Vertiv Holdings Co (VRT) Earnings Call Transcript & Summary

So very excited to have you guys.

Gio, maybe I could just ask you, you've been the CEO for just a couple of months here, and you've been -- but you've been head of the Americas for a year. What's been the biggest changes you've instituted in the Americas under at the company? And how far along do you think Vertiv is in the Americas versus where it could be?

Sure. Well, first of all, glad to be here, and thanks for the opportunity. Yes, we're also very glad to see the progress we have been able to share yesterday the progress in the Americas with margins over 2% in fourth quarter and the trajectory that I think was testament to the hard work that it was, I can say, very broad, which we were working on everything, basically, the organization, the leadership, processes, systems and capacity. We have build new capacity and made new capacity available and more capacity is being made available. Productivity, that, for me is a big mantra and supply chain. But I would say, in a nutshell, we worked on all axis of execution and very importantly, alignment. We needed to align the organization around common goals and rally everyone around a common culture, if you want. So it's a lot of hard work. There are no single silver bullet, of course, everything around capacity, alternative sources, alternative materials and components play a big role. But I would say the single biggest thing is the alignment and the ownership and the executional focus and rigor that we have driven. And as I said, how much more to go? And that's the very good news that we are not done yet. So there is more runway available for us. When we look at the entire Vertiv, clearly, a year ago, Americas was in a very complicated situation, if you will, other regions as our numbers show, more robust in many respects. But I think that sense of a runway ahead is coming to Vertiv as a whole. I think we have margins for performance improvement and pretty much across the board. Early stage, of course, being in the role -- for this role for hardly 2 months. We, of course, started to put my kind of a fingerprint on the organization during the transition during Q4. But if you see and think about what we've done from a price perspective last year with an easy to remember $365 million pricing achievement, if you will. That clearly shows that the organization starts to be indeed has learned to execute on the things that are important. So a lot of work to do, but I'm very, very optimistic. And again, we have runway, and that's the good news.

That's very good, Gio. And then I know you've had leadership positions, both in Europe and the Americas. Maybe comparing contrast the relative strength that Vertiv has in the regions? Are there products or services or market share differences in the regions considering you tend to compete with larger Europeans in Europe. I know they're in the U.S., too. And stepping back, what do you think Vertiv's competitive strengths are as you take over the CEO role?

Yes. I think -- let me start from the back end of your question. So what the competitive strengths are? I think two elements. One is the fact that we truly have a complete portfolio in the critical infrastructure industry. So we're really one-stop shop, you may say, but also we are really kind of the highest -- very high level into locator for all our large customers and the large players in the industry. That is very important because it gives us also a lot of credibility in front of our -- with our customers, but also a lot of visibility on what's going on in the industry. And we are truly global. But if I have to compare contrast, the Americas and EMEA or Europe, there are definitely many similarities, more similarities than I expected, if you will, when I started my American venture, almost exactly a year ago. So both places were pretty much market leaders in the sectors that we serve in both places, and that's true globally. Actually, many of the things I've seen is a true global. Thermal, a strong differentiator for what we do. In both places, now we have the ability with the acquisition of E&I to have a full end-to-end powertrain story. Let's say, absolutely best in the industry service in terms of capability and presence. And in both cases, extraordinarily global. In both, we are up and coming with everything that is channel, and we offer our customers a truly global reach. So in that respect, it's very, very similar. The go-to-market models might be slightly different in different places, but nothing to kind of write an essay about not in a situation like this conversation today. What I think was the difference is the strength, the underlying organization -- organizational strength and the capabilities that were a little bit shaken in the Americas, given that the Americas was the hardest part of our business -- the hardest hit part of our business from everything that happened positively on the demand side, but negatively on the supply side. And that's what we had to rebuild. And we have, we built and we still are strengthening for the further.

Sorry, go ahead. Go ahead.

No. I think that's really it. But then if we compare to our competitors, as you were saying, it really depends on what part of the market. If we talk about hyperscale, colocation and large colos, I would say probably that the set of competitors, at least between Americas and EMEA not dramatically different. North Asia may differ a little bit further. Where we face truly different competition, more local, is on the more run rate enterprise part of the business where we may have local players. But again, I would say that in general, our focus in critical infrastructure, the fact that we are you can say, a pure player in critical infrastructure and everything data center and telecom makes us particularly focused, nimble, but also a very credible to [indiscernible] for all our relevant customers.

