nVent Electric - Q2 2023
July 28, 2023
Transcript
Operator (participant)
Hey, and welcome to the nVent Electric Second Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touch tone phone. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Mr. Tony Riter, Vice President of Investor Relations. Please go ahead, sir.
Tony Riter (VP of Investor Relations)
Thank you, and welcome to nVent's second quarter 2023 earnings call. On the call with me are Beth Wozniak, our Chair and Chief Executive Officer, and Sara Zawoyski, our Chief Financial Officer. They will provide details on our second quarter performance, provide an outlook for the third 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 the future risks and uncertainties, such as the risks outlined in today's press release and nVent's filings with the Securities and Exchange Commission. Forward-looking statements are made as of today, and the company undertakes no obligation to update publicly such statements to reflect subsequent events or circumstances. Actual results could differ materially from anticipated results.
Today's webcast is accompanied by a presentation, which you can find in the Investors section of nVent's website. References to non-GAAP financials are reconciled in the appendix of the presentation. We will have time for questions after our prepared remarks. With that, please just turn to slide three, and I will now turn the call over to Beth.
Beth Wozniak (Chair and CEO)
Thank you, Tony. Good morning, everyone. It's great to be with you today to share our strong second quarter results. We continue to execute on our strategy for growth with a focus on high-growth verticals, new products, acquisitions, and geographic expansion. In the second quarter, we delivered record sales, up 10% and adjusted EPS up an impressive 35%. Our strong execution resulted in another quarter of robust margin expansion and free cash flow. Highlights for the quarter include the acquisition of ECM Industries, expanding our electrical power connection and grounding solutions portfolio. We also published our 2022 ESG report, which highlighted significant progress on our goals around our people, products, and planet pillars. Overall, we are very pleased with our strong first half performance and are raising our full-year sales and adjusted EPS guidance. Now on to slide four.
For a summary of our second quarter performance. Sales in the quarter were up 4% organically, on top of 21% a year ago, with all verticals growing, led by infrastructure. New products contributed approximately three points to sales growth. We've launched 33 new products in the first half and are on track to launch 50+ for the full year. We closed on the ECM acquisition and are excited to welcome the team to nVent. In Q2, ECM added 7 points to sales and was accretive to overall nVent margins. Segment income grew 45% year-over-year, with return on sales up an impressive 540 basis points. Adjusted EPS grew 35% on top of 14% a year ago. We generated $62 million of free cash flow, up 29%. We are on track for another strong year.
I am very proud of our results and the great work being done by our nVent team. I want to share some recent awards and recognition to highlight this. nVent was named a Top 10 Data Solutions Provider by CIO Applications for the second year in a row. This recognition is for companies at the forefront of providing data center solutions and transforming businesses. We also were named by the Minneapolis/St. Paul Business Journal as the 2023 Large Manufacturer of the Year. Based on our contributions to the regional economy and community, this award recognized our performance, innovation, and manufacturing excellence. nVent is one of four finalists in the mid-cap category for the 2023 Diversity, Equity and Inclusion Award by the National Association of Corporate Directors.
This award recognizes forward-thinking boards that leverage the power of DE&I to enhance their governance, create long-term value, and build innovative and inclusive workplaces and boardrooms. Looking at performance across our key verticals, all grew organic sales in the quarter. Infrastructure led the way up 10%, including data solutions growing double digits and power utilities up over 40%. Industrial and energy each grew low single digits, and commercial and resi was also positive. Turning to organic sales by geography, we continued to see broad-based growth in North America, up high single digits. Europe declined low single digits, primarily due to our wind down in Russia, and Asia Pacific declined due to a slow recovery in China. Lastly, organic orders in Q2 grew low single digits year-over-year, on top of high teens orders growth a year ago.
As expected, we saw distributors adjusting their inventories in Q2 with improving supply chains and lead times. Importantly, we continue to see positive distributor sell-through. Looking ahead, I am excited for both the ECM acquisition and TEXA acquisition, which we just announced, and how they further position nVent with the electrification of everything. We are raising our full year guidance, reflecting our strong first half and the addition of our two acquisitions. We expect electrification, sustainability, and digitalization to drive demand. Specifically, we expect continued strength in infrastructure, including data solutions, power utilities, and renewables. In industrial, with the trends of automation and onshoring, and in energy, with the energy transition. We continue to expect the commercial resi vertical to be soft.
