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nVent Electric plc (NVT 1.24%)
Q1Â 2019 Earnings Call
April 25, 2019, 8:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good morning. My name is Carol and I will be your operator today. At this time, I would like to welcome everyone to the nVent Q1 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, we will have a question-and-answer session. (Operator instructions)
At this time, I would like to turn the call over to J.C. Weigelt, Vice President of Investor Relations. Mr. Weigelt, please go ahead.
J.C. Weigelt -- Vice president of Investor Relations
Thank you, Carol, and welcome everyone to nVent's first quarter 2019 earnings call. We're glad you could join us. I'm J.C. Weigelt, Vice President of Investor Relations, and with me today are Beth Wozniak, our Chief Executive Officer; and Stacy McMahan, our Chief Financial Officer.
On today's call, we will provide details on our first quarter performance as well as our second quarter and full-year 2019 outlook. Before we begin, let me remind you that any statements made about the Company's anticipated financial results are forward-looking statements subject to future risks and uncertainties, such as the risks outlined in today's press release and nVent's filings with the Securities and Exchange Commission.
Forward-looking statements included here 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 can be found in the Investors section of nVent's website. References to non-GAAP financials are reconciled in the appendix of the presentation. We'll have time for questions after our prepared remarks. And now I will turn the call over to Beth.
Beth Wozniak -- Chief Executive Officer
Thank you J.C. Good morning and thank you for joining us.
We are pleased with our first quarter results and continue to make steady progress on our strategy to grow our business. First quarter organic sales grew 3% which was at the midpoint of our guidance and adjusted EPS was at the higher end of our guidance. We have a strong portfolio and are executing on a growth strategy that has delivered positive results during our first four quarters as an independent public company. We remain on track to deliver on our original 2019 outlook of 2% to 4% organic sales growth and 3% to 9% adjusted EPS growth, which includes the negative currency impact of approximately $0.02.
Beginning on Slide 3 of the presentation, sales of $538 million grew 3% organically with each of our segments growing. Return on sales expanded by 50 basis points to 17.9% led by a 180-basis point expansion in enclosures. Adjusted EPS was $0.39.
We repurchased approximately $110 million in shares year to date. Given our confidence in the business, we thought repurchasing shares during this time was an attractive use of capital. We continue to evaluate how we use capital to generate the best returns for our shareholders.
Turning to Slide 4 titled nVent Strategy. We believe our strategy is working and driving top line growth and shareholder value. Across the enterprise, we are focusing on common processes and investing in digital capabilities to help drive productivity and velocity.
Moving to Slide 5. Organic sales growth of 3% was at the midpoint of our guidance range and we saw fairly consistent growth across all three segments. The $15 million negative impact from currency during the first quarter was in line with our expectations. We saw broad-based sales growth in Commercial, Industrial and Infrastructure. Sales growth in our Industrial vertical moderated a bit as we expected. We continue to see steady growth in the US and our focus regions such as China and the Middle East. Overall, the trends within our verticals are largely consistent with what we discussed earlier this year.
Segment income for the quarter was $96 million, up 3% versus last year or up 5% excluding corporate and other costs. Recall that the comparative year-over-year quarter had allocated corporate costs and we had guided to this dynamic for the quarter given the higher actual run rate of corporate costs since then.
Inflation was in line with the levels we saw toward the back half of 2018. You can see that in the first quarter price plus productivity more than offset inflation.
Turning to Slide 6 for an overview of our EFS segment. I'd like to take a couple of minutes to review what we believe to be the strong value proposition within this high margin segment. Electrical & Fastening Solutions was founded in 1903 as the Electric Railway Improvement Company, more commonly known as ERICO. The value proposition of EFS is simple. We are end user focused and develop quality products and solutions by first understanding how contractors work and then innovating to help make installations faster and easier. Our team spends countless hours in the field with contractors observing how they work and identifying ways to drive efficiencies. Our solutions can generally be grouped into two categories, fastening solutions, which includes products sold under the nVent CADDY brand, and electrical solutions, which include the nVent ERICO and the nVent ERIFLEX brand. Our fastening solutions include products such as spring steel fasteners, stud wall brackets, and innovative hangers and support. Here the nVent CADDY brand has earned a strong reputation among commercial contractors as the go-to provider of a high quality comprehensive range of fasteners designed to save time, reduce the burden of repetitive tasks and simplify what would otherwise be difficult job.
