nVent Electric plc Ordinary Shares

Ladies and gentlemen, thank you for standing by and welcome to the InVent Q1 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 will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to Mr. J.C. Weigelt. Thank you. Please go ahead, sir.

Thank you, Shelby, and welcome everyone to InVent's first quarter 2020 earnings call. I'm J.C. Weigel, Vice President of Investor Relations, and also on the call are Beth Wozniak, our Chief Executive Officer, and Sara Zawoyski, our Chief Financial Officer. Today, we will provide details on our first quarter performance, as well as a COVID-19 business update on actions we are taking and what we are seeing in our business. Before we begin, Let me remind you that any statements made about the company's anticipated financial results are forward-looking statements subject to future risks and uncertainties, such as the risks outlined in today's press release and in-vents 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 Investors section of Invent's website. References to non-debt 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 Beth.

Thank you, Casey. Good morning, and thank you for joining us. Our goal today is to provide a business update around COVID-19 and spend some time on first quarter results. First, We hope that you and those around you are safe and healthy. I also want to take a moment to thank our InVent employees, all of whom are making extraordinary efforts to support our customers, support our communities, and support one another. In a recent survey, there were two common themes that emerged across InVent. The first was results, and the second was caring. And I see these qualities each and every day with our employees, especially right now. I am so proud and grateful. Turning to slide three, I would like to share our three near-term goals. First, we are focusing on the safety and well-being of our employees. Across our sites, we've adopted social distancing, expanded our hygiene practices, and are working from home where possible. In addition, all of our plants have checklists laying out best practices to follow and learn from one another. We've launched updated well-being programs for employees focused on mental health, social, financial, and nutrition components. We are taking proactive safety measures. All of our facilities have COVID-19 readiness plans. We are in the process of rolling out a temperature testing program. Thank you for joining us today. Many of our employees are working from home and a global cross-functional team is developing plans for returning to the office over time. Our second goal is to continue business operations to serve our customers and support critical infrastructure. As we have discussed, we serve mission-critical applications with our Connect and Protect portfolio. We have worked closely with authorities and followed local guidelines to implement safety practices. As a result, all of our sites remain operational today, including sites across Europe, India, and our facilities in Reynosa, Mexico. Third, we are taking actions to emerge from this current situation as a stronger company. We are continuing to invest in critical areas like new products, digital, and improving the customer experience. And I'll share more about that shortly. While we continue to serve our customers around the world, our ability to operate and respond quickly is helping us find new customers, serving us well today and for our future. I will now turn to slide four of the presentation titled Executive Summary for a discussion of our first quarter performance. We saw demand deteriorate in geographies impacted by the COVID-19 pandemic. First, it was China, and then in Europe, and then North America. Turning to our first quarter performance, enclosures and EFS were generally in line with our expectations, with the exception of COVID-19 impacts. Thermal Management saw increased macro pressure during the quarter from the material drop in oil prices at a warmer than usual winter. Our new acquisitions, Elvin and WBT, performed well. Elvin continued to grow during the quarter and improved return on sales over 300 basis points, while WBT grew modestly and expanded margins. In both thermal management and enclosures, negative volume pressured margin during the quarter as segment income fell 15% and return on sales contracted 230 basis points. Adjusted EPS of 34 cents declined 13% and importantly, free cash flow improved versus prior year as our working capital initiatives began to take hold. Turning to slide five, We want to provide an update on April trends. Although this is a short-term view, we think it is important to review given the deterioration we saw at the end of the first quarter. In April, daily organic sales were down approximately 20% year-over-year. Enclosures was down 20%, thermal management down 15%, and EFS down 25%. Looking at geographies, North America daily sales were down approximately 25% and Europe was down approximately 15%. Asia, which for us is mostly China, is up almost 15%. While China is less than 5% of our business and the first to enter the recovery phase of the COVID-19 pandemic, we do not view it as an exact blueprint to how the rest of the world will recover. Looking across our specific sub-verticals, we're seeing significant weakness from the pandemic. However, there are pockets of strength. Examples of strength include infrastructure, specifically utilities, and investments in data centers and networking solutions. As companies invest in IT systems, in distribution centers, and build out the internet in rural areas. Not surprisingly, we are seeing especially weak trends in areas such as oil and gas and commercial construction. Slide 6 identifies the actions we have taken in response to COVID-19. We have begun executing on a downturn scenario plan to reduce costs by approximately $50 million. These actions include temporary salary reductions for myself and other executives, as well as the reduction of board fees. We've instituted a two-week furlough and other actions globally. We've also implemented a hiring freeze and limited discretionary spending, such as T&E. These actions are in response to demand trends we see and additional actions should demand deteriorate further. On capital allocation, cash is critical and we are taking necessary actions to preserve cash, such as reducing CapEx budgets for the year, While still prioritizing strategic investments, we have also temporarily suspended share buybacks. We view our dividend as an important part of our shareholder return strategy and expect to continue to pay our current dividend. As we take these actions in response to COVID-19, our goal is to manage decrementals, preserve cash, and be ready for a recovery. Now, please return to slide 7, titled Emerging Stronger. We are making decisions and taking actions to build a stronger event. We are responding to new demand dynamics and customer needs with programs such as Hoffman on Demand. We are seeing the benefits of our regional supply chain, which has worked well servicing distributors and new customers. Distributors have reached out to us seeking our help in meeting customer demand. These partnerships are proving to be mutually beneficial, extending our reach to new customers. We continue to bring new products to market with 11 launched in just the first quarter, and we are prioritizing research and development investments. In addition, our team quickly established digitally enabled training for channel partners and electrical contractors. We're finding new ways to connect with customers with video and virtual training sessions, and as a result, are driving orders and sales through these new ways of engagement. Digital is a part of our Spark management system, and we continue to accelerate our digital transformation. We have new go-to-market programs focused on external-facing websites, expanded sales and marketing tools, and enriched product data for end users. Our new Chief Technology Officer quickly identified an opportunity and established an agile project delivery practice to enable velocity and quality for all new software launches. We've begun driving robotic process automation for back office functions to drive productivity. To summarize, we are executing on our near-term goals to prioritize the safety and well-being of our employees while ensuring that we are serving customers. We expect the steps we are taking will help us address current challenges and emerge stronger. With that, I will turn the call over to Sara for some detail on our first quarter results and share some of the different ways we are thinking about the balance of the year. Sara, please go ahead.

