nVent Electric plc Ordinary Shares

Ladies and gentlemen, thank you for standing by and welcome to the Invent Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you'll need 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 fourth quarter and full year 2020 earnings call. I'm JC Weigelt, Vice President of Investor Relations, and on the call are Beth Wozniak, our Chief Executive Officer, and Sarah Zawieski, our Chief Financial Officer. Today, we will provide details on our fourth quarter and full year performance and provide an outlook for the first quarter and full year 2021. Before we begin, let me remind you that any statements made about the company's 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 events 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, and good morning, everyone. We appreciate you joining us today. 2020 was a year that none of us could have imagined. There was not a playbook for a pandemic, and I could not be prouder of our entire global workforce and what we accomplished. Our number one priority was the safety and well-being of our employees. We implemented new safety protocols and learned how to work virtually and with great flexibility. Our second priority was to continue business operations. Our team overcame many challenges and often went to extraordinary measures to serve our customers. At the same time, we improved our quality and delivery performance with our relentless focus on lean and digital. And finally, our third priority was to emerge stronger and we continue to invest in growth and execute on our strategy. Now turning to our executive summary on slide three. We had a strong finish to the year. We delivered better than expected decrementals, executed over $70 million in cost reduction, and generated strong cash flow. Fourth quarter sales trends improved sequentially across each segment. Electrical and fastening had standout performance, with sales about flat organically and strong return on sales at 28%. For Invent, decrementals of 26% improved sequentially, resulting in return on sales in the quarter at 18.6%. We set a record for full-year free cash flow conversion at 120% as our working capital initiatives continue to read out. We broke another record with 53 new products and 40 digital launches in 2020. We expect to see a meaningful contribution from these launches in 2021 and beyond. On the M&A front, we integrated both Eldon and WBT and are excited about what we're seeing in our funnel. Our top priority for capital allocation is growth. Throughout these challenging times, I've been reminded about something I said early on, where we focus, we win. We have executed and positioned ourselves well to emerge stronger, and I'm confident in our strategy and future growth opportunities. Now I would like to turn to slide four for a summary of our fourth quarter and full year performance. Sales during the quarter were $521 million, down 8%. Return on sales contracted 60 basis points to 18.6%. Cash performance continued to show strength in the quarter as we converted approximately 175% of adjusted net income. For the full year, sales of $2 billion were down 9% or 13% organically. Since the second quarter, both sales and decrementals improved sequentially, and we exited the year with decrementals of 26%, even as some temporary costs returned. Electrical and Fastening finished the year with fourth quarter sales growing 4% driven by new products, growth in Europe, and our acquisition of WBT. Enclosure sales continue to recover and decrementals improved. As expected, we saw a slower recovery in thermal management but are encouraged with sequential improvements. Looking at some of our key verticals in the fourth quarter, in infrastructure, We saw relative strength in rail and transit, utilities, and data center and networking solutions. In commercial and residential, thermal management continues to recover with mid-single-digit declines. And while electrical and fastening also declined, we saw growth in prefab and seismic. Within energy, longer cycle projects grew during the quarter, however not enough to offset continued pressure from a decline in MRO spending. While industrial remained down year over year, we continued to see a gradual recovery as demand trends improved sequentially. Looking ahead, we are issuing guidance for the first quarter and full year. Our outlook is for a gradual global recovery, which we saw exiting the fourth quarter and into January. While uncertainty remains, we are confident in our ability to execute and believe we can grow this year as we emerge stronger. Our end market expectations for these verticals in 2021 is mixed, but overall we anticipate growth this year. Specifically, we expect the industrial vertical to return to growth as this historically has been one of the first verticals to come out of a downturn. While we are cautious on commercial, we continue to see pockets of strength in warehouse, education, and healthcare. In infrastructure, we are encouraged with the trends we are seeing around data centers, 5G, and grid modernization, and expect this vertical to grow in 2021. In energy, we still expect modest declines. However, we expect our business to be off the lows in 2020. Turning to our geographical performance, sales within North America were consistent with the third quarter, down low double digits organically. Europe improved sequentially. However, remained down low single digits, we saw marked improvement in sales in emerging geographies such as China and India. In general, there seems to be a high correlation with the region's position on the pandemic recovery curve to that of economic recovery. Looking back at 2020, we adapted and overcame many challenges. We made strategic investments to drive future growth and we executed well. We believe we entered 2021 with momentum and are well positioned to respond to increased demand trends as the economy recovers. I will turn the call over to Sarah for some detail on our fourth quarter and full year 2020 results and our current outlook in 2021. Sarah, please go ahead. Thank you, Beth. Let me begin by saying I'm incredibly proud of our