Our recent time studies on several innovative products have shown nVent CADDY products save contractors up to 80% of their installation time for those particular applications.
Our electrical solutions include grounding and bonding, lightning and surge protection and low voltage power connections. The nVent ERICO brand is a leader in these applications offering engineered solutions, application expertise, and quality products that provide reliable facility electrical protection from the ground up. With our innovative holistic approach to protecting facilities from the effects of lightning and induced surge transients, we protect some of the world's most sensitive equipment buildings and critical processes. EFS offers high quality products and works closely with our customers to develop and provide innovative solutions, and while most of the current revenue comes from North America, we are investing in global growth.
Now, please turn to Slide 7 for a discussion of our first quarter segment performance. Starting with Enclosures. This segment grew sales about 3% organically in the first quarter in line with our expectations. Although growth has moderated, it remains broad based and our growth strategy continued to pay off with strong enclosure sales in Data and Networking Solutions and Commercial. Segment income was up 12%. For the third consecutive quarter, this segment has expanded return on sales. This quarter return on sales expanded 180 basis points to 17.8% as a stronger -- as a result of stronger execution in our global factories and continued stabilization of our new site. As you recall, stabilizing two of our new sites was a key priority last year. We did what we said in 2018 and are now seeing the benefits from those actions. Price was also a strong driver as we delivered approximately $5 million in price during the quarter. Finally, we were very pleased to announce the opening of a new factory in India in the first quarter.
Now looking at Thermal Management, sales of $145 million, grew 2% organically. Industrial MRO sales grew double digits while the Commercial & Residential portion of this business declined due to a slow start to the year. Our backlog was down year over year in longer cycle Energy, however, up in Industrial MRO and Commercial. Strong sales growth within Industrial MRO helped drive margins higher.
Now on to EFS. Sales of $137 million, grew 3% organically, driven by price realization of almost $5 million. Return on sales declined 50 basis points to 22.7%, and segment income declined approximately 2%. As you may recall, we made some changes late last year to address operational inefficiencies within EFS with new leadership investments in capacity and warehouse and transportation management system. My leadership team and I spent last week at our ESF facility in Cleveland, walking the shop floor and reviewing the changes our new team is driving. It was good to see sequential productivity improvement and our product availability is at the highest levels we have seen in some time. Investments in equipment and systems are under way and should read out in the back half of the year.
Turning to Slide 8, I would like to review our 2019 priorities. We continue to see evidence that where we focused, we win and we're off to a good start in 2019. Our first priority is organic growth and we continue to view this business as GDP plus one or two points and have demonstrated that within our first four quarters. Our second priority is margin expansion where we saw 50 basis points of expansion in the first quarter driven by a strong contribution from Enclosures.
Our third priority is capital allocation. We want to be a good steward of our capital. Please turn to Slide 9 for first a more detail on this strategy. We are always competing for the attention, interest and investment dollars from investors around the world. We have a disciplined and flexible capital allocation strategy and you've seen us put this to work within our first year of being an independent public company. Our business has high margins, a strong balance sheet and proven cash flow generation. We are proving our strategy to grow this business and do it in a way that is consistent with our commitment. In 2018, we generated over $300 million of free cash flow, and in 2019, we expect free cash flow to grow in line with our adjusted net income. We intend to allocate capital toward the highest level of return through organic investment, M&A, dividend and share repurchases. We have done just that since then by returning over $250 million to our shareholders by paying a competitive dividend and repurchasing about $170 million in shares. We also have an active M&A program looking for bolt-on opportunities that fit our value proposition, while meeting our financial criteria of being accretive in one year and the return being greater than our weighted average cost of capital in two years to three years. Our business generates an attractive amount of cash and we are focused on being good stewards as we evaluate opportunities to produce the highest return for our cash allocation efforts.
