Q4 2022 nVent Electric PLC Earnings Call
Good morning, and welcome to the <unk> Electric fourth quarter 2022 earnings conference.
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I would now like to turn the conference over to Tony writer, Vice President of Investor Relations. Please go ahead.
Thank you and welcome to <unk> fourth quarter 2022 earnings call.
On the call with me are Beth Wozniak, our Chief Executive Officer, and Theres, a way ski our chief Financial Officer.
They will provide details on our fourth quarter and full year performance and the outlook for the first quarter and full year 2023.
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.
We're looking statements are made as of today.
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 investor section of <unk>.
Hi, Ralph.
References to non-GAAP financials are reconciled in the appendix of the presentation.
We will have time for questions after our prepared remarks.
I also want to add that we look forward to hosting our next Investor day. The morning of Tuesday March 7th in New York City.
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 fourth quarter and full year results.
2022 was a record year for and that's what the fourth quarter, marking our seventh consecutive quarter of double digit organic growth.
Our invent team delivered exceptional results by serving our customers responding to strong demand and overcoming supply chain challenges, we successfully executed on our strategy focusing on high growth verticals.
<unk> global expansion and acquisitions as a result full year sales grew an impressive 18% with adjusted EPS up 22%. This was another year of outstanding performance and value creation, and we're well positioned to do it again in 2020 three.
Slide four summarizes our Q4 and full year performance.
Fourth quarter sales were up 15% organically with broad based growth across all segments and protocols.
Segment income grew an impressive 31% year over year with return on sales of 290 basis points.
Adjusted EPS grew 32% and we generated $180 million of free cash flow up 77%, our fourth quarter results were terrific.
Looking at our key verticals all grew in the quarter.
Industrial led the way up low double digits with broad based growth.
Infrastructure had strong double digit growth led by data solutions and power utilities.
Energy performed well up strong double digits, and finally commercial and residential grew mid single digits driven by North America.
Turning to organic sales by geography, we continued to see broad based growth in North America up strong double digits Europe grew in all segments up high single digits.
Developing regions declined primarily due to COVID-19 related impacts in China.
Lastly orders in Q4 were flat year over year.
Recall, a year ago, we had 37% orders growth a tough comparison.
Also as we discussed in our Q3 earnings call, we expected orders to moderate as distributors returned to seasonal destocking.
Overall, our customer demand and distributor sell through remains strong.
Orders in January have since increased and we continue to have a robust backlog.
For the full year, we had record sales of $2 $9 billion, an increase of 20% organically and segment income also grew 20% adjusted EPS was up 22% on top of 31% in 2021 for the full year, we generated over $350 million of free cash flow.
Let me share a few more highlights first we launched nine new products and our new product vitality is now 20%.
New products contributed approximately three points to our sales growth.
Second with our focus on high growth verticals.
Infrastructure is now approaching 25% of our sales.
From low teens that's fit.
Infrastructure includes data solution power utilities, renewables and E mobility to name a few.
All of these sub verticals are growing rapidly and we continue to expand our portfolio and solutions in these areas.
For example data solutions now represents $375 million in sales and grew over 35% in 2022.
Lastly, we have added more than $300 million in annual sales from acquisitions since then and.
In 2022 sales growth from acquisitions exceeded overall invent growth.
Well, we did not complete any new acquisitions in 2022, we remain disciplined in our approach and built a very healthy pipeline of opportunities. We've had success. When we acquire companies that have differentiated products and solutions that extend our position in high growth verticals, we've been able to rapidly scaled them through.
Our distribution channels global reach and footprint. This approach has led to higher growth and we believe fantastic returns for our shareholders, we're well positioned with ample capacity to execute on M&A in 2023.
Looking at the macro trends, we expect electrification sustainability and digitalization to continue to accelerate.
We anticipate the investments from the infrastructure Bill and inflation reduction Act will drive demand for our products and solutions.
On verticals, we expect industrial to see continued growth with investments in automation and supply chain resiliency.
Infrastructure will benefit from investments with the electrification trends and power utilities renewables and E mobility.
