Q2 2020 nVent Electric PLC Earnings Call
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I would now like to hand, today's conference over to J.C. Why go Vice President of Investor Relations, Sir the floor is yours.
Thank you Carmen and welcome everyone to invest in second quarter 2020 earnings call JC Weigelt, Vice President of Investor Relations and also on the call our best Wasnt <unk>, Our Chief Executive Officer, and Sarah <unk>, Our Chief Financial Officer today will provide details on our second quarter performance as well as a cobot 19 business.
Something before and again, let me remind you that any statements made about the company's anticipated financial results are forward looking statements subject to future risks and uncertainties such as the risks outlined in today's press release and then that's filings with the Securities Exchange Commission forward looking statements are made as of today and the company undertakes no obligation.
Update publicly such statements to reflect subsequent events or circumstances actual results could differ materially from anticipated results.
Today's webcast is accompanied by a presentation, which can be found in the investor section of and that's website references to non-GAAP financials are reconciled in the appendix of the presentation.
Time for questions. After our prepared remarks, and now I will turn the call overt about.
Thank you take the good morning, and thank you for joining US we continue to hope that you and those around you are safe and healthy as we navigate through the pandemic.
I want to extend a special thank you to all of our inventor employees, who have been resilient and who are adapting to a new way of working.
Our focus in collaboration has never been stronger.
The safety and well being of our employees remains our first priority an event.
I want to acknowledge that these are challenging times and our employees have been putting in tremendous effort living our customer first valued to go above and beyond to keep our business running.
I'm truly grateful and inspired by their commitment and dedication.
I also want to make a comment on racism inequality, an injustice in our society.
And that's dance with a black community all people of color and others, who feel marginalized we stand against inequality, an injustice of any kind and we will not tolerate racism in any form.
We have launched listening circles across and then as part of an effort to engage our employees in a dialogue on racism. We've made the commitment that we will listen we will talk and we will act together, we will emerge stronger.
Now I would like to turn to our second quarter results on slide three of the presentation titled Executive summary.
We remain focused on our three near term priorities, which are first focusing on the safety and well being of our employees second continue business operations to serve our customers and support critical infrastructure.
And third take actions to make invent a stronger company well positioned to exit the crisis.
I am proud of our execution during the quarter.
That's been two years ago, we have always been asked by investors, how what did that perform in a downturn I.
I think if your view our second quarter performance, you will see that we executed well during a unique and challenging time.
Our teams executed on our plan to keep operations running with minimal supply chain disruptions.
We manage decrementals and strong strong free cash flow conversion generation with 160% adjusted conversion.
In addition, we continue to invest for growth.
We launched 13, new products made progress on our digital transformation and integration of our acquisitions on track and performing well.
In April we highlighted the actions we were taking to emerge stronger and we view. These results as evidence that we are on a path to do just that.
We executed on the cost actions, we laid out last quarter and second quarter, Decrementals were 39%, including a seven point negative impact from acquisition.
These decrementals were better than our initial expectations of approximately 40%, which excluded the impact from acquisitions.
Second quarter sales were down 17% as each segment's demand was negatively impacted by covert 19.
We improved our free cash flow performance versus a year ago and adjusted EPS came in at 29 cents.
Our two recent acquisitions elden in W.P.G. performed well during the quarter.
We continue to target a mild to moderate scenario of sales down 10% to 20% for the year.
We are taking additional cost actions given our view of a prolonged recovery in certain verticals.
More broadly we are seeing improving trends for countries or states are beginning to open back up.
Specifically verticals within infrastructure are performing well relative to other verticals utilities data centers and networking solutions and rail are seeing improved trends.
Data centers and networking solutions, we have a strong value proposition with our integrated solution inside and outside plant closure.
Detection cable management liquid cooling and power management.
We're also seeing improved trends in commercial tied to the reopening of economies across the globe.
Prefab remains a favorable long term trend and our invented caddy prefab businesses thing double digit orders and backlog growth.
General industrial continues to be weak, although there are some areas that remain more resilient such as material handling and food and beverage.
Overall, we continue to expect an uneven recovery as channel partners manage inventory levels and companies manage their spend.
Similar to last quarter oil and gas trends remain weak.
Well I will point out our thermal management project orders and backlog grew double digits. This corner.
In summary.
Although our business experienced pressure related to covert 19, we executed on our three near term priorities.
Managed decrementals and chat generated strong cash.
We're confident any actions, we're taking to emerge stronger.
