Vertiv Holdings Co (VRT) Earnings Call Transcript & Summary

Good morning. I'm Andrew Obin, I'm BofA's Multi industrial analyst, and we have the management of Vertiv with us. We have Gio Albertazzi, company's CEO; and David Fallon, company's Chief Financial Officer. The format is going to be -- and we have Lynne Maxeiner in the audience. Thanks so much for making this possible. This is our top idea. It's on the U.S. 1 List. So very excited to have the management team here. And we're just going to go right into Q&A into fireside chat, yes.

Thank you.

Thanks so much. Thank you for being here. So maybe we can start with the big picture. I guess, about 1 year ago, ChatGPT flew into the mainstream and NVIDIA launched its H200 AI chips. Gio, you've been in the data center business over 25 years. What's the closest historical analogy to the current AI investment cycle?

It's slightly different than anything we have seen before. If we go back to the probably 2 biggest cycles, the early 1 is the Internet acceleration kind of very, very early 2000 that didn't -- and very well with certainly a bubble at that time or we can go back to the cloud business acceleration, the cloud services acceleration. But this is something different yet. I think we have much more maturity in terms of the industry as a whole. Certainly, way more mature than it was when the whole Internet acceleration first happened. But also we have a much more robust capital structure behind that. And the other thing that we see is that the use cases and the adoption of AI is actually happening. So I would say different from what happened before and faster than what we see happen -- we saw happen with cloud computing in general. So if anything, it's building on the experience of cloud computing.

Depending on sort of the definition is for market share, but we estimate that the top 3 vendors, Vertiv, Eaton and Schneider have about half the market. None of you have done a significant amount of M&A in the data center space. Eaton with Triplight is really the only large deal in the past few years. So I guess the question is why?

Well, if you look at the last couple of years, a couple of -- 2.5 years, as Vertiv, we have done 2 significant acquisitions. One large-ish, at least for our size at a time. The E&I acquisition that significantly stretched portfolio. And another one recently important from a technology side, CoolTera that again strengthened our liquid cooling presence. M&A is part of our capital allocation strategy. We're much more, let's say, structured in the process than we were in the past. It is a fundamental piece of our, let's say, the way we run the company. So I can't speak for the others. But we will continue to do the moves that are necessary to continuously lead the space.

And maybe we've been getting a lot of questions on CoolTera. Just maybe just expand a little bit what it is strategically you've achieved with CoolTera acquisitions? Like what -- is it IP? Is it capacity? What does it give you?

It's fundamentally IP. We've been cooperating and partnering with CoolTera for quite a few years before we pulled the trigger, so to speak. And just simply because in the very early stage of a technology, you have to add your bets, your internal bets, your organic and inorganic bets. And that's what we did. Definitely acquiring one of the leading technologies in the liquid cooling space and adding to our portfolio and our thermal chain, the in-rack part that simply was not there as a market as everything was air cooled and it was just intrinsically built in the rack. So not so much capacity. As we explicitly shared with investor community, we are rapidly making capacity available for the market and for our customers using the -- leveraging our procurement and manufacturing footprint to expand the liquid cooling capacity.

So we'll definitely talk about capacity later, but maybe we can just talk about sort of AI-related demand. So Vertiv -sized AI benefit at 300 to 400 bps benefit to growth. What does that imply for AI penetration of the data center market by let's say, 2028, 10% of megawatts, 20%?

2028 is -- we're going fast, but it's still fairly far away. I would believe probably more than that. I don't know how much.

More than 20%?

More than 20%. I don't know how much. But one thing is from an infrastructural standpoint, it could be -- it will not be a clear delineation of what is what. One thing that we see is a lot of the data centers that are being designed today are designed with -- for being hybrid and being future ready. Not necessarily a data center owner today knows what the load in terms of high density, low density, liquid cooling, air cooling, how that profile will change over time. So we tend to talk with our customers about how to make that transition gradually possible with the infrastructure. That has implications in the way you design the cooling part, the way you design the power part. But again, these conversations confirm the fact that there is a fluidity out there. And we'll -- what exactly is AI? Is AI 100% high density? Or is it a little bit of a mixed situation there? So a lot yet to be defined in the future.

All right. Got you. As probably everyone in this room knows, orders were up 60% year-over-year last quarter. And even our strategist knew that number. So guidance is for sequential decline in second quarter. And I think part of it is timing of sort of larger orders. But can you just talk about what is a large order for Vertiv at this point? Is it $50 million, $100 million, $200 million?

All the numbers that you mentioned, I'll be good. So that is absolutely without saying. I would probably not focus so much necessarily on the size of the individual PO. That could be almost, let's say, deceiving a little bit. So Dave can have -- we like to think in terms of build-outs. You're going to have a gigasite or anyway, a very large site that is built in chunks. So it's very important to be there with the first step with -- so that then you can roll out because data center owners like to have the same infrastructure across an entire campus. So it's not so much about the individual PO, but it's about what that represents in terms of the opportunity that you have across the build-out in specific. So we talk about big campuses. We talk about large accounts. And yes, $50 million to $100 million, $200 million are certainly big orders.

But what do you think is the key driver of the cadence of order activity through the year-end? What do you think is going to determine it?

I would say the -- from here to year-end you were saying?

Yes.

