nVent Electric plc Ordinary Shares

Ladies and gentlemen, thank you for standing by and welcome to the Invent Q3 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. 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. I would now like to hand the conference over to J.C. Weigelt, Vice President, Investor Relations. Please go ahead, sir.

Thank you, Regina, and welcome, everyone, to Invent's third 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 Sarah Zawoisky, our Chief Financial Officer. Today, we will provide details on our third quarter performance and provide an outlook for our fourth quarter. 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-depth 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 Inven'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, and good morning, everyone. We appreciate you joining us today. As we navigate through the pandemic, we continue to hope that you and those around you are safe and healthy. Our goal on this call is to provide additional detail behind our third quarter results, discuss trends we are seeing, and provide an outlook for the fourth quarter. Turning to our executive summary on slide three, I would like to start by thanking our InVent employees who are working tirelessly. They continue to inspire me with their commitment and dedication. Their safety and well-being remains our top priority. Our third quarter results reflect strong execution as both sales and margin improved sequentially across each segment. We exited the quarter with 19.8% return on sales. Our free cash flow generation was strong at $180 million year to date and up 34% above prior year. I am proud of our ability to maintain these high margins and robust cash flow in a very challenging environment. We continue to invest in new products and digital transformation, critical elements of our growth strategy. We have shifted our focus from cash preservation to cash deployment with a focus on both organic and inorganic growth. We remain confident that through our actions we can emerge stronger and are well positioned to grow. Now I would like to turn to slide four for a summary of our third quarter performance. Sales during the quarter were $509 million, down 9%, with strong relative performance from electrical and fastening. Return on sales contracted 70 basis points to 19.8%. Cash performance remained strong in this challenging environment with approximately 140% conversion of adjusted net income. Electrical and fastening delivered terrific results, demonstrating the strength of the portfolio. Enclosures executed well, achieving 18% return on sales, 20% decrementals, and saw sequential sales improvement. We continue to execute on our Invent growth priorities and year-to-date have launched 33 new products. Looking ahead, we are issuing guidance for the fourth quarter. Our outlook is for a gradual recovery based on trends we saw exiting the third quarter and into October. Our earnings reflect the execution of the $70 million of cost actions we outlined last quarter. We are not extending the company-wide salary reductions or furloughs into the fourth quarter. We are confident in our ability to execute. However, uncertainty remains with the pandemic and its impacts around the world. Looking at some of our top verticals, commercial and residential and infrastructure continue to perform well on a relative basis. In our largest vertical, industrial, we are cautiously optimistic as demand trends improve sequentially. We expect to see a gradual recovery as global OEMs increase capex spend and channel partners restock inventory. This is a trend we have seen play out in our enclosures segment over past economic cycles. Today, we believe we are even better positioned given our ELDIN acquisition and the operational improvements we have implemented. In commercial, we saw sequential improvements as contractors returned to job sites. We are closely monitoring construction demand for new products and renovation activity. We expect residential to continue to grow and see additional positive signs in healthcare and education. Infrastructure continues to perform well. This includes data centers and networking solutions, utilities, and rail, and is weighted more toward our enclosures and electrical and fastening segments. One area where we are more cautious is oil and gas, which we expect to be weak. We believe our backlog in thermal management should help offset some of this pressure, and while we expect MRO sales to rebound, the timing is uncertain. Overall for Invent, we expect to see sequential sales improvement in the fourth quarter, reflective of a gradual recovery, and to continue to build momentum. I will turn the call over to Sarah for some detail on our third quarter results, an update on capital allocation, and balance of year outlook. Sarah, please go ahead. Thank you, Beth. Let me begin by saying we continue to execute well and our financial position remains strong, which gives us the foundation to continue investing in growth to emerge stronger. Let's turn to slide five to review third quarter 2020 performance. Sales of $509 million were down 9% relative to last year and declined 14% organically. The acquisitions of Eldon and WBT added about four points to growth. I'd like to take a moment to talk about trends in the quarter. In enclosures and electrical and fastening, orders