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.