Q1 2020 Earnings Call
Ladies and gentlemen, thank you for standing by welcome to the infant Q1 earnings Conference call.
This time, all participants are any listen only mode.
After the speaker presentation, there will be a question and answer session.
A question during the session you will need to press star one on your telephone.
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I would now like to hand, the conference over to Mr. JC Weigelt. Thank you. Please go ahead Sir.
Thank you Shelby and welcome everyone to invent first quarter 2020 earnings call I'm, GC Weigelt, Vice President Investor Relations and also on the call our best <unk>, Our Chief Executive Officer, and serious away ski our Chief Financial Officer, Dave will provide details on our first quarter performance as well as they called it 19 business up.
On actions, we're taking and what we're seeing in our business 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, an index filings with the Securities and Exchange Commission Board.
Looking statements are meet 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 presentation, which can be found any investor section and then that'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 that.
Thank you Casey good morning, and thank you for joining us.
Our goal today is to provide a business update around cobot 19 and spend some time on first quarter results.
First we hope that you and those around you are safe and healthy.
I also want to take a moment to think arent that employees all of whom are making extraordinary efforts to support our customers support our communities and support one another.
In a recent survey there were two common themes that emerged a crop in that.
First was results and the second what's caring.
I see these qualys each and every day with our employees, especially right now I'm, so proud and grateful.
Turning to slide three I would like to share our three near term goal.
First we are focusing on the safety and well being of our boys.
Across our sites, we've adopted social distancing expanded our hygiene practices and are working from home where possible.
In addition, all of our plants have checklist laying out best practices to follow and learn from one another.
We've launched updated well being programs for employees focused on mental health, social financial and nutrition components.
We are taking proactive safety measures all of our facilities have covert 19 readiness plan.
In the process of rolling out a temperature testing program.
And many sites have already implemented face masks for added safety.
Communication is critical during these times, our leadership team meat daily and we're conducting town halls and team meetings with employees to keep them informed of what actions, we're taking and listening to their concerns.
Early on we established a corona virus information hub that is regularly updated with the latest resources and best practices. Many of our employees are working from home at a global cross functional team is developing plans for returning to the office overtime.
Our second goal is to continue business operations to serve our customers and support critical infrastructure.
As we have discussed we serve it mission critical applications with our connect and protect the portfolio. We have worked closely with authorities and follow local guidelines to implement safety practices. As a result, all of our site remain operational today.
Including sites across Europe, India, and our facilities in Reynosa, Mexico.
Third we are taking actions to emerge from this current situation as a stronger company, we're continuing to invest in critical areas like new products digital and improving the customer experience and all share more about that shortly.
While we continue to serve our customers around the world our ability to operate and respond quickly is helping us find new customers.
Serving us well today and for future.
I will now turn to slide four of the presentation titled Executive summary for a discussion of our first quarter performance.
We saw demand deteriorate and geography impacted by the coldest 19 pandemic first it was China and then towards the end of the quarter. We saw the med weaken in Europe and North America.
Turning to our first quarter performance enclosures, and MFS were generally in line with our expectations.
With the exception of Cobot 19 impacts.
Thermal management saw increased macro pressure during the quarter from the material drop in oil prices at a warmer than usual winter.
Our new acquisition, Elton and WB T performed well.
Elden continued to grow during the quarter and improved return on sales over 300 basis points.
W.P.T. grew modestly and expanded margin.
In both thermal management and enclosures negative volume pressured margin during the quarter a segment income fell 15% and return on sales contract in 230 basis points.
Adjusted EPS of 34 cents declined 13%.
Importantly, free cash flow improved versus prior year as our working capital initiatives began to take hold.
Turning to slide five.
We want to provide an update on April trends. Although this is a short term view. We think it is important to review given the deterioration we saw at the end of the first quarter.
In April Deeley organic sales were down approximately 20% year over year enclosures was down 20% thermal management down, 15% and he fs down 25%.
Looking at geographies North America daily sales were down approximately 25%.
And Europe was down approximately 15% Asia, which for US is mostly China is up almost 15%.
Well, China is less than 5% of our business and the first to enter the recovery phase of the Cobot 19 pandemic, we do not view it as an exact blueprint to how the rest of the world won't recover.
Looking across our specific sub verticals, we're seeing significant weakness from the pandemic. However, there are pockets of strength.
Examples of strengthen include infrastructure, specifically utilities.
And investments in data centers and networking solution.
Companies invest and I T systems in distribution centers and build on the Internet in rural areas.
Not surprisingly, we are seeing especially weak trends in areas, such as oil and gas and commercial construction.
Slide six.
Dennis I see actions, we have taken in response to cope with Nike.
We have begun executing on a downturn scenario plan to reduce costs by approximately $50 million.
These actions include temporary salary reductions for myself and other executives.
Well, if the reduction of board seats.
We've instituted a two week furlough and other actions globally.
We've also implemented a hiring freeze unlimited discretionary spending such as T. Any these actions are in response to demand trends, we see today and we have identified additional actions should demand deteriorate further.
Capital allocation cash is critical and we are taking necessary actions to preserve cash such as reducing capex budgets for the year, well still prioritizing strategic investments.
We have also temporarily suspended share buybacks.
We view our dividend as an important part of our shareholder return strategy and expect to continue to pay our current dividend.
As we take these actions in response to cope with 19.
