Q3 2020 Vertiv Holdings Co Earnings Call
[music].
Good morning, My name is Andrea and I will be your conference operator today.
At this time I would like to welcome everyone to the Vertis third quarter 2020 earnings Conference call.
All lines have been placed on mute to prevent any background noise.
Please note that the call is being recorded I would now like to turn the program over to your host for today's conference call Lynn Max Diner, Vice President of Investor Relations.
Thank you Andrea good morning, and welcome to burden third quarter 2020 early on the call.
Joining me today are Burton Executive Chairman, David Cody, Chief Executive Officer, Rob Johnson, Chief Financial Officer, David.
And chief strategy and development Officer, Gary meter.
Before we begin I'd point out that during the course of this call. We will make forward looking statements regarding future events, including the future loan operating performance supported 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 process which includes.
In todays release, you can learn more about these risks in our registration statement, our proxy statement and other filings with the FCC.
Any forward looking that we make today are based on assumptions that we believe to be reasonable as of the state. We undertake no obligation to update these statements as a result of new information or future events during.
During this call. We will also present, both GAAP and non-GAAP measures, our GAAP results and GAAP to non-GAAP reconciliations can be found in our earnings press release and in the Investor Slide deck on our website at investors that burden dotcom.
With that I will turn the call over to executive Chairman, Dave Cote.
Thanks, and good morning, everyone.
When we spoke in August the herd fevered wrapped up a very successful second quarter.
Let me just say the team demonstrated excellent execution again in the third quarter.
Vertical continues to have great physician and a good industry and I think the proof points over the last several quarters demonstrate that it's not a fluke.
Even during this over time the data center market remains strong and third of continues to validate our leadership position in the market.
While the Pete and executed on both the top and bottom line over the past several months.
We also continue to focus on the plane.
So we'll win not only in the short term, but also the long term.
Initiatives, such as the new verdict product development activities Bpd.
Deploying the bird of user experience or customer view and developing their three year strategic plan or just some of the ways. The vertis team is focused on ensuring sustainable success.
I am really impressed with the adapter adaptability and the Receptiveness of Rob and his team though.
The overall.
Just as excited today about the future Verde, because there was a year ago and I can't wait to continue working with the team.
The wood there during the call over to Rob.
Good morning, everyone and thank you Dave your ongoing coaching and mentoring has meant a lot both me and the team.
I also want to say, thank you to the entire Veritiv team for their efforts in Q3, despite the challenges of the quarter.
The positive comps as has been the team's relentless focus on delivering to our customers.
Others Teen creativity energy and passion for serving our customers is always front and center.
Let's look at the slide turning to slide three.
Overall, the demand side of the business was very promising the sales were up 8.5% and orders were up over 15% as compared to Q3 last year.
Additionally, this is the fourth quarter in a row, where our backlog rose and hit yet another all time high.
We will get a bit more into the specifics on the demand side of the business over the next few slides.
From a profitability standpoint, our adjusted EBITDA was $179 million, which is up 31% from last year's Q3.
This results in adjusted EBITDA margin expansion of 270 basis points.
This was driven by higher sales higher contribution margin lower fixed cost on a percentage basis.
Our free cash flow at the end of Q3 was $129 million, which was 115 million higher than last year's Q3.
During our last earnings call, we mentioned that we would be working on restructuring plan. In Q3, we completed that activity and took an $80 million restructuring charge for the programs. These restructuring efforts will drive $85 million of annualized run rate savings by 2023 days.
David will share more details about our plans later in the presentation.
Next on this slide we wanted to provide you some of the ranges for the expected outcome of Q4.
We are anticipating the implications of co that to continue to fluctuate based on our current visibility, we expect organic sales to be up 6% to 8% and our adjusted EBITDA will be up 18% to 24% from the last quarter Q4 last year. So.
So while these dynamics can change we did want to share with you. What we're currently seeing playing out in Q4.
Now all of this is clearly predicted predicated on cobot not impacting our customers.
And not impacting site access anymore than what we saw in Q3.
We'll discuss more on this topic later.
Finally, I wanted to add a bit of color around 2021, as we see things right now the demand side is holding up and our backlog should be robust as we exit the year on the cost side, we're keeping a close eye on fixed costs constant but are continually looking at investments in vps.
And other growth program to ensure long term success.
Turning to slide four.
We use this slide last quarter received good feedback on it. So we wanted to keep it in for consistency and also at our thoughts around the current market environment.
