Q3 2023 nVent Electric PLC Earnings Call

Hello, and welcome to the advent of electric third quarter 'twenty to 'twenty three earnings call.

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It kind of comes out of a television writer Vice President of Investor Relations. Please go ahead Sir.

Thank you.

It won't come down best third quarter of 2023 earnings call.

On the call with me are Beth Wozniak, our chair and Chief Executive Officer and serves the Waikiki, our Chief Financial Officer.

They will provide details on our third quarter performance provide an outlook for the fourth quarter and an update to our full year 2023 outlook.

Before we begin let me remind you that any statements made about the company's anticipated financial results are forward looking statements subject to future risks and uncertainties.

Such as the risks outlined in today's press release and in its filings with the security 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 investor section of <unk> website.

References to non-GAAP financials are reconciled in the appendix of the presentation, we will time for questions. After our prepared remarks.

With that please turn to slide three and I'll now turn the call over to Beth.

You, Tony and good morning, everyone. It's great to be with you today to share our record third quarter results.

I'm very pleased with our execution in the quarter, we had exceptionally strong income growth Ros expansion and robust free cash flow. We continue to execute on our strategy focused on high growth protocols, new products acquisitions and geographic expansion.

We believe we are well positioned with the electrification of everything.

In the third quarter, we had record sales up 15% with the addition of E C M and textile industries adjusted EPS was up an impressive 27%.

Acquisitions performed well and are great additions joined that.

Overall, we are very pleased with our Q3 performance, we had strong execution, despite a mixed environment, which I will comment on shortly.

Now onto slide four for a summary of our third quarter performance.

<unk> sales in the quarter were up slightly on top of 20% a year ago, we continue to see channel inventory adjustments, resulting in lower than expected organic sales.

Organic orders were positive in the quarter growing low single digits.

Segment income was up 40% year over year and return on sales up an impressive 420 basis points. Adjusted EPS grew 27% on top of 25% a year ago, and we generated $136 million of free cash flow up 8%.

Let me touch on a few highlights for the quarter.

New products contributed approximately two points to sales growth and we are well ahead of our goal of launching over 15, new products for the year.

Turning to acquisitions, we're excited to have the ECM and Texas team as part of that.

These acquisitions have strong product portfolios, which we believe further position us with the electrification of everything and high growth verticals globally.

In Q3, they added 14 points to sales and delivered better than expected income.

What do you see them, we are executing on our plan to globalize its portfolio. In particular, we are working on the certifications to expand the scope or connection offering for Europe and Asia Pacific.

We are making progress with our distribution partners to expand coverage. In addition, we are working on pulling garden. This products through some of the ECM channels.

With text that we're executing on our plan to position its industrial cooling portfolio alongside our enclosures through our European distribution channels.

Similarly, we're executing on the product roadmap to expand the portfolio to North America. We believe there is significant potential for global growth and expansion with both acquisitions starting next year.

I would also like to share a couple of awards that we recently received and that was named as one of Fortune's best workplaces in manufacturing and production.

We were also named as one of Newsweek's America's Greenest companies. Finally, we were awarded the I'm Mark supplier of the year for L. Scope pardon me see yep, which highlights the strength of that product portfolio.

Looking at our vertical performance in the quarter overall, we saw a mixed environment organic sales were led by industrial and commercial razee each growing low single digits in the quarter, while industrial is growing the rate of growth is slowing in commercial we saw pockets of growth.

Infrastructure declined low single digits, largely in electrical <unk> fastening solutions due to customers and channel partners adjusting their inventories as our supply chain in Peru.

Our solutions continue to grow double digits, we're making good progress on expanding our footprint and capacity to meet growing demand for liquid cooling driven by the acceleration of AI.

We remain confident in the growth of the infrastructure vertical with the electrification of everything and legislative funding expected to ramp in 2024.

Finally energy was flat in the quarter, but with the energy transition we are seeing positive order trends.

Turning to organic sales by geography, we continue to see growth led by North America up low single digits Europe declined low single digits, primarily due to a wind down in Russia, and Asia Pacific declined primarily due to China.

Looking ahead, we are updating our sales expectations and raising our full year adjusted EPS guidance. This reflects our view on a continued mixed environment importantly, it also reflects our confidence in our ability to execute.

Theater acquisitions, new products pricing productivity and cash we believe are all strengths for us we expect electrification sustainability and digitalization to continue to drive demand specifically, we expect strength in infrastructure and data solutions and industrial what the true.

[noise] of automation and onshoring and in energy with the energy transition.

We continue to expect the commercial rescue protocol to have pockets of strength.

Overall, I'm very proud of that team and our execution I will now turn the call over to Sarah for some detail on our third quarter results and our updated outlook for 2023. Sara. Please go ahead. Thank you back we had a solid quarter with robust margin expansion and free cash flow, let's turn to slide five.

Five to review our third quarter results.

Sales of $859 million were up 15% relative to last year organically sales were up slightly with price contributing four points to growth and volumes down three points.

Acquisitions added a meaningful $104 million in sales or 14 points to growth.

Third quarter segment income was $202 million up 40% return on sales was an impressive 23, 5% up 420 basis points year over year.

Our strong performance was driven by continued productivity improvements and accretive return on sales from the ECM acquisition.

In addition price more than offset the impact from inflation of just over $20 million.

Q3, adjusted EPS was <unk> 84 cents up 27% and above the high end of the guidance range. This included a better than expected <unk> contribution from the ECM acquisition, we generated robust free cash flow in the quarter of $136 million.

8% this.

This included higher capex investments for growth and capacity.

Now please turn to slide six for a discussion of our third quarter segment performance.

Starting with enclosures sales of $413 million increased 6%, the Texas acquisition contributed one and a half points to sales org.

Organically sales were up 4% with solid price and volumes slightly down commercial ready was up low double digits with strength in North America.

Infrastructure and industrial were each up with continued strength in data solutions and positive growth in industrial automation Geographics.

Geographically North America led up mid single.

[laughter] digits, while Europe was flat and China was down.

Enclosures third quarter segment income was $89 million up 24% return on sales of 21, 7% increased 320 basis points year over year, driven by price cost and productivity.

This includes our increased investments in our data solutions business and expect this to ramp in Q4 and into 2024.

Moving to electrical and fastening sales of $302 million increased 45%.

E C. M acquisition contributed 47 points to sales growth further scaling our highest margin segment organic.

Growth declined 4%, mainly driven by infrastructure that stemmed from channel and customer inventory reductions.

This was partially offset by low single digit organic growth in commercial <unk>, which has grown each quarter. This year.

Geographically sales growth declined low single digits in North America, and mid single digits and Europe.

Notably orders were up low single digits.

Electrical and fastening segment income was $98 million up 61% return on sales was a notable 32, 3% up 320 basis points relative to last year and solid price cost favorable mix and productivity.

Turning to thermal management sales of $144 million were down 3% organically.

Price contributed three points to growth while volumes were negative.

The decline was driven by commercial rosy down low double digits, partially offset by energy.

Industrial MRO demand remained solid G.

Geographically North America was up low single digits, China grew double digits, while Europe declined, including our wind down in Russia.

Notably orders were up mid teens, driven by energy transition projects and backlog grew year over year and sequentially.

Thermal management segment income of $35 million was down 3% return on sales of 24, 2% was flat year over year due to lower volumes and mix.

On slide seven titled balance sheet, and cash flow, we ended the quarter with $113 million of cash on hand, and $600 million available on our revolver.

We believe our healthy balance sheet provides us with ample capacity to invest in the business and execute on our growth strategy.

As you can see on the slide we've invested nearly $50 million in capex year to date.

Nearly 60% versus a year ago.

Turning to slide eight where we outlined our capital allocation priorities, we believe our robust balance sheet and cash generation puts us in a strong position to continue to invest in growth return cash to shareholders and deliver great returns.

We had a strong free cash flow in the quarter and year to date growing 46% compared to a year ago.

We exited Q3 with a net debt to adjusted EBITDA ratio of 2.4 times back within our targeted range of two to two and a half times well ahead of our expectations. After the ECM acquisition.

This is a testament to our strong cash flow generation and ECM performance.

Year to date, we have returned $103 million to shareholders, including dividends and share repurchases.

Moving to slide nine for updated full year outlook, we are updating our reported and organic sales forecast to reflect the mixed environment and expected channel inventory adjustment ripped.

Reported sales growth is now expected to be in the range of 12% to 13% versus our prior guidance of 13% to 15%.

This reflects full year organic growth of 3% to 4% versus our prior guidance of 46%.

Continue to expect acquisitions to contribute approximately nine points to sales growth.

We are raising our adjusted EPS guidance to a range of $3.01 to $3 three up 25% to 26% versus our prior guidance of $2 85 to $2.91.

Our new guidance reflects our year to date performance continued strong execution.

And better acquisition performance.

We now expect acquisitions to contribute approximately 15 cents to adjusted EPS versus our previous expectation of eight to 10 cents.