Our goal is to manage decrementals preserve cash and be ready for a recovery.
Now please turn to slide seven titled emerging stronger.
We are making decisions and taking actions to build a stronger in debt.
We are responding to new demand dynamics and customer needs and programs such as Hoffman onto Matt.
We are seeing the benefits of our regional supply chain, which has worked well servicing distributors and new customers distributors have reached out to us thinking are helping meeting customer demand. These partnerships are proving to be mutually beneficial extending our reach to new customers.
We continue to bring new products to market with 11 watched in just the first quarter and we're prioritizing research and development investments.
In addition, our team weekly established digitally enabled training for channel partners and electrical contractors were finding new ways to connect with customers with video and virtual training sessions and as a result are driving orders and sales through these new ways of engagement.
Digital is a park are part of our spark management system, and we continue to accelerate our digital transformation.
We have new go to market programs focused on external facing website expanded sales and marketing tools and enriched product data for end users.
Our new Chief Technology Officer quickly identified an opportunity and established an agile project delivery practice to enable velocity and quality for all new software lunches.
We've begun driving robotic process automation for back office functions to drive productivity.
To summarize we are executing on our near term goals to prioritize the safety and well being of our employees, while ensuring that we are serving customers.
We expect the steps, we're taking will help us address current challenges and emerge stronger with that I will turn the call over to Sarah person detail on our first quarter results and share some of the different ways. We're thinking about the balance of the year. Sarah. Please go ahead.
Thank you Beth.
Let's turn to slide eight to review first quarter 2020 result.
Sales of $520 million were down 3% relative to last year on a reported basis and declined approximately 8% organically.
The acquisitions at the L., then and W.P.T. added five points to growth and performed well overall against our expectations.
As we looked good trends during the quarter average daily orders declined low single digits for most of the quarter. However quickly deteriorated in the last several weeks of March ending the quarter down roughly 5%.
First quarter free cash flow was better than prior year, despite lower profits as our working capital initiatives began to take hold.
We saw good improvements in inventory during the quarter, specifically he Fas made some early progress reducing finished goods inventory.
We continue to target, 100% cash conversion for the full year.
Now please turn to slide nine for a discussion of our first quarter segment's performance.
Starting with enclosures sales of $259 million grew 1% with the addition of Belden and declined 8% organically.
As we expected the industrial vertical was slowed during the quarter with additional weakness from coven 19.
L., then had a strong quarter growing 3% and expanding return on sales over 300 basis points as we continue to execute on our integration plan.
Enclosure segment income declined 10%, mainly due to lower volumes and the impact from coven 19, resulting in return on sales declining 200 basis points.
We did initiate cost actions during the quarter that should begin to read out in the second quarter and balance at the year.
Moving to thermal management sales of $121 million declined 16% organically. There were two main factors impacting thermal management sales. This quarter first we saw pressure in the oil and gas vertical due to lower lower oil prices, which immediately impacted and MRO spend.
Second commercial revenue was lower due to a warmer winter as well as a difficult comparative quarter and cobot 19 simply amplified the negative impact on demand.
Orders trended generally in line with sales, reflecting the amro and commercial weakness with projects performing a bit better.
Importantly, backlog continue to be up double digits year over year, reflecting a continued to lead the funnel can translate into sales growth overtime.
For background I wanted to provide some detail on our oil and gas mix as it relates to thermal management.
Today or oil and gas represents approximately 30% of thermal management overall sales down from 40% in 2016.
For invent overall, approximately 15% of sales are attributed to oil and gas.
In thermal downstream represents approximately 60% of the oil and gas sales, well midstream and upstream make up the balance and split roughly equally.
We are seeing significant deterioration in the upstream but again this is only roughly 1% of total invent sales.
In mid stream, we are seeing some pockets of resiliency around transport in storage well the global supply demand dynamics, along with coping 19 are certainly impacting downstream and refinery spend levels.
Return on sales declined 680 basis points due to lower than expected volume and industrial MRO and commercial which both tend to have a higher margin mix component.
In thermal we have taken incremental actions to reduced fixed cost structure and realign our business that will begin to read out in the second quarter in back half of the.
Now on to eat that overall, we had a very strong quarter sales of $142 million grew 3% organically with positive contributions from both price and volume.
This combined with productivity gains translated into strong return on sales expansion of 90 basis points.
We also closed on the W.P.T. transaction during the quarter.
It's unique and labor saving cable trade product line is a great complement to our invent catty and invent Hoffman portfolio.
Allowing us to offer customers a one stop solution for cable management and pathways for data and networking solution as well as commercial and industrial applications.
Turning to slide 10, titled healthy liquidity position.
We have a strong liquidity position, our net leverage ratio at the end of the first quarter was 2.3 times, we had $188 million and cash an additional $315 million available on our revolver and limited maturities until 2023.
We proactively drew $150 million from a credit facility in March to bolster our cash position.
We have received a number of questions around debt covenants, specifically EBITDA wouldn't need to decline over 40% for four consecutive quarters to reach your maximum net leverage ratio covenant of 3.75 times.
So from where we stand today, we remain confident in our liquidity position. In addition to our cash generation activities. This year.
On slide 11, titled balance sheet, and cash flow. The first quarter is typically a cash usage corner for us and this remain true this quarter.