Charter several but it relates to real time view, we have on the demand side of things.
It is qualitative in nature and depicts our view on the level of health and activity in each of the markets. We serve we continued to see strong levels of activity in every region in the cloud and co location Merck as indicated by the six green button in the top two rows.
Emerging vital applications, such as online education, telemedicine video and gaming are benefiting our cloud and co location customers as they serve as surge in demand is benefiting us as well in contrast, we see the enterprise and small to medium business still being challenged by cobot and indicated by the Red and.
Yellow buttons enroll three this.
This segment spending continues to be mixed it's probably slightly more positive today than it was 90 days ago, but not significant enough to upgrade any of the regions in this particular space.
Switching to the telecom side of things most of our regions are pretty consistent with prior quarter. We continue to see fiveg deployments in us and parts of Asia or.
While China is certainly deploying fiveg, we see a small pause at the moment as they digest some of their equipment. This is not surprising and we expect that it will be short lived.
Finally, as we've told you before our Cfd business often tracks GDP over the longer run, but sometimes the quarterly timing can be different. While this segment has held up better than expected things remain relatively flat.
Well, certainly some puts and takes but overall a decent market picture when you consider our mix of datacenter business. The applications people use everyday to become more and more vital because those applications are needed to be processed stored transmitted and this creates a great practice for our business.
Moving to slide five.
To reiterate the overall demand is strong as evidenced by our order rates in our re and our record backlog led by EMEA and Asia EMEA was particularly strong due to due to some larger projects specifically in the Colocation market.
As I mentioned in the prior chart the enterprise and channel markets are still not back to pre cobot levels, but there are signs of life as evidenced by our integrated rack solutions business, having positive growth in the third quarter this year versus the same quarter last year.
Switching to the supply side now I'm pleased to report that most of our facilities are operating normally however, I will say that things continue to evolve very rapidly we.
We are being very cautious with our workforce as safety is our number one priority. We continue to navigate through these impacts of that on the operations and supply chain side, but we have become creative problem solvers and experts in mitigating issues before they become concerns for our customers.
Gaining access to sites for installation services has proven to be an issue, but we continue to manage around any restrictions countries like Singapore, and Malaysia, Philippines are still struggling with coated and we've seen some of these countries in western Europe tightening back up again.
These unfortunate cobot related situations are outside of our control and however, we continue to work closely with our customers to adhere to health and safety requirements and to make sure that our scheduling of of our service departments are as flexible as possible to meet their needs.
With that I will turn it over to David solid to walk us through the financials David.
Thanks, Rob turning to slide six this page summarizes our third quarter financial results.
Versus last year as you see net sales were up $91 million or 8.5%.
8.3% when adjusted for a slight foreign exchange tailwind.
We continued our strong momentum with orders as Rob mentioned, which were up 15.5% in the third quarter and 10% year to date adjusted EBITDA increase.
$43 million or 31%.
Driven by higher sales improved contribution margin.
And relatively flat fixed cost converting into a 270 basis point improvement.
On an adjusted EBITDA margin.
Our sales and profitability performance certainly translated into strong free cash flow of $129 million, which was up $115 million from last years third quarter.
We will review some of the drivers of this improved free cash flow in a couple of slides.
But before lead in this page we are proud to emphasize that our third quarter adjusted EBITDA related margins and free cash flow figures are all record quarterly highs demonstrating our continued focus on profitable growth and strong cash flow generation.
Turning to slide seven.
This slide summarizes our third quarter segment results net sales in the Americas were down 14 million.
<unk> million dollars or 3% as growth in our integrated rack solutions segment, primarily in the channel.
It was more than offset by lower large project sales in our critical infrastructure and solutions segment and lower sales in our services and spares segment caused by coded site access issues.
Net sales in Asia, Pac increased $56 million or 17%.
Primarily due to continued strong growth in China across most end markets, including data centers.
The communications and industrials.
Geographic locations outside of China in Asia Pac were relatively flat as we continue to deal.
With some site access challenges in.
Some of those jurisdictions.
Net sales in EMEA were up $49 million or 24% was $7 million driven by a stronger euro.
The 42 million or 21% organic growth somewhat aided by the timing of large projects was spread across several market verticals, including co location data centers telecommunications and commercial and industrial.
From a profitability perspective, adjusted EBITDA margin improved in all three geographic segments, but notably in the Americas.
Where margin increased over 800 basis points from last year's third quarter.
A portion of this improvement was driven by strong product mix this quarter.