Looking at our fourth quarter outlook on Slide 10, we expect reported sales to grow 15% to 17% with acquisitions contributing approximately 13 points to sales.

Organic sales are expected to be up 1% to 3%.

We expect adjusted EPS to be between 73 and 75 cents.

Which at the midpoint reflects 12% growth relative to last year.

Wrapping up we delivered another quarter of robust margin expansion and cash flow and are well positioned for another great year.

This concludes my remarks, and I'll now turn the call back over to Bob.

Thank you Sara please turn to slide 11.

That event, we are building a more sustainable and electrified world.

The trends of electrification digitalization and sustainability are driving secular demand for our products and solutions I'm confident about the future given the macro trends and our strategy with our focus on high growth verticals, new products and acquisitions.

Starting with macro trends, we believe the 1.3 trillion dollars in U S and European Legislative funding for infrastructure has the potential to add between $250 million to $500 million and in bed sales over the next five plus years.

Looking at the trend of digitalization.

Artificial intelligence is driving demand for our liquid cooling solutions, leading us to increase investments to expand our product portfolio and capacity to drive future growth.

Looking at sustainability, we are seeing the energy transition gained traction, notably our third quarter project orders were up double digits in our thermal management segment.

Next is our focus on high growth verticals and new products.

As we shared at our Investor day more than 60% of our sales are exposed to secular trends.

Some of the high growth verticals. We are focused on include industrial automation data solutions power utilities renewables in the energy transition.

For example, we expect our data solutions business to continue to grow double digits and reach over $500 million in sales next year.

By the way, we look forward to hosting investors at the supercomputer aid show in Denver next month, where we will showcase our innovative portfolio, including our liquid cooling solutions.

Turning to new products, we have seen significant growth.

We have improved our new product introduction process, increasing velocity and time to revenue.

Year to date, new products have contributed three points to sales growth and we have launched 64, new products way ahead of our expectations.

Lastly on acquisitions, we play in a highly fragmented $75 billion space, we see tremendous opportunities to continue to grow and expand with our acquisition framework recall, we look for differentiated product portfolios and high growth verticals that we can invest it.

And scale to strengthen our position with the electrification of everything.

This year, we expect the ECM and tech, Texas acquisitions to add approximately nine points to sales.

We have a strong track record of deals exceeding our weighted average cost of capital in two to three years.

In summary, we expect to continue to execute on value, creating deals with our active funnel and strong balance sheet.

We are excited about the electrification of everything.

Wrapping up on slide 12.

We had a strong quarter with record sales and adjusted EPS.

We expect 2023 to be another year of double digit sales and adjusted EPS growth.

Well the current environment is mixed our execution has been strong we are driving growth with new products, we're executing well on acquisitions, we are expanding margins with price and productivity.

And we are delivering robust cash flow.

We are within our target leverage ratio in less than two quarters after completing our largest acquisition ever.

The ECM and Texas acquisitions had been meaningful additions to invent and are performing well.

We are excited about the growth and scale of our combined portfolios I'm very proud of how well our team is performing.

Looking ahead to 2024, we believe we are well positioned with the electrification sustainability and digitalization trends, we believe the legislative funding and investments in infrastructure will start to flow.

We expect to see the continued acceleration of artificial intelligence and the energy transition.

And we expect the sales synergies from our acquisitions to begin to layer it where.

We are excited for our future our future is bright with that I will now turn the call over to the operator to start Q&A.

Thank you at this time, we will begin the question and answer session.

And you May Press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.

This time, we will pause momentarily to assemble the roster.

And today's first question comes from Jeff Sprague with vertical research.

Thank you good morning, before and it is well good morning, Hey could we just.

Kind of touch on the channels, a little bit here, a little bit more detail that you gave on the call. So.

What kind of a year into kind of channel inventory liquidations at this point right and I'm just kind of wondering your confidence in kind of parsing, what actually is normalization versus maybe just kind of eroding fundamentals underneath the surface.

Kind of deteriorating here as we go.

I think you know as we are we started to see some of this activity taking place earlier in the year of supply change improved and that continued and we expected. It to continue in Q3, and I would say some of them.

Panel partners have done that and some are still continuing so its somewhat mixed and I think you know early on we saw some of the slowness and commercial ready and so we saw some of that activity taking place there than you know we've started to see industrial slowing you know say sell through has been slowing as.

Well, but I think it is some end markets have you know are choppy. So we're seeing some slowness there, but then we will see some positive you know in some of the we've seen commercial in some places to be very positive or invent caddy portfolio has seen some nice growth over the last several quarters. So I think it's.

Really mixed Jeff that opened and what we're seeing and I do think with supply change improving that's been one of the big drivers of the adjustments.

And you did note orders were positive in Etfs and thermal how did they perform in enclosures and is there.

Is there a particular additional inventory issue that youre working through there.

Yes on the enclosure side, you know, it's a they were down and some of that is what we saw in industrial slowing.

And but again puts and takes there infrastructure data solutions was very strong. So some of it is inventory adjustment and some of it is if some industrial areas starting to slow.

And maybe just last one just your confidence on.

The continued ability to kind of price that are.

You know kind of I'll just call it flat volume environment.

Well I think you've seen every quarter that we've had strong price. Although we said it was going to slow as we progress through the year just because of how we started to lap some of our price increases we're continuing to do some price increases where we think that makes sense. For example, we've had some price increases in <unk>.

And I think as we look into next year, we still expect that we will be positive when it comes to price.

Great. Thank you.

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

Yeah.

Thanks, Good morning, everyone.

So I'm gonna Yeah fair enough Bill for the question, you're probably not going to answer that.

Appreciate your thinking about the 24 bodman you know.

Shannon adjustment.

Some maybe getting stronger some weakening, but we said hey, you know quite deep into that process right. Now so perhaps you got some favorable comps coming up on the on the channel and just when you pool, but most of it actually in the backlog build a P M.

And obviously the data center.

On the tailwind I was thinking about the growth set up for next year. I mean are you confident obviously your best thing and says about the business, but what kind of a problem in your Powerpoint playful.

Well look we're confident in 2020 for being a solid growth year for us and you know when we think about as I was saying in some of my concluding remarks first you have some of this infrastructure spending starting to actually ramp in 2024, and we can see that because of some things that were.

Quoting on so we know that that money will start to flow would have more have an impact into 2024 second we look at some of the order rates that we have and data solutions, which has given us the confidence right to make those significant investments.

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And you know build out more capacity. So in that case, we've got good visibility, especially with some of the Hyperscale and where we're involved with you know this AI, which is driving the demand for liquid cooling.

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Third when you take a look at our thermal management business, we see those orders increasing so we talked about double digit orders growth and in particular around that energy transition and we've seen some nice wins, whether it's on renewables or carbon capture so we're seeing you know funding going into that.

Tony Riter: I would now turn the conference over to Tony Riter, Vice President of Investor Relations. Please go ahead, sir. Thank you. And welcome to nVent's 3rd quarter of 2023 earnings call. On the call with me, our Beth Wozniak, our Chair and Chief Executive Officer, and Sara Zawoyski, our Chief Financial Officer. Today we will provide details on our 3rd quarter performance, providing outlook for the 4th quarter and an update to our full year 2023 outlook.

Energy transition. So I think there you know the channel inventory adjustments. This year have been you know one of those things a little bit out of our control, but everything that we've been working on new products. What we will have more new products. This year than we've had in the last couple and that's always been a great driver for growth for us.

Tony Riter: 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 Security and Exchange Commission. 4-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 a company via presentation, which can find in the investor's section of NVent's website. References to non-get financials are reconciled in the appendix of the presentation.

And I just wanted to add of course, we have the two acquisitions and those sales synergies that we've been working on will start to begin in 2024. So all of that I believe sets us up for a solid growth year next year.

And maybe one other one of the thing I will just add from a modeling standpoint to you know this year at and in that level are the impact of our wind down of the Russia business was roughly a point of headwind on the top line and what we will see a little bit of a rollover in that in Q1 and thermal it will have a negligible impact from a year over year perspective.

Tony Riter: We'll have time for questions after our prepared remarks.

Beth Wozniak: With that, please turn to slide 3 and I'll turn the call over to Beth. Thank you, Tony. And good morning, everyone.

Going into next year, so we won't have that headwind either.

Great. Thanks Bill.

Okay, Embeds, a pretty significant step down in margin.

Beth Wozniak: It's great to be with you today to share our record 3rd quarter results. I'm very pleased with our execution in the quarter. We had exceptionally strong income growth, loss expansion, and robust free cash flow. We continue to execute on our strategy, focused on high growth verticals, new products, acquisitions, and geographic expansion. We believe we are well positioned with the electrification of everything. In the 3rd quarter, we had record sales up 15% with the addition of ECM and taxa industries.

Are we getting to that one the pool, but I did want to just dig into the M&A contribution of 15 cents for the year, because that's obviously a nice pickup.

Eight cents in the quarter I think it implies maybe five to 10 in the fourth quarter.

