Q3 2020 nVent Electric PLC Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the and then Q3 earnings Conference call. At this time all participants are in a listen only mode. After.
The speaker presentation, there will be a question and answer session.
Ask a question during the session you will need to press star one on your telephone. Please be advised that todays conference is being recorded I would now like to hand, the conference over to J.C. White guilt, Vice President Investor Relations. Please go ahead Sir.
Thank you Regina and welcome everyone to invest third quarter 2020 earnings call I'm <unk>, Vice President of Investor Relations and also on the call are best Watney <unk>, our Chief Executive Officer and share the Waikiki, our Chief Financial Officer today, we will provide details on our third quarter performance and provide an outlook for our fourth quarter before we.
Again, let me remind you that any statements made about the company's anticipated financial results are forward looking statements are subject to future risks and uncertainties.
The risks outlined in today's press release, and <unk> filings with the Securities and Exchange Commission forward looking statements are made as of today and the company undertakes no obligation to update publicly such statements to reflect subsequent events or circumstances actual results could differ materially from anticipated results.
Today's webcast is accompanied by a presentation, which can be found in the Investor section and then that's what say references to non-GAAP financials are reconciled in the appendix of the presentation.
I have time for questions. After our prepared remarks, and now I will turn the call over to Beth.
Thank you Tracy and good morning, everyone. We appreciate you joining us today as we navigate through the pandemic. We continue to hope that you and those around you are safe and healthy.
Our goal on this call is to provide additional detail behind our third quarter results.
Discuss trends, we are seeing and provide an outlook for the fourth quarter.
Turning to our executive summary on slide three.
I would like to start by thanking our inventor employees, who are working tirelessly. They continue to inspire me with their commitment and dedication.
Their safety and well being remains our top priority.
Our third quarter results reflect strong execution as both sales and margin improved sequentially across each segment.
We exited the quarter with 19.8% return on sales.
Our free cash flow generation was strong at $180 million year to date.
And up 34% above prior year.
I am proud of our ability to maintain these high margins and robust cash flow in a very challenging environment.
We continue to invest in new products and digital transformation critical elements of our growth strategy.
We have shifted our focus from cash preservation to cash deployment with a focus on both organic and inorganic growth.
We remain confident that through our actions, we can emerge stronger and are well positioned to grow.
Now I would like to turn to slide four for a summary of our third quarter performance.
Sales during the quarter were $509 million down, 9% with strong relative performance from electrical and fastening.
Return on sales contracted 70 basis points to 19.8%.
Cash performance remained strong in this challenging environment with approximately 140% conversion of adjusted net income.
Electrical and fastening delivered terrific results demonstrating the strength of the portfolio.
Closures executed well, achieving 18% return on sales, 20% decremental and saw sequential sales improvement.
We continue to execute on or is that growth priorities and year to date have launched 33 new products.
Looking ahead, we're issuing guidance for the fourth quarter.
Our outlook is for a gradual recovery based on trends, we saw exiting the third quarter and into October.
Earnings reflect the execution of the $70 million of cost actions, we outlined last quarter.
We are not extending the company wide salary reductions or furloughs into the fourth quarter, we are confident in our ability to execute however.
However, uncertainty remains with a pandemic and its impacts around the world.
Looking at some of our top verticals commercial and residential and infrastructure continue to perform well on a relative basis.
In our largest vertical industrial we're cautiously optimistic as demand trends improved sequentially.
We expect to see a gradual recovery as global Oems increased capex spend and channel partners restock inventory.
This is a trend we have seen play out in our enclosure segment overpass economic cycle.
Today, we believe we are even better positioned given our Elgin acquisition any operational improvements we have implemented.
In commercial we saw sequential improvement as contractors were turned to job sites.
We are closely monitoring construction demand for new products and renovation activity.
We expect residential to continue to grow and see additional positive signs in health care and education.
Infrastructure continues to perform well this includes data centers and networking solutions utilities, and real and its weighted more toward our enclosures and electric one fastening segments.
One area, where we are more cautious if oil and gas, we expect which we expect to be weak.
We believe our backlog and thermal management should help offset some of this pressure.
Well, we expect Emerald sales to rebound the timing is uncertain.
Overall for and that we expect to see sequential sales improvement in the fourth quarter reflective of a gradual recovery and to continue to build momentum.
I will turn the call over to Sarah for some detail on our third quarter results and update on capital allocation and balance of year outlook. Sarah. Please go ahead.
Thank you Beth.
Let me begin by saying, we continue to execute well and our financial position remains strong which gives us the foundation to continue investing in growth to emerge stronger.
Let's turn to slide five to review third quarter 2020 performance sales.
Sales of $509 million were down 9% relative to last year and declined 14% organically.
The acquisitions of L., then in W. Beachy added about four points to growth.
I'd like to take a moment to talk about trends in the quarter.
In enclosures, and electrical and fastening orders were generally in line with sales. However, we saw positive momentum in September.
Thermal management orders remained weak drought and included a tough comparable with a large <unk> Arctic LNG project, we booked a year ago.
For investment as we lived in October we were encouraged to see both orders and sales trends improve relative to the third quarter.