I will turn the call over to Sarah for some detail on our second quarter results, an update on our cost actions and share some thoughts on the balance of the year. Sarah. Please go ahead.
Thank you Beth.
Let's turn to slide four to review second quarter 2020 result.
Sales of $447 million were down 17% relative to last year on a reported basis and declined 22% organically. The acquisitions, Oh, then MW Beachy added about six points to growth.
Looking at monthly trends over all during the quarter daily organic sales year over year were fairly consistent by month with a marginal improvement in June notably organic orders declined less than sales at down 15%.
Second quarter Decrementals were 39% all in including a seven point negative impact from acquisition, so better than our initial outlook.
We executed well on our scenario plan, including both structural and temporary cost action, while investing in future growth.
Free cash flow continued to improve versus prior year, and we had a strong conversion in the quarter at approximately 160%.
Now please turn to slide five for discussion of our second quarter segment performance.
Starting with enclosures sales of $219 million declined, 16% and 25% organically, while cobot 19 negatively impacted demand across most verticals, we did see pockets of relative strength and we grew low double digits in rail.
Race was negative in the quarter as we won some competitive new business.
Oh, that's sales declined we expanded margins over 300 basis points on a pro forma basis and are well on track with their integration efforts.
Enclosure segment income declined 41% and return on sales declined 560 basis points.
The impact of lower volume inefficiencies and increased costs related to covert 19 negatively impacted margins.
Decrementals are expected to improve in the back half the year.
Moving to thermal management sales of $96 million declined 24% organically as expected industrial MRO sell the steepest decline due to continued site closures in parts of the world and delayed or deferred spend.
Our project business was down single digits as we continued to execute on our backlog.
In addition, we grew backlog sequentially and year over year as we continue to win major project bookings.
Recall, the vast majority of our energy exposure is downstream, which seems to be faring better in this environment.
Commercial revenue experienced significant declines in the first part of the quarter. However saw modest recovery in June and we continued to make good progress expanding our channel presence with our commercial offering.
Segment income was down 43% and return on sales declined 460 basis points due to lower volume and industrial MRO and commercial tend to have a higher margin mix component.
We saw a significant sequential improvement in Decrementals from Q1, as the actions to reduce our fixed cost structure and we airline realign our business our rate read out.
Now on CFS sales of $132 million declined, 12% and 14% organically.
The commercial vertical was negatively impact bank of in 19, mainly due to site shutdown an area in particular strength in the quarter was in the utilities vertical which grew mid single digits and accounts for nearly 10% to be at that sales.
Segment income was down 17% and return on sales declined 130 be hundred 30 basis points, but remain strong at over 26%.
Yeah, that's had almost a point of contribution from price and realized strong productivity gain which helped offset operational inefficiencies from coping 19.
Turning to slide six team executed well on the cost action through a combination of restructuring and temporary actions.
As Bruce continues to lag and uncertainty remains we implemented additional cost actions.
In aggregate, we're now targeting approximately $70 million of cost savings versus your original 50 million, we discussed on the April earnings call.
These actions include an extension of the temporary measures, we took in second quarter as well as more structural changes.
Reviewing our near term capital allocation strategy, we will continue to invest first inorganic growth with a focus on new product development and our digital transformation our dividend remains a key component of returning cash to shareholders.
We are lifting the suspension of our share buyback program and will continue to assess buyback stock buying back stock based on market conditions and M&A opportunities.
On M&A, we're focused on actively building relationships in our funnel. So that we're in a position to be ready as market conditions improve.
As always we will continue to evaluate the returns for each capital allocation decision, but the goal to generate the highest return well managing liquidity and leverage.
Moving to slide seven titled Healthy liquidity position, our net leverage ratio at the ended the second quarter was 2.4 times, which is slightly above the first quarter.
We ended the quarter with $235 billion in cash and an additional $315 million available on a revolver.
We have limited maturities until 2023 and remain confident in our liquidity position as well as our cash generation activities. This year.
Specifically on working capital our team continues to make good progress.
Working capital Task Force is taking a data driven approach to target opportunities grading structural improvements to benefit our cash generation in future periods. We did see an uptick in inventory early in the quarter given the steep decline into man made progress and expect this to continue to improve in the back half the year. This.
Focus on working capital is another example of how we intend to emerge stronger from this pandemic.
[noise] on slide eight title balance sheet cash flow.
Have a healthy balance sheet and as I mentioned earlier, we are seeing improved year over year cash generation and the second quarter, we focused on liquidity preservation, well also deploying $30 million to dividends and approximately $7 million to capex.
