Q4 2020 nVent Electric PLC Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the end of fourth quarter 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 to ask a question during the session you'll need the press star one on your telephone please be advised that today's conference is being recorded.
I would now like to hand, the conference over to J C. Weigelt Vice President Investor Relations. Please go ahead Sir.
Thank you Regina and welcome everyone to invest fourth quarter and full year 2020 earnings call I'm J C. Weigelt, Vice President of Investor Relations and on the call of Beth Wozniak, Our Chief Executive Officer and series of Whiskey, Our Chief Financial Officer Today, We will provide details on our fourth quarter and full year performance and provide an outlook for the first.
Quarter and full year 2021.
Before we begin let me remind you that any statements made about the company's of anticipated financial results are forward looking statements subject of future risks and uncertainties such as the risks outlined in today's press release, and the <unk> filings with the Securities and Exchange Commission.
We're 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 investors section of intense web site.
For instance, the non-GAAP financials are reconciled in the appendix of the presentation.
We'll have time for questions. After our prepared remarks, and now I will turn the call over to debt.
Thank you Jason and good morning, everyone. We appreciate you joining us today 2020 was a year that none of us could have imagined there was not a playbook for a pandemic and I could not be prouder of our entire global work force and what we accomplished.
Our number one priority once the safety and wellbeing of our employees, we implemented new safety protocols and learned how to work virtually and with great flexibility are.
Our second priority was to continue business operations are.
Our team overcame many challenges and often went to extraordinary measures to serve our customers.
At the same time, we improved our quality and delivery performance with our relentless focus on lean and digital and finally, our third priority was to emerge stronger and we continue to invest in growth and execute on our strategy.
Now turning to our executive summary on slide three.
We had a strong finish to the year, we delivered better than expected decrementals executed over $70 million in cost reductions and generated strong cash flow.
Fourth quarter sales trends improved sequentially across each segment.
Electrical <unk> fastening had standout performance with sales of about flat organically and strong return on sales of 28%.
For invent decrementals of 26% improved sequentially, resulting in return on sales in the quarter at 18, 6%.
We set a record for full year free cash flow conversion at 120% of their working capital initiatives continue to read out.
We broke another record with 53, new products in 40 digital launches in 2020, we.
We expect to see a meaningful contribution from these launches in 2021 and beyond.
On the M&A front, we integrated both Eldon and WB tea and are excited about what we're seeing in our funnel.
Our top priority for capital allocation is growth.
Throughout these challenging times I've been reminded about something I said early on where we focus we win.
We have executed and positioned ourselves well to emerge stronger and I'm confident in our strategy and future growth opportunities.
Now I would like to turn to slide four for a summary of our fourth quarter and full year performance.
Sales during the quarter were $521 million down 8% for.
Return on sales contracted 60 basis points to 18, 6% cash.
Cash performance continued to show strength of the quarter as we converted approximately 175 per cent of adjusted net income.
For the full year sales of $2 billion were down 9% or 13% organically.
Since the second quarter, both sales and Decrementals improved sequentially and we exited the year with Decrementals of 26 per said, even as some temporary costs returned.
Electrical <unk> fastening finished the year with fourth quarter sales growing 4% driven by new products growth in Europe, and our acquisition of W. E T.
And closure sales continue to recover and Decrementals improved as.
As expected we saw a slower recovery in thermal management, but are encouraged with sequential improvements.
Looking at some of our key verticals in the fourth quarter and infrastructure.
We saw relative strength in rail and transit utilities, and data center and networking solutions and commercial and residential thermal management continues to recover with mid single digit declines and while the electrical <unk> fastening also declined we saw growth in prefab and seismic.
Within the energy longer cycle projects grew during the quarter. However, not enough to offset continued pressure from a decline in MRO spending.
Well industrial remained down year over year, we continued to see a gradual recovery as demand trends improved sequentially.
Looking ahead, we are issuing guidance for the first quarter and full year.
Our outlook is for a gradual global recovery, which we saw exiting the fourth quarter and into January well uncertainty remains we are confident in our ability to execute and believe we can grow this year as we emerge stronger.
Our end market expectations for these verticals in 'twenty and 'twenty, one is mixed but overall, we anticipate growth this year.
Specifically, we expect the industrial vertical for to return to growth as this historically has been one of the first verticals to come out of the downturn.
Well, we are cautious on commercial we continue to see pockets of strength and warehouse education and health care.
In infrastructure, we are encouraged with the trends we are seeing around data centers five G and grid modernization and expect this vertical to grow in 2021.
In energy, we still expect modest declines however, we expect our business to be off the lows in 2020.
Turning to our geographical performance sales with the North America were consistent with the third quarter download double digits organically.
Europe improved sequentially.
Her remain down low single digits, we saw marked improvement in sales in emerging geographies, such as China and India in general there seems to be a high correlation with the region's position on the pandemic recovery curve to that of economic recovery.
Looking back of 'twenty 'twenty, we adapted and overcame many challenges we made strategic investments to drive future growth and we executed well. We believe we enter 2021 with momentum and are well positioned to respond to increased demand trends of the economy recovers.
