Q1 2020 Earnings Call

May 6, 2020

Operator: Q1 2020 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. Please note that this event is being recorded. I'd like to turn the program over to your host for today's conference call, Ms. Lynne Maxeiner, Vice President of Investor Relations. Please go ahead.

<unk> earnings Conference call.

All lines have been placed on mute to prevent any background noise. Please note that this event is being recorded.

And I'd like to turn the program over to your host for todays conference call is when Maxsimil <unk>.

Vice President of Investor Relations. Please go ahead.

Thank you, Matt Good morning, and welcome to burden first quarter 2020 earnings conference call.

Lynne Maxeiner: Thank you, Nick. Good morning, and welcome to Vertiv's Q1 2020 earnings conference call. Joining me today are Vertiv's Executive Chairman, David Cote, Chief Executive Officer, Rob Johnson, Chief Financial Officer, David Fallon, and Chief Strategy and Development Officer, Gary Niederpruem. Before we begin, I would 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, you can learn more about these risks in our registration statement, our proxy statement, and other filings with the SEC.

Joining me today, our Virtus Executive Chairman, David Cody, Chief Executive Officer, Rob Johnson, Chief Financial Officer, David Fowle, Chief strategy and development Officer, Gary meter claim.

Before we begin I would 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 burden is 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 you refer.

Are you to the cautionary language included in today's earnings release, and you can learn more about these risk in our registration statement, our proxy statement and other filings with the FCC.

Lynne Maxeiner: 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, David Cote.

Any forward looking statements that we make today are based on assumptions that we believed to be reasonable as of the state.

We undertake no obligation to update these statements as a result of new information or future events.

This call. We 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 then the Investor Slide deck found on our website at investors that burden dot com.

With that I'll turn the call over to executive Chairman David Cody.

Thanks, and good morning, everyone want to welcome you to the bird of Investor calls were announcer Q1 2020 results.

David Cote: Thanks, good morning, everyone. I want to welcome you to the Vertiv Investor Call to announce our Q1 2020 results. Before I turn it over to Rob Johnson, I want to begin with a few opening remarks. As we spoke last time, as many of you know, I was fortunate to be able to work for Honeywell for about 16 years. Those who invested with us made a great return. That performance was marked by consistent annual improvements in the people, processes, and portfolio of the businesses that made up Honeywell. We did all the seed planting for new products, services, process improvement, and other growth initiatives needed to perform well for a long time.

Before I turn it over to Rob Johnson I want to begin with a few opening remarks.

As we spoke last time and as many of you know I was fortunate to be able to work for herself about 16 years.

Those who invested with us made a great return.

Performance was marked by consistent annual improvements in the people processes and portfolio with the businesses that made up Honeywell.

We did all the seed planting for new products services process improvement and other growth initiatives needed to perform well for a long time.

So there wasn't a very different place than where we spoke a couple of months ago, but.

David Cote: The world is in a very different place than when we spoke a couple of months ago. Those opening remarks stay true, whether we are in a period of economic expansion or economic contraction. If you look at our success at Honeywell, it really took off after the Great Recession, and I attribute that success largely to the fact that we continued to implement an operating system, we drove technology investments, and we planted seeds even during that difficult time. Why do I bring it up? Because we're doing that same kind of seed planting at Vertiv. Now, some of you may conflate our withdrawal of guidance, even in the face of good orders growth, with the liquidity scenarios we've included, and conclude we see a serious problem looming. That would be an error. They are two entirely separate points.

With those opening remarks stay true whether we are at a period of economic expansion.

Economic contraction.

If you look at our success at Honeywell It really took off after the great recession.

And I attribute that success largely the fact that we continue to implement an operating system, we drove technology investments and we plan to scenes even during that difficult time.

Why do I bring it up.

Because we're doing that seemed kind of seed planting diverted.

No.

Some of you make conflate our withdrawal of Guy.

Even in the face of good orders growth.

With the liquidity scenarios we've included.

Conclude we see a serious problem blooming.

That would be an era.

Our two entirely separate points.

We have withdrawn guidance because we can't be sure. We can ship given government shutdown of facilities for us and suppliers at various times.

David Cote: We've withdrawn guidance because we can't be sure we can ship, given government's shutdown of facilities for us and suppliers at various times. Additionally, our service people sometimes aren't allowed access to facilities. Our credibility matters greatly to us, and we don't want to guide to numbers we may not be able to deliver, even in the face of strong orders. Totally separately, we've included a couple of liquidity scenarios to demonstrate that even if sales fell to $4 billion, or even in a 25% sales decline, we will be just fine. It's not a forecast. It's an attempt to make you feel comfortable that we're just fine. Combining these two separate points into the erroneous conclusion that we are forecasting disaster is, well, erroneous. This time has been difficult for everyone, but it also has demonstrated how important data centers and the edge are to our society.

Additionally, our service people, sometimes aren't allowed access the facilities.

Our credibility matters greatly to us and we don't want to guys. The numbers, we may not be able to deliver even in the face a strong orders.

Totally separately.

We've included a couple of liquidity scenarios to demonstrate that even if sales fell to $4 billion.

Or even in a 25% sales decline we will be just fine.

It's not a forecast.

It's an attempt to make you feel comfortable that were just fine.

Combining these two separate points into the erroneous conclusion that we are forecasting disaster is well.

Erroneous.

This time has been difficult for everyone.

Correct.

It also has demonstrated how important data centers and the edge our to our society.

David Cote: It is clearly critical infrastructure and reaffirmation this is a good industry. We have a great position in that good industry, and even at this difficult time, we are investing in the future. Based on how we're running the business during extraordinarily difficult times, including our own customer focus, while still seed planting, I am just as excited today as I was three months ago about our future. Now, I'll turn over the call to Rob, who can take you through the business in a little more detail. Rob?

It is clearly critical infrastructure and reaffirmation. This is a good industry.

We have a great position in that good industry and even at this difficult time, we are investing in the future.

Based on how we're running business during extraordinarily difficult times, including our own customer focus while still seed planting I have just as excited today as I was three months ago about our future.

Now I'll turn it over the call to Robert can take through the business and little more detail Rob.

Hey, Thank you, Dave and welcome everyone today, and they said on the last call I really value. The advice of Davis provided to the team since you've been engaged with Veritiv and I, especially appreciate his counsel now as we navigate through these pandemic times.

Rob Johnson: Hey, thank you, Dave, and welcome everyone today. As I said on the last call, I really value the advice that Dave has provided to the team since he's been engaged with Vertiv, and I especially appreciate his counsel now as we navigate through these pandemic times. Before I walk you through the slides, it goes without saying that we have been proactive in protecting the safety of our employees and our customers. We have implemented precautionary measures, from temperature screening to increased cleaning and disinfecting of facilities, to social distancing at work, just to name a few. Additionally, our service technicians have followed Vertiv's safety protocols and adhered to additional safety measures adopted at customer sites. Safety of our Vertiv employees and our customers has been, and will continue to be, at the forefront of everything we do.

Before I walk you through the slides it goes without saying that we've been proactive in protecting the safety of our employees and our customers. We've implemented precautionary measures from temperature screening to increase cleaning and disinfecting facilities to social distancing at work just to name a few.

Additionally, our service technicians have followed Virtus.

Safety protocols inner ear to additional safety measures adopted at customer sites safety of our vertical employees and our customers has been and we'll continue to be at the forefront of everything we do.

I want to thank the versus employees for their hard work during Q1 and give us a shout out to the manufacturing workers and the service technicians, who continue to provide products and services to our customers and conduct day to day business with the up most of caution emits cobot 19.

Rob Johnson: I want to thank the Vertiv employees for their hard work during Q1 and give a shout-out to the manufacturing workers and the service technicians who have continued to provide products and services to our customers and conduct day-to-day business with the utmost caution amidst COVID-19. I appreciate their steadfast commitment to Vertiv. It's their unwavering dedication that has allowed us to serve our customers, enable those customers to provide technology and vital applications to the world that they rely on more than ever. To all of our employees on the front line, I say thank you. Let's take a look at the slides, starting with Slide 4. Overall, the demand side of our business was very robust in Q1, as orders were up 13% compared to Q1 2019.

I appreciate their steadfast commitment to Vernon, it's their unwavering dedication and has allowed us to serve our customers enable those customers to provide technology and vital applications to the world that they rely on more than ever.

To all of our employees on the front line I say thank you.

Let's turn to take let's take a look at the slides starting with slide four.

Overall, the demand side of our business is very robust in Q1 as orders were up 13% compared to the first quarter of 2019.

We exited Q1 with a record high backlog of $1.6 billion, which can be attributed to cloud co location and telecom customers around the world. We're delivering vital application. So students could be educated online hospitals and health care facilities could function workers could work from home and business is experiencing a surge.

Rob Johnson: We exited Q1 with a record high backlog of $1.6 billion, which can be attributed to cloud, co-location, and telecom customers around the world who are delivering vital applications so students could be educated online, hospitals and healthcare facilities could function, workers could work from home, and businesses experiencing a surge in demand during the stay-at-home mandate could deliver. On the revenue side, despite almost all of our manufacturing facilities being up and running, we have been deemed essential. We were still adversely impacted by COVID, as many of our facilities are still dealing with some level of disruption. Additionally, Q1 of 2019 had a few large projects complete, which made a difficult comparison.