Moving to slide nine consistent with what we first presented in April we continue to manage our business through scenario plans and actions at all levels of the organization.
Well, we believe the worst is behind us the shape and pace of the recovery remains unclear. Accordingly, we are continuing the suspension of our full financial guidance until the market conditions stabilize.
More near term, we do expect third quarter organic sales to be down in the 10% to 20% range. So an improvement from the second quarter.
A couple of data points that gives us reasons to believe sales can improve.
First orders declined less than sales in the second quarter and down 15%.
Additionally, both in June and July orders were down mid teens showing improvement from the May trough.
We also saw an improvement in July sales versus second quarter trend.
We expect Decrementals to further improve in the third quarter and to be in the range of 25% to 30% before acquisition.
Its cost actions and improved efficiencies continue to read out.
For the full year 2020, we continued to see sales down between the mild and moderate scenarios.
As we progressed through the rest of the year, we expect sequential improvement in each of our segment, albeit still down year over year.
Again these are scenarios that we have modeled enterprise segment and it each of our plan to help ensure we had the plans in place and we're ready to execute.
As a reminder, these scenarios exclude the impact from acquisitions.
If you other points and guidepost for full year 2020, we now expect interest to be in the approximately $40 million range and a tax rate in the 17% to 18% range on shares if we did not buy back any more this year, our diluted share count will be close to 171 million.
Our focus is on actively managing decrementals, driving cash and deliver and recovering fast I'm confident that we're taking the appropriate actions to create a stronger invent as we emerge and I'm pleased with our second quarter results and execution amidst this challenging environment.
This concludes my comments on the second quarter and I'll now turn the call back over to that.
Thank you Sarah.
I'm going to start on slide 10, our near term goals, we executed well on these priorities during the quarter, bringing a safe work environment, keeping our business moving forward and executing on actions to emerge stronger.
Across our facilities, we have developed detailed cobot 19 checklist to ensure the safety of our employees customers and suppliers.
We are communicating frequently to help employees be informed of the measures, we're taking and any changes to local guidance.
We're also providing employees with a variety of tools and resources to support their wellbeing, such as mindful Mondays and financial Friday.
Serving our customers and working in a safe environment are critical for our success.
Factor, we are operational around the globe has allowed us to win new business and new customers.
Quickly adapted to working virtually and digitally and this new environment.
Turning to slide 11, I want to share the actions, we're taking to emerge stronger.
First on new products.
We've launched 24, new products in the first half of the year and a few significant launches already this quarter that I would like to highlight.
I'm excited by the launch of our global AISI enclosures portfolio for optimum protection and industrial applications. This full range of enclosures and accessories meets international standards makes it easier and faster for customers to specify order and assemble superior solutions around the world. This long.
Builds on our Elden acquisition.
In thermal management, we introduced a wireless communication interface that builds on invent raychem election family of smart connected control of monitoring solutions recall, we had the largest installed base of thermal he trace products in the world. This product allows customers with hard wired communications to up.
Great to wireless remote connectivity for monitoring.
[noise] NFS, we're building on our invent AERCO CAD weld exothermic connection and grounding materials for the rail and utility vertical.
We have made over 100 million connections worldwide over the last 100 years and now we have just launched the invent era Coke had weld impulse, which builds on our legacy of innovation new features around safety power and ease of use.
We've been creative and launching new products and providing training sessions virtually we've seen a significant increase in attendance often reaching capacity within hours of registration.
Our digital transformation is accelerating as well enabled by the development of our agile project delivery system, we launched a new thermal management website with richer content, citing crews and had search capability and where to buy feature to locate our products at the closest distributor.
We've also introduced a number of marketing and sales tools with digital lead generation instant online quote and a new pricing tool all of which can benefit our sales force by providing real time analytics.
Better business insights these tools right efficiency and growth.
We've also had numerous new digital launch is focused on our operations the automated and digitized manual processes. Many of these use robotic process automation and examples include automating order entry NPO acknowledgement.
Another area, where where we are emerging stronger is with acquisitions elden in W.P.T. added six points of growth during the quarter, notably Elton has been rebranded invent Hoffman.
Next step toward our goal of supporting customers around the world with a global portfolio for virtually every environment.
Our M&A funnel remains healthy as we targeted strategic bolt on acquisitions that are highly complementary to our current portfolio recall, we are a 2 billion dollar company in a 60 billion dollar fragmented space Elden in WB T are great examples, which extend our capabilities and global reach and arc.
