Q4 2020 Vertiv Holdings Co Earnings Call
Good morning, My name is Nick.
I'll be your conference operator today and at this time.
And welcome everyone and whatever its worth quarter 2020 earnings conference call.
All lines have been placed on mute to prevent any background noise. Please note that this event is being recorded.
Now I'd like to turn the program over to your host for today's conference call Lynn <unk>, Vice President of Investor Relations.
Great. Thank you Nick good morning, and welcome to burden from fourth quarter 2020 earnings Conference call. Joining me today are verdicts executive Chairman, David Cody Chief Executive Officer, Rob Johnson, Chief Financial Officer, David Fallon, and Chief strategy, and development Officer, Gary Neocart and before we begin.
Now that during the course of this call we will make forward looking statements regarding future events.
And the future financial and operating profile and converting these forward looking statements are subject to material risks and uncertainties that could cause actual results to differ materially from those and the forward looking statements.
We refer you to the cautionary language included in today's earnings release, and you can learn more about these risks and a registration statement a proxy statement and other filings with the SEC and.
Any forward looking statements that we make today are based on assumptions that we believe to be reasonable as of this day. 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 and the Investor Slide deck found on our website at investors about third of Dot com with that I'll turn the call over to executive Chairman David Cohen.
Thanks Lynn.
As I reflect on the past year reverted I'm, even more encouraged that everything we've discussed and the roadshow has been proved to be even more true today.
Third it is a great position and a good industry and we can differentiate with technology.
Sales growth and margin rate expansion opportunity abounds and we have a team that's making it happen.
That opportunity show and wisely and 2020.
We were able to hold sales flat.
And significantly increase orders and a terribly difficult year and.
And we're able to increase our margin rate on flat sales, which is always difficult.
And at the same time, we ramped up investment and R&D other growth drivers and process initiatives like the growth of operating system further product development.
And we'll transformation and customer view diverted user experience.
Same is true for 2021.
As verdict guides to sales growth margin rate expansion and.
And the reinvestment that drives both in 2022 and beyond.
Cash and overall liquidity improved markedly.
And net leverage is down a lot more than anticipated, especially in a COVID-19 year.
My confidence has increased not decreased over the past year.
No matter, where I look and verdict, we're making great progress.
And as typical book three said and their 1986 song.
The future so bright we've got aware shape.
I felt that way a year ago, and I feel that way even more so today.
With that I'll turn the call over to Rob.
Thank you, Dave and I truly appreciate your partnership and the good advice you continue to provide to me and my executive leadership team.
And I also want to thank diverted employees for their efforts and Q4 and throughout last year, they've pulled together and demonstrated how our collective efforts can accomplish amazing feats during a very challenging time.
They've adapted to a can do attitude use creativity ingenuity and outside the box thinking and order to serve our customers. During this pandemic.
I commend my team by Board and <unk>.
Many partners for delivering the results I will share with you today.
Moving to slide three.
Overall, the demand side of our business was very promising as Q4 sales were up over 11%.
Moving to Q4 2019.
Driven largely by significant growth and the European and Asia Pacific regions.
Orders for the quarter were up 9% when compared to the fourth quarter of last year and I'm pleased to remind you that the orders for Q3, we're already up 15% as compared to Q3 of the previous year.
Our backlog remains at an all time high and is up $450 million from the end of 2019.
And we'll talk more specifically about the demand side of the business over the next few slides.
From a profitability standpoint, our adjusted EBITDA was $187 million, which was up over 25% from last year's Q4.
This resulted in adjusted EBITDA margin expansion.
160 basis points, driven higher by sales and higher contribution margin and lower fixed costs on a percentage basis.
Additionally, our free cash flow at the end of Q4 improved over the same time period last year by $86 million to $175 million because of higher earnings and lower transformation spending.
Turning to the full year results for 2020, we delivered $39 million more and adjusted EBITDA as compared to 2019 with sales down approximately 1%. This equates to a 110 basis point improvement and adjusted EBITDA margin versus the prior year.
Our free cash flow improved $171 million over last year to $163 million, driven primarily by higher adjusted EBITDA and lower cash interest.
Looking at 2021, we anticipate above market topline growth increased profitability and even stronger balance sheet, all while continuing to invest significantly in strategic areas like research and development and sales and marketing.
Finally, I wanted to let you know that we have transitioned the measure of profitability from adjusted EBITDA to adjusted operating profit.
So there are a few moving parts associated with this transition. This is nothing more than continuing on our committed path to keeping our financials and communications as simple as possible.
In order to aid the analysts with this transition. We've included exhibit 99, two and our 8-K that reconciles all the pertinent information.