You can demand during the stay at home mandate could deliver.

On the revenue side.

Despite almost all of our manufactured metric manufacturing facilities being up and running we had been deemed essential.

We were still adversely impacted by co that as many of our facilities are still dealing with some level of disruption.

Additionally, Q1 in 2019 had a few large projects complete which made it difficult comparisons.

In Q1, we proactively implemented cost actions to protect the business haven't seen in felt the impact of Covidien, China before things spread to other parts of the world.

Rob Johnson: In Q1, we proactively implemented cost actions to protect the business, having seen and felt the impact of COVID in China before things spread to other parts of the world. These cost actions are expected to generate $60 million of benefit by the end of the year. David will address liquidity later, but we feel good about our position today and know that even under a variety of downside scenarios that Dave spoke to, we will be able to maintain our strong liquidity base. We stay close to our customers and continually monitor and comply with directives of governments around the world as they relate to pandemic actions. This pandemic has put us and others in a position where things will remain dynamic and unpredictable over the next several months. Because of this, we are withdrawing our previous guidance.

These costs cost actions are expected to generate $16 million a benefit by the end of the year.

David will address liquidity later, but we feel good about our position today and know that even under a variety of downside scenarios that Dave spoke to you will be able to maintain our strong liquidity base.

You see let's turn to customers and continually monitor and comply with directives of governments around the world as they relate to pandemic actions.

And then make has put us and others in a position where things will remain dynamic and unpredictable over the next several months because of this we withdrawing our previous guidance I can tell you. This however, veritiv has been designated as an essential business, we see strong demand for our products and services, we are taking short term.

Rob Johnson: I can tell you this, however, Vertiv has been designated as an essential business. We see strong demand for our products and services. We are taking short-term and long-term actions to make sure we continue to serve our customers. We are nimble, flexible, and responsive. We are ready to adapt, react, and serve in ways that will be needed for today and tomorrow and in the future. Turning to slide 5. There's a lot of content on this slide, so I won't hit every bullet. We wanted to provide you with additional knowledge and deeper insight about our business. The Q1 COVID impact of $80 million was roughly 60% supply base and 40% demand base. On the supply side, I'm proud to tell you that all of our facilities, with the exception of a small plant in China, are back up and running.

Term and long term actions to make sure we continue to serve our customers, we're nimble flexible and responsive.

We are ready to adapt reactor and serve in ways that will be needed for today and tomorrow and in the future.

Turning to slide five.

There's a lot of content on the slide so I won't hit every bullet.

Well, we wanted to provide you with additional knowledge and deeper insight about our business.

The first quarter coal that impact of 80 million was roughly 60% supply base and 40% demand based.

On the supply side I'm proud to tell you that all of our facilities with the exception with exception of a small plant in China are back up and running.

Rob Johnson: Now, not all of our facilities are running at 100% because there are still many things they are struggling with, parts issue, logistics constraints. Nonetheless, we are able to operate at some level in every region. The supply side is aggressively being monitored on a daily basis as issues arise. Whether it's government health inspections, supplier output, logistics, and many more, there's just a myriad of obstacles that our team has to continue to overcome on a daily basis. The Vertiv team has done an outstanding job to carefully and methodically resolve these issues as they arise in places all over the globe. We continue to supply products to our customers and assist them with their services needs. Moving on to the demand side. Certainly, the headline number of orders being up 13% is great accomplishment of the sales and marketing team.

Now not all of our facilities are running at a 100% because there are still many things. They are struggling with purchase you issues logistics constraints, but nonetheless, we are able to operate at some level in every region.

The supply side is aggressively being monitored on a daily basis as issues arise.

Whether its government health inspections supplier output logistics and many more theres just a my read of obstacles that our team has to continue to overcome on a daily basis.

The Veritiv team has done an outstanding job to carefully and methodically resolve these issues as they arise in places all over the globe. So we continue to supply products to our customers and assist them with their services needs.

Moving onto the demand side, certainly the headline number of orders being up 13% is great accomplishment of the sales and marketing team.

Rob Johnson: Each region grew orders substantially, with EMEA leading the way at 26% year-over-year growth in Q1. The orders were largely driven by cloud, large co-location, and telecommunication companies. The area where we saw softness was within the small and medium-sized business that is served by our IT channel partners, who have been adversely affected by the pandemic. As this segment of the business starts to come back, we expect to see demand continue. Turning to slide 6. As I mentioned previously, we were in early identifying, addressing, and implementing a number of different cost actions for Q1. The entire leadership team and board of directors took a 10% base pay cut. While this may not be new news to most of you, what you didn't know is that they volunteered to do this. I didn't even have to ask them.

Each region grew orders substantially with EMEA, leading the way at 20%, 26% year over year growth in Q1.

Orders were largely driven by cloud large co location and telecommunication companies.

The area, where we saw softness was within the small and medium sized business that has served by our channel partners, who have been adversely affected by the pandemic.

As this segment of the business starts to come back we expect to see demand continue.

Turning to slide six.

As I mentioned previously where it we were in early identifying and dressing and implementing a number of different cost actions for Q1.

The entire leadership team and board of Directors took a 10% bakes space based pay cuts. While this may not be new news to most of you, which you Didnt know is that the volunteered to do this I didn't even have to assets.

Rob Johnson: Additionally, merit increases for employees were halted for 2020. The 401K match in the US has been stopped, and every department has been tasked with a discretionary 15% cut. Furthermore, Dave mentioned in his opening remarks about use of furloughs, and we have implemented those across every function and every jurisdiction where it's allowed. Employees have been understanding and supportive of our efforts to utilize these measures to make sure Vertiv stays strong and financially healthy. These actions, and a few others, will contribute to $60 million of P&L benefit during the rest of 2020. We are also being aggressive on the revenue side. Our sales and service teams are strengthening ties with the customer, providing updates and reassurances to them regularly.

Additionally, merit increases for employees were halted for 2020 before one k. matching the U.S. has been stopped and every department has been task with the discretionary 15% cut.

Furthermore, Dave mentioned in his opening remarks about use of furloughs and we've implemented those across every function and every juritz jurisdiction, where it's allowed.

Employees have been understanding and supportive of our efforts to utilize these measures to make sure vertis stays strong and financially healthy.

These actions and a few others will contribute to $60 million a piano benefit during the rest of 2020.

We are also being aggressive on the revenue side, our sales and service teams are strengthening ties with the customer providing updates and reassurances to them regularly.

Rob Johnson: We have enhanced our marketing message and increased our social media presence as we look for additional ways to reach those in need of the products and services that we provide. The selfless nature of our 19,000-plus employees is a testament to the culture of the organization, our desire to be present and helpful to those who need us, our willingness to work while we battle COVID-19. I am proud of the way Vertiv and its team have acted and reacted to all the unknowns we faced in Q1. With that, I'll turn it over to David Fallon to give a deeper dive into the.

We've enhanced our marketing message and increased our social media present, as we look for additional ways to reach those in these are the prior products and services that we provide.

The selfless nature of our 19000 plus employees is a testament to the culture of the organization our desire to be present and helpful to those leaders our willingness to work, while we battle Cobot 19.

I'm proud of the way Veritiv and his team have acted and reacted to all the unknowns we faced in Q1.

With that I'll turn it over to David found to give a deeper dive into the.

Sure.

Thanks, Thanks, Rob turning to slide seven.

David Fallon: ... Thanks, thanks, Rob. Turning to slide 7, this page provides a summary of our debt structure and our current and expected future liquidity. Starting on the left-hand side, we remind investors that we, we were able to time the SPAC transaction and debt refinancing quite well, with neither likely available to us in this current market environment.

David Fallon: Thanks, thanks, Rob. Turning to slide 7, this page provides a summary of our debt structure and our current and expected future liquidity. Starting on the left-hand side, we remind investors that we, we were able to time the SPAC transaction and debt refinancing quite well, with neither likely available to us in this current market environment.

This page provides a summary of our debt structure in our current and expected future liquidity.

Starting on the left hand side, we remind investors that we were able to time. This fact transaction and debt refinancing quite well with neither likely available to us in this current market environment.

David Fallon: However, as a result, we possess a rather simple long-term debt structure with a $2.2 billion term loan maturing in 2027, with $1 billion at a variable rate, currently at 3.4%, and $1.2 billion swapped to a fixed rate of 4.1%, resulting in a relatively modest annual cash interest run rate of less than $90 million, which is inclusive of interest on our $455 million asset-based lending facility or our ABL. Now, counterparties to our ABL are all large, well-known, reputable banks, hence we believe there is little counterparty risk related to credit in our ABL.

However, as a result, we possess a rather simple long term debt structure with a 2.2 billion dollar term loan maturing in 2027.

With $1 billion at a variable rate currently at 3.4% and $1.2 billion swapped to a fixed rate of 4.1%, resulting in a relatively modest annual cash interest run rate of less than $90 million.

