Good morning. My name is Daisy, and I'll be your conference operator today. At this time, I would like to welcome everyone to Vertiv's First Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note, this call is being recorded. I would now like to turn the program over to your host for today's conference call, Lynne Maxeiner, Vice President of Investor Relations, to begin. So Lynne, please go ahead.

Great. Thank you, and good morning, and welcome to Vertiv's First Quarter 2023 Earnings Conference Call. Joining me today are Vertiv's Executive Chairman, Dave Cote; Chief Executive Officer, Giordano Albertazzi; and Chief Financial Officer, David Fallon. Before we begin, I'd like to point out that during the course of this call, we will make forward-looking statements regarding future events including the future financial and operating performance of Vertiv. These forward-looking statements are subject to material risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. We refer you to the cautionary language included in today's earnings release, and you can learn more about these risks in our annual and quarterly reports and other filings made with the SEC. Any forward-looking statements that we make today are based on assumptions that we believe to be reasonable as of this date. We undertake no obligation to update these statements as a result of new information or future events. During this call, we will also present both GAAP and non-GAAP financial measures. Our GAAP results and GAAP to non-GAAP reconciliations can be found in our earnings press release and in the investor slide deck found on our website at investors.vertiv.com. With that, I'll turn the call over to Executive Chairman, Dave Cote.

Well, it's one hell of a debut for our new CEO's first quarter isn't it? I am very pleased with the results we delivered in the first quarter and our ongoing progress. Gio's first quarter as CEO is under his belt, and his operational focus on delivering results and creating a high-performance culture is particularly noticeable, especially in the Americas. We over-delivered in the first quarter compared to guidance and we increased the midpoint of our AOP guidance by $25 million, and cash flow was terrific. We entered the year with a very strong backlog. We were able to secure needed parts and we had capacity in place to deliver a high Q1 sales level. Order rates will be another metric that looks different this year. Gio has some detail in his prepared remarks to explain that. We are constantly focused on the orders rate, and we are encouraged both by the pipeline activity and the pace of investment in our end markets. I've said this for a number of years. There is a true secular growth story at Vertiv and the work we have done in positioning the company for growth and being able to leverage that growth in a meaningful way by getting after margin opportunities while still protecting growth investment makes Vertiv uniquely positioned to create substantial value in the years ahead. It is what attracted me to this assets 4 years ago, and I'm even more excited today with the runway ahead. So with that, I'll turn the call over to Gio.

Thank you, Dave. Thank you very much, and good day, everyone. So we delivered a very strong first quarter sales, up 35% organically, led by Americas, up over 60% and EMEA, up 25%. We were able to ship more in Q1 than a typical first quarter as we strengthened our supply chain and increase capacity across the world, in particular, in our Monterrey thermal management facility. We had very high backlog starting the year, and we have the capacity to serve the growing demand of the industry. Orders excluding FX, were down 23% from last year's first quarter. This was in line with our expectations, driven by the comparison with an exceptionally high Q1 '22 and consistent with the orders normalization trend we referred to in February. Book-to-bill ratio was 1x and backlog remained flat versus year-end '22, our historical peak. I will further elaborate on this when we review Slide 6. Our adjusted operating profit was $176 million, which was $41 million higher than the top end of our guidance. The beat was largely driven by additional volume and higher-than-expected variable contribution margin coming from a combination of manufacturing efficiency and supply chain efficiency. We are raising our full year adjusted operating profit guidance by $25 million at the midpoint, given the strong first quarter results. Adjusted free cash flow was another good story with $25 million cash generation in the quarter, $100 million higher than our guidance. Although we're pleased with our first quarter performance, we know very well there is still work to do. We are holding the adjusted free cash flow guidance for the year at $350 million, i.e., the previous midpoint, but we understand there is ample opportunity for improvement and certainly in inventory. We are continuing to strengthen our processes and operational rigor around…

