Vertiv Holdings Co (VRT) Earnings Call Transcript & Summary

Do you feel -- where do you think Vertiv stands relative to, say, Schneider and Eaton with respect to your abilities and how long you've been working on the technologies that will facilitate AI?

Yes. I would say we -- we're talking about thermal. So it's not necessarily the same type of competitive landscape that we have in power of some of the players you mentioning of power. But let me not necessarily draw comparisons here. I'd say that we feel confident we are strongly positioned from a technology and an ability to execute standpoint.

Okay. And I know you touched on this a second ago. But in terms of the timing, and obviously, no one has a crystal ball. But just in terms of thinking about an endpoint, I've heard some people say that virtually all data centers in the future will need to be able to handle AI. And I've heard other people say that, well, no. AI, if you think about, like, I don't know, 10, 20 years from now, perhaps 20% of data centers will be able to handle AI. What's your own view in terms of where we sort of wind up at some point?

My point of view is that it is more complicated than that in the sense it's not necessarily binary. It's not kind of AI, not AI. There is a lot of AI today, a lot of AI at work. Now what we're talking about is the ChatGPT type of AI. It's yet another level of AI and another level of infrastructure. So we believe that, that transition will be gradual in terms of some percent over time, but where it will exactly be 5, 7, 8 years from now are hard to tell. But certainly, there is a big installed base of data center and a lot of capacity out there. So the need to upgrade the existing stock certainly will exist and something that we are interested in as well. So we see a positive market landscape also.

And you've given me a really good feel for, I think, the volume and the revenue opportunity and the market share opportunity. I guess the other question that we get a lot is, what about the costs and therefore, the margin in sort of AI and maybe new ChatGPT AI versus some of the traditional stuff? Is there anything that we should be thinking about there? Or is it really a similar cost, similar margin profile?

Technologies are still at their infancy in many respects. And volume is definitely insufficient to be able to draw any conclusions. But again, it is a higher technology, more complex orchestration that I say, more value addition from a vendor like ourselves. So where that leads, early, early to say. But we like what we see ahead of us.

Sure. Okay. So let's switch gears and talk a little bit about supply chain, still an important topic. I guess maybe just at a high level, where would you say we are in terms of the road back to normal? And rather than focusing on price cost headwind, tailwind, which we'll get to in a second, but really, is it possible to talk more in terms of how much product are you buying on spot? Is there a -- today versus, say, at the height of the crisis, the number of products or parts that you're having a hard time finding today versus 6 months ago, the length of time in the delay today versus 6 months ago, those types of...

Absolutely. I think we were vocal during earnings call about our spot buy situation, and spot buy situation is pretty much normalized. Normalized means to go into kind of the pre supply -- general global supply chain chaos. Now there clearly are some commodities that are still tricky as we said during earnings. And we're talking about power electronics, so power electronics and some fans, again, are victim, if you will, of the same power electronic shortage but normalizing. But there are 2 aspects of -- or maybe more than 2 aspects of the supply chain situation. As we said a month ago, on the one hand is the world is normalizing, which is good news. So general supply situation is normalizing. But we have done a lot, a lot to move ourselves to a much more resilient position than we were before. Like many in our industry, we used to have probably one vendor, very often one vendor per our most critical components. [ Because we're saying, no, you are a critical performer, ] you want to be with the strongest vendor, if you will, or partner. But then we now understand that, that type of position that was pretty common in the industry, in many industries very, very risky in terms of resilience. So we have now almost all the critical components on a dual or triple source. And that's a philosophy that we inject in everything we do now. And we're moving this kind of a logic further in a sense that it's not just enough to have 2 suppliers. But we want to make sure that there is supplier resiliency, geographic or geopolitical resiliency as well in what we build. So it's a new philosophy for us to handle supply chain and to design our products. But supply chain, generally speaking, for us means also our ability to manufacture in terms of a net capacity. And like many, like the whole industry, we were behind demand in terms of available capacity. We have and we are continuing to invest. We opened a new factory in Novo Mesto -- sorry, that was my plant -- that's Freudian slip here. In Monterrey, we opened a new factory in Monterrey, Mexico. That's our largest factory for thermal management, hence very, very relevant for everything AI in the future. But we are expanding capacity in Reynosa, Mexico. We are expanding capacity in the UAE factory in Slovakia. In India -- we're building a large thermal factory in India. The other factory expansions that I mentioned are more on the power side of things. So we are on a very good trajectory in terms of the capacity we can make available for the industry.

Did you say -- I heard you say Slovakia. Did you also say UAE?

UAE.

Okay. Got you. Okay. And so it sounds like then you're feeling better positioned. The strategy is not let's just -- hey, we got through it. Let's just hope that we never have that problem again.

No, no, no. I think everyone learned a lot of lessons. And we certainly did learn a lot of lessons. And one of the strategic priorities I gave to the organization is operational excellence. Now it's very cliche, if you will, very simple. But I want to make sure that the entire organization is focused on execution and execution for our customers. So again don't forget I'm an operations guy by background. So for me, that is absolutely important. So general statement, but very, very clear actions behind. We want to make sure that we are the strongest player from an execution standpoint in the industry.

Got you. And then last question on supply chain. You have a nice tailwind now from price/cost. How long realistically do you think that, that lasts? And I guess at some point, are you seeing your customers starting to say, "Hey, well, supply chain is easing. So how about discounting me again?" And how does that look? How does that work? How do you expect that to look?