The next Evertec space.
Turning to slide 12.
I'm pleased to announce the launch of our first social responsibility report.
Which reflects our three focus areas people, our employees and the inclusive culture, we're building together products, our products and solutions that connect and protect our customers and plant it how we care for the environment and support our communities.
When we launched invent we made inclusion and diversity priority and here are a couple of proof points.
67% of invents board of directors represent diverse groups.
And women make up 45% of our executive management.
Other highlights include.
As part of an dent in action employees from 14 countries volunteered more than 41 hour 4100 hours in their communities are invent than foundation awarded grants supporting stem focused use education program.
And in bed diverted 97% of waste from landfills.
This foundational report as a meaningful step in our commitment to driving progress around the world on issues important to our employees customers and shareholders. We look forward to updating you on our progress.
To summarize my comments today, we are executing well in a challenging environment I.
I am proud of our team and what we accomplished in the second quarter.
I am confident in the actions, we're taking to emerge from this pandemic as a stronger invent would that I will now turn the call over to the operator to start today.
Thank you and as a reminder, if you do have any questions. Please press star one on your telephone keypad at this time.
Your first question or will come from a line of Jeff Hammond with Keybanc capital markets. Please go ahead with your question.
Hi, good morning.
Good morning.
So just I'm just talking on the decremental margins you know nice performance in the quarter. I think you said serve 25 to 30 in the third quarter can you just talked about whats informing the improvement in the Decrementals is it simply the you know the better so you're the less bad sales in the and the internal restructuring or whatever.
She was going on there.
Yeah, I'll take that just a couple of things there. So one we would expect to see the largest improvement in enclosures really having worked some through some of those operational uncovered related disruptions in some of our largest factories and then secondarily, we expect to expect fs to improve as well thermal.
So we expect a that business to continue to kind of hold in that low to mid Thirtys decremental range from 11 perspective from a price cost we would expect that to continue to get marginally better you know in Q3 inflation easing a bit but really I expect the productivity.
Improvement to add to continue to take hold with some of the cost action. I think Q2 was a good example of that where if you look at just are you know overall profit walk you see there that we've got $8 million and productivity that includes $17 million or.
Net productivity right and so you've got $17 million of productivity offset by roughly $9 million Inflations, that's where you see inflation easing a little bit from Q1 and productivity almost three acts that of Q1. So we'll continue to expect that to to ramp here in Q3, and giving us the better better decrementals.
I think the other thing you know one other thing to point out to Jeff. It's just from the acquisition standpoint, just because we're gonna be lapping the l. than acquisition in September we do expect that overall impact from acquisitions to ease a bit in Q3.
Okay excellent and then you mentioned the June and July order trends I'm getting better can you just talk about that was you know by segment I think you called out if that's particularly.
[music].
Yes, so I would say from a Q2 perspective, you know we talked about orders being down in that 15% range. So enclosures was more down in that high teen Yeah, Thats was down roughly 12% and thermal more in that mid teen range.
The kind of cadence of the quarter I would say mirrored a lot of what we saw on the order side or on the sales side. So fast that trough was more in that April timeframe and it continually got better through the course at the quarter enclosures that trough with a bit more in that may timeframe and thermal was a bit more and even you know just.
Given the project I met dynamic of that.
We looked at July specifically, you know we talked about that you know better than sales performance extending into July so those July order rates.
We're in that mid teen range similar to what we saw for overall Q2 as well as for June and revenue was better than that overall, if you looked at that from a segment perspective enclosures was really right in line with the overall invent yet best was better on both both fronts, both from a sales and orders per se.
Active and thermal you know wasn't that and worse than that firm orders and revenue perspective, I do think it's helpful to point out I'm just sit on the order front for thermals, we do expect that to be negative here in Q3, because we will be lapping in Q3 of a year ago, we talked about a very large you know Arctic.
LNG job as well, but even with that being said, we do expect backlog to be up year over year in Q3.
Okay very helpful color all thanks a lot.
Your next question is from the line of Joe Ritchie with Goldman Sachs Go ahead.
Thanks, Good morning, everyone morning learning.
Maybe just starting out can we we just talk a little bit about the thermal business. If you were to kind of parse out the growth I'm kinda by end market. This quarter, a it'd be helpful. Just give some color around you know what commercial flash tomorrow did it really kind of what your expectation is for me going for.
Work for the rest of the year.