Importantly, we ended the quarter in a better free cash flow position versus last year, mainly due to our focus on improving working capital.
We believe this is a trend that can't continue as we progressed through the year and is another example of how we too it's how we expect to emerge as a stronger in bed.
We decreased our full year capex spend to the lower end of original estimate tardy targeting $40 million, which prioritizes strategic investments.
Moving to slide 12, as we evaluated the current environment. We believe it is prudent to withdraw our 2020 guidance given the amount of uncertainty in the market today, we expect to evaluate evaluate providing some type of guidance later this year.
In lieu of guidance, we have prepared a number of scenarios to map what actions, we would take to help manage decrementals, while preserving growth investments and driving cash.
Specifically, we looked at mild moderate and severe scenarios the factor in a range of revenue decline over a 12 month period and what actions we would take to ensure we continue operations manage decrementals.
Continue to pair dividend and importantly, strengthen our ability to recover fast.
We are driving cost actions through a combination of restructuring activities and temporary reductions.
Acquisitions and changes in mix can have an impact in these scenarios.
I thought it would be helpful to walk you through these scenarios and provide additional detail.
Let me start with a mild scenario, where revenue is down low double digits. In this scenario, we would target margin decrementals before any impact from acquisition to be in a 30% range. We expect free cash flow to be down low double digits or in line with sales with assumptions such as improvements in working capital.
A reduction in Capex spend capex spend offset impart by cash component to some of the cost action.
In a moderate scenario, which I would characterize as a similar scenario to the 2008 in 2009 financial crisis, we modeled sales down roughly 20% for full year.
Our current expectations for full year 2020 are between the mild and moderate scenario.
We have identified additional cost actions to keep margin decrementals near 35% range, including further discretionary spend reduction extensions of the temporary cost reductions lower incentive.
Long with some targeted footprint changes, we'd expect free cash flow to be down 25% to 30%.
Looking at the more severe scenario this assumes revenue down 30% or more we could also call a cash break even analysis, meaning how far sales would have to decline before we risk having negative free cash flow after paying dividends.
Post cost actions, we would assume margin decrementals would be closer to 40% and free cash flow down over 40%.
Again these scenarios that we have modeled at at enterprise segment level and at each of the plans to help ensure we have the plans in place and we're ready to execute.
Our goal is to manage decrementals.
Her strategic growth investments and drive cash to help us recover faster and returned to growth.
Well, we're not providing guidance for the second quarter I thought I would share how we're thinking about it as we close April.
Looking at current daily sales rates and trends throughout the business. It seems logical to think that organic sales in the second quarter could be down 20% to 30% year over year.
Based on the timing of our cost action, we would expect the drop through a margin decrementals to be closer to 40% in the second quarter, we see quench all improvement.
We do expect the second quarter to be the weakest quarter based on current economic forecasts.
As this situation involved there's can certainly change. However, this viewpoint is based on what we're seeing today [noise].
As we progressed throughout the year, we're not expecting a quick or V shaped recovery, we expect a longer duration of the current environment and while the rate of decline may moderate throughout the year with the second quarter being the most challenged we expect to continue to align our costs with what we're seeing in the market.
A couple other points as guidepost for full year 2020.
We continue to expect interest in the $40 million to $43 million range and the tax rate between 18 and 19%.
On shares if we do not buyback any more this year, our diluted share count would be closer to 171 million, but still lower versus prior year.
Our focus is on actively managing decrementals preserving cash and recovering fast I'm confident that we're taking the appropriate actions to create a stronger and then when we emerge.
This concludes my comments on the first quarter and I will now turn the call back over to that.
Thank you Sarah.
Please turn to slide 13, summarizing our prepared remarks today.
Our goal during these challenging times are clear first we are focusing on the safety and well being of our employees.
Our second goal is to continue business operations to serve our customers and support critical infrastructure.
Third we are taking actions to emerge from this current situation as a stronger company.
We have a healthy balance sheet and solid liquidity position, we have already begun executing on levers to unlock cash with our working capital initiatives.
Our longer term strategy remains intact, and we have accelerated and expanded many of our one invented initiatives.
These include a focus on key verticals, where we think we can win geographic expansion and new product introductions, we continue to drive productivity across our business and are in the midst of a digital transformation to improve analytics and velocity as well as the customer and employee experience.
We will continue to evaluate our capital allocation strategy, but the goal of finding the best return with our cash.
Long term growth is a priority for us and our team continues to execute on our strategy.
We believe we're focused in the right areas to drive growth and deliver positive results.
These are uncertain times and I'm proud of the way our team has performed.
As we take these actions in response to cope with 19, our ultimate goal is to emerge stronger.
We thank you for your support and we remain committed to making invent a top tier performance company with that I will now turn the call over to the operator to start today.
As a reminder, if he would like to ask a question via the phone you may do so by pressing Star then the number one on your telephone keypad again that is star one if he would like to ask a question.
Your first question comes from Jeff Sprague with vertical research.
Thank you good morning, everyone hope everyone as well just a couple from me I'm sorry, I missed the first couple of minutes of the coal, but looking at the $50 billion of cost the out for 2020 could you elaborate on how much of that is temporary and then the I appreciate the discussion on managed.
King Decrementals kind of wondering what you would have kind of teed up to do Additionally.
Things do remain challenging over the balance of the year.