You're pointing to some integration and investment spending in the back half of the year just wondering if maybe some about pushing out to the right. I guess the question is what's driving the upside to the M&A question.

Yeah, I mean, I think it's a couple of things you know one as we bring that E. C. M. You know into the invent fold here I think the team is executing very well from a price cost perspective, I also think that they're executing well from an overall you know productivity and cost control measures. So I'm I think it's just I think the other.

Beth Wozniak: Adjusted EPS was up an impressive 27%. The acquisitions performed well and are great additions to Vent. Overall, we are very pleased with our Q3 performance. We had strong execution despite a mixed environment, which I will comment on shortly.

Point I would make to Nigel is as we also have some mix benefit there as you look at that business. If you remember them as largely through distribution, but we also have OEM and retail ecommerce that distribution business is actually growing and growing nicely. So we're getting some positive mixed contribution there as well, but as we look into.

Beth Wozniak: Now on to slide 4 for a summary of our 3rd quarter performance. Organic sales in the quarter were up slightly on top of 20% a year ago. We continued to see channel inventory adjustments resulting in lower than expected organic sales. Organic orders were positive in the quarter growing low single digits. Segment income was up 40% year over year and return on sales of an impressive 420 basis points. Adjusted EPS grew 27% on top of 25% a year ago. And we generated $136 million of free cash flow, up 8%.

Good for you know from Q3, there's a couple of things to keep in mind. It there and you have some normal seasonality in that business very similar to the Etfs business and we will begin to ramp on the investment side. You know too you know be in a good position for those sales synergies that <unk> talked about and that's going to take the form of.

Digital investments and sales and marketing engineering investments et cetera, and we're really excited about what that holds for us next year.

Beth Wozniak: Let me touch on a few highlights for the quarter. New products contributed approximately 2 points to sales growth, and we are well ahead of our goal of launching over 50 new products for the year. Turning to acquisitions, we're excited to have the ECM and Texas team as part of event. These acquisitions have strong product portfolios, which we believe further position us with the electrification of everything in high growth verticals globally. In Q3, they added 14 points to sales and delivered better than expected income.

Great job. Thank you.

Thank you and the next question comes from Deane Dray with RBC capital markets. Thank.

Thank you and good morning, everyone. Good morning, Good morning, Hey, we'd like to talk a bit here about data solutions investment that you're making I know you talked about it last quarter was hoping you could size for us yeah.

I think you've told us the capex, but how much capacity are you adding in liquid cooling.

Beth Wozniak: With ECM, we are executing on our plan to globalize its portfolio. In particular, we are working on the certifications to expand the Oscar power connection offering for Europe and Asia Pacific. We are making progress with our distribution partners to expand coverage. In addition, we are working on pulling our invent products through some of the ECM channels. With Texas, we are executing on our plan to position its industrial cooling portfolio alongside our enclosures through our European distribution channels. Similarly, we are executing on the product road maps to expand the portfolio to North America. We believe there is significant potential for global growth and expansion with both acquisitions starting next year.

And when does that come online and we'll probably hear more about this at a super compute but just give us a sense of your customer concentration it looks like all the hyperscale guys are the ones who have moved the fastest into this space. How broadly do you think the customer base expands and what time frame.

Okay. So you know this is been we've been adding capacity our first opening a new plant in Mexico. So we could expand capacity within our you know, Minnesota campus. If you will for more liquid cooling and then we realized that wasn't enough. So we're moving distribution out of that location to a new center to expand more.

Lastly, I think you know we're going to double our capacity you know, maybe it's more than that but I mean, that's how we're thinking about it when we look at the liquid cooling and a couple of things that we've been doing in addition to the Hyperscale accounts. We've also been creating some more standard offerings that we can take through some of our distribution channels.

Beth Wozniak: I would also like to share a couple of awards that we recently received. Invent was named as one of Fortune's best workplaces in manufacturing and production. We were also named as one of Newsweek's America's greenest companies. Finally, we were awarded the iMark supplier of the year for IlSco, part of ECM, which highlights the strengths of that product portfolio.

As well as serve Sabey say, maybe enterprise accounts, where they're looking for maybe not a custom solution, but for something ready to go and off the shelf. These are some of the products will actually have on display at the supercomputer aid show. So we can give a you know we can overview for those of an attack.

Beth Wozniak: Looking at our vertical performance in the quarter, overall we saw a mixed environment. Organic sales were led by industrial and commercial resi, each growing low single digits in the quarter. While industrial is growing, the rate of growth is slowing. In commercial, we saw pockets of growth. Infrastructure declined low single digits, largely in electrical and fastening solutions due to customers and channel partners adjusting their inventories as our supply chain improved. Data solutions continued to grow double digits, where making good progress on expanding our footprint and capacity to meet growing demand for liquid cooling.

It's just all the different breadth of our capability. There. So you know we we've often talked about it takes a couple of years to work with an account to get these systems certified we've been doing that for several years now. So we believe these new customers are starting to come online and that's also part of what's accelerating our growth.

Into next year, and we just see a long runway here that you know liquid cooling just because of the types of chips that are being used and even some of the energy efficiency play there, but that will be the future.

That's fabulous.

Beth Wozniak: Driven by the acceleration of AI, we remain confident in the growth of the infrastructure vertical with the electrification of everything and legislative funding expected to ramp in 2024. Finally, energy was flood in the quarter, but with the energy transition, we are seeing positive order trends.

Let me go.

Go back to a couple of points that Nigel was asking about on E. C. M. Can you separate for us how much of the cost synergies you've captured so far and it sounds like most of the revenue synergies are still in front that.

Certification to take the products into Europe, and Asia, that's still happens, but it's unlike some of these enclosures business might be selling some of ECM as well maybe that the timeframe is earlier, so where do you stand on cost synergies and timeframe for revenue.

Beth Wozniak: Turning to organic sales by geography, we continued to see growth led by North America up low single digits. Europe declined low single digits, primarily due to our wind down in Russia, and Asia-Pacific declined primarily due to China.

Beth Wozniak: Looking ahead, we are updating our sales expectations and raising our full-year adjusted EPS guidance. This reflects our view on a continued mixed environment. Importantly, it also reflects our confidence in our ability to execute. Be it our acquisitions, new products, pricing, productivity and cash, we believe are all strengths for us. We expect electrification, sustainability and digitalization to continue to drive demand. Specifically, we expect strength and infrastructure, in data solutions, in industrial, with the trends of automation and ensuring and in energy with the energy transition. But we continue to expect the commercial ready vertical to have pockets of strength. Overall, I'm very proud of our event team and our execution.

Well I'll start with the cost synergies and so I would say Deane, we're off to a great start from a cost synergy standpoint, if you recall, we estimated roughly $10 million to $15 million by year, three and some of that execution in the corridor is really a faster than expected realization of some of those cost synergies.

Gs whether it's looking at some of our you know freight parcel rates are combining kind of the overall insurance programs I think the team's doing a nice job of finding those synergies early.

And so we're well on track to achieve that $10 million to $15 million of cost synergies I think the other thing I would just point out to you know we talked about this and it shows up really in our and our cash flow numbers is we are also on track and seeing the cash tax synergies as well roughly $6 million to $8 million you know her.

Sara Zawoyski: I will now turn the call over to Sara for some detail on our third quarter results and our updated outlook for 2023. Sara, please go ahead. Thank you, Beth.

A year cross that 10 to 15 year kind of amortization periods. So you know the cost and the tax synergies are well on track.

Sara Zawoyski: We had a solid quarter with robust margin expansion and free cash flow.

And on the revenue synergies I would say they are still in front of us, but what we've been working on you know we said, we're going to expand the ECM products through our distribution channels and so we've been engaged in those discussions I mentioned that and I think we'll start to see that layer in as we go next year. Similarly, we've been looking at some of the unique channels that ECM.

Sara Zawoyski: Let's turn to slide five to review our third quarter results. Sales of $859 million were up 15% relative to last year. Organically, sales were up slightly with price contributing 4 points to growth and volumes down 3 points. Acquisitions added a meaningful $104 million in sales or 14 points to growth. Third quarter segment income was $202 million up 40%. Return on sales was an impressive 23.5% up 420 basis points year-to-year. Our strong performance was driven by continued productivity improvements and a creative return on sales from the ECM acquisition. In addition, price more than offset the impact from inflation of just over $20 million.

Had and what products from our portfolio can we bring through their channel. So again those discussions are overweight and I think where we're trying to certify the product I mean, you know for global distribution that takes a little bit longer it because you've got to get those certifications in and there are some you know different modifications, we need to make to the product so I think going.

Into 'twenty 'twenty four is when we start to see those synergies start to layer in.

Thank you see you in Denver.

Very good thanks Dean.

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

Sara Zawoyski: Q3 adjusted EPS was 84 cents of 27% and above the high end of the guidance range. This included a better than expected 8-cent contribution from the ECM acquisition. We generated robust free cash flow in the quarter of $136 million up 8%. This included higher-cap-ex investments for growth and capacity.