Thank you, Beth. Let's turn to slide 8 to review first quarter 2020 results. Sales of $520 million were down 3% relative to last year on a reported basis. and declined approximately 8% organically. The acquisitions of Eldon and WBT added five points to growth and performed well overall against our expectations. As we looked at trends during the quarter, average daily orders declined low single digits for most of the quarter, however quickly deteriorated in the last several weeks of March, aiming the quarter down roughly 5%. First quarter free cash flow was better than prior year despite lower profits as our working capital initiatives began to take hold. We saw good improvements in inventory during the quarter, specifically EFS made some early progress reducing finished goods inventory. We continue to target 100% cash conversion for the full year. Now please turn to slide nine for discussion of our first quarter segment performance. Starting with enclosures, sales of $259 million grew 1% with the addition of Eldon and declined 8% organically. As we expected, the industrial vertical was slow during the quarter with additional weakness from COVID-19. Eldon had a strong quarter growing 3% and expanding return on sales over 300 basis points as we continue to execute on our integration plan. Enclosure segment income declined 10% mainly due to lower volumes and the impact from COVID-19, resulting in return on sales declining 200 basis points. We did initiate cost actions during the quarter that should begin to read out in the second quarter and balance of the year. Moving to thermal management. Sales of $121 million declined 16% organically. There were two main factors impacting thermal management sales this quarter. First, we saw pressure in the oil and gas vertical due to lower oil prices, which immediately impacted MRO spend. Second, commercial revenue was lower due to a warmer winter, as well as a difficult comparative quarter. And COVID-19 simply amplified the negative impact on demand. Orders trended generally in line with sales, reflecting the MRO and commercial weakness, with projects performing a bit better. Importantly, backlog continued to be up double digits year-over-year, reflecting a continued belief that the funnel can translate into sales growth over time. For background, I wanted to provide some detail on our oil and gas mix as it relates to thermal. Oil and gas represents approximately 30% of thermal management's overall sales, down from 40% in 2016. For InVent overall, approximately 15% of sales are attributed to oil and gas. Downstream represents approximately 60% of the oil and gas sales, while midstream and upstream make up the balance and split roughly equally. We are seeing significant deterioration in the upstream, but again, this is only roughly 1% of total InVent sales. In midstream, we are seeing some pockets of resiliency around transport and storage. While the global supply-demand dynamics, along with COVID-19, are certainly impacting downstream. Return on sales declined 680 basis points due to lower-than-expected volume in industrial MRO and commercial margin mix components. Incremental actions to reduce fixed cost structure and realign our business that will begin to read out in the second quarter and back half. Now on to EFS. Overall, we had a very strong quarter. Sales of $142 million grew 3% organically with positive contributions from both price and volume. This, combined with productivity gains, translated into strong return on sales expansion of 90 basis points. We also closed on the WVT transaction during the quarter. This unique and labor-saving cable trade product line is a great complement to our Invent Caddy and Invent Hoffman portfolio, allowing us to offer customers a one-stop solution for cable management and pathways for data and networking solutions, as well as commercial and industrial applications. Turning to slide 10, titled Healthy Liquidity Position. We have a strong liquidity position. Our net leverage ratio at the end of the first quarter was 2.3 times. We had $188 million in cash, an additional $315 million available on our revolver, and limited maturities until 2023. We proactively drew $150 million from our credit facility in March to bolster our cash position. We have received a number of questions around debt covenants. Specifically, EBITDA would need to decline over 40% for four consecutive quarters to reach our maximum net leverage ratio covenant of 3.75 times. So from where we stand today, we remain confident in our liquidity position in addition to our cash generation activities this year. On slide 