Q3 2021 Vertiv Holdings Co Earnings Call

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Sure.

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Good morning, My name is Anthony and I will be your conference operator for today at this time I would like to welcome everyone to the <unk> third quarter 2021 earnings conference call. All lines have been placed on mute to prevent any background noise. Please note that this call is being recorded.

I'd like to turn the program over to your host for today's conference call.

And Matt <unk>, Vice President of Investor Relations.

Yes.

Great. Thank you Anthony and good morning.

And welcome diverted third quarter 2021 earnings Conference call. Joining me today are burgers Executive Chairman, David Cody Chief Executive Officer, Rob Johnson, Chief Financial Officer, David Fallon, and Chief strategy and development Officer, Gary Nito pun.

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 financial and operating performance of Bergen.

These forward looking statements are subject to material risks and uncertainties that could cause actual results could differ materially from those in the forward looking statements.

We refer you to the cautionary language included in today's earnings release, and you can learn more about these risks in our registration statement. Our annual report on Form 10-K, and other filings with the SEC.

These forward looking statements that we make today are based on assumptions that we believe to be reasonable as of the date. We undertake no obligation to update these statements as a result of new information or future events.

We will also present, both GAAP and non-GAAP financial measures, our GAAP results and GAAP to non-GAAP reconciliation can be found in our earnings press release and in the Investor Slide deck found on our website at investors that burden of dot com with that I'll turn the call over to executive Chairman David Cody.

Good morning, everyone.

Uh huh.

Current environment, we're operating in is certainly a challenging one I can't remember a time analogous to it.

You can see from the press that demand remains strong in almost every end market.

And ours is very strong, especially with our new product initiatives.

In the short term we have to continue to fight the battle.

Or component parts to support our customers.

And we need to get ahead of the price inflation that Rob will tell you more.

Well this is a painful and irritating times to deal with it is what it is.

And I can assure you we will come out of this admirably, especially given our investments in the long term.

We're obviously enthused about the Eni acquisition, which we will do very well.

Gary and I were down in the facility at South Carolina, or a few weeks ago with Phil <unk>.

Brainstorming and reviewing the cost and revenue synergies, we know we can create over the next several years.

In addition to the synergy review we <unk>.

The investments we can make in further products and services process improvements people and systems that will pay dividends over the medium and long term.

There is a lot happening in the business that portends a superb future.

So while we continue planning and executing for the future. We recognize we also got to get through the current situation and do everything we can to continue supporting our customers, which we will do.

So with that I'll turn the call over to Rob.

Thank you Dave the reviews that you continue to connect with me and the team always need us in a better place and that business is actually in a much better place because of your involvement.

So all of you on today's call. Thank you for being here.

For you to hear more about our 2021 third quarter performance our outlook on the market and an update on our portfolio.

There are six key messages I want to convey today first as Dave mentioned demand for <unk> products and services remain strong during our last earnings call. We reported second quarter sales were up more than 25% and orders were up 24% compared to the second quarter of last year.

I am pleased to report that sales and orders are up again in Q3 sales were up 6%.

Which is very much in line with the guidance we provide.

Providing our last update and orders were up 17%.

In addition, our Q3 backlog rose two goes to $2 4 billion the highest its ever been.

Second profitability is up this quarter, our adjusted operating profit was $131 million up $64 million from last year's third quarter. This resulted in adjusted operating margin expansion of 490 basis points.

Third year to date free cash flow is greater today than it was this time last year free cash flow for Q3 was $44 million and year to date is $128 million for a year from a year to date perspective. This represents an improvement of over $140 million.

The first three quarters of 2020.

Fourth as Dave mentioned, we are dealing like others with supply chain and inflationary issues.

We encountered supply chain challenges in Q3 and experienced commodity and freight inflation, we made spot buy so that we can meet our delivery commitments, we've made to our customers and we have implemented strategies to recapture those cost.

Pricing always lagged cost by a few quarters and that's exactly what we're seeing now however, we believe as we've mentioned before pricing will be a tailwind in 2022.

Fifth we expect to close the Eni acquisition by November <unk>, which is a month earlier than previously communicated.

In addition, we signed an agreement to sell our heavy industrial UBS business and we expect to close that transaction by the end of Q4.

And the final key message is we are confirming our latest guidance.

For the Burton base and slightly increasing our guidance for the impact of the M&A transaction.

Turning to slide four.

Yeah.

This is the chart we used to illustrate what we're seeing in each of our world regions and each of our end markets.

And the cloud and Hyperscale Colocation markets.

<unk> two remains strong as evidenced by the green buttons the demand for digital continues to fuel the industry and is driving a strong and growing need for virtu product and services.

In our enterprise and small to medium business market. We continue to see signs of progress enough progress is made in America to upgrade this segment from yellow to green.

We continue to experience an increase in the pipeline and orders with America's leading the way.

The communication networks had a few moments we saw <unk> deployments in earlier parts of the year.