Thanks, a lot maybe I'm just a margin question first off I'm. So it looks like the fourth quarter guide you're embedding them, you know I think sort of flattish revenue.

Sequentially.

It's sort of you know eight 860 ish or something but the operating margin is down you know 250 to 300 basis points. So just wondered if because that was roughly correct and I'm. You know understood you often have seasonally down margins in Q4 sequentially, but if there was any particular.

Sara Zawoyski: Now, please turn to slide six for discussion of our third quarter segment performance. Starting with enclosures, sales of $413 million increased 6%. The tax acquisition contributed one and a half points to sales. Organically, sales were up 4% with solid price and volumes slightly down. Commercial ready was up low double digits with strength in North America. Infrastructure and industrial were each up with continued strength in data solutions and positive growth in industrial automation. Geographically, North America led up mid-single digits while Europe was flat and China was down.

Aspect driving them this time or it's just conservatism.

Now if you recall them Julien there's a seasonality to that Q3 to Q4 margin that has you know consistently played out historically.

So when you think about it some of it is just going to be the next to the business in terms of you know enclosures and E. F. As you know versus thermal and I think the other piece I would point to is just the acceleration on the investment front from an EPS perspective, So we talked about that in our prepared remarks, I'm a big piece of that is going to be.

Sara Zawoyski: In closures, third quarter segment income was $89 million, up 24%. Return on sales of 21.7% increased 320 basis points year-to-year, driven by price costs and productivity. This includes our increased investments in our data solutions business and expects this to ramp in Q4 and into 2024.

You know on the data solutions investment side of things. So nothing in there you know beyond really that historical seasonal E. P. S. A pattern as well I think the other thing you know I would point to just from an EPS perspective, it doesn't necessarily show up on the wrong side of the equation because that's overall accretive.

It's just gonna be ECM, we do believe that ECM will have less of a contribution still stronger than what we expected initially but again, that's just that added seasonality element to it.

Sara Zawoyski: Moving to electrical and fastening, sales of $302 million increased 45%. The ECM acquisition contributed 47 points to sales growth.

That's helpful. Thank you and then just.

A second question around the top line.

Sara Zawoyski: Further scaling are highest margin segment. Organic growth declined 4% mainly driven by infrastructure that stemmed from channel and customer inventory reductions. This was partially offset by low single digit organic growth in commercial resi, which has grown each quarter this year. Geographically, sales growth declined low single digits in North America and mid single digits in Europe. Notably, orders were up low single digits. Electrical and fastening segment income was $98 million, up 61%.

Sara Zawoyski: And productivity.

Should we assume that that.

Orders improvement in E. S. S translates into sales quickly so in Q4.

Sales.

Growing again in Etfs.

And more broadly the the comments around Destocking.

Are you seeing any kind of project delays in commercial or industrial and then that's feeding through to distributors selling into those projects starting to pull back on their orders to the suppliers such as yourself.

Well, maybe one area that I would point to is I'll. Just give you. An example, you know ground rods are used in utilities and telecommunications and construction et cetera. This was an area, where we had really long lead times over the last couple of years like months and then we you know we're now in stock and it's.

Sara Zawoyski: Turning to thermal management, sales of $144 million were down 3% organically. Price contributed 3 points to growth, while volumes were negative. The decline was driven by commercial resi, down low double digits, partially offset by energy. Industrial MRO demand remained solid. Geographically, North America was up low single digits. But China grew double digits, while Europe declined, including our wind down in Russia.

Down to like weeks and so what we saw there was that there was inventory that had been built up at our channel partners and then there was inventory even at end customers and so that's one of the impacts and you know as I characterize it that we saw for E. S. S occurring even though we know the future with everything electrifying. This is a category that is going to continue.

To grow and when we've tried to understand where the inventory is that we have you know we know in some accounts. There are some end customers that perhaps they're waiting for other components beyond ground rods that we don't make that has slowed some of those projects that's one area but.

Sara Zawoyski: Notably, orders were up mid teens driven by energy transition projects and backlog grew year-to-year and sequentially. Thermal management segment income of $35 million was down 3%, return on sales of 24.2% was flat year-to-year due lower volumes in mix.

That's just one example, but I would say generally it's it's just inventory adjustments is mainly what we're seeing.

And I go ahead, sorry, Yeah, and then just from a Q4 sales perspective, we do expect to see modest growth in U S. As in Q4. So if you just take a step back and look at that organic growth is 1% to 3% and we expect them colors to lead and expect modest growth in E. S. S. And then expect thermal to.

Sara Zawoyski: On slide 7, titled balance sheet and cash flow, we ended the quarter with $113 million of cash on hand and $600 million available on our revolver.

Sara Zawoyski: We believe our healthy balance sheet provides us with ample capacity to invest in the business and execute on our growth strategy. As you can see on the slide, we have invested nearly $50 million in cat-backed year-to-date, up nearly 60% versus a year ago.

To be down with some of those trends continue and commercial razee and that Russia impacting just to characterize that a little bit you know that Russia impact specifically on that thermal management business is roughly five points in Q4.

Sara Zawoyski: Turning to slide 8, where we outline our capital allocation priorities. We believe our robust balance sheet and cash generation puts us in a strong position to continue to invest in growth return cash to shareholders and deliver great returns. We had a strong free cash in the quarter and year-to-date growing 46% compared to a year ago. We exited Q3 with a net debt to adjusted EBIT ratio of 2.4 times back within our targeted range of 2-2.5 times well ahead of our expectations after the ECM acquisition. This is a testament to our strong cash flow generation and ECM performance.

Great. Thank you.

Thank you.

Sara Zawoyski: Year-to-date, we have returned $103 million to shareholders, including dividends and sharing purchases.

Comes from Joe Ritchie with Goldman Sachs.

Yeah.

Hi, Good morning, everyone. Good morning, good morning.

Hey, just maybe can we just start on E. S. S margins I know that you've got the acquisitions going through there as well.

You kind of think about you know negative organic growth.

Yeah, the EBIT margin now north of 30% north of 32%.

How do we think about the trajectory of these these margins from here fully recognizing that I think that there is a step down expected in fourth Q.

Yeah, I mean, I think here's what I would say, it's one I think that team has done an incredible job of managing that price cost equation I think we're beginning to see that productivity ramp and within the four walls as we would've expected kind of heading here into the back half I think the other piece, that's really showing up in that Q3 number is the net.

Sara Zawoyski: Moving to slide 9 for our updated full-year outlook. We are updating our reported and organic sales forecast to reflect the mixed environment and expected channel inventory adjustment. Reported sales growth is now expected to be in the range of 12-13% versus our prior guidance of 13-15%. This reflects full-year organic growth of 3-4% versus our prior guidance of 4-6%. We continue to expect acquisitions to contribute approximately 9 points to sales growth.

That I referred to in my prepared remarks, and then we just had sort of an uneven you know mix of revenue. If you will commensurate with what that typically looks like and that's driving some of that 32, plus you know return on sales for that for that quarter, but if we look just going ahead you know in electrical.

Passing and I would argue that this is cut across enclosures as well you know we continue to see strong underlying margin expansion opportunities and it goes back to you know with volume and new product those new products tend to have higher margins.

Sara Zawoyski: We are raising our adjusted EPS guidance to a range of $3.01 to $3.03 up 25 to 26% versus our prior guidance of $2.85 to $2.91. This new guidance reflects our year-to-day performance, continued strong execution, and better acquisition performance. We now expect acquisitions to contribute approximately 15 cents to adjusted EPS versus our previous expectation of 8 to 10 cents.

Because of the value that we're providing to our customers. The supply chain, you know excellence, well, we're improving productivity improving productivity within the four walls, we're still not at our normalized levels of productivity. If you will so there's still plenty of runway there to go we're also.

Doing things like transportation optimization, and lean automation and simplification of product families, but there's a lot going on there as well along with just general functional excellence that you do see the leverage we're getting from an SG&A perspective. So there's lots of things that we're doing to drive that ongoing.

Sara Zawoyski: Looking at our fourth quarter outlook on slide 10, we expect reported sales to grow 15 to 17% with acquisitions contributing approximately 13 points to sales. Organic sales are expected to be up 1 to 3%.

Sara Zawoyski: We expect adjusted EPS to be between 73 and 75 cents, which at the midpoint reflects 12% growth relative to last year.

<unk> future margin improvement within electrical <unk> fastening solutions as well as the broader the broader our segments as well I'm enclosures and thermal and the only other thing I would make is is that Q3 to Q4. Two am does include the incremental investments you know we plan on making within the E C N.

Sara Zawoyski: Rapping up, we delivered another quarter of robust margin expansion and cash flow and our well-positioned for another great year.

Beth Wozniak: This concludes my remarks, and I will now turn the call back over to Beth. Thank you, Sarah.

Acquisition as well that'll really begin to ramp here in Q4 and into next year.

