nVent Electric plc Ordinary Shares

Ladies and gentlemen, thank you for standing by and welcome to the InVent Q2 earnings conference call. At this time, all participants' lines are in a listen-only mode. After the speaker's remarks, there will be a question and answer session. To ask a question during this session, you will need to press star 1 on your telephone. Please be advised that today's conference call is being recorded. If you should need further assistance, please press star zero for the operator. I would now like to hand today's conference over to J.C. Weigelt, Vice President of Investor Relations. Sir, the floor is yours.

Thank you, Carmen, and welcome everyone to InVent's second quarter 2020 earnings call. I'm J.C. Weigelt, 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 second quarter performance as well as a COVID-19 business update. 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-vent filings with the Securities and Exchange Commission. Forward-looking statements are made as of today, and the company undertakes no obligation to update publicly such statements to reflect subsequent events or circumstances. Actual results could differ materially from anticipated results. Today's webcast is accompanied by a presentation, which can be found in the Investor section of Invent's website. References to non-GAAP financials are reconciled in the appendix of the presentation. We'll have time for questions after our prepared remarks, and now I will turn the call over to Beth.

Thank you, JC. Good morning, and thank you for joining us. We continue to hope that you and those around you are safe and healthy as we navigate through the pandemic. I want to extend a special thank you to all of our InVent employees who have been resilient and who are adapting to a new way of working. Our focus and collaboration has never been stronger. The safety and well-being of our employees remains our first priority at InVent. I want to acknowledge that these are challenging times and our employees have been putting in tremendous effort, living our customer first value to go above and beyond to keep our business running. I'm truly grateful and inspired by their commitment and dedication. I also want to make a comment on racism, inequality, and injustice in our society. Invent stands with the black community, with all people of color, and others who feel marginalized. We stand against inequality and injustice of any kind and we will not tolerate racism in any form. We have launched listening circles across InVent as part of an effort to engage our employees in a dialogue on racism. We have made the commitment that we will listen, we will talk, and we will act. Together we will emerge stronger. Now I would like to turn to our second quarter results on slide three of the presentation titled Executive Summary. We remain focused on our three near-term priorities, which are first, focusing on the safety and well-being of our employees. Second, continue business operations to serve our customers and support critical infrastructure. And third, take actions to make Invent a stronger company, well-positioned to exit the crisis. I am proud of our execution during the quarter. Since spend two years ago, we have always been asked by investors, how would Invent perform in a downturn? I think if you review our second quarter performance, you will see that we executed well during a unique and challenging time. Our teams executed on our plan to keep operations running with minimal supply chain disruptions. We managed decrementals and strong free cash flow conversion generation with 160% adjusted conversion. In addition, we continued to invest for growth. We launched 13 new products, made progress on our digital transformation, and the integration of our acquisitions are on track and performing well. In April, we highlighted the actions we were taking to emerge stronger, and we view these results as evidence that we are on a path to do just that. We executed on the cost actions we laid out last quarter, and second quarter decrementals were 39%, including a 7-point negative impact from acquisitions. These decrementals were better than our initial expectations of approximately 40%, which excluded the impact from acquisitions. Second quarter sales were down 17%, as each segment's demand was negatively impacted by COVID-19. We improved our free cash flow performance versus a year ago, and adjusted EPS came in at 29 cents. Our two recent acquisitions, Eldon and WPT, performed well during the quarter. We continue to target a mild to moderate scenario of sales down 10% to 20% for the year. We are taking additional cost actions given our view of a prolonged recovery in certain verticals. More broadly, we are seeing improving trends where countries or states are beginning to open back up. Specifically, verticals within infrastructure are performing well relative to other verticals. Data Centers and Networking Solutions and Rail are seeing improved trends. In Data Centers and Networking Solutions, we have a strong value proposition with our integrated solutions inside and outside the enclosure with leak detection, cable management, liquid cooling, and power management. We're also seeing improved trends in commercial tied to the reopening of economies across the globe. Prefab remains a favorable long-term trend, and our InventCatty prefab business is seeing double-digit orders and backlog growth. General industrial continues to be weak, although there are some areas that remain more resilient, such as material handling and food and beverage. Overall, we continue to expect an uneven recovery, as channel partners manage inventory levels and companies manage their spend. Similar to last quarter, oil and gas trends remain weak, although I will point out our thermal management project orders and backlog grew double digits this quarter. In summary, although our business experienced pressure related to COVID-19, we executed on our three near-term priorities, managed decrementals, and generated strong cash. We're confident in the actions we are taking to emerge stronger. I will turn the call over to Sara for some detail on our second quarter results, an update on our cost actions, and share some thoughts on the balance of the year. Sara, please go ahead. Thank you, Beth.