Third quarter, Decrementals were 27%, which is an improvement of 12 points sequentially as our teams executed well on both temporary and structural cost actions.
Price plus productivity more than offset inflation and free cash flow continued to improve versus prior year up $17 million.
As you saw in our press release. This morning, we recognized a noncash goodwill impairment charge during the quarter and thermal management.
This was the result of adverse market and economic conditions related to the pandemic combined with the volatility in the oil and gas leading to a potential sustained downturn in the energy industry. This impairment charge of $212 million was reflected in our reported results.
Now please turn to slide six for a discussion of our third quarter segment performance, starting with enclosures sales of $245 million declined 7% and 14% organically we.
We saw weakness in automotive in oil and gas and while overall industrial remain down trends improved as we exited the quarter.
Data center in networking solutions grew high single digits and rail grew double digits. We expect these focused verticals along with industrial to continue to strengthen.
At the one year, Mark Elden continues to perform well and exceed our expectations with pro forma sales down low single digits and another quarter of strong margin expansion in.
Importantly, we begin to see our first we began to see our first wins with a newly launched I see portfolio.
Enclosure segment income declined 8% and return on sales reached 18% down only 10 basis points versus prior year.
Disciplined cost controls and strong execution in our factories drove 20% Decrementals, which is an almost 30 point sequential improvement versus the second quarter.
[noise] now onto electric on fastening sales of $148 million declined, 1% and 5% organically.
We saw moderating declines in our largest vertical commercial we saw pockets of strength and prefab and seismic and sales continued to grow nicely in the utility and infrastructure verticals.
Segment income was down 1% and return on sales was 27.6% flat relative to last year.
Price contributed over $3 million and offset inflation.
The team continues to make great progress on our lean journey as evidenced by strong improvement in productivity and working capital.
Moving to thermal management sales of $117 million declined 22% organically.
Similar to last year industrial MRO saw the steepest declines due to continued spend reductions well project sales grew in the quarter coming.
Commercial and residential sales, which account for roughly a third a thermal management were down mid single digits.
Segment income was down 34% and return on sales declined 430 basis points, mainly due to lower volume and industrial MRL.
We had positive net productivity of approximately $4 million, although not enough to offset volume declines and a negative mix impact.
On slide seven patent entitled balance sheet, and cash flow, we have a healthy balance sheet and continue to generate strong free cash flow.
We ended the quarter with $160 million of cash on hand, and an additional $465 million available on our revolver.
We repaid the $150 million, we proactively borrowed earlier this year.
Working capital remains one of our top priorities and our teams continue to make terrific progress despite the challenging environment.
We managed our receivable days relatively in line with past quarters and improved our payable days well.
Inventory days increased overall as we managed our supply chain, we made great strides in our electrical and fastening segment.
Please turn to slide eight titled capital allocation update.
Our framework remains unchanged, we will manage our leverage reinvest in our business pursue attractive M&A and return excess cash to shareholders. We.
We exited the third quarter with a net debt to adjusted EBITDA ratio at 2.3 times, which is within our target range of two to two and a half time.
Our strong cash generation provides the foundation to invest in both organic and inorganic growth.
We continue to invest in new products, and our digital transformation and maintain a full year capex forecast of approximately $40 million in line with prior year.
And then they remains a top priority for US we believe we have a rich phone vital a bolt on opportunities in both enclosures and electrical and fastening with two acquisitions in the last 12 months. We believe these are great proof points that we can execute on our strategy build upon this.
Drinks of our invent brand and integrate well.
We are 2 billion dollar company competing in a highly fragmented $60 billion space. So.
So we see plenty of opportunities.
We continue to have to pay a competitive dividend with an attractive yield and it remains a key component of returning cash to shareholders. We.
We bought back shares in October, which brings our total share repurchase purchases to approximately $40 million year to date, which helps offset dilution.
Moving to slide nine titled Q4, 2020 invent outlook we.
We expect sales to decline, 10% to 14% organically.
We continue to expect a gradual recovery absent any material disruptions from Cove at 19.
By segment, we expect enclosures to see modest sequential improvement.
Electric on fast seem to be fairly consistent with the third quarter and a slower recovery in thermal management.
We expect adjusted EPS to be between 38 and 43 cents.
Two important factors to note when modeling the fourth quarter.
First we're not planning to extend companywide furloughs or salary reductions and second the fourth quarter is typically one of our more seasonably lower margin quarters due to the mix of the business and we expect this to hold true this year.
For the full year, we expect to see over 100% conversion of adjusted net income.
As we look back history has shown or business bounces back after downturn as economic uncertainty subsides and channel partners look to restock.
For example, in 2010, and 2011 enclosures and electric on fasting grew high single to low double digits.
And following the mild industrial recession in 2018. These segments grew mid to high single digits.
And thermal management, while history suggests and MRO spend is the first lever pulling to control costs.
Nickel plant maintenance eventually resume.
[noise], although this downturn might be different from other cycles and the timing remains uncertain. We believe we are well positioned for the recovery.
That concludes my comments I want to emphasize that we continue to execute well during these challenging times.
In April we laid out scenarios as to how we expect it to perform.
I'm pleased to say, we have executed better on bone, Sacramento and cash and we exited the quarter in a strong financial position.