But that was coupled with a lower margin large project last year caused by poor internal execution, but the remainder of the increase was the result of higher contribution margin from strong execution of purchasing and pricing initiatives.
In driving lower fixed costs.
On a year to date basis, adjusted EBITDA margin in the Americas has increased over 400 basis points from last year illustrate.
Illustrating the progress we have made with our margin expansion initiatives in a relatively short period of time.
Next moving to slide eight.
This chart bridges third quarter free cash flow from last year.
The $115 million increase is primarily driven by lower cash interest pursuant to the debt pay down and refinancing in the first quarter.
And that is coupled with higher to Jeff adjusted EBITDA.
After beginning the year with the use of cash in the first quarter. If you recall, we used about $203 million of free cash flow in Q1.
But since then we have generated more than $190 million of free cash flow over the last two quarters really indicative of the strong cash generation potential of this business.
This free cash flow has allowed us to pay down our ABL by $170 million in the third quarter.
While improving our liquidity position from about 1400 $50 million at the end of first quarter to over $650 million at the end of September.
Next turning to slide nine.
This page summarizes cost and benefits of the restructuring program.
Which supports our continuing objective to maintain fixed costs constant while reinvesting in the long term growth of the business.
Pursuant to this program, we recorded a $71 million restructuring reserve in the third quarter.
Which was primarily related to severance for head count efficiency and footprint optimization projects.
We launched in the fourth quarter in over the next couple of years.
In addition, we recorded a $9 million intangible asset impairment charge for.
For trademarks and developed technology in a small small business unit we are streamlining.
We anticipate additional albeit smaller restructuring program expenses in both 2021 and 2022 that arent covered by the third quarter reserve.
We estimate $84 million net cash outflow.
To execute the restructuring program with approximately $16 million of that in 2021.
We expect $85 million run rate savings from the program in full year 2023 with.
With those gross savings ramping up each 2021 and 2022 for next year, we expect over $40 million gross savings.
From the restructuring program offset by approximately $20 million of additional restructuring.
Restructuring expenses not covered by the third quarter reserves.
Next turning to slide 10.
This page summarizes our financial guidance for the fourth quarter.
And over arching any expectations for the next several months is the dynamic uncertainty with coded which is certainly worsening in many global jurisdictions.
Jurisdictions.
Accordingly, our guidance for next quarter assumes that co that conditions are not significantly change from what we experienced in the third quarter.
If conditions do become more challenge our guidance here today could be significantly negatively impacted.
Notwithstanding these changing coded conditions, we do expect strong fourth quarter topline growth of 6% to 8% from last year's fourth quarter, and 7% to 9% sequentially from this year's third quarter as we continue to benefit from a record high 1.85 billion.
Backlog at the end of September.
Adjusted EBITDA margin is expected to improve approximately 165 basis points at the midpoint from last year's fourth quarter as contribution margin should increase from purchasing and pricing initiatives.
And fixed cost, although slightly higher than last year, primarily due to growth investments.
Should decline as a percentage of sales.
Fourth quarter adjusted EBITDA margin.
When looked at sequentially from the third quarter.
You should.
It should be relatively flat.
Quarter over quarter.
Despite the anticipated higher sales and some of the drivers that include the anticipation of an approximately $30 million increase.
In fixed costs in the fourth quarter versus the.
Third quarter as the benefits from our COVID-19 cost savings program ramp down and.
And in addition to higher growth investments and public company costs.
Once again.
Before moving on this slide we certainly reiterate that these expected fourth quarter results could be significantly negatively impacted by any worsening coated nineteens conditions.
So with that I turn it back over to Rob.
Thanks, David turning to slide 11 here is a bit more detail regarding our perspective on 2021.
Black expect cloud Colocation and telecom markets will continue to be healthy as we enter into 2021 Bill.
Because of Cove, it will enable to anticipate with the enterprise market will look like but we anticipate growth in the overall data center landscape.
Our backlog should be slightly better heading into 2021 than we thought at the end of last quarter, which provides us good visibility and confidence on the revenue side for the first half of 2021.
However, the uncertainty of Covance provides us a pause today more than we were thinking 90 days ago, certainly we're not in the business of making predictions on when there will be a vaccine, but we do see this as a very dynamic situation today as David mentioned earlier.
As we have seen during this entire pandemic, we're planning for the worst scenario.
And working and hoping for the best as things remain very dynamic even today.