Just one follow-up on that. Like I think you kind of alluded to it, but like it does take time to change culture. And like if you look at the Americas sales force, they might have had one culture that was different than the European sales force where you came from. Do you think the Americas sales force is kind of where they need to be in sort of -- and their incentives are in the right place now at the price. Like obviously, we see them in the numbers, right? But like 1 of the issues if I sit here a year ago, was it seem like there was too much discounting, all that kind of stuff. Like is that stuff kind of -- I don't want to say taking care of, but has it evolved like the company wanted to.

Yes. I think the culture in general to the organization is evolving towards more executional focus, accountability and making sure that with execution also we put incentives in the right place, and this is definitely true for our Salesforce. Definitely true for our American Salesforce. We have aligned incentives. We are much clearer and much crispier in setting objectives that not only reward top line, but also account accurately of our ability to deliver margins and price. But also, we have reinforced and that's true globally that very important here in the Americas. We have reinforced everything that is our pricing capabilities. So 2 ends, one is setting the right price. So make sure that we can translate into price the value and have also a quick feedback loop that with everything that is cost evolution. But again, there is a reaction to cost. There is embedding value enterprise. So we have, I think, stepped up our ability to manage both. But -- and this is something that badly needed strengthening. Everything is project-specific price deviations. I'm pretty confident that we are now robust there. And all these three elements is what I call the pricing muscle. Are we from 0 to 10. At 10, no, but we score way higher than we did a year ago. And we get a good grace there at least in my playbook.

Helpful color. So I just want to ask you about Dave Cote because obviously, this time last year, you took more active role in the company day-to-day management and operations. So what's he doing now? And how has he helped you, Gio as you've sort of transitioned to the Americas role, now the CEO?

Of course, Dave needs no introduction. And we need that. He is a very active type of person to start with and certainly a very active Executive Chairman. I would say that not only is that -- he's an amazing mentor and a very demanding one. To start, I think Dave was so angry that didn't occur to me. Why did you have to tell me that? Still happens. And now we have a very, very good relationship and he is a tremendous help. But he's also tremendous help because he gives us all attention. But having said that, of course, I run the company and he is a tremendous support, tremendous support and someone who is involved on the -- in the main strategic areas. So I think it's a very, very healthy -- it's very, very healthy relationship and an amazing help to Vertiv and quite honestly, also very pleased with that.

Got it. And then let me ask you a couple of more near-term questions. You reported earnings yesterday, markets seemed to be holding up quite well. Orders are kind of in line with your expectations. You got a ton of backlog. Enterprise cloud, maybe slowing a little bit off of how good they were last year, but still pretty good. I think you just changed one of your bubbles, it's yellow in Europe around cloud, but you did have that one cancelation. I think somebody asked you about it and said it was -- is kind of more of an anomaly. So maybe talk about like the overall market. It seems like -- am I characterizing them correctly, Gio? Is that like again maybe a little slower but still pretty strong and you're watching markets like enterprise, but they really haven't faltered too much yet. Is that the right way to think about it?

I think you're not too far from the way we put it as a matter of fact, I think we will need to separate to dimensions. The dimensions are the market sells the investments in the industry and the dimension of what we will see as bookings going forward. And we were, I think, elaborated quite a lot on -- around a normalization yesterday during earnings call. So we're serving an industry or industries that clearly on a strong secular trend. That aims changing. If anything -- everything artificial intelligence or ChatGPT, et cetera, are going in the right direction. And this is funny also. . I was thinking about this, this morning while I was coming to work. Now we all talk about artificial intelligence and ChatGPT, et cetera, but we forgot the enormous gaming market, enormous and growing gaming market. That is also quite demanding, enormous market. So the demand is there. Capacity is being built. Now there are always fluctuations. So not here speculating exactly how things fluctuate, but one thing we know is that just like about a year, 1.5 years ago, the way we saw orders come in and not just we averted, the industry as a whole, particularly us. So the order come in was kind of unnaturally stretched to cover very long demand periods out a year, 1.5 years, 2 years worth of orders. And that was customers and the industry getting ready for lengthening lead times kind of going after scarce capacity in terms of supply capacity and hence, wanted to secure. The situation, if you will, is normalizing in the sense that lead times on the supply side are shrinking for us and then eventually for our customers. And customers understand that, that type of behavior is no longer required. And of course, they go back to a more normal 6, 9 months lead time for at least large Hyperscale, colo cloud so that everyone can maintain the flexibility that is natural in the market. So should not view this as demand slowing down. Well, demand may -- demand will continue to grow, may grow at a lower speed. That we will see. We're thinking in terms of an 8% to 10% more or less, that's what at least analysts out there tell us for what the hyperscale or colo cloud is concerned, but we will see this kind of a different pattern in bookings for us going forward. When it comes to enterprise, there are many dynamics there. Certainly a data center enterprise, and we are there trying to exactly understand what the macros will or how they will play. It is -- we continue to expect it to grow. Maybe, again, there could be an adjusting growth speed, but there are other applications, especially in the enterprise that might move in an accelerated fashion. So we're very much, as I mentioned yesterday, very keenly watching all the leading indicators of demand. And so far, we feel pretty good.

