Vertiv Holdings Co (VRT) Earnings Call Transcript & Summary

All right. We're back after a little bit of a break here with Dave Fallon and Gary Niederpruem from Vertiv. [Operator Instructions] Guys, thanks so much for joining me here today and spending a bit talking about the story. I don't cover the stock, but I've been watching it and know it over the years at the former owner. So maybe you could just give an update on current demand trends, what you're seeing by the end markets? Just to give an update on kind of the overall demand.

Certainly. Thanks for having us, Steve. And I can start, and then David, please feel free to join it at any point in time. So I would say one of the things, Steve, that as we reflect back over the last 12 months, if somebody was -- hey, look, you can take the company public, you're going to enter a pandemic, there's going to be all sorts of supply chain and demand volatility and fluctuations. And at the end of all of that, you're going to have generally flat sales, your profitability is going to be up, the stock price is going to be 2x of what it was when you went out public, I'd consider that a pretty successful year, all said and done. So I think in general, we're pretty happy with how the company performed over the last 12 months. Specifically, what we see right now from a demand environment is the data center space is really pretty good. The enterprise, obviously, which I'm sure we'll get into in a little bit, has been depressed just because of the effects of COVID but the cloud, the colocation business has been really, really strong. The telecom business in a couple of areas, with 5G really starting to come online, has been pretty strong. So if you boil it all down, I would say, the demand side of our business relative to a lot of the other industrials, a lot of the other companies and industries, those poor people that got hit pretty hard. We've been in a pretty fortunate, blessed position. We've executed pretty well during that same time also.

And what does it take to get these kind of enterprise customers back to the table and start spending? I mean, is it they still are kind of unclear what their structure is going to be like and who's going to be where? And is that a little bit of a nonres type of thing? I mean, I'm -- I don't -- I'm not quite sure what it is, but what is the -- what's the outlook there on the enterprise side?

Yes. I would say, Steve, we saw sort of a bifurcation in that enterprise segment. So we saw some industries and some verticals do really pretty well last year. So education was still pretty good. Financial services was pretty good. Some of the big box retailer was good as they figured out ways to make their e-commerce fulfillment flawless from a digital standpoint. I mean, that all took digital infrastructure. So we saw those folks perform really pretty well. On the downside of that bifurcation those clearly was travel and entertainment, hospitality, some of the tier 2 retailers, some of the more regional type players in that space. And I think a lot of what will draw them back in there is purely having these vaccines, having demand come back in their business. And we've had a couple of really good tried-and-true enterprise customers that we've had for years. Just now over the last couple of weeks that have come to us and said, hey, I was going to place these orders a year ago, but I postponed them because of COVID, and I'm now ready to start releasing now. And it wasn't 1, it wasn't 2, it was 3 distinct customers from 3 distinct different verticals that all said that they were going to do that over the last couple of weeks. So independently, none of those orders are going to flow the backlog number up by 50% or anything crazy like that. But when taken in total, I think it's a good sign and a good sentiment that some of that enterprise spend in those more distressed verticals are really now starting to come back.

Is there when you -- when you think about kind of like the product sets that you guys sell, was there a major difference in kind of the demand for the types of products as well as we just talked about kind of like the verticals and the end markets, maybe the types of products you guys are selling, any major moving parts there?

Yes. I would say we're knowing for 3 or 4 big segments of our business, I would say. So both the power and the thermal segments performed about the same. So they were flat to down just a little bit, but those 2 performed relatively well in concert. The business that we sell primarily through the channel, which is all what we call our IRS business, so smaller power, smaller thermal racks, things like that. That was down a little bit more, which you would expect just because their end markets are more vectored towards IT channel and the enterprise segment. And then our service business was down a little bit, but that was primarily because of getting site access in a lot of these jurisdictions, particularly in Southeast Asia and in the U.S. So we're excited to get that sort of flush all that stuff through the system. And as we get into 2021, we expect growth in almost every one of those single product lines.

Got it. When you think about geographies, what drove such strength in China last year? Was that generally kind of infrastructure? Can you just talk about what the key drivers were there?