11, titled Balance Sheet and Cash Flow, the first quarter is typically a cash usage quarter for us, and this remained true this quarter. Importantly, we ended the quarter in a better free cash flow position versus last year, mainly due to our focus on improving working capital. We believe this is a trend that can continue as we progress through the year and is another example of how we expect to emerge as a stronger InVent. We decreased our full-year CapEx spend to the lower end of our original estimate, targeting $40 million, which prioritizes strategic investments. Moving to slide 12, as we evaluated the current environment, we believe it is prudent to withdraw our 2020 guidance for today. We expect to evaluate providing some type of guidance later this year. We have prepared a number of scenarios to map what actions we would take to help manage decrementals while preserving growth investments and driving cash. Specifically, we looked at mild, moderate, and severe scenarios that factor in a range of revenue declines over a 12-month period. We continue operations, continue to pay our dividend, and importantly, strengthen our ability to recover fast. We are driving cost actions through a combination of restructuring activities, acquisitions and changes in mix can have an impact in these scenarios. Thought it would be helpful to walk you through these scenarios and provide additional detail. Let me start with a mild scenario where revenue is down low double digits. In this scenario, we would target margin decrementals before any impact from acquisitions to be in the 30% range. We expect free cash flows to be down low double digits or in line with sales with assumptions such as improvements in working capital, a reduction in CapEx spend, offset in part by a cash component to some of the cost actions. In a moderate scenario, which I would characterize as a similar scenario to the 2008 and 2009 financial crisis, we modeled sales down roughly 20% for a full year. Our current expectations for full year 2020 are between the mild and this moderate scenario. We've identified additional cost actions to keep margin decrementals near 35% range, including further discretionary spend reductions, Extensions of the temporary cost reductions, lower incentives, along with some targeted footprint changes. We'd expect free cash flow to be down 25 to 30%. Looking at the more severe scenario, this assumes revenue down 30% or more. We could also call a cash break-even analysis, meaning How far sales would have to decline before we risk having negative free cash flow after paying dividends. Post-cost actions, we would assume margin decrementals would be closer to 40% and free cash flow down over 40%. Again, these scenarios that we have modeled at enterprise, the segment level, and at each of the plants to help ensure we have the plans in place and we are ready to execute. Our goal is to manage decrementals Preserve strategic growth investments and drive cash to help us recover fast and return to growth. While we are not providing guidance for the second quarter, I thought I would share how we were thinking about it as we close April. Looking at current daily sales rates and trends throughout the business, it seems logical to think that organic sales in the second quarter could be down 20% to 30% year over year. Based on the timing of our cost actions, we would expect the drop-through or margin decrementals to be closer to 40% in the second quarter with sequential improvement. We do expect the second quarter to be the weakest quarter based on current economic forecasts. As this situation evolves, this can certainly change. However, this viewpoint is based on what we are seeing today. As we progress throughout the year, we are not expecting a quick or V-shaped recovery. We expect a longer duration of the current environment, and while the rate of decline may moderate throughout the year with the second quarter being the most challenged, we expect to continue to align our costs with what we are seeing in the market. A couple other points as guideposts for full year 2020. We continue to expect interest in the $40 to $43 million range and a tax rate between 18% and 19%. On shares, if we do not buy back any more this year, our diluted share count would be closer to $171 million, but still lower versus prior year. Our focus is on actively managing decrementals, preserving cash, and recovering fast. I am confident that we are taking the appropriate actions to create a stronger InVent when we emerge. This concludes my comments on the first quarter and I will now turn the call back over to Beth.