team's execution. It is because of this that we sit here today in a strong financial position with an outlook of growth and we believe a clear path to emerge stronger. Let's turn to slide five to review fourth quarter 2020 performance. Sales of $521 million were down 8% relative to last year and declined 11% organically. The acquisition of WBT added about a point to growth. Looking at trends, we are encouraged by both orders and sales. Sales improved sequentially across every segment versus the previous quarter, with December our strongest month. Orders in the fourth quarter were down mid-single digits, with electrical and fastening and thermal management orders generally in line with sales, while enclosures was better. Looking at January for overall invent, we continue to see orders and trends improve relative to the fourth quarter. Fourth quarter decrementals were 26%, which is slightly better than the third quarter, even at some temporary cost returns. Price was positive, and we delivered strong gross productivity of $26 million, which was driven by many of the cost actions we took earlier in the year. Adjusted EPS of 43 cents was at the high end of our guidance range. Free cash flow continued to improve versus prior year, and our conversion of adjusted income was 175%. In summary, this was another quarter of strong execution. Turning to slide six for a quick recap of our full year 2020 results. We ended the year with approximately $2 billion in sales, which were down 9% and included a four-point contribution from acquisitions. While we continued to navigate through the challenges of this global pandemic, we executed well on costs and decrementals, delivered a record cash conversion of 120%, and importantly, continued to make strategic investments for future growth. Now please turn to slide seven for discussion of our fourth quarter segment performance. Starting with enclosures, sales of $230 million declined 10% and 12% organically. While the overall industrial vertical was down, it did continue to slowly recover. We saw relative strength in food and beverage, rail and transit, material handling, and data center and networking solutions, and we expect these trends to continue. Enclosure segment income declined 11%, while return on sales of 15.4% was only down 20 basis points versus prior year. Discipline, cost controls, and strong execution in our factories drove 18% decrementals, which was lower than any other quarter this year. Now on to electrical and fastening. Sales of $147 million were up 4% and almost flat organically, demonstrating the strength of this portfolio. We continued to see moderating declines in our largest vertical commercial, while both electrical infrastructure and utilities grew nicely in the quarter. Segment income was up 16% and return on sales was 28%, up 290 basis points relative to last year. The team is performing at a high level with new product launches, channel and contractor conversions, improving return on sales, and working capital improvements relative to last year. Moving to thermal management, sales of $143 million declined 17% organically. Industrial MRO sales remained down double digits due to continued spend reductions. Longer cycle projects were up in the quarter, led by some larger chemical projects and strength in Europe. Commercial and residential sales, which account for roughly a third of thermal management, were down mid-single digits. Segment income was down 29% and return on sales declined 440 basis points, mainly due to lower volume in industrial MRO. Net productivity improved sequentially, although not enough to offset volume declines and the negative mixed impact. On slide 8, titled balance sheet and cash flow, we strengthened our balance sheet during the fourth quarter. We ended the year with $123 million of cash on hand. We have an additional $565 million available on our revolver after repayment of $100 million in the quarter. Our strong and resilient cash flow enabled us to maintain CapEx at $40 million, similar to prior year. Great progress in our working capital performance certainly contributed to our cash flow and continues to be a priority for us again in 2021. Turning to slide nine, titled Capital Allocation Update. We exited the fourth quarter with a net debt to adjusted EBITDA ratio at 2.1 times, which is at the low end of our target range of two to two and a half times. Our strong balance sheet and cash generation puts us in a good position to invest in growth and execute our M&A strategy. We expect CapEx to be between $40 and $45 million in 2021, reflecting our asset-light model and continued investments. After a record year of product launches and digital introductions, we aim to do it again in 2021. We continue to pay a competitive dividend with an attractive yield, which remains a key component of returning cash to shareholders. And we repurchased $43 million of shares during 2020, which helps offset dilution. Moving to slide 10, titled Full Year 2021 Invent Outlook. We expect sales to grow 3% to 6% organically. We expect a gradual recovery through the year with weakness in the first quarter, followed by strength in remaining quarters, and particularly in the second quarter, given the comparisons. From a segment perspective, we expect enclosures to benefit the most from a strong recovery in the industrial vertical, while we anticipate more modest growth in electrical and fasting driven by strength in utilities and infrastructure and gains within the commercial vertical. For thermal management, we also expect modest growth driven by return in MRO spend and growth in commercial and residential sales. A couple important items to note for currency and price cost. First on currency, given recent moves in FX rates, we expect a one to two point tailwind to sales this year. On price cost, we are seeing an inflationary environment, and particularly with steel, copper, and freight. A couple things to highlight here. First, we expect to continue driving both productivity and price to offset inflation, as we have consistently demonstrated. Our rolling lock programs with many of our metal suppliers provides