Yes. So Q1 for China was certainly down since they got hit with the pandemic first. So we saw them have a difficult time in Q1. After that, I would say, Q2, they started to come back online. And really in the second half, we saw an acceleration, both on the data center side as well as the telecom side. So some of that, we think, was government stimulus related. Some of that was just the Chinese telecom carriers deciding that they were going to go all in on deploying 5G so we saw the likes of China Mobile, China Unicom, China Telecom, all really start to release orders and roll out 5G in a pretty aggressive way. And there was even some signs of C&I growth in our China business as well. When you think about some of the light applications, they're putting in a lot of infrastructure in airports, a lot of infrastructure in light rail and train. And a lot of our products fit into those applications as well. So it's really data centers, telecom and C&I, all 3 of those segments saw pretty good growth in China, particularly as we accelerate into the second half of 2020.

And I think you guided Asia Pacific up pretty strong, with very strong growth in the first half. But would imply some declines in the second half. Is that -- are we reading too much into that? Any large projects to be aware of that create a tough comp? Or how do we kind of look at first half versus second half?

Yes, I certainly want to get my colleague, David Fallon, involved here. So I'll let him join in the fun and turn that one over to David.

Okay. So numbers are involved. So the CFO has to talk. So yes, so unquestionably, we saw some tailwinds in the back half of 2020 related to 2 things. Number one were the large projects. And as Gary mentioned, they were both related to the data center and also the telecom market verticals. In addition, we had some specialized industries that we service in China. One that we've -- bullet pointed in a few of our presentation is related to wind power. And it's a pretty lumpy business. A little bit lower profitability, but we definitely saw some tailwinds last year for wind power. And it's really hard to forecast what we anticipate for that over the long run. So I think if you look at the numbers, we're probably implying something like a 50% growth rate in the first quarter for APAC. And a lot of that is related to the COVID impact that we saw in 2020, that was concentrated in the first quarter last year. And then the rest of the year is forecasted relatively flat, as you mentioned, and that's the math. I think if you adjust for those larger projects, including the wind power, the organic growth rate is probably between 6% and 7% in the back half of the year, adjusted for some of that lumpiness.

Got it. What is the wind power? Just remind us of what the wind power product is?

Yes. So at the base of a lot of our UPS and power business really sits an inverter and inverter technologies and controls. And so that wind power business will help take the native power that comes from that turbine. And then when you inject that back into the utility grid, you have to step that down or invert that and so that's a large part of what that wind power business will do. They'll be -- think of it as, in layman's terms, sort of like UPS in converting that wind power, that native power that comes in and then injecting that into the grid. And so there's a lot of sophistication in the inverter, in the controls, in the service team that takes place, which has a lot of elements, very similar to what we do in the data center side.

How big of a business is that?

Globally, it's just, give or take, $100 million probably. But to David's point, we've seen much accelerated growth in that more than we even anticipated, as you step back 2 years ago, we've seen outsized growth in that. Some of it stays in China because a lot of the business is in China and the other part of it are exported into mainly Europe while another part where wind is obviously really big.

Yes. And that can be kind of lumpy. Is that a business that you guys have always had? Or did you add that in an acquisition? I don't recall Emerson talking about that. Maybe they did, I think...

No, I'm sure they didn't. It would have been very, very small at that point, Steve. In fact, we probably wouldn't have even talked about it in the early stages of Vertiv 5 years ago or 4.5 years ago. So it's always been resident in the company. It's just now, I think we figured out how to penetrate that space a little bit more. We figured out how to design product better. And some of it is government subsidy back, but we've seen a point now where in some of these countries in municipalities, you don't need as much government subsidy to sustain that growth quite as much as you would have a couple of years ago. So I think it plays great into sustainability story, which obviously is big. So it's -- yes, you're not wrong in terms of nobody would have talked about it, but it's sort of a nice little nugget that we're mining right now in a really pretty nice way.

What are you guys seeing in the Americas? I think you have a flat outlook there for 1Q. How do you see the demand trends there progressing over the course of the year?