We expect continued strong growth with our portfolio in liquid cooling for data centers, given the energy efficiency benefits.
They're all commercial is expected to slow however, the need for more labor saving solutions will drive demand for our products as well as growth in power and data infrastructure.
Residential is expected to be soft, but represents less than 5% of our portfolio.
In energy, we expect to see continued growth with MRO and.
And projects supported by de Carbonization, with LNG clean fuel and carbon capture.
Well supply chains remain challenging we do expect them to gradually improve we also expect an inflationary environment.
We have shown we are able to manage the price cost positive. We're confident we can continue to perform.
Overall, I am proud of our event team and the record results we delivered in 2022.
We continue to change the growth profile of the company focusing on higher growth verticals tied to longer term secular trends. We believe 2023 will be another year of strong growth and value creation.
I'll now turn the call over to Sarah for some details on our results as well as our 2023 outlook Sara. Please go ahead.
You bet I am pleased to share another quarter of great execution with double digit sales growth strong return on sales expansion.
Double digit EPS growth and robust free cash flow, let's begin on slide five with our fourth quarter results.
Sales of $742 million were up 11% compared to last year are 15% organically.
Overall sales grew across all segments and vertical volumes were up modestly compared to last year and price added 15 points to growth Foreign exchange was a four point headwind.
Fourth quarter segment income was $144 million up 31% with strong incrementals of 47% return on sales was 19, 4% up 290 basis points year over year.
Better price cost and sequential productivity improvements drove the strong outperformance versus our expectations.
Price contributions more than offset the impact from inflation of roughly $40 million and continued supply chain inefficiencies.
In addition, we continued to make investments in R&D digital and sales and marketing for growth and productivity.
Q4, adjusted EPS was <unk> 66 cents up 32% and above the high end of our guidance range on cash we delivered significant working capital improvements in the quarter, resulting in $180 million of free cash flow.
77% year over year.
Now please turn to slide six for a discussion of our fourth quarter segment performance, where you will see continued sales strength across all three businesses.
Starting with enclosures sales of $376 million increased 17% organically with both price and volume contributing.
Sales growth was broad based across all verticals led by industrial infra.
Infrastructure also grew nicely with data solutions up approximately 30%.
Geographically North America led followed by Europe .
Enclosures fourth quarter segment income was $72 million up 67%.
Return on sales of 19, 2% increased an impressive 620 basis points year over year, driven by strong execution and catching up on price cost.
For the full year, Ross expanded 80 basis points to 17%.
Moving to electrical <unk> fastening sales of $194 million increased 16% organically with strong price contribution well volume was down slightly.
Sales growth was led by infrastructure with power utilities up over 50%.
Geographically all regions grew led by North America.
Electrical <unk> fastening segment income was $53 million up 18% return on sales was 27, 5% up 120 basis points compared to last year on solid execution and price cost.
This marks the fourth consecutive year of bras expansion for electrical and fastening.
Turning to thermal management sales of $172 million grew 9% organically with both volume and price contributing.
All verticals grew led by industrial with particular strength in chemical.
Graphically North America led with MRO and large projects, while Europe grew modestly impacted by Russia, and commercial whereas he headwinds.
Thermal management segment income of $44 million was up 1%.
Return on sales of 25, 7% was down 70 basis points year over year.
This decline was due to higher project sales mix and R&D investments.
Now turning to slide seven for a recap of our full year 2022 result.
We ended the year with record sales of $2 $9 billion up 18% or 20% organically segment income grew 20% to $524 million and return on sales expanded 30 basis points to 18%.
Adjusted EPS for the full year was $2 40 up 22% and free cash flow was $351 million up 5% with 87% conversion of adjusted net income.
A few callouts for the year.
First volume contributed six points to sales growth.
Second all segments grew organic sales double digits and expanded margins.
Third we have consistently demonstrated our ability to manage price cost. This is a testament to the strength of our portfolio and the solutions, we provide to our customers.
And lastly acquisitions added two points to sales.
In summary, 2022 was an outstanding year.
On slide eight titled balance sheet, and cash flow you will see we exited the year with $298 million of cash on hand, and $600 million available on our revolver, our balance sheet and financial position has never been stronger.