Recovers I will turn the call over to Sarah for some detail on our fourth quarter and full year 2020 results and our current outlook in 2021 Sara. Please go ahead.
Thank you Beth let me begin by saying I'm incredibly proud of our team's execution. It is because of this that we sit here today in a strong financial position with an outlook of growth and we believe a clear path to emerge stronger.
Let's turn to slide five to review fourth quarter 2020 performance.
Sales of $521 million were down 8% relative to last year and declined 11% organically the app.
Acquisition of WB T added about a point to growth.
Looking at trends, we are encouraged by both orders and sales sales improved sequentially across every segment versus the previous quarter with December our strongest month.
Orders in the fourth quarter were down mid single digits with electrical <unk> fastening in thermal management orders generally in line with sales while enclosures was better.
Looking at January for overall, invent we continue to see orders and trends improve relative to the first fourth quarter.
Fourth quarter, Decrementals were 26%, which is slightly better than the third quarter. Even if some temporary costs returned price was positive and we delivered strong gross productivity of $26 million, which was driven by many of the cost actions. We took earlier in the year.
Adjusted EPS of <unk> 43 was at the high end of our guidance range.
Free cash flow continued to improve versus prior year and our conversion of adjusted net income was 175 per cent in summary, this was another quarter of strong execution.
Turning to slide six for a quick recap of our full year 2020 results. We ended the year with approximately $2 billion in sales, which were down 9% and included a four point contribution from acquisitions.
We continue to navigate through the challenges of this global pandemic, we executed well on costs and Decrementals delivered a record cash conversion of 120 per cent and importantly continued to make strategic investments for future growth.
Now please turn to slide seven for a discussion of our fourth quarter segment performance.
Starting with enclosures sales of $230 million declined, 10% and 12% organically.
The overall industrial vertical was down it did continue to slowly recover.
We saw relative strength in food and beverage rail and transit material handling and data center and networking solutions and we expect these trends to continue.
Enclosures segment income declined 11% while return on sales of 15, 4% was only down 20 basis points versus prior year.
Disciplined cost controls and strong execution of our factories drove 18% Decrementals, which was lower than any other quarter. This year.
Now on to electrical <unk> fastening sales of $147 million were up 4% and almost flat organically demonstrating the strength of this portfolio.
We continued to see moderating declines in our largest vertical commercial while both electrical infrastructure and utilities grew nicely in the quarter.
Segment income was up 16% and return on sales was 28% up 290 basis points relative to last year.
The team is performing at a high level with new product launches channel and contract the conversion improving return on sales and working capital improvements relative to last year.
Yeah.
Moving to thermal management sales of $143 million declined 17% organically industrial MRO sales remain down double digits due to continued spend reductions.
Longer cycle projects were up in the quarter led by some larger chemical projects and strength in Europe.
Marshall and residential sales, which account for roughly a third of thermal management were down mid single digits.
Segment income was down 29% and return on sales declined 440 basis points, mainly due to lower volume in industrial MRO net.
Net productivity improved sequentially, although not enough to offset volume declines and the negative mix impact.
On slide eight titled balance sheet, and cash flow, we strengthened our balance sheet. During the fourth quarter. We ended the year with $123 million of cash on hand, we have an additional $565 million available on our revolver after repayment of $100 million in the quarter.
Our strong and resilient cash flow enabled us to maintain capex at $40 million similar to prior year.
Great progress in our working capital performance certainly contributed to our cash flow and continues to be a priority for us again in 2021.
Turning to slide nine titled Capital allocation update we exited the fourth quarter with the net debt to adjusted EBITDA ratio at two one times, which is at the low end of our target range of two to two and a half times, our strong balance sheet and cash generation puts us in a good position to invest in growth and execute.
Our M&A strategy.
We expect capex to be between 40 and $45 million in 2021, reflecting our asset light model and continued investments.
After a record year of product launches and digital digital introductions, we aim to do it again in 2021.
We continue to pay a competitive dividend with an attractive yield which remains a key component of returning cash to shareholders.
We repurchased $43 million of shares during 2020, which helped to offset dilution.
Moving to slide 10, titled full year 2021, invent outlook, we expect sales to grow 3% to 6% organically, we expect the gradual recovery through the year with weakness in the first quarter, followed by the strength and remaining quarters and particularly in the second quarter given the comparisons.
From a segment perspective, we expect enclosures to benefit the most from a strong recovery in the industrial vertical while we anticipate more modest growth in the electric on fasting driven by strength in utilities and infrastructure and gains within the commercial vertical.
For thermal management, we also expect modest growth driven by return of MRO spend and growth in commercial and residential sales.
A couple of important items to note for currency and price cost first on currency given recent moves in FX rates, we expect the one to two point tailwind to sales this year.
On price cost, we are seeing an inflationary environment, and particularly the and particularly with steel copper and freight.
Couple of things to highlight here first we expect to continue driving both productivity and price to offset inflation as we have consistently demonstrated.
Our rolling launch programs with many of our metal suppliers provides us with good cost visibility of quarter, or so out which helps us manage our price cost equation.
Metal inflation, mostly impacts from closures and electrical <unk> fastening and we have already executed price increases at the beginning of the year to help offset these costs.