us with good cost visibility a quarter or so out, which helps us manage our price-cost equation. Metal inflation mostly impacts enclosures in electrical and fastening, and we have already executed price increases at the beginning of the year to help offset these costs. Our outlook for full-year adjusted EPS is between $1.58 and $1.68, which represents growth of 5% to 12% relative to 2020. This takes into account the carryover of approximately $15 million in structural actions we took in 2020, which helps offset the return of many of the temporary cost actions. Overall, we believe each segment benefits from recovering volumes, pricing actions, and a productivity funnel to deliver expanded margins this year. We expect another year of strong cash flow and cash conversion of adjusted net income at or above 100%. Some other below-the-line items we are calling out are net interest expense of $35 million, a tax rate of 17% to 18%, and shares of approximately $169 million. And lastly, we expect corporate costs of $52 to $55 million. Looking at our first quarter outlook on slide 11, we expect organic sales to be down 9 to 4% as pandemic-related challenges continue. By segment, we anticipate sequential improvements in enclosures and thermal management and expect a modest downtick in electrical and fastening due to a difficult comparison quarter. We expect price plus productivity to offset inflation in the quarter. We expect adjusted EPS to be between 32 and 36 cents. At the midpoint, this would be flat relative to last year. We expect flat to modest margin expansion during the first quarter driven by the structural cost actions we took last year. Wrapping up, I wanted to emphasize that I am proud of our execution in 2020. In April, we laid out scenarios in our plans to manage decrementals and cash, and I'm pleased to say we outperformed on both. All the while, we did not back down on strategic investments for future growth, maintaining our CapEx levels and setting a record on new products and digital introductions. We have seen steady improvement through the quarter starting with the second quarter. With this momentum, we believe we are set up for a strong year with a path towards sales growth, margin expansion, and strong cash generation. This concludes my remarks, and I will now turn the call back over to Beth. Thank you, Sarah. Turning to slide 12, you can see our priorities for 2021, which are consistent with our longer-term strategy. I want to walk through them today and we will expand upon them further at our March 3rd investor meeting. Our first priority remains the safety and well-being of our employees. Today, we operate at world-class safety levels and continue to set goals to improve our safety performance. Last year, our incidence frequency rate was 0.6%, which was a 23% improvement over 2019. Another imperative for us is social responsibility, as we are all part of one global community. We continue to make progress and will share our plans for driving improvements for people, products, and planet during our March 3rd investor meeting. It is certainly an exciting time and event as we advance our efforts here that are important to our employees, customers, and shareholders. Growth remains a priority for us, both organic and inorganic. We continue to pursue higher growth verticals and expand strategic relationships with channel partners and end users. We remain convinced that our portfolio can benefit from macro trends, such as the electrification of everything, which aligns with our mission to connect and protect. Looking closer at the trend towards the electrification of everything, we are well positioned. Let me give you some examples. In enclosures, we continue to build out our data center and networking solutions portfolio, including liquid cooling. We are expanding our presence in industrial automation with our new IEC portfolio. In electrical and fastening, we are well positioned around grid modernization within utilities and electrical infrastructure build-out with our low voltage power connections and grounding and bonding solutions. In thermal management, we are tapping into the industrial internet of things with our connected control solutions. Throughout last year, we accelerated our digital capabilities to improve the customer experience. from enhanced websites to better configuration and search tools to enriched digital product information. An example of this is a recent launch of our instant quote feature for some Invent Hoffman enclosures. This feature enables customers to quickly obtain price and availability information, which has resulted in an uptick in our win rate due to improved velocity in the end-to-end customer journey. We expect 2021 to be another strong year of product and digital launches. We're planning to introduce approximately 50 new products again this year. We continue to strengthen our portfolio, expanding our cooling and smart enclosures, driving innovation in electrical and fastening, and building out our connected control solutions. On the digital front, we are investing in our go-to-market capabilities, automation, and the digitization of our back office functions and factories. The use of data and intelligence is expanding, helping us drive insights to support our growth. This will also drive productivity and working capital improvements. M&A is a top priority for us. Remember, we compete in a $60 billion space that is highly fragmented. Our strategy to build upon our great brands, leading positions, and to expand globally. Wrapping up on slide 13. We have a strong foundation with many bright growth prospects. The macro trend towards the electrification of everything we believe can drive more demand for our products and solutions. With our strong brands, our spark management system, and our momentum on marketing and sales excellence, new products and digital, we are well positioned to benefit from these trends. As we continue to execute on our strategy, we expect to emerge stronger, to grow, and to make Invent a high-performance electrical company. With that, I will now turn the call over to the operator to start Q&A.