Turning to slide nine.
We continue to prioritize growth and execute a balanced disciplined approach to capital allocation in 2022, we returned $183 million to shareholders.
<unk>, a competitive dividend and share repurchases of $66 million.
We exited with a net debt to adjusted EBITDA ratio of one four times.
We believe we have ample capacity and strong cash flows to execute on our growth strategy, including M&A and deliver attractive shareholder returns.
Moving to slide 10, our 2023 outlook.
We expect organic sales growth in the range of 4% to 6%. This assumes low single digit volume growth and roughly three points of price well, we expect sales growth and positive price each quarter growth is expected to be stronger than the first half given our robust backlog and pricing carryover.
This also reflects macroeconomic uncertainty.
Our outlook for full year, adjusted EPS is $2.51 to $2.61, which represents growth of 5% to 9%.
A few important items to note.
First we expect price plus productivity to more than offset persistent inflation.
We anticipate stronger year over year margin performance in the first half given comparisons and favorable price cost and third we will continue to invest in new products digital and capacity for growth.
Lastly, we expect free cash flow conversion of approximately 95%.
This reflects higher capex investments and constrained areas we.
We continue to expect strong underlying working capital improvements.
A few 2023 below the line item assumptions, we'd like to call out include higher net interest expense of approximately $40 million due to higher rates on our variable rate debt.
Tax rate range of 18 to 18, 5% and shares of approximately $168 million.
Additionally, we anticipate corporate cost of approximately $95 million and capex of $55 million to $60 million.
Moving to slide 11, and our first quarter outlook.
We expect organic sales growth in the range of 5% to 7%, we anticipate another quarter of strong margin performance.
For earnings per share, we expect adjusted EPS in the range of 56 to 58 cents up 12% to 16% year over year.
In closing our team delivered another year of outstanding results in 2022, and I believe we are well positioned for another strong year with that I will now turn the call back over to Beth.
Thank you Sarah turning to slide 12, I wanted to spend a few moments recognizing the great work of our event team over.
Over the course of the year, our ability to respond to strong demand and overcome supply chain challenges was appreciated by our customers.
Well, we still have a few challenging areas our distributor partners placed us in the top performing suppliers when it came to delivery and quality as.
As you can see on the slide we are highlighting a few of the many recognitions we received for our commitment and partnership to our customers' success.
These recognitions weren't just about product delivery these extended to innovation and safety performance measures we value it invert.
Another area of recognition is our ESG performance E.
S. G is at the center of our strategy as we build a more electrified and sustainable world. We've made significant progress in our sustainability commitments.
For the second consecutive year, we were again awarded a silver sustainability rating from Eagle Vegas, our overall score improved placing us in the top 9% of companies assessed in our industry.
And the 85th percentile of all companies assessed.
Key to our success is our focus on our people and culture, which we believe to be a differentiator.
We have made inclusion and diversity a priority for us to create a great workplace.
I'm very proud that our board of directors is 70% diverse and we were recognized by 50 50 women on boards.
Also we are certified as a best place to work.
Our people are our priority and strength and we are committed to building a culture of inclusion that allows every employee to thrive and contribute to our success.
Turning to slide 13.
I look forward to our upcoming Investor Day next month and sharing how invent is building a more sustainable and electrified world.
Wrapping up on slide 14.
2022 was another year of outstanding performance from that deal.
Delivering differentiated value for our customers and shareholders.
We are well positioned with the electrification of everything sustainability and digitalization trends.
And we expect 2023 to be another strong year of financial performance.
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.
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At this time, we will pause momentarily to assemble roster.
The first question will be from Jeff right from vertical research. Please go ahead.
Good morning, Thank you.
Hey, just two earning a couple hi, good morning priced numbers, obviously, he's continuing to jump off the page just thinking about the bridge.
Think in 2022, right you said Paul.
Rice, offset all inflation and I think the 23.
Said price plus productivity offsets inflation I just wonder if you could put a finer point on that do you actually need to dip into productivity.