Yes, I can start, and then David can jump in there, too. So I would say, Americas certainly got hit last year because of enterprise and IT, almost more than anywhere else. The other thing was we saw a lot of the -- when we talk about demand moving around for some of the cloud and colocation customers, that just really means in the Americas, there was a big build out that occurred in '18 and '19, and then they digested a little bit of that in '20. Whereas unlike Europe, which we saw huge growth rates, there was a lot of demand to build greenfield data centers that we saw last year, and we'll continue to see this year. In Americas, we think most of that digestion is probably over out. So between enterprise starting to slowly come back online. And then just good old fashioned, talking to customers and voice of the customer. We see the cloud and colocation companies continuing to want to build-out in all regions of the world with the Americas being no exception to that. So Dave, I don't know if you want to add anything else to that, but certainly, I'll let you comment.

No, I think you hit all the pertinent points. I think what we've included in the guidance is relatively flat year-over-year in the first quarter. And the big driver there, as Gary mentioned, is that COVID didn't really impact the Americas, if you kind of go back a year. It didn't really impact the first quarter. So relatively normalized comp year-over-year. But the back half of last year, certainly impacted by COVID due to site access. So if you look at the full year guidance, which is probably mid-single digits, a lot of that growth is going to be in the back half of the second quarter and then the second half of the year.

Got it. And then in EMEA, you guys grew pretty strongly in the second half, Middle East was up strong. Any projects there that we have to think about as being a little lumpy, timing-wise, to kind of create a challenging comp into '21?

Yes. I can start and Gary -- so...

I'll address all the numbers questions.

Yes, that's -- I'm just going to say numbers, no background or anything. But...

That's fine. That seems to be the way this market is run these days. So that...

Exactly. So we made some pretty strong traction in EMEA despite the COVID headwinds. I think for the full year, EMEA grew probably 2% or 3% organically in 2020 versus 2019. And that's despite a lot of the same challenges that we saw in the Americas. And a lot of that traction was related to strength with several colocation customers. And specifically as it relates to the Middle East, there was a larger project in the Middle East that we were able to deliver in part in the third quarter and some in the fourth quarter. So we will continue to have this dynamic with a little bit of lumpiness with these large projects. But as we look at growth in 2021, there's going to be a fair share of those larger projects in '21 as well. So I think our full year projection is probably mid-single digits in EMEA. And we have pretty good visibility going out 6 months. I would say there's probably some upside opportunity there for the full year, and we'll have more visibility and talk about that in a little bit more detail at the end of the first quarter.

How do you define kind of a large project? What's a large project for you guys, dollar value wise?

Yes. I mean, there's definitely some subjectivity there. We generally had a cutoff line of about $10 million. And like I said, there's some judgment. There are some larger deliveries that could be $50 million, but it could be $5 million of regular deliveries over a period of 18 months. We wouldn't necessarily consider that a larger project. But if it is a first-time install, so a new data center where they're doing the initial load of the data center, if it's over $10 million, we'll consider that a larger project. But we do have some projects. We had a large project at the back half of 2019, that was $50 million. But in general, they're anywhere between $10 million and $25 million, some of the projects that we would classify as large.

And those have kind of grown in size here in the last couple of years, I mean, with all the build-out that's been going on?

No doubt. And for us, probably even more so than the industry because if you recall, Steve, this business under prior ownership didn't really focus on colocation and hyperscale. We made some traction with both those customers, I guess, in the first 18 to 24 months after the separation from Emerson, but we're really starting to see very heavy traction there over the last several years. And that continues to be a real significant portion of our growth.

Stepping back and thinking a little bit longer term, so I'll go like thematic and focus this one at Gary a little bit. What's the driver of the step down from 20% annual growth in IP traffic to kind of a low to mid -- to like a low to mid-single-digit growth rate, just theoretically here?