At this time, if you would like to ask a question, simply press star followed by the number one on your telephone keypad. Again, that is star one for any questions. Our first question will come from the line of Jeff Hammond with KeyBank Capital Markets. Please go ahead.

Hey, good morning, everyone.

Good morning.

So good color on the segment kind of outlooks. I think, you know, EFS and enclosures makes a lot of sense. I think, you know, thermal... I'm just a little perplexed that you're expecting kind of modest growth just given four years of declines and sharp declines in 2020. Talk about easy comps and talk about the backlog and how you see that shipping and just any near-term trends on the MRO piece, which I think one of your competitors started to talk about some improvement there.

Yeah, as we've always discussed, thermal management is roughly a third residential and commercial, a third MRO, and a third project. And as we stated through last year, our projects have held up. And commercial, as we looked at fourth quarter, started to improve. And I think the biggest driver where we see that next year is going to be our MRO spend coming back, because that was significantly reduced in 2020. We've already seen that trend of orders improve as we exited fourth quarter and into January. And so we believe that's where we're going to see the uplift. And as we talked about in Q4, that obviously had a negative mixed impact on our return on sales. That's how we see it as it goes into 2021, that it's really that MRO that's going to improve and commercial. So we're off the lows, I guess I would say, from where we were in 2020. Okay.

So from a mixed standpoint, you should have some mixed-rich recovery if that MRO recovers? Yes. Okay. And then just, again, good color on price and productivity versus cost, but 2020 was a heavy productivity year and limited on price. Clearly, we're seeing inflation, as you talked about. Can you just talk about what you've announced in terms of price increases and what you think the price component is going to be or what you've built into the guide? Thanks.

Yeah, I'll start and Sarah can jump in here too. So, you know, we've already, as we exited last year, we'd announced some price increases going into 2021. As we started 2021, we've already announced some second price increases. Some of them are underway or some are still to come during the quarter. But that's in response to just what we've seen going on with inflation. And if you recall in previous years where we had inflationary environments, you know, we've done multiple pricing increases And, you know, we'll watch that. And, you know, we're managing the cost side just because of our price locks. If you could look at 2018, 2019 as years of, you know, how we executed in inflationary environments, you know, we always say we want to get a point of price. But when we're in these inflationary environments, we expect to do a lot better than that, somewhere between 1% to 2%, depending on the portfolio. And maybe just the only thing I would add to that is we continue to expect to offset that inflation with price plus productivity. We see that happening in Q1 and we see that happening for the full year. So in addition to those pricing actions that Beth talked about, we're also driving that productivity, particularly as it relates around inflation. productivity in the factory. With that volume, we do expect to get some good leverage there, as well as underlying productivity, especially as it relates to logistics and some of the digitization efforts that I've talked about as well.

Okay. Thank you.

Our next question comes from the line of Dean Dre with RBC Capital Markets.

Thank you. Good morning, everyone.

Good morning.

I'd like to pick up where we left off there with Jeff's questions. And I'd be interested in hearing how much in the way of temporary costs came in in the fourth quarter and what the assumptions are, maybe on a percent basis, or you can give us dollars in how they get feathered back in 2021. Maybe we can start there, please.

Okay, so this bigger picture, we did execute roughly $70 million of cost reductions in 2020, and roughly $30 million of that was temporary in nature. And when we talked about that Q3 to Q4 and some of those temporary costs returning, think of those in roughly that $5 million mark. As we think about that, you know, those temporary costs feathering back in, if you will, in 2021, we wouldn't expect all of those to come in day one. And, in fact, you know, that's why we're expecting, you know, flat to up, you know, Ross, in Q1 here because, as you might imagine, no one is traveling as we sit here today in Q1, and we also have those structural costs coming in. you know, from a savings perspective. So from that temporary cost perspective, I would say that, you know, roughly a third of that, you know, simply relates to T&E, and so that's going to take time to kind of feather in. Another chunk of that is discretionary spend, and so you'd expect that to really kind of flow in as that top line recovers. Maybe the only other thing, Dean, I would point out is from a structural cost, we talked about that $15 million of savings coming in in 2021 based on what we did in 2020 on the cost action front. And you'd expect to see that come in really largely in the first half of this year with a bit trickling into Q3.

I appreciate all those specifics. And then over on free cash flow, which I think is one of the success stories, for 2020. And Sarah, can you just give us some insight here into some of the dynamics on working capital? Do you have the specific goals that you're looking for as a percent of sales? And just confirm, were there any kind of one-timers benefiting? I know some companies benefited from the CARES Act, which gave you some relief on tax payment timing. Is there any of those one-timers in your numbers in 2020?

Yeah, so we feel great about the free cash flow conversion really being a record year for us at that 120% mark. Certainly our working capital performance contributed to that. We saw actually improvement from a DPO perspective really based on some data-driven data uh work that the teams did you know looking across the globe on you know harmonizing some of our supplier terms i think the other thing to point out there would be the electrical and fastening you know business they really improved every metric when it came to working capital and specifically on the inventory side you know what drove that or um further advancements on on in lean really getting to plan for every part improvements in demand planning but also looking at ways we can improve our supply chain efficiencies, looking at long lead time suppliers and extending that vendor-managed inventory program to over 20 suppliers. And I would say there's further runway for us from a working capital standpoint. Over time, I could see multiple points of working capital as a percentage of sales improvement, and inventory continues to be our top area that we're focused on. From an overall timing perspective and what impacted 2020, I would say two things. One, we did see the benefit of some of those deferral of payroll taxes, roughly $10 million in 2020. But I would also say that we also absorbed some of the restructuring cash payment efforts of roughly $20 million as well. So we had some puts and takes to that overall feed cash flow performance.

