nVent Electric plc Q2 FY2020 Earnings Call

Ladies and gentlemen, thank you for standing by, and welcome to the nVent Q2 Earnings Conference Call. At this time, all participants' lines are in a listen-only mode. After the speakers' remarks, there will be a question-and-answer session. Please be advised that today's conference call is being recorded. I would now like to hand today's conference over to J.C. Weigelt, Vice President of Investor Relations. Sir, the floor is yours.

Thank you, Carmen, and welcome, everyone to nVent's second quarter 2020 earnings call. I'm J.C. Weigelt, Vice President of Investor Relations; and also on the call are Beth Wozniak, our Chief Executive Officer; and Sara Zawoyski, our Chief Financial Officer. Today, we will provide details on our second quarter performance as well as a COVID-19 business update. Before we begin, let me remind you that any statements made about the Company's anticipated financial results are forward-looking statements subject to future risks and uncertainties, such as the risks outlined in today's press release and 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. Good morning and thank you for joining us. We continue to hope that you and those around you are safe and healthy as we navigate through the pandemic. I want to extend a special thank you to all of our nVent employees, who have been resilient and who are adapting to a new way of working. Our focus and collaboration have never been stronger. The safety and well-being of our employees remain our first priority at nVent. I want to acknowledge that these are challenging times and our employees have been putting in tremendous effort, living our customer-first value to go above and beyond to keep our business running. I am truly grateful and inspired by their commitment and dedication. I also want to make a comment on racism, inequality, and injustice in our society. nVent stands with the black community, with all people of color and others who feel marginalized. We stand against inequality and injustice of any kind. We have launched listening circles across nVent as part of an effort to engage our employees in a dialogue on racism. We have made the talk, and we will act. Now, I would like to turn to our second quarter results on Slide 3 of the presentation, titled Executive Summary. We remain focused on our three near-term priorities, which are first, focusing on the safety and well-being of our employees. Second, continued business operations to serve our customers and support critical infrastructure. And third, taking actions to make nVent a stronger Company, well-positioned to exit the crisis. I'm proud of our execution during the quarter. Two years ago, we were often asked by investors how nVent would perform in a downturn. If you review our second quarter performance, you will see that we executed well during a unique and challenging time. Our teams executed on our plan to keep operations running with minimal supply chain disruptions. We managed decrementals and generated strong free cash flow conversion with 160% adjusted conversion. In addition, we continued to invest for growth. We launched 13 new products, made progress on our digital transformation, and the integration of our acquisitions is on track and performing well. In April, we highlighted the actions we were taking to emerge stronger, and we view these results as evidence that we are on a path to do just that. We executed on the cost actions we laid out last quarter, and second quarter decrementals were 39%, including a 7-point negative impact from acquisitions. These decrementals were better than our initial expectations of approximately 40% which excluded the impact from acquisitions. Second quarter sales were down 17%, as each segment's demand was negatively impacted by COVID-19. We improved our free cash flow performance versus a year ago, and adjusted EPS came in at $0.29. Our two recent acquisitions, Eldon and WBT, performed well during the quarter. We continue to target a mild to moderate scenario of sales down 10% to 20% for the year. We are taking additional cost actions given our view of a prolonged recovery in certain verticals. More broadly, we are seeing improving trends where countries or states are beginning to open back up. Specifically, verticals within infrastructure are performing well relative to other verticals. Utilities, data centers and networking solutions, and rail are seeing improved trends. We have a strong value proposition with our integrated solutions inside and outside the enclosure with leak detection, cable management, liquid cooling, and power management. We're also seeing improved trends in commercial tied to the reopening of economies across the globe. Although, there are some areas that remain more resilient, such as material handling and food and beverage. Overall, we continue to expect an uneven recovery as channel partners manage inventory levels and companies manage their spending. Similar to last quarter, oil and gas trends remain weak. However, it is noteworthy that our Thermal Management project orders and backlog grew double digits this quarter. In summary, although our business experienced pressure related to COVID-19, we executed on our three near-term priorities, managed decrementals, and generated strong cash. We're confident in the actions we are taking to emerge stronger. I'll turn the call over to Sara for some detail on our second quarter results, update on our cost actions, and share some thoughts on the balance of the year. Sara, please go ahead.