Very robust and began to see that slow or a digestion.

Over the last quarter or so.

We've experienced Europe, beginning to deploy <unk>, and we see consistent deployment and Americas.

In the commercial industrial market things remained consistent.

This is a smaller size of our business the variety of products and services, we sell here continue to expand.

Moving to slide five.

As referenced in my opening slide our orders rates continue to be robust. Our Q3 order rates were up 17% over Q3 of 2020 and on a year to date basis are up 21% versus the same time period last time with cloud and co location segments, leading our way.

The executive team remains closely connected to the accounts and we're seeing strong demand continue.

Because of the deliberate connections we are making we are gaining further visibility into customer demand customer demand, leading to advanced orders and insight to their future pipelines that we haven't seen in the past.

Which is a tremendous help in our demand planning as we go forward.

This and other actions, we're taking have led to a record backlog as I mentioned earlier $2 4 billion, which is 34% higher than our backlog was at the end of 2020.

As you heard from Dave in his opening comments.

Can use to pose challenges for us.

And many many others in the industry each of the regions are experiencing it but it is most acute in Americas, where material availability is most difficult and commodity prices have risen beyond expectations.

Where necessary, we will continue to use spot buys so that we can take care of our customers.

From a pricing standpoint, we are in line with our prior guidance. We provided for Q4 will continue with pricing actions throughout 2022.

Moving to slide six when we spoke last we expected to close Eni deal by December one, but I'm very pleased that we'll be able to close this deal a month earlier due to the diligence of the combined verdict and Eni teams and with help from our transaction partners.

We had successfully we had a successful debt raise a few weeks back and all antitrust hurdles have been cleared.

The market reaction has been overwhelmingly positive Gary Phil our regional President I have been on the phone with hundreds of customers and the receptivity to the deal is exactly what we wanted very optimistic and very excited.

Integration planning has started right. After the deal was signed and I look forward to entering into the execution mode in a few days.

While Eni orders remained very strong they are facing site readiness and supply issues on electric components no different from others in the industry.

Now, let's turn to divestitures of the heavy duty industrial Upi business. We have signed an agreement to sell this business to a financial sponsor called Renaissance <unk> will retain the existing management team, which makes for a very easy transition and provides for a great customer continuity.

We expect this transaction as mentioned earlier the close by the end of Q4.

With that I'll turn it over to David to take a closer look at the Q3 numbers and we'll come back with some final comments at the end David.

Great. Thanks, Rob turning to page seven.

This slide summarizes our third quarter financial results net sales were up $67 million or 6%.

4% when adjusted for a $20 million foreign exchange tailwind.

However, our third quarter top line was negatively impacted by continued challenges with procuring.

Electronic parts and underlying market demand is much stronger than implied in our year over year.

Quarterly sales growth.

Strong underlying market demand was evident with third quarter orders as Rob mentioned, which were up 17%.

After increasing over 20% in the first half of the year.

Adjusted operating profit of $131 million was just above the midpoint of our guidance range and increased $64 million or 94% from.

From last year's third quarter, which included an $80 million charge for restructuring and an asset write off.

Contribution margin in the third quarter continued to be negatively impacted by material and freight inflation, which outpaced our pricing by approximately $40 million in the quarter.

We expect to further narrow the imbalance between inflation and price in the fourth quarter and expect net price inflation to be favorable for full year 2022, as a result of incremental pricing actions in the fourth quarter and into next year.

Adjusted operating margin of 10, 7% was 490 basis points higher than last year's third quarter, but approximately 200 basis points lower.

When last year is adjusted for the restructuring and asset write off charge.

And this year over year.

Reduction is driven entirely by net inflation.

Finally on this page free cash flow of $44 million was approximately eight.

$85 million lower than last year, and we will address the components of that Delta in and just a couple of slides, but despite this quarterly unfavorable variance year to date free cash flow of $128 million is still approximately 140.

The Americas region continues.

Supply chain challenges.

The two other regions due to regional differences in the pace of material inflation and availability of electronic parts.

These supply chain challenges negatively impacted both Americas top and Bottomline.

With net sales up just $5 million or 1% against the strong market backdrop and adjusted operating margin was down approximately 400 basis points driven primarily by net inflation.

Moving to the right APAC net sales were up approximately 4%, but relatively flat on an organic basis as.

As last year's third quarter benefit from China government investment in several telecom and wind power programs.

Third quarter adjusted operating margin in APAC was up both before and after adjusting for.

For the $11 million restructuring charge.

In last year's third quarter.

EMEA continues to post very strong financial performance with net sales up 19% from last year's third quarter and adjusted operating margin was up almost 300 basis points. After adjusting for last year's $41 million regional restructuring charge.

And although not immune to the effects of net inflation in the EMEA.

Apply chain environment at least to date has been.

Less disrupted than the other two regions.

Next turning to slide nine.

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

Down about $85 million to $44 million.

The most significant negative variance is driven by a $43 million inventory build in this year's third quarter.