Perfect. Thanks, Gio. Turning to Page 7. This slide summarizes our first quarter financial results. As you can see, we exceeded the high end of guidance for all metrics on this slide, starting with sales, which were up organically $405 million or 35% from last year's first quarter. $105 million of this increase was from pricing and $300 million from volume, which was up approximately $100 million versus what we assumed in guidance. A vast majority of this volume increase was based in the Americas as we continue to see significant improvements in supply chain and manufacturing efficiency and the 2 are related in that region. And it all starts with, and it's supported by a sound SIOP process. Adjusted operating profit of $176 million was $163 million higher than last year's first quarter. and $41 million higher than the top end of guidance, and this was primarily due to volume leverage and a higher contribution margin percentage driven by the improved manufacturing efficiency in our North American plants as once again, supply chain issues continue to be addressed and process improvements take hold. Of note at the very bottom of the second gray box at the bottom of this page, we recognized a $13 million charge for restructuring in the quarter, and you can see that on the face of our income statement. In the spirit of winning now and winning later, while we continuously invest in productivity and efficiency projects, we will overdrive these investments when opportunities present themselves. -- well, in the first quarter, an $8 million onetime gain related to the reversal of an indemnification claim pursuant to the Emerson carve-out provided that opportunity. Instead of dropping this gain to the bottom line, we accelerated restructuring projects costing $13 million, which should drive $20 million of…

Well, thank you, David. Let us then turn to Slide 11, and let's summarize the key takeaways. So a very good first quarter. Momentum is continuing. Market remains healthy, and we benefit from having a large backlog and a better supply chain and more capacity. We are raising our AOP guidance given a good Q1 performance. I am very pleased to announce Vertiv will be hosting its first Investor Conference on November 29 at the New York Stock Exchange. More details certainly to come, but already now, hope your pencil is down your calendars, and we hope you will be able to join us. As Dave, Dave Cote is known for saying, "The trick is in the doing and we are getting after the doing." And that means a strong execution, supported by a high-performing team and culture, make sure there are no shortcuts, no magic wands, the doing is clarity of vision, alignment and relentless focus on improvement and execution. I am very proud of the staff [indiscernible] we continue to take as an organization, and I want to thank the entire Vertiv team for the ever-increasing focus and passion and execution. We are still in the early stages of our acceleration. And after my first quarter as a CEO, I'm more optimistic than ever about our path ahead. With that, we will now turn the call over to the operator who will open the line for questions for us. Thank you very much.

[Operator Instructions] Our first question today is from Andy Kaplowitz from Citigroup.

Gio, could you give us a little more color into your end markets and elaborate on your comments that you think orders could turn positive later this year? I think some investors are probably surprised that cloud and colocation markets in the Americas have hung in as well as they have. So maybe more specific color on those markets? And then how much of the incremental orders or pipeline that you see -- or would you say more AI focused? And what gives you the confidence that China is going to come back in the second half of the year?

Okay. Well, thank you for your question, Andy. I would say that many elements for this confidence. One is what we see in the pipelines and pipelines are moving, we are definitely pleased by our book-to-bill ratio at 1, as we were saying, especially given the overage in sales relative to Q1 guidance. But as we said, the -- especially the hyperscalers and not stopping their investment. We also heard some prominent hyperscalers in the last few days, sending messages about their infrastructure spend. So there is positivity in the year. And again, that resounds with our -- with what we see in the pipeline. Now we talked last time about normalization, and that's what we continue to see. So do not be surprised when we will see still the second quarter that on a competitive basis will be down year-on-year, but up in absolute terms versus Q1 as we were saying. But again, there is movement out there. There is a positivity. Now not all the hyperscalers are exactly in the same place or all the colos are in the same place, but many of the large ones are -- continues to plan capacity expansion. It is difficult to your point about AI. It's difficult to really draw a line between AI investment, enabling investment and other investments. I would say that the line is blurring. One would think that AI is a totally new thing. Certainly, generative AI is accelerating very rapidly. But there are elements in AI and everything we do today already. So if anything, we see an acceleration not a sharp transition to something completely new. But we see AI in terms of the type of conversations and specifications that we see coming our way. And again, as I was saying, when going through the slides, a lot about power density, and a lot about bigger capacity investments, kind of bigger chunks and that's encouraging. So again, AI as a transition and I invite everyone to think AI more in terms of a transition towards a higher density, higher density compute and high-density power as a consequence. You were asking about China. We believe China will reaccelerate in the second half. The best indicator -- 2 indicators. That's what we see other markets, other industries than China in general is an economy say in and trending towards but also we see it quite clearly in our pipeline. Our pipelines are strongly accelerating in China. Hope I answered your question.

