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nVent Electric plc (NYSE:NVT)
Q2 2020 Earnings Call
Jul 31, 2020, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the nVent Q2 Earnings Conference Call. [Operator Instructions]

I would now like to hand today's conference over to J.C. Weigelt, Vice President of Investor Relations. Sir, the floor is yours.

J. C. Weigelt -- Vice President of Investor Relations

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 the 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.

Beth Wozniak -- Chief Executive Officer

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 has never been stronger. The safety and well-being o;f our employees remains 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'm 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, and we will not tolerate racism in any form. 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 commitment that we will listen, we will talk and we will act. Together, we will emerge stronger.

Now I would like to turn to our second quarter results on slide three 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, take actions to make nVent a stronger company, well positioned to exit the crisis. I am proud of our execution during the quarter. It's been two years ago, we have always been asked by investors. How would nVent perform in a downturn. I think 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 manage decrementals and saw strong free cash flow conversion generation with 160% adjusted conversion. In addition, we continue to invest for growth. We launched 13 new products, made progress on our digital transformation and the integration of our acquisitions are 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. In data centers and networking solutions, 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. Prefab remains a favorable long-term trend, and our nVent CADDY prefab business is seeing double-digit orders and backlog growth. General industrial continues to be weak, 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 spend. Similar to last quarter, oil and gas trends remain weak, although I will point out 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 will turn the call over to Sara for some detail on our second quarter results, an update on our cost actions and share some thoughts on the balance of the year. Sara, please go ahead.

Sara Zawoyski -- Executive Vice President And Chief Financial Officer

Thank you, Beth. Let's turn to slide four 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 less than sales at 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 five 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 margins 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 sales declined 560 basis points.

The impact of lower volume, inefficiencies and increased cost 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 continue 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, saw a modest recovery in June, and we continue 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 commercials, 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 our readout. 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 six. The team executed well on the cost actions through a combination of restructuring and temporary actions. As growth continued to lag and uncertainty remains, 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 second quarter as well as more structural changes. Reviewing our near-term capital allocation strategy, we will continue to invest first in organic 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 buyback stock 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 seven, 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 continues to make good progress. Our working capital task force is taking a data-driven approach to target opportunities, creating 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 it 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 eight, 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 nine. 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.

What 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, so an improvement from the second quarter. A couple of data points that gives us reasons to believe sales can improve. First, orders declined less than sales in the second quarter and 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 acquisitions as cost actions and improved efficiencies continue to readout. For the full year 2020, we continue to see sales down between the mild and moderate scenario. 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 in each of our plans to help 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 guidepost for full year 2020. We now expect interest to be in the approximately $40 million range and a tax rate in the 17% to 18% range. On shares, if we did not buyback anymore 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, and I am pleased with our second quarter results and execution amid this challenging environment. This concludes my comments on the second quarter.

And I will now turn the call back over to Beth.

Beth Wozniak -- Chief Executive Officer

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 be 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 Friday. 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, on 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, 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 that builds 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 aware to buy feature to locate our products at the closest distributor. We've also introduced a number of 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 use 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 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 bolt-on 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, which extend our capabilities and global reach in our connect and protect space. Turning to slide 12. I'm 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.

And 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 4,100 hours in their communities. Our nVent foundation awarded grants supporting stem-focused use education program, 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 am 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'll now turn the call over to the operator to start Q&A.

Questions and Answers:

Operator

[Operator Instructions] Our first questioner will come from the line of Jeff Hammond with KeyBanc Capital Markets. Please go ahead with your question.

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

Hi, good morning. So just talking on the decremental margins, 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, the less bad sales and the internal restructuring? Or what else is going on there?