This concludes my prepared remarks, and I will now turn the call back over to Beth.
Thank you Sarah.
On slide 10, I want to discuss how we see the future for invent.
We believe the macro trends with the electrification of everything and the need for labor saving solutions are in our favor.
The proliferation of data and electronics means the world needs more enclosures for protection everywhere.
We expect the move toward five G. smart buildings in the city electric vehicles increased energy storage and the industrial Internet of things will drive demand for our products.
With the addition of Elden, we have strengthened our enclosures portfolio and can meet almost any specification and provide solutions around the world.
Similarly for electrical in fastening with the electrification of everything our flexible voltage connectors grounding and bonding solutions are well positioned with E mobility energy storage smart grids and electrical infrastructure Buildout.
The trend toward labor saving solutions and efficiency driven by the shortage of skilled labor, we are well positioned with our invent catty portfolio. We had for decades been a leader and innovator with labor saving fasteners and have extended further into prefab solutions.
Our thermal management segment has launched the Alexa family of connected control to grow with the industrial Internet of things and reduce total cost of ownership.
Just this week, we announced the launch of the event rate Chem supervisor platform designed to connect control and monitor temperature critical assets.
Our foundation consists of leading brands such as invent Hoffman and then Tatiana event rate cap. These brands are top of mind with customers and channel partners with our breadth of offering innovation applications expertise and high quality products and solutions.
Another hallmark of our strong foundation is our spark management system, which consists of five elements people growth lean digital and velocity.
People are at the core of spark in our recent global employee engagement survey, we had an 85% participation rate and saw improved scores in 96% of the question.
The results speak to the fact, we have engaged energized employees and are building a high performance culture at event.
On the element of growth, we are building capabilities through a focus on commercial excellence, improving marketing and sales and integrating the two even more closely with digital we have a lean culture and will continue to drive improvements in our integrated supply chain and business processes.
Our lean foundation allowed us to implement agile seamlessly to help drive or digital transformation did.
Digital is happening across our entire enterprise, whether its factory automation or back office improvements with robotics process automation.
We have accelerated our efforts to improve the customer journey with digital capability, whether it's content configurators for digital sales and marketing programs.
And our last element of spark velocity is our focus on driving speed and efficiency in everything we do and builds upon our lean digital efforts.
On margins and cash we not only see ourselves as having top tier margins in this space and a strong cash profile, but also believe we have a path to improve these overtime through new products scale lean and digital efficiencies.
We see these attributes as differentiators for and that as we build and grow as a high performance electrical company.
Well, we know the recovery may take longer we believe we are well positioned and are confident in the actions we are taking to emerge stronger.
With that I will now turn the call over to the operator to start <unk>.
At this time I would like to remind everyone in order to ask a question. Please press star followed by the number one on your telephone keypad. Our first question will come from the line of Julian Mitchell with Barclays. Please go ahead.
Hi, Good morning, good morning morning.
Good morning, maybe just the first question around the thermal business. So you did take quite a large goodwill write down in the third quarter, maybe hope you.
Give us an update on how you're thinking about that business. Its place in the portfolio you know the sales growth was tough pre cozied.
It doesn't look much easier this year or next perhaps Paul it since the selmo portfolio that could be prudent and maybe remind us of the synergies that that segment has with the other two.
Okay. So let me start by saying you know with thermal you know there's a we've always talked about thermal having a third or more of these project. This project side of the business, the third and industrial MRO and a third in commercial and so to start with you know where we see a lot of the synergies has been around.
This is particularly the commercial portfolio, but also through our distribution channels. So thermal has benefited greatly of our one invent strategies that weve had around core verticals like data and networking solutions commercial driving channel driving digital but fair to say I think when we think about.
Verticals, and we think about you know whats going to grow faster than not only through this pandemic, but but you know as we go forward oil and gas is just going to be a tougher place. So for us as we think about you know some of our growth priorities and we think about even inorganic growth you've seen us do a couple of acquisitions.
That had us build up more of the electrical portfolio in both enclosures and electrical and fastening. So fair to say, we're going to keep our priority there because we believe that's where we really have an opportunity with such fragmentation there to really scale, what we do from that just core electrical portfolio.
Got it thank you and maybe just on the.
The operating leverage side sort of down and then.
I don't understand for Q4 are we thinking about a decremental margin year on year, that's kind of similar to that 27% figure that you saw in Q3.
And then when you're thinking about the recovery you gave some very good historical context on the sales trajectory in recoveries just wondered if you could help us with what type of operating leverage on incremental margin on the way up we should see as the sales come back.
Yeah, Hi, Julian I'll take that so from a from a Q4 perspective, we do expect the decrementals to be largely in line with Q3 and a couple of puts and takes there you know why do we expect to have you know less about a headwind from just the acquisition impact from a Q3 to Q4 perspective.
But we are in we should also benefit from that gradual recovery as well in some of the structural cost actions really folding into Q4 I'm. You know offsetting that you know is these temporary cost actions that began to kind of you know fold in if you will but overall, we expect the decrementals to be roughly in line with that of Q3.
You know as we think about that in the context of you know next year. Yeah. We would look to really you know target incremental incrementals in the 30% range.
