nVent Electric plc (NVT) Q3 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the nVent 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. [Operator Instructions] 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 nVent's third 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 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 nVent's 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 nVent'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, J.C., 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 details 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 3. I would like to start by thanking our nVent 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 4 for a summary of our third quarter performance. Sales during the quarter were $509 million, down 9%, with strong relative performance from Electrical & 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 & 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 nVent 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 companywide 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 Eldon acquisition and the operational improvements we have implemented. In commercial, we saw sequential improvement 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 & Fastening segments. One area where we are more cautious is oil and gas we expect - 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 nVent, 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 Sara for some detail on our third quarter results, an update on capital allocation and balance of year outlook. Sara, 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 5 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 & 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 nVent, 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 6 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 focused verticals along with industrial to continue to strengthen. At the 1-year mark, Eldon continues to perform well and exceed our expectations, with pro forma 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. Enclosures 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 & 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%, flat relative to last year. Price contributed over $3 million and 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 MRO saw the steepest decline due to continued spend reductions while project sales grew in the quarter. Commercial and residential sales, which account for roughly one-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 MRO. We had positive net productivity of approximately $4 million, although not enough to offset volume declines and a negative mix impact. On Slide 7 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 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've made great strides in our Electrical & 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 2.5 times. Our strong cash generation provides the foundation to invest in both organic and inorganic growth. We continue to invest in new products and 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 & 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 nVent 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 returning 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 9 titled Q4 2020 nVent 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 segment, we expect Enclosures to see modest sequential improvement, Electrical & Fastening to be fairly consistent with the third quarter and a slower recovery in Thermal Management. We expect adjusted EPS to be between $0.38 and $0.43. Two important factors to note when modeling the fourth quarter: first, we are not planning to extend companywide 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 and Electrical & 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 pulled to control costs, critical plant maintenance eventually resumed. 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. I'm pleased to say we've 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, Sara. On Slide 10, I want to discuss how we see the future for nVent. 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 Eldon, we have strengthened our Enclosures portfolio and can meet almost any specification and provide solutions around the world. Similarly, for Electrical & 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 nVent CADDY 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 ELEXANT 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 nVent RAYCHEM Supervisor Platform designed to connect, control and monitor temperature-critical assets. Our foundation consists of leading brands such as nVent HOFFMAN, nVent CADDY and nVent 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 at nVent. 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 nVent as we build and grow as a high-performance electrical company. While 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.

[Operator Instructions] Our first question will come from the line of Julian Mitchell with Barclays. Please go ahead.

Hi, good morning. Maybe just the first question around the Thermal business. So, you did take quite a large goodwill write-down in the third quarter. Maybe help give us an update on how you're thinking about that business as placed in the portfolio? The sales growth was tough pre-COVID. It doesn't look much easier this year or next. Are there perhaps parts of the Thermal portfolio that could be pruned? And maybe remind us of the synergies that, that segment has with the other two?

Okay. So let me start by saying with Thermal, there's a - we've always talked about Thermal having one-third more in these - this project side of the business, one-third in industrial MRO and one-third in commercial. And so to start with, where we see a lot of the synergies has been around particularly the commercial portfolio but also through our distribution channels. So, Thermal has benefited greatly of our One nVent strategies that we've had around core verticals like data and networking solutions, commercial, driving channel, driving digital. But fair to say, I think when we think about verticals and we think about what's going to grow faster not only through this pandemic but as we go forward, oil and gas is just going to be a tougher place. So for us, as we think about some of our growth priorities and we think about even inorganic growth, you've seen us do a couple of acquisitions that had us build up more of the electrical portfolio in both Enclosures and Electrical & Fastening. So fair to say, we're going to keep our priority there because we believe that's where we really have an opportunity with such fragmentation there to really scale what we do from that just core electrical portfolio.

Got it, thank you. And maybe just on the operating leverage side sort of down and then up. Just want to understand, for Q4, are we thinking about a decremental margin year-on-year that's kind of similar to that 27% figure that you saw in Q3? And then when you're thinking about the recovery, you gave some very good historical context on the sales trajectory in recoveries. Just wondered if you could help us with what type of operating leverage or incremental margin on the way up, we should see as the sales come back?