Let's turn to slide four to review second quarter 2020 results. Sales of $447 million were down 17% relative to last year on a reported basis and declined 22% organically. The acquisitions of Eldon and WBT added about six points to growth. Looking at monthly trends overall during the quarter, daily organic sales year over year were fairly consistent by month, with a marginal improvement in June. Notably, organic orders declined less than sales at down 15%. Second quarter decrementals were 39% all in, including a seven point negative impact from acquisitions. So better than our initial outlook. We executed well on our scenario plans, including both structural and temporary cost actions while investing in future growth. Free cash flow continued to improve versus prior year, and we had a strong conversion in the quarter at approximately 160%. Now please turn to slide 5 for discussion of our second quarter segment performance. Starting with enclosures, sales of $219 million declined 16% and 25% organically. While COVID-19 negatively impacted demand across most verticals, we did see pockets of relative strength and we grew low double digits in rail. Price was negative in the quarter as we won some competitive new business. While L-then sales declined, we expanded margins over 300 basis points on a pro forma basis and are well on track with our integration efforts. Enclosure segment income declined 41% and return on sales declined 560 basis points. The impact of lower volume, inefficiencies and increased costs related to COVID-19 negatively impacted margins. Defermentals are expected to improve in the back half of the year. Moving to thermal management, sales of $96 million declined 24% organically. As expected, industrial MRO saw the steepest declines due to continued site closures in parts of the world and delayed or deferred spend. Our project business was down single digits as we continued to execute on our backlog. In addition, we grew backlog sequentially and year over year as we continued to win major project bookings. Recall the vast majority of our energy exposure is downstream, which seems to be faring better in this environment. Commercial revenue experienced significant declines in the first part of the quarter, however saw a modest recovery in June and we continue to make good progress expanding our channel presence with our commercial offering. Segment income was down 43% and return on sales declined 460 basis points due to lower volume in industrial MRO and commercial. tend to have a higher margin mix component. We saw a significant sequential improvement in decrementals from Q1 as the actions to reduce our fixed cost structure and realign our business rate readout. Now on to EFS. Sales of $132 million declined 12% and 14% organically. The commercial vertical was negatively impacted by COVID-19 mainly due to site shutdowns. An area of particular strength in the quarter was in the utilities vertical, which grew mid-single digits and accounts for nearly 10% of EFS sales. Segment income was down 17% and return on sales declined 130 basis points but remained strong at over 26%. EFS had almost a point of contribution from price and realized strong productivity gains, which helped offset operational inefficiencies from COVID-19. Turning to slide 6, the team executed well on the cost actions through a combination of restructuring and temporary actions. As growth continues to lag and uncertainty remains, we implemented additional cost actions. In aggregate, we are now targeting approximately $70 million of cost savings versus the original $50 million we discussed on the April earnings call. These actions include an extension of the temporary measures we took in second quarter as well as more structural changes. Reviewing our near-term capital allocation strategy, we will continue to invest first in organic growth with a focus on new product development and our digital transformation. Our dividend remains a key component of returning cash to shareholders. We are lifting the suspension of our share buyback program and will continue to assess buying back stock based on market conditions and M&A opportunities. On M&A, we are focused on actively building relationships in our funnel so that we are in a position to be ready as market conditions improve. As always, we will continue to evaluate the returns for each capital allocation decision with the goal to generate the highest return while managing liquidity and leverage. Moving to slide seven, titled Healthy Liquidity Position. Our net leverage ratio at the end of the second quarter was 2.4 times, which is slightly above the first quarter. We ended the quarter with $235 million in cash and an additional $315 million available on a revolver. We have limited maturities until 2023 and remain confident in our liquidity position as well as our cash generation activities this year. Specifically on working capital, our team continues to make good progress. Our working capital task force is taking a data-driven approach to target opportunities, creating structural improvements to benefit our cash generation in future periods. We did see an uptick in inventory early in the quarter given the steep decline in demand, but made progress and expect this to continue to improve in the back half of the year. This focus on working capital is another example of how we intend to emerge stronger from this pandemic. On slide eight, titled Balance Sheet and Cash Flow, we have a healthy balance sheet, and as I mentioned earlier, we are seeing improved year-over-year cash generation. In the second quarter, we focused on liquidity preservation while also deploying $30 million to dividends and approximately $7 million to cap-backs.