Which is inclusive of interest on our 455 million dollar.

Asset based lending facility or our LTL.

Now tower party to our ABL are all large well known reputable banks, hence we believe there is little calendar.

Marty risk.

Related to credit in our a BL.

David Fallon: Our term loan contains no financial maintenance covenants, and our ABL contains only one springing financial maintenance covenant if our availability falls below $45.5 million or 10% of the total facility. The springing financial maintenance covenant is a fixed charge coverage ratio that must be greater than 1, and which was at 3.7 at the end of March. Hence, we believe there is minimal risk of violating this covenant, even under significant downside scenarios. The right-hand side of this page summarizes our liquidity, a strong $446 million at the end of Q1, including $289 million of non-restricted cash and $157 million available on our ABL. We will review the components of negative free cash flow in Q1 in a few slides.

Our term loan contains no financial maintenance covenants and our ABL contains only one springing financial maintenance covenants, if our availability falls below $45.5 million or 10% of the total silly.

Spring and financial maintenance covenants is a fixed charge coverage ratio.

Just be greater than one and which was at 3.7 at the end of March. Hence we believe there is minimal risk of violating this covenant even under significant downside scenarios.

The right hand side at this stage summarizes our liquidity.

A strong $446 million at the end of the first quarter, including $289 million of non restricted cash and a $157 million available on our LTL.

We will review the components of negative free cash flow in the first quarter in in a few slides.

David Fallon: One hundred million dollars of that use of cash was pursuant to discrete payments related to the SPAC transaction and cash interest, which will not recur going forward. We continue to expect positive free cash flow for the full year, including slightly negative in Q2 and significantly positive in Q3 and Q4. This projected quarterly cash flow cadence is consistent with prior years, as we generally use cash in Q1, and Q2 free cash flow is generally somewhat modest due to lower collections from lighter seasonal Q1 sales. Normally, a large percentage of our full-year free cash flow is generated in the second half of the year. We feel quite good about our liquidity projections, even under unlikely significant downside scenarios.

But $100 million that use of cash was pursuant to discrete payments.

Related to this fact transaction and cash interest, which will not recur going forward.

We continue to expect positive free cash flow for the full year, including slightly negative in the second quarter and significantly positive in the third and fourth quarters.

Projected quarterly cash flow cadence is consistent with prior years says, we generally use cash in the first quarter and second quarter free cash flow is generally somewhat modest due to lower collections from lighter seasonal first quarter sales normally a large percentage our full year free cash flow is generated in the second half of the.

Year.

We feel quite good about our liquidity projections, even under unlikely significant downside scenarios.

David Fallon: For example, even if sales are modeled to decline an improbable 25% from last year, and as, as Dave mentioned at the outset, and just for avoidance of doubt, we provide this illustrative downside scenario simply to demonstrate confidence in our liquidity and not as any form of directional guidance. Even under this extreme scenario, our projected liquidity low point in 2020 still does not drop below $300 million, as lower adjusted EBITDA is partially offset by a recovery of working capital, which runs at about 22.5% of sales.

For example, even if sales are model to decline in improbable.

25% from last year.

And as as Dave mentioned at the outset and just for avoidance of doubt we provide this illustrative downside scenarios simply to demonstrate confidence in our liquidity and not as any form of directional guidance, but even under this extreme scenario, our projected liquid and low point in 2020.

Bill does not drop below $300 million as lower adjusted EBITDA is partially offset by a recovery of working capital, which runs at about 22.5% of sales.

And for further clarity this 300 million dollar low point is not a year end liquidity figure.

David Fallon: For further clarity, this $300 million low point is not a year-end liquidity figure, but this would be projected to occur at some point intra-month in Q4 as our liquidity ebbs and flows intra-quarter, but is generally highest at each quarter and year-end. In addition, under this and any significant downside sales scenario, our liquidity is also negatively impacted by lower collateral on the ABL, as lower sales reduce eligible accounts receivable supporting the borrowing base. Of course, this modeling scenario also assumes that customers continue to pay amounts owed to us in a timely manner, and we pay suppliers similarly. As of today, we have not experienced any significant collection issues.

But this would be projected to occur at some point interim month in the fourth quarter as our liquidity ebbs and flows intra quarter, but is generally highest at each quarter.

And year end.

In addition, under this in any significant downside sale scenario. Our liquidity is also negatively impacted by lower collateral on the sale as lower sales reduce eligible accounts receivable supporting the borrowing base.

Of course this modeling scenario also assumes that customers continue to pay amount owed to us in a timely manner and we pay suppliers. Similarly.

As of today, we have not experience any significant collection issues. In addition, our modeling does not assume the benefit of any additional cost actions, which certainly would be likely in a significant sales downturn.

David Fallon: In addition, our modeling does not assume the benefit of any additional cost actions, which certainly would be likely in a significant sales downturn, nor does this scenario include the benefit of any potential additional liquidity actions, including contractually extending supplier payment terms, establishing local lines of credit, or even though we do not foresee a dire need at this point, opportunistically accessing debt financing markets. Next slide, turning to slide 8. This page summarizes our Q1 financial results versus last year's Q1. Net sales were down $158 million or 15%, including approximately $80 million due to COVID-19 and $19 million from unfavorable changes in foreign exchange rates, as most global currencies weakened versus the US dollar in Q1.

Nor the this does this scenario included the benefit of any potential additional liquidity actions, including contractually extending supplier payment terms, establishing local lines of credit or even though we do not foresee a dire need at this point opportunistically accessing.

Debt financing markets.

Next slide turning to slide eight.

This paid summarizes our first quarter financial results versus last year's first quarter.

Net sales were down $158 million or 15%.

Including approximately $80 million due to co the 19.

And $19 million from unfavorable changes in foreign exchange rates.

As most global currencies weakened versus the U.S. dollar in the first quarter.

David Fallon: The remaining $59 million reduction was anticipated heading into the quarter, primarily driven by large projects in last year's Q1, predominantly in Americas and EMEA. adjusted EBITDA declined $40 million from last year due to the lower top line and partially offset by lower fixed costs from prior year restructuring activity. Adjusted EBITDA margin declined 260 basis points, primarily due to the lower of leverage, lower leverage of fixed costs. To the far right, free cash flow declined $158 million from last year's Q1, including $100 million combined due to discrete payments pursuant to the SPAC transaction and cash interest that will not recur going forward. We will provide a more fulsome explanation of changes in free cash flow in just a couple of slides.

The remaining $59 million reduction was anticipated heading into the quarter, primarily driven by large projects in last year's first quarter predominantly in Americas and EMEA.

Adjusted EBITDA declined $40 million from last year due to the lower top line and partially offset by lower fixed costs from prior year restructuring activity.

Adjusted EBITDA margin declined 260 basis points, primarily due to the lower of leverage.

Lower leverage of fixed costs.

And.

Far right free cash flow declined $158 million from last year's first quarter, including $100 million combined due to discrete payments pursuant to this fact transaction and cash interest that will not recur going forward.

I will provide a more fulsome explanation of changes.

In free cash flow and just a couple of slides.

Finally on this slide we include a note at the bottom explaining that pursuant to our debt refinancing at the beginning of March where we raised the new term loan and concurrently paid off several high interest rate notes.

David Fallon: Finally, on this slide, we include a note at the bottom explaining that pursuant to our debt refinancing at the beginning of March, where we raised the new term loan and concurrently paid off several high interest rate notes, we recognized a $174 million loss on extinguishment of debt. $99 million of this loss was a non-cash write-off of deferred financing fees, and $75 million was a cash payment for the early redemption of the notes. Neither of these items is included in adjusted EBITDA, the cash payment for early redemption, or the $75 million, is included in financing activities in the statement of cash flow. Next, turning to slide 9. This page summarizes our Q1 segment results. COVID-19 certainly negatively influenced each of the three regions.

We recognized $174 million loss on extinguishment of debt.

$99 million of this loss was a non cash write off that deferred financing fees and $75 million with the cash payment 40 early redemption of the notes. Neither of these items is included in adjusted EBITDA and the cash payment for early redemption or the 75 million is included in financing.

Activities in the statement of cash flow.

Next turning to slide nine.

This page summarizes our first quarter segment results.

I won't delved into the details that cobot 19, certainly negatively influenced each of the three regions.

David Fallon: We disclosed the, the top line impact for each region on page 5 of this presentation, including $50 million of the 80 in APAC, as China was virtually shut down in February. However, excluding the impact of COVID-19 and adjusted for $8 million of foreign exchange, APAC sales actually increased $23 million from last year's Q1, primarily on the strength of telecom and larger colocation, and hyperscale customers. Net sales in the other two regions were down from prior year, even excluding COVID-19 and foreign exchange, primarily driven by several larger projects that shipped in the Q1 of 2019. Lower adjusted EBITDA and EBITDA adjusted EBITDA margin in each region, each region was primarily driven by lower year-over-year net sales. Next, turning to slide 10. This chart bridges Q1 free cash flow from last year.

We disclosed the topline impact retreat in on page five of this presentation, including $50 million of the 80.

In Asia Pac as China was virtually shut down in February.