Yeah. Hi Julian, I'll take that. So from a Q4 perspective, we do expect those decrementals to be largely in line with Q3, and a couple puts and takes there. One, we expect to have less of a headwind from just the acquisition impact from a Q3 to Q4 perspective. And we should also benefit from that gradual recovery as well as some of the structural cost actions really folding into Q4. Offsetting that is the temporary cost actions that begin to kind of fold in, if you will. But overall, we expect those decrementals to be roughly in line with that of Q3. As we think about that in the context of next year, we would look to really target incrementals in the 30% range. And while it's very preliminary, we're still working through our operating plans of next year. The way we think about it is that we would expect with that gradual recovery to have modest ROS expansion. We do expect some of the structural cost actions that we took this year to benefit next year, so expect those cost savings to be in that $10 million to $15 plus million range. We'd also look to really manage that price/cost equation. We do expect to see some inflationary pressures next year. But we've had past successes that is in more inflationary environments, we're able to price so we're going to manage that price/cost equation. And we also have really good ongoing actions as it relates to productivity. Some of the things that Beth talked about in terms of our digital transformation, that's beginning to pay off in some of our back-office efficiencies. We continue to optimize our footprint. So, while those temporary costs are going to continue to feather in and fold in over time next year, with our carryover cost actions, the benefit from just that gradual recovery on the top line and some of our underlying productivity, we think we can manage those incrementals in that 30% plus range and drive for that modest ROS expansion.

Great, thank you.

Your next question will come from the line of Deane Dray with RBC Capital Markets. Please go ahead.

Great. Good morning, everyone. Would like to stay on this topic that we just finished off where Julian left off. And first of all, it's really nice to see you back in the guidance business. It just speaks to your earnings visibility in an otherwise pretty uncertain time. And you also are one of the first companies to announce that you'll be rolling back those salary reductions and furloughs, so we are going to see it in the impact on the decrementals. Sara, you just explained that really well. I was hoping maybe - but you also said you would be feathering in those temporary costs coming back in 2021. So I'm trying to get a sense of how much comes into the fourth quarter, if you could size that and then how much would be coming into 2021 on the temporary side?

Yeah. So we've talked about our total cost reductions in that $70 million range here for this year. And that included roughly $30 million from the temporary cost actions, but that included things like furloughs, salary reductions or retention fee reductions, et cetera. But it also included things like discretionary spend and T&E. And so my comments are more kind of on that latter part, when we think about travel, when we think about just overall discretionary spend, we're going to feather that in as we continue to see recovery on the top line, right? So that's not all going to kind of drop-in day one. I would also say that we're continuing to find different ways of doing business and leveraging the more virtual and digital world, so some of these may not even feather in at all. So as we think about it in the context of this Q3 to Q4, some of these temporary actions coming back in more specifically on the furloughs and salary reductions, think about that kind of in that $5 million-ish range. And the $30 million temporary reduction is kind of going into next year, again, that will kind of - we expect that to kind of feather in over time, if you will.

That's really helpful. And if there's a hot button on the industrial side, it continues to be any expectations in non res construction. You all have some good insight there. And there's still this worry that there's some kind of air pocket as the current construction projects roll off that you don't see a big green lighting of new projects. And just from where you sit today, especially with EFS, what is your expectation in terms of the continuity of new projects coming in? Is there a concern about an air pocket?

Well, I think, Dean, what we've been seeing is that, first of all, coming into the third quarter, we started to see construction activity. Anything that's under way is going to continue and complete. And I think there's a view that things will slow down, although there still is some renovation and retrofit with healthy buildings and otherwise. So I think the economists are saying that commercial next year could be down. I don't know if it's an air pocket but it's certainly going to be slower. And for us, you saw our performance in Q3 and we've said Q4 for EFS should look much like Q3. This is where we have done a lot of things to really - to position this portfolio to grow in different ways. So, even if the economy shows commercial being down, we believe we can outperform. And the reason I say that is a lot of the new products that we launched have been in this area, and we know that extends our ability to win over new contractors. This is still an area for us where we're moving into new products, areas like seismic and code changes are driving growth and adoption of seismic fastening solutions. Our prefab business has been growing double-digits and that's an area where we want to continue to build out. And we just believe that we're going to be able to grow more globally with this portfolio. And I also then just want to balance that with not all of EFS is commercial, and so one of the things we've seen is the strength of the Electrical portfolio in EFS that is positioned, as I talked about electrification, with energy storage, e-mobility, all of those trends. So, from that standpoint, we think we have a lot of opportunities to continue to perform with EFS as we go forward.