Thank you, Beth. Let's turn to Slide 4 to review second quarter 2020 results. Sales of $447 million were down 17% relative to last year on a reported basis and declined 22% organically. The acquisitions of Eldon and WBT added about six points to growth. Looking at monthly trends overall during the quarter, daily organic sales year-over-year were fairly consistent by month, with a marginal improvement in June. Notably, organic orders declined and sales were down 15%. Second quarter decrementals were 39% all in including a 7-point negative impact from acquisitions, so, better than our initial outlook. We executed well on our scenario plans including both structural and temporary cost actions while investing in future growth. Free cash flow continued to improve versus prior year and we had a strong conversion in the quarter at approximately 160%. Now, please turn to Slide 5 for a discussion of our second quarter segment performance. Starting with Enclosures, sales of $219 million declined 16% and 25% organically. While COVID-19 negatively impacted demand across most verticals, we did see pockets of relative strength and we grew low double digits in rail. Price was negative in the quarter as we won some competitive new business. While Eldon sales declined, we expanded margin over 300 basis points on a pro forma basis and are well on track with our integration efforts. Enclosures segment income declined 41% and return on sale declined 560 basis points. The impact of lower volume, inefficiencies, and increased costs related to COVID-19 negatively impacted margins. Decrementals are expected to improve in the back half of the year. Moving to Thermal Management; sales of $96 million declined 24% organically. As expected, industrial MRO saw the steepest declines due to continued site closures in parts of the world and delayed or deferred spend. Our project business was down single digits as we continue to execute on our backlog. In addition, we grew backlog sequentially and year-over-year as we continued to win major project bookings. Recall, the vast majority of our energy exposure is downstream, which seems to be faring better in this environment. Commercial revenue experienced significant declines in the first part of the quarter. However, we saw a modest recovery in June and we continued to make good progress expanding our channel presence with our commercial offering. Segment income was down 43% and return on sales declined 460 basis points due to lower volume in industrial MRO and commercial, which tend to have a higher margin mix component. We saw a significant sequential improvement in decrementals from Q1 as the actions to reduce our fixed cost structure and realign our business started to pay off. Now on to EFS; sales of $132 million declined 12% and 14% organically. The commercial vertical was negatively impacted by COVID-19 mainly due to site shutdowns. An area of particular strength in the quarter was in the utilities vertical, which grew mid-single digits and accounts for nearly 10% of EFS sales. Segment income was down 17% and return on sales declined 130 basis points, but remained strong at over 26%. EFS had almost a point of contribution from price and realized strong productivity gains, which helped offset operational inefficiencies from COVID-19. Turning to Slide 6, the team executed well on the cost actions through a combination of restructuring and temporary actions. The growth continues to lag and uncertainty remains, so we implemented additional cost actions. In aggregate, we are now targeting approximately $70 million of cost savings versus the original $50 million we discussed on the April earnings call. These actions include an extension of the temporary measures we took in the second quarter and more structural changes. Reviewing our near-term capital allocation strategy, we will continue to invest first inorganic growth with a focus on new product development and our digital transformation. Our dividend remains a key component of returning cash to shareholders. We are lifting the suspension of our share buyback program, and we'll continue to assess buying back stock based on market conditions and M&A opportunities. On M&A, we are focused on actively building relationships in our funnel, so that we are in a position to be ready as market conditions improve. As always, we will continue to evaluate the returns for each capital allocation decision with the goal to generate the highest return while managing liquidity and leverage. Moving to Slide 7, titled Healthy Liquidity Position. Our net leverage ratio at the end of the second quarter was 2.4 times, which is slightly above the first quarter. We ended the quarter with $235 million in cash and an additional $315 million available on our revolver. We have limited maturities until 2023 and remain confident in our liquidity position, as well as our cash generation activities this year. Specifically on working capital, our team continued to make good progress. Our working capital task force is taking a data-driven approach to target opportunities, grading structural improvements to benefit our cash generation in future periods. We did see an uptick in inventory early in the quarter given the steep decline in demand but made progress and expect this to continue to improve in the back half of the year. This focus on working capital is another example of how we intend to emerge stronger from this pandemic. On Slide 8 titled Balance Sheet and Cash Flow. We have a healthy balance sheet, and as I mentioned earlier, we are seeing improved year-over-year cash generation. In the second quarter, we focused on liquidity preservation while also deploying $30 million to dividends and approximately $7 million to CapEx. Moving to Slide 9, consistent with what we first presented in April, we continue to manage our business through scenario plans and actions at all levels of the organization. While we believe the worst is behind us, the shape and pace of the recovery remains unclear. Accordingly, we are continuing the suspension of our full financial guidance until the market conditions stabilize. More near-term, we do expect third-quarter organic sales to be down in the 10% to 20% range, which is an improvement from the second quarter. A couple of data points give us reasons to believe sales can improve. First, orders declined less than sales in the second quarter and were down 15%. Additionally, both June and July orders were down mid-teens showing improvement from the May trough. We also saw an improvement in July sales versus second quarter trends. We expect decrementals to further improve in the third quarter and to be in the range of 25% to 30% before acquisition. As cost actions and improved efficiencies continue to read out. For the full year 2020, we continue to see sales down between the mild and moderate scenarios. As we progress through the rest of the year, we expect sequential improvement in each of our segments, albeit still down year-over-year. Again, these are scenarios that we have modeled at enterprise, at segment, and at each of our plants, helping ensure we have the plans in place and we are ready to execute. As a reminder, these scenarios exclude the impact from acquisitions. A few other points as guideposts for full year 2020. We now expect interest to be approximately in the $40 million range and a tax rate in the 17% to 18% range. On shares, if we do not buy back any more this year, our diluted share count will be close to $171 million. Our focus is on actively managing decrementals, driving cash, and recovering fast. I am confident that we are taking the appropriate actions to create a stronger nVent as we emerge. I am pleased with our second quarter results and execution amidst this challenging environment. This concludes my comments on the second quarter, and I will now turn the call back over to Beth.