I'm really glad you added that last piece in about the restructuring because a large number of companies are excluding those from operating results, and that's good quality of earnings for you guys to include it. And then I know I gave pre-cash flow a shout out. The other impressive point was all the new product introductions. I just think in a period of COVID to have continued that output on innovation is terrific. That's it for me. Thanks.

Thank you, Dean.

Our next question will come from the line of Nigel Koh with Wolf Research.

Thanks. Good morning, everyone.

Good morning.

So just to really, you know, the framework sort of, you know, pretty much with what we'd expected, but I'm just curious, You know, how does the, you know, the outside trends we saw in EFS margins and obviously the outside weakness we saw in thermal this year, how does that roll into 2021? I'm wondering if we should expect EFS operating leverage to be sort of impacted to the downside and maybe thermal recovers on MROs. Any comment there would be helpful.

So from a full year 2021, from a margin perspective, we do see our biggest expansion opportunities really in enclosures and thermal. Enclosures, you know, because we expect that industrial recovery to really be the strongest from our overall verticals, and that should help from an overall drop-through. And thermal, one, getting back to growth, and two, as we discussed earlier, a lot of that growth coming through that higher margin MRO part of that business. We do still expect expansion in EFS, but as you might expect, it would be just more moderated versus what we're expecting in enclosures and thermal.

Yeah, EFS is outstanding. And then when we think about the price productivity and warm material inflation impacts in 21, should we take that $15 million of restructuring savings as part of productivity, or is that in a separate bucket?

No, that's going to be part of productivity.

Yeah, okay, that's helpful. And then just on capital deployments, you know, you've given us share count guidance. I'm just wondering where you got baked in for buybacks in 21.

I mean, our guidance overall really reflects the goal of offsetting dilution. And so, you know, we ended the year with a full-year diluted share count of over 170 million shares. And so that 169 really just, you know, is guiding to, you know, offsetting that dilution. So we may have to do a bit more buyback, you know, just to get to that share number. But overall, you know, as Beth talked about in our prepared remarks, our goal, you know, continues to be growth. and getting after our overall M&A strategy.

Great. Thanks, Deb.

Our next question will come from the line of Julian Mitchell with Barclays.

Hi, good morning. Maybe just trying to look at the firm-wide margin guide. So it looks like you're dialing in about a 25% incremental margin for the segments on a pre-corporate basis for 21. Just wanted to double check if that's roughly correct. And then Related to that, looking at slide five, I think you called out $26 million of gross productivity in Q4. So that's leaving $10 million for that inflation and investments piece. Just wondered for fiscal 21, what does that $10 million number look like?

Okay, so let me – what was the first part of the question here? Incremental.

Oh, incrementals.

Okay, yes. So, sorry about that. So, from an incremental perspective, yeah, we are expecting full-year incrementals to be in that mid-20s range. And really what that reflects, you know, different than sort of how we were thinking about things in December – is really two things. One, and the majority of it really just relates to that price-cost dynamic. So as you roll in more inflation and work to offset that by way of price, that just impacts you know, those overall incrementals. But from a pure, you know, volume, you know, draw-through outside of that, you know, we continue to expect that, you know, to get back to that 30% to 40% range. It's really that price-cost dynamic that's impacting those overall incrementals for the full year. And from an overall run rate coming out of Q4, I mean, gross productivity is $26 million. Obviously, that's strong. You know, we've talked about that being a bit muted in 2021 with the context of some of these temporary cost actions rolling back in. From an inflationary environment, we do expect that inflation number to increase. It will increase modestly in Q1, but we would expect that to ramp in Q2, Q3, Q4. but really looking, again, as we talked about earlier, to offset that with price along with productivity. I would say that that dynamic, that situation is dynamic. We continue to monitor it. And as Beth talked about, we've already taken multiple price increases here in the context of Q1, and we'll continue to monitor that as we go.

Thank you. That's helpful. And then secondly, It looks like Thermal is in for an okay year, not an easy one. Just wondered, strategically I suppose, how satisfied you've been with Thermal's performance during this downturn and whether there is the appetite to do something more surgical with the portfolio within Thermal if there are areas that you're trying to kind of re-emphasize or de-emphasize as you try and position it better for the next upturn?

Yeah, I think certainly our thermal business segment was impacted the most as we went into the downturn with the pandemic and also what happened with the price of oil. This is the segment that we also took the most structural cost actions. And so I think we got on that very quickly from that standpoint. And so that's part of what you see as we go into next year, how we've repositioned that business. Our view is that because that MRO spend dropped off so quickly that we're going to see that improve. And like the other segments, we continue to invest in those strategic areas because we have a really large installed base. So anything that we can do with connected controls as a You know, retrofit opportunity, investing in that commercial side, residential side, also that's kind of been a priority. And as we think about the go forward, you know, our view is let's ensure we're positioned where the growth is going to be. So when we think about projects, for example, as we go forward, we know that there's going to be investment in, chemicals, for example, in APAC. And so we're ensuring that our, you know, that our resources and where we're prioritizing or putting our focus is in those areas that are going to grow. So we believe in resi and commercial. We've got opportunity there. Mine the installed base, you know, from an MRO standpoint, just because of the you know, millions of controls and sensors and everything that we have out there and heat trace cable to making sure that we're positioned in the right geographies as we go forward. And I guess, you know, the last part of that question is we're always looking to optimize our portfolio and, you know, what makes sense. And you've seen us, as we've done our acquisitions, really focus on products that are helping us position for you know high growth whether it's data and networking solutions whether it's industrial automation or whether it's global growth and we're going to continue to do that great thank you our next question comes from the line of joe ritchie with goldman sachs uh thank you good morning good morning