Lastly, artificial intelligence is driving demand for our liquid cooling solutions, leading us to increase investments in the back half of the year to drive future growth in our data solutions business. Overall, I am very proud of our nVent team and how we continue to execute and deliver for our customers and shareholders. We're on track for another strong year. I will now turn the call over to Sara for some detail on our second quarter results and our updated outlook for 2023. Sara, please go ahead.
Sara Zawoyski (CFO)
Thank you, Beth. We had a strong second quarter with robust margin expansion and free cash flow. Let's turn to slide five to review our second quarter results. Sales of $803 million were up 10% relative to last year, or up 4% organically. Price contributed more than five points to growth, and volumes were down two points. ECM added $50 million in sales or seven points to growth. Second quarter segment income was $181 million, up 45%. Return on sales was 22.6%, up 540 basis points year-over-year. Our strong performance was driven by price cost, continued productivity improvements, and favorable mix in the quarter. Price more than offset the impact from inflation of roughly $25 million.
In addition, ECM contributed meaningfully to the quarter and was accretive to overall nVent return on sales. Q2 adjusted EPS was $0.77, up 35% and above the high end of our guidance range. This included a $0.02 contribution from the ECM acquisition. We generated robust free cash flow in the quarter of $62 million, up 29%. This includes higher CapEx investments for growth and capacity. Now, please turn to slide six for a discussion of our second quarter segment performance. Starting with enclosures, sales of $400 million increased 5% organically, with both price and volume contributing. Infrastructure led with continued strength in data solutions. Industrial was also a solid contributor, driven by the trends in automation. Geographically, North America led up high single digits. Enclosure second quarter segment income was $90 million, up 46%.
Return on sales of 22.5% increased an impressive 630 basis points year-over-year, driven by price cost and productivity. We are expanding our data solutions business rapidly and stepping up investments in CapEx and OpEx in the second half to support our strong orders and future growth. Moving to Electrical and Fastening, sales of $267 million increased 33%, with the ECM acquisition contributing 25 points to sales. Organic growth was 8%, driven by strong price. All verticals grew, led by infrastructure of low double digits, with strength in power utilities and data solutions. Commercial resi grew mid single digits. Geographically, sales growth was led by North America and Europe. Electrical and Fastening segment income was $86 million, up 47%.
Return on sales was a notable 32.4%, up 310 basis points relative to last year on price cost and favorable mix. Turning to thermal management, sales of $136 million were down 5% organically. Price contributed four points to growth, while volumes were negative. The decline was driven by commercial resi and industrial, both declining high single digits, partially offset by infrastructure and energy. Industrial MRO demand remained solid. Geographically, North America was flat, with declines in China and Europe, including our wind down in Russia. Notably, orders were up mid-single digits and backlog grew sequentially. Thermal management segment income of $29 million was up 1%, and return on sales of 21% was up 160 basis points year-over-year on strong execution.
On slide seven, titled Balance Sheet and Cash Flow, we ended the quarter with $139 million of cash on hand and $500 million available on our revolver. We added approximately $900 million in debt to our balance sheet in the quarter to finance the ECM acquisition. Turning to slide eight, where we will 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 strong free cash flow in the quarter, with the first half growing more than 150% compared to a year ago. We exited Q2 with a net debt to adjusted EBITDA ratio of 2.8 times.
With our strong cash flow generation, we believe we are on track to get back to our targeted range of two to 2.5 times. In the first half of the year, we've returned approximately $73 million to shareholders, including dividends and share repurchases. Moving to slide nine, we are raising full-year reported sales and adjusted EPS guidance, reflecting our strong first half performance and the impact of acquisitions. Reported sales growth is now expected to be in the range of 13%-15% versus our prior guidance of 4%-6%. We continue to expect organic sales to grow 4%-6%.
We now expect adjusted EPS to be in the range of $2.85-$2.91, up 19%-21%, versus our original guidance of $2.65-$2.73. This new guidance reflects our strong first half, increased investments in data solutions, and $0.08-$0.10 for acquisitions. A couple of modeling assumptions to note. First, acquisitions are expected to add approximately 9 points to sales growth in the year. Second, with acquisitions, full-year net interest expense is now expected to be approximately $80 million, and depreciation and amortization are expected to be approximately $140 million. Third, we now expect our tax rate to be 19.5% versus 18.5% due to geographical mix and the ECM acquisition.