Thank you, Sara. I'm going to start on Slide 10, our near-term goals. We executed well on these priorities during the quarter. Creating a safe work environment, keeping our business moving forward, and executing on actions to emerge stronger. Across our facilities, we have developed a detailed COVID-19 checklist to ensure the safety of our employees, customers, and suppliers. We are communicating frequently to help employees stay informed of the measures we are taking and any changes to local guidance. We're also providing employees with a variety of tools and resources to support their well-being such as Mindful Mondays and Financial Fridays. Serving our customers and working in a safe environment are critical for our success. The fact that we are operational around the globe has allowed us to win new business and new customers. We've quickly adapted to working virtually and digitally in this new environment. Turning to Slide 11, I want to share the actions we are taking to emerge stronger. First, our new products. We've launched 24 new products in the first half of the year. And a few significant launches already this quarter that I would like to highlight. I'm excited by the launch of our Global IEC Enclosures portfolio for optimum protection in industrial applications. This full range of Enclosures and accessories meets international standards and makes it easier and faster for customers to specify, order, and assemble superior solutions around the world. This launch builds on our Eldon acquisition. In Thermal Management, we introduced a wireless communication interface to build on nVent RAYCHEM Elexant family of smart connected control and monitoring solutions. Recall, we have the largest installed base of thermal heat trace products in the world. This product allows customers with hardwired communications to upgrade to wireless remote connectivity for monitoring. In EFS, we are building on our nVent ERICO Cadweld Exothermic Connections and grounding materials for the rail and utility verticals. We have made over 100 million connections worldwide over the last 100 years. And now we have just launched the nVent ERICO Cadweld Impulse, which builds on our legacy of innovation with new features around safety, power, and ease of use. We've been creative in launching new products and providing training sessions virtually. We've seen a significant increase in attendance, often reaching capacity within hours of registration. Our digital transformation is accelerating as well, enabled by the development of our agile project delivery system. We launched a new Thermal Management website with richer content. The site includes enhanced search capability and a 'where to buy' feature to locate our products at the closest distributor. We've also introduced several marketing and sales tools with digital lead generation, instant online quotes, and a new pricing tool. All of which can benefit our sales force by providing real-time analytics for better business insights. These tools drive efficiency and growth. We've also had numerous new digital launches focused on our operations that automated and digitized manual processes. Many of these used robotic process automation and examples include automating order entry and PO acknowledgment. Another area where we are emerging stronger is with acquisitions. Eldon and WBT added six points of growth during the quarter. Notably, Eldon has been rebranded as nVent HOFFMAN, a big step toward our goal of supporting customers around the world with a global portfolio for virtually every environment. Our M&A funnel remains healthy as we target strategic acquisitions that are highly complementary to our current portfolio. Recall, we are a $2 billion Company in a $60 billion fragmented space. Eldon and WBT are great examples that extend our capabilities and global reach in our connect and protect space. Turning to Slide 12. I am pleased to announce the launch of our first Social Responsibility report, which reflects our three focus areas: people, our employees and the inclusive culture we're building together; products, our products and solutions that connect and protect our customers; and planet, how we care for the environment and support our communities. When we launched nVent, we made inclusion and diversity a priority. Here are a couple of proof points: 67% of nVent's Board of Directors represent diverse groups and women make up 45% of our executive management. Other highlights include, as part of nVent in action, employees from 14 countries volunteered more than 1400 hours in their communities. Our nVent foundation awarded grants supporting STEM-focused youth education programs, and nVent diverted 97% of waste from landfills. This foundational report is a meaningful step in our commitment to driving progress around the world on issues important to our employees, customers, and shareholders. We look forward to updating you on our progress. To summarize my comments today, we are executing well in a challenging environment. I'm proud of our team and what we accomplished in the second quarter. I am confident in the actions we're taking to emerge from this pandemic as a stronger nVent. With that I will now turn the call over to the operator to start Q&A.