On the margin side as we as we mentioned previously we are firm believers in the strategy of holding fixed costs constant. This concept is being practiced today, but as mentioned previously we will continue to invest in R&D and growth investments that will be key for our long term success. So while we're not providing specific 2021.
Guidance at this point, we didnt want to refresh the commentary we provided to you last quarter.
Now turning to slide 12.
Our backlog fixed costs content approach, we have implemented and our liquidity position are in great shape.
We hold a leadership position in a growing industry and the demand for digital infrastructure to support the vital applications. The world needs has never been stronger we.
We will continue to invest for the future while Simon simultaneously managing for today. So we are prepared to be even more successful as we emerge from this pandemic and the world adapt to a post coated like.
Thank you for being on the call today. Thank you for your support I will now turn the call over to the operator, who will open up the line for questions.
We will now begin the question and answer session in order to ask a question. Please press Star then the number one on your telephone keypad.
We will pause for just a moment to compile the key M&A.
The first question comes from Andy Kaplowitz of Citigroup. Please go ahead.
Good morning, guys. Thanks for all the detail.
Good morning, Andy.
Robin raising about two reason can just early thoughts about 2012. When you gave US you mentioned you said to see strong demand from cloud and collocation healthy Telecom and then it's too early to call on the enterprise stuff, but it seems like when you put that together with your backlog and you consider the easy comparisons you have at least in the first half to 21 does it give you at all.
Some confidence that Vertis could see the type of organic growth you are recording in the second half 20 lasting into 21. Despite increased cover this you're concerned about.
I think it's up it's really too early to call what again the recovery on the enterprise in the small to medium.
Business, So I would say that.
As this business has over the last four years, Andy there is a a digestion period and then there's a building period and we can't really predict what thats going to look like so why wouldnt.
Would it be projecting in saying that.
We guarantee or we have the same level of growth, but we are seeing a robust market out there and were participating and we're winning market share.
That's helpful and then.
I mentioned, the $20 million of incremental benefit in Q3. They came from increased productivity pricing mix, maybe could talk more generally about the progress in implementing the deferred of operating system, where are you in the process. How do we think about the incremental opportunity in terms of pricing productivity as we go into 21.
It was on a trailing can benefits actually accelerate as you continue improve your focus over the next few quarters.
Sure Andy Good question, so our Veritiv operating system and we've talked about this this is something that takes time right. It's not something that we actually get done in a year or two years, but it happens over a period of time as we we will roll that out and deploy that and the benefits from some years, maybe 50 basis points next year may be 100 basis points.
We feel good about the pilot plants that we have running now and on our progress that we've made so far as it relates to willing automotive operating system and again, we do see long term benefits from that from a pricing perspective, we continue to get in various parts of the world pricing and we expect to get pricing again net.
Last year as we go into 2021, whether it's on products or services or our differentiated product sets that we're coming out with and Thats part of the reason why we're investing a lot of money in the in the what we call diverted product development is to to bring those features up and have those innovative solutions that customers are willing to do.
To pay.
A better price or I give us about a price for that so we're not just competing on a commodity level.
Our product for product.
And then just one more quick one for me the lower contribution margins that you estimate for Q4 was Q3, it's really just a function of that $30 million in higher fixed costs and then you know just continued investment.
Nothing else really to read into there other than that.
Yes, Andy this is David that certainly is a is a headwind for us in for Q, the higher fixed costs.
Certainly passive.
Have to point out that we see that higher fixed fixed costs as investment in the long term.
A lot of that is driven by.
Spend R&D spending and continue to invest in some of the growth markets.
But we also anticipate contribution margin to dip a little bit in.
In Q4 versus Q3, which is separate from fixed cost and that's driven in part by.
Product segment mix so we.
We see healthy growth Q3, Q4 on the topline, but it's probably a little bit over balanced to the critical infrastructure and solutions product segment, which has.
A little bit lower margin than the other two product segments.
Very helpful guys. Thanks.
Again.
The next question comes from Mark Delaney of Goldman Sachs. Please go ahead.
Yeah. Good morning, everyone. Congratulations on the strong third quarter results and thanks very much for taking the question.
I was hoping to better understand the commentary on the Hyperscale market and and of course as discussed the company had very good orders.
In that segment and I was expecting so frankly continue there can.
Can you elaborate a little bit more on that end market in particular and I ask because at some of the semiconductor and tech hardware company that had seen a slowdown and data center spending it doesnt seem like Thats Vertis outlooks. There. So maybe you can help us understand a little bit more on what you're seeing in that market and why vertis business may be a little bit different.