However, excluding the impact that coated 19, and adjusted for $8 million of foreign exchange.

APAC sales actually increased $23 million from last year's quarter, primarily on the strength of telecom and larger co location and Hyperscale customers.

Net sales in the other two regions were down from prior year, even excluding coded 19 and foreign exchange.

Primarily driven by several larger projects that ship in the first quarter at 2019.

Lower adjusted EBITDA and EBITDA adjusted EBITDA margin in eateries each region.

Was primarily driven by lower year over year net sales.

Next turning to slide 10.

This chart bridges first quarter free cash flow from last year.

David Fallon: While we have historically used cash in the first quarter, free cash flow this year was further negatively impacted by lower sales from COVID-19, which significantly contributed to the $41 million increase in inventory and a $40 million reduction in adjusted EBITDA. In addition, cash interest in this year's first quarter was actually $33 million higher than last year, as we accelerated accrued interest payments on the notes we paid off pursuant to the debt refinancing. We were also negatively impacted by the timing of interest payments on the former term loan. Of course, on a go-forward basis, our quarterly cash interest will be significantly reduced, as reflected by the $79 million run rate adjustment in the green bar farthest to the right.

While we have historically used cash in the first quarter free cash flow. This year was further negatively impacted by lower sales from coated 19.

Which significantly contributed to the $41 million increase in inventory.

And a $40 million reduction in adjusted EBITDA.

In addition, cash interest in this year's first quarter was actually $33 million higher than last year.

As we accelerated accrued interest payments on the notes, we paid off pursuant to the debt refinancing and we were also negatively impacted by the timing of interest payments on the former term loan.

Of course on a go forward basis, our quarterly cash interest will be significantly reduced as reflected by the 70.

$9 million run rate adjustment in the Green bar this to the right.

David Fallon: First quarter free cash flow was also negatively impacted by $21 million of discrete costs pursuant to the SPAC transaction. In summary, on a pro forma run rate basis, we used about $103 million of free cash flow in Q1, with approximately $80 million directly or indirectly attributable to COVID-19. Despite this negative free cash flow in Q1, we still expect significantly positive free cash flow for the full year. With that said, I turn it back over to Rob.

First quarter free cash flow was also negatively impacted by $21 million of discrete cost pursuant to this fact transaction.

So in summary on a pro forma.

Run rate basis, we used about $103 million of free cash flow in the first quarter with approximately $80 million directly or indirectly attributable to covert 19.

And despite this negative free cash flow in the first quarter, we still expect significantly positive free cash flow for the full year.

And with that said I turn it back over to Rob.

Thanks, David.

Rob Johnson: Thanks, David. As we turn to slide 11, it's important to communicate the fact that our critical digital infrastructure is more necessary now than ever before because of the world's growing need and dependency on vital applications. While we remain cautiously optimistic on the balance of the year, the dynamic nature of the situation makes it extremely difficult to provide guidance at this time. We do feel good about the demand side, and we believe the volatilities of the supply chain will moderate over time. It's not possible at this time to be able to peg a number for 2020. What I can share, however, is internally we have run multiple scenarios, as discussed earlier, and sensitivity analysis.

As we turn to slide 11, it's important to communicate the fact that are critical digital infrastructure is more necessary now than ever before because of the girls world growing need and dependency on vital applications.

Well, we remain cautiously optimistic on the balance of the year.

The dynamic nature of the situation makes it extremely difficult to provide guidance at this time.

We do feel good about the demand side and we believe the volatility is of the supply chain will moderate over time.

But it's not possible at this time to be able to peg a number for 2020.

What I can share. However is internally we have run multiple scenarios as discussed earlier and sensitivity analysis and even in the most aggressive downside case with sales at 4 billion, we would still be in a position to deliver approximately 500 million in adjusted EBITDA.

Rob Johnson: Even in the most aggressive downside case, with sales at $4 billion, we would still be in a position to deliver approximately $500 million in adjusted EBITDA. Clearly, additional cost actions would be taken, which we have, but those actions have been identified and are realistic from a timing and savings standpoint. I provide these numbers as a reference point, but have no reason at this time to believe we will see sales fall this far. We are always preparing for every ever-changing scenario. Turning to slide 12, and in closing. I want to thank you for your support over the past quarter and in the quarters to come. We participate in a great industry, as Dave said.

Clearly additional cost actions, we'd be taken which we have.

But those actions have been identified and a realistic from a timing and saving standpoint.

I provide these numbers as a reference point.

But have no reason at this time to believe we will see sales fall this far.

We are always preparing for every ever changing scenario.

Now turning to slide 12 and in closing.

I want to thank you for your support over the past quarter, and then the quarters to come.

We participate in a great industry as Dave said.

Rob Johnson: We have the leadership and position, and never has critical digital infrastructure to support the vital applications of the world been so important as it is now. Our order rate, our cost actions we've implemented, and our liquidity position are all in great shape as we continue operating during this dynamic time. We will continue to invest, as Dave said, for the future while managing for today. This strategic approach will prepare us to be even more successful when we emerge from this pandemic and the world adapts to a new normal. Thank you again for your support. Stay healthy. I now turn the call over to the operator, who will open the line up for questions.

We have the leadership and position and never has critical digital infrastructure to support the vital applications of the world been so important as it is now.

Our order rate our cost actions, we've implemented our liquidity position all in great shape as we continue operating during this dynamic time.

We will continue to invest as Dave said for the future while managing for today.

This strategic proposal approach will prepare us to be even more successful when we emerge from this pandemic and the world adapts to new normal.

Thank you again for your support stay healthy I now turn the call over the operator, we'll open the line up for questions.

We'll now begin the question answer session.

David Cote: We'll now begin the question-and-answer session. In order to ask a question, press star, then the number 1 on your telephone keypad. We'll pause for just a moment to compile the Q&A. First question comes from Nicole DeBlase with Deutsche Bank. Please go ahead.

Operator: We'll now begin the question-and-answer session. In order to ask a question, press star, then the number 1 on your telephone keypad. We'll pause for just a moment to compile the Q&A. First question comes from Nicole DeBlase with Deutsche Bank. Please go ahead.

In order to ask a question.

Press Star then the number one on your telephone keypad.

We'll pause for just a moment the compound acuity.

First question comes from the colder bowls with Deutsche Bank. Please go ahead.

Hi.

Oh, sorry, I was on the good morning, guys.

Nicole DeBlase: Oh, sorry, I was on mute. Good morning, guys.

Good morning, the call right.

Rob Johnson: Good morning, Nicole.

David Cote: Sorry.

Nicole DeBlase: Maybe.

Maybe we could Hello, maybe we could start with the cost savings. So the 60 million that you guys they're targeting.

Rob Johnson: Good morning.

Nicole DeBlase: Hello. Maybe we could start with the cost savings. The $60 million that you guys are targeting, it seems to me that these are kind of all incremental actions relative to the medium-term margin expansion plan that you've laid out. Maybe you can talk about, you know, the temporary versus structural nature of the cost savings. It seems to me like these are all temporary, and they will come back when demand resumes, and maybe the ability to pull some of the medium-term cost items that you guys are working through into 2020 as demand is weak.

Seems to me that these are kind of all incremental actions relative to the medium term.

Second expansion plan that you laid out so maybe you can talk about the temporary versus structural in nature of the cost savings. It seems to me like these are all temporary and they will come back when demand resumed and maybe the ability to pull some of the medium term cost items that you guys are working through into 2020 as demand this week.

Rob Johnson: Yeah. Nicole, hi, this is Rob. What I would tell you is, they're, they're not costs that we expect to come back into the business when we return back to work. These are costs, and we'll realize, as I mentioned in my comments, we'll benefit from these actions, whether they're our furloughs, whether they're merit increases, whether it's the discretionary expense decrease. We fully expect to realize these costs and see them hit the bottom line throughout the quarter.

So Nicole Hi, this is Rob.

When I would tell you is there not cost that we expect to come back into the business when we return.

Back to what these are cost and we will realize as I mentioned in my mind My comment will benefit from these actions whether there are furloughs whether is there.

Merit increases.

Whether it's the discretionary spends decrease so we fully expect to realize these these cost and see than hit the bottom line throughout the quarter. We have and you are correct. We continue to operate on what we've talked about in the past the other levers for margin expansion.

Rob Johnson: We have -- and you are correct, you know, we continue to operate on what we've talked about in the past, the other levers for margin expansion, utilizing the Vertiv operating system as a utilization to increase and better our margin profile and all of the other fixed cost constant things. Everything we've talked about, that's separate to the $60 million. This is really in addition, and as Dave Fallon mentioned, there are additional levers that we can pull if necessary, if we see demand or changes in the environment. David Fallon, any other thoughts?

Utilizing the Americas operating system.

As as a utilization to increase.

And better our margin profile and all of the other fixed cost constant things everything we've talked about that separately. The 60 million. This was really in addition, and as Dave Fallon mentioned there are additional levers that we can pull.

If necessary, if we see demand or changes in the environment.

Maybe without any other thoughts sorry go ahead.

Nicole DeBlase: Sorry, go ahead.