You did. And I asked it in 4 parts. So Gio, just a little more color on free cash flow. Obviously, much better than your initial expectations for Q1. We know it's one of our tops focus if not your top focus this year. So you didn't raise the guide as you said. Is that just sort of prudent, and what have you really changed so far this year about collecting cash?

Yes. Multifaceted question. I'll ask also David to chip in at a certain stage. But I would say that when we look at Q1 is really a combination of a better AOP, better profit certainly helped, and the are kind of our payments, advanced payments that helped. We know that we have work to do on the trade working capital and we are focusing on that. For us, that means concentrating especially on inventory and for us, industry -- inventory reduction and inventory optimization means working intensely on supplier lead time reduction, execution in everything that is a size of material planning, material management production planning. Vendor management in general, we are activating a lot of vendor-managed inventory agreements, all things that will go in the direction of shortening the cycle. As the cycle shortens our inventory go down, I was talking about supply chain resiliency, that's a big element. Supply performance is a big element because we can reduce our safety stock without impacting our service level, et cetera. So it's a system. It's an array of actions. And I think that touched upon the most important. David, anything else to add? Of course, it's not just inventory. There are many facets.

Yes. I think the important thing Gio mentioned, the beat in the first quarter was driven by higher profitability and the advanced payments. The advanced payments were super focused on that. But that's a matter of timing. We have to prove that execution over and over as we get through the year or it will just be accelerating cash we would have seen later in the year into the first quarter. So we'll have a better update in 3 months from now. And at this point, we're still very comfortable with that $300 million to $400 million guide.

Our next question is from Nicole DeBlase from Deutsche Bank.

Maybe we could just start with the Americas. Obviously, like the biggest source of the beat and really, really impressive growth this quarter. Can you just talk maybe about how you see that phasing throughout the rest of the year because I expect that 60% plus organic growth probably isn't sustainable.

I would say that we have been able to overperform in the Americas, we were talking about, of course, 60%. If you think about the -- what the details David gave us with a 48% volume. So you think about almost 50% volume is certainly a reflection of a much more reliable supply chain. Absolutely not perfect yet, as I was saying. But very, very importantly, in availability of capacity that we did not have before. So we have more capacity now than we had in the past and certainly a lot more capacity to serve an industry that needs capacity. We, in the Americas have done -- we have approached the improvements in the Americas at many, many angles, alignment, talent, leadership capacity processes, fixed supply chain, a lot of price, price, price, but we continue to have a strong backlog also in the Americas. Now comparatives will be a little bit more challenging, but we continue to see growth for the rest of the year. So the strength of the first quarter was not a fluke. It was simply, okay, let's say, simply a reflection of all the hard work and the investment and the transformation of a business and a culture towards a strength that we did not certainly have a year ago.

Got it. So maybe it's fair to say that if you guys are making the claim not for the whole business, there's less seasonality this year. And revenue can be kind of stable throughout the year versus what you reported in 1Q, that comment may also apply to the Americas. Is that a fair characterization?

Very much so. Very much so. And our business -- norma business, is there is such a thing as kind of a pre-COVID normal, would have shown always kind of a very steep second half towards last quarter type of seasonality, it will be much flatter here across the year, in particular for the Americas. I don't know, David, anything you want to add?

Yes. And Nicole, just to help with your modeling. You have all the components to look at first half, second half. We definitely -- we see -- still see a $250 million, $300 million increase in sales in the second half versus first half. We do anticipate more uniformity than in prior years. If you look at it from a regional perspective, most of the lift that you'll see in the second half will come from APAC and the Americas and EMEA would be relatively uniform.