Maybe just starting off on inventory levels. I think you guys sell maybe two-thirds of your business through distribution. I'd be curious, any color that you can provide on where you think inventory levels are today? And then also, secondly, on EFS, the kind of down take that you're expecting in one queue, how much of that is being influenced by what you're seeing to start the year in that business?

A couple of things there. In fourth quarter, as we shared in our last earnings call, we expected that inventory levels were really going to sequentially improve to match the demand that the distributors were seeing. I think that's exactly what we saw. Recall, we talked about the fact that A lot of times in a year you'll see distributors stock up at the end of the year and we just didn't expect that to happen because of where they were with respect to rebate programs, etc. But I say this, we've seen inventory demand on us improve and it's meeting end demand. we've seen that continue into january so i think we're still seeing that gradual improvement of inventory levels matching demand so um still more runway there i would say as we go throughout the year And then on EFS, I'll let Sarah just talk to that. Yeah. So I would say, Joe, it's really more of a function of, you know, comps of a year ago that were guiding to just a modest, you know, downtick from that roughly, you know, flattish organic, you know, growth rate that we saw in Q4. So no different than, you know, what we said more broadly in January for the segments. We see strength, you know, here in January overall.

Okay, great. And then maybe just a longer-term question for Beth. It's great to see all the investments that you guys are making on the product launches and all the digital launches as well. I'm curious, when you're thinking about this as part of the longer-term growth algorithm for the company, how much do you think this can contribute? How quickly do you expect to see some of this growth coming through from all of the launching that you're doing currently?

Yeah, you know, on new products, we'd like to see us get about a point of growth from new products every year. And recall, we've talked about getting our new product vitality up to 20%. We're in the mid-teens today, so that's our expectation, that it's going to drive about a point of growth. On digital, it's somewhat of an enabler, right? In some cases, it's helping us drive growth. In other cases, it's helping us to drive productivity. So it builds into that equation of both the growth side and what we see in terms of margin expansion. But, you know, I would say what we're tracking really closely is all these new digital launches, are we getting the returns that we expected as we kind of laid those out as an investment project? So I think we're doing a better job than we've ever done in terms of really looking at are we getting the value from these efforts? And what's nice about the agile approach that we've adopted is that we're very quickly being able to see success or make adjustments as we go. And I think we're only going to get better at that, too.

Got it. Thank you both.

Our next question comes from the line of Andrew Schloss with Vertical Research.

Hi, this is Andrew Schloss for Jeff Sprague. Thanks for squeezing me in here. Just a quick one on data centers. Could you provide us with a more precise growth rate on data centers in the quarter and some of the trends you're seeing there?

So, yeah, I would say overall from a data and networking perspective, where we saw really strong double digits was on the global front and, importantly, in orders, right? So where we, you know, see that growth is in some of the hyperscale. I mean, if you remember, WBT was one of the acquisitions that we did early on in the year. That brought in a whole new cable management tray offering for that space. So that's something that has grown double digits for us really since we um you know spun and would expect you know heading into 2021 then again it would get back to the double digit growth rate yeah i i think about it this way you know we were pre-pandemic like we'd grown in data and networking solutions double digits for the last couple years and then obviously impacted pandemic sites shut down integrators can't get on job sites but we've started to see that double digit order trend occur again and we think As we, you know, in 2021, there's no reason to believe that we can't continue to have strong growth, especially, as Sarah said, we've built up the portfolio. So, more around liquid cooling, more around just the completer solution with cable management. So, we're excited about, you know, where we're positioned here and the potential, you know, for long-term growth.

Great. Thanks for the color. I'll pass on the baton.

Our next question comes from the line of Scott Graham with Rosenblatt Securities.

Hi. Good morning, all, and congrats on a year of only 15% decline in EPS, which would further be much worse given what you were, some of the markets you faced. I really wanted to ask about the organic because I know that, well, certainly the first quarter looks a little bit less than what I was thinking in my model. Would the cadence here essentially be sort of, you know, your first quarter number and then sort of, you know, up low teams in the second quarter on that easier comp and then sort of plus mid-single for the rest for the second half of the year? Like, is that kind of the way you're thinking of it?

Yeah, so, Scott, that cadence sounds about right.

And then for the second quarter, what would be the big factors that kind of I know the biggest one is obviously the comp, but what are the markets that you see as going from sort of this down number to an up low team spot?