Slight inflation in 2023, it seems like in 2022, you actually were able to drop that productivity to the bottom line through some nice margin enhancement.
Yeah, I think let me start with 2022 and 2022 you know price needed to offset inflation as well as some of the negative productivity. We saw just due to the supply chain inefficiencies. So in essence, it took us cost us more to service our customers with the robust demand we were seeing and.
And the strong volume growth and so as we walk into 2023, we would expect you know price to offset cost and we would expect productivity you now to turn to a positive and that is going to be more gradual in the context of throughout the year and really what's going to help meet or that is just that supply chain.
Movement, but we've talked about this in our last call, we're really focusing on the supply chain investments to help them remove some of those areas that we've constrained and as well as focus on productivity in the factories that provide that productivity improvement over the course of 2023.
And maybe just a little bit of color on what youre seeing in the channel.
There was certainly some concern exiting Q3 that maybe.
You know, we'd have some drawdown or distributors rebalancing and the like it doesn't look like that happened to a material degree, but maybe address that and kind of the health of the channel as you look into the beginning of the year here.
Yeah as we have discussed on our Q3 call you know we expected to see some return to normal seasonal destocking and I would say we did see that you know as as we progressed through the quarter. We certainly saw a drop off in orders. However, what we did see was strong demand and sell through from our.
Distribution partner, so they were resetting some of their inventory levels now as we turn to this year in January we've seen those orders increase and so I think there was some you know management all of that inventory level. If you like but they still are sharing with us that they've got good backlogs good.
Demand and and so you know we believe we're going to see that pick up here as we go through 2023.
Yeah.
Great. Thanks for the color.
Yeah.
And the next question will be from Nigel Coe from Wolfe. Please go ahead.
Hi, This is sebastian filling in for Nigel.
Obviously.
2023, and so on in 2022 price contribution was about 14%.
My question is for 'twenty three price contribution expectation do.
Do you expect any pockets of price give backs.
And then maybe if you could touch on.
Where you see price realization on the orders.
Uh huh.
Well, let me just start by talking about price you know our view is it still an inflationary environment. There's still supply chain challenges you know, there's inflated labor energy costs et cetera, and so as we stated an inflationary environment. So our aim is to hold our price up.
However, it's you know and it's not at the same level as we were last year as you know a ship at a zero shared with you our assumption as we go forward.
Yeah. Thank you.
And then maybe just one one point to add to that in terms of kind of that stickiness I do think it is reflecting our.
Our ability to deliver and our ability to innovate for our customers and then you know maybe I'll just expand a moment on the inflationary environment to give a bit of a color on on that piece of it.
Something to keep in mind is if you look at our total cost structure. You know that's roughly $2 3 billion, that's cogs as well as all of our operating expenses and so metals, specifically are less than 20% of that overall tot cost structure. So while we are seeing some easing on the inflationary side as it relates to metals were saying.
Inflation and everything else so as Beth alluded to you've got components, you've got electrical electronics Labor logistics energy professional services, you know that is where we're seeing that inflationary pressure and so like we've consistently demonstrated in 2021 in 2022 we're going to consistently keep front footed and Matt.
<unk> that price cost equation going into 2023.
Great. Thank you and then my full of question would be how should we think about the sustainability of inclusion of margin.
Our Q4 Q is typically weak margin quarter for enclosures are would you expect the full year to be above the 19% to 20% range.
No. So one of the things we commented on is if you look at the quarters. How we are how we progressed with enclosures that was a segment that had the most challenges in terms of demand and supply chain inefficiencies and so it was very you know whether it was labor shortages, whether it was.
Freight et cetera, so to some extent we had some inefficiencies we improve that towards the back half or back ended the year and some catch up on price cost we would.
Spect to return to them than more normal margin profile that we've shown over the last several years and so we don't expect that margin to be at that level going into Q1.
Yeah.
Alright, thank you.
Okay.
Thank you and the next question is from Joe Ritchie with Goldman Sachs. Please go ahead.
Hi, Thank you good morning, everyone.
Good morning here.
So oh I'll ask hopefully the last pricing question and I'm, just going to take a little different a little bit of a different angle here.