And while it's very preliminary you know we're still working through our operating plan of next year and the way. We think about it is that we would expect that that gradual recovery to have modest Ros expansion. Yeah. We do expect some of the structural cost actions that we took this year to benefit next year, So expect those cost savings.
To be in that 10 to 15 plus percent are a million range. Yeah. We'd also look to to really manage that price cost equation. Yeah. We do expect to see some inflationary pressures next year, but yeah weve had past successes that as in more inflationary environments, we're able to price that we're going to manage that price cost decrease.
And then we also have really good ongoing actions as it relates to productivity you know some of the things that I've talked about in terms of our digital transformation and that's beginning to pay off in some of our back office efficiencies, we continue to optimize our footprint and so while those temporary costs. You know are going to continue to feather in and full then.
Over time next year, you know with our carryover cost actions or the benefit from just that were gradual recovery on the top line and some of our underlying productivity. We think we can manage that as those incrementals in that 30% plus range and and drive for that modest rotce expansion.
Great. Thank you.
Your next question will come from the line of Deane Dray with RBC capital markets. Please go ahead.
Thank you good morning, everyone. Good morning.
We would like to stay on this topic that we just finished off where Julian left off and first of all it's really nice to see you back into guidance business. It just speaks to your earnings visibility in an otherwise a pro.
Pretty uncertain time and you also are one of the first companies to announce that you'll be rolling back those salary reductions in furlough. So we are going to see it in the impact on the Decrementals sorry, you just explain that really well I was hoping maybe.
But you also said you might be if you would be feathering in those temporary costs coming back in 2021, So I'm trying to get a sense of how much comes into the fourth quarter. If you could size that and then how much would be coming and to.
2021 on the temporary side yeah.
Yeah. So we've talked about our total you know cost reductions in that $70 million range here for for this year and that included roughly 30 million from a temporary cost actions, but that included things like you know furloughs salary reduction or in retention fee reductions et cetera, but it also included things on you know.
Death, discretionary spend and T. any and so my comments are more kind of on that latter part on when we think about you know travel when you think about you know just overall discretionary spend we're going to feather that in as we continue to see recovery on the top line right. So that.
Yeah, that's not all going to kind of drop in day. One I would also say that we're continuing to find different ways of doing business and leveraging the more virtual and digital world. So some of these you know may not even feather in at all and.
So as we think about it in the context of you know this Q3 to Q4. Some of these tenants temporary actions coming back end more specifically on the furloughs and salary reductions and think about that kind of in that $5 million ish range and the 30 million temporary reductions kind of going into next year again that'll all kind of we expect that to kind of feather in over time.
Well.
That's real helpful and if there's a a hot button on the industrial side there continues to be a.
Any expectations.
And non res construction you all have some good insight there and there's still this.
Worried that there's a some kind of air pocket as the current construction projects roll off that.
You don't see a big.
Green lighting of new projects, and just from where you sit today, especially with the Fas.
What is your expectation in terms of the continuity of new projects coming and is there a concern about an air pocket.
Well I think Dean you know what we've been saying is that you know first of all coming into the third quarter. We started to see construction activity anything that's under way is going to continue and complete and I think there's a view that things will slow down although there still is some renovation and retrofit with healthy buildings and otherwise.
I think you know.
<unk> Mr., saying that you know commercial next year could be down I don't know if it's an air pocket, but it's certainly going to be slower and for US you saw or performance in in in Q3, and we've said Q4 for Fs should look much like Q3, you know this is where we have done a lot of things to really.
To position this portfolio to grow in different ways. So even if the.
Economy shows commercial being down we believe we can outperform and the reason I say that is a lot of the new products that we launched have been in this area and we know that extends our ability to win over new contractors. This is still an area for us where you know we're moving into new products areas like seismic and co change.
Those are driving growth and adoption of seismic fastening solutions are prefab business has been growing double digits and that's an area, where we want to continue to build out.
We just you don't believe that we're going to be able to grow more globally with this portfolio and I. Also then just want to balance that with you know not all of the events as commercial and so one of the things you see we've seen as the strength of the electrical portfolio and Fs that is positioned as I talked about electrification.
With energy storage Emobility, you know all of those trends so from that standpoint, we think we have a lot of opportunities to continue to perform with the fast as we go forward.
I appreciate all that color. Thank you.
Your next question comes from the line of Nigel Coe with Wolfe Research.
Thanks, Good morning, everyone. Good morning, good morning, so im sick with similar.
And I understand the similar margins of being weighed down by the MRO mix can you just confirm that the MRO is down more than the 22%.
Sales performance sounds like it is.
Considering commercial held up.
And maybe just put in context, you know how that emera profile looks this is probably down cycles, and then maybe what kind of recovery profile should we expect you know based on prior down cycles.
Yeah. So I'll take the first part of the question. So from an overall on sales force performance in thermal you're right. The MRO was down considerably more than the overall thermal because we actually saw you know commercial you know being done that mid teens and actually the order rate in the quarter for commercial down low single digits.
It's an improving you know as we look at Q4 here I'm from a project standpoint again projects were actually up in the corridor you know as we continue to to have a nice nice backlog to build out from so on the M are always what's down more significantly and again as we look at past history. You know that is the first lever.