Moving to slide nine,

Consistent with what we first presented in April, we continue to manage our business through scenario plans and actions at all levels of the organization. While we believe the worst is behind us, the shape and pace of the recovery remains unclear. Accordingly, we are continuing the suspension of our full financial guidance until the market conditions stabilize. More near term, we do expect third quarter organic sales to be down in the 10% to 20% range, so an improvement from the second quarter. A couple data points that gives us reasons to believe sales can improve. First, orders declined less than sales in the second quarter at down 15%. Additionally, both June and July orders were down mid-teens, showing improvement from the May trough. We also saw an improvement in July sales versus second quarter trends. We expect decrementals to further improve in the third quarter and to be in the range of 25-30% before acquisitions, as cost actions and improved efficiencies continue to read out. For the full year 2020, we continue to see sales down between the mild and moderate scenarios. As we progress through the rest of the year, we expect sequential improvement in each of our segments, albeit still down year-over-year. Again, these are scenarios that we have modeled at Enterprise, at Segment, and at each of our plans to help ensure we have the plans in place and we are ready to execute. As a reminder, these scenarios exclude the impact from acquisitions. A few other points as guideposts for full year 2020. We now expect interest to be in the approximately $40 million range and a tax rate in the 17% to 18% range. On shares, if we did not buy back any more this year, our diluted share count would be close to $171 million. Our focus is on actively managing decrementals, driving cash, and recovering fast. I am confident that we are taking the appropriate actions to create a stronger InVent as we emerge, and I am pleased with our second quarter results and execution amidst this challenging environment. This concludes my comments on the second quarter and I will now turn the call back over to Beth. Thank you, Sara.