So you did over $300 million in pricing in 2022, Theres got to be some some good carryover pricing that comes into 2023 and it also kind of sounds like because you believe that backdrop is gonna be inflationary. There is some likelihood that youll put additional pricing increases through so can you maybe.
Comment on the carryover pricing and whether you plan to put additional pricing through 2023.
Yeah, as we said in our prepared remarks, there Joe I mean that three points of price that's part of that 4% to 6% organic growth much of that is really carryover as well as things that are already announced and that's reflective of the inflationary environment that we see today, but you know as the year progresses.
We're going to continue to manage you know that price cost equation as we've done in years past.
Okay great.
That's super helpful. And then and then just just thinking through the volumes right.
Your demand backdrop still sounds like it's very good.
You know most of our companies have yet to see very much money from the infrastructure Bill.
And yet you know you're calling for volumes to be maybe up low single digits.
Help me square that and then if you could provide any color on whether you're starting to see any benefit from the infrastructure Bill that'd be helpful.
You know I think.
There still remains a lot of macro uncertainty right and so you know that's reflected in how we put our guide together when it comes to both the infrastructure Bill and the inflation reduction Act more so the infrastructure Bill some of that funding you know it's very it's moving you know through the states and it's.
You know it's allocated for.
Roads, and bridges in transportation, and water and broadband and ports and airports as you know and you know we look at all that and say, okay, Here's where our enclosures. Our U S business, where were positioned where we could expect to see some growth, but I think that in particular is going to be more towards the back half and it'll be multi years as we.
See those investments flow you know maybe could be a point for E F. As in enclosures as we start to see those funds flow when it comes to the the inflation reduction act. Some of that is going to start to drive demand in areas, where we have like renewables and solar and some areas, where we're working on E mobility.
But I think more that's more to come and towards the back half of this year as we currently see it.
Okay. Thank you.
Yeah.
And the next question is from Julian Mitchell from Barclays. Please go ahead.
Hi, good morning.
Just good morning, just wanted to look at the.
Operating margins a little bit more so I think you've guided those maybe up about sort of 50 60 bps for the year I'm just wanted to check that that's roughly the right range.
And then trying to understand sort of on a on a segment basis. How are we thinking about that just off to the fourth quarter, you had very different sort of year on year margins by by segment.
You know, we're seeing a bigger increase maybe in some old and then enclosures is is more flattish any any color around that please.
Yeah, I would start by saying kind of that ballpark you know margin. If you kind of just back into that from a segment income perspective. It. It's in the ballpark you know Julien and then from a from a color perspective by by segment I would say a couple things first and we're confident in the year.
Next year is going to be or this year right 20 train three is gonna be another year of margin expansion, yeah, that's going to come from the contribution from volume, but also positive price cost productivity.
We also expect margin year over year performance to be stronger than the first half versus the second half and that's really twofold. It's one just given you know our comparisons of a year ago.
You know we're lapping here in the first half you know some of that negative productivity just high cost to serve right from a supply chain perspective.
But also we're carrying forward you know as you saw in Q4, you know some products stronger price cost.
So if you look at that from a segment perspective, you know we continue to expect really the largest expansion from enclosures building off of that 17% Ross that they exited the year with in 2022, so again expecting that price cost benefit you know closures here in Q1 in the first half.
And continue to expect to see gradual improvement from a productivity standpoint.
I would also say that we expect to see margin expansion both in enclosures and thermal management just less so I mean, yes. That's has had tremendous margin expansion you know over the last four years, we said right and then with thermal Martin our thermal management still expect margin expansion just a bit more modest.
Given some of the the mix pressures as projects are really come come come back on board here and grow strongly.
Yeah.
Thanks, very much Sarah and just trying to I'm looking at say slide seven so you've got that very helpful segment income bridge on the lower left.
And just to focus on the sort of price and net productivity bucket.
Buckets for a second room with thinking about 2023.
You know you've got a sort of a 40 million odd spread between price versus net productivity in 'twenty two.