Thank you. Your first question will come from the line of Jeff Hammond with KeyBanc Capital Markets. Please go ahead with your question.

Hi, good morning.

Good morning.

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

Yes, I would say that, Jeff. So a couple of things there. First, we would expect to see the largest improvement in Enclosures, really having worked through some of those operational and COVID-related disruptions in some of our largest factories. Secondarily, we would expect EFS to improve as well. Thermal, we expect that business to continue to hold in that low to mid '30s decrementals range. From a leverage perspective, from a price-cost, we would expect that to continue to get marginally better in Q3, but really expect the productivity improvement to continue to take hold with some of the cost actions. I think Q2 is a good example of that. If you look at our overall profit walk, you see there that we've got $8 million of productivity. That includes $17 million net productivity, right. So you've got $17 million of productivity offset by roughly $9 million inflation, that's where you see inflation easing a little bit from Q1 and productivity almost three times that of Q1. We'll continue to expect that to ramp here in Q3, giving us better decrementals. I think one other thing to point out to Jeff. It's just from the acquisition standpoint. Just because we're going to be lapping the Eldon acquisition in September, we do expect that overall impact from acquisitions to ease a bit in Q3.

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

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

Okay, very helpful color. Thanks a lot.

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

Thanks, good morning everyone. Maybe just starting out, can you just talk a little bit about the thermal business that you were to kind of parse out the growth by end-market this quarter? It'd be helpful to just get some color around what commercial flash MRO did and really kind of what your expectation is for mix going forward for the rest of the year?

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

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

Yes, exactly.

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

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

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

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

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

Thank you. Good morning, everyone. Could we get color on the geographies? And then also within the context of how they progressed through the quarter?

Deane, this is Sara. So from a geographical perspective, sales were down overall 20% on an organic basis. We saw North America down the most and a bit of an improvement on the EMEA perspective relative improvement. On the APAC side, we ended up roughly flat. For the most part, that cadence reflects the cadence that I talked about earlier from an overall orders and sales perspective.

How about Europe?

EMEA experienced a smaller decline compared to North America, which saw a significant drop of 20%. EMEA performed somewhat better, and APAC remained relatively unchanged.

Got it. And then to go back to the decrementals and on the slide where you give your scenario planning. Just I know this does not include acquisitions, you emphasized that before and we understand the impact of M&A was 7 points this quarter. How does that shape up for the third quarter in terms of impacted decrementals? I know you said Eldon anniversaries in September, but what would be the guidance today?

Yes. So we expect that impact on the decrementals to be about 5 points in Q3, just given the lapping of that Eldon acquisition in September.

That's real helpful. And just last one. Just, what's the approach? I mean, we talk about Eldon, but the brand goes away. I thought there would be brand value in Eldon going forward. So does it disappear altogether and just what's the thinking behind that?

Yes, Deane, over time, it does disappear. Part of that is we did a very thoughtful market assessment including with the Eldon team. As we go forward, remember, one of the opportunities we have is to have one brand to support global OEM customers around the world. We needed to unify that offering with that brand. But you will see that there is a lot of transitionary material from our website to everything that is allowing customers to understand and do those cross-references between Eldon and Hoffman. We put a very thoughtful approach in place, but ultimately it enables that strategy to have one set of products and branding and nomenclature to support a global OEM around the world.

That's really helpful. Thank you.

Your next question comes from the line of Julian Mitchell with Barclays. Please go ahead with your question.