David will speak to this further during his section as well.
Turning to slide four we've.
We've used this slide over the past few quarters to illustrate what we're seeing and our market environment regarding demand.
It's been updated here to reflect how things look today.
And the cloud and cocoa co location market, we continued to see strong levels of activity and every region as indicated by the sixth Green button and the top two rows.
Emerging digital applications, such as online education telemedicine and video.
And gaming are benefiting our cloud and co location customers and that demand benefits us as well.
In contrast, we see the enterprise and small to medium business continuing to be challenged by Covid as indicated by the red and yellow button and low three.
It spending continues to be mixed.
We commented last quarter that this segment was slightly more positive and October than it was in July.
And it's slightly better today than it was in October.
And the changes subtle, but it is trending and the right direction.
Wishing to the telecom side of things we.
And we see little changed from last quarter. However, we are seeing an uptick of five day deployment and U S and parts of Asia.
Several of our larger U S carriers are continuing to grow our <unk> and we expect the rollout to continue for several more quarters.
Finally, our commercial and industrial business, often tracks GDP, but sometimes the quarterly timing can be differently.
There was a positive movement and a few light commercial and industrial applications over the past few months and most notable changes we're seeing are taking place in Europe.
So certainly some puts and takes but overall a strong market picture given our mix of the datacenter business did.
Digital applications people use every day continue to become more and more important to daily living as a result of demand increasing for those digital applications. So they can be processed stored and transmitted.
This is creating a significant opportunity for our customers and constantly and consequently, a significant opportunity for virtu.
Moving to slide five.
To reiterate the overall demand is strong as evidenced by our order rates and backlog.
Each of our world regions saw orders growth between 2019, and 2020, which was led by strength of the cloud and Colocation markets as I mentioned and the prior chart the enterprise and channel markets are still not back to pre COVID-19 levels, but they are moving and the right direction.
The it channel momentum as evidenced by our integrated <unk> solutions revenue have and increased every quarter and 2020.
While we continue to maintain a high level of vigilance around Covid, our backlog is approximately $450 million higher than it was entering 2020, and we're confident about our position and the market for 2021 and beyond.
Switching to the supply side.
Now I'm pleased to report that most of our manufacturing facilities are operating normally.
We have taken and the priority we placed on safety has allowed us to continue to operate and a relatively normal state amid the disruptions caused by Covid and sometimes those disruptions are daily.
Though we've seen a strong appetite and the broader market for some of the components, we use to manufacture our products I am proud of how we have diversified our logistics and supply chains globally to mitigate any serious consequences.
With that I'll turn it over to David Fallon to walk us through the financials David.
Thanks, Rob starting with slide six this page summarizes our fourth quarter financial.
Results versus last year, net sales were up $134 million or 11, 4%, 95% when adjusted for a $22 million foreign exchange translation tailwind.
Tailwind.
We continued our strong momentum with orders, which were up 9% and the fourth quarter after increasing 15% and the third quarter.
Adjusted EBITDA increased $38 million or 26%, primarily driven by the flow through from higher sales and slightly offset by a foreign currency transaction loss.
Translating into a 160 basis point improvement in adjusted EBITDA margin.
Our sales and profitability performance converted into strong free cash flow of $175 million.
$86 million higher than last year's fourth quarter.
And review some of the drivers of this improved free cash flow and a couple of slides.
Turning to slide seven.
Kevin.
This slide summarizes our fourth quarter segment results.
Net sales and the Americas were up $3 million or 6% as growth and telecom.
It was offset by lower services sales, which continued to be negatively impacted by Covid site access issues.
Net sales and APAC increased $70 million or 19%, primarily due to continued strong growth in China.
Most end markets, including data centers telecommunications and industrials.
Geographic locations outside China, and APAC were up slightly as we continued to deal with site access challenges and some of those jurisdictions.
Net sales in EMEA were up $60 million or 25%.
It's entirely in the critical infrastructure and solutions product segment.
By several larger co location projects.
From a profitability perspective, adjusted EBITDA margin improved in both the Americas, and EMEA, but notably in EMEA.
Our margin increased over 600 basis points from last year's fourth quarter.
This improvement was driven by both higher contribution margin and sales leverage on relatively flat year over year fixed costs.
Higher contribution margin was primarily due to continued operational and procurement improvement despite a slight negative mix impact from larger projects.
EMEA adjusted EBITDA margin has improved sequentially each quarter and 2020, reflecting the benefits of past transformational spending the launch of Divertive operating system and of course, the leverage benefits of growing the topline while holding fixed cost constant.