Yeah. Good morning to have so I'll just start by answering the question on the on the cost reduction efforts, so on that $50 million of targeted cost reductions for 2020.
Roughly 20 million of that is temporary and we'd expect to see roughly half of that in Q2 with some of those specific actions that we talked about in terms of temporary salary reductions and furloughs.
The remaining 30 million is really more structural a 15 million of that is really the carryover from 2019, so that should be largely weeding out here in the first half a year and the rest of that is structural incremental actions that we're taking in 2020, and that's largely going to read out in Q2.
Q3 in Q4, so it looks like more of a $20 million annualized cost out savings and that's really targeted on more so in the thermal space largely around oil and gas as something closures with the short cycle on industrial weakness that we saw.
[noise] gray, but not on the kind of potential additional actually look what are what are the things that you're looking at if.
We do remain kind of in the and deeper problem here yeah. So some of the additional cost actions include really extending some of these temporary cost actions that weve a at least currently sitting here today are focused on Q2 and secondarily it wouldn't be taking a further reduction in some of our discretionary spend.
Including DNA in Q3 in Q4.
We'd also be.
The adjusting our inventory compensation expense, that's largely intact here in Q1 I'm as you typically would expect it's early on in a year, but we would see some and incremental benefit from incentive compensation as well as targeted on real estate office spaces and us.
Targeted footprint actions, so they're incremental additional actions that we would take obviously as things with them and progress in terms of death or duration.
And then one other follow up for me a appreciate none of US has a crystal ball so actually getting the demand equation right is challenging were all making our best guess here, but I wonder on channel inventory.
How closely linked.
Your businesses right now to worthy inventories stand I guess the question really to put Simplistically do have to work through you know some notable channel inventory liquidation before your sales kind of reconnect within demand are we kind of you know pacing at end demand right now.
You know, it's this is best Jeff and I think that's.
That's one of the things in our business as we've always share two thirds of our revenue goes through distribution channels and you know we've shared the models in the past, especially O eight or nine where you know our sales drop off faster because of that inventory repositioning I think we're going through some of that now inventory is healthy in the channels.
I think is our channel partners expect to see the same type of degradation in the second quarter, there's likely some further inventory reduction when you look at where our sales are in April and he asks US you know has been had up sequentially strong quarters, including nephews first quarter, so to see that dropped.
There I think that some of that inventory reduction that's going on through the channel right now and I. We expect that to continue through Q2, which is why were framing up 20% to 30% is likely where we're going to see our sales and up that.
Understood. Thanks for the color they'll still look.
Okay. Thanks.
Your next question is from Jeff Hammond of Keybanc capital markets.
Hi, good morning, good morning.
So so but can you maybe just speak to what you're seeing in terms of order trends in April versus the sales numbers. You gave I'm just trying to you don't match up what.
No what the order trend is may be telling you that might be the same or different versus sales and then maybe just.
A little at a little more color on your best Besides the distributor Destocking why that business is maybe you know showing a little weaker.
Yeah. So let me start with a latter part of that on E.S.S.
Yes, that's a is mostly a commercial construction business and certainly mostly a north American based business as you know and I think you've seen in many parts of the country, where job sites have just been shut down and typically with that type of inventory. It's one that distributors can turn off and turn off.
Turn off quickly et cetera, So I believe that's exactly what we're saying because a we you know nice growth and Fs. In fact orders were up all through Q1, so coming into Q2, we started to see that inventory repositioning and I'll, let Sarah adds more color on orders in general in April.
Yeah. So Jeff this is Sarah so orders actually trended a little bit better than the daily sales rate in April I'm really down 10% to 15%, let me give a little bit of color. Just by segment enclosures orders were generally in line you know with the sales Fs was a bit better we saw some good order intake.
In some of our regions outside of the U.S. that was down 15% thermal was actually up double digit a in orders and that's really reflective of some good project wins that came in and April I'm, particularly around LNG and some of the some of the regions outside of North America.
Okay, Great and then you give some color Sir on the you know the temporary costs and how those flow through but if you just look at that 50 million of savings. You know is there a way to kind of how much did you get in one to what are you expecting two two and in second half.
Yeah. So you know in those savings, we got roughly around $10 million of cost outs saving in Q1 that was really.
But we actually probably closer to eight and that was really a function of largely the carryover savings from 2019, we would expect that to ramp in Q2, essentially be double that and that's in large part because of those temporary salary reductions that we took 'em we talked about.
Metal furloughs incurring incremental salary reduction on the discretionary spend reductions et cetera, you know from there I would say you know we're going to be prepared Jeff to ramp and adjust those temporary and those discretionary cost actions based on the demand that we see.
Okay, and then just real quick one on the thermal orders what are you hearing from your customers on the you know the orders that are in the backlog of orders that just came in around you know cancellation risk or deferral risk. Thanks.
Yeah, I think certainly Theres, a everyone is evaluating and pausing. So we feel good about the orders that we've received its just going to be the timing and execution of some of those projects I wouldn't say in the short term what we immediately saw was and impact on the MRO side of the bid.
Yes, because you know as everyone adjusted their capital spent the projects, especially those that are under construction right now we expect to continue its just that duration.
So likely we're going to see some things delayed or pushed out but we haven't had other down the MRO side. We haven't had many cancellations really anything significant to speak up. So we believe the you know the projects that are projects that are in work are going to continue they'll finish those jobs off its just a matter of timing.