Our outlook for full year adjusted EPS is between a dollar of 58 and $1 68, which represents growth of 5% to 12% relative to 2020.
This takes into account the carryover of approximately $15 million in structural actions. We took in 2020, which helps offset the return of many of the temporary cost actions.
Overall, we believe each segment benefits from recovering volumes pricing actions and the productivity funnel deliberate to deliver expanded margins this year.
We expect another year of strong cash flow and cash conversion of adjusted net income at or above 100 per cent.
Some other below the line items, we are calling out our net interest expense of $35 million of tax rate of 17% to 18% and shares of approximately of $169 million and lastly, we expect corporate cost of $52 million to $55 million.
Looking at our first quarter outlook on slide 11, we expect organic sales to be down 9% to 4% as pandemic related challenges continue.
By segment, we anticipate sequential improvements in enclosures, and thermal management and expect a modest downtick in electrical and fastening due to a difficult comparison quarters we.
We expect price plus productivity to offset inflation in the quarter.
We expect adjusted EPS to be between 32, and 36 36 cents at the midpoint this would be flat relative to last year.
We expect flat to modest margin expansion during the first quarter driven by the structural cost actions, we took last year.
Wrapping up I want to emphasize that I am proud of our execution in 2020 and April we laid out of the scenarios in our plans to manage decrementals in cash and I'm pleased to say we outperformed on both.
All of the while we did not back down on the strategic investments for future growth, maintaining our capex levels and setting a record on new products and digital introductions, we have seen steady improvement through the quarter, starting with the second quarter with this momentum. We believe we are set up for a strong year with a path towards.
<unk> growth margin expansion and strong cash generation.
This concludes my remarks, and I will now turn the call back over to Beth. Thank you Sarah.
Turning to slide 12, you can see our priorities for 2021, which are consistent with our longer term strategy.
I want to walk through them today, and we will expand upon the further at our March 3rd Investor meeting.
Our first priority remains of the safety and wellbeing of our employees today, we operate at World class safety levels and continue to set goals to improve our safety performance.
Last year, our incident frequency rate was 0.6%, which was a 23% improvement over 2019.
Another imperative for us of social responsibility as we are all part of one global community.
We continue to make progress and we'll share our plans for driving improvements for people products and planet during our March 3rd Investor meeting.
It is certainly an exciting time at advent as we advance our efforts here that are important for our employees customers and shareholders.
Growth remains a priority for us both organic and inorganic we continue to pursue higher growth verticals and expand strategic relationships with channel partners and end users.
We remain convinced that our portfolio can benefit from macro trends such as the electrification of everything which aligns with our mission to connect and protect.
Looking closer at the trend towards the electrification of everything we are well positioned let me give you some examples.
And in closures, we continue to build out our data center and networking solutions portfolio, including liquid cooling.
We are expanding our presence in industrial automation with our new IEC portfolio and electrical <unk> fastening, we are well positioned around grid modernization within utilities and electrical infrastructure build out with our low voltage power connections and grounding in bonding solutions and thermal management, we are tapping into the <unk>.
This industrial Internet of things with our connected control solutions.
Throughout last year, we accelerated our digital capabilities to improve the customer experience from enhanced websites to better configuration in the search tools to enriched digital product information.
An example of this as of recent launch of our instant quote feature for some invent Hoffman enclosures.
This feature enables customers to quickly obtain price and availability information, which has resulted in an uptick in our win rate due to improved velocity in the end to end customer journey.
We expect 'twenty 'twenty, one to be another strong year of product and digital launches, we're planning to introduce approximately 50, new products again. This year, we continue to strengthen our portfolio expanding our cooling and smart enclosures, driving innovation and electrical investing and building out our connected control solutions on the digital front.
We are investing in our go to market capabilities automation and the Digitization of our back office functions and factories. The use of data and intelligence is expanding helping us drive insights to support our growth. This will also drive productivity and working capital improvements.
M&A is a top priority for us remember we compete in a $60 billion space that is highly fragmented.
Our strategy to build upon our great brands, leading positions and to expand globally.
Wrapping up on slide 13.
We have a strong foundation with many bright growth prospects.
The macro trend towards the electrification of everything we believe can drive more demand for our products and solutions.
With our strong brands, our spark management system, and our momentum on marketing and sales excellence new products and digital we are well positioned to benefit from these trends.
As we continue to execute on our strategy, we expect to emerge stronger to grow and to make invent a high performance electrical company with that I will now turn the call over to the operator to start Q&A.
At the time, if he would like to ask a question simply press star followed by the number one on your telephone keypad again that of Starwood for any questions. Our first question will come from the line of Jeff Hammond with Keybanc capital markets. Please go ahead.
Hey, good morning, everyone. Good morning.
So good color on the the segment kind of outlook I think you know the FES and the closures makes a lot of sense I think.
Thermal.
I'm, just a little perplex that you're expecting kind of modest growth just given for years of declines in sharp declines in in 2020, just let me talk about easy comps and talk about the you know.
The backlog and how you see that shipping and just any near term trends on the on the MRO piece, which that's like one of your competitors starting to talk about some some improvement there.
Yeah as we've always discussed you know thermal management is roughly a third you know residential and commercial of third MRO in the third projects and as we stated through last year, our projects have held up.