That's very helpful. Let me ask you the kind of same question, but kind of by region in the sense like you've got different things going on in different regions, right? So like in the U.S., for example, how much of it all is onshore and helping Europe? You've talked about data sovereignty is really driving growth in individual countries. Is that still continue in the early part of the game in that? And then China, like obviously, Q4 was a little slower given COVID, like how has China progressed through Q1 so far? And what do you expect for the year?

What I was describing earlier and answer your previous question was pretty much general in the world, but anything was probably more weighted towards Europe and the Americas and North America, in particular, that combined represent anyway, the biggest market. Data sovereignty, that was a big thing a few years ago, seems to be less of a huge thing, it's more latency, it's more proximity to the load or follow the geopolitics in many respects. So that is generating interesting dynamics in Europe and not only and dynamics that I would say are not unfavorable dynamics that from a clear business standpoint. I think the -- if we look at APAC, certainly China is going to move the needle quite a bit not only our industry, but all industries expect China after a New Year's Eve -- sorry, Chinese New Year to reaccelerate and/or accelerate quite a lot. I would say that thinking that our space would behave differently, would probably be wrong. So I would say that our business,our space and our industry will follow the rest of the macroeconomics in China.

Gio, just ask you quickly about like communications because we often talk about data centers. It's kind of the same trends there because you mentioned latency, so I think immediately communications like you have a lot, I think, yellow on your bubble chart, but generally speaking, like would you expect growth in that area for you guys?

Again, that's a slightly difference because communication telecom goes in different technology ways, if I will. Now we went through in many, many jurisdictions, many, many regions through the 5G wave and the yellows that you see, if you will, characterize the post big 5G rollout and the stability that always follow, that fluctuates. So that's where I present that. So we do not expect many changes. We do not expect a particularly kind of vibrant environment when it comes to telecom. It's just, I think, the yellow across the board correctly speaks volumes, if you will, on a [indiscernible] situation right now.

So just focusing on backlog for a second, you've dialed in pretty strong growth for '23, mid-teens, I think, 10% pricing -- 5% pricing, right, 10% volume. Like -- so I guess my question is, even at the end of this year, isn't backlog going to stay still reasonably high? And what does that mean for visibility into '24? I know you don't -- we've got to get through 2030 but how should we think about that?

But I think your question is very pertinent as a matter of fact. If you go back to my comments about normalization of booking rate or a normalization of lead times -- requested lead time when we get appeal from a customer and the fact that is shrinking. That's naturally even if we have constant -- the 10% volume growth that we project in 2023, even if ideally just for the pure -- put a math there, you project it going forward and you overlay on that kind of this wave on the booking side, you will see us getting out of '23 with a lower backlog than the $4.8 billion that we shared yesterday. I would say that $4.8 billion, a 70-plus percent coverage is a natural. I mean, we like it, don't get me wrong, but it reflects an industry that is not well yet, not same Vertiv, but an industry that is not well yet. So we -- think about an industry that is well, it's probably an industry that goes back to coverages that were probably under 50% or below in the past in a given -- or lower in any given year. I cannot say where we will be at the end of 2023. But again, think about also in the industry and Vertiv, in this case, in particular, with a much more capacity, much more flexibility and resilience from a supply chain standpoint, a company that is able and then an industry that are able to work on much shorter lead times than today and lead times that are, again, more normal for the industry, and you have a recipe of going back to normality in terms of backlog coverage. At what speed the industry will get there? What speed we will get there? It's hard for me to tell now.

Sure. No, that's helpful. And then I wanted to ask you about margins, I'll ask it in a couple of different ways. First, can -- why can't Americas margins sort of reach EMEA? Any sort of structural things that would stop it from doing that? And then I'll ask you about E&I just because we're talking about margins. And obviously, we saw what you did in Q4. Like what is the risk, Gio that E&I execution still is something that we're talking about in '23?

How many questions are these questions, but I'm not sure? I think 3 questions but I'm sure.

They're all related. They're all about margin, Gio.