Yes. We try to keep this as simple as possible. You can definitely tell the David and I is yin and yang, that's why this complement works so well here, though. So I would say, Steve, there's probably 3 or 4 big things. So one is, if you assume data traffic has grown, to your point, at 20-ish percent, and we think the market for our basket of goods is going to grow at 3% to 4%, 3% to 5%, something like that. That delta is primarily created because of 3 or 4 things. One is this concept of virtualization, which means if I go back 10 years from now, typically, if you had an application like email, it ran on a dedicated server. What virtualization did was it allowed you to run multiple applications on the same server. Therefore, that was more efficient for the data center operators. So virtualization was one of them. The thing about virtualization is, 10 years ago, it was at 40%. Today, it's probably at 85%. So most of the runway and efficiency is already sort of built out there from a virtualization standpoint. Number 2 would just be good old energy efficiency. Even if you look at our products, 10 years ago, efficiencies were probably 90% up for our products. Today, they're at 97% or 98%. So we're almost getting to the top end of what you can do with efficiency, but efficiencies, certainly, historically would have been a headwind. Temperature ratings, so we have a pretty big thermal management business, over $1 billion when you think about the temperature that the servers and storage and network that you need to operate in. People are always trying to push the boundaries of how hot you can run those things. But there's a limit there where you don't even want people operating in a room that's going to be much hotter than 80 or 85 degrees Fahrenheit. So we think that the temperature is probably about as high as it's going to get for the most part. And then the last thing is just redundancy in the architectures. So again, you sort of just compare and contrast to a decade ago. Most data centers would have built off of what's called a 2N redundancy or 2N plus 1, which means if I needed 5 UPSs to run that data center, I would have 10, I'd take the 2 plus -- 2x to 5, which is 10 plus 1. So I'd actually have 11 UPSs, when I really was only using 5 of those. Over the period of the last several years, people have found different ways to build redundancy into the system, to the point now where if they're going to deploy a network that needs 5 UPSs, they'll go with an N plus 1 redundant architecture, which means now I just use 6 UPSs in total. So we would have went from needing 11, years ago to not only needing 6 today. But at some point, you're not going to go any below N plus 1 because you're going to always have some level of redundancy, and you always have to make sure you can back up that load. So those are probably the 4 biggest things, Steve. But when you walk through each one of those, what we talk about is those mitigating factors are mitigating themselves. I mean there's always so much more you can eke out of those things. Now there'll always be the next generation, whatever it's going to be to try to continue to eke out some of those efficiencies. But those are the big 4 that we've historically seen that have sort of compressed that 20%-ish down to 4% or 5%. But again, most of those, that we know about today, are mitigating themselves.

And you ultimately think that, that leads you guys to growing longer term? What's kind of the standing long-term growth target for you guys?

Yes. We've always said that we want to grow about 1.5x the market. So in years like last year, which the market was negative, we grew, we think, at 1.5x that. And if the market grows 3%, we'll grow 4.5%. Market grows 5%, we hope to grow 7.5%. So we haven't put a specific number on it. But market, we think, through the cycle is sort of a 3% to 4%, 3% to 5% growth rate.

Okay. So it still kind of leads you to that, call it, mid- to high singles, like 5% to 7% type of number?

I think something right in that range is probably about right.

Right. Maybe 5% to 6%. Do you guys feel like you're over-indexed to any particular part of the -- you mentioned that you pivoted more towards less enterprise over time. Are you still over-indexed to enterprise versus cloud, hyperscale and colo?

Yes. Super, Steve, questions. I would say if we are, it's only by a hair at this point in time. So if I go back into, again, sort of think just pre Vertiv, we probably had 5% to 7% of our data center business was with the cloud and colocation companies. Today, that same number is almost 30%. So we've made tremendous strides penetrating the cloud and colocation market. And it hasn't been because the enterprise business has fallen off, the enterprise business is generally flattish at that time during that same time. We've just grown the cloud and colocation business that much. So I would loosely say 30%, give or take, in any given quarter, is the balance of our data center business that's vectored towards cloud and colocation. The market is probably between 30% and 35% cloud and colocation in terms of spend. So underindexed, maybe a hair, but rapidly catching up from a place just 5 years ago where we were mid-single digits, and now we're all the way up to 30%. So there's more room to run there, but we've done a really nice job pivoting into those growth markets.

And notwithstanding what's happening with COVID here, that's still the most attractive growth part of the market?

Yes. I think that will always be the fastest-growing part of the market. As things come back online, we think this IT channel and Edge application in play will also be very, very attractive and Edge is going to play out both in enterprise customers as well as telecom customers as well as cloud and colocation customers. So this advent this concept of edge has a lot of -- there's a multitude of different applications to it. But I think that will be -- we're pretty bullish on the Edge and servicing some of that through all of the different routes to market as well.