Okay. That's helpful. And just as a follow-up, with all of the news about potential credit crunch, can you guys just talk about how concerned you are about a tighter financing environment potentially impacting project activity in the data center space.

In this moment, again, the thing that we keep an eye on is really what customers or our customer's customers tell us what we see in the pipeline. It's hard to -- it's hard for us to speculate on the consequences of the consequences. It's hard to say -- what we think is that the biggest portion of our market, say, everything related to hyperscale but not only colocation, seem not to be extremely bothered by this at this stage.

Our next question is from Scott Davis from Melius Research.

Good to see your stock price up. But let's -- if you don't mind, Gio, I'd love to go back to AI and -- because this is also new to so many of us and the materiality of the comments is always hard to really get our arms around. But when you think about the faster -- the heat -- the thermal management, the faster speed switches and all the stuff that might be necessary. Is -- are your orders just for a different mix or a higher end mix of new or are you talking about retrofit and there's some demand there to go back into existing data centers and upgrade perhaps at a faster clip than you'd anticipated prior.

Hello, first of all, Scott, thank you for the question. I say you quite an insightful question. In a sense that in this moment, it's predominantly a new infrastructure conversation. But I -- as CEO, Vertiv as a whole, we're extremely intrigued by the opportunities out there because there is a lot of large data center stock, of course. And thinking that all the high density will be brand new into an existing data center infrastructure, which certainly happened. But it's solely happening in that dimension. No. We believe that the opportunity for retrofit will be there, a bit premature, I must say. But one thing I'm sure we are extremely well positioned there, a, because in the existing stock of data center globally, we have a big installed base. So no one better than current vendor can help you transition to the new technology, but also again, because if you think about our global presence of service domain knowledge. And one thing that is interesting, as I alluded to, probably a little bit too rapidly in -- when we're going through the slides is that, when I talk to them, to our customers, rarely do they think binary in terms, oh it's all AI, oh, it's all -- the new infrastructure is all very high density. The most think about an infrastructure that needs to be resilient over time and enable a transition of technology they probably last 10 years. So this mix and change of mix is very -- it's very intriguing. It's very interesting and very promising tool for us [indiscernible].

And Gio, just [indiscernible]

[Indiscernible]

I'm sorry. Go Ahead. Were you going to jump in there, David? Or -- I'm sorry, guys, you must have bad connection. But let me -- I just -- I hate to ask a question. I think I know the answer, and it may be stupid. But when you think -- when you talk about an order that's coming in, in a facility that needs to manage the power density of AI, are you talking about a larger bill of goods or with a higher margin mix or kind of help us understand and what magnitude is it? Is it 10% more intensity of Vertiv products? Is it double? Is there some sort of way to think about TAM as it relates to what may happen here and the changes necessary to accommodate AI?

I would say the investment is not marginal in terms of portion of infrastructure. And I would say that the total accessible market is not -- certainly not shrinking, certainly not shrinking, if anything, expanding because, again, you have to think system and not just individual piece of technology more in the future than today. And we can think system.

Our next question is from Nigel Coe from Wolfe Research..

So we've had a pretty decent competition about AI. So I want to switch to the more prosaic enterprise market now. I mean we've seen some negative data points on enterprise IT spending. So just curious, recognizing the fact that your outlook hasn't changed by end market. But on balance, are you seeing a more cautious enterprise customer out there maybe just brief up to speed in terms of where we are on that migration path from on-prem to cloud.

The migration plan from on -- and Nigel, first of all, the migration is continuing, but it's -- again, it's not from 100% on-prem, 100% cloud. I'd say that there are elements of stabilization. Clearly, migration continues. We see the enterprise business growing at single digit in this moment. More or less, that's what we see also through our channel business that, by the way, is in a good health right now. So -- and think about enterprise business also as not just data center, but we see also enterprise demand on the commercial and industrial part of the business as a consequence of trends like near shoring. So we see good level of activity there.