Appreciate all that colors. Thank you.

Your next question comes from the line of Nigel Coe with Wolfe Research. Please go ahead.

Thanks. Good morning, everyone. So I want to stick with Thermal and I understand Thermal margins are being weighed down by the MRO mix. Can you just confirm that the MRO is down more than the 20% core sales performance? Sounds like it is, considering commercial held up rather well. And maybe just put in context how that MRO profile looks versus prior down cycles? And then maybe what kind of recovery profile should we expect based on prior down cycles?

Yeah. So I'll take the first part of that question. So from an overall sales performance in Thermal, you're right, the MRO was down considerably more than the overall Thermal because we actually saw commercial being down in that mid-teens. And actually, the order rate in the quarter for commercial, down low single-digits and improving as we look at Q4 here. From a project standpoint, again, projects were actually up in the quarter as we continue to have a nice backlog to build out from. So the MRO is what's down more significantly. And again, as we look at past history, that is the first lever that's pulled to control costs but do eventually see that come back just based on critical maintenance that's required. And just given the sizable install base that we have in Thermal, expect that to eventually recover.

And we went back and we've looked at all our businesses over these different cycles. And when oil in the mid - like 2014 and the price of oil dropped all the way down in 2016, what we found is that our MRO business declined during that period. But then in '17, '18 and '19, it came back high single-digits. And I think our portfolio is even better positioned going forward just because we've launched all these connected controls and with trends of just needing labor-saving solutions and monitoring. So that's our view. At the point that there is some confidence and/or stability, we'll see that MRO come back and history has said, it grows high single-digits for us, and we'll see if we could do better.

That's great color. And my follow-up question is on the data center. I mean, I understand data center is not a huge end market, but it's an important growth initiative. Intel dropped a bit of a bomb on data center market earlier this week, talked about demand being down. Are you seeing any signs of an air pockets or demand kind of decoupling in data center based on what you've seen so far?

No. In fact, for us, again, that similar comment about having system integrators not on job sites, we actually saw our data and networking solutions business start to improve to where we expect we're going to see some growth there through the back half of the year on the Enclosures side.

Great, thanks very much.

Your next question will come from the line of Jeff Sprague with Vertical Research. Please go ahead.

Thanks. Good morning, everyone. On new products, Beth, you gave us the growth rate on prefab. But can you give us a sense of kind of how significant these are in terms of percent of sales or kind of incremental dollar growth you expect in 2021 versus 2020, something to help us get our head around what we're talking here from an incremental benefit?

Yeah. I think Jeff, so normally, we want to see that we're trying to, over time, drive about one point of growth with these new products. But these are unusual times. And so for us, we're trying to get those products positioned in the portfolio through our channels with our contractors because we know, in some cases, we can win over contractors when we extend our portfolio, for example. But that's - in a normal year, I'd say that's how we think about it. And so we've really gained momentum here but we felt it was important to keep investing here because it positions us for the future. And I would say, one example I would give of like a significance is, we've taken that Eldon IEC portfolio, and there were things that we needed to do to be able to manufacture and launch that in North America and then we will follow that next year into Asia Pacific. That's an example of something that is a whole complete portfolio that we're going to - we think is, for Enclosures, is going to be a meaningful driver for us next year. So, it's important.

Yeah. So, are you talking a multiple of that normal 1%? Or can you size that at all?

No. I mean I'm going to stay with that 1% because it just depends how fast that industrial growth starts to come back, right? But as we talked about, at the point that there is confidence in end markets and CapEx spend, we know that Enclosures rebounds very strong, but it's too hard to call that at this point.

And there was a couple comments on inventory. But I just wonder if you could kind of come back and put a finer point or clarify a little bit more what you're seeing, and maybe there's some distinct differences between Enclosures and EFS. I think Thermal is kind of a totally different dynamic. But thinking about Enclosures and EFS, are you, in fact, seeing channel restocking that's, in any way, materially impacting your business? Or is there any kind of notable difference between those two segments?