Can you talk about that a little more, the Edge opportunity?

I can. So think of Edge in a number of different ways. The easiest way for me to think of Edge is let's take a big box retailer. Traditionally, they would have had a centralized data center or centralized data centers and everything would have went back through that mother ship. Now the distribution facilities are almost as important as anything in their lifestyle because that's how they're servicing and shipping all the stuff that -- my door bell rings probably like yours, 2 or 3 times a day where somebody flattens up the knob. That's because of the e-commerce capabilities in a distribution facility as well as in the actual stores themselves, where they're doing printing labels and they have digital signage in all these stores now in video and cameras and security. All of that is data intensive. So before where the core data center would have been our primary market, now with that same big box retailer, the core data center is a market as well as we're putting all sorts of critical digital infrastructure into those distribution centers as well as into those stores. It's not just backing up the POS equipment at a register anymore, it's -- there's tons and tons of racks and rows of data and equipment that are in the back rooms of those stores and data center to make all of this connectivity work. And so that's -- that will only continue to proliferate as we go.

Right, right. Maybe an update for the opportunity on 5G and your products? How fast has that been growing and how sustainable?

Yes. So we saw definitely an uptick in 5G in 2020, primarily both in the U.S. and as well as China, what we talked about earlier. So those 2 markets are clearly front and shoulders and ahead of anywhere, any other geographies right now from 5G deployment. There's pockets of growth that we're seeing in Southeast Asia. We're starting to see some things pop in Western Europe, but things in Eastern Europe, things in India, things in Africa, things in Latin America haven't really started with 5G yet. So I think this 5G deployment has got a good 4 -- a 3- to 5-year run ahead of it, with the demand shifting around just based on how aggressive countries are going to be. But we definitely saw an uptick in our telecom business last year, primarily driven by the U.S. and China and specifically driven by 5G in those 2 areas.

So I mean, a pretty decent amount of growth for you guys coming through here, I guess, after maybe some lumpy comps in the second half, but it seems like the trends are definitely with you on these big themes.

Yes, I think that's right, Steve. Now I mean, the telecom carriers are always shifting their spend around. So if 5G is not all incremental spend above what they did with 4G, they will always arbitrage that type of stuff, so it's not all additive. But net-net, 5G deployments are still a good thing for Vertiv, and I think there's a good couple of year run still ahead of us there.

How do you guys define recurring revenue? And how does that kind of -- how did that perform for you in this more challenging environment?

Yes. So but let me take sort of a giant step back and say, loosely speaking, of our total portfolio, about 40% of our business is more project oriented. And then the other 60% is recurring. So let me walk through the project and then I can get to the recurring pretty quickly. So a project for us, to David's point earlier, a customer comes in and says, I need to build out a 20-megawatt data center. And let's just say that the first tranche of that is I'm going to build out 10 megawatts and it's going to cost me $10 million just to keep the numbers easy. That 10 megawatt, $10 million install is what we would classify as a project piece of the business. Then over the subsequent 2 to 3 years, they're going to come back in, and they're going to want to add and refresh to that original 10-megawatt and add those other 10 megawatts. And maybe they'll do 2 megawatts a year for the next 5 years to get to the full capacity. Those 2-megawatt increments that they add in each of the next 5 years at a rate of, let's say, $2 million a year would be considered part of this recurring or flow business. So there definitely -- it's not like a software annuity piece to recurring. But when you have enough installed base, we have gigawatts of powering, gigawatts of thermal that are out there, when you have enough data center of installed base typically that flow and recurring business comes through pretty naturally. So that's the product piece of that. Then there is -- our service business in total is about $1.3 billion, $1.4 billion, and about 80% of that is maintenance business, which reoccurs on a very, very repetitive quarterly or annual cycle. So you put sort of the 2-megawatt chunks for the next 5 years of the product piece together. Coupled with the $1 billion of the service annuity business that we have. And together, that's what sort of forms that 60% of the business that is really sticky, pretty high margin, pretty good profile business for us.