Mark Hi, this is Rob and thanks for the question thanks for being on today, but.
But what I'd say is a couple of things you we are seeing strength globally and the co location and Hyperscale market what tends to happen though is.
What you might hear from the chip manufacturers doesn't necessarily correlate or connect directly to the demand that we're seeing partly because.
While we are building, they're not filling and so there is some timing differences as data centers get built and get deployed as from them to filling with the equipment from that perspective.
So I don't think we use those is that the indicators of where things are going because they are little bit lagging what we're seeing on the on the front end of the business.
Got it that's helpful. I just wanted to ask on free cash flow and as we're thinking about 2021 modeling I know, it's still early but how should we think about incremental EBITDA dropping through into incremental free cash flow are there any.
Investment in working capital or Capex, we should be.
Cognizant of thinking about it at this point and.
How much is enough that dividend, but if you could also talk about how you guys are driving that higher free cash flow, how should investors be thinking about the use of that free cash flow.
Yes. Thanks for your question Mark So first on free cash flow.
I think a lot of.
A good starting point to understand 2021 is to go back to our beginning of the year guidance.
For 2020, and this is all pretty coded but on a pro forma basis. When you adjust for some of the transaction related expenses and also.
Adjusts for some of the benefits that.
We started to receive at the end of the first quarter from the debt refinancing and pay down we had set of pro forma free cash flow for 2020 was in that 285.
To $300 million range.
I think thats, a really good starting point for next year.
There certainly will be some moving pieces in one of those is related to the cash outlay.
Pursuant to the restructuring program, which we said was about $60 million we should.
See some some benefit.
From from the lower expenses from some restructuring.
I think thats, probably a really good.
Starting point.
As it relates to what we are going to do with the cash.
Yes at this point, our intention is to pay down debt.
That's helpful. If I could.
Sneak one last follow up and around that restructuring if I recall correctly on last quarter's call, we talked about potential savings.
$50 million to $70 million in 2020 wide and that today talking about a higher number and that 2023, but but but but if I'm understanding correctly 21, Jamie this is maybe a little bit lower.
David If you could if you could or anyone on the team you could clarify a bit more on on how to think about the trajectory of.
Savings from the for the program. Thank you.
Yes.
Great question, so apples to apples the $50 million to $70 million that we discussed at the in the second quarter.
After we complete.
Completed the initial planning is likely going to be in the $40 million range. So thats a gross savings number.
The reason that has declined from when you talked about it three months ago is primarily related.
Got it to some of the planning on the footprint optimization. So.
Of course.
The primary goal of the restructuring is to take cost out, but we have to do that with very minimal impact on our customers. So.
As we looked at the plan we've moved some of the planning out on some of the footprint projects.
From mid to late 2021 into 2022, and so the savings have not changed the expected change exceeding 10 actually increased a little bit but just the timing has moved out from 2021 into 2022.
Thank you.
The next question comes from Dario Bonnie of Evercore. Please go ahead.
Good morning, and thanks for taking my questions.
I guess, maybe start with you know as it about the September quarter growth numbers that 8% growth in I guess, when I think the December quarter midpoint of growth as long as you guys will do seven 8% organic growth in the back half of this year.
How do I think about that outperformance versus your longer term growth you've talked about a 3% to 4% is that coming more from share gains or better end markets and sort of the durability of that as we go forward.
I'll start with that this is rob momentum thanks for the question.
I think it's a combination of both the end markets are strong as it relates to co location and that was one of our key strategies that we've kind of put in place to to take share there and weve done really well on a global basis.
And that in market itself is fairly robust today and again driven a lot by.
Co bid and people working from home and just not having enough.
Capacity from that perspective, so I think the Overperformance. There are as strong performances is really driven by by those two things we feel good about our position against the competition.
Perfect and I guess, maybe to just follow up on the Americas performance, which was down 1% on gamut. There was an overall update.
If you look at that Delta.
Well hopefully all attributed to the timing of large projects or I guess, maybe how much was not versus some of the other factors do you expect to catch up the performance in the December quarter.
Yes. This is David so.
I think you're you hit it right on the head so the impact of the large project.
Was somewhere between 405 hundred basis points of growth. So so that alone would have turned that negative two and a half it's a positive but.
But.
If you also look at the product segment results for the Americas. There also was a headwind for services, which probably contributed about.
200 basis points and in addition.