Next turning to slide eight.
This chart bridges fourth quarter free cash flow from last year that.
And that $86 million increase is primarily a result of higher adjusted EBITDA lower cash interest payments and lower transformational spending.
The $175 million of free cash flow and the quarter was higher than our internal expectations, primarily driven by the timing of cash collections at the end of December versus early January.
After beginning 2020 with a use of cash and the first quarter of approximately $200 million.
We generated $366 million of free cash flow over the last three quarters indicative of the strong cash generation potential of this business.
This free cash flow has allowed us to pay down our ABL completely and.
And in conjunction with the $157 million.
The cash we received per.
Pursuant to the redemption of the public warrants prior to year, and we increased our liquidity to $964 million at 12 31.
And assisted by additional cash received in January from the warrant redemption and approximately $100 million.
Liquidity currently stands close to $1 $1 billion up from $446 million at the end of the first quarter.
Next turning to page nine.
This slide summarizes our full year financial results.
Net sales were down $60 million or one 4% from 2019 and as higher sales in EMEA and APAC set by lower sales and the Americas.
Which was more significantly impacted by Covid site access challenges and the other two regions.
And when.
And looking at our full year sales result is instructed to bifurcate the euro per year comparison.
Sales were down 13% in the first half of 2020.
And up 10% and the second half in part driven by more challenging comps and the first half of 2019, but also demonstrating the rebound from Covid challenges and the continued resilient growth in our industry.
Despite lower full year sales adjusted EBITDA increased $39 million or 7% and adjusted EBITDA margin improved 110 basis points as procurement and pricing initiatives drove contribution margin improvement.
And fixed costs were down $40 million aided in part by Covid cost saving actions launched and the second quarter.
Finally on this page and this is the money chart free cash flow improved $171 million from 2019, as we benefited from lower cash interest payments and higher adjusted EBITDA and lower transformation spending.
Beginning on page 10, we pivot to looking forward, including with this slide which discusses our transition to adjusted operating profit as our primary financial metric rather than adjusted EBITDA.
And for avoidance of doubt, we will not be reporting adjusted EBITDA going forward.
We define adjusted operating profit and operating profit excluding the.
And the impact of intangible amortization expense.
Operating profit is a GAAP financial measure that will be included on the face of our income statement and we show an example, and the next slide.
With one with the only adjustments operating profit, both prospectively and per historical periods.
Intangible amortization, which we will also include on the face of our income statement.
Lead using adjusted operating profit will greatly simplify our communication and analysis of financial results with net analysts and.
And investors and by.
Eliminating all adjustments other than intangible and amortization, we address all components of GAAP financial results enhanced net.
Quality of earnings and we also.
And of course and eliminate the previously disclosed historical adjustments.
At the bottom of slide 10, we provide a reconciliation of adjusted EBITDA to operating profit and then too.
Adjusted operating profit.
And as you can see net net the differences between adjusted EBITDA and adjusted operating profit are the historical add backs.
And also other onetime adjustments and depreciation expense and.
And adjusted operating profit is simply operating profit less the impact of intangible amortization.
Last item of note on this slide we will also be restating, our historically reported adjusted earnings per share to remove historical adjustments, except intangible amortization and we include those reconciliations.
On pages 26, and 27 in the appendix.
Next moving to slide 11.
This slide illustrates changes and our GAAP income statement presentation going forward, which facilitates our transition to adjusted operating profit.
Once again, we will specifically include operating profit a GAAP measure on the face of the income statement and we will also include components of the previously previously used other deductions net.
Including amortization of intangibles.
Peter will easily be able to calculate adjusted operating profit for any future or historical period with items included on the face of the income statement and as Rob mentioned.
To aid analysts and investors with this transition, which we hope is a once every 10 or 15 year transition.
We have included exhibit 99, two to our earnings release, 8-K, which includes restatements for historical periods, including quarters consistent with this presentation.
Also includes revised regional segment information, including reconciliations from historical adjusted EBITDA to adjusted operating profit and quarterly and full year reconciliations from historically reported adjusted earnings per share to the prospective calculation removing historical adjustments and.
And as always Lynn Mac sign and our VP of Investor Relations and I.
We will both be available for any assistance and.
Any assistance and understanding and facilitating this transition.
Next.
Turning to slide 12.
This page summarizes our current financial guidance for 2021.
We expect the momentum from the second half of 2020 to continue into 2021.
With organic net net sales up 7% at the midpoint.
We project adjusted operating profit of $575 million at the midpoint up 68% from prior year and up 26% when pro forma.