And where we and of commercial as we looked at fourth quarter started to improve.
And I think the biggest driver where we see that at the next year is going to be our MRO spend coming back because that was significantly reduced in 2020, we've already seen that trend of orders improve as we exited the fourth quarter and into January and so we believe that's where we're going to see the of.
Up lift and as we talked about in Q4 that obviously head of our mix on our a negative mix impact on our return on sales. So that's our that's how we see it as it goes into the 'twenty 'twenty, one that it's really that MRO, that's going to improve and in commercial so we're off the lows I guess I would say from where we were in 2020.
Okay. So just from a mix standpoint, you should have some sort of mixed rich recovery of that MRO recovers yes.
Okay, and then just again, good color on price and productivity versus cost but.
20th of heavy productivity year unlimited on price clearly, we're seeing inflation as you talked about can you just talk about what you're what you've announced in terms of price increases in.
What you think the price component is going to be or what you've built into the guide. Thanks.
Yeah, I'll start and then Sarah can jump in here too. So you know we've already as we exited last year, we had announced some price increases going into 2021 as we started 2021, we've already announced some second price increases some of them are underway or in the summer or still to come during the quarter, but that's in response to just what we've seen.
Going on with inflation and if you recall in previous years, where we had inflationary environments. You know we've done multiple pricing increases and Ah you know well, we'll watch that and you know we're managing the cost side, just because of our price locks.
If you you could look at 2018 of a 2018 2019 as years of how we executed in inflationary environments. You know, we always say, we want to get of point of price, but when we're in these inflationary environments. We expect to do a lot better that than that somewhere between 1% to 2% depending on the portfolio.
And maybe just the only thing I would add to that you know as we continue to expect to offset that inflation with price plus productivity and we see that happening in Q1, and we see that happening for the full year. So in addition to in addition to those pricing actions that Beth talked about we're also you know driving that productivity, particularly as the.
It relates around productivity in the factory and with that volume, we do expect it to get some good leverage there as well as underlying productivity, especially as it relates to the logistics and some of the Digitization efforts that I've talked about as well.
Yeah.
Okay. Thank you.
Our next question comes from the line of Deane Dray with RBC capital markets.
Thank you good morning, everyone.
Earning he'd like to pick up where we left off there with jeff's questions and I'd be interested in hearing how.
How much of in the way of temporary costs came in in the fourth quarter and what the assumptions are maybe on a per cent basis or if you can give us dollars in how they get feathered back in 2021.
Maybe we can start there please.
So just bigger picture, we did execute roughly $70 million of cost reductions in 2020, and roughly $30 million of that was temporary a temporary of nature and when we talked about you know that Q3 to Q4 and some of these costs to bring costs, returning and think of those in in roughly the.
That $5 million Mark you know as we think about that you know the temporary cost feathering back in if you will in 'twenty and 'twenty. One we wouldn't expect all of those to come in day, one and in fact, you know that's why we're expecting of flat to up in of Ros in Q1 here because as you might imagine and no. One is traveling as we sit here today in Q1 and we all are.
So have the structural costs coming in from of savings perspective, so from that temporary cost perspective, I would say that you know roughly a third of that simply relates to the T. N E and so that's going to take time to kind of feather in another chunk of that is discretionary spend and so you'd expect that to really kind of flow in as that top line Ricky.
Hubbard.
The other only other thing Deane I would point out is from a structural costs. You know, we talked about that $50 million $15 million of savings coming in in 'twenty and 'twenty one based on what we did in 2020 on the cost action fronts and you'd expect to see that come in really largely in the first half of this year with a bit trickling into Q3.
I appreciate all of those specifics and then over on free cash flow, which I think is one of the success stories for 2020, and sorry could you just give us some insight here and just some of the dynamics on working capital.
Do you have the specific goals that you're looking for as a percentage of sales and just confirm where there any kind of one timers.
Benefiting I know some companies benefited from the cares Act, which gave you some relief on tax payment of timing is there any are any of those one timers in your numbers in 2020.
Yeah. So we feel great about the free cash flow conversion really being a record year for us, but that 120% Mark.
Certainly our working capital performance contributed to that we saw actually improvement from the D. P. O perspective, really you know based on some data driven work that the teams did you know looking across the board of on harmonizing. Some of our supplier terms I think the other thing to point out there would be the electrical and fast.
In a business they really improved every metric when it came to working capital and specifically on the inventory side, you know what drove that or further advancements on and lean really getting to plan for every part of improvements in demand planning, but also looking at ways, we can improve our supply chain efficiencies.
At long lead times of suppliers and extending them that vendor managed inventory programs too you know over 20 suppliers, So and I would say there is further runway for us from a working capital standpoint over time I can see multiple points of working capital as the percentage of sales improve.
Improvement in inventory continues to be our top area that we're focused on from an overall timing perspective, and what impacted 2020, I would say two things one we did see the benefit of some of the deferral of payroll taxes, roughly 10 months of $10 million in 2020, but I would.
I also say that we also absorbed.
Some of the restructuring cash payment of efforts of roughly $20 million as well. So we had some puts and takes of that overall free cash flow performance.