Americas also had a foreign exchange headwind the other two regions had a tailwind in the in the third quarter, but because of the Mexican peso the Brazilian reai.
It was about a 1%.
Headwind.
And looking forward into the fourth quarter and I think we bullet point. This on the guidance slide we are anticipating.
Low single digit growth in the Americas in the fourth quarter. So we do anticipate a little bit of a rebound there.
Versus what we saw year over year in the third quarter.
Perfect. That's it for me thank you.
Okay.
The next question comes from Nicole Deblase milestone should bank. Please go ahead.
Yeah. Thanks, good morning, guys.
Good morning and flow.
So I just wanted to follow up on that.
I have a question asked earlier on the new.
Factoring program. So I think you know the 40 million gross savings get that part I guess, what I'm missing is I think you guys had talked about about $60 million of temporary cost benefits in 2020 that you were looking to offset I guess.
Is the expectation that that full 60 million does come back next year and thats, creating a net headwind or how do we think about that.
Yes, Nicole so.
Really good question so.
What we would say is we really have to look at these things independently. So when we look at the restructuring.
We do anticipate.
$40 million of gross savings, we will have additional restructuring expenses of 20 million. So there's a net no net $20 million up savings next year related to restructuring separately, we do anticipate some headwinds pursuant to that coded cost saving program, we put in place.
If you recall, we anticipate that to be $60 million. This year and we're certainly on track but of that 16, we believe 40 million is going to come back into the business. So.
Those two things certainly offset but when you look at all of the.
Savings initiatives and the headwinds here, our goal and our target is to keep fixed cost constant.
And we purposely on to 2021 slide we.
You provided some indication that we actually anticipate fixed costs to increase in 2021 versus 2020, and a big driver of that is related to the size of the reinvestment back into.
R&D.
And growth investments in the market. So we kind of look at all the puts and takes Fungibility and.
It all boils down to what our fixed cost doing next year, we actually anticipate those to increase so.
A little bit because of that growth investment on a net basis.
Thats really helpful to clarify that I guess I wanted to follow up when you guys think about restructuring costs are you going to add back to adjusted EBITDA Im just trying to think of the right way to model that.
We are not so.
Going forward, we are the only item that we will adjust will be for the intangible amortization and that would be.
Reflected in our.
Adjusted EPS adjusted net income, but going forward any restructuring expenses.
Will be included in whatever we guide and whatever we report for adjusted EBITDA or whatever.
Other.
Whenever financial metric.
That will be reporting.
Okay got it. Thanks, I'm just trying to squeeze on my end I get back to the point on R&D also below the 2020, Ryan any idea I got about the magnitude of R&D growth next step up in investment.
Okay, and then I guess like longer time does R&D me to continue increasing from here beyond 2020 lateral.
Nicole has it's Rob I'll take the first part of that and Dave can share.
Sure some guidance or some not guidance, but some numbers. We are part of our strategy US as we stated was to take our R&D up to around 6%.
So we expect that to increase every year as we look at the adjacent.
Bob called markets are adjacent product areas and continuing to fill out the product line and driving driving that innovation in both the edge and continued in the in the Colo Colo and Hyperscale.
So we look at continued investment as part of.
Our our vector of differentiation going forward is to continue that.
Development cycle, and new products, and we we measure that and take a look at revenue from new products and how that.
Now that helps us grow so I would expect expect for the next couple of years as we ramp up to the 6% and we will continue to spend at that level and that will be a key differentiator for us.
Thanks for the time I'll pass it on.
The next question comes from Lance Vitanza of Cowen. Please go ahead.
Hi, guys. Thanks for taking the question and congratulations on the quarter.
I guess I wanted to drill down a little bit on the Americas EBITDA margin, obviously, just really strong.
In the quarter and then even if you were to look over a nine month. The last nine months is pretty impressive.
I know you mentioned you've got some just costs that are coming back in in Q4 should we assume that that is that sort of the big driver that big margin improvement and is it possible to sort of think about what that margin would have been kind of on a go forward basis and just more generally I guess you know.
Do you think about that level of.
Sales margins as.
As ultimately sustainable are achievable. Thanks.
Yes. Thanks. Thanks Lance this is David So first I would want to.
You know reiterate.
How pleased we are with the progress that we're seeing not only in Americas, but.
In all the regions as it relates to margin expansion, but in particular in the Americas and.
Certainly the 800 basis point improvement.
Versus the third quarter last year was very impressive but.
But.
So improved about 200 basis points from Q2, which is probably more comparable.
And.