Well, in that quarter, you know, what we said is we all, you know, historically, we've always seen industrial lead us out of a downturn period. And we know that CapEx was one of those levers that everyone constrained. So we would expect that industrial vertical to lead the way. as well as as we mentioned you know seeing that double digit orders growth in data and networking Solutions we would expect that also to be strong as uh as we go throughout the year those would be the the key areas okay um two other quick ones um on the um point that you just made Beth about the new products of the goal adding one percent would you expect that to be the case this year in 2021 Yes, we would. Because so if we, you know, 53 products last year, extraordinary efforts to get those launched. And I think we've done some contractor conversions. And so, for example, or we've seeded some at OEM. So we'd expect to see that take place this year. And we'll build upon that with another 50 new products.

Yes, that's impressive. Thank you. And the last question is around capital. So Nadja asked a question earlier about share repurchases. And you obviously have a Very large, outstanding authorization. At what point in the year do we get to second quarter, third quarter? If acquisitions don't necessarily manifest the way you were thinking, when does that share repurchase become more than a placeholder, more than to offset the dilution? What is the trigger there?

Yeah, I mean, I think you've seen that we've always, you know, we're going to do some repurchases based on share dilution. But as we go throughout the year, although we feel very confident in our funnel and the opportunities in front of us, but we've always said we wouldn't just have cash hanging on our balance sheet and we put it to work. So, you know, we're constantly looking at that, Scott. Although I do think that, you know, we're going to see some opportunity for us over the course of this year to do a couple of acquisitions.

Great. Thanks a lot for your time.

Thank you. Thanks. Your next question comes from the line of Justin Bergner with G-Research.

Good morning, Beth. Good morning, Sarah. Good morning. Nice delivery on things you're able to control in this environment. Thanks. To start, I want to ask, In regards to the, I guess, margin guide, which implies modest margin expansion, is that coming from volume leverage or is that coming from mix? Do you expect mix to be neutral to margins or positive to margins?

So I guess the way I would answer that is both. So from an overall volume leverage perspective, clearly that's going to help in 2021. So that would be one thing. And then two, we would expect mix, particularly in the thermal business, to help. I mean, you've seen sort of an outsized negative impact here in 2020 based on that um side of that business uh which is you know highly profitable being down strong double digits and as that slowly recovers we'd expect that to not only drive you know the growth but also uh drive some positive mixed impact as well okay but some of that would be offset by i guess the other segments growing faster than esx right Yeah, clearly at a kind of total portfolio basis, you'd have some offsets there. But again, within each one of these segments, you know, mix is going to have a bigger play in thermal management, you know, to the positive than what we might see otherwise in enclosures in EFS.

Okay, that's helpful. And then on the thermal side, do you expect to grow all three portions of that business, the project, the MRO, and the commercial and residential in 2021, or will some of them be more break-even, neutral?

So we expect the most growth in MRO. We expect commercial and resi. Resi should have some strength. Commercial is expected to have some softness there. But our view is we always want to outperform how the industry is. So we'll see how that plays out over the course of the year. And with respect to projects, I think we see that, you know, flattish over the course of the year. So that's kind of how we're viewing. And we'll see, you know, there's – we'll see how and when the economy still recovers and that dynamic. But, you know, that's why we, you know, continue to just temper that to saying there still is uncertainty, you know, how quickly the economy recoveries and where.

Okay. And then maybe lastly, just thinking about the organic growth, you know, down materially in 2020 as expected, you know, bouncing back 3% to 6% in 2021, you know, do you think getting back the level of organic growth in 2019 is sort of more of a 2022 or more of a 2023 event, you know, recovering that full 13% organic decline from 2020.

Well, it may depend on the segment. Again, it's the timing of how we see the economy recovery around the world. So if you think about it, we think industrial is the vertical that's going to lead first. And I think as we start to see how that recovers, that could take us into 2022. As we think about commercial, that's expected to be slightly down this year, and so maybe that recovers into next year. We'll see. And I think the view is that energy is is improving well it's going to be it's going to be tough this year we're going to improve relative to that but i think that's a slower uh improvement rate so those three different dynamics there and infrastructure should be strong so you know we call infrastructure includes data networking solutions and utilities and we expect that to be strong all those different dynamics for us is by segment some likely recover in 2022 and others may be out into 2023.

Okay. Thank you. That's a very helpful framework. Appreciate it.

Our next question will come from the line of David Silver with CL King.

Yeah. Hi. Good morning. Thank you.

Good morning.

Good morning. Yeah, great. I was hoping to kind of maybe parse some of your comments about the cost outlook. So I've heard inflation, I've heard costs, I've heard productivity. But I was hoping to tease out the raw material and logistics elements of your cost expectations for next year. So leave out labor, leave out the temporary cost out. But could you maybe talk about where you see the greatest raw material cost pressures? I'm guessing metals, of course, but I'm also thinking of the shortages that have been talked about quite a bit on the chip and electrical component side. So whether it's cost, whether it's availability, how do you assess kind of the ability to continue to operate without disruptions and then to – capture or cover the incremental raw material and maybe logistics costs that you anticipate. Thank you.