Lastly, we are raising our CapEx expectations $15 million to a range of $70 million-$75 million to reflect the impact of acquisitions and investments to expand capacity for our Data Solutions business. Looking at our third quarter outlook on slide 10, we expect reported sales to grow 16%-18%, with acquisitions contributing approximately 14 points to sales. Organic sales are expected to be up 1%-3%. We expect adjusted EPS to be between $0.72 and $0.74, which at the midpoint reflects 11% growth relative to last year. Wrapping up, I am pleased with our second quarter performance. We delivered robust margins and cash flow and are well positioned for another great year. This concludes my remarks, and I will now turn the call over to Beth.
Beth Wozniak (Chair and CEO)
Thank you, Sara. Turning to slide 11, I would like to share a few highlights on nVent. I would like to talk about our opportunity for data solutions. The acceleration of AI, greater data consumption, rising heat densities, and growth in edge computing are all drivers of demand for our data solutions offerings, including liquid cooling. We view the total opportunity in data solutions to be approximately $10 billion, growing at roughly 10%. Our data solutions business was $375 million last year, growing 30% the last two years, we believe we are in a position to win and outgrow the industry. Today, only about 5% of data centers are liquid-cooled. When compared to conventional cooling, we believe liquid cooling is growing three times faster and providing up to a 50% savings in energy.
What differentiates us is our leading technical expertise, our innovative designs, and our ability to manufacture at scale. We have been partnering with major data center players for many years, some going back pre-spin, and have developed high-quality solutions. We provide a broad range of cooling offerings for both greenfield and retrofit. We are building out a portfolio of standard products to drive scale, broader adoption, and access through distribution channels. To serve the increasing demand, we're making significant investments in the back half of the year and next year to expand our operations and capacity. We believe our data solutions business is well on its way to over $500 million. Moving to slide 12. Last month, we published our latest ESG report, and I'm proud of the meaningful progress we've made on our goals in our three pillars of people, products, and planet.
In our people pillar, we increased diverse representation in our employee population and continued to build on our programs to develop, recognize, and support our employees. We believe our culture and our people are a differentiator for nVent. We were certified again as a great place to work and received the highest recognition by 50/50 Women on Boards. In our products pillar, we continued to build on our efforts to deliver innovative products that make a positive ESG impact in one or more of our three ESG categories: eco-friendly materials, eco-friendly designs, and end user safety. 76% of the products in our new product pipeline at the end of 2022 met at least one of these criteria. In our planet pillar, we reduced our Scope one and Scope two greenhouse gas emissions and increased our renewable energy consumption to 13%.
We remain focused on environmental stewardship, achieving our planet goals, investing in renewable energy, reducing water consumption, and reducing and diverting waste. We will continue to build on the progress we've made across our people, products, and planet pillars. At nVent, we are building a more sustainable and electrified world. Turning to slide 13, we continue to execute on our strategy for growth, which includes acquisitions, and have now completed six deals since then. We expect a lot of future value creation from these acquisitions and continue to have a strong pipeline of opportunities. Our acquisition framework starts with finding companies that have great products aligned to high growth verticals, with the ability to scale and invest for growth. The ECM and TEXA acquisitions squarely fit this framework. ECM is a leader in power connections and grounding solutions, tools and test instruments, and cable management.
ECM closed in May and is off to a good start. We have a dedicated team leading our efforts to execute our integration playbook. We are excited for the TEXA acquisition. That closed a few weeks ago and is now part of our enclosure segment. TEXA, much like our Eldon acquisition in 2019, has an innovative product portfolio, which we plan to expand through our distribution channels and globally. TEXA provides innovative industrial air conditioners and chillers. With increasing heat loads, cooling is critical inside an enclosure to ensure performance and uptime. Combined with our expertise in liquid cooling, TEXA strengthens our ability to provide global cooling solutions in demanding environments such as industrial auto-automation and energy storage. Both acquisitions are a great fit for nVent, expanding our connect and protect portfolio. We believe they have significant growth potential and long-term value creation with the electrification of everything.
Wrapping up on slide 14, we had another strong quarter with record sales and adjusted EPS. We completed two acquisitions and have made significant progress on our ESG goals. We are raising our guidance and expect another year of strong sales and EPS growth. We believe we are well positioned with the electrification, sustainability, and digitalization trends. Our future is bright. With that, I will now turn the call over to the operator to start Q&A.
Operator (participant)
We will now begin the question and answer session. To ask a question, you may press star then one on your touch tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we'll pause momentarily to assemble our roster. The first question will come from Julian Mitchell with Barclays. Please go ahead.