Thank you. And Happy Financial Friday. Maybe just a first question around the scenario on sales. And I fully realize that this is a scenario, not formal guidance and there's a lot of uncertainty. But I suppose your mild to moderate scenario, as you put it, is implying the organic sales for the year are down, call it mid-teens. That would imply, I guess the fourth quarter at mid-teens level consistent with the first half and with Q3. Is that just reflecting the uncertainties in the macro environment, or is there something specific perhaps how you see energy playing out in the balance of the year or something on the timing of sales coming out of the backlog in thermal more broadly? Just wanted to understand that and then, yes, specifically on energy, what we should expect sales to be down in the second half?

Yes. To your question, I mean, some of this just is the uncertainty, right. So we've seen economies open up and recover and then some steps taken to shut things down again as the pandemic spreads. This creates caution in spending. So it is that uncertainty as we think about that going forward. I would say, though, on some of those end markets, as we've said, we just expect that oil and gas will be weaker. While we're going to have project relative strength, we expect that MRO business just to be weaker. CapEx spend there is likely to be weaker. So that's what we have factored in as we've thought about our outlook.

Thank you. And then secondly, around the capital deployment. Your balance sheet is not very levered, you're anniversarying the Eldon acquisition in a few weeks. So you've got the sort of bandwidth to do more on capital deployment. But understand the environment as you just said, the macro is uncertain. So maybe help us understand what the scope of excess cash is to spend over the next six months to 12 months? How aggressive could investors expect you to be on buybacks or acquisitions from here?

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

Great, thank you.

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

Hey, good morning all. Well done.

Good morning, Scott.

I wanted to ask a question of Sara, and then something maybe more strategic off with Beth. Sara, why did you go back into the tone and raise the cost-outs? It looks like decrementals was fine. It sounds like you are happy with it, but what motivated that?

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

Got you. Beth, two you on strategic. We talked last quarter about the Company sort of fee rising how to move from, where you serve buildings in a couple of businesses enclosures and you know some particular and how we transition that to more buildings where there are better catch to better end markets, be hospital, healthcare, corporate, this type of thing. I was just wondering about inertia on that strategy during the quarter.

Yes. As we consider our EFS business, particularly regarding CADDY, we have observed continued strength in our efforts around prefabrication. Given the COVID environment, the demand for easy-to-install contactless solutions has highlighted pre-fabrication as an emerging trend. We are focused on scaling that business and exploring additional verticals. We primarily analyze data, and for CADDY, we are expanding into the data and networking space, providing applications beyond just office buildings. We are putting considerable thought into our product offerings and how to effectively market them to communicate their value. We are actively working on positioning our portfolio to target a wider range of vertical markets.

Your data education process is that direct to the end user or do your distributors already sell to those markets, which would obviously be a little bit easier for you?

Yes. Our distributors tend to access all those markets. For us, it's a matter of doing two things. We're very strong, particularly in that EFS portfolio because we have such a strong contractor loyalty program. So these virtual training sessions that we offer, we do a couple of things. We get products, we actually ship products to get them into their hands so it's very tactile and they can play with it. But we also do virtual sessions to talk about applications where else those products can be used and what's the value proposition. So it's all of those things, working with our channel partners and then direct to the end user and explaining them the value and the benefits of the products in the applications.

Got you. Last question from me. Data centers, could you maybe tell me how they did in the quarter? But maybe more broadly, some of the strategies behind that business to keep it one of your better growth businesses and specifically within the data center market for you guys, are you more levered to data forms or the hyper scalers?

Yes. So data and networking solutions for us had more relative strength, although it was down in the quarter. But we look at that and job sites got shut down. So if you think about getting contractors on-site to do installations, all of that got shut down during the quarter and there's some time for when everyone's getting comfortable with returning to the office, etc. We still think the long-term trend here is very favorable. For us, you know, we tend to deal primarily with system integrators and more through channel partners. We do have some hyperscale, but we tend not to target and focus there. We can do all levels, from a simple racking system up to a more integrated solution with liquid cooling. But we tend to have most of our sales going through distribution channels, which tends to be more of those smaller arms in the hyperscale.

Understood, thanks.

Thank you.

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

Yes, thank you. Good morning.

Good morning.

I'm looking at Slide 8, the scenario planning slide, and it appears quite similar to what it was three months ago. It seems you're still anticipating a mild to moderate scenario internally. However, I would like to know your perspective on what has changed in your overall outlook compared to three months ago. This could involve internal factors, distributor channel behavior, supply chain security, or perhaps the macro environment. For instance, three months ago, many were expecting or hoping for a V-shaped recovery, but I don't hear that as much from management now. In comparison to three months ago, what do you think has shifted either internally or externally?