I will now turn the call over to Stacy to outline our second quarter and full-year 2019 outlook. Stacy, please go ahead.
Stacy McMahan -- Chief Financial Officer
Thank you, Beth, and good morning, everyone. I am starting on Slide 10 titled, Balance Sheet and Cash Flow. At the end of Q1, our net debt was approximately 2 times EBITDA. The first quarter is typically our heaviest cash usage quarter and this year was no different. We believe we are well positioned to deliver on our cash flow commitments this year and look to invest in our core businesses, look for attractive bolt-on acquisitions and continue to return cash to shareholders.
Turning to Slide 11, we wanted to provide an update on our tax rate. Remember in January, we guided to a full year tax rate of 18% and identified a potential 300-basis point headwind from proposed regulations. The good news is that we expect to fully offset the impact on an annualized basis beginning in 2020. In 2019, we are updating our tax rate guidance to 19% to 20%. This reflects the retroactive timing of the proposed regulations and a partial year of mitigation.
We are maintaining our adjusted EPS guidance for the year of $1.80 to $1.90. We estimate our second quarter effective tax rate to be approximately 21%, which translates into an approximate $0.02 headwind in the quarter.
Please turn to Slide 12 titled Second Quarter 2019 nVent Outlook. We expect second quarter organic sales growth for nVent to be 2% to 4%. Our growth strategy remains on track and should continue to contribute organic growth to our top line. We continue to expect a currency headwind to growth in the second quarter of approximately 2 points. Our adjusted EPS guidance for the second quarter is $0.42 to $0.46. Just to remind everyone, this will be our last quarter for pre-spend comparison. Our guidance takes into account slightly higher corporate and other costs as well as higher interest expense as we lap some allocated costs from last year prior to the spend. This range also reflects the expected $0.02 headwind from the proposed tax regulation and the related one-time catch-up adjustment in the second quarter. You will also see on Slide 12 a share count assumption of 176 million shares reflecting recent share repurchases.
Turning to Slide 13 titled Full-Year 2019 nVent Outlook. Our outlook remains unchanged relative to what we gave you in January, with sales growing 2% to 4% organically, return on sales expanding 40 basis points to 60 basis points, and adjusted EPS of $1.80 to $1.90. For modeling purposes, our tax rate was 18% in the first quarter and we expect approximately 21% for the second quarter, and 19.5% for the third and fourth quarters. This should get us to a tax rate between 19% and 20% for the full year and equates to an approximate $0.03 headwind relative to a tax rate at 18%. Using this new assumption for our effective tax rate and a slightly lower share count, we are holding our 2019 adjusted EPS guidance for the year at $1.80 to $1.90 and view the midpoint of this range as an appropriate estimate for modeling purposes. This range represents 3% to 9% growth when compared to pro forma EPS of $1.74 in 2018. We continue to evaluate repurchasing shares and both on M&A and this capital allocation may change based on opportunities for bolt-on M&A and our own share price, as we look to optimize per share value.
In summary, our outlook remains the same and we are managing the below the line items.
With that, I will now turn the call over to Carol to start Q&A.
Questions and Answers:
Operator
Thank you. (Operator Instructions) Our first question today comes from Jeffrey Sprague from Vertical Research Partners. Please go ahead.
Jeffrey Sprague -- Vertical Research Partners -- Analyst
Thank you. Good morning everyone.
Beth Wozniak -- Chief Executive Officer
Good morning.
Jeffrey Sprague -- Vertical Research Partners -- Analyst
Good morning. Hey, I was wondering if we could just kind of focus a little bit more on the growth outlook. Your guide is clearly apparent here in what you laid out, but just kind of looking at the comparisons, for example, in EFS, you know you had this volume pressure you know in the -- particularly in the early part of last year, but all through last year, the comparison there seems fairly easy.
So I just wonder if you could give a little bit more color on maybe you know the potential uncorking, if you will, of the bottlenecks there, how the volumes actually played in the quarter, volumes versus price? And do you anticipate the ability of that business to accelerate a little bit as the year progresses?