So, I would say for both EFS and Enclosures, in the third quarter, we saw that our orders through our channel partners improved but largely to match demand. And that's continued to improve even into October. So I would say we've not seen a significant restock because we think they're being very cautious. And the one thing that we're watching closely is typical with - in EFS and Enclosures, right now, are behaving similarly. What we do know is with the industrial side, that Enclosures probably bounces stronger when that comes back. But what we're watching through the fourth quarter is normally toward the end of the year, distributors may take stronger inventory positions just because they're looking at rebate structures or being positioned going into next year. And we're not certain that's going to happen this year. So, we think that we're still going to see distributors matching inventory levels to what the end demand is. And until we see stability and more certainty, that's the point that we typically will see Enclosures really jump up. We're not there yet.

Yeah, thanks. I'll leave it there.

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

Hey, good morning. So, I wanted to understand a little bit about the comment on the better September into October. So September in industrial and is really the third month of the quarter is usually the largest. So when you say better in September, did you mean September year-over-year was better than the first two months?

Correct, Scott, looking at the rate.

Right. And October...

That's just in the absolute dollars. Yeah, yeah.

And the October rate year-over-year better than the third quarter rate year-over-year?

Correct. And the October rate's better than Q3, both on sales and orders.

Right, nice. Okay, yes. Sara, while I have you, the cost reductions. Help me understand something here. First of all, if you could just tell us what - I can't find it. And if it's here, I apologize for not seeing it. But what was the cost-out number in the third quarter alone?

Over $20 million, and that's a combination of both temporary and structural. Yeah.

Right. And sort of in the proportions that you talked about, right, would you say? $20 million, $30 million.

Yeah.

Right. So then, if you say you're executing on over $70 million of cost reductions, yet you're going to roll back some of the variable in the fourth quarter here. Can you maybe connect those dots? Is there more structural or what am I missing?

Yeah. And so if we look at Q4, we're targeting those cost reductions to be just under $20 million. And so that reflects some of those temporary costs rolling on but some of the structural actions that we said we were going to do additionally rolling into the back half, kind of rolling into the P&L.

Great, thank you. Last question is, so the working capital improvement sounds like it was largely in EFS. Does that mean that you're not as focused on Enclosures, that you're happy there? And then - Sara, I know you're never happy with working capital. I should have never said that. But I mean, when did the improvements in working capital, particularly from EFS, start to show up in the margin from just better throughput?

Yeah, so maybe a couple of things. So, I would say that we've got working capital runway across every one of our businesses. I would say that looking at EFS, and particularly, they had probably the most opportunity, just given, I would say, where they were at on their overall lean journey because I do look at working capital, as a measure of how good we are, right, or how mature we are, if you will, on our overall lean journey. So with Electrical & Fastening, I think they've put together a team and really had some laser focus there. And we've seen some nice year-over-year improvements in our inventory days. And so that's why I sort of singled out and called that out. But look, I think there's still more runway to have there. And I do, to your point, Scott, they tend to go hand-in-hand. You see some nice working capital improvement. And you also see that even while organic sales were down 5%, and ROS was flat and they delivered a really strong 27.6% ROS and saw some improving productivity in the factory. So, we're seeing great momentum on the productivity side in the factories and good working capital on improvements. Now with all that being said, there's also laser focus in the other segments across every one of those working capital metrics and would expect our overall working capital initiatives to continue to read out and provide runway for us here on cash as we move forward.

Understood. I do have another question but I'll get back in the queue. Thanks.

Your next question comes from the line of Jeff Hammond with KeyBanc. Please go ahead.

Hi. Good morning. So, just on - maybe you can level set us. Oil and gas has been under a lot of pressure. Just how big is it today as part of the portfolio as you run rate it? And then just on the Thermal MRO, are you seeing more destock or deferral? And where would you say inventory levels are within that product line?

Yeah. So just our overall energy within our sales mix is 14%. But I would also say that the Thermal piece of that is smaller and it's typically in that midstream, downstream. Our electrical utility business in EFS also shows up in that overall energy number. So, the oil and gas piece is a smaller piece of that overall 14% of sales.