I'm just trying to understand sort of how do we think about that in in 'twenty three in light of your comments around kind of productivity, you're becoming a tailwind, but maybe the price cost spread narrows as we go through the year and investment side I think you called out yet.
Yeah, So I think you've colored it didnt, rather well Julien I mean, I think in terms of a price cost perspective, we do expect price to offset inflation, but to a narrower degree that what we saw in 'twenty two 2022 and some of that again was catch up right in terms of quarters passed and then productivity.
<unk> well productivity embedded in that $290 million mm headwind. If you will that was negative 65 million with a balance of that being a inflation. So we do expect that productivity to improve sequentially through the year. So not right at the gate here in Q1, but.
We continue to see you know good gradual improvement for supply chain, even from Q3 to Q4, we expect that to continue into Q1 and continue through the course of the year. So we see that a little bit more weighted towards productivity and then price cost, but both contributing positively to that bar in 2023.
Great. Thank you.
The next question is from Deane Dray from RBC capital markets. Please.
Please go ahead.
Thank you good morning, everyone.
Hey, sorry, I was hoping you could just take us through some of the dynamics in our free cash flow really strong finish to the year. How much was working capital at play you know did you take down buffer inventory I know you referenced some of that for the 23 free cash flow guide, but just take us through that.
The working capital improvements what happens to buffer inventory from here.
Yeah. So we were really pleased with our free cash flow and working capital performance in Q4, and if you look at.
Q2 to Q3 that inventory was flat even while sales grew and then from Q3 Q3 to Q4, we did take down some of that inventory and it really was reflective of some of the supply chain improvements we were seeing so as we saw some of the lead times come down you know, we were able to tighten up our own inventory.
But still I would say, it's very surgical but there is there are still some areas that were not where we want to be and our service levels and know that we've got to make some of the some of those investments. So we're pleased with the progress. We've made there in Q4, we know that there's continued progress we can make you know as that supply chain improves.
But we're going to continue to take a very surgical approach to it to make sure that we're also investing in those areas that we need to that are constrained or that have more challenging lead times.
That's helpful and then for Beth Ah, we get some more color on the data center solutions business, you're significantly outgrowing the market. There can you give us a sense of how much of that is being driven by enclosures versus liquid cooling.
Yeah.
When we look at that growth I would say, it's a in data solutions. It's two areas. One is our liquid cooling solutions and when we do sell those off and were selling those with racks in enclosures and fastening solutions, but we've talked about this before where liquid cooling is a more efficient way energy efficient way of <unk>.
Calling data centers and with data centers and ships getting hotter. It's it's really the direction that we're seeing across all data center applications. So significant growth from liquid cooling. The other area I would comment on where we saw growth is from our power distribution use.
So as we think about how you know our growth you know outlook here. It really is all of what we do but led predominantly by liquid cooling and our power distribution units and that pulls through the rest of our enclosures and fastening solutions.
That's great. Thank you.
And the next question is from Jeff Hammond from Keybanc. Please go ahead.
Hey, good morning, everyone.
Good morning, good morning.
I just wanted to go back to the enclosure margins are very good in the quarter I think Beth you said.
That that you would not expect that to repeat.
Hum.
I'm just wondering if there are any aberrations or why why that steps back.
Maybe there's some seasonality dynamics et cetera, but.
Just wondering on the sustainability there.
Yeah.
This is Sarah so maybe I'll build upon what Bob said I mean in the quarter right from a Q4 perspective.
Some of that price was really catching up from the early part of the year. So Q1, and Q2, where cost exceeded you know price and so when we looked at Q4 Standalone excellent impressive return on sales as you well know usually we have sort of a seasonal down.
And Ross, but that was you know very strong sort of quarter to quarter sequentially. So as we look at maybe I'll put it in the context of the full year, we exited the year at 17% return on sales for enclosures and we expect you know that you know from a full year perspective, and so we would expect.
To build upon that and see the strongest margin expansion you know heading into 2023, and we would expect that first half sort of year on year margin expansion to be the strongest in comparison to the full year based on that price cost carryover. So we do expect you know some nice margin performance here.
And in quarter, one and year over year from a margin perspective.