It's pulled to control cost, but do you eventually see that come back I'm just based on critical maintenance that's required and you know just given the sizable installed base that we have in thermal you expect that to eventually recover and we went back and you know we've looked at all or businesses over these different cycle.
And you know when oil in the mid you know like 2014, and the price of oil dropped all the way down in 2016, what we found is that our MRO business. It declined during that period, but then in 17 18 and 19. It came back high single digits and I think you know our portfolio, it's even better position.
Going forward, just because weve launched all these connected control and with you know trends of just needing labor saving solutions in monitoring. So you know that's our view at the point that there are some.
Confidence and or stability, you know, we'll see that MRO come back in and history has said you know what grows high single digits for us and we'll see if we can do better.
Oh, that's great color. Thank you.
Question is on the data center I mean, I understand this and it's not a huge in market, but it's simple.
A growth initiative.
Until the.
On days in the markets.
Earlier, this week, but demand being down are you seeing any signs of an air pocket.
It's kind of decoupling in data center based on what you've seen so far.
No in fact, you know for US again, that's a similar comment about you know having its system integrators not on job sites, we actually saw our data and networking solutions business start to improve you know to where we expect you know we're going to see some growth there through the back half of the year and on the enclosure side.
Great. Thanks very much.
Your next question will come from the line of Jeff Sprague with vertical research. Please go ahead.
Thanks, Good morning, everyone morning morning, Hey on new products.
That's a good was the growth rate on on prefab, but can you give us a sense of kind of how significant these are.
In terms of percent of sales or kind of incremental dollar growth you expect and in 2021 versus 2020 something to help us get our head around what we are talking here from an incremental benefit.
I think you know Jeff. So you know normally we want to see that were kind of trying to you know overtime drive about a point of growth with these new products, but these are unusual times and.
And so you know for US you know, we're trying to get those products positioned in the portfolio through our channels with our contractors because we know in some cases, we can win over contractors when we extend our portfolio for example.
But you know that's in a normal year I'd say, that's how we think about it and so we've really gain momentum here, but we felt it was important to keep investing here because it positions us for the future.
And I would say you know one one example, I would give us like a six significant as we've taken that ILD and I see portfolio were and there were things that we needed to do to be able to manufacture and launch that in North America and then we will follow that next year into Asia Pacific. That's an example of something that is a whole complete portfolio that we're going to we think as for income.
Closures is going to be a meaningful driver for us next year.
So its important yes, there are you talking a multiple of that normal 1% or can you size that at all no I mean, I'm going to I'm going to stay with that 1% because you know it just depends how fast that industrial growth.
Growth starts to come back greatest Cat, you know, but as we talked about at the point that there is confidence you know in end markets and Capex spend you know, we know that in closures rebounds, very strong, but it's too hard to call that at this point.
Thanks, a there was a couple of comments on inventory, but I just wonder if you could kind of come back and put a finer point or clarify a little bit more what you are seeing and maybe you know maybe there are some distinct differences between enclosures and any a fascinating thermals it kind of a totally different dynamic, but thinking about enclosures and he fs.
Are you in fact, seeing you know channel restocking.
That's an anyway materially impacting your business or is there any kind of notable difference between those two segments. So.
So I would say for both MFS and in closures in the third quarter, we saw that our orders through our channel partners improved but largely to match demand.
And and that's continued to improve you don't even into October. So I would say, we're we've not seen a significant restocking because we think they're being very cautious and the one thing that we're watching closely is typical with a you know any offence and enclosures right now are behaving. Similarly, what we do know is with the industry.
Sales side that enclosure is probably bounced a stronger when that comes back but that's what we're watching through the fourth quarter is normally you know toward the end of the year or distributors may take stronger inventory positions just because they're looking at rebate structures are being positioned going into next year and we're not certain that's going to happen. This year. So we think that.
We're still going to see distributors matching inventory levels to what the end demand is and until we see stability and more certainty.
So that's the point that we typically will see enclosures really jump up.
And we're not there yet yep. Thanks, I'll leave it there. Thank you.
Your next question comes from the line of Scott Graham with Rosenblatt Securities. Please go ahead.
Hey, good morning, good morning.
So I wanted to understand a little bit about the comment on the better September into October so.
<unk> in industrial it is really the third month of the quarter is usually the largest so we you see better in September did you mean September year over year was better than the first two months.
Correct, Scott looking at the rate.
Right and I, just didn't get forgetting about the absolute dollars Yep Yep and the October rate year over year better than the third quarter rate year over year correct.
Her rate you know better than.
Q3, both on sales and orders.
Right Oh nice okay yeah.
So while I have you the.
Cost reductions help help me understand something here first of all if you could just tell us what I can't find it and if it's here I apologize for not seeing it but what was the cost out number in the third quarter alone.
Over $20 million.
And that's a combination of both temporary and structural yep.
Right and sort of in the proportions that you talked about right would you say.
Yes, 30, yeah right. So then.
If you say you're executing on over 70 million of cost reductions you're going to roll back some of the variable in.
In the fourth quarter here can.