Beth Wozniak -- Chief Executive Officer

Yes. I'll take that, Jeff. So a couple of things there. So one, 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. And then secondarily, we expect EFS to improve as well. Thermal, we expect that business to continue to kind of hold in that low to mid-30s decremental range. From a lever perspective, from a price cost, we would expect that to continue to get marginally better in Q3, inflation easing a bit. 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, where if you look at just our overall profit walk, you see there that we've got $8 million of productivity. That includes $17 million net productivity, right? And so you've got $17 million of productivity, offset by roughly $9 million inflation. So that's where you see inflation easing a little bit from Q1. And productivity, almost 3 times that of Q1. So we'll continue to expect that to ramp here in Q3, giving us those better decrementals. I think the other thing one other thing to point out too, Jeff, is just from an 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.

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

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

Beth Wozniak -- Chief Executive Officer

Yes. So 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 teens. EFS was down roughly 12% and thermal more in that mid-teen range. The kind of cadence of the quarter, I would say, mirrored a lot of what we saw on the order side on the sales side. So EFS, that trough was more in that April time frame and it continually got better through the course of the quarter. Enclosures, that trough was a bit more in that May timeframe. And Thermal was a bit more even just given the project dynamic of that. 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 looked at that from a segment perspective, Enclosures was really right in line with the overall nVent, EFS was better on both fronts, both from a sales and orders perspective. And Thermal was a bit worse than that from an orders and revenue perspective. I do think it's helpful to point out Jeff, that on the order front for Thermals, we do expect that to be negative here in Q3 because we will be lapping in Q3. Over 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.

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

Okay, very helpful color. Thanks a lot.

Operator

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

Joe Ritchie -- Goldman Sachs -- Analyst

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

Beth Wozniak -- Chief Executive Officer

Yes. So from a thermal perspective, if you do remember, roughly 1/3 of that business is commercial, 1/3 projects and 1/3 more MRO. And so we talked about that project business actually being only down single digits. 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. And then we saw MRO probably hardest hit if you will. And so that's kind of how that segmented out overall. I would say from an orders perspective, again, we saw strength on the project side, actually up double digits as well as we continue to build backlog year-over-year as well as sequentially. So as we look 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 do expect projects to be continue to be more resilient as we execute against our backlog, as well as the orders, are holding up relatively well.

Joe Ritchie -- Goldman Sachs -- Analyst

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?

Beth Wozniak -- Chief Executive Officer

Yes, exactly.

Joe Ritchie -- Goldman Sachs -- Analyst

Okay. Great. And then maybe my one last question. Just thinking about the additional cost out. I'd be curious just if you could provide any color around how much of the 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's a portion that bleeds into 2021, that would be helpful, too.

Beth Wozniak -- Chief Executive Officer

Okay. Let me kind of break that down. So the so overall, we're targeting $70 million for the full year. We saw over $20 million of that play out in Q2, and we really expect that to extend into 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 of that $70 million, $30 million is on the temporary side and roughly $40 million is structural. So that incremental $20 million that we did here, taking it from the $50 million to $70 million was roughly half temporary and half structural. So if you looked at just that structural piece of $40 million, we talked about this last April, $15 million of that was simply carryover from what we did last year. $25 million is more structural costs 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.

Joe Ritchie -- Goldman Sachs -- Analyst

Yes, that makes a lot of sense.

Beth Wozniak -- Chief Executive Officer

One more point I would say is, as we look at some of these temporary cost actions, there's 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 just think about trade shows and marketing and we're doing it all more digitally, I think we're going to find that some temporary cost doesn'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.

Operator

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

Deane Dray -- RBC Capital Markets -- Analyst

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

Sara Zawoyski -- Executive Vice President And Chief Financial Officer

Dean, this is Sara. So from a geographical perspective, in that sales overall down 22% from an organic basis. We saw North America down the most, a bit of an improvement on the Europe EMEA perspective relative improvement. And on the APAC side, we ended up roughly flat. And I would say that for the most part, that cadence, if you will, reflects the cadence that I talked about earlier from an overall orders and sales perspective.

Deane Dray -- RBC Capital Markets -- Analyst

How about Europe?

Sara Zawoyski -- Executive Vice President And Chief Financial Officer

So EMEA was a bit so EMEA was down a bit less than what North America. So North America was heaviest, right, in terms of that down 22%, EMEA performed a bit better and APAC was overall flat.