Yeah, so from a from a thermal perspective on if you remember that's roughly a third of that business is commercial third project and a third I'm more MRL and so we talked about that project business actually being only down low single digits I'm on the commercial side, you know mainly due to some of these you know.
Hi closures and some of the overall you know economic headwinds here in in Q2, we did see commercial down in greater than 20% range and then we saw MRO and probably hardest hit if you will.
And so that's kind of how that you know segmented out overall I would say from an orders perspective again, we saw strength on the projects that actually up double digits as well as and we continue to build backlog year over year as well as sequentially. So as we look at the back half. The year. You know we continue to expect that you know.
Commercial business to improve our you know, albeit at a slower rate and morale, we think thats going to continue to be under some pressure you know just given the overall spend on deferrals.
And delays and do we do expect I'm projects to continue to be more resilient as we you execute against our backlog as well as you know the orders.
Are holding up relatively well.
Got it that's a that's super helpful that sounds like it sounds like mix with already negative this quarter and we'll probably continue to be negative, which is which is why the decrementals will be pretty comparable going forward is that a fair way to think about it yeah exactly.
Okay, Great and then maybe Mike My one last question I'm, just thinking about that the the additional cost out.
I'd be curious just if you could provide any color around how much of the this cost actions actually came through in the second quarter and then what the expectation is for the additional cost actions into the second half of the year and and then I guess, if there's a it theres a portion that bleed into 2021 that would be helpful.
Two.
Okay.
Let me kind of break that down so they so overall, we're targeting $770 million for the full year, we saw over $20 million of that play out in Q2, and we'd really expect that to extend into Q3 as we extend some of our tech temporary actions on as well as some of these structural actions coming into the.
Gold if we look at it just by way of structural and temporary so that 70 million.
30 million into on the temporary side and roughly 40 million its structural so that incremental 20 that we did here taking it from the 50 to 70 70 was roughly half temporary and have structural so if you looked at im just that structural piece of $40 million and we talked about this last April on you know.
18 million of that was simply carry over from what we did last year. A 25 million is more structural cost. This year and that would include roughly $10 million to $15 million of carry over into next year. So we think thats going to be a key part of helping US you know offset some of these temporary cost reductions coming.
Back into the fold in 2021.
Yeah that makes a lot of sense. Thank you very much.
One more point I would say is as we look at some of these temporary cost actions.
There's a portion there that likely.
Doesn't come back rights as we think about we're all working virtually in digitally we're traveling last probably travel doesn't get back to the levels, where it was even as we just think about trade shows and marketing and we're doing it all more digitally I think we're going to find that some temporary cost doesn't come back into our panellist. We look forward. So we're still evaluating that but I think.
Thats another lever that we're going to have.
Your next question was come from a line of Deane Dray with RBC capital markets. Please go ahead with your question.
Thank you good morning, everyone.
Turning warning he can we get.
Ah colour on the geographies and then also within the context about how they progressed through the quarter.
Kadenacy, Sarah so from a geographical perspective, you know in that sales overall down 22% from organic basis.
We saw a north American down the most I'm a bit of an improvement on a Europe EMEA purpose perspective relative improvement and on the APAC side, we ended up roughly flat.
And I would say that you know for them for the most part you know that cadence. If you will you know reflects the cadence that I talked about earlier from an overall orders and sales perspective.
And how about Europe.
So a me EMEA was a bit so AMEA went down a bit less than what North America, North America with heaviest right in terms of that down 22% AMEA performed a bit better and they pack with overall flat.
Got it and then to go back to the Decrementals.
And on the slide or will you give your scenario planning.
I know this does not include acquisitions, you emphasized that before and we understand the impact of M&A was seven points. This quarter, how does that shape up for the third quarter in terms of impacted decrementals.
He said L. Dan.
Anniversaries in September, but what would be the guidance today, yeah. So we'd expect that on impact on it decremental to be about five point in Q3.
Yeah, just given the lapping of that Elden acquisition in September that's real helpful. And just last one just what's the approach I mean, we talk about El then.
But that brand goes away I thought there would be brand value and elds and going forward.
So does it disappear altogether and just whats the thinking behind that yeah, Dean over time, it does disappear and part of that as we did some very thoughtful market assessments, including with the elden team and as we go forward remember one of the.
Opportunities that we have as to have one brand to support global OEM customers around the world and so we needed to unify that offering with that brand, but you'll see that there's a lot of transitionary material from our website to everything that is allowing customers to understand and do those cross reference.
This is between Elden and Hoffman, so we've put a very thoughtful approach in place, but ultimately it enables that strategy to have one set of products and branding and nomenclature to support a global OEM around the world.