I'm going to start on slide 10, our near-term goals. We executed well on these priorities during the quarter. Creating a safe work environment, keeping our business moving forward, and executing on actions to emerge stronger. Across our facilities, we have developed detailed COVID-19 checklists to ensure the safety of our employees, customers, and suppliers. We are communicating frequently to help employees be informed of the measures we are taking and any changes to local guidance. We are also providing employees with a variety of tools and resources to support their well-being, such as Mindful Mondays and Financial Fridays. Serving our customers and working in a safe environment are critical for our success. The fact that we are operational around the globe has allowed us to win new business and new customers. We've quickly adapted to working virtually and digitally in this new environment. Turning to slide 11, I want to share the actions we are taking to emerge stronger. First, on new products. We've launched 24 new products in the first half of the year and a few significant launches already this quarter that I would like to highlight. I'm excited by the launch of our global IEC enclosures portfolio for optimum protection and industrial applications. This full range of enclosures and accessories meets international standards, makes it easier and faster for customers to specify, order, and assemble superior solutions around the world. This launch builds on our Eldon acquisition. In thermal management, we introduced a wireless communication interface that builds on Invent Raychem Alexan Family of Smart Connected Control and Monitoring Solutions. Recall, we have the largest installed base of thermal heat trace products in the world. This product allows customers with hardwired communications to upgrade to wireless remote connectivity for monitoring. In EFS, we are building on our Invent Errico Cadweld Exothermic Connections and Grounding Materials for the rail and utility verticals. We have made over 100 million connections worldwide over the last 100 years. And now we have just launched the Invent Erico Cadweld Impulse, which builds on our legacy of innovation with new features around safety, power, and ease of use. We've been creative in launching new products and providing training sessions virtually. We've seen a significant increase in attendance, often reaching capacity within hours of registration. Our digital transformation is accelerating as well, enabled by the development of our agile project delivery system. We launched a new thermal management website with richer content. The site includes enhanced search capability and a where to buy feature to locate our products at the closest distributor. We've also introduced a number of marketing and sales tools with digital lead generation, instant online quotes, and a new pricing tool, all of which can benefit our sales force by providing real-time analytics for better business insights. These tools drive efficiency and growth. We've also had numerous new digital launches focused on our operations that automated and digitized manual processes. Many of these use robotic process automation and examples include automating order entry and PO acknowledgement. Another area where we are emerging stronger is with acquisitions. Eldon and WBT added six points of growth during the quarter. Notably, Eldon has been rebranded in Vent Hoffman, a big step toward our goal of supporting customers around the world with a global portfolio for virtually every environment. Our M&A funnel remains healthy as we target strategic bullpond acquisitions that are highly complementary to our current portfolio. Recall, we are a $2 billion company in a $60 billion fragmented space. Elden and WBT are great examples which extend our capabilities and global reach in our connect and protect space. Turning to slide 12, I'm pleased to announce the launch of our first social responsibility report. which reflects our three focus areas, people, our employees, and the inclusive culture we're building together, products, our products and solutions that connect and protect our customers, and planet, how we care for the environment and support our communities. When we launched InVent, we made inclusion and diversity a priority. And here are a couple of proof points. 67% of InVent's board of directors represent diverse groups. And women make up 45% of our executive management. Other highlights include, as part of Invent in Action, employees from 14 countries volunteered more than 4,100 hours in their communities, our Invent Foundation awarded grants supporting STEM-focused youth education programs, and Invent diverted 97% of waste from landfills. This foundational report is a meaningful step in our commitment to driving progress around the world on issues important to our employees, customers, and shareholders. We look forward to updating you on our progress. To summarize my comments today, we are executing well in a challenging environment. I am proud of our team and what we accomplished in the second quarter. I am confident in the actions we are taking to emerge from this pandemic Thank you.

And as a reminder, if you do have any questions, please press star 1 on your telephone keypad at this time. Your first questioner will come from the line of Jeff Hammond with KeyBank Capital Markets. Please go ahead with your question.

Hi. Good morning.

Good morning.

So just talking on the decremental margins, you know, nice performance in the quarter. I think you said, Sara, 25 to 30 in the third quarter. Can you just talk about what's informing the improvement in the decrementals? Is it simply the, you know, the better, you know, the less bad sales and the internal restructuring or what else is going on there?

Yeah, I'll take that, Jeff. So a couple things there. So one... We would expect to see the largest improvement in enclosures, really having worked through some of those operational and COVID-related disruptions in some of our largest factories. And then secondarily, we expect EFS to improve as well. Thermal, we expect that business to continue to kind of hold in that low to mid-30s decremental range. From a lever perspective, from a price-cost, we would expect that to continue to get marginally better in Q3, inflation easing a bit, but really expect a productivity improvement to continue to take hold with some of the cost actions. I think Q2 is a good example of that where if you look at just our you know overall profit walk you see there that we've got eight million dollars of productivity that includes 17 million dollars or net productivity right and so you've got 17 million dollars of productivity offset by roughly nine million dollars inflation so that's where you see inflation easing a little bit from Q1 and productivity almost 3x that of Q1 so we'll continue to expect that to to ramp here in Q3, giving us those better decrementals. I think the other thing, one other thing to point out too, Jeff, is just from the acquisition standpoint, just because we're going to be lapping the Elden acquisition in September, we do expect that overall impact from acquisitions to ease a bit in Q3.

Okay, excellent. And then you mentioned the June and July order trends getting better. Can you just talk about That was, you know, by segment, I think he called out EFS particularly.