Okay. Thanks, so much.
Your next question is from Julian Mitchell of Barclays.
Thanks, Good morning, I'm learning.
Maybe just the first question around the thermal management business and in particular, the margins that in a very heavy decline in margins year on year in the first quarter.
Maybe just talk through the drivers behind that is it's all about oil and gas and MRO nose diving and that's very high margin, though is that was there something else aside from that.
Should we assume that those decremental margins remain heavy as long as oil and gas and MRO is on the severe topline pressure.
Hi, Julien. This is there so I would say amped answer the latter part of that question first we would expect the decrementals and that Ross contraction to improve in Q2 from Q1 in large part due to the incremental structural cost actions as well as the incremental temporary.
Cost reduction actions that that the team is taking there in Q2. So we do expect those depend to improve on specifically in Q1 I'm a couple of different drivers, what's driving that kind of worse than than what we expected from a Ross perspective. It really is probably first and from the significant sharp decline that we saw the MRO side, if you remember.
You know the thermal business is roughly a third commercial a third and MRO and third projects.
On an MBR on commercial have a high contribution mix margin in that Amro business has been relatively resilient because that tends to be a little bit more op expense versus capex, but just given the severity of the only thing best declines we saw more immediate and a more severe impact those MRO.
Rate sales, so that was probably the largest driver obviously commercial being down double digits I'm also inc. and impacted that Ross as well like I said on really any improvement in Q2 and beyond its really a function of the incremental cost actions that team is taking by way of struck.
Actual.
Cost actions as well as the incremental temporary cost reductions as well.
Thank you and then my follow it would be a firm wide question. So decremental margins in the first quarter.
Love field to see heavy 80% plus.
Can cause a I think you talked about maybe 40% decremental margin as a good.
Framework.
If we look at the year as a whole on slide 12, you're talking about the mild to moderate so maybe a 20, 25%.
Sort of studies, 85% Decrementals for the year as a whole.
On that mild to moderate a plan that's implying very narrow decrementals in the second hall, given you know QR, who was 80 plus in Q twos foresee.
Just wondering if I'm reading that right and if so is that a function that second half narrowing of those cost saves and perhaps an abatement of some of those mix headwinds that sample that you just touched upon.
Yeah really in the largest part of that is really going to be the timing is the cost actions. So as we take those incremental structural cost actions really none of that was it was within Q1, just based and the timing of those actions. So we would expect that to fold into Q2 and extend into the back half or you know we also talked.
About we do expect Q2 to sort of be the heaviest impact you know from an overall top line perspective, and with that Decrementals being in that 40% range, but we would expect you know topline to either bed and Inc. decrementals to also ease good I he get.
Better in the back half of this year.
Great. Thank you.
Your next question is from Deane Dray of RBC capital.
Thank you good morning, everyone wishing everyone good health.
Good morning, Thank you.
Hey, Thanks, I just want to add the the thank you here for the effort to go through the scenario planning on this not many companies have been as willing to outline the sensitivity analysis. So now that takes a lot of work and planning. So we appreciate that it just some additional questions on it is what are you.
Monitoring in terms of the the total sales I know that's for the full year, but the rate of decline is the one get a sense of how nimble you'll be.
Are you looking at the daily order rates.
The trailing month.
What's just a sense of how nimble can you be.
And tracking the sales decline because that sounds like that's the gating factor as to what sort of additional cost cutting that you'll take so let me start there. Please.
I think dean a couple of things we are tracking daily orders, we are talking with some of our key channel partners and customers just to understand what trends, they're seeing a part of this I would say more about Q1 issue you know and early early part of April was US also looking at our.
Managing our capacity or labor right in our factories, because as you can imagine starting with China, our plans to get shut down there and then as we had they stay at home orders. It took some time for everyone to understand and including employees, we were deemed essential but just to manage our capacity. So I think we look at.
How's our planned performing we look at what's the trends from our distributors what are our customers, telling us and just other economic indicators and those are the things that we're you know trying to be to manage and then flex our workforce. So that we can you know respond to the way down and there were spot on the way back up.
Equally.
[noise], that's certainly helpful. I, just feel as though we'll be watching a news about a infection rates and and hospitalizations and more than the I assume this time, but.
I certainly appreciate the color there.
And then just a follow up question on.
Free cash flow and working capital sorry could you take us through some of the the focus areas and the accounts receivable, you're seeing some credit issues and how are those being deal with and and also on inventory would you be since you ramped down production you'd be selling some from your own.
Inventory and so that inventory liquidation actually gives a lift to [noise].
Free cash flow, so just take us through some of those dynamics. Please.
Yeah.
So you know historically, we have seen typically a tailwind in working capital in a downturn as you suggest you know inventory comes down faster than what we see on the sales front.
So that will that will certainly help but but clearly we came into this year with a top priority a and focus on working capital and I think the team has done an excellent job I think with Cowen 19, you know it is important there were balancing things, we're managing for supply chain continuity, which is absolutely critical to service our customers.
But we're also targeting for reduction in specific areas, where we have opportunity and some excess inventory and I gave the example of yet that specifically in Q1, I'm really taking a data driven cross functional team approach to where they saw maybe some longer parts in the supply chain on instant access.
Inventory specifically around some purchase finished good I'm. So we're making some good progress there and overall you asked on the air France. You know some of this is in relation to kind of our one event focused that we've been.