Thank you, Sara. Please turn to slide 13, summarizing our prepared remarks today. Our goals during these challenging times are clear. First, we are focusing on the safety and well-being of our employees. Our second goal is to continue business operations to serve our customers and support critical infrastructure. Third, we are taking actions to emerge from this current situation as a stronger company. We have a healthy balance sheet and solid liquidity position. We have already begun executing on levers to unlock cash with our working capital initiatives. Our longer term strategy remains intact. And we have accelerated and expanded many of our One Invent initiatives. These include a focus on key verticals where we think we can win, geographic expansion, and new product introductions. We continue to drive productivity across our business and are in the midst of a digital transformation to improve analytics and velocity as well as the customer and employee experience. We will continue to evaluate our capital allocation strategy with the goal of finding the best return with our cash. Long-term growth is a priority for us, and our team continues to execute on our strategy. We believe we are focused in the right areas to drive growth and deliver positive results. These are uncertain times, and I'm proud of the way our team has performed. As we take these actions in our ultimate goal, We thank you for your support and we remain committed to making InVent a top-tier performance company. With that, I will now turn the call over to the operator to start Q&A.

As a reminder, if you would like to ask a question via the phone, you may do so by pressing star, then the number 1 on your telephone keypad. Again, that is star 1 if you would like to ask a question. Your first question comes from Jeff Sprague of Vertical Research.

Thank you. Good morning, everyone. Hope everyone is well. Just a couple from me, and I'm sorry I missed the first couple minutes of the call, but looking at the $50 million of cost out for 2020, could you elaborate on how much of that is temporary? And then I appreciate the discussion on managing decrementals. Kind of wondering what you would have kind of teed up to do additionally, you know, if things do remain challenging over the balance of the year.

Good morning, Jeff. So I'll just start by answering the question on the cost reduction efforts. So on that $50 million of targeted cost reductions for 2020, roughly $20 million of that is temporary, and we'd expect to see roughly half of that in Q2 with some of those specific actions that we talked about in terms of temporary salary reductions and furloughs. The remaining $30 million is really more structural. $15 million of that is really the carryover from 2019, so that should be largely reading out here in the first half of the year. And the rest of that is structural incremental actions that we're taking in 2020, and that's largely going to read out in Q2-Q3. Q3 and Q4. So it looks like more of a $20 million annualized cost out savings. And that's really targeted more so in the thermal space, largely around oil and gas, as well as enclosures that we saw.

Great. And then on what are the things that you're looking at if we have a problem here?

Yeah. So some of the additional cost actions include Really extending some of these temporary cost actions that we've currently sitting here today are focused on Q2. Secondarily would be taking a further reduction in some of our discretionary spend including T&E in Q3 and Q4. We'd also be adjusting our inventory compensation expense that's largely intact here in Q1 as you typically would expect as early on in the year. We would see some incremental benefit from incentive compensation as well as targeted real estate, office spaces, and some targeted footprint actions. So there are incremental additional actions that we would take, obviously, as things would progress in terms of depth or duration.

And then one other follow-up for me, I appreciate none of us has a crystal ball, so actually getting the demand equation right is challenging, and we're all making our best guess here. But I wonder on channel inventory, how closely linked your business is right now to where the inventories stand? I guess the question really, to put it simplistically, do we have to work through some notable channel inventory liquidation before your sales kind of Are we kind of, you know, pacing at end demand right now?

You know, this is Beth, Jeff, and I think that's one of the things in our business is we've always shared two-thirds of our revenue goes through distribution channels. And, you know, we've shared the models in the past, especially 2008, 2009, where, you know, our sales drop off faster because of that inventory repositioning. I think we're going through some of that now. Aravind Padmanabhan Ph.D., Robert Van Der Kolk Aravind Padmanabhan Ph.D., Robert Van Der Kolk Your next question is from Jeff Hammond of QBank Capital Mark. Hi, good morning. Good morning.

So, Beth, can you maybe just speak to what you're seeing in terms of order trends in April versus the sales numbers you gave? I'm just trying to match up what the order trend is maybe telling you that might be the same or different versus sales. And then maybe just add a little more color on EFS besides the distributor destocking, why that business is maybe showing a little weaker. Yeah.

Yeah, so let me start with the latter part of that on EFS. EFS is mostly a commercial construction business and certainly mostly a North American-based business, as you know, and I think you've seen in many parts of the country where job sites have just been shut down. And typically with that type of inventory, it's one that distributors can turn off and turn off Turn Off Quickly, etc. So I believe that's exactly what we're seeing because, you know, nice growth in EFF. In fact, orders were up all through Q1. So coming into Q2, we started to see that inventory repositioning. And I'll let Sara add some more color on orders in general in April.

Yeah, so Jeff, this is Sara. So orders actually trended a little bit better than the daily sales rate in April, really down 10% to 15%. Let me give a little bit of color just by segments. Enclosures orders were generally in line with the sales. ESS was a bit better. We saw some good order intake in some of our regions outside of the U.S. That was down 15%. Thermal was actually up double digits in orders, and that's really reflective of some good project wins that came in in April, particularly around LNG and some of the regions outside of North America.

Okay, great. And then you gave some color, Sara, on the temporary costs and how those flow through. But if you just look at that $50 million of savings, is there a way to kind of – how much did you get in one Q? What do you expect in two Q and second half?

Yeah. So in those savings, we got roughly around $10 million of cost-out savings in Q1. That was really – We're actually probably closer to eight, and that was really a function of largely the carryover savings from 2019. We would expect that to ramp in Q2, essentially be double that, and that's in large part because of those temporary salary reductions that we took. We talked about the incremental furloughs, the incremental salary reductions The Discretionary Spend Reductions, etc. From there, I would say we're going to be prepared, Jeff, to ramp and adjust those temporary and those discretionary cost actions based on the demand that we see.

Okay. And then just real quick on the thermal orders, what are you hearing from your customers on the orders that are in the backlog, the orders that just came in around cancellation risk or deferral risk? Thanks.