That's real helpful. Thank you.
Your next question comes from online Julian Mitchell with Barclays. Please go ahead with your question.
Thank you and I'm happy financial Friday, [laughter], maybe that's the first question around the this scenario on sales and I fully realize that it's a bit scenario not formal guidance and that's a lot of them. So it can see but I suppose you'll you'll mild to moderate scenario.
As you put it.
That's implying the organic sales for the year, you know were down call it mid teens.
You know that would imply I guess the fourth quarter.
That mid teens level, you know consistent with the first call from with Q3 is that just reflecting the uncertainties in the macro environment or is this something specific perhaps seeing how you see energy playing out in the balance of the year or something on the timing of sales coming out of the backlog in selmo more.
So broadly.
Just wanted to understand that then yes, specifically on energy what we should expect sales can be done in the second half.
Yeah, I think to your question I mean, some of this just is the uncertainty right. So you know we've seen economies open up an or cover and then some steps to take things too at the pandemic spreads to just closed some areas down which creates some caution in spending so it is that uncertainty as we think about that going for.
Sure I would say, though on some of those end markets. As we've said you know, we just expect that oil and gas is going to be weaker now while we're going to have project.
Relative strength, we expect that MRO business just to be weaker right capex spend there is likely to be weaker. So that's what we've factored in as well as we've thought about our outlook.
<unk>.
Thank you and then secondly, it rounds I suppose the capital deployment.
Your balance sheet is not very levered, yeah anniversary ing the elden acquisition in a few weeks. So you've got the sort of bandwidth to do more on capital deployment, but understand the environment. As you just said the macro is uncertain.
Maybe help us understand what the scope of sort of excess cash is to spend over the next six to 12 months.
You know how aggressive could investors expect you to be on buybacks or acquisitions from here.
Well I I think the answer on that is.
You know, we're always looking for what's the best use of our cash right and capital and we always want to focus and prioritize first on growth now having said that it is a very challenging environment and so.
I think on the M&A front, while we're working our funnel and relationships.
There's uncertainty as to just and feasibility right. You know as you think about the ability to do an acquisition and so we're going to continue to work that but you know at the I think there's going to be sent some timing challenges to that so then we're going to look at just you know the certainty of the markets and.
And evaluate that when it comes to share buybacks et cetera. So were what we like is that we believe we've got some nice optionality and we're just going to make sure that we put our cash to use on what or whatever the best opportunity is as we assess the market.
Great. Thank you.
Your next question is from a line of Scott Graham with Rosenblatt Securities. Please go ahead with your question.
Hey, good morning, all well done.
Morning, guys.
I wanted to ask a question.
Question, those Sharon and then something maybe more strategic with that.
So.
Why these you go back into the till one raise the cost outs.
It looks like Sacramento was fine sounds like you're happy with it what motivated that.
Yeah. So I'm Scott we in April we talked about you know the need to take some additional you know targeted structural actions, particularly in the oil and gas space as well as you know in some specific areas on the industrial side. So we believe that these incremental incremental actions really position us well to manage our decrementals within that framework.
But also while enabling us to recover faster as well. So I would say that you know these incremental cost sections really allow us to help offset some of these covert 19, you know costs and inefficiencies that we're seeing ads as well as sort of been dressing and Sunday select verticals, what we think maybe a more prolonged recovery you know maybe in and.
Thurman and close and closures as an example.
That's true.
That's true for you on strategic we talked last quarter about.
No. The companies you know sort of [laughter] theorizing how to move from.
Were you serve buildings in.
Both businesses enclosures, and you know some particular and how we transition that's more a buildings, where it's there or bet that that are attached to better end markets be to know hospital, you know Oh My health care corporate this type of thing I was just curious as to whether there were.
Is there any you know inertia on that.
Strategy during the quarter.
Yeah, as we think about.
Where ah well I guess, what I would say you know one of the proof points as we think about our fs business and particularly what we do there with around catty as you know we've continued to strengthen what we're doing around prefab and we think in this coded environment, a more easier to install contact glisten environment.
Does that prefabrication is a growing trend right. So we're continue to put effort into how we scaled that business.
And from looking at just some of these other verticals you know I would say for US. We also look at data and for catty in particular to that data and networking space expanding their as another application for that catty portfolio beyond I'm, just office buildings or other areas. So we think about a lot in terms of the pro.