Okay. So it doesn't sound like you've seen any deterioration there. Okay. And then maybe just to talk about the pipeline. You talked about a very encouraging pipeline, especially in China in the second half of the year. But when you think about the visibility and your confidence in future backlog growth, would you say that the Americas are still a place where you feel more confident in the outlook?

More confident than other places or you're asking...

Your pipeline is stronger -- yes, where do see the most vibrant pipeline.

I would say that clearly, the size of the pipeline is different in different regions, reflecting the markets that we serve. We see pipeline particularly [ vacant ] if you will, in China and in Asia. And we see good level of pipeline supporting our plans in the other parts of [Indiscernible] in Europe and in EMEA and in the Americas. So I'd say that I am positively encouraged. I'm encouraged by the size of the pipeline and by the speed at which we are creating new pipeline.

[Operator Instructions] Our next question is from Mark Delaney from Goldman Sachs.

Yes. Congratulations on the good results. I had one on the pricing outlook for 2023. So you're now expecting a bit higher pricing than you assumed as of last quarter and you're doing it with less volume. So can you see a little bit more on where the pricing is coming from and what's leading to the higher price for 2023?

Yes. Thanks, Mark. So you're right. We took our full year pricing guide up from $275 million to $300 million. We hit the number in Q1, but there's always a little bit of art as it relates to defining what pricing is. And when we look at our backlog and run the numbers versus last year, they're coming up higher. And we continue to be successful with our new pricing. I think the incremental $25 million came from a recalculation of the carryover, but the big thing with the pricing is it's not turning the other way. So the pricing in the market certainly in the Americas and EMEA, it's sticking, and we're continue to be out there, and we think we're kind of at the right price point, but we'll continue to push it a little bit.

Our next question is from Jeff Sprague from Vertical Management.

Just wanted to -- if I'm going to do one, maybe just go to free cash flow. David, you pointed out maybe people were a little too nervous about your leverage. But I did want to just get to the point of conversion. Your free cash flow, the EBITDA is about 40% or so. A lot of companies in my group kind of operate in the 60% range or so. So how do we kind of get that conversion relative to your EBITDA higher? Are there any things in particular that need to happen? I think working capital is probably a big chunk of it, but maybe you could bridge us to potential improvement in the out years on that metric.

Yes. We talked about this a little bit on the first quarter call. Our long-term goal, of course, every industrials get to 100. That's very dependent upon growth because trade working capital is the biggest drag. So I think if you look at the metric based on 2023, and you have to look at adjusted net income, it's probably 75%. The 2 biggest drags versus getting to 100 is working capital. And then also, we're over investing this year with CapEx. So our depreciation, if you include software amortization is probably close to $90 million, $95 million, but we have $140 million of CapEx a lot of that, which is supporting additional capacity. So in the long run, that has to stabilize just mathematically. So that will probably close maybe a little less than half of that gap. But in the long run, your point is absolutely right on. It has to be work -- with working capital. And we made some progress here in the first quarter, and we project that, that will continue to make progress over the rest of the year. But in the long run, to hit that target, we're going to have to continue to optimize inventory and balance out AR and AP.

Our next question is from Amit Daryanani from Evercore.

I guess my question is really on the backlog side. The $4.8 billion backlog, I'd love to understand how do you think that looks into year-end? Just trying to get a sense of how much of the growth do you think this year is going to come from backlog conversion versus not? And anything you would call out in terms of cancellations, something would be really helpful. And then separately, Gio, I'm hoping you could talk a little bit on this AI dynamic. A lot of the hyperscale companies, I think, at this point are debating if they want to do 100% immersion liquid cooling or hybrid cooling. Do you think your value proposition is as attractive in the immersion liquid cooling market as it's on the hybrid side?