Yeah, I think certainly everyone is evaluating and pausing, so we feel good about the orders that we've received. It's just going to be the timing and execution of some of those projects. I would say in the short term, what we immediately saw was an impact on the MRO side of the business because The projects, especially those that are under construction right now, we expect to continue. It's just that duration. So likely we're going to see some things delayed or pushed out, but we haven't had, other than on the MRO side, we haven't had many cancellations, really anything significant to speak of. So we believe the projects that are in work are going to continue. They'll finish those jobs off. It's just a matter of timing.

Okay, thanks so much.

Your next question is from Julian Mitchell of Barclay.

Thanks, good morning. Good morning. Maybe just the first question around the thermal management business, and in particular the margins there. You know, very heavy decline in margins year on year in the first quarter. Maybe just talk through the drivers behind that. Is it all about oil and gas? Thank you for joining us.

Hi Julian, this is Sara. So I would say, to answer the latter part of that question first, we would expect those decrementals and that ROS contraction to improve in Q2 from Q1. In large part due to the incremental structural cost actions as well as the incremental temporary cost reduction actions that the team is taking there in Q2. So we do expect those to improve. Specifically in Q1, a couple different drivers What's driving that kind of worse than what we expected from a Ross perspective? It really is probably first and foremost the significant sharp decline that we saw on the MRO side. If you remember, this thermal business is roughly a third commercial, a third MRO, and a third project. And MRO and commercial have a high contribution mix margin. And the MRO business has been relatively resilient because that tends to be a little bit more off expense versus capex. But just given the severity of the oil and gas declines, we saw a more immediate and a more severe impact to those MRO projects. So, that was probably the largest driver. Obviously, commercial being down double digits also impacted that ROS as well. But like I said, really, you know, the improvement in Q2 and beyond is really a function of the incremental cost actions that TEAT is taking by way of structural cost actions as well as the incremental temporary cost reductions as well.

Thank you. And then my follow-up would be a firm-wide question. So your decremental margins in the first quarter were obviously heavy, you know, 80% plus. Second quarter, I think you talked about maybe a 40% decremental margin as a good framework. If we look at the year as a whole on slide 12, you're talking about the mild to moderate, so maybe a 20%, 25%, or sorry, 30%, 35% decremental for the year as a whole on that mild to moderate plan. So that's implying very narrow decrementals in the second half, given Q1 was 80 plus and Q2 is 40. Just wondered if I'm reading that right, and if so, Is that a function, that second half narrowing of those cost saves and perhaps an abatement of some of those mixed headwinds at thermal that you just touched upon?

Yeah, Julian, the largest part of that is really going to be the timing of the cost actions. So as we take those incremental structural cost actions, really none of that was in Q1 just based on the timing of those actions. So we would expect that to fold into Q2 and extend into the back half. We also talked about we do expect Q2 to sort of be the heaviest impact from an overall top-line perspective. And with that, decrementals being in that 40% range, but we would expect top lines to ease a bit and decrementals to also ease, i.e. get better in the back half of this year.

Great. Thank you.

Your next question is from Dean Dre of RBC Capital.

Thank you. Good morning, everyone. Wishing everyone good health.

Thank you.

Hey, thanks. I just want to add the thank you here for the effort to go through the scenario planning on this. Not many companies have been as willing to outline the sensitivity analysis. I know that takes a lot of work and planning, so we appreciate that. Just some additional questions on it is what are you monitoring in terms of the total sales? I know that's for the full year, but The rate of decline is, I want to get a sense of how nimble you'll be. Are you looking at the daily order rates? You know, the trailing month? What's just a sense of how nimble can you be in tracking the sales decline? Because that sounds like that's the gating factor as to what sort of additional cost cutting that you'll take. So let me start there, please.

Yeah, I think, Dean, a couple things. We are tracking daily orders. We are talking with some of our key channel partners and customers just to understand what trends they're seeing. Part of this, I would say, more of a Q1 issue, you know, an early part of April was us also looking at managing our capacity or labor, right, in our factories because, as you can imagine, starting with China, our plants, they get shut down there. And then as we had these stay-at-home orders, it took some time for everyone to understand and including employees that we were deemed essential, but just to manage our capacity. So I think we look at how's our plant performing, we look at what's the trends from our distributors, what are our customers telling us, and just other economic indicators. And those are the things that we're trying to manage and then flex our workforce Aravind Padmanabhan Ph.D., Robert Van Der Kolk

I certainly appreciate the color there. And then just a follow-up question on free cash flow and working capital. Sara, can you take us through some of the focus areas in the accounts receivable? Are you seeing some credit issues and how are those being dealt with and And also on inventory, would you be, since you ramped down production, you'd be selling some from your own inventory and so that inventory liquidation actually gives a lift to free cash flow. So just take us through some of those dynamics, please.