David Cote: If I, yeah, if I could interject a bit. You are a bit right there, though, Nicole. I mean, once volume comes back, yes, people will expect merit increases. We'll return the 401K, that sort of thing. As Rob points out, these are very real cost savings this year, so we will get those. Some of those costs only come back if the volume really comes back. Independent of that, I guess, somewhat complementary to it, to Rob's point, we're still working all our plans to keep fixed costs constant as we go forward. I put all that together and say, this is a, this is a smart thing for us to be doing right now and helps us to achieve everything that we've talked about.

If I, if I could that interject a bit.

You are a bit right there, though to call. It may once volume comes back.

People will expect merit increases will return the floral one k. that sort of thing.

Hi drop points out these are very real cost savings. This year. So we will get those.

And some of those costs only come back if the volume really comes back and independent of that I guess somewhat complimentary to it.

Right.

We're working all our plans to keep fixed cost cost as we go forward.

So I put all that together and say this is it. This is a smart thing for us to be doing right now.

And helps us to achieve everything that we've talked about.

David Cote: At the same time, we wanna be prepared for the future. As volume comes back, which we suspect it's going to, given everything we see in our industry, and we think it's actually gonna be pretty darn good. Yeah, some of that may come back, but it's only gonna come back with volume that's in that 45% contribution margin range.

But at the same time, we want to be prepared for the future and as volume comes back, which we suspect it's going to give it everything we see in our industry, we take that that's going to be pretty good.

Yes, some of that May come back, but it's only going to come back with volume that's in that 45% contribution margin.

Got it that's really helpful and then.

Nicole DeBlase: Got it. That's really helpful. Can we also maybe dig in a little bit to what you guys are seeing in April? Most companies have been willing to comment on that a little bit just because we don't really have a ton of visibility, sitting here with, you know, what you guys are seeing in the early stages of this in North America and Europe. Is that something that you're willing to give some color on?

Can we also maybe dig in a little but to what you guys are seeing in April.

Yes companies have been willing to comment on that a little that just because we don't really have a ton of visibility sitting here with what you guys are seeing in the early stages of this in North America Europe is that something that you're willing to give some color on.

Yes, Hi, this is Rob just at a high level, what I would tell you we expect throughout to.

Rob Johnson: Yeah, hi, this is Rob. Just at a high level, what I would tell you, we expect throughout Q1, April, to see orders continue in a growth trajectory, and then we expect to see some impact from the COVID and from our ability to deliver. We don't have exact numbers, we really don't know. Again, as we mentioned, we're battling every day, all around the world, to make sure we can supply, keep our factories open, sub-suppliers. I would just say that, you know, we expect the orders to continue to be favorable, and we expect to have some COVID impact as we, as we go through Q2, like most other companies have suggested.

Q on April.

To see orders continue.

In a growth trajectory and then we expect to see some impact.

From the co bid and from our ability to deliver.

We don't have exact numbers. So we really don't know and again as we mentioned we're battling everyday all all around the world to make sure. We can supply keep our factories open sub suppliers. So I'd just say that we expect to orders to continue to be favorable and we expect to have some coal that impact as we as we go through to two like most other companies.

Have suggested and when you say favorable to you mean orders are still up year on year first like this quarter versus the one to order growth.

Nicole DeBlase: When you say favorable, do you mean orders are still up year-on-year, versus like the quarter-

Rob Johnson: Uh-

Nicole DeBlase: versus the 1Q order growth?

Rob Johnson: Uh-

Nicole DeBlase: versus the 1Q order growth?

Yes.

Rob Johnson: Yes.

Okay. Thanks, I'll pass it on.

Nicole DeBlase: Okay, thanks. I'll pass it on.

Your next question comes from Mark Delaney of Goldman Sachs. Please go ahead.

David Cote: Your next question comes from Mark Delaney of Goldman Sachs. Please go ahead.

Operator: Your next question comes from Mark Delaney of Goldman Sachs. Please go ahead.

Yes, good morning, thanks for taking the questions.

Mark Delaney: Yes, good morning, and thanks for taking the questions. I was first hoping the company could discuss the demand environment, both in terms of how the first quarter closed and if any business slipped out compared to what the company had been expecting when it held its last earnings call in March. Maybe more importantly, given the record backlog and based on what management knows today, is Vertiv still expecting a pickup in 2H20 sales compared to 1H20 on a qualitative basis?

When the company could I just got the demand environment. Both in terms of how the first quarter closed in any business slipped out compared to what the company have an expensive and how that set last earnings call in March, but maybe more importantly, given the record backlog and based on what management knows today as we're still expecting a pick up in two aged 20 sales compared to one aged 20 on that qualitatively.

Yes.

Hey, Mark Hi, Rob Rob here again.

Rob Johnson: Hey, Mark. Hi, Rob, Rob here again. A couple comments there. We did see, to answer your first question, we did see some pushouts, basically access to sites, happen in, you know, the combination of not being able to fulfill orders or pushouts because of site access or areas being shut down, for example, like Singapore today is. We do expect, and this has been consistent with what we've talked about since the beginning, that the second half would be an upside for us. Now, again, given, you know, COVID, no one can predict, you know, how long the thing will last and when every country will be back to work, but the expectations are that the second half will be an up, up half, as we, as we said in the past.

A couple of couple of comments there we did see add to answer. Your first question. We did see some push outs basically access to sites.

Happen in the combination of not being able to fulfill orders or push out because the site access or areas being shut down for example, like Singapore today is.

We do expect and this has been consistent with what we've talked about since the beginning that the second half would be.

An upside for US now again given.

Coated no one can predict how long the thing will last and win every country will be back to work, but the expectations are that the second half will be an up a path as we as we said in the past.

Got it is helpful. And then your second question I, just wanted to better understand one of the comments in the in the press release.

Mark Delaney: Got it, that's helpful. My second question, I just wanted to better understand one of the comments in the press release. I think the company talked about a stable demand environment, but also orders were up 13% year-over-year. I'm just trying to better reconcile some of the commentary, some of the puts and takes in orders that the company is seeing and just kind of, you know, better understand stable relative to the order growth that was reported. Thanks.

I think it's only talked about a stable.

Demand environment, but but also orders were up 13% year over year I'm, just trying to better reconciles at some of it in the commentary.

The other puts and takes in orders at the company as seen and just kind of.

To better understand stable relative to the order growth that was reported thanks.

Rob Johnson: Yeah. Mark, just going through that at a high level, but to hopefully give you enough color here. As we had been talking about, and I think in our last conference call, we talked about the fact that there was this digestion going on in the US, and we would expect in Q1 to begin to see orders pick up, specifically in the colo and hyperscale space. We saw real strength in the colo, hyperscale, and telecommunications. That drove a lot of that, and that was what we had expected, and it had happened. I think there were some orders, people had placed orders in advance to get in line because they wanna make sure they're gonna get their product.

Yes.

Mark just just going through that at a high level, but hopefully give you enough color here.

As we had been talking about and I think than the last conference call. We talked about the fact that up there was this digestion going on in the U.S.

And we would expect in Q1 to begin to see orders pick up.

Specifically in the Colo and Hyperscale space.

So real strength.

In the in the Colo Hyperscale and telecommunications and so that drove a lot of that and that was what we had expected. It had happened I think there were some orders.

People have placed orders in advance to get in line because they want to make sure you're going to get their product.

Rob Johnson: The areas which you would expect, small to medium business and enterprise during these times, and the channel type business, would not be on a growth trajectory right now. Again, with the products we're releasing, with our focus on that market, we fully expect when people get back to work, that we'll have recovery there.

The areas, which you would expect a small to medium business and enterprise during these times and the channel type business.

I would be would would not be on a growth trajectory right now, but again with the products we were leasing.

With our focus on that market, we fully expect when people get back to work that will help recovery there.

Okay, and then just lastly, a follow up on on the questions related to cost and especially in <unk> dollars were fair amount less than what some I had been anticipated they talked about some of those incremental savings telecom. So they maybe just help us understand how to think about us generate ours in to Q.

Mark Delaney: Okay. Just, just lastly, a follow-up on the questions related to costs and SG&A dollars were a fair amount less than what I had been anticipating. I know they talked about some of those incremental savings still to come. Maybe just help us understand how to think about SG&A dollars in Q2 and throughout the year. You know, do those trend lower than the levels that were reported in Q1? Again, just some of the temporary actions that, you know, I realize will be achieved, you know, do some of those temporary costs start to come back in?

Throughout the year and go to those.

The trend lower than than the levels ever more reported in the first quarter or.

They have is this some of the temporary actions that I realize will be achieved.

It into some of those temporary cost started to come back in and so.

Mark Delaney: You know, the OpEx dollars, you know, start to go back up compared to where, where we came in at, for Q1. Thanks.

Opex dollars start to go back up compared to where we came in at for the first quarter. Thanks.

Rob Johnson: Yeah, I have a couple comments. This is Rob again, and then I'll turn it over to Dave or David. What I would tell you is, the world is gonna be, I think, different. I can't predict exactly what it's gonna look like, but I think we've learned to do work in a different way, which, could affect, you know, some of our discretionary expenses, whether it's travel, the T&E side of things. I, I would fully expect that, and our team is working on new ways of doing work that are more efficient, more effective. Give you an example, during this time, training for our sales, for our service people, traditionally is something where we fly them in, they sit in class, and it's expensive.