Julian Mitchell (Equity Research Analyst in US Industrials)
Thanks very much, and, good morning, everyone.
Beth Wozniak (Chair and CEO)
Good morning.
Julian Mitchell (Equity Research Analyst in US Industrials)
Morning. May-maybe just the first question around the, the orders, trends, and what you're seeing in kind of distributor and, and channel partner behavior. I think you said orders were up, low single digit in Q2. Just wondered, you know, what you're expecting for the third quarter in, in terms of the order intake. How would you characterize the state of the destocking right now? Is it sort of episodic, you know, every few months it comes in and out? Then how do you assess the aggregate state of sort of inventories? I realize you sell across a vast array of, of distributors, but guess your comfort levels on where inventories sit versus sell through today.
Beth Wozniak (Chair and CEO)
Okay, well, Julian, first, one of the things I want to say is that, you know, as we expected in Q2, we, we expected inventory adjustments to occur. One of the positive points is that when we continue to look at distributor sell-through, we're positive. We think that some of those actions took place in Q2. You know, some actions I think will continue in Q3. As we go forward, we think that we're going to see a growth with respect to infrastructure. A lot of the infrastructure bill and, you know, Inflation Reduction Act is going to drive growth in areas such as, you know, utilities and renewables and those other areas. You know, we think the outlook for that, that is very positive.
The other comment I would just make with respect to orders is that we've seen increasing orders in data solutions, particularly for our liquid cooling solutions, and we see that accelerating.
Julian Mitchell (Equity Research Analyst in US Industrials)
That's helpful. Thank you. Just my follow-up would be, trying to understand a little bit better how you're thinking about the 2nd half, sort of split in organic sales between price and, and volumes. You know, in Q2, volume was down two, I think, and price was up five. In terms of your 2nd half guide, Are we thinking about sort of, you know, price exiting the year at one or two points, and volumes staying in that sort of flat to down territory?
Beth Wozniak (Chair and CEO)
Yeah. I would say that, a couple things. One is we do expect positive price, you know, each quarter. I think that's important, given the fact that, you know, we continue to see 2023 as an inflationary environment. In Q3, embedded in that organic guide of up 1%-3%, we do see that, predominantly priced, and I think a big piece of that is just reflective of some of those inventory level adjustments continuing to happen, in the third quarter, as well as thermal management, and thermal management specifically in relation to, some of that commercial resi softness, you know, but also the wind down, in that Russia business is more acute, there in that Q3 and Q4 timeframe.
It's, it's having roughly a four-point impact on thermal management, there in the back half, and that winds that down to, to roughly zero Russia sales as we, you know, go into 2024. I would say that from a Q4 perspective, you know, we do expect, you know, things to ramp, you know, a bit from a volume, and overall growth standpoint. The biggest contributor there is just gonna be the what we see in the data solution space. Beth talked a little bit about, you know, that order book, you know, building, the funnel of opportunities building, and we're really focused on making those investments here in Q3 and Q4, you know, to, to capture that growth.
Jeff Hammond (Managing Director)
That's great. Thank you.
Operator (participant)
The next question will come from Deane Dray with RBC Capital Markets. Please go ahead.
Deane Dray (Managing Director)
Thank you. Good morning, everyone.
Beth Wozniak (Chair and CEO)
Good morning.
Deane Dray (Managing Director)
Hey, I'd like to stick with liquid cooling if we could. We did a deep dive report this quarter on the whole market. What I find fascinating is that nVent has such a first mover advantage in direct-to-chip cooling. Remarkably, most of your competition are startups. What's your expectation competitively with so many other startups in this space, do you expect to see consolidation? I like seeing you're, you're adding capacity in this. Do you need to add any new technologies in this side? You know, from our perspective, immersion and rear door heat exchangers are probably less efficient, so we'd rather see you in direct-to-chip.
Just how do you see the industry playing out in terms of consolidation, and where and how do you need to add either capacity or technologies in the space?
Beth Wozniak (Chair and CEO)
Well, Dean, thank you for the question. We are very excited about liquid cooling, and as you know, we have been doing liquid cooling even before we spun into industrial applications, and over the years have developed great relationships with data center providers. I would say it takes time, you know, the test cycle and scaling manufacturing and the quality and the requirements that you have, it takes time to build that out, and we feel that we have done that for several years now, and in fact, are in test with many new customers, as well as seeing accelerating order growth. One of the things that I would say is, in addition to our manufacturing expertise, is we understand that cooling loop.