Yeah. So, you know, historically, we have seen typically a tailwind in working capital and a downturn. As you suggest, you know, inventory comes down faster than what we see on the sales front. So that will certainly help, but clearly we came into this year with a top priority and focus on working capital, and I think the team is Thank you for joining us today. and some excess inventory. And I gave the example of ESS specifically in Q1, really taking a data-driven, cross-functional team approach to where they saw maybe some longer parts in the supply chain and some excess inventory specifically around some purchased finished goods So we're making some good progress there overall. You asked on the AR front, you know, some of this is in relation to kind of our One Invent focus that we've been really focused on since then. And as we look at some of our top very strategic, you know, relationships and we are consistently rolling out this One Invent program, some of that is providing some opportunity just to harmonize terms. Thank you all for joining us today. A good job of managing all of that, really working to hold to help ensure that we can really just maintain our cash profile and continue to support our business and support the needs of our customers.

That's real helpful. Thank you, and best of luck, everyone.

Thank you. Your next question is from Joe Richdy of Goldman Sachs.

Thank you. Good morning, everyone. Hope you're all well. Good morning. So on slide five, guys, you highlighted a few verticals that remain positive, including data centers. I'm just curious, like, as you kind of see the year progressing, and I know the demand environment is really, really difficult to predict, but, like, are these verticals that you would expect to stay positive in this type of environment or at least less negative? Just any color around that would be helpful.

Yeah, I think some of these areas, maybe it's hard to say if things are going to be positive all year, but I think less negative. And so just take data centers and networking solutions. You know, with everyone having stay-at-home, kids working from home, with everyone doing online shopping, I mean, you know, we're just seeing that there's a build-out of that infrastructure in rural America, for example, right? Networks weren't up to the... Thank you for joining us. The environment that we're in right now, and that's where we're focusing some of our commercial effort.

That makes sense. And I may have missed this earlier, but the trends, was that through kind of April, or was that more of like a quarterly comment?

It was first quarter and as of April. Those were the areas that we generally saw some more positive performance.

Okay. Okay. Okay, great. And then maybe just my follow-on question, just thinking about the price-cost dynamic for the rest of the year, you commented your price, I think, was about a $3 million positive this quarter. We're in a deflationary environment. How does that equation look for you guys as the year progresses?

Yeah, so this is Sara. Hi. So we continue to manage the price plus productivity is going to offset inflation as well as some of our strategic investments. So I'll maybe give a little bit of color on Q1 because I think that'll help kind of shape, kind of balance the year. From a Q1 perspective, productivity was $5 million and inflation was $10 and we got about a point of price. And Beth talked about this earlier, you know, We did see some good productivity on the operating expense side as we work to contain some of our discretionary spend even in Q1. But we did see some impacts of COVID-19 on just the overall kind of productivity with some of the fits and starts on our factories that was included in that roughly $5 million of number. So as we look into Q2, we do expect productivity, which would include material productivity, As well as some of our cost actions to RAMP, but we would still expect those decrementals to be in that 40% range just due to the pace of some of our structural cost out actions. Just for the full year, we continue to expect price, targeting price in that 1% range, and inflation we continue to see, but we're driving that productivity hard, not just our cost actions, temporary and structural, but also on the material productivity side, so trying to capture some of that deflationary environment that we're seeing.

Okay, that makes sense. Thanks so much, Sara. Take care, guys.

Thank you. Your next question comes from Justin Bergner of G-Research.

Good morning, Beth. Good morning, Sara. Good morning, Casey.

Good morning. Good morning.

A couple questions here. I guess to start, those verticals that you had in the plus column on slide five, how much of your sales do they roughly represent, you know, at present or, you know, thinking about 2019?

So we typically have talked about infrastructure and that's That's in that 10% to 15% range. But let me give a little bit of color maybe on some of these sub-verticals, right? So utilities, that's less than 5% of our sales, and that's going to predominantly show up in the EFS business, particularly our Aerco brand. And then on the automotive side, again, that's another sub-vertical that maybe we haven't talked as much about. And that's in that, again, less than 5% overall, and that's particularly going to be in our enclosures segment. Some of these others are the very big buckets of verticals that we've talked about in terms of our largest being industrial, second to that being commercial, and then on the infrastructure side. Data centers and networking solutions is roughly $100 million in sales.

Okay. That's helpful. I guess I want to ask about the decrementals. I'm assuming that Includes the benefit of the temporary cost cuts. Would the split of the decrementals or I guess a rank order of the decrementals across the different business units look similar to what it looked like in the first quarter as we look at sort of the scenarios for the year as a whole in terms of thermal being the most challenged, followed by enclosures, followed by EFS?

Well, I would say that there's a couple different things that are going to impact, you know, decrementals. I think, you know, we talked about in Q2 really targeting that 40% decremental. A couple things that are going to come into play with that, you know, enclosures and EFS are going to be impacted by the acquisitions. Well, that folds in as incremental dollars on the top line, on the bottom line. It does put some pressure on. Thank you for joining us. I think the other piece maybe to note more specifically to Q2 is we are expecting some mixed headwinds by way of the decrementals and EFS as well. We would expect the thermal decrementals to meaningfully improve from Q1, but again, just due to the pace of that decline, we would expect that to still be heavier.