Well, I would start with, I think three months ago we weren't quite sure how difficult or challenging Q2 was going to be, right? We progressed through that and we saw that there were shutdowns, but eventually things reopened. Now, it was not back to business as usual, certainly. But I think we saw progression during the quarter as we spoke about that in terms of just orders and even in terms of some of our segments' sales. So as Sara said, we expect that Q2 is the toughest quarter, all right. The other thing I would say is just as we look at our supply chain, two things one, we had these stay-at-home orders or there was always this initial reaction where employees weren't sure or companies weren't sure. We have different locations, like Mexico, where we had to ensure that we were deemed essential to continue up and running. So it was very disruptive. When we talk about some of the operational inefficiencies or COVID costs, thinking about how we needed to manage our shifts or now invest in PPE and other safety measures, all very important. I think we've now got that in a more managed situation to where that was all new. So our ability to optimize things and manage some of those operational efficiencies, I think we have a good perspective and feel more positive about how we manage that going forward. Those are just a couple of things. I would say it was our expectation and we can go back in time, particularly with the Enclosures, because a lot of our business, particularly Enclosures and EFS, goes through distribution channels. We know from history that when we enter a downturn, we always get destocked faster, particularly in Enclosures, and when you start to see recovery, we come up faster. We're not there yet, but we do expect that trend will be consistent. So that’s why we talk about an expected gradual improvement over time. But we should expect that.

That's great insight. Thank you. I have a follow-up question regarding organizational sustainability. Considering that you've been adjusting to the pandemic for a few months, it appears you're adapting as the situation evolves. When evaluating your production, logistics, marketing, and administrative functions separately, do you see areas where you might maintain your current approach indefinitely, or do you believe that a more decentralized structure could create gaps or decrease productivity? For instance, in product development and other creative aspects, which typically rely on collaboration, could a decentralized structure hinder effectiveness? As you plan for long-term operational sustainability and manage different processes, which areas do you think might struggle to maintain their current effectiveness without experiencing some diminishing returns?

Let me address that from a straightforward standpoint. All of our plants are operational, and we require personnel to produce products at those facilities. We have learned to effectively manage our safety protocols and shifts, going above and beyond to ensure the safety of our employees and visitors. In terms of functions that are operating online, we have improved with our digital tools. I believe that our future will feature a more flexible work environment, which will occasionally necessitate in-person collaboration. We have implemented an agile project delivery system, commonly associated with software development, which involves a structured process including regular meetings for collaboration. There are excellent digital tools that facilitate idea sharing and execution with follow-up in two-week intervals. We have made progress, which reinforces our commitment to accelerating digital transformation through our agile methods and program management. This has allowed us to enhance our efforts. From a product development perspective, this year has been record-breaking, as we have learned to launch products using YouTube videos and virtual sessions. While some engineers need to be on-site for testing, we are managing our global operations with flexibility. Employees can safely access our offices and contribute, so all offices aren't completely closed and we are still engaging. I do not see any barriers to progress, as we are improving our digital capabilities and managing our workforce flexibly. The digital tools we are using are aiding collaboration beyond our expectations. Finally, our focus on safety and well-being is crucial, as we aim to prevent stress and support our employees in adjusting to this new working model.

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

Yes, I think the answer to that question is, there is still so much uncertainty as to how the pandemic is progressing. We're seeing some countries globally that seem to have contained things early on now reporting new cases. We need to see globally some view that we have containment. It doesn't necessarily have to be a vaccine, but we just need to know that economies are going to keep opening and shutting down. I really don't think we're there yet. That's one of the things we're going to be looking for quite a bit. Some stability around the control measures around the world. We're going to try and give you as much color as we can from these scenarios. As we did pointing to where we think Q3 sales are. As much transparency as we can provide with the information we have, we're going to provide it, as Sara also just outlined July in that perspective. Well, I want to thank you for joining us this morning. Even though this uncertainty persists in this environment, we're confident in the actions we're taking to emerge stronger. We're managing decrementals, generating strong free cash flow, and investing in growth. Our team is aligned on the near-term goals to manage through this and emerge stronger. Thank you again for your time, and we hope you remain safe and healthy. Operator, you may now conclude the call.

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