I have a couple of comments. This is the ramp again, and then I'll turn it over to David David but what I would tell you is the world is going to be I think differently I don't can't predict acting what it's going to look like I think we've learned to do work in a different way, which could affect some of our discretionary expenses when they travel.

T in east side of things.

So I would fully back then in our team is working on.

New ways of doing more of that are more efficient more effective and give you. An example, during this time training for our sales for our service people traditionally is something we fly them and they sent in class and it's expensive we've been able to do and used tools online online testing online classes. So we'll continue to take the efficiencies in the things we learn.

Rob Johnson: We've been able to do and use tools online, online testing, online classes. We'll continue to take the efficiencies and the things we've learned during this pandemic, and apply those to drive more efficiency going forward. David Fallon?

During this.

Pandemic and apply those to drive more efficiency going forward.

David talent.

Yes.

David Fallon: Sure. And, and just some, you know, further detail on that $60 million, probably about 70% of that will impact SG&A. A good portion of the cost actions that we put in place will benefit at SG&A going forward. I think some of the drivers of the lower year-over-year SG&A in 1Q versus Q1 last year, will continue going forward. You know, we were able to put in place some restructuring activity last year, which we will benefit from in each quarter going forward.

Sure and just some.

In further detail on that 60 million, probably about 70% of that will impact desk DNA. So a good portion.

Of the cost actions that we put in place will benefit SNA going forward.

And I think some of the drivers of the lower year over year SGN eight in one Q.

Versus the first quarter last year will continue going forward.

We were able to.

Put in place some restructuring activity last year, which we will benefit from in.

Each quarter going forward. So yes, we certainly have.

David Fallon: You know, we, we certainly have, you know, some tailwinds behind us as it relates to SG&A. Also, reminding folks that we are continuing to invest in innovation and technology, and specifically R&D, even through, you know, some of the, you know, top-line issues, and that R&D will be rolling through SG&A. You know, even though, you know, if you look year-over-year, we do not anticipate a significant increase in SG&A because we believe we can offset some of the higher costs of R&D with some of these favorable SG&A trends. You know, we, we wouldn't, you know, necessarily expect significant reductions going forward.

You know some tailwinds behind us as it relates SGN AG, but also.

Reminding folks that we are continuing to invest in innovation and technology and specifically R&D even through.

Some of the.

Topline issues and.

That R&D, we'll be rolling through SGN a.

So.

Even though if you look year over year, we do not anticipate a significant increase in SGN a because we believe we can offset some of the higher cost of R&D with some of these.

Favorable s. DNA trends.

[music].

We wouldn't.

Necessarily expect at significant reductions going forward.

Got it thank you.

Mark Delaney: Got it. Thank you.

Next question comes from Lance Vitanza of Cowen. Please go ahead.

Operator: Next question comes from Lance Vitanza of Cowen. Please go ahead.

Hi, Thanks, guys. Thanks for all the helped the color.

Rob Johnson: Hi. Thanks, guys. Thanks for all the helpful color. I wanted to actually focus on slide 5. I found that very helpful. I'll start. You know, I was surprised to see the demand impact so significant. I mean, 40% of the, of the $80 million of revenue, so roughly $30 million. I'm just trying to figure out, how does that square with the commentary around orders being up year-over-year across the board? Specifically, does demand in this context, does this here include the inability to access customer locations? When you refer to demand, are you really specifically referring to just customers saying, you know, we no longer want what we thought we wanted?

Lance Vitanza: Hi. Thanks, guys. Thanks for all the helpful color. I wanted to actually focus on slide 5. I found that very helpful. I'll start. You know, I was surprised to see the demand impact so significant. I mean, 40% of the, of the $80 million of revenue, so roughly $30 million. I'm just trying to figure out, how does that square with the commentary around orders being up year-over-year across the board? Specifically, does demand in this context, does this here include the inability to access customer locations? When you refer to demand, are you really specifically referring to just customers saying, you know, we no longer want what we thought we wanted?

I wanted to actually focus on slide five I found that very helpful and I'll start.

Yeah, I was surprised to see the demand impact so significantly 40% of the of the 80 million of revenues roughly $30 million and I'm just trying to figure out how does that square with the commentary around orders being up year over year across the board and specifically does demand in this call.

Next is this your include the inability to access customer locations or when you refer to demand are you really specifically, referring to just customers, saying, yes, we no longer what what we thought we wanted.

Yeah.

David Fallon: Yeah. Hi, this is Rob again. A few comments on that, then I'll hand it over to David. What I'd say is, what we haven't seen is customer demand-

Rob Johnson: Yeah. Hi, this is Rob again. A few comments on that, then I'll hand it over to David. What I'd say is, what we haven't seen is customer demand someone place an order and then cancel that. We have not seen canceled orders. What we have seen, as you mentioned, and you're direct on, is that the access to the site are people actually pushing it out just because they're shut down and we can't access that site. The combination of not being able to manufacture the goods because of the things that are happening in our manufacturing facilities and the access to sites really drove that revenue, that $80 million COVID impact.

Hi, This is Rob again.

Few comments on that and then I'll hand handed over to David what I'd say as we hit what we Havent seen is customer demand of someone placed an order and then cancer that we have not seen canceled orders. So what we have seen as you mentioned in your direct on is that the access to the site our people actually pushing.

Rob Johnson: ... someone place an order and then cancel that. We have not seen canceled orders. What we have seen, as you mentioned, and you're direct on, is that the access to the site are people actually pushing it out just because they're shut down and we can't access that site. The combination of not being able to manufacture the goods because of the things that are happening in our manufacturing facilities and the access to sites really drove that revenue, that $80 million COVID impact.

It out just because they are shut down and we can't Axesat site. So the combination of not being able to manufacture the goods because of the things that are happening in our manufacturing facilities and the access to sides really drove that revenue that $80 million covidien back.

Okay. That's that's super helpful and kind of what I, what I expected, but wasn't clear. So then to the extensive this revenues deferred rather than loss, obviously nobody knows when the lockdown ends, but once the locked down does and how quickly would you think you know all else equal we expect to see that deferred revenue return.

Lance Vitanza: Okay, that's, that's super helpful and, and kind of what I, what I expected, but wasn't clear. To the extent that this revenue is deferred rather than lost, obviously, nobody knows when the lockdown ends, but once the lockdown does end, you know, how quickly would you think, you know, all else equal, we expect to see that deferred revenue return? I mean, I would think it would be pretty quick, meaning in, you know, within a couple of months from whenever the lockdowns are over. Is that, is that a fair estimation?

I would think it would be pretty quick meaning in within a couple of months from whenever the Lockdowns Rover is that is that a fair estimation.

Rob Johnson: I wouldn't say within 2 months, only because I don't know when our factories and the rest of the supply chain will be at full strength and full health. That's gonna be dependent, but access to sites will open up, and we'll certainly have a large backlog to work through and get that out. I would expect to see, as we've talked about, and again, even pre-COVID, that the second half will have a nice jump into it. I think, based on what we've seen in the backlog and customer, customer overall demand, we're not seeing people cancel or delay. Now, I did mention, and we did talk about the channel, things, things with small to medium business, who knows how these are gonna come back?

I wouldn't I wouldn't say within a couple of months be only because I don't know when our factories and address the supply chain will be at full strength and pull how that's going to be dependent but access to sites will open up and we will certainly have a large backlog to work through.

And get that out so I would expect to see as we've talked about in again, even pre cobot at the second half will have a nice jump into it and I think based on what we've seen in the backlog and customer customer overall demand.

We're not we're not seeing people canceled or delayed now I did mention and we did talk about the channel.

Things things with small to medium business, who knows how these are going to come back and various verticals whether its entertainment.

Rob Johnson: In various verticals, whether it's entertainment, or whether it's travel, some of those have been, been impacted pretty hard, and I just can't predict how that's gonna come back. We do see other areas, like healthcare. The thing I'm so excited about is this work from home initiative is really driving the, the fact that we need more edge devices. Latency has become a real huge issue. I bet every one of you experienced that in your home. Overall, we, we see the, the world coming back and our, our stuff being more, even more vital than what it was prior to COVID.

Our whether its travel some of those have been impacted pretty hard and I just can't predict how that's going to come back, but we do see other areas like health care and the thing I'm. So excited about is this work from home initiative is really driving the fact that we need more edge devices latency has become a real huge issue I bet every one of you experience at.

In your home. So overall, we see the will coming back in our stuff being more even more volatile than what it was prior to the global.

Understood maybe just two quick follow ups on the first is could you remind us what percentage of your revenue currently comes from the channel and then secondly, the EBITDA impact that you saw from the co that hit in the first quarter is about 35, 40% flow through is that what whatever the revenue impact turns out to be in the second quarter, we don't know but.

