, you know, perhaps all of that activity slows maybe that market turns into more break and fix next year.
You talked through that.
Yeah, I mean, I think that's right you know you see I mean, certainly you've seen the interest rates again, we're not really in RASM, but youll see it starting there with homebuilders right now and I do think you know on the commercial side, we would expect to see that slow and in our view as you know we're so broad based in terms of the different types of builds.
Things warehouses data centers et cetera that we support with our products and offerings and they also particularly with our E. S. S portfolio a lot of what we're driving our labor saving solutions and are in data infrastructure is where we play so the content. We think is a.
Is key so you know our view is as we keep coming up with new products that are labor savings that can be extended across medical or institutional or you know that we believe we're still going to you know manage to grow and outperform just because of the value prop.
Physicians that we have but you know it's it'll certainly commercial is going to slow from where it has been in 2020 two.
I'm happy to hear you contemplate that cause I.
It seems like it kind of have to look at right at least ports.
I wanted to ask you about was you know sort of the cadence of orders in the quarter. You know obviously continues to be very strong but does it also include some pricing.
A fair amount of pricing.
I'm, just wondering really two things on orders, what the sort of cadence was each month year over year and into October if possible and.
Or the order volumes.
As well.
Well I think you know the one thing I would say as we look at the quarter and just you know keep in mind that you know August is a big holiday period, and you know in Europe . So you know when we look at the quarter. Overall I don't think there was any I mean, it was fairly consistent right and as we've gone into this fourth quarter, it's fairly consistent so there hasn't been any.
Particular trend one way or another just you know strong order growth.
And of course, it is both volume and price that we're seeing.
Alright. Thank.
Thank you I appreciate it thank.
Thank you.
The next question comes from David Silver from CL King. Please go ahead.
Yeah, Hi, good morning, Thank you good morning.
Yeah, I'm going way down my list of potential questions here, but first first question and it is this will just take a few seconds, but you know broadly speaking I guess I'm interested in your thoughts about the vitality index or new product sales.
More to the point last couple of years, you've kind of set internal targets for new product introductions I think at around 50.
And you know your company has been growing as you pointed out are pretty pretty at a pretty healthy clip.
And you are sharpening your focus on those high growth verticals. So is it is it a reasonable surmise on my part to think that.
50 is is moving from kind of the target or the ceiling to kind of a floor on your new product.
Introduction efforts and secondly, you know maybe just a comment about going to market with new products maybe.
The last 12 months, you would probably say we were emerging or recovering from it.
Downturn, maybe over the next 12 months globally will be entering.
Economic slowdown so just maybe some thoughts about new product introduction pace and any.
Changes or shifts in how you go to market.
The global economy enter a slower patch. Thank you.
Yeah, well I think with new products. This is an area, where I think we've had really tremendous performance and it really is a cross functional approach right that we think about what is the market opportunity how do we differentiate and then how do we launched through our supply chain and through our channel partners. So you are correct to say.
Over the last couple of years, you know, we've been able to launch about 50, new products and keep in mind. Our portfolio has everything from you know our fastening product all the way up to a connected control solution or a liquid cooling solutions. So there you know we have.
Differences in terms of the the the cycle time to create those new products. So will that number go up it could but I think you know 50 is a good number for us what we look to see is that the impact in terms of our cycle time. The revenue dollars margin all of those things, which is why we're so.
Saying arbitrarily increase.
And I you know I would say from a launch standpoint, you know I think we've gotten much more effective in the commercialization because launching a new product effectively. These days means that you have all the digital assets in place.
Not just that you launch a new product and I think we've gotten really good with our channel partners and with our end users to engage them in our process. So that we launch very effectively and have inventory on hand et cetera. So that we the time to revenue recognition from these new products is a lot faster. So let's say we go into next year and things are slower.
Don't think that changes our approach because you know, we're basing our new products on creating value and whether it's labor savings or whether its liquid cooling, which is energy efficiency and I spoke to the need for electrification and sustainability I. You know I think we're going to continue to see a strong impact of new products on our overall growth.
Yeah.
Okay great.
And.
This next question I guess I'm looking at slide 11 in the lower right hand corner, where you list you know many of your recent acquisitions.
Acquisitions. So you know I believe it was three percentage points of your growth.
This quarter came from.
You know M&A or inorganic sources.
I look at that list I was just wondering if you may comment on which of those acquisitions, you think are contributing kind of at or above.
The company average.
Or maybe a little bit below and in particular, I'm thinking proportionately I mean, I understand there's all different sized companies.
Companies in there, but which would you say or maybe punching above your weight or or have been you know.
Positively a positive surprise relative to expectations.
Maybe if there's one or two that are lagging that would be helpful. As well well David just to clarify are we had said that new products has driven three points of growth that was a three point comment. We've said these acquisitions have been growing at a rate of 30% year to date and so recall overall and that has grown at 20.
2%, so our acquisitions are all outperforming our overall invent growth rate and so what I would point to here is more from a if you look at C. I S Global and W. B T. These acquisitions have been focused on data solutions data centers. So wanted to ask you know infrastructure areas.
When I look at our Benki EE acquisition, it's been focused on renewables and places like solar So we're seeing growth there and we think about Eldon focused on global growth in industrial automation. So they really are all have all outperformed you know the models that we put in place and and I just use that as a.
To show that you know when we've done acquisitions, we know how to focus on high growth verticals integrate them into our business and make them successful through our vertical and channel approach.
Okay. Thank you.
I see got it got a little confused there.
The numbers didn't quite add up.
But anyway, but that was my mistake. Thank you for clarifying that.
Appreciate the insight.
Thank you.
This concludes our question and answer session I would like to turn the conference back over to Beth Wozniak for any closing remarks.
Thank you.
And thank you for all of us joining us today.
We're very proud of the outstanding performance, we have delivered and we will continue to execute on our strategy to make invent a top tier high performance electrical company delivering for our people our customers and our shareholders. We believe invent is well positioned for the trends in electrification and sustainability our future is bright.
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.
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