Got it. How much of that is like contractual, how much is transactional? And how much is software?

I'll take those in reverse order here and make sure you hold me honest here. So I would say software is very little....

That's for Dave. Maybe that's for David, I don't know.

I would probably answer that even for reference. So I would say software is very, very small. The software piece in our portfolio is much -- software for us is much more meant to be a differentiator for our products and to enable our service organization. That's how we view software in the company today. So the software revenue very, very minor in the grand scheme of things. The service piece is about $1 billion of that, and then the rest of that would be considered product.

Got it. Can you talk about the ramp in R&D and sales and marketing? And ultimately, where you're going with that to kind of incrementally take some market share and where the most exciting opportunities are?

Yes, absolutely. I can talk for probably more than the time allotted on those 2 topics right here. So let's start with the R&D first.

Let's see, 3 minutes.

No problem, no problem. Give me the time frame we -- ping me when I'm coming close. So the R&D side, I would say, the vast majority of that R&D spend, probably 90% of it really more E&D. So we're thinking about projects that are near-term, products that we can launch anywhere from 12 to 24 months. There's no -- we're not solving nuclear physics and any of this money here. So the vast majority, 90% of that spend, is going towards product development and road maps that we can action over the course of the next couple of years. So that's sort of Number 1. Number 2 is a big focus of that is really doing things jointly with our customers. One of the biggest things we found, and it sounds easy, but it's hard to earn the largest cloud and colocations trust, but when we do joint development agreements with our customers, it's really sticky, and we come up with a really, really good product at the end. So we're doing a lot of joint development agreements with those dollars with our customers. So on big power, on big thermal, next-generation energy storage stuff, different ways to help them have their data centers to be sustainable. I mean that's where a big chunk of that money is going. Another big chunk of the money is going into service the edge in that it channel through our IRS products at the integrated rack solutions segment. And so we've refreshed that entire product line, and we're continuing to add SKUs and parts every day to make us relevant to -- because with the reseller channel, you want to be relevant. You want to have a big enough line card that you can be relevant to them. And that's the part where we're at right now. And now we're starting to take those and build solutions and digitally enable those solutions for all of our partners. So a lot of focus on the really big stuff in cloud and colo with joint development agreements and a lot of stuff focused on the product development from a go-to-market on the reseller piece of it. The sales and marketing piece comes into play because what we didn't want to do is we spend all of this great money and have the world's best products, and not be able to tell anybody about it. So a lot of those sales and marketing efforts are really towards sales enablement, demand generation, application engineers in the field, salespeople on the field that can really help us sell those products when they are ready to come to market, because we didn't want to have -- it's like Popeye, he didn't want to have huge forearms and dinky biceps. So we wanted to make sure that we could put together everything that makes sense when it comes to launching a product all the way from doing voice to the customer to servicing that customer once it's already out in the field. So that's the end-to-end spectrum of always at Vertiv product development, that's what we're talking about.

Got it. I have a couple of questions from clients here. First of all, how should we think about the pace of Vertiv's growth in the IT distributor market? What are the key drivers of that growth? How big is the end market now? And how big could it be in 2 to 3 years?

Okay. Again, I'll try to remember most of those. I think I'll hit the -- all the...

IT distributor market, growth size, how do you guys plan to grow there?

Yes. So we have about 10% market share today in that it channel space. And that business is, loosely speaking, for us, about $450 million give or take. So it's a multi, multibillion-dollar market that is in front of us. That's where we sit today. Our plans certainly are to grow even faster than that 1.5x rate in that IT channel space. Whether that comes this quarter, next quarter, the following quarter, the timing of that is up in the air a little bit, but certainly, over the course of -- through the cycle over the next couple of years. We should be able to meaningfully demonstrate a number that's much higher than $450 million. So I won't put a number on it, but it's much higher than just even growing at 1.5x at market rate, if we do this right over the course of the next couple of years. So really excited about that and both the reseller and the distribution piece of that.

Got it. Second one is with the oncoming growth of electric vehicles, which precedes autonomous vehicles, eventually, do you currently have content and charging stations? If so, how much? And will that content growth accelerate with the progression of EVs to AVs?