And with the MRO business, so there's a couple things. One, there is some product does go through the channel and so much like everything we saw in Q2, just the buy through distribution channels for product decreased. Although again, like EFS and Enclosures, everything started to improve somewhat in Q3. But I would say really, it's driven by CapEx spend in plants, and a lot of that has just been - you look at the price of oil, a lot of companies really just did all cost cutting measures and MRO is one of those first things that they cut. So as Sara had talked about, we saw that significantly down. And our view is that it will return over time once there's more certainty because some of it has to return. It's just - some of it's tied to critical plant maintenance.

Okay. And then just on capital allocation. It was good to see you buy back some stock here in the quarter. Just give us a sense of based on what you see in the pipeline and where your stock price is, what your lean is in terms of capital allocation in the near-term?

Well, as we've always said in our framework, our priority there has always been on growth. And we executed on some share buybacks to offset dilution. But our view is we're starting to see M&A opportunities, and we're going to prioritize growth and we have a very rich funnel. And it paused for a little bit but we're actively engaged. And so I think we'll just see how the year plays out and into next year. But that's our first priority, investing organically and inorganically into growth.

Okay. Thanks so much.

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

Hi, Good morning. So I had a question. I wanted to maybe zero in on the EFS segment, please. And the margin performance is pretty eye-catching. The 27.6% on my model, that seems to be a little bit of a ceiling in the last couple of years. I mean it's been a number of quarters that was precisely that ROS. But I also noted that, I think it was Sara mentioned it in terms of the journey, right, on the margin side. So, I think when the business was originally purchased from Pentair, I think it maybe had a pro forma margin in the 28% or 29% range for a full year. But what kind of a journey do you think that, that segment can go on in terms of operating margin improvement from here? And I know there's going to be a number of moving parts, sales volumes and things like that. But what opportunities do you see incrementally there to drive the margins above the recent highs of that 27.6%, and maybe what might be one or two of the tactics or strategies to get there? Thanks.

Yeah. Well, let me just start that the margin profile in our EFS business really reflects the strong value proposition that we have. So - which is really around labor-saving solutions. So, anytime we innovate a new product, we come up with a better way to take labor off the job site. So, from a contractor standpoint, we actually - they may pay a higher price for our product but it saves them time on the job that more than makes up for. And our number one selling product, we've talked about this, is less than $1. So the value proposition really holds. And every time we launch a new product, we're looking at how to - what labor do we take out and we're looking to launch new products at higher margins, right? So, we just continue to do that. So, new products are a big piece of it. But the second element is just remember, we acquired this business, ERICO, and it wasn't very mature from a lean standpoint. So, things that we've been doing to improve that margin profile is driving just a lean approach, right, end-to-end thinking, driving improvements with digital, which - making CapEx investments in there. So, we still believe there's runway with this portfolio because of its strong value proposition and because of all the things that we can do to enhance the portfolio, that we're going to see improvements there. I don't think we're ever going to get above 30%, but I still think it's going to be in that high 20s range.

Okay, thank you for that. And then I had a question, I guess, about your new product launches. So, apologies for being kind of a scorekeeper here, but I think the target for this year overall was in the 50 range, and I think as of the third quarter now, you're at 33. And I stipulate it's just been an unusual year from any number of angles. But that said, I was wondering if you - when you look overall at your new product efforts, new product commercialization efforts and you see the gap between maybe where you were in January and where you are now, is the gap there because of just it being a little bit slower but you're still going to get to the same destination? In other words, all 50 of those products are still going to be launched? Or are you - have you taken another look and maybe decided that a couple of them didn't meet your return criteria or merit extra development work? Or is it something like due to changes in the market, a product has to be reworked or redesigned to provide the value proposition you're seeking? So, maybe just the gap between the 50 target and where you think you'll be now. And then maybe if you wouldn't mind, some of the thinking behind why you won't get all the way to 50 would be great.