were generally in line with sales, however, we saw positive momentum in September. Thermal management orders remained weak throughout and included a tough comparable with a large Arctic LNG project we booked a year ago. For Invent, as we looked at October, we were encouraged to see both orders and sales trends improve relative to the third quarter. Third quarter decrementals were 27%, which is an improvement of 12 points sequentially, as our teams executed well on both temporary and structural cost actions. Price plus productivity more than offset inflation, and free cash flow continued to improve versus prior year, up $17 million. As you saw in our press release this morning, we recognized a non-cash goodwill impairment charge during the quarter in thermal management. This was the result of adverse market and economic conditions related to the pandemic. Combined with the volatility in oil and gas leading to a potential sustained downturn in the energy industry, this impairment charge of $212 million was reflected in our reported results. Now please turn to slide six for a discussion of our third quarter segment performance, starting with enclosures. Sales of $245 million declined 7% and 14% organically. We saw weakness in automotive and oil and gas, and while overall industrial remained down, trends improved as we exited the quarter. Data center and networking solutions grew high single digits, and rail grew double digits. We expect these focus verticals, along with industrial, to continue to strengthen. At the one-year mark, Eldon continues to perform well and exceed our expectations, with performance sales down low single digits and another quarter of strong margin expansion. Importantly, we began to see our first wins with a newly launched IEC portfolio. Enclosure segment income declined 8%, and return on sales reached 18%. down only 10 basis points versus prior year. Disciplined cost controls and strong execution in our factories drove 20% decrementals, which is an almost 30-point sequential improvement versus the second quarter. Now on to electrical and fastening. Sales of $148 million declined 1% and 5% organically. We saw moderating declines in our largest vertical, commercial. We saw pockets of strength in prefab and seismic, and sales continued to grow nicely in the utility and infrastructure verticals. Segment income was down 1%, and return on sales was 27.6%. relative to last year. Price contributed over $3 million in offset inflation. The team continues to make great progress on their lean journey as evidenced by strong improvement in productivity and working capital. Moving to thermal management, sales of $117 million declined 22% organically. Similar to last year, industrial MROs saw the steepest declines due to continued spend reductions, while project sales grew in the quarter. Commercial and residential sales, which account for roughly a third of thermal management, were down mid-single digits. Segment income was down 34%, and return on sales declined 430 basis points, mainly due to lower volume in industrial MROs. We had positive net productivity of approximately $4 million, although not enough to offset volume decline and the negative mix impact. On slide seven, entitled balance sheet and cash flow, we have a healthy balance sheet and continue to generate strong free cash flow. We ended the quarter with $160 million of cash on hand and an additional $465 million available on our revolver. We repaid the $150 million we had proactively borrowed earlier this year. Working capital remains one of our top priorities, and our teams continue to make terrific progress despite the challenging environment. We've managed our receivable days relatively in line with past quarters and improved our payable days. While inventory days increased overall as we managed our supply chain, we made great strides in our electrical and fastening segment. Please turn to slide 8, titled Capital Allocation Update. Our framework remains unchanged. We will manage our leverage, reinvest in our business, pursue attractive M&A, and return excess cash to shareholders. We exited the third quarter with a net debt to adjusted EBITDA ratio at 2.3 times, which is within our target range of two to two and a half times. Our strong cash generation provides the foundation to invest in both organic and inorganic growth. We continue to invest in new products in our digital transformation and maintain a full year CapEx forecast of approximately $40 million in line with prior year. M&A remains a top priority for us. We believe we have a rich funnel of bolt-on opportunities in both enclosures and electrical and fastening. With two acquisitions in the last 12 months, we believe these are great proof points that we can execute on our strategy, build upon the strengths of our in-bed brands, and integrate well. We are a $2 billion company competing in a highly fragmented $60 billion space. so we see plenty of opportunities. We continue to pay a competitive dividend with an attractive yield, and it remains a key component of our turning cash to shareholders. We bought back shares in October, which brings our total share repurchases to approximately $40 million year to date, which helps offset dilution. Moving to slide nine, titled Q4 2020 Invent Outlook. We expect sales to decline 10 to 14% organically. We continue to expect a