From our perspective heading into Q3, the performance that we saw from Americas from a EBITDA margin perspective around 30% probably was at the upper range of what we anticipated.
There were a lot of things that went the right way in Q3, including.
Product mix not necessarily between product segments, but within product segments.
So as we move to the fourth.
Fourth quarter, we would not anticipate to see a EBITDA margin in Americas comparable for Q3.
We still would see very nice growth from Q4 last year, but we would anticipate EBITDA margin in Q4 to be more close to Q2 and one of the drivers. There for Q4 is that a lot of our growth that we're seeing in Americas and.
Also the other two segments is in that critical infrastructure and solutions segment, which as which does have a little bit lower margin than the other two segments. So.
We're very hopeful.
That that contribution margin and the EBITDA margin, we saw in Americas really per tens what's to come for that segment and the business in general, but just looking out one quarter, we would anticipate that to drop back a little bit.
Thanks, that's helpful. If I could just get one more in.
Quick one.
You mentioned in the slide deck the definition that your free cash flow definition includes dispositions of pp any I don't think that that was material. In Q3 do you expect that that will be material going forward at any point.
No certainly not this year I think.
We had about $5 million last year I'm not sure we had anything here.
Year to date, so we would anticipate anything.
Significant for Q3, our I'm sorry for Q4, however related to the restructuring program, we do plan to sell facility some equipment and and.
[music].
That probably would.
The trend in 2022, it could slip into the end of 2021, but we.
We wouldn't anticipate anything for at least significant anything significant for at least a year.
Have those.
Prospective potential inflows been pummeled netted against the numbers that we're talking about in terms of your spend over the course of the next year.
It is so when we.
Well for the lifetime in the program.
Were expecting.
$84 million net cash outflow.
To support the savings the anticipated sale of assets is net in that number and it's somewhere between 20 and $25 million.
So the growth can the gross cash outflow is over a $100 million, but we do anticipate to get between 20 and $25 million for these asset sales and once again most of that we anticipate to come in 2022.
Thanks for the clarification guys.
Hello.
Thank you thanks.
The next question comes from Andrew Obin of Bank of America. Please go ahead.
Hi, guys good morning.
Good morning, Andrew.
I think a lot of my questions have been answered, but just one question just to clarify so fixed costs are going to be increasing 21 versus 222. So should we think about incremental EBITDA margins coming in below gross margins so far.
Part of your contribution margin, 40% to 45%, but maybe thinking low to mid Thirtys contribution is that reasonable.
No. So I think from a contribution margin perspective, what we have.
Spoken too was yes, generally ranged between 40 and 45% it depends on the region it depends on.
Customer mix and market vertical mix, but we still generally not plan internally for that range and thats, what we would speak to.
Externally.
What I will say from a fixed cost perspective and.
I want to caveat all this and we are not providing guidance for 2021, yet we are still going through the planning.
Process ourselves.
But we felt it prudent to provide.
Provide some expectations that we see a lot of good R&D and BBD projects for next year quite frankly more projects and we have resources to complete and.
And we thought it was prudent to.
We continue.
Continue to invest in those and as a result because of the.
The size of that investment, we anticipate fixed costs increase but.
From a margin perspective, we would not believe that to be a tailwind so.
From a impact on margin, we don't believe fixed cost is going to increase as a percentage.
As.
As high.
As the topline will increase year over year, so even though fixed costs will increase we don't think that would be a significant headwind as it relates to as it relates to EBITDA margins.
Gotcha and just another question just to clarify on enterprise versus sort of small and medium business. I think one of your competitors commented actuated that there were somewhat more bullish on enterprise outflow of both near term and medium term and I just want to parcel out you did.
Talk about sort of big project.
Slippage was that on the enterprise side or was that sort of on the call.
Cloud side, just want to understand just yes. So that's.
Thats a good question I mean other than just a little bit more color on what's happening in small and medium business side of things.
Yes sure.
This is Rob a couple of the large projects, our coal and hyperscale, so but that kind of covers that area on the enterprise side.
What we look at as as we really go to this hybrid world of on Prem and cloud.
Be referring to some of the edge strength that we are seeing in some of the the enterprise certainly we are seeing a lot of activity.
In the enterprise from an engineering perspective.
So when we say we are not.
Enterprise still hasn't recovered, they're just not pulling the trigger there is certainly a lot of activity out there that we have visibility to projects that that will break at some point in time from the small to medium business, we did see.
A little bit of growth in the what we call our IRS business.