Well, we're actually - we've always had a plan that was more back-end loaded, to be fair, so it was never linear. And I think we're going to get pretty close to that 50 in terms of just executing some of those new products. And this was an area that we decided we wanted - like digital, that we wanted to continue our investment. Now did we have challenges along the way? Sure, because all of a sudden, our engineers are having to work remotely. We had to learn how to do virtual launches of our new products. And I think if anything, the uptake on the new products, just because of the market conditions, we expect to be slower. But what we have been able to do is in our EFS business, we've been able to have - virtually do these training sessions, we've been able to get - ship products to contractors. We've been able to do some contractor conversions as we've launched new and better products. And so we're still doing all the same effort to - and maybe even more efficient because we're getting great pickup of these training sessions, but getting these products launched and seeded into the market. It's just that the revenue stream, I think, is going to be a little bit slower just based on where we are with all the end markets. So, from an execution standpoint, I mean, we're - we talk about velocity and we've also implemented a more agile approach to how we're doing things. So, I think we're still accelerating here when it comes to new product launches.

Yes. And that was just my last little question but I meant to ask it in the initial thing. But do you anticipate 2021 new product launches? Will they be at kind of a similar level to 2020, a little bit higher, a little bit lower? How does that relate to kind of your thinking about velocity and the importance of that aspect of your growth strategy? Thanks.

Well, it's likely going to be similar. But what I'd like to think is - and it always depends because sometimes we're launching really big new platforms that take time, and sometimes we've got smaller extensions and we count all of that. But from a standpoint of our ability to accelerate our velocity in our new product development process and for us to launch more effectively, we've spent a lot of time this year on those two areas. So, I think you're going to see similar execution next year. And I believe if we serve to see some uncertainty go away or if we start to see our end markets improve, we'll be really well positioned.

Thank you very much.

Your next question will come from the line of Justin Bergner with G. Research. Please go ahead.

Good morning Beth. Good morning Sara. Nice execution in a difficult environment.

Thank you.

Thanks.

To start, could you give out the specifics on the October share repurchase like how many shares and what price? Or would you rather wait until the Q or whenever that's formally disclosed?

Justin, we'll probably just wait until the Q to give that information, but it was - we didn't repurchase any of those shares in Q3 and that program began as October started.

Okay, that's fine. Just to clarify on the cost side, were you suggesting that there were $10 million to $15 million of structural cost savings that wrap around in the 2020 on a gross basis or $10 million to $1 million, net of the temporary cost actions that will unwind?

So, that was the gross. That was the gross carryover cost savings that we expect based on the structural actions that we took this year that should carry over into next year. And again, those temporary cost actions, we would not expect those to drop in day one. They're going to be tempered and feathered in over time.

Okay, that makes sense. I certainly understand some of the discretionary expenses. Maybe just big picture. I'm sure you guys have been thinking about the potential for an infrastructure bill and what it could mean for nVent's businesses. So, any thoughts on where you see sort of the most upside if we get a big infrastructure bill in the coming quarters as it relates to your business?

Well, infrastructure for us is important. I mentioned our EFS business, in particular, the - where we have some of our electrical products that - certainly, anything that's from an electrical infrastructure build-out, our EFS business is well positioned there but so too is Enclosures. Remember, as I said, we enclose everything. So whether it's 5G, whether it's related to infrastructure with water, I mean, EFS and Enclosures will do very well with an infrastructure improve - any stimulus around infrastructure.

Understood. Lastly, one of your competitors, I guess, sort of copied you on the vertical approach recently, so I guess they were commending you for your vertical approach in doing so. Are there opportunities to sort of push that further? And any sort of update on where some inroads may be occurring positively that investors weren't as aware of six months ago?

Yeah, thank you for that question. One of the things I would say is, we've always said that nVent, particularly EFS and Enclosures, we're very - we sell a lot through channels. Our view –and we've been investing more in commercial teams, and we did this upon launch to really go after some targeted verticals. And so we talked about commercial, we talked about data and networking solutions, for example. Well, we're taking that even further. So, when we think about our Enclosures business, looking at further sub verticals, whether it's food and beverage, whether it's around 5G, for example and having commercial teams there so that we really are driving end user demand, even if the products are sold through a channel because our view is you really have to understand your end customers, and you have to understand that you have to ensure that you've got the coverage. And so our Enclosures business has recently furthered their vertical approach. And I would say one of the things with EFS is we also have really good end user demand sales focus and balancing that with building out the channel approach. And even as we think about our Thermal business, with oil and gas being a tougher environment, we're putting more focus in verticals like chemical, for example, and particularly in Asia Pacific. So what we started a couple of years ago, we saw the success we had in data networking solutions, and we're replicating that even further. And you have to create demand at all points along the value chain from end user through channel partners and distributors to even the installer or the contractor. And so we've done a lot of work there, and that's part of our commercial excellence journey.