Really focused on since then.
And if we look at some of our top very strategic you know relationships and we are consistently rolling out. This one invent program. Some of that is providing some opportunity just to harmonize terms in pockets of areas, where we didnt have as as good of terms as we did kind of overall with maybe one of our one of our larger.
Brands, you know from a you know in kind of context to covert 19, well there's always some pressure you know on I'm working capital in terms of folks I'm looking for extension of terms I think again, we're doing a good job of managing all all of that I'm really working to hold to help ensure that we can really.
Just maintain our cash profile and continue to support our business and support the needs of our customers.
That's real helpful. Thank you and best of luck everyone.
Thank you have seen.
Your next question is from Joe Ritchie with Goldman Sachs.
Thank you good morning, everyone up girl well.
Good morning.
So on slide five guys you highlighted if you verticals that that remain positive, including including data centers I'm. Just curious like as you kind of see year progressing and I know I know that demand environment is really really difficult to predict felt like are you at east vertical that you would expect to stay positive in this type.
Of environment or at least less negative just any color around that would be helpful.
Yeah, I think some of these areas maybe it's a it's hard to say if things are going to be positive all year, but I think less negative and so just take datacenters and networking solutions, you know with everyone at having stay at home kids working from home with everyone doing online shopping I mean, you know, we're just seeing that theres a build out of that infrastructure in.
Rural America for example, right networks were an up to the you know the bandwidth or the speeds and so we're seeing that build out now some of those projects. While we're seeing some nice orders there the execution of those projects again with construction there could be delays, but in general. This is an area that as we've said as a long term strategy, we think theres strength.
So.
Our view here is it's hard to say are they going to be positive full year don't know, but we think that these are areas just in a strength based on a the environment that we're in right now that the and that's where we're focusing some of our commercial effort.
That makes sense that I mean, miss this earlier, but but the the trends it was that through kind of April or was that was that more but the quarterly comment.
It was out you know it was first quarter and as of April those were the areas that we generally soft for more positive performance.
Okay. Okay, Great and then maybe just my follow up question I, just just thinking about the price cost dynamic for the rest of the year. You guys. You commented price I think was about a $3 million. All did this quarter a word and we're in a deflationary environment like how does that equation looks for you guys as the year progresses.
Yes. This is there a high on so we continue to manage the price plus productivity is going to offset inflation as well as some of our strategic investment. So I'll, maybe give a little bit of color on Q1. So I think that'll help on kind of shake kinda balance any <unk> a year from a Q1.
Perspective productivity was $5 million.
And inflation was 10, and we got about a <unk> point of price and that talked about this earlier you know.
We did see some good productivity on the operating expense side as we work to contain you know some of our discretionary spending even in Q1, but we did see some impacts of covert 19 on just the overall kind of productivity when some of the fits and starts on our factories and that was included in that roughly $55 million.
Number so as we look into Q2, we do expect productivity, which would include material productivity.
As well as some of our cost actions to ramp, but we would still expect those decrementals to be in that 40% range just due to the pace of some of our structural some of our structural cost out actions.
Just for the full year, we continue to expect price targeting price in that 1% range and Ah you know inflation, we continue to see but felt were driving that productivity hard not just our cost actions temporary in structural but also on the material productivity sites and trying to capture some of the deflationary environment that we're seeing.
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Okay that makes sense. Thanks, so much Sarah take care guys.
Thank you.
Your next question comes from Justin Bergner of GE research.
[noise] towards both good morning, so [noise].
Busy morning morning.
Two questions here I guess to start those most schools.
But you had an a plus carlo.
Slide five wholesale sales do they roughly represent you know president or thinking about 2019.
So we typically have talked about infrastructure and that.
In that 10% to 15% range, but let me give a little bit of color maybe on somebody sub verticals right. So utilities, that's less than 5% of our sales and that's going to predominately show up in the five you know business particular AERCO Brennan.
And then on the automotive side again, that's another sub vertical that we maybe we haven't talked as much about and that's in that again less than 5% you know overall, and that's particularly gonna be entering closures brand or enclosure segment.
Some of these others are the very big buckets of a a verticals that we've talked about in terms of I largest being industrial second to that being commercial and then on the infrastructure side.
Data centers and networking solutions as you know roughly 100 million in sales.
Okay.
That's helpful.
I guess I want to ask about the Decrementals I'm, assuming that includes the benefit of the temporary.
Cost cuts would the split of the Decrementals are skus or rank order of the decrementals across the different business units looks similar to what it looked like in the first quarter as we look at sort of scenarios for the year as a whole in terms of.
Thermal being the most challenged followed by a closures followed by U.S.S.
Well I would say that there's a couple of different things that are going to impact in a decrement Decrementals I think we you know we talked about in Q2 really targeting that 40% decremental on a couple of things that are gonna come into play with that you know enclosures and Fs are are gonna be impacted by the acquisition.
And well that full then as incremental dollars on the top line on the bottom line. It does put some pressure or at least initially until we get and kind of kind of ramp up those on those ross's margins on you know the decrementals. So I think that's one piece to note I think the other piece maybe to know more specifically to Q2.
Is we are expecting some some some mix you know on headwinds by way of the Decrementals NFS as well I, we would expect the thermal decrementals to meaningfully improved from Q1, but again just due to the pace that decline, we would expect that to still be heavier.
