Vertiv Holdings Co (NYSE:VRT) Q1 2024 Earnings Call Transcript

Vertiv Holdings Co (NYSE:VRT) Q1 2024 Earnings Call Transcript April 24, 2024

Vertiv Holdings Co isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning. My name is Jordan, and I’ll be your conference operator today. At this time, I’d like to welcome everyone to Vertiv’s First Quarter 2024 Earnings Conference Call. [Operator Instructions] Please note this call is being recorded.

I’d now like to turn the program over to your host for today’s conference call, Lynne Maxeiner, Vice President of Investor Relations.

Lynne Maxeiner: Great. Thank you, Jordan, and good morning and welcome to Vertiv’s First Quarter 2024 Earnings Conference Call. Joining me today are Vertiv’s Executive Chairman, Dave Cote; Chief Executive Officer, Gio 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.

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Q&A Session

With that, I’ll turn the call over to Executive Chairman, Dave Cote.

David Cote: Well, we’re pleased to bring a very good morning to our investors. Our performance continues to strengthen. Demand is clearly accelerating, and we’re well positioned to capture the growth and to deliver great returns for our investors. We demonstrated the flexibility of our capital deployment strategy, initiating an opportunistic share repurchase in the first quarter, and our current cash flow generation profile provides wonderful opportunity.

We’ve made great progress, but our focus is on how much further we still have to go. Gio and the team are working process improvement everywhere. Hard work doesn’t pay off with our results, so you will see the results in the orders and sales growth, profitability and cash generation. We intend to build a track record of consistency over many years.

We’re well positioned to further differentiate and gain competitive advantage with the technology shifts underway in the data center industry. Our goal is not just to be better than we were last year or the year before but to be better than everyone at serving our customers and running our business at world-class levels. Essential to accomplishing that is creating a high-performance culture. We can’t be great without it. That high-performance culture is starting to take hold, and we are still very early on this journey.

I’m excited about the year ahead. It started off strong. And I’m more excited about 2025 and beyond and the opportunity we have to continue to create tremendous shareholder value. We ain’t done yet. I’m also enjoying my discussions with Gio. He in each meeting is saying, for my next trick, and it’s working, and I’m enjoying it.

So with that, I’ll turn the call over to Gio.

Giordano Albertazzi: Thank you very much, Dave, and good day, everyone. We go to Slide 3. And as Dave mentioned, we had a good start to 2024. Q1 sales were up 8%, and we saw high single-digit growth across the 3 regions. Our orders grew 60% year-on-year and 4% sequentially. More to come on Slide 4. This is an indicator of good market demand and of our very relevant market position.

The strength in order drove a very strong Q1 book-to-bill at 1.5x. Important to note, most of the orders overage in Q1 is for deliveries beyond ’24. Most of the acceleration comes from large orders, which typically have longer customer-requested lead times. Adjusted operating profit was $249 million, corresponding to an adjusted operating margin of 15.2%, a significant $73 million and 370 bps improvement year-on-year, which demonstrates we are progressing on our road map to operational excellence, as explained at our Investor Day. Our adjusted free cash flow was $101 million, an improvement of $76 million from Q1 last year.

In Q1, we repurchased 9.1 million shares at an average weighted price of $66 a share. This included buying back approximately $8 million of the shares from Platinum Advisers as they exited their position in Vertiv. We deployed $600 million of cash to do those share repurchases. We believe it was a favorable time to do so. Our net leverage at the end of the first quarter ticked up slightly to 2.2x driven by the opportunistic share repurchase in Q1. Our ’24 guidance suggests that we will return comfortably to our targeted 1x to 2x range as we make our way through the year.

We again raised our full year guidance and expect full year ’24 organic growth of 12% and adjusted operating margins to expand to 17.7%. Overall, good progress towards our long-term target of 20-plus percent. I am pleased with the start of the year, and I’m very encouraged by what we see in the data center market and now positioned within that.

Let’s go to Page — Slide 4 now. As you may have noticed, we did not include the market environment slide this quarter. It becomes difficult to differentiate shades of color for market over very short periods of time, and our last call was just about 2 months ago. We will continue to provide a view on how we see the market in our future earnings releases material and in our accompanying remarks.

Certainly, we have seen a very strong data center market environment, and we feel we have a unique vantage point: our profile of 75% data center exposure and our decades of experience serving the industry. It is an industry that has reliability at its core. And during times of technological transformation, as the one underway now with AI, our customers lean on the knowledge strength Vertiv can offer. Advanced technology, deep domain expertise, global scale, 24/7 local service globally, these are true differentiators we built over the decade serving the data center industry and understanding its truly unique requirements and not easy to replicate.

So if we look at the left side of Slide 4, extremely strong order growth, as we said. Pipelines velocity clearly increased as evidenced by backlog being up $800 million in first quarter. This acceleration brought into Q1 some orders we expected for future periods. It is also clear that AI is starting to scale, and that’s particularly true in the Americas. We already explained the accelerated dynamics of large projects. So no surprise that most of the impact is on future years. That gives us better visibility as we think about the years ahead. We anticipate orders will remain strong, but I want to caution 60% order growth is not the new expectation. We are — there are reasons specific to Q1 that supported that very high level of order growth.

For example, Q1 was our easiest comparison given that Q1 ’23 orders were down 33% year-on-year. The comparison will get tougher as ’24 progresses, and precise timing on orders can fluctuate. So while I don’t want to suggest false precision, seeing orders down Q1 to Q2 sequentially would not be a surprise. It is expected and not particularly worsen given the very high absolute value of Q1 orders. We are anyway expecting good order growth year-on-year in Q2.

Our book-to-bill of 1.5x is very strong. Also here, we’re not anticipating that this is the new normal. We believe book-to-bill should remain above 1x throughout the year, which suggests the absolute dollar of orders we are anticipating remains at high levels given the sales guidance range we provided. How that looks quarter-to-quarter depends on multiple factors like pipeline velocity and now customers build schedules.