The first was around margins in the Americas. So if you think historically, our Americas margins were higher than EMEA. So I -- no reasons why we should not get back to that situation over time. So -- but again, yesterday, we talked to some of the profit improvement programs, of course, price first and foremost, but not only, definitely not only. And those profit programs -- profit improvement programs will indeed have a positive impact across the board regardless of the geography, regardless of the line of business. When it comes specifically to E&I, we are accelerating the integration process of E&I. I mentioned at the beginning when you were asking us about our strengths and our competitive advantages, I absolutely call E&I now and the ability that it enables to offer the entire power train for the digital infrastructure and enormous assets are there. So we are very pleased. Indeed, [indiscernible] almost surprised, but how well sales synergies are playing. But again, there is a lot of integration, a lot of rigor that we have to ensure is injected in how the whole thing is run and really align the way we run every part of the company, including E&I. That's something that we are -- that we have started.

Gio, is it kind of just like for Pan Vertiv in the sense that you get this capacity up and it gives you a lot better sort of chance of hitting that $80 million of profit that you're talking about for '23 in E&I. Is that part of it?

It's capacity up, but also it's everything, procurement, management process, intelligence. How we leverage intelligence, business intelligence and how we run the business more generally speaking that can -- that will -- you will see improve.

Got it. No, helpful. And then maybe just to get David involved, like I want to ask about cash flow. But David, let me ask you about cash. Cash has lagged Vertiv's recovery a bit, as you know. Obviously, there was a nice step up in Q4, but still below your guidance. So maybe talk about, we all know that supply chain has been an issue for everybody. But talk about what Vertiv specifically is doing to improve cash to hit your target for '23 that you have and maybe longer term, where we go from here on cash conversion?

Yes, absolutely. And just to kind of reiterate what you said and what we mentioned yesterday, cash flow is critically important to us. I think we spent a lot of time effort in 2022 fortifying the P&L. And as you mentioned, the balance sheet has lagged and that's going to be the absolute -- everyone has multiple priorities, but I can tell you it's my #1 priority for 2023. Our leverage isn't where it needs to be. I think mechanically at 5.6x debt to EBITDA at the end of '21 -- I'm sorry, at the end '22. When we execute upon '23, including generating $865 million of EBITDA and generating $350 million in cash, we should exit 2023 closer to 3x, which is within the range that we've mentioned historically. But to do that, we have to execute. And as you mentioned, the inventory has been a challenge, not only for us, but across just about every industrial, but particularly acute for us. I think inventory was up almost $250 million during the year. So there's opportunities to be had across all working capital components. I think the AR -- our DSO is probably up 5 or 6 days. That is primarily administrative, mechanical. There is no fundamental change as it relates to the terms that we transact business with our customers. We do have more complicated orders, which has created some delays in payments, but all very much fixable. The inventory is a little more complicated, right, because it touches the operations with two challenges. Number one, the supply chain is much better, but it's not totally clean. And we are heading into a year where we're going to have continued record sales. So those are three things that are challenging to manage, but we have specific plans developed. And sometimes it's easier to develop plans to execute, but we feel good with what we have assumed in our guidance as it relates to working capital reductions. And I would say it's not super aggressive. So we feel good with what we have in our guidance, and we would hope to do better.

Dave, let me ask you just -- so I'll relate a question that I have here with this discussion, right? So like a year ago, we were talking a little bit about your ERP system, as you know. And like you put in a new ERP gave you better visibility about supply chain, all that kind of stuff. So one thing that people ask me is for a relatively new public company like you guys are still relatively new. Do you have the systems you need to sort of monitor and see the cash as it's coming in? Or do you still need to improve that like do you have the visibility that we hope you do. So when you give us a target on cash that you can do it. You know what I'm saying?

Yes. No, very fair. And just to remind everyone, the system implementation, it wasn't a global system implementation. Our systems in both EMEA and APAC are very mature and very good, and we have very good visibility in both those regions. The implementation was in the Americas. And certainly, it was a challenge when we initially launched. I would say we're much, much improved. I don't think you ever get to a point where you're totally satisfied, but much improved. And I would say visibility into the mechanics of daily collections and daily disbursements, that's not an issue. I would say the visibility is related to operational things, right? So if there's a delay in the supply chain and we can't produce and ship a product, that's certainly going to impact cash flow 60 days from now. So I would say we can always get better, but I think we've identified the main issues. And from a visibility perspective, I think we're covered The dynamic with the fourth quarter, it's a fair question. Didn't we see this at the end of October. I always hate giving cash flow guidance for a quarter, right? But you're kind of forced to do that at the end of the year because you have a full year target out there but you can have fairly significant swings just with one check run moving $40 million, $50 million, just 48 hours difference. And that was a little bit of a dynamic in the fourth quarter. We had some large receipts that we anticipated in December. They moved into the first quarter. So that type of thing is always going to happen, but I don't think it's a macro issue as it relates to what we think we should do from a cash flow perspective quarter-to-quarter and certainly for the full year.