I'm really glad you out of that last piece of it in about the restructuring because.
A large number of companies are excluding those from operating results and that's a good quality of earnings are for.
Are you guys to include it and then I just I know I shouted gave free cash flow the shout out the other impressive point was a all of the new product introductions I just think in a period of Covid to have continued that output on the innovation is terrific.
That's it for me thanks, Thank you Deane.
Our next question will come from the line of Nigel Coe with Wolfe Research.
Thanks, Good morning, everyone for.
<unk>.
So just for the two really the free.
<unk>.
It's pretty much with the.
What we'd expected, but I'm just curious.
How does the the outsized.
Net margin and obviously the outsized weakness we saw in thermal this year, how does that roll into 'twenty and 'twenty one of them I'm wondering if we should expect.
The sort of impacted to the downside and then maybe some over Cabazon MRO, just any any kind of the that'd be helpful.
So from a full year 'twenty 'twenty, one from a margin perspective, we do see our biggest expansion opportunities really in enclosures and thermal enclosures, you know because we expect them and then industrial recovery to really be the strongest from an overall verticals and that should help from an overall drop through and thermal.
One getting back to growth and two as we discussed earlier a lot of that growth coming through that higher margin MRO of part of that business and we do still expect you know expansion you get for us, but as you might expect it would be just more moderated versus what we're expecting in enclosures and thermal yes.
Yes.
The spending and then when you think about the price productivity and raw material inflation impacts.
In 'twenty, one should we take the 15 million of restructuring savings as part of productivity or was that in the separate bucket.
No that's gonna be part of productivity, yes.
Okay. That's helpful. And then just one kind of deployment.
You've got so you've given us the share Count guide.
<unk>. So I'm just wondering we've got baked in for for buybacks in 'twenty one.
I mean, our guidance overall really reflects the goal of offsetting dilution and so you know we ended the year with the full year diluted share count of over 170 million shares and for that 169, I'm really just you know is guiding to offsetting that dilution. So we may have to do a bit more buyback.
To get to that that that share number but overall you know has been talked about in our prepared remarks, our goal continues to be growth and getting after overall M&A strategy.
Alright, thanks, guys.
Our next question will come from the line of Julian Mitchell with Barclays.
Hi, Good morning, maybe just trying to look at the firm wide.
The margin guide so it looks like you're dialing in about a 25%.
Incremental margin for the segment from a pre corporate basis for 'twenty, one I'm just wanted to double check.
If that's roughly correct and then related to that I'm looking at slide five I think you'd called out 20.
26 million of gross productivity in Q4.
So that's leaving you know $10 million for that inflation and the investments piece.
Just wanted it for fiscal 'twenty, one what does that 10 million number looks like.
Okay.
Okay. So let me what was the first part of the question here.
Incremental of Incrementals okay.
Sorry about that so from an incremental perspective, yeah. We are expecting full year incrementals to be in that mid you know mid twenties range and really what that reflects you know different than sort of how we were thinking about things in December is really two things one and the majority of it really just relates to that price cost dynamic.
So as you roll in more inflation and worked hard for said that by way of of price you know that just that.
That just impacts the overall incrementals, but from a pure volume drop through them outside of that we continue to expect that you know to get back to that 30 to 40 per cent range, it's really that price cost dynamic that's impacting the overall incrementals for the full year.
And from a overall run rate coming out of Q4, I mean gross productivity is 26 million of obviously that strong you know we've talked about that being a bit muted in 2021 with the context of some of these temporary cost actions rolling back in from an inflationary environment, we do expect that inflation number.
For to increase it will increase modestly in Q1, but we expect would you expect that to ramp in Q2 Q3 Q for them, but really looking again as we talked about earlier to offset that with price along with productivity I would say that that dynamic that situation of dynamic we continue to.
The monitor it and as Bob talked about we've already taken multiple price increases here in the context of Q1, and we'll continue to monitor that as we go.
Thank you that's helpful and then secondly.
It looks like for them.
Oh is in the for for an okay year not not in the easy one just one the.
You know strategically I suppose how satisfied you've been.
With the animals perform and during this downturn and you know whether there is the appetite to do something more surgical with the portfolio within some of them.
If there are areas that you're trying to kind of re emphasize or deemphasize the Z try and position it better for the next upturn.
Yeah, I think of as we used the you know certainly our thermal business business within the segment was impacted the most as we went into the downturn with the pandemic and also what happened with the price of oil. This is the segment that we also took the most structural cost actions.
So I think we got on that very quickly from that standpoint, and so that's part of what you see and you know the as.
As we go into next year, how we've repositioned that business.
You is that because of that MRO spend dropped off so quickly that we're going to see that improve and like the other segments. We continue to invest in those strategic areas. Because we have a really large installed base. So anything that we can do with connected controls as a retrofit opportunity investing in that commercial side of it.
The residential side also that's kind of been the priority and as we think about the go forward you know our view is let's ensure we're positioned where the growth is going to be so when we think about projects. For example, as we go forward, we know that there's going to be investment in chemicals for example, in APAC and so we're ensuring that our.