There's various different technologies, whether you are retrofitting or greenfield, also depending on who the provider is, sometimes they want to have some of those technologies themselves. I think the good news is that we have partnerships across various of those areas, as well as a strong product portfolio ourselves. As I mentioned, you know, data centers are only, you know, roughly cooled by liquid cooling 5%. That's, you know, where we're at today. I think there's plenty of room for growth, and I think you're going to see us continue to strengthen and build out our product portfolio, including a standard set of offerings, so we can have more broader adoption, as well as many more partnerships and end customers.
I think there's plenty of opportunity for growth, and it may take a while before we see some consolidation because there's various cooling technologies, and they all have a role right now.
Deane Dray (Managing Director)
That's really helpful, and thanks for all that color. Just as a follow-up, you know, one of the data points you provided this morning on power utilities, being up more than 40%. Just, just share with us what was going on there. Is that a comp issue? I note that that's also one of the areas that could benefit and should benefit from liquid cooling, along with edge computing and energy storage and so forth. What's going on in power utilities?
Beth Wozniak (Chair and CEO)
Well, I think in power utilities, it really is just the strength of the infrastructure build-out in our portfolio. We, not a comp issue, we had strong growth there last year. We continued to add new products into that area. You know, as we go forward, we think about how liquid cooling, especially around energy storage or battery management, has a role to play there. I think those are solutions that, that will come into play in the future. Overall, we just see that's part of the, the strength in the infrastructure build-out and in part to the execution by our team with our supply chains.
Deane Dray (Managing Director)
That's great to hear. Thank you.
Operator (participant)
The next question will come from Jeff Hammond with KeyBanc Capital Markets. Please go ahead.
Jeff Hammond (Managing Director)
Hey, good morning.
Beth Wozniak (Chair and CEO)
Good morning.
Jeff Hammond (Managing Director)
I, I really wanted to just cover kind of the margin sustainability and enclosures in EFS into the second half. It looks like our biomass, you know, margins stepped down 1 point. Maybe you can speak to, you know, how ECM, you know, plays into that. It just seems like, you know, the margin step-downs maybe more than we would have thought, and, you know, particularly given thermal kind of seasonally steps up?
Sara Zawoyski (CFO)
Yeah. Jeff, let me take that one. I would just say first, we expect, again, you know, another quarter of margin expansion in Q3 from a year-over-year perspective. You know, that really is reflective of continued good price cost management, you know, as well as productivity. A couple things maybe to point out from an overall Ross perspective, I'll start from a segment standpoint. We expect enclosures to, again, you know, be that largest driver of that year-over-year margin improvement on price, cost, and productivity. We do expect in Q3, underlying margin expansion in electrical and fastening. You're right to point out that ECM, while it's accretive to overall nVent, you know, as expected, it is dilutive to that EFS margin, so that's in part what you're seeing.
Thermal, you know, we expect, you know, that margin performance to be a bit more, you know, flattish, you know, from a Q3 perspective, a bit more reflective of what's going on in the top line, you know, versus anything else. They continue to, you know, work, you know, good price cost actions as well as just overall cost actions to work that to margin expansion, you know, for the full year. Maybe two other things I would just point out from a sequential standpoint, Jeff, is one, you know, we are investing incrementally in data solutions in Q3 and Q4. Overall, you know, you're seeing that kind of fold in, if you will, to that enclosures margins as well as to the overall nVent margins when you look at, you know, Q2 to Q3.
I think the other thing I would just point out is that price-cost narrowing. This is nothing new. This is something that we expected, you know, coming to, coming into the year. We're seeing that, you know, play out, you know, in the back half versus first half. We do expect a bit of a sequential uptick in metal, specifically in Q3 from where we're at in those favorable first half positions, just based on our lock strategy.
Jeff Hammond (Managing Director)
Okay. Very helpful, Sara. Thanks. Just back on liquid cooling, you know, we've been getting a, a ton of questions, as, as I'm sure you are. Just wondering if you could put a finer point on kind of the size of the business today within that data solutions, what that business has been growing at relative to the 30% growth and data solutions overall, and then how it impacts, you know, margin mix. Then maybe just speak to the specific investments, you know, you're looking at in terms of capacity. Thanks.
Sara Zawoyski (CFO)
Well, back in our Investor Day, you know, we talked about our data solutions business being $375 million in sales and 40% of that being cooling and power. Certainly, our liquid cooling business is one of the fastest growing parts of that business. This is why, you know, I-- the takeaway on that one chart is we expect to be over a $500 million business. You know, we're well on our way, and we've had strong double-digit growth. You know, I think as we continue to invest in expansion and we see the acceleration of orders, it's going to become a, you know, a more significant piece overall of what we do in data solutions.