For 2020 discrete items as we illustrate on slide 13.
Adjusted operating margin is expected to be approximately 12% at the midpoint.
420 basis points from 2020, and up 160 basis points on a pro forma basis.
Of course analysts investors and we internally, we will have to recalibrate margin improvement goal on a relative basis using adjusted operating profit as opposed to adjusted EBITDA.
With adjusted operating margin for 2021 about 180 basis points lower than the comparable adjusted EBITDA margin, but of course, the magnitude and substance of our long term margin improvement goals are unchanged.
We expect 2021 adjusted earnings per share of $1 four at the midpoint.
With disclosure of assumptions included on slide 28, and the appendix.
Finally on this slide we currently expect strong 2020 free cash flow of $285 million at the midpoint.
Up approximately $120 million from 2020 and.
And we will provide additional detail on this improvement on slide 14 coming up.
Next.
Slide 13, this slide illustrates our bridge from 2020, adjusted operating profit of $342 million.
Two projected midpoint 2021, adjusted operating profit guidance of $575 million growth of approximately 68%.
To the far left and the bridge, we pro forma 2020 and.
Adjusted operating profit for two discrete items.
$92 million.
For the 2020 restructuring reserve and asset impairments and $21 million sports back transaction costs and the first quarter of 2020.
Compared to the resulting $456 million 2020 pro forma figure we.
And we project the operating improvement in 2020.
In 2021.
Of about 26%.
Components of this operational increase are illustrated in the bridge and include the following anticipated favorable drivers high.
Higher sales volume continued contribution margin expansion from procurement pricing and Boston initiatives.
And net benefit from restructuring of approximately $20 million, including $40 million lower costs from 2000 and from the 2020 restructuring program offset by $20 million of additional restructuring and related project expense and 2021.
These tailwind are offset by higher anticipated fixed cost as we discussed in our third quarter.
Earnings Conference call.
Including additional investments of $65 million for R&D and growth initiatives.
And and anticipated $40 million impact from various onetime COVID-19 cost saving actions and.
2020.
That don't repeat.
We don't normally do not spend significant time, explaining and other bar, but in this case there are quite a few variances going each way included in the other bar on this bridge.
Tailwind and include $26 million of that.
FX transaction loss from 2020.
And $40 million of cost savings.
That we expect in 2021 not related specifically to the 2020 restructuring program.
Headwinds offsetting headwinds include a $30 million negative foreign exchange impact on fixed cost.
And $5 million per global merit increases and $11 million of additional depreciation expense.
Of particular note the $51 million of historical add backs from 2020.
Which included $13 million per stock compensation expense and $38 million per transformation related adjustments as detailed on slide 19 in the appendix.
Is almost entirely offset by a combined $50 million of anticipated expense in 2021 equally split between stock compensation expense and continuing project implementation costs.
Transitioning to slide 14.
We included a bridge for the $122 million projected increase in free cash flow from 2020 to 2021.
We expect this increase will primarily be driven by higher adjusted operating profit and lower cash interest payments.
These positive drivers will be partially offset by certain headwinds, including 2021 restructuring payments pursuant to the 2020 program.
Higher capex due to delayed 2020 project and anticipate and investment and operational restructuring.
In addition, cash taxes are projected to increase due to expected higher profitability and several foreign jurisdictions.
Overall, our expected 2021 free cash flow will be somewhat normalized except for the.
And the higher cash requirements for restructuring.
And Capex is likely slightly elevated due to the push from 2020 projects and incremental spend from the operational restructuring.
And finally for me slide 15.
This slide summarizes our financial.
Guidance for the first quarter traditionally, our lowest sales and profitability quarter, and typically a quarter, where we use cash.
Before diving into numbers as a reminder, relative relative to other quarters last year's first quarter sales and adjusted operating profit were most significantly negatively impacted by COVID-19, notably in APAC.
Even though it is challenging to specifically quantified the exact year over year Covid impact since Covid still presents headwinds and part of our parts of our business today clearly last year's first quarter is the easiest comp of the four quarters.
With that in mind, we expect 13% organic growth from the first quarter of last year.
Our adjusted operating profit is projected to increase $55 million at the midpoint and.
And adjusted operating margin is expected to increase approximately 500 basis points.
Adjusted earnings per share is expected to be approximately <unk> <unk>.
<unk> at the midpoint up <unk> 76.
And from last year's first quarter.
This year over year quarterly earnings per share increase includes a 50 <unk> benefit.
From two discrete items and the first quarter.
Including the $174 million loss on extinguishment of debt and $21 million and spec transaction costs.