Stacy McMahan -- Chief Financial Officer
Okay. Well, first quarter was in line with what we expected. And as we entered this year, we knew that growth was going to moderate. I can share this, our growth initiatives are tracking really well. So we're still very pleased with our performance against all those objectives that we set to get in line with our strategy. For EFS in particular, as we had shared, we had some inefficiencies. So we had some bottlenecks in terms of some equipment. We weren't operating at the availability level in order for us to service customers and we started to see momentum coming into this year. Some of those capital investments that we're putting in place aren't going to fully be online until the back half of the year, so that's when we'll start to see productivity read out. But I do think that our ability to execute on growth, we're in a much better position. Having said that, we're still calling 2% to 4% because we think there is some moderation going on out there. Not to mention, as we look at our distributors, there were various challenges throughout the quarter, that they shared with us whether it was trade or tariffs and they were being cautious or whether it was even weather impacts. So I do think we'll get momentum in EFS as the year -- as we progress through the year.
Jeffrey Sprague -- Vertical Research Partners -- Analyst
Maybe just a little more specifically, did volumes actually grow in EFS? You had a -- you're comping against negative year-over-year volumes. It looks like at -- at 3% organic growth, all that growth might have just been priced.
Stacy McMahan -- Chief Financial Officer
You're right. That growth was priced. So we were more or less flat on volume and we do expect that to shift, right, as we've got availability and capacity coming online.
Jeffrey Sprague -- Vertical Research Partners -- Analyst
Okay. Thank you.
Operator
Our next question comes from Jeff Hammond from KeyBanc Capital Markets. Please go ahead.
Jeffrey Hammond -- KeyBanc Capital Markets -- Analyst
Hey. good morning.
Beth Wozniak -- Chief Executive Officer
Good morning.
Jeffrey Hammond -- KeyBanc Capital Markets -- Analyst
Can we just touch on Thermal here; one, just what drove some of the slow start in Commercial and how do you see that kind of forming into 2Q? And then just talk about what you're seeing in the long cycle business in terms of order activity and you know visibility as you move through the year?
Beth Wozniak -- Chief Executive Officer
Okay. So for our Thermal business, on the Commercial side, again, a lot of that business going through distribution. We saw, as I expressed with EFS, we saw some of our distributors being cautious with tariffs and trade, we saw weather impacts as well. We saw more momentum as we came out of the quarter for Thermal definitely in our Commercial business. So our backlog did increase, but it was just a slow start given all those dynamics. When it comes to our longer cycle Energy business, the quoting activity, as we've said previously is very strong. We just haven't seen that translate to orders and you know we're expecting that, it's not completely within our control, but we do expect that to turn through 2Q and 3Q this year.
Jeffrey Hammond -- KeyBanc Capital Markets -- Analyst
Okay, great. And then, is there a way to quantify the impact on segment income for EFS from these inefficiencies you had in 1Q and what you think the impact would be 2Q?
Beth Wozniak -- Chief Executive Officer
Yes, what you're essentially seeing the return on sales margin of EFS basically sequentially improve, but it's still year-on-year unfavorable, and but we are seeing a pick-up in -- from Q4 to Q1 in productivity and we do expect that to read out, Jeff, more in the back half of the year because those capacity investments come online in roughly the Q2 -- Q3 time period and so that will help us get more efficiencies in the factory.
Jeffrey Hammond -- KeyBanc Capital Markets -- Analyst
Okay. And then just sneak in a couple housekeeping, I'm just -- just to be clear, so tax rate into 20%, you think you can get it back to 18% and buyback just in the guidance -- is that just reflect buybacks year to date or some additional buybacks? Thanks.
Beth Wozniak -- Chief Executive Officer
We've taken into account the buybacks year to date and sort of anticipated dilution going forward.
Stacy McMahan -- Chief Financial Officer
And on the tax rate, yes, as as we know it because regulations aren't finalized, but as we know it today, we believe we have mitigation actions, so that will be in line with that 18% tax rate.