Beth Wozniak (Chair and CEO)
Maybe just to add, I think you asked a question, Jeff, on margin. You know, we, we see it generally in line, you know, with our overall enclosures margin and something that, you know, we can be, improve that, you know, going forward. I, I think just here in the back half, you know, as we significantly invest around the OpEx as well as, you know, what's going on in terms of the CapEx side of the equation, you know, that's what's impacting kind of here in the back half, you know. We see that as great returns in terms of the investments we're gonna make, you know, to, to deliver on the, on the top line as well as the, the margin and the drop-through.
Jeff Hammond (Managing Director)
Just the CapEx investments, I think you were moving some stuff around and creating some capacity. Just speak to that.
Sara Zawoyski (CFO)
Yes. Our initial phase I of this is we opened a, a new manufacturing facility in Mexico, and really some of our-- expanded some of our core enclosures products there so that we could optimize our Anoka facility, which is here just outside of Minneapolis, so that we could expand our liquid cooling capacity, some of our lab capability, engineering capability. There's other facilities across the U.S. that we're also expanding for some of those core product offerings. The CapEx is really helping us invest to further scale and support, you know, the, the testing requirements, the, you know, addition of new customers so we can really accelerate as the market accelerates.
Jeff Hammond (Managing Director)
Okay. Thanks so much.
Sara Zawoyski (CFO)
Thank you.
Operator (participant)
The next question will come from Joe Ritchie with Goldman Sachs. Please go ahead.
Joe Ritchie (Managing Director)
Thanks. Good morning, everyone.
Sara Zawoyski (CFO)
Good morning.
Joe Ritchie (Managing Director)
Hey, I just wanted to, maybe get a little bit more clarification on Julian's question on the destocking. I think, you know, Beth, last quarter you guys had mentioned that it was really broadly impacting your business, and, and then this quarter it seems like it, it's been a little bit more so on the commercial and resi side, but I clearly don't want to put words in your mouth. Just, just maybe just talk about, like, where you're seeing it across your businesses today, and then, like, your, your confidence that you'll get through most of it, you know, in, in, in the upcoming quarter.
Beth Wozniak (Chair and CEO)
Well, I think as we said, you know, distributors were adjusting their inventories for 2 reasons. 1, you just take a look at lead times coming in and supply chain challenges. Second, you know, I just want to emphasize again, our sell-through the distributors has been positive.As we've seen, it, where the supply chain has improved or where areas have been softer, like commercial resi, that's where we saw some of that adjustments take place. Even now, as you start to see more so with industrial, we're seeing some of those adjustments take place there as well. I would say, areas where, you know, their strength continues to be infrastructure. You know, we think this is going to play out as expected. Again, we feel very confident because of the positive sell-through that we see at our distributors.
Joe Ritchie (Managing Director)
Got it. That, that makes a lot of sense. Then, and then, and, and I know, you know, AI and liquid cooling is going to be a hot topic for a long period of time. I guess just, just two quick questions there. In terms of the R&D investments that you're making, maybe I missed it, but, but how, how much are you stepping up R&D for the remainder of the year, and then specifically, in what type of applications? Then, and then, and then my second question, is there a way to maybe parse out your, you know, your, your, I don't know, whether it's your content for data center and whether how that's going to be changing over time, given, given recent developments?
Beth Wozniak (Chair and CEO)
Well, I guess I would say, you know, first of all, the investments that we're making in CapEx and OpEx, those investments are both in R&D, in operations, in, you know, just across the board. I mean, we're investing in that business across all functions, just as we see, you know, the growth and opportunity. And what we're doing specifically when we think about R&D is, you know, I mentioned how we were building out a more standard portfolio that would allow us to scale some of the capability and, you know, scalable products through distribution. That's, that's how we think about all of those investments to support the current customers, new customers, the testing required for these solutions, sometimes it takes a year, as well as developing these standard products. It's really all of that.
When it, you know, and again, as, as we mentioned, we think there's various cooling solutions. Whether it's greenfield or retrofit, whether it's hyperscale or enterprise, you know, a suite of products that we're working on developing.
Joe Ritchie (Managing Director)
Okay, great. Thank you.
Operator (participant)
The next question will come from Jeff Sprague with Vertical Research. Please go ahead.