It's just a pipeline and how the pipeline translates into orders. So again, we've been explicit about year-to-go book-to-bill bigger than 1. And again, the rest is pipeline translation into orders. What we noticed, and we were vocal about that, it's a pipeline, let's say, speed is accelerating.

Right. And you did say last quarter that pipeline for AI project doubled between January and March. And generally, Vertiv would get involved after the land purchase, electricity agreement. And early layout is done. So how should we think about the pipeline being ready to convert to orders over the next 6 to 9 months, given that what has to happen on the ground?

I would say that normally, we think in terms of cycle in the pipeline of that kind of orders between 3 to 9 months. So yes, that conversion should be there. But mind you, there is always a win rate attached to that. But all the rest being equal, we are positive about the translation of that into orders going forward.

Got you. And your target having 25% spare capacity in your own factories. So where did you stand on that metric in the first quarter? And second, '24 CapEx guidance did go up a bit with first quarter results. Is capacity keeping place with the backlog?

Sorry, there are a multiple angles to your question. First of all, let's call that 25% is a wiggle room or margin that we like to keep in our capacity as we design capacity for the future. Our capacity clearly is consistent with the trajectory of the business and is consistent with the trajectory of our pipeline. Hence, it's consistent with our backlog. So expect an ongoing capacity growth trend for Vertiv. That 25% is built in the way we think about our infrastructure. So we do not design for 24/7, 7 days a week. We typically design for a little bit sub 2 shifts on average. That's not necessarily true always for every line of business in terms of exactly where we are in terms of loading, because we know one thing is sure about a forecast, it will never be exact. So you will have peaks or you will have things happening a little bit earlier or a little bit later than you forecast, and that 25% gives us the chance to follow demand and absorb the difference between forecast and the demand. So that is always going to be there.

And just thinking about just capacity additions because I think you sort of talked about doubling it. And if you look -- if I look at your announcements, there really does seem to be a lot of announcements coming out of burden of capacity, but it's very regional, right? You have sort of Central Europe, you have India, you have North America. So how should we think about sort of your global supply chain? Should we think about it sort of these regional verticals? Or should we think about your supply chain as global, can you use, right, because different article standards globally. Do you have access to your global supply chain, if you're in North America? Or is it really region for region?

It is multidimensional in its very nature. There are 2 aspects. One but when we announce things that are -- when for example, we announced India thermal factory in Chakan, close to Pune is because we have that. But when we think about our supply chain, we think in terms of a global supply chain, global manufacturing footprint. Let me separate supply chain like the stuff that we buy from the stuff that -- like the input components or raw material and in our manufacturing. We increasingly think globally in terms of accessing the capacity and serving globally. When we do that, though, we are acutely aware of the importance of being -- serving a market in the proximity of the market at the same stage. That is a matter of resilience that is a matter of shorter supply chain. So we balance the 2 facts. We have capacity. When we look at capacity, we look at capacity globally and region for region. So don't be misled by maybe a regional announcement will be, for example, when we are communicating about liquid cooling capacity or we were communicating about switchgear and bus bar, busway capacity, we were talking always in terms of global capacity, because there is certainly a global manufacturing footprint that is being utilized. But again, a lot of attention of serving, for example, the North American market and having the right capacity in North America to serve the North American market. The same is true for the supply chain like raw material and inputs. Always think global, but always think in terms of building redundancy within the supply chain. And we're becoming very scientific about that.

And specifically, maybe we can just sort of drill down into North American supply chain. Clearly, you have made efforts over the last 3 years around adding suppliers and having alternative components. So where are we now? And what level of supply to commitments are you seeing now versus a year ago?

So the efforts that you mentioned here is certainly what we've done for North America, but this is our approach globally. Already a design stage of new product launch, we make sure that we have redundancy built into supply chain and multiple suppliers for -- in terms of raw material and raw components. And at the same time, we have developed tools to make sure that, that kind of intrinsic resilience is maintained. As a consequence of that, we -- relative to a year ago and certainly even more so 1.5 years ago, the stability in our supply chain is a totally different level. Is perfect -- it's never perfect, but we are satisfied in terms of the ability to have a very, very stable output situation. Then when you have a new product or new product lines, there is always the kind of a warming up the supply chains, et cetera. But in absolutely within the realm of business as usual. We have so much more resilient than we were in the past.

Got you. So maybe we can sort of go to liquid cooling, which I know is sort of maybe a couple of...

People like liquid cooling a lot, and we do too.

Yes. So when you have a transition like with liquid cooling, that's an opportunity also for new entrants to offer point solutions like, for example, cool and distribution units. So what would be if I were to go against Vertiv, what would I pitch? And what's your competitive advantage, right? What keeps these new entrants out? And what keeps the current industry structure, because the industry structure to be fair, right, it's -- if you include services, it's you, it's Schneider, it's Eaton, it's Siemens, Legrand. And then there is half the market, right, if you take more expansive.

Yes, one should probably separate power and thermal, two slightly different groups of competitors, but yes.

But -- yes, so how should -- because we're getting a lot of questions. That's like if there's one question we get a lot of people call us like, what about entrant and what does it do to ecosystem and how does Vertiv keeps these folks out or how does Vertiv work with that? We can probably spend an hour just taking about that.