Lance Vitanza: Understood. Maybe just 2 quick follow-ups on that. The first is, could you remind us what percentage of your revenue currently comes from the channel? Secondly, the EBITDA impact that you saw from the COVID hit in Q1 is about 35% to 40% flow through. Is that whatever the revenue impact turns out to be in Q2, we don't know, but whatever that revenue impact is, should we expect the same kind of flow through to EBITDA that we saw in Q1?

However that revenue impact is should we expect the same kind of flow through to EBITDA that we saw in first quarter.

Rob Johnson: Sure, I'll handle-

Sure I'll handle that.

Lance Vitanza: Percentage.

Now I'll handle first part and then turn it over to David on the channel side that represents about 15% of our overall global revenue.

Rob Johnson: Yeah, I'll handle the first part and then turn it over to David. On the channel side, that represents about 15% of our overall global revenue. So it's, you know, it's around $600, 700 million. David Fallon, on the margin side or flow through.

So it's it's around six $700 million.

David.

Alan on the margin side.

Yeah. So.

David Fallon: Yeah. We applied a 40% contribution margin to the $80 million COVID sales impact. The reason we use a number that is probably a little bit lower than what we have been broadcasting as our contribution margin, is because 50 of that $80 million was in APAC. In general, our contribution margins in APAC are lower than the other two regions. For the sake of modeling, you know, going forward, we would anticipate any lost sales in APAC, whether it's related to COVID or otherwise, to be somewhere between the 40% and 45%. Probably a little bit higher than what we used in Q1.

We applied at 40%.

Contribution margin to the 80 million dollar.

Co that sales impact and the reason we use a number that is probably a little bit lower than what we have been broadcasting as our contribution margin is because 50 of that 80 million was in a pack and.

In general our contribution margins in Asia Pac are lower than the other two region.

For the sake, a modeling going forward, we would anticipate.

Any lost sales is pack, whether it's related to co that or otherwise to be somewhere between 40, and 45%, so probably a little bit higher than what we used in the first quarter.

Thanks, very much guys I appreciate your time.

Lance Vitanza: Thanks very much, guys. I appreciate your time.

Your next question comes from Scott Davis of many of US Research. Please go ahead.

Operator: Your next question comes from Scott Davis of Melius Research. Please go ahead.

Hey, good morning, guys.

Scott Davis: Hey, good morning, guys.

Rob Johnson: Good morning, Scott.

Scott Hi.

Scott Davis: Hi. Is there any impact on price in the quarter? Is price generally pretty flattish at this point, or are you able to get any positive price, particularly with new products?

Is there any impact on price in the quarter as price generally pretty flattish at this point or are you able to get me positive price takeover new products.

Yes, so it's great great question, and I would say within within the quarter. We did we were able to get some price.

Rob Johnson: Yeah, great, great question, and I would say within the quarter, we did, we were able to get some price. We have actions, ongoing actions we did last year and will continue this year to drive price in areas. New products being delivered to the market give us some unique features and give us a little bit of pricing power as well. The combination of just being, you know, maniacally focused on pricing on a global basis and new product intros that have innovative features that allow us to get more price than our competitors. For example, new models of our DSE air conditioner that allow higher margins for us. We've been still able to get price during this time in various areas.

We have actions ongoing actions, we did last year and will continue this year to drive price in areas.

New products being in.

Delivered to the market give us some unique features and give us a little bit of pricing power as well. So the combination of just being monopoly focused on on pricing on a global basis.

And new products intros that have innovative features that allow us to get more pricing. Our competitors. For example, new models of our DSE Air Conditioner that will allow higher margins for us. So we've been still able to get price. During this time in various areas, we're very focused on that.

Rob Johnson: We're very focused on that.

Okay Thats helpful and then.

Scott Davis: Okay, that's helpful. Then, I probably should have asked this question a while ago, but how much of your backlog has a down payment? What's kind of the standard in putting something into backlog or, you know, which, you know, obviously the confidence in that backlog? Love to get your opinion on that as well. But first question, really relating to how much of that requires a down payment.

I should ask this question, a while ago, but how much your backlog as a down payment what's kind of the standard and.

And putting something into backlog.

Which.

Obviously, the confidence about backlog.

Let me get your opinion on that as well, but first question really relating to how much of that requires a down payment.

Rob Johnson: Yeah. Scott, not, not much, not much at all. Very little do we have, you know, prepayment, cash up front on that. Now, the backlog is supported by very healthy, healthy companies. Those orders that are coming in, whether it's colo, hyperscale, telecom, although all companies are affected by this pandemic, we have, we have a really solid base of, of very financially stable companies that have placed these orders, and we, we feel real confident that we won't be seeing canceled, canceled orders. The demand is, is as high as you can get.

Yes, Scott not not much not much at all.

Very little do we have prepayment cash upfront on that.

Now the backlog is supported by very healthy healthy companies those orders that are coming on a little below Hyperscale telecom.

Although all companies are affected by this pandemics, we have we have a really solid base of very financially stable companies that in place. These orders and we do feel confident that we won't be a be seen cancel the canceled orders. The demand is high as you can.

Okay and just point.

Scott Davis: Okay, and just a point of clarification, Oh, please go, go right ahead. I'm sorry.

Please go ahead sorry.

David Cote: Yeah, Scott, the other thing that I'd add is just right now, this is a tremendous proof point that data centers are important, not just now, but going forward. It's hard to imagine that these orders don't get don't continue. To Rob's point, historically, we've had it's been the backlog tends to be pretty robust. The other thing, Scott, is I know you got another biz question, but I strongly expected some kind of shot about Brady going to the Bucs, but I guess you'll have to send me a note and say.

Yes, Scott the other thing that I.

That is just.

Right now this is a tremendous proof point that data centers are important not just now but going forward.

It's hard to imagine that these are you still get.

Well continue it to Rob's point historically, we've had.

It's been.

The backlog that has to be pretty robust.

The other thing Scott, let me get another biz question, but I strongly expected some kind of shot about Brady go into the box, but I guess, you'll have the Permian, though [laughter] well after I have to admit after we've had 25 companies report in the last several [laughter] pretty brand tried to.

Scott Davis: Well, I have to, I have to admit, after we've had 25 companies report in the last several days, I'm pretty brain fried to even think about football right now. Your Patriots are gonna suck for a long time, Dave, and it's gonna be fun to watch it. You have really no-

Think about football right now, but Doug.

But your Patriots are gonna Soc for a long time, Dave that's going to be fun to watch it.

[laughter] Rio and no forward with our yet [laughter] [laughter], Oh man anyways to get back to the press.

David Cote: I'm not ready to throw in the towel yet.

Scott Davis: Oh, man. Anyways, to get back to brass tax here. A couple just cleanups, and hopefully you don't have a lot of other questions, just cut me off if you do. Am I to assume that if 70% of that $60 million is SG&A, then the other 30% is kind of at the factory level? You know, perhaps some of that could be structural/permanent. Is that possible or?

Tax here a couple just clean ups and hope we don't have a lot. Other questions is cut me off if you do but it am I to assume that if 70% of that 60 million has asked you made any other 30% is kind of at the factory level.

Okay and.

And perhaps some of that could be structural plush permanent because that possible.

David Fallon: Hi, Scott. This is David Fallon. Absolutely. If you look at the large components of the $60 million, probably 1/3 of that is discretionary spending, and that is more than likely the bucket of costs that we would be targeting going forward to be a permanent reduction. You know, a portion of that is D&A, as an example, and we're all kind of learning new ways to do business without jumping on a plane.

Yeah, Hi, Scott. This is this is David Valley, absolutely. So if you look at the large components of the 60 million probably a third of that is discretionary spending and that is more than likely the bucket of cost that we would see targeting going forward to to be a permanent reduction.

And so you know.

Portion of that as DNA as an example, and we're all kind of learning new ways to do business without jumping on a plane.

And.

Scott Davis: Yep.

David Fallon: If you look at the different components, I would say there's gonna be something of that $60 million that certainly flows through into next year and going forward. You know, we look at, you know, one thing, one philosophy that David Cote has brought to us is, you know, a fixed cost is a fixed cost, you know, whether it's in the factories or in the office, and we treat all fixed costs the same, and certainly a significant portion of this will be benefiting the factories as well.

So if you look at the different components I would say, there's going to be something of that 60 million that certainly flows through.

Into next year and going forward.

And.

And it we look at one thing one philosophy that David Toti has brought to us is.

Fixed costs as a fixed costs, whether it's in the factories are in the office and we treat all fixed costs were saying and certainly a significant portion of this will be.

Benefiting the factories as well.

Okay. So I'm, sorry, I have one last final one.

Scott Davis: Okay. Super. Sorry, I have 1 last final one. Inventories, was it the shutdown in the middle of March that kind of caught you guys with your pants down, if you will, on inventories? Because that was a pretty meaningful buildup that we saw. Presumably, you saw issues, I would imagine, in China, particularly earlier in the quarter. I was a little surprised the inventory is built that much.

Inventories the what's at the shutdown in middle of March that kind of caught you guys were here you are passed out if you will on inventories because.

It was a pretty meaningful on build up that we saw and presumably you saw a issues I would imagine in China, particularly earlier in the quarter that.

So as I was surprised inventories built that much.

Yeah, so absolutely the.