In addition interest expense and last year's or I'm, sorry interest expense and this year's first quarter is expected to be $45 million lower and the first quarter of 2019, driving and additional 13 per share.
Adjusted EPS benefit a year over year benefit that does not repeat as significantly over the remaining three quarters due to the due to the timing of the stack transaction and debt refinancing last year.
With that said I'll turn it back over to Rob.
Thanks, David.
Turning to slide 16, I wanted to provide some color on the key themes and initiatives. We shared with you on our earnings calls over the past year.
First our focus is on the top line, we continued to strengthen all of our customer relationships, but especially with providers and the cloud and Colocation space.
Doing so has led to order increases in 2020.
While large projects with cloud and Colocation customers will always ebb and flow.
Gaining greater visibility into the future needs of our customers, which will translate into our ability to meet future demand and.
And wind projects down the road.
Furthermore, we continue to hold and our go to market effort and the it channel area. We saw the greatest traction occur in the United States and the impact got stronger as the year went on and secondly, we are piloting the verdict operating system known as loss and two of our manufacturing facilities already we are experiencing improved.
Performance and favorable results as we formalize and standard wise the way we work.
And the rollout globally as we've said we will take time.
And I am pleased with the early results that we're seeing.
David talked about margin expansion and his comments and I am very pleased with our performance in this area.
And our sourcing capabilities and continue to improve.
Our pricing initiatives have continued to yield favorable results and our restructuring actions announced last quarter are now and full flight.
The foundation, we've established and the trajectory that we're on gives me confidence and our ability to achieve the expansion plans, we laid out a year ago.
Finally, and maybe my personal favorite.
Bpd, our various product development progress, we continue to focus and fund our research and development programs.
Even though we couldnt and our had limited travel in 2020 imposed because of Covid, we still conducted the verdict user experience view.
And to bring us closer to our customers and help us become more stronger strategic partners for the long term.
We've seen the pace of new product and service introductions increased year over year and.
And in 2021, there'll be no different and.
In addition to these real time result, we have also started to do some seed planning and a few future targeted areas to ensure we continue to be on the cutting edge and our industry.
Now turning to slide 17.
I am very proud of the vertical team and what we've accomplished over the last 12 months, we delivered on our commitments. We demonstrated we are a great company and a growing industry. We have executed on many key activities, which are implemented many strategic and and implemented many strategic initiatives, which will serve as both well and the short term and and the long term.
To all of our employees on the call today. Thank you for the dedication and tireless effort to take care of our customers to all of our investors. Thank you for your support over the past year and being with us on today's call.
I'll now turn the call over to the operator, who will open up the line for questions. Thank you.
Okay.
Well now begin the question I have for sessions.
In order to ask a question for a startup and the number one on your telephone keypad.
Well pause for just a moment to cover all the computer and a.
First question comes from Jeff Sprague with vertical research.
Thank you good morning, everyone.
Okay.
Yes.
The change and the reported actual will be positive over time and simplified zone, but with a fair amount of confusion here. This morning, but from what I can tell.
Book to something pretty close to where consensus was so thanks for all the states.
And to talk about the normalization of cash flow a little bit if we could flow.
I understand there is some pressure here in 2021 as you rollout and the bridge.
Non-GAAP was free cash flow and 2021 net.
On the low side relative.
Adjusted EPS or EBITDA or revenues that I, just one of your view if you could give any context on once we work our way through 2021 here some of these items normalize.
How you would kind of frame up the kind of the ongoing free cash flow picture.
Yes, Thanks, Jeff This is David and thanks for the feedback.
So I would point out two things in 2020 cash flow that are somewhat anomalistic. So the first and most significant is the cash required for restructuring.
So we had anticipated to have.
Approximately at $60 million cash outlay in 2021 for restructuring.
And programs, our current estimate is closer to $70 million and $50 million of that.
And is embedded and the restructuring cash payments.
Bridge items on slide 14, and and we have another.
$10 million to $20 million included in adjusted operating profit for 2000.
21 projects so.
And that's about 20 or about $70 million cash outflow.
And these have some outflow for restructuring from a cash basis, but.
That probably high by $50 million.
The other item I'd point out is capex.
I think historically we've.
And have provided.
Forward direction of Capex, and the $75 million range, we're guiding to 95 next year.
And a lot of good projects are included in that 95, but it also includes some projects that were pushed from 2020.
So if I were doing a model and I probably would include 95 going forward, but I would include more than 75.
And my guess is that we will settle and right around $85 million.
All the other items, including cash interest.
And if anything that should decline going forward.
Cash taxes, probably will increase.
Working capital is.