Beth Wozniak: Please turn to slide 11. At events, we are building a more sustainable and electrified world. The trends in electrification, digitalization, and sustainability are driving secular demand for our products and solutions. I'm confident about the future given the macro trends in our strategy with our focus on high growth verticals, new products, and acquisitions. Starting with macro trends, we believe the $1.3 trillion in US and European legislative funding for infrastructure has the potential to add between $250 to $500 million in event sales over the next five plus years.

Yeah.

Got it that's that's helpful Fair and I guess, maybe maybe piggybacking on on Julians question around commercial.

Interesting I mean, if you take a look at the starts data it's.

It's been it's been pretty pretty tough over the last several months.

And then you look at the performance of each of your different businesses and depending on the business you know commercial ready has been growing or not growing I'm just.

Kind of hard to square at all.

So maybe maybe just maybe just kind of like give us a little bit more insight as to why you know potentially yeah commercial rise he might be holding up a little bit better and yet that's been in thermal if theres any anything to get out there.

Beth Wozniak: Looking at the trend of digitalization, artificial intelligence is driving demand for our liquid cooling solutions. Leading us to increase investments to expand our product portfolio and capacity to drive future growth. Looking at sustainability, we are seeing the energy transition gain traction. Notably, our third quarter project orders were up double digits in our thermal management segment.

I think it has to do with our product portfolio. So if you think of what we do with our invent caddy brand, which is all around supporting power and data infrastructure and you think about it's really applicable to any type of construction or remodel and we just think everything is getting smarter and there's more power and data what you know.

Required in a building in a hospital.

You know, whether it's industrial construction, new plants et cetera.

Beth Wozniak: Next is our focus on high growth verticals and new products. As we shared in our investor day, more than 60% of our sales are exposed to secular trends. Some of the high growth verticals we are focused on include industrial automation, data solutions, power utilities, renewables, and the energy transition. For example, we expect our data solutions business to continue to grow double digits and reach over $500 million in sales next year.

And we've done a lot to invest in new products and that product line. So our new product vitality. There is approaching 20% and you know when we acquired U S. It was you know single digits. So seismic you know just different things that we're doing that I think that portfolio ubiquitous in and where we are our commercial portfolio and thermal is not as huge.

Bear with US just because we're doing for esports protection or we're doing under floor heating or we're doing.

Beth Wozniak: By the way, we look forward to hosting investors at the super compute trade show in Denver next month, where we will showcase our innovative portfolio, including our liquid cooling solutions. Turning to new products, we have seen significant growth. We have improved our new product introduction process, increasing velocity and time to revenue. Year to date, new products have contributed three points to sales growth, and we have launched 64 new products way ahead of our expectations.

Hum you know maintaining hotline for heat tracing within a building. So it just you know the applications are a little bit different and I think that's one of the things that we're seeing the difference there.

And then maybe one other thing to add it to the thermal management business has and more of the ROTC you know as well impacting that from a growth rate perspective.

Yeah, I guess, maybe that's that's that's very helpful and appreciate it all that detail maybe the follow up there is it is there is.

Is it should we be reading into the commercial starts data in and ultimately what that means for your business.

Beth Wozniak: Lastly, on acquisitions, we play in a highly fragmented $75 billion space. We see tremendous opportunities to continue to grow and expand with our acquisition framework. Recall, we look for differentiated product portfolios in high growth verticals that we can invest in and scale to strengthen our position with the electrification of everything. This year, we expect the ECM and tax the acquisitions to add approximately nine points to sales. We have a strong track record of deals exceeding our weighted average cost of capital in two to three years.

Well I you know this is one where it's we've got pockets of growth and I think one thing. We're seeing is you know just construction in general right, which tends to be a little bit more on that industrial construction is driving growth for some of our products. There's a lot of investment in new battery plants, and other things and sometimes those.

Products and what category you know, we just we can't tell but you know because it may look more commercial even though it is headed to industrial construction I think that is another area that's driving growth for us.

Yeah.

Okay, great. Thank you.

Beth Wozniak: In summary, we expect to continue to execute on value-creating deals with our active funnel and strong balance sheet. We are excited about the electrification of everything.

Yeah.

Thank you and the next question comes from our lab is tricky with Citigroup.

Hey.

Good morning, Thanks for taking my call.

Good morning.

Beth Wozniak: Rapping up on slide 12, we had a strong quarter with record sales and adjusted EPS. We expect 2023 to be another year of double-digit sales and adjusted EPS growth. Well, the current environment is mixed. Our execution has been strong. We are driving growth with new products. We are executing well on acquisitions. We are expanding margins with price and productivity. And we are delivering robust cash flow. We are within our target leverage ratio in less than two quarters after completing our largest acquisition ever. The ECM and tax the acquisitions have been meaningful additions to invent and are performing well. We are excited about the growth and scale of our combined portfolios.

So.

Just stepping back.

Wanted to ask you you know as we've seen increased pressure on interest rates recently.

What are you hearing from your channel partners in terms of.

How increased close to funding their own inventories is influencing sort of how they're approaching this.

Destock cycle, and whether you see some risks that you know destock could be.

They could swing further in the other direction versus recent cycles, just given their increased cost of financing.

Well you know they don't really they're not really that explicit in sharing with us how they're thinking about it but we know you know that's certainly one of those considerations and we think that's what's played out over the course of this year that they've looked at their cost of capital and inventory in which supply chain improving its it's a multitude of factors, but we certainly think that's what's that's what's played out here in <unk>.

Beth Wozniak: I'm very proud of how well our team is performing. Looking ahead to 2024, we believe we are well positioned with the electrification, sustainability, and digitalization trends. We believe the legislative funding and investment and infrastructure will start to fall. We expect to see the continued acceleration of artificial intelligence and the energy transition. And we expect the sales energies from our acquisitions to begin to layer in. We are excited for our future. Our future is bright.

23.

Okay.

That's helpful and then just maybe.

You mentioned I think in thermal China, low double digits growth.

Can you just talk about specifically, what's driving that in China versus you know not a great overall backdrop in the region.

Are you thinking about sort of.

The inability of good growth in China for thermal.

Unknown Attendee: With that, I will now turn the call over to the operator to start Q&A. Yes, thank you. At this time, we will begin the question and answer session. To ask a question, you may ask a star then one on your touch-tone phone. If you are using a speaker phone, please figure out your hands up before pressing the keys. To try a question, please press a star then two. At this time, we will pause momentarily to assemble the roster.

Well one of the things I would say with our our business in China. You know, we've got a lot of project type of paper based business and so some of that could be on the chemical side or on the energy side, and that's where you know over the last little while we've been working on projects and orders.

Nigel Coe: And today's first question comes in just for egg with vertical research. Thank you, good morning. Good morning.

Starting to see some of that growth there you know on that industrial side for us.

Okay.

Beth Wozniak: Hey, could we just kind of touch on the channels a little bit here, a little bit more detail on the call? So we will kind of a year into kind of channel inventory liquidations at this point, right? And just kind of wonder your confidence in kind of parsing what actually is normalization versus maybe just kind of a roading fundamental underneath the surface, you know, kind of deteriorating here as we go. I think, as we started to see some of this activity taking place earlier in the year as supply change improved, and that continued and we expected it to continue in Q3, and I would say some of our channel partners have done that and some are still continuing, so it's somewhat mixed, and I think early on we saw some of the slowness and commercial resi, and so we saw some of that activity taking place there,[inaudible] so we're seeing, and I do think with supply chains improving, that's been one of the big drivers of the adjustments.

Great.

Thanks, I'll get back in queue.

Thank you.

Thank you and the next question comes from Jeff Hammond with Keybanc capital markets.

Hey, good morning, everyone. Good morning.

Maybe just to go with organic growth of different way you know it looks like you lowered your guide you now from four to six two to three to four.

Just wondering if that's simply kind of a destocking effects or you know if there's anything else on that.

What's driving that change.

That's basically it you know we.

As we've noted some of our channel partners. We think are through that inventory adjustments and then some have indicated they're going to continue that through Q4. So just in light of that and it's sort of being choppy. We just that you know we just let you know that was our view that we would see improvement in <unk> from Q3 to Q4, but we did lower it just.

Cuz that inventory adjustment is going to continue went to that fourth quarter.

Okay, Great and then just.

Liquid cooling it seems like a lot of other companies are talking about liquid cooling.

Just update us on competitive landscape emerging competitors I don't know if these products are that may be complementary or different or or if you're seeing kind of new competition and new capacity investments.

Well you know a couple of things you know we've been at this for a long time, even pre spin working with some of these big leading customers and over the course of the last you know five years have developed some solutions that took a while to really optimize the manufacturing manufacturing supply chain capability and they're really ramping.

Beth Wozniak: And you did note orders for positive and EFS and thermal. How did they perform in enclosures, and is there, you know, is there a particular additional inventory issue that you're working through there? Yes, on the enclosure side, you know, it's, they were down, and some of that is what we saw in industrial slowing, but again, puts and takes their infrastructure data solutions was very strong, so some of it is inventory adjustment, and some of it is, in some industrial areas starting to slow.