Yes. So I'd say directly -- when you think about charging stations, that might be on a corner and you're plugging somebody's Tesla into that, we don't play there today. But I think that we do 2 things that are very relevant to that. One is just as more autonomous vehicles and more EV charging comes online, that's naturally going to require more processing, storage and networking power for both data centers and telecom. So there's sort of a second derivative benefit that we'll have from that. That's number one. Number 2 is closely coupled to that, though, we are doing a lot of work in lithium batteries as it relates to things that we can do both in the C&I space as well as in the data center space. When you talk about inverters, controls, lithium ion batteries and service. There's a lot of things that we think that we can do that would be tangential to sort of a core data center business today. So it might not be direct EV charging stations. But we think there's a second derivative benefit. And we think with the core technology we have, there's going to be other things we could do with that -- those inherent characteristics.

We got about 5 minutes left here, shifting a bit to margins. You've got a midterm plan to get to 15% to 16% from the 12% expected in '21. What are some of those key levers to get to that entitlement? I mean that's a pretty big jump over time. What are the biggest moving parts there?

Yes. So just some background. We've done a transition as it relates to our primary financial metric. We -- and Steve, I'm not sure how or where you are at this, but we went from adjusted EBITDA to an adjusted operating profit. And so we've had to re anchor some of the specific numbers that we're targeting. But the concept and the magnitude of the margin improvement goals have not changed. So we're at 12% based on our '21 guidance. A like number for last year was about 10.4%. So we saw about 160 basis point improvement in 2020 or anticipating in 2021. Long-term goal is 16%. And the primary drivers of that are going to be both on a contribution margin basis. And the way we look at our business internally, and it's very consistent with the way we explain it externally is not necessarily looking at gross margin and SG&A. But it's variable costs, which drive the contribution margin and then fixed cost. And including those fixed costs are certain elements of cost of sales and also SG&A. So a huge philosophy of Mr. Cote is keeping that fixed cost based constant. And that is something that is going to be a very significant lever for us going forward. We could see some creep there as it relates to increasing R&D, but we've launched a program dubbed the Vertiv Operating System, which is mirrored off the Honeywell operating system, that we will be able to use tools there to keep those fixed costs relatively constant. And that alone, even without any contribution margin benefit, could be 75 to 100 basis points of margin improvement per year. And when you look at the contribution margin and inherent in our 2021 guidance, is about an 80 basis point improvement in contribution margin. The 2 most significant levers there are procurement actions and also pricing. And the procurement benefits, these are opportunities that we probably have a lifespan of about 2 to 3 years based on where we were to where we should be. So this business historically was built through acquisitions, very decentralized. And if you went back even as recently as 24 months to 36 months ago, we really had 20 different procurement departments. And what we've done is instead of operating like 20 $200 million of businesses with no leverage, we've created a global supply chain of global procurement function. And we're able to not only take advantage of the leverage of size, but also be a little bit more strategic in some of our low-cost geography purchasing. So both of those levers will definitely contribute to getting to that 16%. But that 16%, we just look at that as really an intermediate goal. In the long run, we see no reason why this business can't be at 20%. Now one thing that we have not done is to put an artificial time line in place saying we're going to get 100 basis points a year. So to get from 12 to 16, we're going to -- that's going to take 4 years. It is going to be very much dependent upon the amount of reinvestment we do back into the business. So we're reinvesting about $65 million in 2021 in R&D and some market initiatives. That could ramp up. That could drop back a little bit. That's all dependent upon the opportunities that we see for any particular year. And the reason we don't give a time line is we don't want to create -- effectively putting ourselves into a corner to make decisions that aren't right for the business in the long run.

Right. I think we have 1 more question from the audience. Is that Dave Cote's book behind you on the bookshelf?

It most certainly is. I get a $5 per minute royalty for every fireside chat that I display that. So...

That's good, Dave. You'll be able to buy cup of coffee every day from that.

That's right.

This is worth a...

That's right. On sale on amazon.

I think that's the time we have here. So I really appreciate you guys coming, and hopefully, you've enjoyed your day, and we'll talk soon. Thank you.

Appreciate it. Thanks, Steve.

Thanks, Steve.