You know there of resources, and where we're prioritizing or putting our focus is in those areas that are going to grow. So we believe in <unk> and commercial we've got opportunity. There mine. The installed base you know from our MRO standpoint, just because of the you know millions of controls and sensors and every.
That we have out there and heat trace cable to making sure that we're positioned in the right geographies as we go forward and I guess you know the last part of that question is we're always looking to optimize our portfolio and what makes sense and you've seen us as we've done our acquisitions really focus on products that are helping us position for you know.
High growth, whether it's data and networking solutions, whether it's industrial automation or whether it's global growth and we're going to continue to do that.
Great. Thank you.
Yeah.
Our next question comes from the line of Joe Ritchie with Goldman Sachs.
Thank you good morning.
Morning.
It's maybe maybe just starting off on inventory levels. I think you guys sell yeah, maybe two thirds of your business through the distribution I'd be curious any color that you can provide on where you think inventory levels are today.
And then and then also secondly, the on E. S aspect that they kind of downplayed the you're expecting in <unk>.
So that is being influenced by what youre seeing to start the year in that business.
So a couple of things there as we you know in fourth quarter and you know as we shared in our last earnings call. We expected debt inventory levels were really going to sequentially improve to match the demand of the distributors were seeing and I think that's exactly what we saw in recall, we talked about the fact that.
A lot of times in a year, you'll see it distributor of stock up at the end of the year and we just didn't expect that to happen because of where they were you know with respect of rebate programs et cetera, but I'd say this we've seen inventory improve like demand on us improve and its meeting and demand we've seen that continue into January.
The worries so I think we're still seeing that gradual improvement of inventory levels matching demand. So I'm still more runway. There I would say is as we go throughout the year.
And then on E. S. S. I'll, let Sarah just talk to that yeah. So I would say.
Joe It's really more of a function of comps of a year ago that we're guiding to just a modest downtick from that roughly flattish organic growth rate that we saw in Q4, so no different than what we said more broadly I'm in January for the segments, we see.
Strength, you know here in January overall.
Okay, Great and then maybe just out of longer term question for Beth Yeah look it's great to see all the investments you guys are making on the product launches and all of the digital launches as well I'm curious like when you are thinking about this as part of the longer term growth algorithm for the company.
How much do you think this can contribute how quickly do you expect to see some of the growth coming through.
From from from all of the launching of that Youre doing currently yeah. I you know on new products, we'd like to see of forget about a point of growth from new products every year and recall, we've talked about getting our new product vitality up to 20 per cent and we're in the mid teens today. So that's our expectation that it's going to drive about a point of growth.
On digital it's somewhat of an enabler right in some cases, it's helping us drive growth in other cases, it's helping us to drive productivity. So it builds into that equation of you know both the growth side and what we see in terms of margin expansion.
You know I would say, what we're tracking really closely as all of these new digital launches are we getting the returns that we expected as we kind of laid those out as an investment project. So I think we're doing a better job than we've ever done in terms of really looking at are we getting the value from these efforts and what's nice about the ads.
We'll approach that we've of a adopted is that we're very quickly being able to see success or make adjustments as we go.
And I think we're only going to get better at that too.
Got it thank you both.
Our next question comes from the line of Andrew Slosh with vertical research.
Hi, This is Andrew sloshing on for Jeff Sprague. Thanks for squeezing me in here just.
Just a quick one on data centers.
Could you provide us with the more precise growth rate on data centers in the quarter and some of the trends youre seeing there.
Yeah.
So yeah, I would say overall from a data and networking.
The perspective, where we saw really strong double digits was on the global front and importantly in the orders right. So where we see that growth is in some of the Hyperscale I mean, if you remember it W. V. T was one of the acquisitions that we did early on in the year that brought in a whole new cable management trade offering for that space.
So that's something that has grown double digits for us really since we spun.
Spun and would expect you know heading into 'twenty and 'twenty, one debt again, it would get back to the double digit growth rate Yeah, I I think about it. This way you know we were pre pandemic like we'd grown in data and networking solutions double digits for the last couple of years, and then obviously impacted pandemic sites shut down integrators can't get on job sites, but we started to.
See that double digit order trend occur again, and we think as we you know in 'twenty and 'twenty. One there's no reason to believe that we can't continue to have strong growth, especially as Sarah said, we've built out the portfolio. So more around liquid cooling are more around just the complete solution with the cable management. So we're excited about you know.
Where we're positioned here and the potential you know for a long term growth.
Great. Thanks for the color I'll pass on the Baton.
Our next question comes from the line of Scott Graham with Rosenblatt Securities.
Hi, good morning, all and congrats on a year of only 15 per cent decline in the E. P. S.
For the would be a much worse given what you were with the some of the markets you face I really wanted to ask about the organic because I know the well certainly the first quarter looks a little bit less of what I was thinking in my model.
The cadence here essentially be sort of your first quarter number and then sort of you know up.
The low teens in the second quarter on that easier comp and then sort of plus mid single for the rest for the second half of the year.
Like is that kind of the way of thinking of it.
Yeah, So Scott that the cadence sounds about right.
And then for the second quarter, what would be the big factors that kind of.
I know the biggest one is obviously the comp but what are the markets that you see us going from sort of this down number two went up low teens.
Well.