Yeah, so I would say from a Q2 perspective, you know, we talked about orders being down in that 15% range. So, enclosures was more down in that high teens. EFS was down roughly 12% and thermal more in that mid-teen range. The cadence of the quarter, I would say, mirrored a lot of what we saw on the sales side. EFS, that trough, was more in that April timeframe and it continually got better through the course of the quarter. Enclosures, that trough, was a bit more in that May timeframe. Thermal was a bit more uneven, just given the project dynamic of that. If we looked at July specifically, we talked about that better than sales performance extending into July. So those July order rates were in that mid-teen range, similar to what we saw for overall Q2, as well as for June. and revenue was better than that overall. If you looked at that from a segment perspective, Enclosures was really right in line with the overall Invent. EFS was better on both fronts, both from a sales and orders perspective. and Thermal was a bit worse than that from an orders and revenue perspective. I do think it's helpful to point out, Jeff, that on the order front for Thermals, we do expect that to be negative here in Q3 because we will be lapping in Q3 of a year ago. We talked about a very large Arctic LNG job as well. But even with that being said, we do expect backlog to be up year over year in Q3.

Okay, very helpful caller. Thanks a lot.

Your next question is from the line of Joe Ritchie with Goldman Sachs. Go ahead.

Thanks. Good morning, everyone.

Morning.

Maybe just starting out, can we just talk a little bit about the thermal business? If you were to kind of parse out the growth kind of by end market this quarter, it'd be helpful to just get some color around, you know, what commercial slash MRO did and really kind of what your expectation is for mix going forward for the rest of the year.

Yeah, so from a thermal perspective, if you do remember, roughly a third of that business is commercial, a third projects, and a third more MRO. And so we talked about that project business actually being only down single digits. On the commercial side, mainly due to some of these site closures and some of the overall economic headwinds here in Q2, we did see commercial down in greater than 20% range, and then we saw MRO probably hardest hit, if you will. And so that's kind of how that segmented out overall. I would say from an orders perspective, again, we saw strength on the project side actually up double digits as well as we continue to build backlog year over year as well as sequentially. So as we look at the back half of the year, we continue to expect that commercial business to improve, albeit at a slower rate. MRO, we think that's going to continue to be under some pressure, just given the overall spend deferrals and delays. And we do expect projects to continue to be more resilient as we execute against our backlog, as well as the orders are holding up relatively well.

Got it. That's super helpful. So it sounds like mix was already negative this quarter and will probably continue to be negative, which is why the decrementals will be pretty comparable going forward. Is that a fair way to think about it?

Yeah, exactly.

Okay, great. And then maybe my one last question is just thinking about the additional cost outs. I'd be curious if you could provide any color around how much of the cost actions actually came through in the second quarter and then what the expectation is for the additional cost actions into the second half of the year. And then I guess if there's a portion that bleeds into 2021, that would be helpful, too.

Okay, let me kind of break that down. So overall we're targeting $70 million for the full year. We saw over $20 million of that play out in Q2 and we'd really expect that to extend into Q3 as we extend some of our temporary actions as well as some of these structural actions coming into the fold. If we look at it just by way of structural and temporary, so of that 70 million, 30 million is on the temporary side and roughly 40 million is structural. So that incremental 20 that we did here taking it from the 50 to 70 was roughly half temporary and half structural. So if you looked at, you know, just that structural piece of $40 million, we talked about this last April, you know, $15 million of that was simply carryover from what we did last year. $25 million is more structural cost this year, and that would include roughly $10 to $15 million of carryover into next year. So we think that's going to be a key part of helping us, you know, offset some of these temporary cost reductions coming back into the fold in 2021.

Yep, that makes a lot of sense. Thank you very much.

One more point I would say is as we look at some of these temporary cost actions, there's a portion there that likely doesn't come back, right? So as we think about we're all working virtually and digitally, we're traveling less, probably travel doesn't get back to the levels where it was. Even as we just think about trade shows and marketing and we're doing it all more digitally, I think we're going to find that some temporary cost doesn't come back into our P&L as we look forward. So we're still evaluating that, but I think that's another lever that we're going to have.