Okay. So it's really you had a big price cost catch up and maybe that.
Yeah, there's a little bit smaller going forward, yeah, 'cause it comparing that to kind of where where things stood in Q1, you know of a year ago as well.
Okay, and then just back on data solutions.
No I appreciate the outgrowth in color. There just you know maybe give us your view on the on the outlook. There for 2023. It seems like there's a lot in the backlog, but you know some some kind of emerging concerns just around data center and particularly some of the hyperscale guys kind of cutting.
People and cutting back a little bit just wondering if that's showing up at all and in the and the demand trends are order rates. Thanks.
The way we look at that is you know our backlog is strong there and because we're seeing this technology conversions to liquid cooling, which actually reduces operating expenses. We're seeing demand for these types of solutions increase and despite of that backdrop of everything.
Else going on so it's a.
A more efficient way, it's a technology shift and so that conversion and we think is going to continue to.
Extend across multiple data center AR applications, both new and retrofit. So that's why we're seeing such strong demand and expect that to continue.
Okay, and then you know.
Just on that front would you say your data solutions business. You know is kind of running above that three points of outgrowth or would you say that's that's more broad based.
I'm not sure we're tracking with the three points of outgrowth can you maybe just explain that.
I think you said that the new products contributed three points of outgrowth. So I'm just wondering.
How much is that lean towards data solutions or is it more broad based well I would say that the three points of outgrowth. This is broad based across you know yeah for us in thermal but for enclosures significantly it's both on the power distribution side and the data center cooling that we're seeing that.
Higher than three points of growth from those new products.
Okay. Thanks, so much.
Yeah.
And the next question is from Scott Graham from <unk>.
Please go ahead.
Hey, good morning, all terrific.
Hum.
A couple of questions myself and I was just wondering you know one of the things we've been hearing this earnings season is.
With the supply chain getting a little bit better.
Deliveries outbound deliveries.
That time shrinking that there's sort of this natural tendency for the customer so not necessarily order that much because their order is kind of already in your backlog right. So.
Could you talk about maybe with the orders being flat in the fourth quarter kind of how you parse that out between sort of improve.
Improvement in on time delivery from both you and supply chain, let's say versus some destocking.
Versus.
The whole comp versus demand dynamic.
Dynamic.
Well, Scott I would say, it's both of those things. So what we saw occur in Q4 was that some of our distributors work looking at their inventory levels and doing some destocking and so hence that reduced our order rates and I made the comment that our sell through was still very strong and now as we've progressed.
In 2023 order rates have picked up again in January but I.
I do think you know remember we were seeing crazy order rates in Q4 of just a 'twenty 'twenty. One you know we had 37% orders growth. So that at that point, you know, we were definitely saying our customers and our partners, placing more orders on us to you know to.
Give us visibility to demand so we could respond.
I think we're seeing that you know that a supply change improve they're not placing those orders six months out to give us visibility and so we're seeing it more balanced but you know having said that sell throughs. Good orders have picked up.
And so I think that's just part of the gradual supply chain improvements that we're seeing.
Thank you for that.
On the new products that was a really big number and I'm just wondering what the 3%.
It looks like in 2023, if you could hazard a guess there and I assume.
Well I don't want to do anything how much how do you sort of handicap pricing.
As a contributor within new products or is that just a volume number.
Yeah, We don't really you know the way, we think about new products. When we launch new products, we're always looking to see that they're providing outsized value right, so, they're reducing labor or they're driving energy efficiency or better operational performance. So therefore, we launch new products with a higher.
Margin expectation because of the value that we're creating so that's that's how we think about it versus you know pricing right. So it's you know theres a whole way that we look at value.
And I would say as we go into or as we're in 2023, you know we always look to launch at least 50, new products, we look to launch them with faster cycle time improve margin, we always want to get at least one point of growth and but you know I think you know well we're going to continue to.
Strive to to have great differentiated products, where like this year, if we can drive that higher volume and growth from them we will.
Very good. Thank you for your time in taking my questions.
Thanks Scott.
And again, if you have a question. Please press Star then one.