Okay Fantastic that's helpful. And lastly, you mentioned that you'll keep an eye off for bolt on acquisition opportunities.
We are with the focus be and.
Is that something you would do today or do you want to sort of wait a couple of quarters to see how the world looks before using your balance sheet more.
Yeah, I think it's fair to say you know, we're still integrating elden, we just acquired WB T. In Q1, so we're quite busy and those integrations.
We're very focused on our liquidity and cash so from an M&A from executing M&A I would see that would be further out right just because of our we've always said, we want it to be able to execute and integrate well.
And our Meanwhile, though you know we think there's lots of opportunities to do M&A. It's a very fragmented space as you know the process by which you do M&A is to build relationships and you know we're working our M&A team are doing that so that we have a rich pipeline and when we think that things are and I'm.
More stable time or position and when we feel.
Good at <unk> under having good visibility to that stabilization you know that's when I think we would be ready to execute against so it's certainly not in the near term.
Okay understood. Thank you for taking my questions and stay well you too.
Your next question is from David Silver of C.L. King.
Yeah, Hi, good morning.
Good morning, I hope yeah. Thanks, I have one one particular question and it would have to do is.
Industrial marketing or commercializing you know of your new new product programs. So.
I know you've mentioned in the past this year was going to be a record for new product introductions.
You know for better or worse, you don't you don't get to choose the markets that you launch products and but I was wondering if you could maybe give us an overview of how you know what 50 plus.
New product launch schedule might be affected by the current environment in other words I'm assuming for products that might be commercialize through the Distributer distributor channel you know I think no time like the prison, but maybe if there were.
New products targeted towards strategic customers are some the required kind of end market.
Testing, where demonstration you know.
Just wondering if that kind of in March the current environment, maybe might cause delays or a change in schedule that better better align you know the supply you with your new the rollout of new products with the Receptiveness of the AD market. So just some comments on yeah commercializing Europe.
50, plus new products. This year. Thank all right well you know this is an area for us that were we're going full steam ahead and not slowing down that's not to say, sometimes there are challenges with maybe working with suppliers are tooling, but you know we're trying to gain velocity as we work through our new product launches and so we've rolled out you know launching.
Agile and as we think about new products, we think about new product introduction. So it's also the commercial aspects and with these you know take for example, these new 11 products that launched in Q1, which was you know very high for US our teams have gotten creative in terms of doing video.
Launches and one thing we're finding with everybody you know working from a stay at home. We've had a couple of new product sessions, where we've gone out and said, we're launching new product there'll be a training session. In some cases, we've been able to ship products to our customers. So that when were doing the training they physically have.
The product in their hands and what's been amazing is with one of those first session. It sold out so to speak within hours. So we had to put a second session on I know, what our Hoffman and closures. We were doing some training sessions and had like a thousand people sign up within 24 hours. So we're finding great risk.
Section to launching these products at this time and I think the key thing is our ability to quickly move to video or being creative because we don't <unk> over Powerpoint people, but getting product in their hands. In fact, we've seen orders taken because once a customer can see the product see the value proposition videos great.
For that specially with some of our MFS products. We've received some new orders. So we're we're going to continue down this path and I think our distributors have also been very receptive to this in some cases, we have products that are you know targeted for labor savings or their targeted for data and network.
Looking solutions or their targeted for food and beverage applications.
So what you know what may take longer just because we're in it down market is for our sales to ramp to the original profile that we had but still getting those ceded right. Now we think is really important and we think it's one of those ways. When we talk about invent emerging stronger. The fact that were going full force here.
We think this is one of the critical areas for us.
Thank you for that and I think you kind of stole my Thunder with the follow up but but I was looking at slide seven and.
Are you break it down into three panels. The middle panel this new products in that but then the rate most panel digital transformation I guess that was that was another.
Priority of your company you know that you've discussed than past conference calls and I think you touched on it but I just wanted to check on whether you know your new sales tools like that digital capabilities, you think or have gotten to the point, where where they need to be or is this.
You know, that's an area, where you might want to accelerate the the resources or accelerate the development effort. There you know to take advantage or to operate in the current environment. Thank you I mean, absolutely. So this is an area where I mean, there's always more that can be done and so you know we looked at this.
Time as to again driving an agile approached everything we do is driving a lot more velocity, but with a virtual working at home and by the way our infrastructure held up we had no issues. When we went to working virtually it really was tremendous.
But what we found as we were able to do more process work more data cleansing more enriched product data a expand some of the tools that we have working with our channel partners as they're expanding their digital capability. So it's an area, we're putting more focused on and using some tools to drive velocity there.
So it's it's always been part of our strategy, but just getting momentum there doing robotics process automation, there's a lot going on and it's an area. We're really focused on because that is the future.
Okay. Thank you for that night I meant to say this first for they did appreciate you here.
Investor Relations effort to send along the slides ahead of time, so that did help me.
Getting some things done this morning that head of the cool. Thank you.
Thank you thanks.
Your final question comes from Scott Graham of Rosenblatt Securities.
Yeah, Hey, good morning, Good health school through yet.
You through Scott you too.
So it's one of your filing of your Q I was hoping you could help with the model a little bit here you know for example, like what we're enclosures industrial sales down what was thermal energy sales down in the quarter you have those numbers.
[noise] she has got given since the second here.