But generally speaking, clearly, in very inflationary times like the ones that we have experienced, we have all experienced, the price to compensate inflation type of argument is clearly strong as inflation diminishes or normalizes -- well, and by the way, it's not happening yet. There is still a lot of inflation, and anyway, cost of material is not going backward necessarily. But as things normalize, of course, the ability to price to offset inflation diminishes. Normally, that's what markets are for. So then it is about how good a company is at creating value for the customer, value -- you create customer value in terms of customer experience, again, operationally, but also and that I'd say most importantly and primarily through innovation and through the technology and through the total cost of ownership that you enable for your customer. If your product, if your value proposition is superior, then you can attach some more price. And that more price is, in the end, a better economic equation for your customer. So you have certainly a valid thought process around that, that customer understands. That -- another thing that we have learned during the last couple of years is that our pricing processes were not as strong as we needed them to be. We've been very vocal, I think, in the last 6, 9 months. And I feel extremely stronger now in terms of our pricing processes. And we are not done. The ability to price for value is a science that we are implementing also than we had before.

Great. Okay. So we have about 5 minutes left. I wanted to ask quickly on ESG, and then maybe we'll get to the balance sheet and capital allocation. And then we'll open it up for Q&A if we have any time left. But ESG is a big deal at Cowen, and it's a big deal because our largest institutional investors demand that we make it a big deal. My sense is that you agree with that given -- I think it was just yesterday, you filed your second annual ESG report. I'll be honest, I did not have a chance to get through that document, but...

Not yet, you mean?

No, not yet, I will. But are there any sort of highlights that maybe you want to call out? Or I guess, how would you -- is this -- how much of a box checking exercise is this for you versus something that you really -- that the Board is really -- do you guys really care about this?

No, we absolutely do care about that. ESG is important to us.

And I'm sorry, let me just -- I really want to focus more on the social and the governance first and then the environmental piece, obviously, given your industry, of course, you're going to care about that. But...

No, absolutely. So we care about all the 3 letters of ESG, and it would probably be a lengthy conversation. Really invite everyone to read our ESG 2022 report as I said was out yesterday. But on the social, it stretches multiple, multiple aspects, diversity certainly in terms of type of education and initiatives. But look at the composition of -- my team actually is pretty diverse in terms of various dimensions of diversity. And that's something that we foster. We foster a lot of community interaction locally in various countries where we are present. And so I think we are making -- we're accelerating in that direction. It's very, very important for us. I personally believe that diversity is not only important to be as compliant, if you will, in the ESG, but a diverse company performs better, performs way better, and that's proven. On the governance side, also very important. We can go through many things, but the fact that the role of the CEO and the Chairman are separate is an element of governance, strength of governance.

So okay, let's move to the balance sheet, capital allocation. I think if we think about financial leverage on a trailing basis, you still kind of screen a little bit high at about 4.3x, I think, was the number that you called out in March. And that's obviously because that calculation is still including some of the numbers from the supply chain pressure and so forth. So our model, we have -- we project that the company is down at around 3x net leverage by the end of this year and at 1.5x levered by the end of 2025. Those are just Cowen's numbers. What is your target leverage level? And is that lower today than it might have been, let's say, a year or 2 ago perhaps because we're in a much higher interest rate environment, perhaps because we've lived through the supply chain shock, and you have a more conservative view anyway?

Yes. So traditionally, we've communicated a target between 2 and 3x for the reasons you mentioned. And I'll make a shameless plug for our investor conference coming up in November. But we'll be speaking to not only long-term targets for capital allocation, but we may squeeze that range to 2 to 2.5x. For us, the importance of that leverage is to allow us financial flexibility to do strategic actions, including M&A. So we don't see that range as kind of a magic range. I mean if we need to float a little bit above it to do a strategic deal, that's fine. If we float a little bit below it, we don't see that as cash burning a hole in our pocket. And -- but at the end of the day, that flexibility comes from our ability to generate free cash flow, which has been a huge focus for us, of course, this year, and it will be going forward.

Okay. Well, you answered my next couple of questions on the capital allocation there as well. So we have just another minute or so left, but -- and I've got a bunch of more questions, but are there any questions from the room? Would someone like to jump in with a question before we finish up here? If there are no takers, then I'll finish up, but no? Going once, going twice? Okay. Well, since you mentioned M&A, I guess, could you give us a sense for what the potential targets might be? Obviously, E&I was a great fit. We heard really good things about that acquisition from your competitors who are very worried because it made their jobs harder. You had that much more product -- breadth of product to sell. Are there other sort of -- I'll be honest with you, I wasn't really familiar with switchgear and busway before you did that deal. Are there other sort of product areas that maybe we'll read about that you were reaching into going forward? Or how should we think about the M&A opportunity?

Shall I take it real quick? We don't think about something as big as E&I, not in immediate future, but you never know. You don't know what, what -- you don't know, and sometimes opportunities -- to have their own time. But in general, in this moment, we think in terms of technology gap fillers, if anything. And as we have a very dynamic thermal management environment, a very dynamic power management environment, we didn't talk about that, but there is a lot going on there in terms of transition to renewables, et cetera, that will change, let's say, the landscape on the power side of our business, and hence, the E&I acquisition very strong. So there will be technologies that we may decide to bring into our portfolio. But it's very premature. That's the normal activity. It's a portfolio management exercise. And that's what we do quite on a regular basis.

Thank you, gentlemen. We're out of time. I appreciate you being here with us this morning. Best of luck.

Well, thanks a lot.

Thanks.

Thanks a lot.