The next question is from David Silver from C. L. King. Please go ahead.
Yeah, Hi, good morning, Thank you good morning.
Yeah. My my question would be about your R&D spend and maybe Youre think has you know.
Thinking about that going forward. So this was a record year for your R&D spend up towards 25% or so and.
I thought it was interesting that each quarter with a four quarters of 2022 had the highest four four highest quarterly spends on R&D. So I don't know to me it seems like.
I am wondering if maybe there has been an evolution in your thinking in some direction about.
The goals or the priorities within your R&D spend.
And I'm wondering if maybe there is an increasing or if you could highlight the collaborative nature of your R&D spend currently in other words, how many projects are done, let's say directly with particular customers in mind or in collaboration with those customer.
Thank you.
Well you know we've always stated that we were going to wait our intent was to always increase our R&D spend because we thought as a percent of sales when we spun it was on the low end and we have made those increases about our top line has grown so well and we've also had such impact right, which is a which has been terrific.
So I think the major changes for us and how we've driven R&D to realize such great results is that it's a very collaborative approach it starts with us understanding the market needs in some cases it may be a specific customer, but we tried to think of as a developer developing platform products that.
And serve multiple customers in a particular application and then between our marketing and technology folks and our supply chain folks.
We work through the development process, and we've really done a great job to reduce our cycle times every year by 20% to 30% that's philosophy right. Its productivity and then we've also improved the launch process. So that when we launch a new product we have a way of getting a position more quickly through our distribution partners. We've got.
Tori we've got digital collateral right you just can't launch a product without having the digital product information available and it's all of those things that I believe have allowed us to have such a greater impact and you know we'll continue to invest there as we see great.
Returns.
Yeah.
Okay. Thank you for that.
Next question I had was maybe just about your projected.
Capital spending for 2023.
There is a little bit of a bump there, but I I recall Sarah at at least a couple of points are calling out.
Constraints that needed to be addressed.
And I'm just wondering if you wouldn't mind qualitatively, maybe just calling out.
The top couple of areas, where discretionary capital will be spent in 2023 to maybe alleviate some of those constraints or alternatively to exploit some opportunities that you see what's the highest priorities for you the discretionary portion.
Of your capital spending thanks, maybe I'll.
Start by saying, we've talked about how our data center solutions and our <unk> is growing so significantly so we need to make further investments to expand our manufacturing capability for that particular product line and that also involves us having some expansion within Mexico, where we need to.
At and additional a plant to our campus or extended campus.
To be able to have the capacity for some of these high growth areas in high growth verticals.
Yeah. So maybe just a couple of things to add to that I mean, our capex really is focused on new products digital transformation and high growth verticals. So that's consistent you know going into 2023 here I think that uptick is really those things that just Brett Beth just alluded to you know we believe our supply chain has it been a position of <unk>.
Strengths for US here in 2022, 2022 in terms of enabling us to deliver for our customers and do it very very well, but we are capacity constrained in some areas and so you know some of this reflects building out existing you know capacity and building that out in Mexico, particularly.
In our enclosures addressing some of these bottlenecks that we're seeing it's also increasing our investments in automation as well as modernizing some of what we have in our factory to really allow for better output and frankly more efficient output as well as we go forward.
Yeah.
Yeah.
Okay. Thank you for that and then just last question.
About the new products you know you started out a couple of years ago, Beth I think with a target of 50, new products and how you know I noticed the number in this year was 59, so I can't resist asking is going forward will <unk> be the new 50 as far as the hurdle rate for new product.
Thank you well, yeah, well just to add to answer that we always want to have 50 and it depends on the types of products, whether they're brand new product platforms, whether you know in our fastener business. We tend to have a more types of fasteners, which are fast faster smaller projects. So it really judge.
Just depends but I think what we're striving for is at least 50, new products a year, reducing that cycle time higher margins and then having at least driving a point of growth if not more.
Terrific. Thank you very much.
Thank you.
Ladies and gentlemen, 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 for joining us. This morning, we're proud of our strong finish to a terrific year I believe we are changing the growth profile of invent I'm 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.
Okay.
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