Jeffrey Hammond -- KeyBanc Capital Markets -- Analyst
Okay. Thanks.
Operator
Our next question comes from Deane Dray from RBC Capital Markets. Please go ahead.
Deane Dray -- RBC Capital Markets -- Analyst
Thank you. Good morning, everyone.
Beth Wozniak -- Chief Executive Officer
Good morning.
Deane Dray -- RBC Capital Markets -- Analyst
Hey, appreciate all the specifics around the tax and your guidance for the year. That's really helpful and how you're going to offset it. So I appreciate that. The question I have starts with Enclosures. I just was interested you know given the margin strength there and the improvement, you talked about the stabilization of the new sites and just maybe could you share with us exactly how that gets reflected in the margins when you talk about stabilization? What are you doing better? And I trust that this is all sustainable.
Beth Wozniak -- Chief Executive Officer
Yeah. So you know if you think about when you're bringing capacity online, you're just inefficient, right, in terms of the labor effort, in terms of -- recall, one of those new sites was a new distribution facility, so we didn't have our lanes and our routes as efficient as they needed to be. So it's all those things you know when you bring on new capability, it's really getting to a sustained performance level and optimization. And you know we've seen that progress as we said in 2018 through several quarters and believe you know we're in a very solid position at this point and it is sustainable.
Deane Dray -- RBC Capital Markets -- Analyst
Good to hear. And then I couldn't help but notice maybe a little bit more of a spotlight on M&A prospects both in your remarks as well as Stacy's remarks in the capacity. And you also started off your new public company with having M&A as you know not a priority. You want to show you can grow what you own, but now having kind of established that, M&A seems to be coming back more as a priority and maybe share with us what the pipeline looks like and it seems to us that EFS is a prime candidate, just dropping in additional products into that portfolio is a terrific way to leverage the platform and so maybe is that consistent with what you're looking at? Thank you.
Beth Wozniak -- Chief Executive Officer
Ok. So Deane, you're correct. We were very clear in saying, in our first year as a new public company, it was most important that we show that we could execute, right. And so that was the priority for the leadership team and for us as a company and we're approaching our one year anniversary next week. And so you're correct, you know, we're in a position where we feel that we are ready to execute on M&A if there are opportunities. As you know, we are A -- in a very large space. We characterize the space where we play as an electrical business is $60 billion. And so it is -- well, there are some large players. It's also very fragmented. We believe across each one of our segments that there are opportunities, right, that allow us to extend capability or help us to have a stronger global position, and certainly EFS, there are opportunities. But you know I will also share we want to ensure we're able to execute, and so when we look at where those opportunities are, we want to ensure that we are delivering and executing on the current profile of the business and so that also weighs in to where we think we want to do M&A first.
Deane Dray -- RBC Capital Markets -- Analyst
Good to hear. Thank you.
Beth Wozniak -- Chief Executive Officer
Thank you.
Operator
Our next question comes from Julian Mitchell from Barclays. Please go ahead.
Lee Sandquist -- Barclays -- Analyst
Hey, good morning. This is Lee Sandquist on for Julian. Margins were up 50 bps in Q1, in line with the midpoint in the full year guide, presumably price cost gets better throughout the year, so what gets worse?
Stacy McMahan -- Chief Financial Officer
Julian -- I mean, Lee -- sorry, Lee, we are expecting that inflation continues to be heavy in second quarter. Also, currency is a headwind of about for the full year guide it's about 20 basis points to 30 basis points of a headwind. So that is essentially where we go as well as expected projects coming back into the revenue mix for Thermal Management which will moderate the margins somewhat.
Lee Sandquist -- Barclays -- Analyst
Got it. And then just relative to the total company margin expansion guide for 2019, how should we think about the expectations by segment?
Stacy McMahan -- Chief Financial Officer
Well, I would say that most of the margin expansion is going to be in Enclosures, Thermal will be flat to very modest, and some in EFS.
Lee Sandquist -- Barclays -- Analyst
Got it. Thanks a lot.
Operator
Our next question comes from Robert Barry from Buckingham Research. Please go ahead.