David Fallon: Yeah. Absolutely the, you know, the negative impact from COVID and, you know, as we got through the Q1, we were actually in line with our internal projections as it relates to the top line, and things moved south really quickly in China, you know, virtually shut down, all of February. Then, of course, the impact in the other regions accelerated into March. As we were putting our inventory, you know, build plans together, as of early February, you know, we didn't necessarily anticipate the size of the negative impact that actually occurred.

The negative impact from coded and.

We as we got through the first quarter, we were actually in line with our internal projections as it relates to the topline.

And things move South really quickly in China virtually shut down all of February and then of course.

The impact in the other regions accelerated into March.

So as we are putting our inventory.

Build plans together as of early February.

We didnt necessarily anticipate the size of the negative impact that actually.

Occurred.

David Fallon: I, I, I would attribute a very large portion of that $40 million, if not all, just related to our sales planning projections, you know, based on where we were sitting at the end of January.

So I I would attribute a very large portion of that 40 million if not all just related to our.

Sales planning projections based on where we were sitting at the end of January.

Oh, you made a mistake adjusting our salesforce I get it how do that all the time well. Thank you can kind of thought.

Scott Davis: Oh, you made a mistake of trusting your sales force. I get it. I do that all the time. Well, thank you, guys. Good luck to you.

Thank God.

David Fallon: Hey, thanks, Scott.

[laughter].

Scott Davis: Good luck.

Going to be able to question Press Star then one on your telephone keypad.

Operator: Again, if you have a question, press star, then 1 on your telephone keypad. Your next question comes from Nigel Coe of Wolfe Research. Please go ahead.

Your next question comes from.

Hi, Joe Cole Wolfe Research. Please go ahead.

Thanks, Good morning, and thanks for the question, Hey, Nigel Nice nice to hear from you Hey, Dave Little time, let's see how you.

Nigel Coe: Thanks. Good morning, thanks for the question.

David Cote: Hey, Nigel. Nice to hear from you.

Nigel Coe: Yeah, hey, Dave. Long time let's speak. How are you?

Very well thanks.

David Cote: Very well, thanks. captivity suits me well, it seems.

Captivity suits me well it seems you know it's a with a fancy with you in Davis it felt like a Honeywell cool circa 2009 [laughter] [laughter].

Nigel Coe: You know, it's, you know, with the banter with you and Davis, it felt like a Honeywell call circa 2009.

David Cote: Funny.

Nigel Coe: Yeah. Okay. Thanks for the question, guys. I thought one of the highlights of the quarter was services growth remained remained in place, and I'm just curious how the, you know, the shelter-in-place restrictions have impacted services. Then on top of that, maybe just characterize, you know, the service book in terms of transactional, stroke, discretionary services versus contractual.

Okay. Thanks for the question got them. So I thought one of the highlights the quarter was.

Since his growth remains remained in place and I'm just curious how the Shelton place restrictions of impact the services and then on top of that maybe just characterize citrus book in terms of transactional show discretionary services. This is contractual.

Yeah I Nigel Thanks for the question in your time here.

Rob Johnson: Yeah. Hi. Hi, Nigel. Thanks for the question and your time here. Yeah, the services, one of the areas of growth is if you look at and recall when we kind of on the road and going through is, you know, services and the channel IT. Service has been a real focus for us to expand that, get higher capture rates and so forth. We expected, you know, to see growth there. Where we were able to get access, we do have, you know, about 55%, 60% of our services are under contract, and whether they're preventive maintenance and so on. We've seen some pushback on preventive maintenance and people going to more critical services necessary during this time or what we call startup services.

The services one of the areas of growth. This is if you look at and recall when we kind of on the road and going through his services and the channel I T. The service has been a real focus for us to expand that get higher captured rates and so forth. So we expected.

The see growth there, where we were able to get access we do have you know about the 50, 560% of our services or under contract and whether the preventive maintenance and so on and we've seen some pushback on preventive maintenance and people going to more clinical service necessary during this time or.

What we call startup services. So we did see an uptick in the actual services, but we did see a downtick a little bit in the spare parts side of things. So the combination of the to let us to a little bit of a little bit of growth. There, we expect deal coming out of this especially.

Rob Johnson: We did see an uptick in, in the actual services, but we did see a downtick a little bit in the spare parts side of things. The combination of the two kind of led us to a little bit of a little bit of growth there. We expect, you know, coming out of this, especially, you know, like Dave mentioned, things are so vital now, customers really want to make sure they get the health checks on their systems and so on. I would expect, and we'll continue to invest in service people, service personnel, to make sure that these networks remain vital and robust.

Dave mentioned things are so vital now customers really wants to make sure they get the health checks on their systems and so on so I would expect and we'll continue to invest in.

Service people service personnel to make sure that these networks remain vital and robust.

Nigel Coe: Right. Yeah, that makes sense. I thought the free cash flow scenario analysis was very, very helpful, and, you know, given that the down 25% isn't your, you know, clearly isn't your best case scenario, but in that scenario, are you assuming that working capital can deliver at the same rate of sales, so that 20% remains fairly constant on sales by year end? Yeah, I think you called out, David, that Q2 free cash flow could be negative. Is that normal seasonality for free cash flow?

Yes that makes sense then that's what the free cash flow Sanofi analysis was very very helpful and given that the down 25% isn't.

Creating a base case scenario, but in that scenario.

Are you assuming that working capital can deliver at the same rate to sale. So that 20% remained fairly constant so on sales bye bye bye bye yearend and then I think you called out David.

The two to free cash flow could be could be negative is that normal seasonality for free cash flow.

David Fallon: Yeah, just to address the second one. Absolutely. If you look at the cadence of our quarterly free cash flow, our Q1 historically has been negative. You know, our Q2 toggles between slightly positive or slightly negative. Certainly, free cash flow in Q2 will be impacted by the lower sales in Q1, so we are anticipating a slight use of cash in Q2 this year. As it relates to, you know, the recovery of working capital, the way we are modeling, and you know, actuals hold true to this, is if we look at, you know, our historical movement in working capital.

Yeah, just address the second one.

Absolutely if you look at the cadence of our quarterly free cash flow, our first quarter historically has been negative and.

Second quarter toggles between slightly positive or slightly negative.

Certainly free cash flow in Q2 will be impacted by the lower sales in Q1. So we are anticipating a slight use of cash in Q2, this year and as it relates to.

The recovery working capital the way, we are modeling and you know actuals hold true to this is if we look at.

Our historical.

Movement in working capital, but.

David Fallon: You know, we're assuming a 22.5% recovery in working capital per $1 of sales, whether that goes up or down. You know, if you compare that to the 42.5% or so contribution margin on sales, for every $1 of sales lost, we lose about $0.20 of free cash flow, and that $0.20 is 42.5% contribution margin, less the 22.5% for working capital.

We're assuming a 22 and a half.

Per cent recovery in working capital per dollar.

Of sales, whether that goes up or down.

And you know if you compare that to the 42.5% or so contribution margin on sales.

For every dollar of sales loss.

We lose about 20 cents.

Free cash flow and that that 20 cents is 42 and a half contribution margin less that are less than 22 and a half.

Percent for working capital.

Nigel Coe: Okay, very clear. Very helpful. Thank you very much.

Okay, great. Okay very helpful. Thank very much.

David Fallon: Yep.

[music].

See an agile.

Rob Johnson: See you, Nigel.

Thanks, Andrew.

David Fallon: Thanks, Nigel.

Okay.

This concludes our question answer session I'd like to turn the conference back over to Mr. Rob Johnson for any closing remarks.

Operator: This concludes our question and answer session. I'd like to turn the conference back over to Mr. Rob Johnson for any closing remarks.

Thank you operator, and thank you all all of you for those questions as they didnt beginning we are investing for the future Durness covert period in R&D and in salespeople in services will continue to do that so we come out much stronger.

Rob Johnson: Thank you, operator, and thank you all, all of you for those questions. As Dave stated in the beginning, we are investing for the future during this COVID period, in R&D and in, in salespeople and services. We'll continue to do that, so we come out much stronger. We're taking the appropriate actions on cost, and we have additional levers if necessary, if this pandemic gets worse. We're continuing to drive the long-term margin expansion that we've talked about, and we'll continue to pull those 4 or 5 levers. And want everyone to be clear, as we've mentioned many times, we feel we have solid liquidity. I wanna thank all 19,000 plus employees around the world for working hard every day to take care of our customers. We appreciate all your time. Please stay safe. We look forward to speaking to you again soon.

We're taking the appropriate actions on cost and we have additional levers if necessary at this pandemic gets worse.

Continuing to drive the long term margin expansion that we talked about and we'll continue to pull those four or five lovers.

And deep and want everyone to be clear as we've mentioned many times, we feel we have solid liquidity.

I want to thank all 19000, plus employees around the world for working hard every day to take care of our customers. We appreciate all your time.

Please stay safe we look forward to speaking you again soon thank you very much. This concludes the call.

Rob Johnson: Thank you very much. This concludes the call.

Conference has now concluded. Thank you for accompany todays presentation you may now disconnect.

Operator: Conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

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