Which is driven by the channel side of things. So we're really happy with the execution that we're doing there but.
But we just haven't seen and if you see some of the numbers out with CDW and so forth people are still experiencing now.
Negative negative growth above beginning to see potential light at the end of the tunnel that being said.
Dip coated continues to persist I think that affects that that particular area. As we go forward. Our plan there as a company was to take share in the channel and grow and I think thats, how we were able to kind of I'll, probably take outperform what most of the companies are doing as it relates to channel by taking taking share with innovative new products.
Thank you very much.
Again, if you would like to ask a question Press Star then the number one on your telephone keypad.
And the next question will come from Nigel Coe of Wolfe Research. Please go ahead.
Thanks, Good morning.
Wanted to pick up on the enterprise question from hundreds of folks to explore the.
See when we see red and yellow rose.
Raises the question of physical versus structural kinds of pressures.
Im just curious to know do things with the current loss. So it sounds like you've seen some some good activity in.
It sounds like Youre encouraged by that.
Do you think that there's been any change in the from the balance between on Prem.
And co location cloud for the Enterprise segment and what do you expect 2021 on the feel very much of near but do you think that the shot and then pricing come back next year.
Yes, hi, Nigel Thanks for the question, what we'd say, yes, we have been seeing some life when.
I would say like we've been seeing a lot of activity in the enterprise side of things, which would indicate at some point in time when they pull the trigger that things will move forward, we havent really seen it a drastic move one way or the other to.
To the cloud our on Prem and certainly things like teams and zoom in Blue jeans, and things like that are driving a lot of internet traffic.
Which is driving the need for more demand.
Bandwidth and latency from that perspective, but we continue to see that the enterprise looks at various applications and those ones that are readily and easily move to the cloud they do and so.
We're still seeing the advent of on Prem and be hedged datacenters. They have other phenomena that we've talked about in the past is really this.
Data.
Kind of staying within the country or within the region. So we're seeing a lot of.
Builds in Europe, and other parts of the world for what.
Where people basically keeping that data certain sets of data within within the region within their countries out of the phone. So we'll continue to see those types of builds as well.
But I think what we're all waiting for and looking to be a once there's a vaccine whatever that might be an enterprise gets back and we have a kind of a new way of I would call. It even a hybrid working from home and working from the office will drive those projects and begin to move up move move those off that center.
Great Thats helpful.
Then I want to talk about the.
The.
Announcement with Honeywell folks that was down 30 to the.
In October.
They had and that slides in I don't think you'd go to Neil studies I think is interesting, but how do you view. This strategically what does this kind of a problem to the soles.
For for both of them and then how do you see it is progressing.
Kind of like I think strategically the question is how does this help you and strengthen you going forward.
Yes, so were.
We're actually really excited about it so not having it in our slides there's no indication of of our excitement of.
Working with them, we see Honeywell and inverted for one on one kind of makes three for the customers Honeywell is very strong in the software and the management side of.
The datacenters and really driving efficiency and algorithms around performance of equipment and our announcement that we talked about the first product that we're working together on is really about using multiple sources in kind of a micro grid fashion for datacenter. So I, we select whether it's solar or whether it's a used fuel cells are.
Pull off the grid and we see this just at the beginning of of some of the collaboration and good things that we believe we can do together. So I think when you put veritiv and Honeywell together both with.
With our global footprint, we can offer the customers and take advantage of a lot of the really good software.
That Honeywell hasn't management systems, coupled with our equipment and you get better performance and help people reach their peak season, and riccio repetitive carbon footprint as well.
I will just be more in the Hyperscale and Colo segments. So it does give us of Goldman.
I think it's much broader than that I think it scales from Hyperscale Colo enterprise and certainly down to the edge is as the edge increases with.
Thousands and millions of devices Honeywell's got a really good strong portfolio of software for managing those and tying that in with our product.
Intelligent and allow us to smartly began to do more of that predictive failure analysis roll trucks, when we need to so again I think it really span, both agile and cloud and Hello.
Okay, great. Thanks.
This concludes our question and answer session I would like to turn the conference back over to Rob Johnson for any closing remarks.
Thank you operator, I'm going to close the call by thanking our 19000 plus employees around the world are working very hard every day to take care of our customers. During this unprecedented time, we appreciate everybody's time today, we appreciate your support.
We stay safe and we look forward to speaking to you again soon thank you very much.
The conference is now concluded. Thank you for attending today's presentation and you may now disconnect.