Very helpful. Gio, I forgot to ask you one thing about when you're talking about backlog, that I just want to go back to you for one second because I think just to avoid confusion over the next couple of quarters, right? Like you've talked about bookings, again, being down double digits in Q1, but you do think that's more sort of normalization of supply chain versus some bigger weakness in demand. Is that fair? Or like how would you characterize the orders environment? I know you have your bubbles, but I just -- I think we need to be clear about that.

Well, absolutely. As I said, what we see today is anyway a market and an industry that continue to have demand. It's actually worth be clear about the fact that when we talk to customer, we talk 2, 3 years out. We do not talk necessarily the month or the quarter. Well, of course, it depends on the type of market. The channel is much more short term. But if we take the biggest part of the market, the data center, colo cloud to a good extent, also the telecom are -- they have a much longer rise, if you will. So what we see today is demand continue to be there.

Okay. Very helpful. And then obviously, you stood at Monterrey. It seems like it went reasonably well. Maybe you can talk about what else if anything, like I think you have your fan supplier in place all that kind of stuff. So anything in terms of resiliency, in terms of capacity that you're still working on? Or are you kind of -- with the understanding you never done, like are you mostly done with the resiliency.

In this changing world, no one will ever be done...

I said that already.

Exactly, never done. But in our case, in particular, I think we have to separate two things. One is capacity and making the capacity available. And Monterrey is definitely an example. We are investing in India because we see opportunity there, but also because we can think of India as a source of global supply. So we're investing heavily there. We are expanding our capacity for everything, E&I, leveraging our kind of a legacy presence in Slovakia, in UAE, that came with the E&I acquisition in Mexico. So we see a lot of opportunity. Clearly, long term, the industry continues to grow as we were saying. We want to make sure that we have capacity available. This capacity, of course, helps us in the short term to secure that, to make us robust for the short-term demand and the backlogs that we have in our [indiscernible] so to speak, right now. But -- so we have moved from a reactive type of resiliency programs to we are moving to kind of a proactive long term. This very morning, for example, I was in our -- my regular meeting with the global procurement leaders and also leaders in which we really take stock of where we are. So for example, fans, we now have multiple fan suppliers. We are working very -- with a lot of focus on everything, power semiconductors because another area, not just us, clearly. And certainly, the entire industry, many industries are struggling with. So I am very, very confident that what we have -- well, first of all, what we have done has made a difference, and you see the difference in our Q4 numbers. But I'm confident that the things that we're doing right now are going in the right direction. But again, this transition from reactive, we do not have component X. Let's make sure that we have other providers to proactively look at everything that could go wrong and make an early move in that respect to, okay, maybe sourcing from country X in 1.5 years now will be problematic. We have to have a plan B and a plan C so more of a kind of a geopolitical aspect to that? Or if we do X, Y, Z, we can have kind of -- we can ease our tariff situations and that is a structured approach that we now have in place. We have, again, a lot of runway, but structure it is. And I think we're heading in the right direction. But again, a lot to do, a lot to do.

Yes. We've got about one minute left, but we've got one question here in the audience if we would.

Just to tie together a couple of Andy's points on pricing and backlog. With all the price that you guys have taken for store margins, how are we confident that the degradation we're seeing in orders and the cancellation in the backlog isn't a function of the higher price and its market share loss and there's pushback and we're dealing with some price elasticity issues that we're unaware of. So how do we have confidence that pricing isn't resulting in some of that?

First of all, we always have to be extraordinarily vigilant about that. One of the things that, for example, we've strengthened in the Americas, that is -- that was -- it is really strong in the other parts of the world is a much more robust management of everything pipeline, commercial opportunity pipeline. So an ability to connect the dots between price, win rates. So let's say, we are getting much better equipped at understanding where the elasticity thresholds lie relative to where we were before. But again, just like what we're saying with the resiliency, here, the job is never done. So it's a day-to-day, transaction-by-transaction at times assessment of what is the right position vis-a-vis making sure that market shares stay very well in focus. So that's a balance that we have to strike day in, day out. But I start to feel confident in the tools that we are using for that type of assessment.

We really appreciate the time, guys. Gio. David, thank you so much for joining us. And next year, you'll hopefully be here. But we'll miss you, but we'll see you soon.

Thanks a lot, Andy. Thanks everyone.

Thanks again. Take care. Bye-bye.