Your next question comes from the line of Dean Dre with RBC Capital Markets. Please go ahead with your question.

Thank you. Good morning, everyone.

Good morning. Good morning.

Hey, can we get color on the geographies and then also within the context of how they progress through the quarter?

So, Dean, this is Sara. So from a geographical perspective, you know, in that sales overall down 22% from our organic basis, we saw North America down the most, a bit of an improvement on the Europe, EMEA perspective, relative improvement. And on the APEC side, we ended up roughly flat. And I would say that for the most part, that cadence, if you will, reflects the cadence that I talked about earlier from an overall orders and sales perspective.

And how about Europe?

So EMEA was down a bit less than what North America. So North America was heaviest, right, in terms of that down 22%. EMEA performed a bit better and APAC was overall flat.

Got it. And then to go back to the decrementals and on the slide where you give your scenario planning, I know this does not include acquisitions. You emphasized that before, and we understand the impact of M&A. It was seven points this quarter. How does that shape up for the third quarter in terms of the impact of decrementals? I know you said, Eldon, anniversaries in September, but what would be the guidance today?

Yeah, so we'd expect that impact on that decremental to be about five points. Thank you for joining us today.

So does it disappear altogether and just what's the thinking behind that?

Yeah, Dean, over time it does disappear and part of that is we did some very thoughtful market assessments including with the Elden team and as we go forward, remember one of the opportunities that we have is to have one brand to support global OEM customers around the world. And so we needed to unify that offering with that brand. But you'll see that there's a lot of transitionary material from our website to everything that is allowing customers to understand and do those cross references between Eldon and Hoffman. So we've put a very thoughtful approach in place, but ultimately it enables that strategy to have one set of products and branding and nomenclature to support a global OEM around the world.

That's real helpful. Thank you.

Just a first question around the scenario on sales, and I fully realize that it's a scenario, not formal guidance, and there's a lot of uncertainty. But I suppose your mild to moderate scenario, as you put it, that's implying the organic sales for the year are down, call it mid-teens. That would imply, I guess, the fourth quarter sales. Aravind Padmanabhan Ph.D., Robert Van Der Kolk Aravind Padmanabhan Ph.D., Robert Van Der Kolk Just wanted to understand that and then yes specifically on energy what we should expect sales to be done in the second half.

Yeah I think to your question I mean some of this just is the uncertainty right so you know we've seen economies open up and recover and then some steps to take things to as the pandemic spreads to just Aravind Padmanabhan Ph.D. We expect that MRO business just to be weaker, right? CapEx spend there is likely to be weaker. So that's what we've factored in as we've thought about our outlook.

Thank you. And then secondly around, I suppose, the capital deployment, your balance sheet's not very levered. The anniversary and the Eldon acquisition in a few weeks, so you've got the sort of bandwidth to do more on capital deployment. Thank you very much for your time.

We're always looking for what's the best use of our cash and capital, and we always want to focus and prioritize first on growth. Now, having said that, it is a very challenging environment, and so I think on the M&A front, while we're working our funnel in relationships, There's uncertainty and feasibility as you think about the ability to do an acquisition. We're going to continue to work that, but I think there's going to be some timing challenges to that. Then we're going to look at the certainty of the markets and evaluate that when it comes to share buybacks, etc. What we like is that we believe we've got some nice optionality. And we're just going to make sure that we put our cash to use on whatever the best opportunity is as we assess the market.

Great. Thank you.

Your next question is from the line of Scott Graham with Rosenblatt Securities. Please go ahead with your question.

Hey, good morning all. Well done.

Good morning. Thank you.

I wanted to ask a question of Sara and then something maybe more strategic with Beth. Sara, why did you go back into the till and raise the cost outs? It looked like the decremental was fine, sounds like you were happy with it. What motivated that?

Yeah, so Scott, in April we talked about the need to take some additional targeted structural actions, particularly in the oil and gas space, as well as in some specific areas on the industrial side. So we believe that these incremental actions really position us well to manage our decrementals within that framework. But also, you know, enabling us to recover fast as well. So I would say that, you know, these incremental cost sections really allow us to help offset some of these COVID-19, you know, costs and inefficiencies that we're seeing as well as sort of addressing in some of these select verticals what we think may be a more prolonged recovery, you know, maybe in thermal and enclosures as an example.