In that quarter I, you know what we said is we all you know historically, we've always seen industrial lead us out of a you know of downturn period.
We know that Capex was one of those levers that everyone constrained. So we would expect that industrial vertical to lead the way as well as as we mentioned you know seeing that double digit orders growth in data and networking solutions. We would expect that also to be strong as our as we go throughout the year.
This would be the the the key areas.
Okay.
The other quick ones on the with the you just made that it's about the new products all of the go.
Adding the 1% would you expect that to be the case this year from 'twenty 'twenty one, yes, we would because so if we you know 53 products last year.
Extraordinary efforts to get those launched and I think we've done some contract for conversions and so for example are we ceded some of the OEM. So we'd expect to see that take place this year.
And we'll build upon that with another 50 new products.
That's that's impressive thank you and the last question is around capital says Nigel asked the question earlier about share repurchases and you obviously have a very large outstanding authorization.
At what point in the year do we get to second quarter third quarter, if acquisitions don't necessarily manifest the way you were thinking.
When does that share repurchase become more than a placeholder of more than a of what's the.
The offset the dilution of what is the trigger there yeah. I mean, I think you've seen that we've always you know we're going to do some repurchases based on share dilution, but as we go throughout the year. If if the although we feel very confident in our funnel and the opportunities in front of us, but we've always said, we wouldn't just have cash hanging on our balance sheet.
We put it to work. So you know we're constantly looking at that Scott, Although I do think that you know we're going to see some opportunity for us over the course of this year to do a couple of acquisitions.
Great. Thanks, a lot for your time thank you.
Your next question comes from the line of Justin Bergner with G Research.
Good morning, if that's the morning, Sara good morning.
A nice delivery on things, we're able to control in this environment.
Inc. The start.
I want to ask in regards to the I guess margin guide which of course.
The modest margin expansion is that coming from volume leverage or is that coming from the mix do you expect mix to be neutral to margins are positive to margins.
So I guess the way I would answer that is both so from an over all of them volume leverage perspective, clearly that's going to help in 2021.
So it would be one thing and then to them, we would expect mix, particularly in the thermal business to help I mean, you've seen sort of an outsized negative impact here in 2020 based on that MRO.
Inside of that business, which is you know highly profitable being down strong double digits and as that slowly recovers, we would expect that to not only drive the growth, but also drive some positive mix impact as well.
Okay, but some of that would be offset by I.
I guess the.
The other segments growing faster than the ex Max right.
Yeah, clearly out of kind of total portfolio of basis you'd have some offsets there, but again within each one of these segments. You know mix is going to have a bigger play in thermal management, you know to the positive and then what we might see them otherwise in enclosures any of us.
Okay. That's helpful and then on the thermal side you expect to grow all three portions of that business. The project, the MRO and the commercial and residential in 2021 of them with some of them the.
No more breakeven neutral.
So we expect the most girls and MRO.
We expect.
Commercial and Rosie, whereas he should have some strength commercial is expected to have some softness there, but you know our view is we always want to outperform how the industry is so we'll see how that plays out over the course of the year.
And with respect to projects I think we see that you know flattish over the course of the year. So that's that's kind of how we're viewing our and.
And we will see you know, there's we'll see how how and when the economy is still recovers and that dynamic, but you know that's why we continue to just temper that just saying theres still as uncertainty you know, how how quickly the economy recoveries and where.
Okay, and then maybe lastly, just thinking about the organic growth you know down materially in.
In 2020 as expected.
Bouncing back 3% to 6% in 2021.
No.
Do you think getting back to the level of organic growth for 2019 as sort of more of of 2022 or more of of 2023 of the you know recovering that full 13% organic decline.
From 2020.
Yeah.
Well it may depend on the segment you know I'd say and it's just again, it's the timing of how we see of the economy recovery of around the world. So if you'd think about it we think industrial is the vertical that's going to lead first and I think you know as we start to see how that recovers.
You know that could take us into 2022, as we think about commercial.
It is that's expected to be slightly down this year and so maybe that recovers into the next next year, we will see and I think you know the view is that energy is.
Is improving well, it's going to be it's going to be tough. This year, we're going to improve relative to that but I think that's of slower improvement rate. So those three different dynamics, there and infrastructure should be strong. So you know we call infrastructure includes data and networking solutions and utilities and we expect that to be strong all of those different dynamic.
For us it's by segment, some likely recover in 'twenty 'twenty, two when others maybe out into 2023.
Okay. Thank you that's very helpful framework I appreciate it.
Our next question will come from the line of David Silver with C. L. King.
Yeah, Hi, good morning, Thank you good morning.
Good morning.
Yeah, Great I was hoping to kind of maybe parse some.
Some of your comments about the cost outlook.
So I've heard inflation I've heard costs of your productivity.
I'm, just hoping to tease out you know the raw material and logistics elements of.
Your your cost expectations for next year, so leave out the labor leave out the temporary cost of.
But could you maybe talk about where you see the greatest for raw material.
Cost pressures I'm guessing metals of course, but I'm also thinking of the shortages that have been talked about quite a bit on the chip and the electrical components side, so whether it's cost whether it's availability.
Do you have a sense.
Kind of the ability to.