Great. That's very helpful. Thank you.

Thank you.

Our final question will come from the line of Scott Graham with Rosenblatt Securities. Please go ahead.

Yeah, good morning. Just two follow-up questions. Beth, one of the things that you championed when you took over was not just One nVent, but the focus on the distribution channels, the customers there, where you literally went out and met many of your top customers. And obviously, since that time, we had a short-cycle weakness and then we had this. I'm just wondering if with - since distributors are starting to see more stabilization in their sales and they are the first one out of a recession, if you're starting to see more receptivity or again, starting to see the receptivity to some of your approaches, whether it's realigning your sales people, demand, but also particularly if you can bring into your answer how Eldon helps you with that One nVent strategy would be great.

Sure, yeah. So, I mentioned earlier that we saw in Q3 that certainly a pickup across our distribution channel in terms of the orders from us, although we largely thought that was matching their end demand versus some large restock. But I would say that we're actively working conversions and that could be at a distributor, at a branch level. We're seeding some of these new products into these channels as well. We're working very hard at the global extension of what we're doing through our channels. And I would say with the Eldon acquisition, there are two opportunities - well, a couple of opportunities there. One, bringing that product into North America. So, I mentioned earlier that we were launching it, ensuring we could manufacture it in North America as well. And so that's a new portfolio to be brought into our distribution channel partners. So, it's consistent with the effort that we're driving. But then I would also say, Eldon was most strongly positioned in Europe, but it didn't have the size that we have, as a $2 billion organization, to have as many strategic relationships. So, as we expand through our channel partners in Europe, Eldon is a big piece of that portfolio that is going to allow us to have further penetration across Europe. And then next for us with Eldon is going into Asia Pacific. But similarly, we're strong there in India already. But as we look at other parts of Asia Pacific, we want to also ensure that we can manufacture the portfolio over there and so that's our plan into 2021.

Thank you, that's a great answer. My other question is about, we're starting to see some reclosures in Europe and well, that has crept not stepped into the United States much and you're obviously much more US-centric. I'm just wondering, the world has changed in a lot of ways, two of them being the ability of a company like you and others to service customers remotely but also those customers to buy remotely, right? So, the answer to this question is different today than it was earlier in the year. Nevertheless, what would you say would be your closure of customer sites exposure going forward, if that, in fact, were necessary?

Yeah. It's difficult to gauge but I tend to agree with you, and I can maybe just comment on what we're seeing in Europe. So, early days in this pandemic, there were a lot of sites that got shut down around the world. But I think including ourselves, we've learned how to operate and keep our employees safe with things like masking and social distancing. And we've learned how to use digital tools to communicate to our customers. So, what we see currently, and of course, we manufacture in Europe is none of our manufacturing sites are shut down. We are seeing maybe more limited travel or we're seeing social things shut down, right, which restaurants or other things like that. But so I believe we're better able to continue to operate and serve our customers in a digital way. And so I suppose it really just depends, Scott, on just if things are controlled or managed, but I think we have found that we can operate our plants effectively, keep our employees safe, engage with customers. And maybe the only thing that this does is it just is why we keep talking about a gradual recovery because I think there's just - everyone is still managing their costs and their CapEx and it's why we remain cautious but just keep pointing to a gradual recovery. But I do think we know how to operate in this environment in a very safe way and stay connected with channel partners and customers.

Thank you, Beth.

Thank you, Scott.

I'll now turn it back over to management for any further remarks.

Well, thank you for joining us this morning. We are pleased with our third quarter performance and are confident in the actions we're taking to emerge stronger. These results serve as another proof point of our strong execution. We have a strong foundation, and we believe there's a bright future ahead for nVent. We hope you remain safe as we continue to navigate through these uncertain times. Thanks again for joining us. This concludes the call. Thank you.

Ladies and gentlemen, that will conclude your call for today. Thank you all for joining and you all may disconnect.