Robert Barry -- The Buckingham Research Group -- Analyst
Hey, everyone. Good morning.
Beth Wozniak -- Chief Executive Officer
Good morning.
Robert Barry -- The Buckingham Research Group -- Analyst
Did you or could you say what the orders were in Thermal, the order growth?
Beth Wozniak -- Chief Executive Officer
Well, we don't really comment and provide that detail. What we did share with you is that when you look at our backlog, it was down in the Energy side of the business, so those are the longer cycle projects, the quote activity is up, but that hasn't necessarily all converted to orders yet. We also did see our backlog grow in our Commercial business which tends to be shorter cycle business.
Robert Barry -- The Buckingham Research Group -- Analyst
Got it. I mean maybe they were one-off comments, but I got the impression that in the back half of last year order activity was actually very strong, though, is that still to come or was the short cycle just particularly weak to start the year?
Beth Wozniak -- Chief Executive Officer
Well, yes, in the back half of the year, orders were strong and we've worked through some of that backlog and some of it is just timing ,but you know as we entered in Q1, it was just -- you know we said it, it was a slower start, but we again see a lot of activity, It's just timing of when that converts to orders, particularly in the longer cycle business.
Robert Barry -- The Buckingham Research Group -- Analyst
Got it. Got it. Following up on the earlier question on kind of price cost, do you think price plus productivity versus inflation will be positive again in 2Q? Is that assumed in your guide?
Beth Wozniak -- Chief Executive Officer
Yes.
Robert Barry -- The Buckingham Research Group -- Analyst
Got it. And maybe just on Enclosures. I think when you originally talked about the margin outlook, you looked -- you were looking for just I think the phrase was like a little room for margin expansion, and clearly we're off to a very strong start here. I know the margin comp was pretty easy. But is there kind of more room to go here as we progress through the year and is anything tracking particularly better there than you thought? Just looks like the margin picture there is just a lot better than it sounded like you thought it could be a couple months ago.
Stacy McMahan -- Chief Financial Officer
Yes, I would say that the -- we do expect that there will be continued margin contribution from Enclosures, so absolutely yes and there's still room for year-on-year improvement, and we were just pleased that our pricing and productivity equation has covered inflation and left a nice sequential improvement in Q1 from Q4. So we are seeing though that the first half inflation impact is heavy in Enclosures, so Q2 will need to overcome a heavy inflation.
Robert Barry -- The Buckingham Research Group -- Analyst
Got it. Just lastly, could you comment on what you're seeing on the -- at the business in Europe, particularly in kind of the more industrial portions of the business like in Enclosures?
Beth Wozniak -- Chief Executive Officer
It's slow, you know, so we definitely -- we characterize the US market has been stronger in Industrial and Europe has certainly moderated.
Robert Barry -- The Buckingham Research Group -- Analyst
All right. Thank you.
Beth Wozniak -- Chief Executive Officer
Thank you. All right, with that, I want to say thank you for joining us this morning and your interest in nVent. Next week, we celebrate our first anniversary as an independent public company. I'm very proud of everything we've accomplished in our first year. We remain laser focused on the strategy we first shared at our February 2018 Investor Day. At nVent, our focus is to drive shareholder value through organic growth, margin expansion, high cash flow conversion and a balanced and flexible capital allocation strategy. We delivered on our commitments in our first year and we believe we have the right strategy, portfolio and people to continue to do so.
I thank you again for your support, and operator, you may now conclude the call.
Operator
That does conclude today's conference and you may now disconnect.
Duration: 33 minutes
Call participants:
J.C. Weigelt -- Vice president of Investor Relations
Beth Wozniak -- Chief Executive Officer
Stacy McMahan -- Chief Financial Officer
Jeffrey Sprague -- Vertical Research Partners -- Analyst
Jeffrey Hammond -- KeyBanc Capital Markets -- Analyst
Deane Dray -- RBC Capital Markets -- Analyst
Lee Sandquist -- Barclays -- Analyst
Robert Barry -- The Buckingham Research Group -- Analyst
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