So and as I mentioned it takes two years to tap so I think for some it takes it takes time and there are some startups and others, but it takes time to get to scale in manufacturing. So I think you know we're in a good position and we're accelerating I think theres a lot of interest here clearly with AI and Oh, you know where we're expanding.

Beth Wozniak: And maybe just last one, just your confidence on the continued ability to kind of price in a, you know, kind of, we'll just call it flat volume environment. Well, I think you've seen every quarter that we've had strong price, although we said it was going to slow as we progressed through the year just because of how we started to lap some of our price increases. We're continuing to do some price increases where we think that makes sense. For example, we've had some price increases in Europe, and I think as we look into next year, we still expect that we will be positive when it comes to price.

Ending.

From what had been more solutions for Hyperscale, there's into our solutions that we can sell through distribution channels or to enterprise accounts and we think that's where over the next several years, we're really going to start to see more scale adoption. So I feel from the standpoint that you know we have several partnerships so well.

Unknown Attendee: Great, thank you. Thank you.

Other it's you know we actually from that whether it's a cold later immersion we had the manifolds. We're doing the distribution units. We've got our solutions that are liquid to air and liquid to illiquid I mean, we've got a variety in our portfolio. So I think it's going to be an area of strong growth and I think we've got.

Nigel Coe: And the next question comes from Nigel Kerr with Wolf Research. Thanks. Good morning, everyone. Good morning. So I'm going to ask, yeah, if I'm going to start off with a question, you're probably not going to answer, but I just appreciate you thinking about, you know, the 24 environment, you know, we've got channel adjustments, you know, some maybe getting stronger, some weakening, but we've 30, you know, quite deep into that process right now.

A good start on it.

Great.

Just last one on ECM I think when you announced the deal I think the margin structure was kind of in line with what the overall in that maybe you're well below your friends, but it sounds like maybe it's coming in a lot higher than you might think would need to kind of adjust our expectations for you know kind of mark.

Nigel Coe: So perhaps we've got some fable comes coming up on the channel into 24, but I'm also actually in this background field of TM. And, you know, obviously the data center, data solutions, how do you think about the growth set up the next year? I mean, are you confident, obviously you're investing in terms of business, but what kind of environment plan 24?

<unk> contribution from that this.

Yeah, so out of the gates, Jeff you know, we we had said that ECM them it would be accretive to overall invent and just given the margin profile of E. S. S them would be a bit you know dilutive there out of the game, but.

But I would say this I mean, I think that E. C. M. <unk> margin profile is a couple of things like I said its the mixed profile that we do believe that as that growth accelerates it'll probably revert back a little bit to the prior kind of margin profile, but but to them, we're going to continue to execute on.

Beth Wozniak: Well, look, we're confident in 2024 being a solid growth year for us. And, you know, when we think about, as I was saying in some of my concluding remarks, first you have some of this infrastructure spending starting to actually ramp in 2024. And we can see that because of some things that we're quoting on, so we know that that money will start to flow and have more, have an impact into 2024.

Our cost synergies and that should accelerate you know over time and I think the third piece you know to keep in mind too is the investments. So I think what you're seeing right. Now is you know great execution by the team you know very good price cost management and some early cost synergies I think what you think to take something to think about as you think about Q4.

Beth Wozniak: Second, we look at some of the order rates that we have in data solutions, which is given us the confidence, right, to make those significant investments and, you know, build out more capacities. So in that case, we've got good visibility, especially with some of the hyper scale, and where we're involved with, you know, this AI, which is driving the demand for liquid cooling. Third, when you take a look at our thermal management business, we see those orders increasing.

And into next year is just the increased investments that we plan on making you know to really ramped the top line, even more and capture some of those sales synergies.

Okay, great appreciate the time.

Beth Wozniak: So we talked about double digit orders growth and in particular around that energy transition. And we've seen some nice winds whether it's on renewables or carbon capture. So we're seeing, you know, funding going into that energy transition. So I think there's, you know, the channel inventory adjustments this year have been, you know, one of those things a little bit out of our control. But everything that we've been working on new products, what we will have more new products this year than we've had in the last couple.

Thank you Jim.

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

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

Got it.

So Beth just to.

Maybe ask you to elaborate your comment on 24, sorry, when you said gross you mean organic or earnings or both.

Beth Wozniak: And that's always been a great driver for growth for us. And I just want to add, of course, we have the two acquisitions and those sales energies that we've been working on will start to begin in 2024. So all of that, I believe sets us up for a solid growth year next year. And maybe what other one of the thing that will just add from a modeling standpoint to, you know, this year at an in that level, the impact of our wind down to the Russia business was roughly a point of headwind on the top line.

Well I was specifically talking about or you know are our overall growth, but I mean, both we expect to grow organically Inorganically, obviously with these acquisitions and to grow EPS.

Very good thank you and one for you Sarah.

The the dropdown in incremental margin in the fourth quarter from the third quarter is that because you.

The gap.

Beth Wozniak: And while we will see a little bit of roll over in that and Q1 and thermal. It will have a negligible impact from a year a year perspective going into next year. So we won't have that headwind either. Great. Thanks, Sarah.

Positive price cost peaks has peaked in the third quarter and kind of narrows, a little bit in the fourth quarter.

Well, here's what I would say theres no nothing different in terms of price cost on performance first half second half we came into the second half expecting that scenario at the same time, though Scott I would say the productivity is ramping I think one thing to keep in mind is if you look at the cadence of last year Q4.

Unknown Attendee: So obviously 4Q embeds are pretty significant step down in margin. So I hope you get into that on the call, but I just wanted to stick into the M&A convolution of 15 cents for the year because that's obviously a nice pick up. 8 cents in the quarter. I think it implies maybe 5 cents or 4th quarter.

Was our best return on sales expansion that we had last year, roughly 300 basis points and that's when it began to kind of turn that's when some of our pricing actions were coming into play and so it's one of our most difficult comps I think enclosures are expanded return on sales, but like over 600 basis points in the core.

Sara Zawoyski: You've wanted some integration and investment spending in the back half of the year just wondering if maybe some of that's pushing us to the right. I guess the question is what's driving the upside to the M&A version? Yeah, I mean, I think it's a couple things, you know, one is we bring that ACM into the invent fold here. I think the team is executing very well from a price cost perspective. I also think that they're executing well from an overall productivity and cost control measures.

Order so I would just come back to in Q4, if you look at it just from a year over year standpoint, despite the difficult comp.

Sara Zawoyski: So I think it's just, I think the other point I would make to Nigel is we also have some mixed benefit there. As you look at that business, if you remember, it's largely through distribution, but we also have OEM and retail e-tomers. That distribution business is actually growing and growing nicely. So we're getting some positive mix contribution there as well. But as we look in Q4, you know, from Q3, there's a couple things to keep in mind there.

We're planning on growing organically, we've got a good line of sight to another quarter of margin expansion you know across invent them and then you roll in the positive impact of acquisitions. So it's coming up to a really nice kind of year over year earnings per.

For sure as we on the air.

Yep got it. Thank you last one if you don't mind.

Just wanted to understand your.

Capital allocation thinking.

Sara Zawoyski: You have some normal seasonality in that business, very similar to the EFS business. And we will begin to ramp on the investment side, you know, to, you know, be in a good position for those sales energies that best talked about. And that's going to take the form of some digital investments, sales and marketing, engineering investments, etc.

Given the sort of the higher for longer mantra that we continue to hear from the fed.

Sara Zawoyski: And we're really excited about, you know, what that holds for us next year.

Does that slow things down for you guys I know you've got the great opportunity understand that get that.

Unknown Attendee: Great job.

Or are you thinking that maybe you have to pause a little bit here or does your criteria get shocked.

Unknown Attendee: Thank you.

What what's changing if anything in that environment.

Well look I think we've always fundamentally been very strategic and disciplined in how we look at you know our capital allocation and we've always said first we want to support growth and so you've seen that in the M&A that we've done in the investments in new products digital expansion right for data solutions.

Constantine Dre: And then next question, Constantine Dre with RBC Capital Markets. Thank you. Good morning, everyone. Good morning. Hey, would like to talk a bit here about data solutions investment that you're making. You talked about it last quarter. It was hoping you could size for us. I think you've told us the catbacks, but how much capacity are you adding in liquid cooling? And when does that come online? And we'll probably hear more about this at Supercomputed, but just give us a sense of your customer concentration. Looks like all the hyperscale guys of ones have moved the fastest into this space. You know, how broadly do you think the customer base extends in what time frame?

Pay a competitive dividend and you know make sure we offset dilution and you know I think that still remains our position and as we look at you know things like growth. We're always looking for good returns and the weekend.

Execute within our framework. So I don't I don't think it's giving us any any different perspective, and how we think about our priorities.

Okay. Thank you again very nice quarter.

Sara Zawoyski: Okay, so this has been, we've been adding capacity, first opening a new plant in Mexico so we could expand capacity within our Minnesota campus, if you will, for more liquid cooling. And then we realized that wasn't enough, so we're moving distribution out of that location to a new center to extend more capacity. I think we're going to double our capacity. Maybe it's more than that, but I mean, that's how we're thinking about it when we look at liquid cooling.