Product offering that we have and then just in terms of how we market that and get those value propositions out there. So we're continuing to work on that how we position our portfolio to reach broader vertical markets.
Your that education process is that direct end user or do you your distributors already sell to those markets, which would obviously be so little bit easier for you.
Yeah, our distributors tend to access all those markets for us. It's a matter of doing two things were very strong, particularly in that area best portfolio, because we have such a strong contractor loyalty program. So these I've mentioned these virtual training sessions, we do a couple of things we get products, we actually ship products to get it into their hands. So it's very tactile and they can play with it.
But we also do virtual sessions to talk about applications, where else can these products be used what's the value proposition. So its all of those things working with our channel partners and then direct to the end user and explaining them to the value and the.
Benefits of the products and the applications.
Got you last question for me.
Data centers could you maybe tell me how they did in the quarter, but maybe more broadly.
Some of the strategies behind that business to keep it you know one of your better growth businesses and specifically within the data center market for you guys are.
Are you more lever to like to data forms for the hyper scale.
Yeah, So Dan networking solutions for Us I would say had more relative strength, although it was down in the quarter, but you know, we look at that and and job site Scott shut down right. So if you think about getting contractors on site to do installations I mean, all of that got shut down.
During the quarter and there's some time for when some of that activity is going to take place just because everyone's getting comfortable with returned to office et cetera. So we still think the long term trend here is very favorable and for US you know we have I would say we tend to be more in terms of.
Dealing with system integrators and more through channel partners, we do have some hyper scale, but wouldn't we tend not to that's not where we're really targeted and focus you know we can do all levels right from a simple racking system up to a more integrated solution with liquid cooling, but we tend to have most of our sale.
Sales going through the distribution channels, which tends to be more of those smaller type of applications versus the data farms in the hyper scale.
Understood. Thanks.
Thank you.
Your next question comes from the line of David Silver with C.L. King. Please go ahead with your question.
Yeah. Thank you good morning, good morning, Yeah, Hi, so I'm.
I'm looking at slide eight because scenario planning slide you know it looks to me I'm pretty similar to three months ago.
And I believe you're still expecting.
Mild to moderate kinda scenario internally, but I'm just wondering what.
Do you from from your perspective, what has changed in your overall outlook from maybe three months ago, so could be internal they could be.
Distributor channel behavior.
Security of supply chain, maybe the macro environment you know three months ago. For example people were some people were expecting are hoping for a V shaped recovery I don't hear that too much anymore from.
The management, so talk to so so compared to three months ago, maybe when you created your scenarios, what either internally or externally.
You think has changed.
Well I would start with you know I think three months ago, we werent quite sure how difficult are challenging Q2 was going to be right and so.
You know I think we progressed through that and we saw that there were shut downs, but eventually things read all but now it was not back to business as normal certainly, but you know I think we saw progression during the quarter as we spoke about that in terms of just orders and even in terms of you know in some.
In some of our segments sales so and at Cerro said, we expect that Q2 is the and they will have been the toughest quarter right.
The other thing that I would say is just as we looked at our supply chain two things one.
You know as we have these stay at home orders or you know there's always this initial reaction employees weren't sure are companies weren't sure and you know we have different places like Mexico. You know we had to work through ensuring that we were deemed essential to continue up and running so it was very disruptive and so when we talk about some of the operational.
Inefficiencies or coal that costs.
No thinking about how we had to manage our shifts or you know now invest in P.P.E. and other safety measures all very important.
Those things I think we've now got in a more better or manage situation to where that was all new right. So our ability to optimize things manage some of those operational efficiencies I think we have a a good perspective or feel you know more positive about how we manage that going forward. So those are just a couple of things you know I would.
Okay and it was our expectation and you know we can go back in time, particularly with enclosures, because a lot of our business, particularly in closures and he had that goes through distribution channels. We know this from history that when we enter a downturn, we always get destocked faster, particularly in enclosures and when you start to see recover.
We come up faster and.
We're not there yet, but we do expect that that trend will be consistent and so that's an indeed, what we did see we know there's always that faster drop off in it it will come back I'm not say, we're seeing that fast pick up yet, but it's a gradual improvement, but overtime, we should expect that and I'll, let Sarah add some more color from the.
Cost standpoint.
And maybe just a couple of more points to make on the on the cost in the decremental side as you know I'd be risk remains without saying that we also saw some really good underlying productivity I mean, the team's focus hard on rapid renegotiations, and particularly a focus on our direct and indirect spend so we did see some guy.