Jeff Sprague (Founder and Managing Partner)
Hey, good morning, everyone.
Beth Wozniak (Chair and CEO)
Good morning.
Jeff Sprague (Founder and Managing Partner)
Good morning. Hey, Beth, I wonder if you could just elaborate a little bit on, you know, kind of what you are seeing in resi and commercial, and obviously, you're really not that big in resi, right? I guess the question is a little bit more commercial. Sounds like it's primarily in, in the thermal business, but maybe if you could, again, just drill down a little bit on what you're seeing and, you know, kind of the top line trajectory in that part of the business.
Beth Wozniak (Chair and CEO)
Our resi business is predominantly, you know, is thermal, and we've seen that be softer, right, and expect that to continue. On the commercial side, commercial is across all of our businesses, a little bit softer in thermal, but I would say, we were, you know, positive in our enclosures. Overall, as nVent, we were positive in commercial, particularly in EFS and enclosures for that matter. As we go forward, we think, where commercial is strongest in our EFS business because of our labor saving solutions, because of the focus that we have around more power and data infrastructure, we expect that to trend positive for us. Again, it's different applications. You know, we look at industrial construction as an area that's very strong, right, which is driving demand for our EFS and our enclosures products.
Jeff Sprague (Founder and Managing Partner)
Then, just on the kind of the topic of volume, right? You guys are not alone here, you know, printing top lines that are mostly or even more than all price. I think the difference, though, as I look at it, you guys had very strong volume growth in 2021 and 2022, and many in my group didn't. The comps are different, but really the essence of my question is, you know, if, as we look forward into 2024 and 2025 and kind of, you know, assume the economy is clicking along here, okay, how are you capacitized to be able to drive volume growth looking forward? Obviously, you talked about CapEx and data solutions, I'm just wondering kind of the state of your capacity and ability to kind of facilitate volume growth, you know, across the portfolio.
Beth Wozniak (Chair and CEO)
Well, over the last couple of years, Jeff, we've continued to look at our supply chains to make them more resilient. We've done a couple of things. We've expanded some, you know, done some expansions with some new plants, and we've talked about that over the last couple of years. Mexico is one of the latest areas, we also expanded in Thailand, for example. We have also invested in new automation and new CapEx for both our EFS business as well as enclosures, so that we could improve throughput. You know, we feel we're in a good position. I would say the biggest... I mean, we're going to continue to invest in, you know, digitization and automation. That's just an ongoing part of our strategy.
I think, you know, the real focus, just because of the significance we're going to see in liquid cooling, is where a lot of our investment is going.
Sara Zawoyski (CFO)
and maybe, Jeff-
Jeff Sprague (Founder and Managing Partner)
Great.
Sara Zawoyski (CFO)
Maybe just to add a point to that, you know, and I think Beth talked about in her prepared remarks, kind of the, what we were lapping in terms of growth of a year ago, being in that 21% range, nine points of that was volume.
Beth Wozniak (Chair and CEO)
... you know, maybe a couple points there to add, too, is we did see volume in enclosures on top of double-digit volume growth of a year ago in Q2. I think the other encouraging piece, you know, we saw, you know, thermal management order, you know, growth in the quarter as well.
Sara Zawoyski (CFO)
Right.
Beth Wozniak (Chair and CEO)
I think maybe one, one other thing to keep in mind, right, as we talk about kind of those inventory level adjustments with, you know, some lead times, our lead times improving, along with just the backdrop of supply chain, you know, where that shows up in the top line is gonna be on the volume side of the equation.
Sara Zawoyski (CFO)
Yep. Okay. Got it. Thank you.
Operator (participant)
The next question will come from Nigel Coe with Wolfe Research. Please go ahead.
Nigel Coe (Managing Director)
Thanks. Good morning, everyone.
Beth Wozniak (Chair and CEO)
Good morning.
Sara Zawoyski (CFO)
Morning.
Nigel Coe (Managing Director)
Beth, every time you mention AI and liquid cooling, the stock ticks higher, keep it going, all right? ECM, I think you've quantified it $0.08-$0.10 for the full year, and I think all of that comes in the second half of the year. Just want to confirm that that's still the case, and does that come in pretty equal between Q3 and Q4? And then, maybe just talk about, you know, what your kind of your impressions are as you've taken control of the business. I mean, has your perspective on the channel opportunities, synergies changed at all?