Continue to operate without disruptions and then to.
Capture recover.
The <unk>.
Incremental raw material and maybe logistics of Clos that are that you anticipate thank you.
Yeah, Let me start and then I'll I'll start by just talking about supply chain resiliency, and then I'll, let Sarah talk more about the cost side.
So recall as we mentioned you know most of our and.
The materials are metals and so you know we have great positions in terms of just how we procure our supply and do these rolling price locks and so we feel good about our access there.
I would say you know we have looked at our supply chain and even in the fourth quarter in some areas look to ensure that we had the right positioning of components. So that we you know as we expected this year and as you know we saw the sequential improvements that we would be in a good position to be able to respond.
So whether that was on just inventory in parts on the supply side or even our own capacity because we we've addressed a lot of capacity.
Requirements in our factories. So I think you know for US at this point you know we see minimal disruptions really are and you know we've you know our supply chain has been robust all of 'twenty and 'twenty AR and so we're very actively working to ensure that we're in a good position with our own in supply and also working that through with.
The distribution channel. So I think at this point, we think we've got the supply chain managed fairly well and again, we'll see how demand goes over the year, but we're going to keep having scenarios to be able to respond to that so I'll, let Sarah then talk about the cost side.
Yes, I think your question was kind of around materials overall, and how to think about metals, specifically, so you'll materials over all of roughly 30% of sales and metals are you know less than half of that and as Beth talked about a lot of those metals is gonna be steel copper and a little bit of nickel.
And we feel really good about the access to that supply and with these locking programs that give us some great kind of lead time and visibility into these inflationary pressures. So you know we feel like we've got that dialed in if you will it is dynamic and as.
The things progress as as Beth and and and we alluded to earlier in the Q&A I'm you know we're going to continue to monitor that right. You know if inflation continues to increase you know, we'll look and we'll look at pricing will look at it productivity.
As ways to manage that.
Yeah.
Okay. Thank you for that.
I'm Gonna have skewed the question maybe about the sequential progression of revenues in the fourth quarter. So you know.
I'd go back in the overall you know your revenue guidance was you know you you've kind of met or beat your revenue guidance overall.
But I always kind of scratch my head and I was saying if you look at it segment by segment I mean, there was a sequential decline in two of your three segments you know the thermal being the exception.
And then.
Year to date I mean, those had been the stronger performing segments. So I'm just I'm just wondering was there a surprise there not so much overall, but.
The segment by segment in other words were you surprised that there was the sequential revenue decline for E S S and and enclosures.
Got you.
Yeah. So I would say that was right in line with our expectations. If you just look at the kind of seasonality of our segments. I'm you know typically there's a downtick in enclosures from Q3 of the Q for them as well as any of that so those are kind of as expected and in line with that seasonal downtick.
Okay. Thank you for that and then last question the this.
Maybe.
An 80 20 question in other words of.
Your 50, plus new products.
Last year of product launches I mean are there a couple of that you could just call out either for their especially bright prospects due to either of their innovative capabilities or just the we're hitting the right market at the right time.
You mentioned the point of growth overall for the company from the new product launches, but you know.
Are there a handful of or one or two that you might say as kind of being a spec.
Especially the bigger optimism is especially high your belt.
Yeah, Okay, I mean, maybe I'll I'll give that is sort of categories and our thermal management business. We've continued to release a lot of connected solutions. So we're excited about that because we believe that they not only present great value for our customers on a on of new.
The perspective, but they're also an MRO opportunities so as I mentioned, our ability with you know having the largest installed base of our ability to go back out there and have our controllers that can drop in and be replacements for existing products out there to create more value in terms of just monitoring capability and better debt.
Performance et cetera, we're very excited about that and we've been on that journey for a while and those controls have.
<unk> done very well for us I'd say in enclosures Theres, a general category you know around globalizing, this IEC portfolio, but as well building out our data and networking solutions capability, particularly around cooling for example, we're very excited about that and.
And then I would say in our E. S. S business, maybe there's two categories of products, we've extended what we do with our caddy portfolio into areas in seismic in prefab and just extending the range and we've been able to see contractor conversions as a result, and similarly on the <unk>.
For cool side of our E. S. S business, we've been launching new products. There that we think really positions as well as you start to see the utility's grid build out anything around or are we have some differentiated capability and are in debt Eric flex portfolio.
All of those are playing into those electrification trends. So those are broadly some categories that we have that we're excited about because they we believe you know there they are positioned to be able to differentiate and create value for our customers and pointed at the higher growth opportunities.
That's great. Thank you very much.
We have no further questions at this time I'll turn the conference back over to management for any further remarks.
Well. Thank you for joining us. This morning, we are pleased with our fourth quarter performance and believe we executed at a high level during 2020 to help set us up for growth and success.
We are grateful for all of the hard work, our global employees put forth to help us emerge stronger.
The economic uncertainty remains we have confidence in our ability to execute on our 'twenty 'twenty, one priorities and deliver growth.
We hope you remain safe and look forward to speaking to you again on March 3rd at our Investor meeting. Thanks again for joining US. This concludes the call. Thank you.
Ladies and gentlemen, thank you all for joining today's call you may now disconnect.
Okay.
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