gradual recovery absent any material disruptions from COVID-19. By segments, we expect enclosures to see modest sequential improvement, electrical and fastening to be fairly consistent with the third quarter, and a slower recovery in thermal management. We expect adjusted EPS to be between 38 and 43 cents. Two important factors to note when modeling the fourth quarter. First, we are not planning to extend company-wide furloughs or salary reductions. And second, the fourth quarter is typically one of our more seasonably lower margin quarters due to the mix of the business, and we expect this to hold true this year. For the full year, we expect to see over 100% conversion of adjusted net income. As we look back, history has shown our business bounces back after a downturn as economic uncertainty subsides and channel partners look to restock. For example, in 2010 and 2011, enclosures in electrical and fastening grew high single to low double digits. And following the mild industrial recession in 2018, these segments grew mid to high single digits. In thermal management, while history suggests MRO spend is the first lever pull to control costs, critical plant maintenance eventually resumes. Although this downturn might be different from other cycles and the timing remains uncertain, we believe we are well positioned for the recovery. As I conclude my comments, I want to emphasize that we continue to execute well during these challenging times. In April, we laid out scenarios as to how we expected to perform, and I'm pleased to say we have executed better on both decrementals and cash, and we exited the quarter in a strong financial position. This concludes my prepared remarks, and I will now turn the call back over to Beth. Thank you, Sarah. On slide 10, I want to discuss how we see the future for Invent. We believe the macro trends with the electrification of everything and the need for labor-saving solutions are in our favor. The proliferation of data and electronics means the world needs more enclosures for protection everywhere. We expect the move toward 5G, smart buildings and cities, electric vehicles, increased energy storage, and the industrial Internet of Things will drive demand for our products. With the addition of Elden, we have strengthened our Enclosures portfolio and can meet almost any specification and provide solutions around the world. Similarly, for electrical and fastening, with the electrification of everything, our flexible low-voltage connectors, grounding and bonding solutions are well-positioned with e-mobility, energy storage, smart grids, and electrical infrastructure build-out. With the trend toward labor-saving solutions and efficiency driven by the shortage of skilled labor, we are well-positioned with our InventCaddy portfolio. We have for decades been a leader and innovator with labor-saving fasteners and have extended further into prefab solutions. Our thermal management segment has launched the Alexa family of connected controls to grow with the industrial Internet of Things and reduce total cost of ownership. Just this week, we announced the launch of the Invent Raychem Supervisor Platform designed to connect, control, and monitor temperature-critical assets. Our foundation consists of leading brands such as Invent Hoffman, Invent Caddy, and Invent Raychem. These brands are top of mind with customers and channel partners with our breadth of offering, innovation, applications expertise, and high-quality products and solutions. Another hallmark of our strong foundation is our Spark management system, which consists of five elements, people, growth, lean, digital, and velocity. People are at the core of Spark. In our recent global employee engagement survey, we had an 85% participation rate and saw improved scores in 96% of the questions. The results speak to the fact we have engaged, energized employees and are building a high-performance culture and event. On the element of growth, we are building capabilities through our focus on commercial excellence, improving marketing and sales and integrating the two even more closely with digital. We have a lean culture and will continue to drive improvements in our integrated supply chain and business processes. Our lean foundation allowed us to implement Agile seamlessly to help drive our digital transformation. Digital is happening across our entire enterprise, whether it's factory automation or back office improvements with robotics process automation. We have accelerated our efforts to improve the customer journey with digital capability, whether it's content, configurators, or digital sales and marketing programs. And our last element of spark, velocity, is our focus on driving speed and efficiency in everything we do and built upon our lean and digital efforts. On margins and cash, we not only see ourselves as having top-tier margins in the space and a strong cash profile, but also believe we have a path to improve these over time through new products, scale, lean, and digital efficiencies. We see these attributes as differentiators for Invent as we build and grow as a high-performance electrical company. Well, we know the recovery may take longer. We believe we are well positioned and are confident in the actions we are taking to emerge stronger. With that, I will now turn the call over to the operator to start Q&A.