Gotcha. Beth, two for you on strategic. We talked last quarter about the companies sort of theorizing how to move from where you serve buildings in a couple of businesses, enclosures in EFS in particular, and how we transition that to more buildings that are attached to veteran markets, be it Aravind Padmanabhan Ph.D., Robert Van Der Kolk

Well, I guess what I would say, one of the proof points as we think about our EFS business and particularly what we do there around CADE is we've continued to strengthen what we're doing around prefab. And we think in this COVID environment, a more easier to install, contactless environment, that that prefabrication is a growing trend, right? So we continue to put effort into how we scale that business. And from looking at just some of these other verticals, you know, I would say for us we also look at data and for CADI in particular too, that data and networking space expanding there as another application for that CADI portfolio beyond just Office Buildings or other areas. So we think about it a lot in terms of the product offering that we have and then just in terms of how we market that and get those value propositions out there. So we're continuing to work on that, how we position our portfolio to reach broader vertical markets.

That education process, is that Aravind Padmanabhan Ph.D., Robert Van Der Kolk

I mentioned these virtual training sessions. We do a couple of things. We get products. We actually ship products to get it into their hands so it's very tactile and they can play with it. But we also do virtual sessions to talk about applications. Where else can these products be used? What's the value proposition? So it's all of those things, working with our channel partners and then direct to the end user and explaining them to the value and the benefits of the products and the applications.

Gotcha. Last question from me. Data Centers. Could you maybe tell me how they did in the quarter, but maybe more broadly, some of the strategies behind that business to keep it one of your better growth businesses and specifically within the data center market for you guys. Are you more levered to the data farms or the hyperscales?

Yeah, so data and networking solutions for us, I would say, had more relative strength, although it was down in the quarter. But, you know, we look at that and job sites got shut down, right? So if you think about getting contractors on site to do installations, I mean, all of that got shut down. We still think the long-term trend here is very favorable. And for us, I would say we tend to be more in terms of Dealing with system integrators and more through channel partners, we do have some hyperscale, but that's not where we're really targeted and focused. We can do all levels from a simple racking system up to a more integrated solution with liquid cooling, but we tend to have most of our sales going through the distribution channels, which tends to be more those smaller type of applications versus the data farms and the hyperscale.

Understood. Thanks.

Thank you.

And your next question comes from the line of David Silver with CL King. Please go ahead with your question.

Yeah, thank you. Good morning.

Good morning.

Yeah, hi. So I'm looking at slide eight, the scenario planning slide. You know, it looks to me pretty similar to three months ago. And I believe, you know, you're still expecting A mild to moderate kind of scenario internally. But I'm just wondering, from your perspective, what has changed in your overall outlook from maybe three months ago? So it could be internal. It could be distributor channel behavior, security of the supply chain. Aravind Padmanabhan Ph.D., Martha Claire Bennett,

I think we saw progression during the quarter as we spoke about that in terms of just orders and even in terms of, you know, in some of our segments, sales. So as Sara said, we expect that Q2 will have been the toughest quarter. All right. The other thing that I would say is just as we looked at our supply chain, two things. One, you know, as we have these stay-at-home orders or, you know, there was always this initial reaction. Employees weren't sure or companies weren't sure. And, you know, we have different places like Mexico, you know, we had to work through, you Thank you for joining us today. Those things I think we've now got in a more better or managed situation to where that was all new. So our ability to optimize things, manage some of those operational efficiencies, I think we have a good perspective or feel more positive about how we manage that going forward. So those are just a couple of things. I would say, and it was our expectation, and we can go back in time, particularly with enclosures, because a lot of our business, particularly enclosures and EFSs, Thank you for joining us. I'm not saying we're seeing that fast pickup yet, but it's a gradual improvement. But over time, we should expect that. And I'll let Sara add some more color from the cost standpoint.