Okay, fantastic. That's helpful. And lastly, you mentioned that you'll keep an eye out for bolt-on acquisition opportunities. Where would that focus be and is that something you would do today or do you want to sort of wait a couple quarters to see how the world looks before using your balance sheet more?

Yeah, I think it's fair to say, you know, we're still integrating Eldon. We just acquired WBT and Q1, so we're quite busy in those integrations. We're very focused on our liquidity and cash. So from an M&A, from executing M&A, I would see that would be further out, right, just because of our, we've always said we wanted to be able to execute and integrate well. And meanwhile, though, you know, we think there's lots of opportunities to do M&A. It's a very fragmented space. As you know, the process by which you do M&A is to, you know, build relationships and build You know, our M&A team are doing that so that we have a rich pipeline and when we think that things are in a more stable time or position and when we feel, you know, good at having good visibility to that stabilization, you know, that's when I think we would be ready to execute again. So it's certainly not in the near term.

Okay, understood. Thank you for taking my questions and stay well.

You too. Your next question is from David Silver of CL Key.

Yeah, hi, good morning. Good morning. I have, yeah, thanks. I have one particular question, and it would have to do with industrial marketing or commercializing, you know, of your new product programs. So, you know, you've mentioned in the past this year was going to be a record for new product introductions. For better or for worse, you don't get to choose the markets that you launch products in, but I was wondering if you could maybe give us an overview of how a 50-plus new product launch schedule might be affected by the current environment. In other words, I'm assuming for products that might be commercialized through the distributor channel, I think no time like the present, but maybe if there are New products targeted towards strategic customers or some that require kind of in-market testing or demonstration. You know, I'm just wondering if that kind of environment, the current environment, maybe might cause delays or a change in schedule to better align, you know, the supply of your new, the rollout of your new products with the receptiveness of the end market. Thank you for joining us.

Working with suppliers or tooling, but we're trying to gain velocity as we work through our new product launches. And so we've rolled out launching with Agile. And as we think about new products, we think about new product introduction. So it's also the commercial aspects. And with these, you know, take, for example, these new 11 products that launched in Q1, which was, you know, very high for us. Our teams have gotten creative in terms of doing video launches. One thing we're finding with everybody working from a stay-at-home, we've had a couple of new product sessions where we've gone out and said we're launching a new product. There'll be a training session. In some cases, we've been able to ship products to our customers so that when we're doing the training, they physically have the product in their hands. What's been amazing is with one of those first sessions, it sold out, so to speak, within hours. We had to put a second session on. I know in our Hoffman enclosures, we were doing some training sessions and had 1,000 people sign up within 24 hours. We're finding great reception to launching these products at this time. I think the key thing is our ability to quickly move to Video or being creative because we don't over PowerPoint people but getting product in their hands. In fact, we've seen orders taken because once a customer can see the product, See the value proposition. Video is great for that, especially with some of our EFS products. We've received some new orders. So we're going to continue down this path. And I think our distributors have also been very receptive to this. In some cases, we have products that are targeted for labor savings, or they're targeted for data and networking solutions, or they're targeted for food and beverage applications. So what may take longer, just because we're in a down market, is for our sales to ramp to the original profile that we had. But still, getting those seeded right now we think is really important. And we think it's one of those ways when we talk about invent emerging stronger, the fact that we're going full force here, we think this is one of the critical areas for us.

Thank you for that. And I think you kind of stole my thunder with this follow-up, but I was looking at slide seven and where you break it down into three panels. The middle panel was new products, but then the rightmost panel, digital transformation. I guess that was another priority of your company that you've discussed in past conference calls. And I think you touched on it, but I just wanted to check on whether Your new sales tools like the digital capabilities you think have gotten to the point where they need to be or is this an area where you might want to accelerate the resources or accelerate the development effort there to take advantage or to operate in the current environment?

Thank you. Absolutely. This is an area where there's always more that can be done. We looked at this time as to, again, driving an agile approach to everything we do is driving a lot more velocity. But with virtual working at home, and by the way, our infrastructure held up. We had no issues when we went to working virtually. It really was tremendous. But what we found is we were able to do more process work, more data cleansing, more enriched product data, expand some of the tools that we have, working with our channel partners as they're expanding their digital capability. So it's an area we're putting more focus on and using some tools to drive velocity there. So it's always been part of our strategy, but just getting momentum there, doing robotics process automation, there's a lot going on. And it's an area we're really focused on because that is the future.

Okay, thank you for that. And I meant to say this first, but I did appreciate, you know, your investor relations effort to send along the slides ahead of time. So that did help me with getting some things done this morning ahead of the call. Thank you.

Thank you. Thanks. Your final question comes from Scott Graham of Rosenblatt Security.

Yeah. Hey, good morning. Good health to all three of you.

You too.

So in front of your filing of your queue, I was hoping you could help with the model a little bit here. You know, for example, like what were enclosures industrial sales down? What was thermal energy sales down in the quarter? Do you have those numbers?