Deane Dray -- RBC Capital Markets -- Analyst

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. It was seven points this quarter. How does that shape up for the third quarter in terms of the impact of decrementals? I know you said Eldon anniversary is in September, but what would be the guidance today?

Sara Zawoyski -- Executive Vice President And Chief Financial Officer

Yes. So we do expect that impact on a decremental to be about five points in Q3, just given the lapping of that Eldon acquisition in September.

Deane Dray -- RBC Capital Markets -- Analyst

That's real helpful. And just last one, what's the approach? I mean, we talk about Eldon, but that 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?

Beth Wozniak -- Chief Executive Officer

Yes. Dean, over time, it does disappear. And part of that is we did some very thoughtful market assessments, including with the Eldon team. And as we go forward, remember, one of the opportunities that we have is to have one brand to support global OEM customers around the world. And so we needed to unify that offering with that brand. But you'll see that there's 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. So we've 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.

Deane Dray -- RBC Capital Markets -- Analyst

That's really helpful. Thank you.

Operator

Your next question comes from the line of Julian Mitchell with Barclays.

Julian Mitchell -- Barclays -- Analyst

Thank you. Happy Financial Friday. Maybe just a first question around the scenario on sales, and I fully realize that it's the scenario, not formal guidance and there's a lot of uncertainty. But I suppose you're mild to moderate scenarios you put it. That's implying the organic sales for the year were down, call it mid-teens. That would imply, I guess, the fourth quarter at that mid-teens level, consistent with the first half with Q3. Is that just reflecting the uncertainties in the macro environment? Or is there something specific perhaps in 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?

Beth Wozniak -- Chief Executive Officer

Yes. I think 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 to take things to as the pandemic spreads to just close some areas down, which creates some 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 is going to be weaker. Now while we're going to have a project relative strength, we expect that MRO business just to be weaker, right? capex spend there is likely to be weaker. So that's what we've factored in, as we've thought about our outlook.

Julian Mitchell -- Barclays -- Analyst

And then secondly around, I suppose, 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 sort of excess cash is to spend over the next six to 12 months, how aggressive could investors expect you to be on buybacks or acquisitions from here?

Beth Wozniak -- Chief Executive Officer

Well, I think the answer on that is we're always looking for what's the best use of our cash, right, and capital. And we always want to focus and prioritize first on growth. Now having said that, it is a very challenging environment. And so I think on the M&A front, while we're working our funnel and relationships there's uncertainty as to just and feasibility, right, as you think about the ability to do an acquisition. And so we're going to continue to work that. But I think there's 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. So we're 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 the best opportunity is as we assess the market.

Julian Mitchell -- Barclays -- Analyst

Great.

Operator

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

Scott Graham -- Rosenblatt Securities -- Analyst

Hey, good morning all. I wanted to ask a question to Sara and then something maybe more strategic with Beth. Sara, why did you go back into the till and raise the cost outs. It looked like the decremental was fine, it sounds like you were happy with it. What motivated that?

Sara Zawoyski -- Executive Vice President And Chief Financial Officer

Yes. So Scott, we 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. So we believe that these incremental actions really position us well to manage our decrementals within that framework. But also while enabling us to recover fast as well. So 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 sort of addressing in some of these select verticals, what we think maybe a more prolonged recovery, maybe in Thermal and Enclosures as an example.

Scott Graham -- Rosenblatt Securities -- Analyst

Got you. Beth, two for you on strategic. We talked last quarter about the company's sort of theorizing how to move from where you serve buildings in a couple of businesses, Enclosures and EFS in particular and how we transition that to more buildings where there are that are attached to better end markets, be it hospital, healthcare, corporate, this type of thing. I was just curious as to whether there was any inertia on that strategy during the quarter?