Yeah, maybe just a couple more points to make on the cost and the decremental side is, you know, I'd be remiss without saying that we also saw some really good underlying productivity. I mean, the team is focused hard on rapid renegotiations and particularly a focus on our direct and indirect spend. So we did see some good underlying productivity along with just, you know, quickly adjusting our cost structure and spend in a short time. So that really helped on the decremental front. And then secondarily, it's really cash. You know, we're trending, you know, a bit more favorable to these scenarios from an overall free cash flow perspective. I mean, the working capital, you know, focus and the priority that we're putting on that I think is beginning to pay off and would expect that I think the other thing to point out too is typically based on the seasonality of our business, the second half of cash flow tends to be where we generate the majority of our cash. So with where we're at from a free cash flow perspective as well as with the seasonality, we feel good about the overall cash performance for the year and the leverage that we're working.

That's great color. Thank you. I have kind of a semi-follow-up, but the topic might be organizational sustainability. So just looking internally, I mean, you've been operating or adapting to the pandemic environment for a few months now, and, you know, it looks like you're continuing to adapt as the situation unfolds. But when you look at your, you know, production, logistics, marketing, administrative environment, Aravind Padmanabhan You know, it's a naturally collaborative function and the separation or the more decentralized structure may lead to some gaps or some lack of productivity there. So as you look at, you know, your range of internal functions, which ones do you think are sustainable for the long term as you're operating now and which ones, you know, might be, you know, less, you know, Thank you.

Well, let me try and answer that from the obvious. All our plants are running, and we need people building product at our plants. And I think we've learned how to manage our safety protocols there and our shifts, and gone above and beyond to ensure the safety of our employees or anyone who visits our plants. When we look at some of the other functions that are operating virtually, I think we're getting better with our digital tools. Now, the future for us, I believe, is we're going to see a more flexible work environment and it will require people from time to time to come in, to collaborate, etc. But, you know, we're able to, I've talked about our Agile project delivery system. And if you're familiar with Agile, which is predominantly used in software development, it is a very structured process with scrums that have people coming together There are great digital tools where you're able to work ideas and requirements and then go away and execute and come back in two-week sprints. I actually have seen us improve and that's why we talk about accelerating our digital transformation because of our agile approach and the program management we have in place. We're actually accelerating what we do. There's a good case and a good example. I would say on the product development standpoint, this is a record year for us. And we've learned how to launch with YouTube videos and we've learned how to do virtual sessions. But we do have engineers that have to come on site to do some testing. And I think with how we're running our operations around the world and with some flexibility, we do have employees that will come into our offices safely. and perform that function so you know it's not as if all offices are shut down and we're not having any engagement so I actually don't see anything right now where I just think we're not going to be making progress because we're getting better at digital we're very flexible in how we're managing our workforce and the digital tools are really driving a lot of collaboration better than we expected So maybe my last point there is this is why we talk about safety and well-being. Because while we can do all those things, people aren't used to it. And so we've done a lot to train managers how to manage their people, how to balance work and home life, do all of those things. So we're trying to support employees with this new way of working because it's a change. And so it's change management.

Okay, thank you. And then just one last one, but what would be required for you to feel enough confidence to restore providing financial guidance? Thank you.

Yeah, I think the answer to that question is there's still so much uncertainty as to how the pandemic is progressing. And, you know, we're seeing some of the countries globally that seem to have contained things early on now report new cases. So I believe we need to see globally some view that we have containment. It doesn't necessarily have to be a vaccine, but we just need to know that economies aren't going to keep opening and shutting down. And I really don't think we're there yet. So that's one of the things that we're going to be looking for is some of that stability around the control measures around the world. We're going to try and give you as much color as we can from these scenarios. Well, I want to thank you for joining us this morning. So even as this uncertainty persists in this environment, we're confident in the actions we're taking to emerge stronger. We're managing decrementals, generating strong free cash flow, and investing in growth. Our team is aligned on the near-term goals to manage through this and emerge stronger. Thank you again for your time, and we hope you remain safe and healthy. Operator, you may now conclude the call.

Thank you. Thank you everyone for joining today's conference call. You may now disconnect. Have a great day.