Let me start, and then I'll start by just talking about supply chain resiliency, and then I'll let Sarah talk more about the cost side. So recall, as we mentioned, most of our materials are metals, and so we have great positions in terms of just how we procure our supply and do these rolling price locks, and so we feel good about our access there. um i would say you know we have looked at our supply chains and even in fourth quarter in some areas look to ensure that we had the right positioning of um components um so that we you know as we expected this year to and as you know we saw these sequential improvements that we would be in a good position to be able to respond so whether that was on just inventory and parts on the supply side, or even our own capacity, because we've addressed a lot of capacity requirements in our factories. So I think for us at this point, we see minimal disruptions, really, and our supply chain has been robust all of 2020. And so we're very actively working to ensure that we're in a good position with our own in supply and also working that through with the distribution channel. So I think at this point, we think we've got the supply chain managed fairly well. And again, we'll see how demand goes over the year, but we're going to keep having scenarios to be able to respond to that. So I'll let Sarah then talk about the cost side. Yes, I think your question was kind of around materials overall and how to think about metals specifically. So materials overall are roughly 30% of sales, and metals are less than half of that. And as Beth talked about, a lot of those metals is going to be steel, copper, and a little bit of nickel. And we feel really good about the access to that supply and with these locking programs that give us some great kind of lead times and visibility into these inflationary pressures. So we feel like we've got that dialed in, if you will. It is dynamic, and as things progress, as Beth and we alluded to earlier, in the Q&A, you know, we're going to continue to monitor that, right? You know, if inflation, you know, continues to increase, you know, we'll look at pricing, we'll look at productivity as ways to manage that.

Okay. Thank you for that. I'm going to ask you a question maybe about the sequential progression of revenues in the fourth quarter. So, You know, I did go back, and overall, you know, your revenue guidance was, you know, you kind of met or beat your revenue guidance overall. But I was kind of scratching my head, and I was saying, if you look at it segment by segment, I mean, there was a sequential decline in two of your three segments, you know, thermal being the exception. And year to date, I mean, those had been the stronger performing segments. So I'm just wondering, was there a surprise there? Not so much overall, but segment by segment. In other words, were you surprised that there was a sequential revenue decline for EFS and enclosures? Thank you.

Yes, I would say that was right in line with our expectations. If you just look at the kind of seasonality, you know, of our segments, you know, typically there's a downtick in enclosures from Q3 to the Q4, as well as in EFS. So those were kind of as expected and in line with that seasonal downtick.

Okay, thank you for that. And then last question, this is maybe an 80-20 question, in other words. Of your 50-plus new products last year, product launches, are there a couple that you could just call out, either for their especially bright prospects due to either their innovative capabilities or just they're hitting the right market at the right time? You mentioned a point of growth overall for the company from the new product launches. You know, are there a handful or one or two that you might cite as kind of being especially, that your optimism is especially high about? Thank you.

Yeah, okay. I mean, maybe I'll give that in sort of categories. In our thermal management business, we've continued to release a lot of connected solutions. So we're excited about that because we believe that they not only present great value for our customers on a new project perspective, but they're also an MRO opportunity. So as I mentioned, our ability with having the largest installed base, our ability to go back out there and have controllers that can drop in and be replacements for existing products out there to create more value in terms of just monitoring capability and better performance, et cetera. We're very excited about that. And we've been on that journey for a while. And those controls have done very well for us. I'd say in enclosures, there's a general category around globalizing this IEC portfolio, but as well building out our data and networking solutions capability, particularly around cooling, for example. We're very excited about that. And then I would say in our EFS business, maybe there's two categories of products. We've extended what we do with our CADI portfolio into areas in seismic and prefab and just extending the range. And we've been able to see contractor conversions as a result. And similarly, on the electrical side of our EFS business, we've been launching new products there that we think really position as well as you start to see the utilities, grid build out, Anything around our, we have some differentiated capability in our Invent Airflex portfolio. So all of those are playing into those electrification trends. So those are broadly some categories that we have that we're excited about because they, we believe, you know, they're positioned to be able to differentiate and create value for our customers and pointed at, you know, higher growth opportunities.

That's great. Thank you very much.

We have no further questions at this time. I'll turn the conference back over to management for any further remarks.

Well, thank you for joining us this morning. We are pleased with our fourth quarter performance and believe we executed at a high level during 2020 to help set us up for growth and success. We are grateful for all the hard work our global employees put forth to help us emerge stronger. While economic uncertainty remains, we have confidence in our ability to execute on our 2021 priorities and deliver growth. We hope you remain safe and look forward to speaking to you again on March 3rd at our investor meeting. Thanks again for joining us. This concludes the call. Thank you.

Ladies and gentlemen, thank you all for joining today's call. You may now disconnect.