Beth Wozniak -- Chief Executive Officer

Yes. As we think about where well, I guess what I would say, one of the proof points as we think about our EFS business, and particularly what we do there around CADDY is we've continued to strengthen what we're doing around prefab. And we think in this COVID environment, a more easier to install, contactless environment that, that prefabrication is a growing trend, right? So we're continuing to put effort into how we scale that business. And from looking at just some of these other verticals, I would say, for us, we also look at data and for CADDY, in particular, too, that data and networking space expanding there as another application for that CADDY portfolio beyond just office buildings or other areas. So we think about it a lot in terms of the product offering that we have. And then just in terms of how we market that and get those value propositions out there. So we're continuing to work on that, how we position our portfolio to reach broader vertical markets.

Scott Graham -- Rosenblatt Securities -- Analyst

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

Beth Wozniak -- Chief Executive Officer

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 I mentioned these virtual training sessions. We do a couple of things. We get products. We actually ship products to get it 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 can these products be used? 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 to the value and the benefits of the products and the applications.

Scott Graham -- Rosenblatt Securities -- Analyst

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 like the data farms or the hyperscales?

Beth Wozniak -- Chief Executive Officer

Yes. So data and networking solutions for us, I would say, had more relative strength, although it was down in the quarter. But we look at that and job sites got shut down, right? So if you think about getting contractors on-site to do installations, I mean all of that got shut down during the quarter. And there's some time for when some of that activity is going to take place just because everyone is getting comfortable with return to office, etc. So we still think the long-term trend here is very favorable. And for us, we have I would say we tend to be more in terms of dealing with system integrators and more through channel partners, we do have some hyperscale, but we tend not to that's not where we're really targeted and focused. We can do all levels, right, 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 the distribution channels, which tends to be more of those smaller type of applications versus the data farms and the hyperscale.

Operator

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

David Silver -- CL King -- Analyst

Yeah. Thank you. Good morning. So I'm looking at slide eight, the scenario planning slide. It looks to me pretty similar to three months ago. And I believe you're still expecting a mild to moderate kind of scenario internally. But I'm just wondering what do you from your perspective, what has changed in your overall outlook from maybe three months ago? So could be internal, could be distributor, channel behavior, security of the supply chain, maybe the macro environment. three months ago, for example, people were some people were expecting or hoping for a V shaped recovery. I don't hear that too much anymore from the managements I talk to. So compared to three months ago, maybe when you created your scenarios, what either internally or externally, do you think has changed?

Beth Wozniak -- Chief Executive Officer

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? And so I think we progressed through that, and we saw that there were shutdowns, but eventually things reopened. Now it was not back to business as normal, 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 in some of our segments sales. So and as Sara said, we expect that Q2 is the will have been the toughest quarter, all right. The other thing that I would say is just as we looked at our supply chain, two things. One, as we have these stay-at-home orders or there was always this initial reaction, employees weren't sure, our companies weren't sure and we had different places like Mexico, we had to work through ensuring that we were deemed essential to continue up and running.

So it was very disruptive. And so when we talk about some of the operational inefficiencies or COVID costs, thinking about how we had to manage our shifts or now invest in PPE and other safety measures, all very important. Those things, I think we've now got in a more better or managed situation to where that was all new, right? So our ability to optimize things, manage some of those operational efficiencies. I think we have a good perspective or feel more positive about how we manage that going forward. So those are just a couple of things. I would say, and 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 this 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. And we're not there yet, but we do expect that, that trend will be consistent. And so that's indeed what we did see. We know there's always that faster drop off, and it will come back. I'm not saying we're seeing that fast pickup yet, but it's a gradual improvement. But over time, we should expect that. And I'll let Sara add some more color from the cut standpoint.

Sara Zawoyski -- Executive Vice President And Chief Financial Officer

Yes. Maybe just a couple more points to make on the cost and the decremental side. I'd be reminisced without saying that we also saw some really good underlying productivity. I mean the team is focused hard on rapid renegotiations and particularly a focus on our direct and indirect spend. So we did see some good underlying productivity along with just quickly adjusting our cost structure and spend in a short time. So that really helped on the decremental front. And then secondarily, it's really cash. We're trending a bit more favorable to these scenarios from an overall free cash flow perspective. I mean the working capital focus and the priority that we're putting on that, I think, is beginning to pay off and would expect that to be the case here in the back half. I think the other thing to point out, too, is typically based on the seasonality of our business, the second half of cash flow tends to be where we generate the majority of our cash. So with where we're at, from a free cash flow perspective as well as with the seasonality, we feel good about the overall cash performance for the year and the leverage that we're working.