Scott.

Thank you.

A question and answer session and I would like to return the call to basketball Zhang for any closing comments.

Thank you for joining us today I'm very pleased with our performance in Q3, we believe inventors of top tier high performance electrical company well positioned for the electrification of everything sustainability and digitalization trends. Thanks again for joining US. This concludes the call.

Sara Zawoyski: And a couple of things that we've been doing, in addition to the hyper scale accounts, we've also been creating some more standard offerings that we can take through some of our distribution channels, as well as serve, say maybe enterprise accounts where they're looking for maybe not a custom solution, but for something ready to go and off the shelf. These are some of the products will actually have on display at the super compute trade show so we can give a, you know, we can overview for those in attendance, just all the different breadth of our capability there.

Thank you that was mentioned in the conference has now concluded. Thank you for attending today's presentation and you may all disconnect your lines.

Yeah.

Sara Zawoyski: So, you know, we, we've often talked about it takes a couple of years to work with an account to get these systems certified. We've been doing that for several years now, so we believe these new customers are starting to come online. That's also part of what's accelerating our growth into next year. And we just see a long runway here that, you know, liquid cooling, just because of the types of chips that are being used and even some of the energy efficiency play there, that that will be the future. That's fabulous.

Sara Zawoyski: Let me go back to a couple of points that Nigel was asking about on ECM. Can you separate for us how much of the cost energies you've captured so far? And it sounds like most of the revenue synergies are still in front that certification to take the products into Europe and Asia that still happens, but it's unlike some of these enclosures business might be selling some of ECM as well. Maybe that timeframe is earlier. So we're just standing cost energies and timeframe for revenue.

Sara Zawoyski: Well, I'll start with the cost energies. So I would say Dean, we're off to a great start from a cost energies standpoint. If you recall, we estimated roughly $10 to $15 million by year three. And some of that execution in the quarter is really a faster than expected realization of some of those cost energies, whether it's looking at some of our, you know, freight parcel rates, combining kind of the overall insurance programs.

Sara Zawoyski: I think the team's doing a nice job of finding those synergies early. And so we're well on track, you know, to achieve that $10 to $15 million of cost energies. I think the other thing I would just point out too, you know, we talked about this and it shows up really in our, in our cash flow numbers is we are also on track and seeing the cash tax energies as well. It's roughly $6 to $8 million per year across that 10 to 15 year kind of amortization period.

Sara Zawoyski: So, you know, the cost and the tax energies well on track. And on the revenue synergies, I would say they're still in front of us, but what we've been working on, you know, we said we're going to expand the ECM products through our distribution channels. And so we've been engaged in those discussions. I mentioned that and I think we'll start to see that layer in as we go next year. Similarly, we've been looking at some of the unique channels that ECM had and what products from our portfolio can we bring through their channels.

Sara Zawoyski: So, again, those discussions are overweight. And I think where we're trying to certify the product, obviously, you know, for global distribution, that takes a little bit longer because you've got to get those certifications. And there are some, you know, different modifications we make to the product.

Sara Zawoyski: So, I think going into 2024 is when we start to see those synergies start to layer in.

Unknown Attendee: Thank you.

Unknown Attendee: Thank you, Jim and Denver. Thank you.

Julian Mitchell: And then, as Crosser comes in, Julian Mitchell with Barclays. Thanks a lot. Maybe just a margin question first off. So it looks like the fourth quarter guide here in bedding, you know, I think sort of flatish revenue sequentially. It's sort of, you know, 8.860-ish or something. But the operating margin is down, you know, 250 to 300 basis points. So just wondered if that was roughly correct and, you know, understood you often have seasonally down margins in Q4 sequentially.

Julian Mitchell: But if there was any particular aspect driving them this time or it's just conservatism. No, if you recall, Julian, there's a seasonality to that Q3 to Q4 margin that has, you know, consistently played out historically. So when you think about it, some of it's just going to be the mix of the business in terms of, you know, enclosures in EFS, you know, versus thermal. And I think the other piece I would point to is just the acceleration on the investment front from an EPS perspective.

Julian Mitchell: So we talked about that in our prepared remarks. A big piece of that is going to be, you know, on the data solutions investment side of things. So nothing in there, you know, beyond really that historical seasonal EPS pattern as well. I think the other thing, you know, I would point to just from an EPS perspective, it doesn't necessarily show up on the rock side of the equation because that's overall creative.

Julian Mitchell: It's just going to be ECM. We do believe that ECM will have less of a contribution, still stronger than what we expected initially. But again, that's just that added seasonality element to it. That's helpful. Thank you.

Sara Zawoyski: And then just a second question around the top line. You know, should we assume that that orders improvement in EFS translates into sales quickly staying in Q4, you know, sales growing again in EFS. And more broadly, you know, heard the comments around destocking. Are you seeing any kind of project delays in commercial or industrial and then that's feeding through to, you know, distributors selling into those projects, starting to pull back on their orders to the suppliers, such as yourself.

Sara Zawoyski: Well, maybe one area that I would point to is, I'll just give you an example, you know, ground rods are used in utilities and telecommunications and construction, et cetera. This was an area where we had really long lead times over the last couple of years, like months. And then we, you know, we're now in stock and it down to like weeks. And so what we saw there was that there was inventory that had been built up at our channel partners.

Sara Zawoyski: And then there was inventory even at end customers. And so that's one of the impacts, you know, is I characterized that we saw for EFS occurring, even though we know the future with everything electrifying. This is a category that is going to continue to grow. And when we've tried to understand where the inventory is at, we have, you know, we know in some accounts, there are some end customers that perhaps they're waiting for other components beyond ground rods that we don't make that has slowed some of those projects. And that's one area. But That's just one example, but I would say, generally, it's just inventory adjustment is mainly what we're seeing.

Sara Zawoyski: And go ahead Sara. Yeah, and then just from a Q4 sales perspective, we do expect to see modest growth in EFS in Q4. So if you just take a step back and look at that organic growth of 1 to 3%, we expect enclosures to lead, expect, you know, modest growth in EFS. And then expect thermal to continue to be down with some of those trends continuing on commercial resi and that Russia impact and just to characterize that a little bit, you know, that Russia impact specifically on that thermal management business is roughly five points in Q4. Great. Thank you.

Sara Zawoyski: And the next question costs in Joe Richie with Goldman Sachs. Hi. Good morning, everyone. Good morning. Hey, just maybe can we just start on EFS margins and know that you've got the acquisition going through there as well. So you kind of think about, you know, negative organic growth, you know, the even margins now north of 30% north of 32%. How do we think about the trajectory of these of these margins from here, fully recognizing that I think that they're just that down expected in 4Q.

Sara Zawoyski: Yeah, I mean, I think here's what I would say is one I think that team has done an incredible job of managing that price cost equation. I think we're beginning to see that productivity ramp and within the four walls as we would have expected kind of heading in here into the back half. I think the other piece that's really showing up in that Q3 number is the mix that I referred to in our prepared remarks.

Sara Zawoyski: And we just had sort of an uneven, you know, mix of revenue, if you will, comment through it with what that typically looks like. And that's driving some of that 32 plus, you know, return on sales for that, for that quarter. But if we look just going ahead, you know, in electrical and fasting, and I would argue that this is cut across enclosures as well, you know, we continue to see strong underlying margin expansion opportunities.

Sara Zawoyski: And it goes back to, you know, with volume and new product, those new products tend to have higher margins because of the value that we're providing to our customers, the supply chain, you know, excellence. While we're improving productivity and improving productivity within the four walls, we're still not at our normalized levels of productivity, if you will. So there's still plenty of runway there to go. We're also doing things like transportation optimization, lean automation, simplification of product families.

Sara Zawoyski: So there's a lot going on there as well, along with just general, you know, functional excellence that you do see the leverage we're getting from an SGNA perspective. So there's lots of things that we're doing to drive that ongoing future margin improvement within electrical and fasting solutions, as well as the broader, the broader segments as well, enclosures and thermals. The only other thing I would make is is that Q3 to Q4 2 does include the incremental investments, you know, we plan on making within the ECM acquisition as well that will really begin to ramp here in Q4 and into next year.

Sara Zawoyski: God, that's the top of Sara. And I guess maybe piggybacking on Julian's question around commercial. It's interesting. I mean, if you take a look at the starts data, it's been pretty tough over the last several months. And then you look at the performance of each of your different businesses and depending on the business, you know, commercial where they've been growing or not growing. I'm just, it's kind of hard to square it all.

Sara Zawoyski: And so, maybe maybe just maybe just kind of like give us a little bit more insight is to why, you know, potentially, you know, commercial where he might be holding up a little bit better in the past and then thermal. If there's anything to add there, I think it has to do with our product portfolio. So if you think of what we do with our invent caddy brand, which is all around supporting power and data infrastructure.