Yeah, Scott, give us just a second here.

Sure.

Well, while you're looking that up, maybe, Beth or JC, you could tell me You know, the data center business, is that entirely in enclosures?

No. No, if you recall, I mean, it's majority in enclosures, but then there's a piece that is our caddy product line. And with our new acquisition of WBC, which is wire basket tray, you know, we've extended more into the EFS space. And there's a smaller piece around thermal management when we do liquid cooling and we do some leak detection. But it's predominantly enclosures, but now expanded further with EFF.

Okay. Additionally, on the cost reductions, could you give us an idea of, you know, kind of how they hit by segment, assuming, of course, thermal will maybe get a disproportionate percent of sales, you know? Do you have any sort of guidance on how we should look at that by segment?

Yeah, so Scott, this is Sarah. So I'll take the two questions, a little bit of the vertical view by segment as well as the cost-out summary. So in that $50 million of cost-out savings, nearly half of it is going to be in thermal, you know, just as you might expect given the oil and gas challenges there and the declines. That's reflective of really the incremental structural cost actions that they're taking as well as some of the incremental temporary and discretionary cost actions. Second to that is going to be enclosures, and then you've also got some cost actions on EFS and then enterprise as well. So that kind of gives you an order of magnitude and order for what those cost savings are showing up by segment. From a vertical perspective, in that enclosure, it's down 8% organic. That roughly lines up with industrial, as you might expect, because that's the biggest percentage of those sales. And where we saw strength in the quarter is really on the commercial side. That was up kind of mid-high single digits. From a thermal perspective, in that down 16%, Industrial was a bit higher than that, so down 20%. And then you've got your commercial better. I mean, overall, I think the commercial vertical performed well across these three segments. And then you've got energy down a bit more than that with infrastructure down less. From an EFS perspective, being up 3%, really we saw strength, the largest strength, in the utilities part of that business, and we talked about that on the call, really showing up in our Erico brand. Second to that, we also grew in commercial, and so overall, we saw good strength in EFS. We did see some industrial declines there in EFS, but that's only 20% of that portfolio.

Yep, yeah, that's very helpful. And will the queue be out today? Yes. Great. Awesome. Here's just another question. It's just sort of a question about a bit of a balancing act. So, you know, as we look at productivity, right, so right now, volumes are lower. So, There's more time for people to put on a mask, take off their mask, do the hand washing and the social distancing thing. But as we go forward and, you know, volumes, let's say, are less down, how do you manage whereby the productivity away from the cost outs does not suffer from that?

Well, Scott, I'm not sure. Let me try and answer your question. I think what you're saying that maybe there's some lack of productivity with just the PPE side of things, but I guess one of the things that I would say, around the world, and it started with China, but as other plants, as areas were either shut down in Europe or we'd have We've had to manage attendance levels. And interestingly enough, one of the things that we've seen is even with attendance levels being down and with some of the social distancing measures in place, we've actually seen productivity improve in some cases. And I think as we go forward, while we're practicing good hygiene and all of those things, we believe there's still ways for us to drive productivity, continuing to execute just on some of our lean initiatives, continuing to execute on where we've invested in capital, continuing to execute on areas that we just knew were inefficient. So I think we believe that all of those measures Aravind Padmanabhan Ph.D., Robert Van Der Kolk Aravind Padmanabhan Ph.D.

It sounds like you're saying that you're not concerned about losing momentum, whether it's lean or whether it's best practices. Does that then by extension mean that if you're generating productivity, even with attendance down, social distancing, washing of hands, that that might usher in some ideas for further cost cutting down the line?

Well, potentially, or it allows us to ramp, right, and drive growth, right? That's the other way that we, you know, we think about it. But certainly, I think the environment that we're in now, there's areas where we're accelerating performance, as mentioned, you know, around digital and just finding great new ways virtually to launch products and engage with customers. And I think operationally, you know, one comment I would make, because we learn from China first. is we started to create these pandemic checklists and share best practices across all of our plants. And that act in itself around the safety measures, I think is creating a better sharing and networking environment to share other best practices, right? That's the culture that we have. And so I believe that's going to continue. In a way, we've become more connected than ever using virtual tools Thank you for joining us. has proved to be very successful for us. And so we're just going to keep continuing that sharing and learning and working virtually to get best practices implemented across the company.

Guys, this has been great transparency. Thank you. And I echo the prior caller about JC sending the deck out earlier. and also really nice work around the cost side. That was something that I think has been absent in some conference calls before you. Have a good day. Thank you.

There are no other questions in queue.

Well, thank you for joining us this morning. Our team is aligned on the near-term goals to manage through this and emerge stronger. We're confident we're working in the best interest of our employees, communities, customers and shareholders. Thank you again for your time and we hope you remain safe. Operator you may now conclude the call.

Ladies and gentlemen this concludes today's conference call. Thank you for your participation. You may now disconnect.