David Silver -- CL King -- Analyst

That's great color. I have kind of a semi follow-up, but the topic might be organizational sustainability. So just looking internally, I mean you've been operating or adapting to the pandemic environment for a few months now. And it looks like you're continuing to adapt as the situation unfolds. But when you look at your production, logistics, marketing, administrative functions separately, I mean, are there any areas where you think while there probably are some areas where you probably continue as you are indefinitely working remotely or more decentralized structure. But are there some areas where you think, at a certain point, it really does start to diminish effectiveness? So wild guess, but I'm just thinking product development, anything kind of on the creative side, it's a naturally collaborative function and the separation or the more decentralized structure may lead to some gaps or some lack of productivity there. So as you look at your range of internal functions, which ones do you think are sustainable for the long term as you're operating now and which ones might be less inclined to continue as you are without some diminution and effectiveness?

Beth Wozniak -- Chief Executive Officer

Well, let me try and answer that from the obvious. All our plants are running and we need people building product at our plants. And I think we've learned how to manage our safety protocols there and our shifts and gone above and beyond to ensure the safety of our employees or anyone who visits our plants. When we look at some of the other functions that are operating virtually, I think we're getting better with our digital tools. Now the future for us, I believe, is we're going to see a more flexible work environment, and it will require people from time to time to come in to collaborate, etc. But we're able to I've talked about our agile project delivery system. And if you're familiar with agile, which is predominantly used in software development, it is a very structured process with scrums that have people coming together and they are great digital tools where you're able to work ideas and requirements and then go away and execute and come back in two week sprints. And I actually see have seen us improve, and that's why we talk about accelerating our digital transformation because of our agile approach and the program management we have in place, we are actually accelerating what we do. So there's a good case and a good example. I would say on the product development standpoint, this is a record year for us.

And we've learned how to launch with YouTube videos, and we've learned how to do virtual sessions. But we do have engineers that have to come on-site to do some testing. And I think with how we're running our operations around the world and with some flexibility, we do have employees that will come into our offices safely and perform that function. So it's not as if all offices are shut down, and we're not having any engagements. So I actually don't see anything right now where I just think we're not going to be making progress because we're getting better at digital. We're very flexible in how we're managing our workforce. And the digital tools are really driving a lot of collaboration better than we expected. So maybe my last point there is, this is why we talk about safety and well-being. Because while we can do all those things, we're not people aren't used to it. And so we've done a lot to train managers how to manage their people, how to have how to balance work and home life, do all of those things, right? So we're trying to support employees with this new way of working because it's a change. And so it's change management.

David Silver -- CL King -- Analyst

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

Beth Wozniak -- Chief Executive Officer

Yes. I think the answer to that question is, there's still so much uncertainty as to how the pandemic is progressing. And we're seeing some of the countries globally that seem to have contained things early on now report new cases. So I believe we need to see globally some view that we have containment, doesn't necessarily have to be a vaccine, but we just need to know that economies aren't going to keep opening and shutting down. And I really don't think we're there yet. So that's one of the things that we're going to be looking for is some of that 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 point into what 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 went outlined July as well. Well, I want to thank you for joining us this morning. So even as 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.

Operator

[Operator Closing Remarks]

Duration: 55 minutes

Call participants:

J. C. Weigelt -- Vice President of Investor Relations

Beth Wozniak -- Chief Executive Officer

Sara Zawoyski -- Executive Vice President And Chief Financial Officer

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

Joe Ritchie -- Goldman Sachs -- Analyst

Deane Dray -- RBC Capital Markets -- Analyst

Julian Mitchell -- Barclays -- Analyst

Scott Graham -- Rosenblatt Securities -- Analyst

David Silver -- CL King -- Analyst

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