Can you maybe connect those dots is there more structural or what am I missing yeah. So if we look at Q4, we're targeting those cost reductions to be you know just just under $20 million and so that reflects some of those temporary costs rolling on but some of the structural actions that we said we were going to do additional.
<unk> going into the back half kind of rolling into the piano.
Great. Thank you last question is.
So the working capital improvement it sounds like it was largely in PFS.
Does that mean that you are.
Not as focused on enclosures nature happy there and.
And so.
Sorry, I know you're never happy with working capital issue [laughter], but I mean, when do the improvements in working capital, particularly from yet PFS start to show up in the margin from just better throughput.
Yeah. So maybe a couple of things so I would say that we've got working capital you know runway across every one of our businesses I would say that you know looking at MFS and particularly they had probably the.
The most opportunity just given I would say where they were at on their overall lean journey, because I do look at working capital as a measure of you know how we get how good we are right or how mature. We are if you will on our overall lean journey and so yeah with electrical and staffing I think Dave you know they put together.
A team and really had some laser focused there and we've seen some nice year over year improvements in our inventory days and so that's why I asked her singled out in called that out but look I think there's still more runway to have there and I do to your points Guide you know they they tend to go hand in hand, you see some nice working capital.
Driven and you also see that even while organic sales were down 5%. That's what I'm rocks was flat on and they delivered a really strong you know 27.6% in Iraq and saw some improving productivity in the factories. So we're seeing great momentum on the productivity side in the factories and good work.
And capital improvements now with all that being said I'm. There's also laser focused in the other segments across every one of those you know working capital metrics and would expect you know our overall working capital initiatives to continue to read out and and provide a runway for us here on on cash as we move forward.
Understood I.
I do have another question, but I'll get back in the queue. Thanks.
Your next question comes from the line of Jeff Hammond with Keybanc. Please go ahead.
Hi, Good morning, good morning morning.
So just on maybe you can level set us in oil and gas has been under a lot of pressure just how big is it today as part of the portfolio you know as you run rate. It and then just on the the thermal borrow or you see more de stock or deferral.
Where would you see inventory levels are within that that product line.
Yes, and just our overall energy within our sales mix and 14% you know, but I would also say that you know that the thermal piece of that is.
Smaller and its typically in that midstream downstream.
And our electrical utility business. They have this also shows up in that overall energy number so the oil and gas piece is a smaller piece of that overall, 14% of sales.
And with me I'm MRO business. So there's a couple things won it you know it is there is some product does go through the channel and so much like everything we saw in Q2, just the the buy through distribution channels for product.
<unk> decreased.
Although again like yeah, fastening closures everything started to improve somewhat in Q3, but I would say really it's driven by capex spend in plants and a lot of that has just been as as you know you look at the price of oil a lot of companies really just did all cost cutting measures and MRO is one of those first thing.
Things that they cut so you know it's as Sarah had had talked about and we saw that significantly down and our view is that it will return over time, you know once there's more certainty because some of it has to return. It's just some of it's tied to critical plant maintenance.
Okay, and then just a couple occasional was good to see buyback some stock here in the in the quarter.
Just just give us a sense of based on what you see in the pipeline and where your stock price is what your lien is in terms of you know cup allocation in the near term.
Well you know as we've always said in our framework in our priority. There has always been on growth and Oh, we executed on some share buybacks to offset dilution, but you know our view is we're starting to see you know a M&A opportunities and you know we're going to prioritize growth and you know we haven't.
Very rich funnel in a pause for a little bit, but you know were actively engaged and so you know I think we'll just see how the year plays out and into next year, but you know that's our first priority investing organically and inorganically into growth.
Okay. Thanks, so much.
Your next question comes from the line of David Silver with C.L. King. Please go ahead.
Yeah, Hi, good morning.
Good morning.
Yeah. So I had a question I wanted to maybe zero in on the offense segment. Please.
And you know the the margin performance is pretty eye catching the 27.6% on my model that that seems to be a little bit of a sealing the last couple of years I mean, it's been a number of quarters.
Precisely that far away.
But I also noted that I think it was there I mentioned it in terms of the journey right on the margin side.
So I think when the business was originally purchased from Pentair I think maybe had a pro forma.
Margin in the 28 or 29% range for a full year.
What kind of a journey do you think that that segment can go on in terms of operating margin improvement from here and I know, there's going to be a number of moving parts.
Sales volumes and things like that but what opportunities do you see incrementally there to drive the.
The margins you know above the recent highs of that 27.6, and maybe what might be one or two with the tactics or strategies to get there. Thank you.
Well, let me just start that you know the margin profile in our Fs business really reflects the strong value proposition that we have so which is really around labor saving solution. So any time, we innovate a new product we come up with a better way to take labor off the job site. So for me.
Contractor standpoint, we actually you know they pay a higher price for our product, but it saves them time on the job that more than makes up for and well you know our number one selling product we've talked about this is less than a dollar.
So the value proposition really hold every time, we launch a new product. We're looking at how do you know what Labour do we take out and we're looking to launch new products at higher margins right. So we just continue to do that so new products are a big piece of it but the second element is just remember.
We acquired this business AERCO and it wasn't very mature from a lean standpoint, so things that we've been doing to improve that margin profile is driving you know just a lean approach right end to end thinking.