Well, many questions in one. So -- thank you, Amit. So first of all, backlog. Clearly, $4.8 million (sic) [ $4.8 billion ] is a good number as we were seeing at the beginning. But let's go back to February, when we're saying we are entering 2022 with more than 70% backlog coverage, and that's not "normal." We still believe that is the case. I mean if you go back to whatever the normal would be, we would be probably on a 50% or below 50% backlog coverage. So I'd like to think in terms of percent, not necessarily absolute number. So probably when we go into 2024, we will be more on -- we will be -- most likely we will be in a lower coverage than the 70% we saw last year. Now it's a little bit premature really to say how everything will pan out. But think in terms of a lower backlog coverage going forward. Again, that's normal. We talked about lead times. We talked about the reduction of lead time and with the reduction of lead time and the levels of backlog coverage that we had at the beginning of 2023 are incompatible. So simply, the industry will adjust again. Clearly, a lot of the revenue in 2023 comes from backlog conversion, but that's just in the math, in the numbers. But you're talking about cancellations. Nothing out of the ordinary. And let me talk about cooling technology. As I was saying earlier, it will be a hybrid world from a cooling technology standpoint and the degree of the mix between traditional and liquid will probably change over time very, very small percent of liquid at the beginning and then increasing in the next years, I would say, certainly not months, years. You're talking about immersion cooling, immersion cooling is just one of the liquid cooling technologies. There are a lot of our technologies that in this moment, are competing in a technology landscape that is not mature yet. And we are working with some of the biggest hyperscalers and some of the biggest chip manufacturers to really make sure that we align our technology to their evolution and we make sure that we enable their scaling, their solutions out in the market.

Next question is from Lance Vitanza from TD Cowen.

Nice job on the quarter. My question is with respect to E&I, as the supply chain has continued to improve, is E&I a drag still? Or has it become a tailwind in the first quarter results? And how do you see that playing out? And then related to that, strategically, are there any other potential acquisitions out there, perhaps tuck-ins that would allow Vertiv to further improve the scope of its product offering and its competitive positioning versus some of the other larger players?

We are happy with the progress on the E&I side of the business. I think it was February, when I was talking about making sure that we accelerate integration, we have taken steps in that direction. In particular, we are embedding the American part of the E&I organization in the bigger Americas business also operationally, so we're satisfied with the progress there. When it comes to portfolio management, in general, it will be anyway premature, but be sure -- rest assured that this is something we keep a keen eye on and it's a part of our management cadence and processes. We certainly are constantly looking at opportunities out there. Sometimes they are mature, sometimes they are not mature, but that's part of what we do.

Our next question is from Patrick Baumann from JPMorgan.

David, maybe a quick one for you. The free cash flow in the quarter, I think you said there was an advanced payment benefit. Maybe that's reflected as deferred revenue, I don't know, in the cash flow statement. It sounds like this could be timing related based on some of your comments. So it would be helpful to get a sense on second quarter expecting -- second quarter expectations for free cash flow. It's not something that you gave on the slides, but you typically give kind of the forward quarter outlook.

Yes. So first of all, advanced payment could the timing if we do not execute and we have every intention and plan to execute. So you're absolutely right. In the balance sheet, it hits deferred revenue. And we have programs in place, notably in Americas to continue that program with larger orders. And it's something that we have embedded in the process. So we're very optimistic that, that will continue. But to embed that into the guidance, we're going to wait for three months another quarter to kind of reassess that. As it relates to individual quarterly guidance for free cash flow, I think historically, we have not provided that we did last year. We are not doing that just because of the lumpiness and some of the variability around free cash flow for individual quarters. As we mentioned in the past, we have $40 million to $50 million check runs that could go out one day versus the next and swing a quarter. So I wouldn't read much into that. We're still very confident with the free cash flow program. We do anticipate it to sequentially increase as we move through the year, and we'll reassess that guidance as we get to the end of the second quarter.

Thank you. This is all the questions we have time for today. So I'd like to hand back to Giordano Albertazzi for any closing remarks.

Well, thank you very much, and thank you for your questions. We are starting off the year with a strong quarter. We certainly intend to continue to build on that momentum as we make our way through 2023. So we definitely look forward to discussing our progress with you. Appreciate your support. And don't forget, looking forward to seeing you on the 29th of November. So with that, thank you very much.

Thank you, everyone, for joining today's call. You may now disconnect your lines, and have a lovely day.