Sara Zawoyski: And you think about it's really applicable to any type of construction or remodel and we just think everything is getting smarter and there's more power and data, what, you know, required in a building in a hospital, you know, whether it's industrial construction, new plants, et cetera. And we've done a lot to invest in new products in that product line. So our new product fatality there is approaching 20% and you know, when we acquired if it was, you know, single digits.

Sara Zawoyski: So seismic, you know, just different things that we're doing that I think that portfolio ubiquitous and where we are, our commercial portfolio and thermal is not as ubiquitous just because we're doing free protection or we're doing under floor heating or we're doing. You know, maintaining hot water, heat tracing within a building. So it just, you know, the applications are a little bit different and I think that's one of the things that we're seeing the difference there.

Sara Zawoyski: It may be one of the things to add to the thermal management business has more of the ready, you know, as well impacting that from a growth rate perspective. Yeah, I guess maybe that's, that's, that's very helpful and appreciated all that detail. Maybe the follow up there is like, I mean, is there is, should we be reading into the commercial starts data and ultimately what that means for your business. Well, you know, this is one where we've got pockets of growth and I think one thing we're seeing is, you know, just construction in general, right, which tends to be a little bit more on that industrial construction is driving growth for some of our products.

Sara Zawoyski: There's a lot of investment in new battery plants and other things and sometimes those products and with caddy, you know, we just, we can't tell, but you know, because it may look more commercial, even though it's headed to industrial construction. I think that is another area that's driving growth for us. Okay, great, thank you.

Unknown Attendee: Thank you.

Unknown Attendee: Thank you, and the next question comes from our lab is tricky with city group. Hey, good morning. Good morning, morning.

Unknown Attendee: So just stepping back, I wanted to ask you, you know, as we've seen increased pressure on interest rates recently, just what are you hearing from your channel partners in terms of, you know, how increased cost of funding their own inventory is influencing sort of how they're approaching this. DeStop Cycle and whether you see some risks that DeStop could be, they could swing further in the other direction versus recent cycles just given their increased cost of financing.

Unknown Attendee: Well, they don't really, they're not really that explicit in sharing with us how they're thinking about it, but we know that's certainly one of those considerations and we think that's what's played out over the course of this year that they've looked at their cost of capital and inventory and what supply change improving, it's a multitude of factors, but we certainly think that's what's played out here in 2023.

Sara Zawoyski: Okay, that's helpful and then just maybe, you know, you mentioned, I think in thermal China, low double digits growth. So can you just talk about specifically what's the driving that in China versus not a great overall backdrop in the region and how you're thinking about sort of the sustainability of good growth in China for thermal. Well, one of the things I would say with our business in China, you know, we've got a lot of project type based business and so some of that could be on the chemical side or on the energy side and that's where, you know, over the last little while we've been working on projects and orders and started to see some of that growth there, you know, on that industrial side for us. Great, that's really helpful. So I'll get back in here. Thank you.

Jeff Hammond: And then ask us a question, Jeff Hammond with Keyport Capital Markets. Hey, good morning, everyone. Good morning.

Jeff Hammond: Maybe just to go out there again, it grows a different way, you know, it looks like you'll lower your guide, you know, from four to six to three to four. I'm just wondering if that's simply kind of the destocking effects or, you know, if there's anything else that's driving that change. That's basically it. You know, we, you know, as we've noted, some of our channel partners, we think are through that inventory adjustments and then some have indicated they're going to continue that through Q4.

Jeff Hammond: So just in light of that, and it's sort of being choppy, we just, you know, we just, that, you know, that was our view that we would see improvement from Q3 to Q4, but we did lower it just because that inventory adjustment is going to continue into that fourth quarter.

Sara Zawoyski: Okay, great.

Jeff Hammond: And then just on liquid cooling, it seems like a lot of other companies are talking about liquid cooling. And maybe just update us on competitive landscape and merging competitors. I don't know if these products are maybe complimentary or different or if you're seeing, you know, kind of new competition and new capacity investments. Well, you know, a couple things. You know, we've been at this for a long time, even pre-spend, working with some of these big leading customers.

Jeff Hammond: And over the course of the last, you know, five years have developed some solutions that took a while to really optimize the manufacturing supply chain capability and they're really ramping. So, as I mentioned, it takes two years to test. So I think for some, it takes time and there are some startups and others, but it takes time to get to scale in manufacturing. So I think we're in a good position and we're accelerating.

Jeff Hammond: I think there's a lot of interest here clearly with AI and we're expanding from what have been more solutions for hyperscalers into solutions that we can sell through distribution channels or to enterprise accounts. And we think that's where over the next several years we're really going to start to see more scale adoption. So I feel from the standpoint that, you know, we have several partnerships. So whether it's, you know, we actually, from the, whether it's a cold later immersion, we have the manifolds. We're doing the distribution units. We've got solutions that are liquid to air, liquid to liquid. I mean, we've got a variety in our portfolio. So I think, it's going to be an area of strong growth.

Sara Zawoyski: And I think we've got a good start on it.

Sara Zawoyski: Great.

Sara Zawoyski: Just last one on ECM. I think when you announce the deal, I think the margin structure was kind of in line with with the overall event, maybe you will blow EFS, but it sounds like maybe it's coming in a lot higher and, and we need to kind of adjust our expectations for, you know, kind of margin contribution from like this. Yeah, so out of the gates, Jeff, you know, we, we had said that ECM would be a creative to overall invent and just given the margin profile of EFS would be a bit, you know, dilute of there out of the gate.

Sara Zawoyski: But I would say that, I mean, I think that ECM margin profile is a couple of things. Like I said, it's, it's the mixed profile that, you know, we do believe that as that growth accelerates, it'll probably revert back a little bit to the prior kind of margin profile, but, but to we're going to continue to execute on our cost energies and that should accelerate, you know, over time. And I think the third piece, you know, to keep in mind, too, is the investments.

Sara Zawoyski: So I think what you're seeing right now is, you know, great execution by the team, you know, very good price cost management and some early cost energies. I think what you think, to think something to think about as you think about Q4 and into next year is just the increased investment that we plan on making, you know, to really, you know, ramp the top line even more and, you know, capture some of those sales energies.

Sara Zawoyski: Okay, great.

Unknown Attendee: Appreciate the time.

Unknown Attendee: Thank you.

Scott Graham: And then ask questions on Scott Graham with C part research. Hey, good morning, all in very nice print and every get tired of saying that with you people. Thank you.

Beth Wozniak: So best just to maybe ask you to elaborate your comment on 24, sorry, when you said growth, you mean organic or earnings are both. Well, I was specifically talking about or, you know, overall growth, but I mean both we expect to grow organically, organically, obviously, with these acquisitions and to grow EPS. Thank you. Very good, thank you.

Sara Zawoyski: And one for you, Sara, the drop down in incremental margin in the fourth quarter from the third quarter. Is that because you know the gap in positive price cost peaks as peak in the third quarter and kind of narrows a little bit in the fourth quarter? Well here's what I would say there's nothing different in terms of price cost on performance. It's first half, second half. We came into the second half expecting that scenario.

Sara Zawoyski: At the same time, though, Scott, I would say the productivity is ramping. I think one thing to keep in mind is if you look at the cadence of last year, Q4 was our best return on sales, you know, expansion that we had last year roughly during a basis point. And that's when it began to kind of turn. That's when some of our, you know, pricing actions were coming into play. And so it's one of our most difficult conflict.

Sara Zawoyski: I think enclosures expanded return on sales by like over 600 basis points in the quarter. So I would just come back to in Q4. If you look at it, just from a year, your standpoint, despite the difficult comp. We're planning on growing organically. We've got a good line aside to another quarter of margin expansion, you know, across invent. And then you roll in the positive impact of acquisitions. So it's summing up to a really nice kind of year year earnings. For share, as we end the year. Thank you.

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

Scott Graham: Well, look, I think we've always fundamentally been very strategic and disciplined and how we look at, you know, our capital allocation. And we've always said, first, we want to support growth. And so you've seen that in the M&A that we've done in the investments in new products, digital expansion, right for data solutions, pay competitive dividend and, you know, make sure we offset solutions. And, you know, I think that still remains our position.

Scott Graham: And as we look at, you know, things like growth. We're always looking for good returns and that we can, you know, execute within our framework. So I don't, I don't think it's giving us any, any different perspective and how we think about our priorities. Okay. Thank you. Again, very nice core. Thank you, Scott. Thank you.

Unknown Attendee: And this concludes a question and an intercession.

Beth Wozniak: And now we'd like to return the call to Beth Wozniak for any closing comments.

Beth Wozniak: Thank you for joining us today. I'm very pleased with our performance in Q3. We believe invent is a top-tier, high-performance electrical company well positioned for the electrification of everything, sustainability and digitalization trends. Thanks again for joining us.

Unknown Attendee: This concludes the call. Thank you. Now, as mentioned, the conference has not concluded. Thank you for attending today's presentation and I'm going to discuss your lines. Thank you very much.