Good underlying productivity along with just a you know quickly adjusting our cost structure in spend in a short times that really help on the decremental front and then I I secondarily, it's really cash you know we're trending a bit more favorable to these scenarios from an overall free cash flow perspective, I mean the.
Working capital focus and the priority that we're paying on that I think is beginning to pay off and would expect that to be the case here in the in the back half I think the other thing to point out too is typically it based on the seasonality of our business. The second half of cash flow tends to be where we generally.
Already over cash so you know with where we're at from a free cash flow perspective, as well as with the seasonality we feel good about the overall you know cash performance for the year in the levers that were working.
That's great color. Thank you.
I have kind of a semi follow up but.
The topic might be organizational sustainability. So can you just looking internally I mean, you've been operating are adapting to the a pandemic environment for a few months now.
You know it looks like you're continuing to adapt as because the situation unfolds, but.
When you look at your production logistics marketing administrative functions.
Separately I mean are there any areas, where you think.
Well there probably are some areas, where you could probably continue as you are indefinitely working remotely or more decentralized structure.
But are there some areas, where you think you know at a certain point it really does start to diminish.
Effectiveness so.
Wild guess that I'm, just thinking product development anything kind of on the creative side. You know, it's it's a naturally collaborative function and the separation and or the more decentralized structure me.
We do some gaps or some some lack of productivity. There. So as you look at you know your range of internal functions, which ones do you think are sustainable for the long term as your as your operating now when which ones you know might might be less.
Less inclined to continue as you are without some diminution in effectiveness. Thank you.
Well, let me, let me try and answer that from a you know the obvious I get all our plants are running any we need people building product at our plants and I think we've learned how to manage our safety protocols, there and our shifts and you know and gone above and beyond to to ensure the safety of our employees or anyone who visit to our plants. When we look at some of.
The other functions that are operating virtually I think we're getting better with our digital tools now the future for US I believe is we're going to see a more flexible work environment and it will require people from time to time to come in to collaborate et cetera, but you know we're able to I've talked about our agile approach.
I think delivery system, and if you're familiar with agile, which is predominantly used in software development is a very structured process with scrums that have people coming together and there are great digital tools, where you're able to work ideas and requirements and then go away and execute and come back in two weeks sprint and I actually.
Team have seen us.
Improve and that's why we talk about accelerating our digital transformation because of our agile approach and and the <unk> program management, we have in place we're actually accelerating what we do so there's a there's a good case and a good example, I wouldn't say on a product development standpoint. This is a record year for us and we.
And how to launch with Youtube videos, and we've learned how to do virtual sessions, but you know we do have engineers that have to come on site to do some testing and I think was house you know how we're running our operations around the world and with some flexibility you know we do have employees that will come into our offices safely.
And perform that function. So you know it's not as if all offices are shut down or we're not having any engagement. So I actually don't see anything right now where I just.
I think we're not going to be making progress because we're getting better at digital or very flexible in how we're managing our workforce.
And the digital tools are really driving a lot of collaboration a better than we expected. So you know maybe my last point. There is this is why we talk about safety and while being because while we can do all those things were not people aren't used to it and so we've done a lot to train managers how to manage their people how to.
I have how to balance work in home like you know do all of those things right. So we're trying to support employees with this new way of working because it's a change and so its change management.
Okay. Thank you and then just one last one but what would be required for you to feel enough.
Confidence to restore providing financial guidance.
Thank you.
Yeah, I think the answer that question is there still much uncertainty as to how the permit dynamic is progressing and you know we're seeing some of the countries globally that seem to have contains things early on now report new cases, so I believe we need to see globally. Some.
View that we have containment.
Doesn't necessarily have to be a vaccine, but we just need to know that economies are going to keep opening and shutting down and I I really don't think we're there yet so that's one of the things that we're going to be looking for is some of that stability around the control measures around the world.
We're going to try and give you as much color as we can from these scenarios you know as as we did pointing to what where we think Q3 sales are a as much transparency as we can provide with you know the information we have we're going to provided as Sarah also just went out line July as well.
Great. Thank you very much.
Okay.
Well I want to thank you for joining us this morning.
So even though this uncertainty persists in this environment you know we're confident any actions, we're taking to emerge stronger we're managing decrementals generating strong free cash flow and investing in growth.
Our team is aligned on the near term goals to manage through this and emerge stronger. Thank you again for your time and we hope Youre main safe and healthy operator, you may now conclude the call.
Thank you. Thank you everyone for joining today's conference call. You may now disconnect have a great Dane.
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