Driving improvements with digital which and making capex investments in there. So we still believe there is runway with this portfolio because of its strong value proposition and because of all the things that we can do to enhance the portfolio that we're going to see improvements. There I don't I don't think we're ever going to get above 30, but you know I still think its.
Going to be in the high Twentys range.
Okay. Thank you for that and then I had a question I guess about your new product launches. So apologies for being you know kind of a <unk> score keeper here, but I think the target for this year overall was in the 50 range.
And I think as of the third quarter now you're if you're at 33.
And I stipulate, it's just been an unusual year for many number of angles, but with that said I was wondering if you you know on them.
If you will when you look overall at your new product effort.
For new product commercialization efforts.
And you see the gap between maybe where you were in January and where you are now.
Is the gap there because of you know just being a little bit slower, but you're still going to get to the same destination in other words, all 50 of those products are still going to be launching or are you have you taken another look and maybe decided that.
You know a couple of them didn't meet your return criteria or married extra development work or or is it you know something like due to changes in the market you know a product to be reworked a redesigned.
To provide you know the value proposition you're seeking so.
Maybe just the gap between the 50 target and where you think you'll be now and then maybe if you wouldn't mind some of the thinking behind you know.
Why you won't get all the way to 50 would be great. Thanks, well, we're actually bullet you know we've always had a plan that was more backend loaded to be fair. So it was never linear.
And you know I think we're going to get pretty close to that 50, you know in terms of just executing some of those new products and this was an area that we decided we want it like digital than we wanted to continue our investment now did we have challenges along the way sure because you know all of a sudden or engineers or having to work remotely we had to learn how to do.
Virtual launches of our new products and I think you know if anything the uptake on the new products just because of the market conditions, we expect to be slower, but what we have been able to do is get our fs business, we've been able to.
Has virtually do these training sessions, we've been able to get shipped products to contractors, we've been able to do some contractor conversions as we've launched new and better products.
And so we're still doing all the same effort to and maybe even more efficient because we're getting great. A test you know great pickup of these training sessions, but getting these products launched and feed it into the market. It's just that the revenue stream I think it's going to be a little bit slower just based on where we are with all the end markets.
So from an execution standpoint, I mean were you know were.
We talk about velocity and we've also implemented a more agile approach to how we're doing things. So you know I I think we're still accelerating here when it comes to new product launches.
Yeah and that that was just my last little question, but I meant to ask it in the initial thing, but do you anticipate 2021, new product launches will they be at kind of a similar level to 2020 little bit higher little bit lower and.
How does that Uh huh.
How does that relate to kind of your thinking about you know velocity and and the importance of that aspect of your growth strategy right well you know, it's it's likely going to be similar but what I'd like to think as you know and it it always depends because sometimes we're launching really big new platforms. They take time and so.
Sometimes we've got you know smaller extensions and we count all of that but from a standpoint of our ability to accelerate our velocity in our new product development process and for us to launch more effectively we've spent a lot of time. This year on those two areas. So I think you're going to see similar execute.
And next year and I believe if we start to see you know some of some uncertainty go away or if we start to see our end markets improve we'll be really well positioned.
Thank you very much.
Your next question will come from the line of Justin Bergner with the GE Research. Please go ahead.
Good morning Basket morning, Sarah Good morning, nice execution in a difficult environment.
Thank you.
To start but could you give out the specifics on the October share repurchase like how many shares and what price or would you rather wait until you know.
The Q or whenever that's formally disclosed.
Just probably just wait till till the queue to get that information, but it was on you know we didn't repurchase any shares in Q3 and a you know that that program be began you know as as October started.
Okay, that's fine.
Just to clarify on the cost side were you, suggesting that there were 10 to 15 million of structural cost savings that wrap around in the 2020 on a gross basis are 10 to 15 million net of the temporary cost actions that will unwind.
So that was the gross that was the gross a carryover cost savings that we expect based on the structural actions you know that we took this year that should carry over into next year and again those temporary cost actions, we would not expect those to drop in day, one yeah, they're gonna be tempered.
And you know feathered in overtime.
Okay that makes sense I certainly understand some of the discretionary expenses.
[noise], maybe just big picture I'm sure you guys had been thinking about the potential for an infrastructure bill and what it could mean for and Vince.
Businesses, so any thoughts on where you see sort of the most upside.
We get a big infrastructure bill in the coming quarters as it relates to your business.
Well you know it infrastructure for US is important you know I mentioned, our fs business in particular, the where we have some of our electrical Uh huh.
You know products that certainly anything that's a from an infrared electrical infrastructure build out our fs business is well positioned there, but so too is enclosures remember you know as I said, we didn't close everything so whether it's you know five g., whether it's related to infrastructure with water I mean.
Oh, you know yeah, fastening closures will do very well with a an infrastructure improvement you know any any stimulus around infrastructure.
Understood Lastly, one of your competitors I guess sort of talk to you on the vertical approach recently, so I guess.
They were commending you figure vertical approach in doing so.
But you need to sort of push that further in any sort of update on where some inroads may be occurring positively that you know investors werent as aware of you know six months ago.
Yeah.