Sure.
Well well, you're looking that up on maybe yeah, that's or J.C. you could Toby.
The data center business he sees that entire we mean closures.
No no if you recall right I mean, its majority in enclosures, but then there's a piece that is our catty product line and with our new acquisition of WB tea, which is why are basketry you know we've extended more into the space and there is a smaller piece around thermal management when we do look the cooling and we do so.
Leak detection, but what it but it's a predominantly in closures, but now expanded further with the F.
Okay.
Additionally, on the cost reductions could you give us an idea of you know kind of how they hit by segments assuming of course.
Thermal will maybe get a disproportionate per cent sales you know.
Can you do you have any sort of guidance on how we should look at that by segment.
Yes. It's got this is there its I'll take that the two questions a little bit of the vertical view by segment as well as the caught that summary, so in that 50 million of cost outs saving and nearly half of that is going to be in thermal you know just as you might expect given that oil and gas challenges, there and that decline and that's reflected.
But really the incremental structural cost actions that they're taking as well as some of the on incremental temporary and discretionary type cost actions a second to that is going to being closures and then you've also got some some cost actions on the at that and then and then a enterprises wells that kind of gives yeah.
In order of magnitude in order for those cost savings are showing up by segment from a vertical perspective, you know in that enclosures down 8% organic that roughly lines up with industrial as you might expect because that's the biggest in a percentage of the sales and where we saw strength in the quarter is really on that.
Commercial side that was up kind of mid high single digits.
From a thermal perspective than that down 16% industrial was a bit higher than that sit down 20% and then you've got your commercial better I mean overall I think the commercial vertical performed well across these three segments and then you've got energy down.
A bit more than that with with infrastructure down less.
From an Iot that's perspective being up 3% I'm really we saw strength the largest strength in the utilities part of that business and we talked about that on the call I'm really showing up in our and our air co brand on second to that we also grew in commercial and so overall, we saw good start.
Anthony if as we did see some industrial a decline there and if that's but that's only 20% of that portfolio.
Yep Yep that's.
Very helpful and will the QB out today.
Yes.
Great well some of you just another question. This is sort of sort of a question about the a bit of a balancing act. So you know.
As we look at productivity right so right now.
Things are lower so.
There's more time for people to put on a mass take off and mass.
To the the Handwashing and the social distancing things, but.
As.
As we go forward in volumes, let's say or less down you know how you manage whereby.
The productivity, we from the cost outs does not suffer from that.
Well, Scott I'm not sure I'd, let me try to answer. Your question. You know <unk> are you I think what you're saying that maybe there's also some lack of productivity with just the pp east side of things, but I guess, what are the things that I would say.
S and around the world when it started with China, but as as other plants, you know as areas, where either shut down in Europe or you know we'd have a maybe a just a a positive free reacted to different states shutting down we've had to manage attendance levels and interestingly enough one of the things that we've seen is even with attendance.
Levels being down and with some of the social distancing measures in place, we've actually seen productivity M prove in some cases.
And I think you know our as we go forward well were practicing good hygiene and all of those things. We believe there's still ways for us to drive productivity continuing to execute just on some of our lean initiatives continuing to execute on where we've invested in capital continuing to execute.
And on areas that we just newer inefficient. So I think we believed that there's that all of those measures can still take place maybe some of it rolls out differently than what we first expected, but we absolutely no that there's ways that we can drive productivity as we go forward.
Gotcha, that's an interesting answer because I would have thought that the I'm a bit of a balancing act that was needed for all companies truthfully with.
How you tend to hold it versus you know the production line and what have you. So it sounds like you're saying that you're not concerned about losing you know momentum is whether its lead.
Whether its best practices does that then by extension mean that if you're generating productivity even with.
Attendance down social distancing, Washington scans that that might.
Oh sure in some ideas for further cost cutting.
Yeah, Dan Malone.
Well I see it potentially or it allows us to ramp right and drive growth right. That's the other way that we you know we think about it but certainly I think the environment that we're in now a there's areas where we're accelerating performance as mentioned you know around digital and.
Just finding great new ways virtually to launch project products and engage with customers and I think operationally you know one comments I would make because we learn from China. First is we started to create these pandemic checklist and share best practices across all of our plants and that act in itself around the saved.
The measures I think is creating a better sharing and networking environment to share other best practices right. That's the culture that we have and so I I believe that's going to continue in a way we've become more connected than ever using virtual tools that we were you know three months ago.
And it's been very impressive and and I think that's also one of the reasons as I go back to the sharing of our of what we've done across our plants that I can say here today all of our plants are operational you know, including Mexico, where many other companies are just shut down. The fact that we were ahead of things in terms of putting in safety practices list.
Two employees working with authorities has proved to be very successful for us and so we're just going to keep continuing that you know that sharing and learning and a working virtually.
To get best practices implemented across the company.
Guys. This has been great transparency, thank you and I echo the prior call or about JC, sending the in the tech out earlier on that line also really nice work around the cost side that was something that I think it's been absent.
Some conference calls for you have a good day.
I think that kinda.
There are no other questions in queue.
Well. Thank you for joining us. This morning, our team has aligned on the near term goals to manage through this and emerge stronger. We're confident we're working in the best interest of our employees communities customers and shareholders. Thank you again for your time and we hope you remain safe operator, you may now conclude.
Oh.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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