Beth Wozniak (Chair and CEO)
Well, let me start, 'cause, you know, we're very-- we're 60 days in, and we're very pleased with the ECM acquisition. As we said, when you look at that portfolio, it builds out our power connections and grounding solutions, so very complementary to what we do, and we see opportunity there to be able to take those products through the strength of our distribution channel and globalize it. That will take some time, but we're working on it. One of the things I would say, you know, there's other products that we believe are essential things that contractors use every day, so that's a great fit, the tools and test instruments, along with our nVent CADDY portfolio.
There are some channels there, specialty channels and retail channels, where we believe that's going to be an opportunity for us to pull through some of our core nVent products. I think we're very pleased as we look at some of those growth synergies, and I'll let Sara talk about the cost side as well. One thing I will say that we learned is, you know, when you get into a business, you find that they have supply chain challenges, and that is our first priority, is to make sure that we're addressing where they've got supplier issues or capacity constraints. That's something we just need to work through, but we've got a great, experienced team that we're working on that so that we, you know, address that, so we can really drive capacity and accelerate our growth there.
Sara Zawoyski (CFO)
Just in terms of the EPS and the, and the cost synergy part of the equation, we do continue to see the EPS contribution in this year being $0.08-$0.10, you know, on the EPS line, for ECM. $0.02 of that, you know, came a bit early, you know, here in Q3, but the balance of that, we would expect, you know, that to be a reasonable assumption of that, roughly kind of running through half and half, you know, Q3 and Q4. From a cost synergy standpoint, you know, we estimated roughly $10 million-$15 million by year three, and, you know, as, as Beth said, you know, on the growth side...
You know, on the cost side, you know, 60 days in, we have high conviction, you know, here and good visibility, and the teams have done an excellent job really executing, even on some early wins here around looking at, you know, parcel rates, looking at, you know, efficiencies from an insurance program standpoint. We also have good line of sight, you know, to the cash tax synergies that we alluded to as well, which is roughly $6 million-$8 million related to that step up in amortization, you know, for the next 10-15 years.
Nigel Coe (Managing Director)
Okay, that's great. That's $0.02 in Q2, not Q3, right? $0.02 in Q2.
Sara Zawoyski (CFO)
$0.02 in Q2, correct.
Nigel Coe (Managing Director)
Yep.
Sara Zawoyski (CFO)
With the balance of that really being in that Q3, Q4 timeframe.
Nigel Coe (Managing Director)
Right. That's great. Obviously, volumes are a big kind of area for conversation right now, and you talked about the sell-through is positive. I'm sure you mean volumes sell-through is positive. I wonder maybe just a bit more color in terms of what you're seeing on sell-through and any quantification you have on that by business would be great.
Beth Wozniak (Chair and CEO)
Well, to your point, yes, when we see that sell-through, that is positive volume. I think as I mentioned earlier, when we look at... It really, what we're seeing is adjustments based on as different supply chains recovered or even in some of the vertical areas. You know, where we saw softness first or inventory adjustments was more around commercial resi, and then we started to see some industrial. Again, it's more of a reflection of overall supplier and supply chain lead times improving. As expected, we saw that happen in Q2.
Expect some of that to still occur in Q3, as we start to see infrastructure build, acceleration of, you know, a lot of the electrification investments, you know, we expect strength there and things to ramp as we, you know, get through to the back half of the year.
Nigel Coe (Managing Director)
Okay. Quick one on liquid cooling, if I can. This capacity expansion that you're, you're investing in, does that allow you to, what, double your, your sell-through there or triple it? I mean, any, any quantification on the capacity expansion would be great.
Beth Wozniak (Chair and CEO)
Well, I guess I would, I would frame it up this way. I think what we're doing right now is phase I in terms of, you know, what we see over the course of maybe the next 12 to 18 months of the capacity that we need and adding new customers. I fully expect, you know, as we get into next year, we'll probably have to start looking at a phase II just because of the growth rates that we're seeing.
Nigel Coe (Managing Director)
Okay. Thanks, Beth.
Beth Wozniak (Chair and CEO)
Thank you.
Operator (participant)
This concludes our question and answer session. I would like to turn the conference back over to Ms. Beth Wozniak for any closing remarks. Please go ahead.
Beth Wozniak (Chair and CEO)
Thank you for joining us today. I'm very proud of our performance in Q2. We will continue to focus on delivering for our customers, employees, and shareholders by executing on our growth strategy. We have made great progress on our ESG goals. We believe nVent is a 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.
Operator (participant)
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.