Thank you for that question you know one of the things I would say as we've always said that in that particularly E S and X and enclosures. You know were very we sell we sell a lot through channels, but you know our view and we've been investing more in commercial teams and we did this upon launch.
To really go after some targeted verticals and so you know we talked about commercial and we talked about data networking solutions. For example, well were taking that even further so when we think about our closures business.
Looking at further sub verticals, whether its food and beverage whether it's around five gene for example, and having commercial teams. There. So that we really are driving end user demand even if the products are sold through a channel because our view is you really have to understand.
And your end customers and you have to understand that.
Then you have to ensure that you've got the coverage and so our enclosures business has recently furthered their vertical approach and I would say one of the things with NFS is we also have really good end user demand sales focus and balancing that with building out the channel approach.
And even as we think about our thermal business, you know with oil and gas being a tougher environment, we're putting more focus in verticals like chemical for example in particularly in Asia Pacific. So what we started a couple of years ago. We saw the success, we had in data networking solutions and we're replicating that even further.
And you have to create demand at all.
<unk> along the value chain from end user through you know channel partners and distributors to even the installer or the contractor and so we've done a lot of work there and that's part of our commercial excellence journey.
Great. That's very helpful. Thank you and.
Q.
Our final question will come from the line of Scott Graham with Rosenblatt Securities. Please go ahead.
Yes, hi, good morning, just a two follow up questions.
That's one of the things that you champion when you took over was not just one thing, but the focus on the dish.
Distribution channels the customers, there, where you literally went out and met many of your top customers.
Obviously since that time, we had a short cycle weakness and then we had this I'm just wondering if with since distributors were starting to see more stabilization in their sales and they are you know the first one out of a recession, if you're starting to see more receptivity, we're again sorry.
See the receptivity to some of your approaches whether it's you know realigning your sales people Hoffman on demand, but also particularly if you can comment bringing to your answer how well do you know helps you.
With that one and say strategy would be great.
Sure Yeah. So I mentioned earlier that we saw in Q3 that.
It's certainly a pickup across our distribution channel in terms of the borders from us. Although we largely thought you know that was matching their end demand versus some large restock, but I would say that we're actively working conversion you know what.
And that could be at a you know at a distributor at a branch level. We're seeding some of these new products into these channels as well, we're working very hard at the global extension of what were doing through our channels and I would say what the element acquisition. There are two opportunities well a couple of opportunities there.
Our one bringing that product into North America. So I mentioned earlier that we were launching it ensuring we could manufacture it in North America as well and so that's a new portfolio to be brought into our distribution channel partners. So it's it's consistent with the effort that we're driving but then I would also.
Say you know Elton was most strongly positioned in Europe, but it didn't have the size that we have as a 2 billion dollar organization to have as much many strategic relationship.
Relationships, so as we expand through our channel partners in Europe, you know Elden is a big piece of that portfolio that is going to allow us to have further penetration across Europe and then next for US with L., then is going into Asia Pacific, but similarly, you know were strong there in India already but as we look.
In other parts of Asia Pacific, We want to also ensure that we can manufacture the portfolio over there and so that's our plan into 2021.
Thank you that's great answer my other question is about.
We're starting to see some we closures in Europe and wall that has really not scripted the United States much and you are obviously much more U.S. centric I'm just wondering.
The World has changed.
A lot of ways to them being the ability of a company like you and others to service customers remotely, but also those customers to bike remote link right. So.
Well the answer to this question is different today than it was earlier in the year. Nevertheless.
What would you say would be or.
Closure of customer sites.
Sure.
Going forward is that in fact were necessary.
Yeah. It's a you know it's difficult to gauge, but I I tend to agree with you and I can maybe just comment on what we're seeing in Europe. So you know early days in this pandemic you know there are a lot of sites that got shut down around the world, but I think you know including.
Ourselves, we've learned how to operate and keep our employees safe with things like masking and social distancing and we've learned how to use digital tools to communicate to our customers. So what we see currently and of course, we manufacture in Europe is none of our manufacturing sites or shut down or we are seeing maybe more.
Youre limited travel or we're seeing social thing shut down right. Once you know restaurants or other things like that.
But so I believe you know, we're better able to continue to operate and serve our customers in a digital way and so I suppose it really just depends Scott on just if if if they if things are controlled or managed but I think we have found that we can operate our plants effectively.
Keep our employees safe engage with customers and maybe the only thing that this does is it just as why we keep talking about a gradual recovery because I think there's just everyone is still managing their costs and their capex.
And you know, it's why we remain cautious, but just keep pointing to a gradual recovery, but I do think we know how to operate in this environment in a very safe way and stay connected with channel partners and customers.
Thank you Beth.
Thank you Scott.
I'll now turn it back over to management for any further remarks.
Well. Thank you for joining us. This morning, we are pleased with our third quarter performance and are confident in the actions, we're taking to emerge stronger. These results serve as another proof point of our strong execution.
We have a strong foundation and we believe there is a bright future ahead for invent.
We hope you remain safe as we continue to navigate through these uncertain times.
Thanks again for joining us this concludes the call. Thank you.
Ladies and gentlemen that will conclude your call for today. Thank you all for joining and you may now disconnect.
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