Fitch Ratings has affirmed the Long-Term Issuer Default Ratings (IDRs) for nVent Electric plc and nVent Finance SARL (collectively NVT) at 'BBB' and the company's senior unsecured debt at 'BBB'.

The Rating Outlook is Stable.

The Stable Outlook reflects Fitch's expectation that NVT will prioritize deleveraging following the acquisition of the parent company of Trachte, LLC (collectively Trachte), including repaying a portion of the debt within the next 12 to 24 months, successful integration of Trachte and the company managing its EBITDA leverage below 2.5x by 2025. The rating considers NVT's strong market position, free cash flow (FCF) generation, financial flexibility and positive industry trends that Fitch expects to fuel medium-term growth.

Key Rating Drivers

Adding to Enclosure Business: NVT plans to acquire Trachte for $695 million, subject to customary adjustments, funded through a combination of available cash, utilizing its revolver and new debt. Trachte is a manufacturer of mission critical control building solutions for use in transmission & distribution, renewable power generation, data centers and other industries. According to NVT, the Trachte acquisition will be earnings accretive in the first year following the completion of the transaction. The acquisition increases NVT's exposure to high growth verticals and complements the company's enclosure portfolio and adds to its system protection capability.

Clear Deleveraging Path: Fitch expects NVT to use its FCF to pay down a portion of its debt over the next 12 months with leverage falling within the company's net leverage target of 2.0x-2.5x by the end of 2025. Over the past five years, NVT's EBITDA leverage has generally been under 2.5x, varying from 1.9x to 2.4x with the 2.4x recorded during 2020 due to the impact of pandemic. NVT has a track record balancing growth through M&A and its financial policies. NVT's EBITDA leverage fell to 2.3x following its $1.1 billion acquisition of ECM Industries, LLC, by the end of 2023, less than 12 months after the transaction.

Record of Cash Flow Generation: NVT has generated strong FCF over the last several years, with post-dividend FCF margins ranging from 8% to 10% over the last four years, including a 10% margin in 2023. Fitch expects this trend to continue, with FCF of around 9% or greater of annual revenue through the medium term. High FCF is supported by effective working capital management and relatively low capital intensity, which should allow the company to maintain adequate financial flexibility through economic cycles.

Positive Tailwinds: Fitch expects continued medium-term growth across NVT's business segments driven by structural trends such as sustainability, electrification of everything, AI adoption and digitalization. Fitch expects these trends to be complemented by acquisitions. Fitch views the company's relatively high exposure to industrial, at 39% of 2023 sales, and limited exposure to residential as a positive in the near term.

Strong Market Positions: NVT has strong market positions in each of its segments; enclosures, thermal management and electrical and fastening solutions. Its products have limited digital content, though it invests around 2% of annual revenue in R&D, which supports long-term growth and margins. The company custom designs many of its products to specifications that its customers require, building the strength of its customer relationships.

Derivation Summary

NVTis a diversified manufacturer of enclosures for electrical products, thermal management products and fasteners, serving a variety of end markets. The company can be compared with other diversified manufacturers of a similar size and end-market exposure.

IDEX Corporation (BBB+/Stable), a manufacturer of pumps and other products for various industrial, health, science and infrastructure end markets, has a stronger EBTIDA margin and lower leverage. nVent can also be compared with Hubbell Incorporated (A-/Stable), which also sells into electrical markets. However, Hubbell is larger than nVent and has stronger diversification but has comparable leverage.

Key Assumptions

Revenues reach $3.5 billion in 2024 as the company benefits from a full year of contribution from ECM;

NVT grows organically by low-to-mid single digits per annum over the forecast period;

EBITDA margins of approximately 24% through the forecast period;

Capital intensity of about 2%-3%;

Dividends increase over the forecast period;

Share repurchases of about $75 million in 2023 and 2024 annually, then increasing to $100 million per annum;

Effective interest rate of 5%-6%.

RATING SENSITIVITIES

Factors That Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

A commitment to a more conservative financial policy that leads to mid-cycle EBITDA leverage sustained below 2.0x;

An increase in size, scale and product diversification that leads to increased market position;

FCF margin sustained above 10%.

Factors That Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

A less conservative financial policy leading to EBITDA leverage sustained above 2.5x;

A material decrease in backlog;

The company shifts capital allocation towards debt-funded shareholder remuneration;

FCF margin sustained below 7%.

Liquidity and Debt Structure

Sufficient Liquidity: NVT had total liquidity of about $773 million as of March 31, 2024, including $173 million in cash on hand and $600 million of borrowing capacity on its revolver. Liquidity is also supported by strong FCF generation. We forecast the FCF margin to track in the high-single-digits in the medium term.

Outstanding debt of $1.8 billion as of March 31, 2024 consisted of $485 million of senior unsecured term loans, $300 million of 2.75% senior unsecured notes due 2031, $500 million of 4.55% senior unsecured notes due 2028 and $500 million of 5.65% senior unsecured notes due 2033. NVT's maturity structure is well spread out with no material debt maturities until 2026.

Issuer Profile

nVent (NVT) is a manufacturer of electrical products including enclosures for electrical products, thermal management products, and electrical fastening solutions for industrial, commercial and residential, energy, and infrastructure markets. The company sells its products through distributors and direct to customers.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

MACROECONOMIC ASSUMPTIONS AND SECTOR FORECASTS

Click here to access Fitch's latest quarterly Global Corporates Macro and Sector Forecasts data file which aggregates key data points used in our credit analysis. Fitch's macroeconomic forecasts, commodity price assumptions, default rate forecasts, sector key performance indicators and sector-level forecasts are among the data items included.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

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