In part due to several large project delays and the strategic stocking of certain electronic parts to protect future customer deliveries.

Capex was approximately $10 million higher this year.

Versus last year and.

Certainly last year's third quarter was negatively impacted by certain COVID-19 constraints.

On a year to date basis free cash flow is up $128 million and.

We reaffirm our full year free cash flow guidance of $205 million, which includes approximately $45 million cash outflow.

<unk> M&A transaction expenses.

Next turning to slide 10.

This page summarizes our fourth.

Ne activity plus the expected impact of the <unk>.

<unk> acquisition and the industrial.

<unk>.

PS business divestiture.

For avoidance of doubt, we exclude M&A transaction closing and other expenses in our financial results and guidance $18 million in the third quarter, which includes a $9 million impairment loss for the sale of the industrial and PFS business.

$51 million in the fourth quarter for $69 million total transaction expenses for the full year and we summarize our non-GAAP treatment of these expenses in the reconciliations in the appendix to this presentation.

Our base <unk> net sales guidance is.

Is up approximately $35 million from our previous guidance.

Upon improved visibility of our supply and shipment schedule M&A, including six.

$65 million from Eni.

$10 million reduced sales from the industrial you PFS.

Business divestiture.

As Rob mentioned when.

When we announced the Eni transaction at the beginning of September we anticipated a December 1st closing date and $45 million of incremental fourth cohort four.

Quarter revenue from Eni.

Now with the acceleration of the anticipated closing date to November <unk>, we expect $65 million of incremental Eni revenue in.

In the fourth quarter.

Adjusted.

Operating profit for base Berta is materially in line with our previous guidance at $540 million.

With the benefit from higher net sales offset by higher expected.

Versus our early September guidance.

We have added approximately $13 million.

Operating profit.

Two our guidance for M&A and that includes $15 million.

For Eni assuming on November 1st closing date, once again and that $15 million is offset by approximately $2 million from the sale of the industrial U P. S T.

Fourth quarter net sales are.

Expect it to be up 8%.

Profit up 16%.

With 90 basis point improvement in.

Adjusted operating margin.

Adjusted EPS is expected to be down approximately <unk> <unk> per share.

But the year over year comparison, certainly is negatively impacted by the timing of income tax expense.

In this year's fourth quarter, which is.

Artificially high due to the quarterly treatment.

Some nondeductible losses from the changes in the fair value of the <unk>.

Warrant liability.

Next turning to slide 11, we summarize.

Our full.

Full year net sales are expected to be $5 billion for the full year.

That's up 14% from 2020 include including M&A.

And the adjusted operating profit for 2021 is expected to be $553 million up 62% from 2020.

And still up 20.

$10 million.

Dollars.

2020 pro forma items.

Our full year adjusted operating profit guidance for <unk> is unchanged from our end.

Adjusted for.

Operating margin for the full year is expected to be 11, 1%.

Uh huh.

330 basis points from 2020, and still up 70 basis points when adjusted for 2020 pro forma items.

Our full year free cash flow guidance of $205 million remains unchanged from previous guidance.

With expected M&A cash transaction.

Action.

In closing it.

Expenses.

So with that said I turn it back over to Rob David Let's turn to slide 12.

Almost all of the commentary thus far has been focused on.

You want to.

<unk>, an early glimpse of 2022, which we're really excited about.

From a topline perspective, we clearly entered the year with a backlog that significantly higher than what we came into 2021.

And from my view right now the backlog will be approximately $500 million.

As discussed on the earlier side, our markets continued to show strong demand for our products.

All signs of Pony to cloud and Coco in case, some markets remaining robust.

Globally.

And from an enterprise perspective demand should continue at the same pace, we are seeing it today.

During our last few calls we highlighted some of the vertical product development initiatives, we have underway and these products only accelerate in 2022 and beyond we continue to invest in new product development and go to market strategies from.

From a potential headwind standpoint, we're expecting to see part shortages last at least through the first half of next year.

We also know customers are dealing with trade labor shortages and difficulty in getting some of the key building materials that they need while.

While it's difficult to predict the exact impact on us. These are very real issues and our customers are dealing with them on a day to day basis.

Pieces.

As for profitability in 2022, we expect pricing will be a tailwind we will have a full year of eni and our results which will be accretive.

We will continue to deploy the tenants of vos fixed cost constant and as mentioned are still funding incremental R&D and growth initiatives. We do expect inflation to continue into 2022, but even at today's level. We are planning next year to be net positive on price.

Turning to slide 13.

As I close I want you to know how proud I am of the <unk> team and what we together as one <unk> have accomplished in the first nine months.

The results. We've shared today are reflective of the hard work and commitment of our 20000 employees globally.

The factories some in the field, so many offices and some still working remotely and over 130 countries.

As I look at the remaining months of 2021 as we continue to invest strategically I'm confident we will see above market topline growth in.

The increase in profitability and strengthening in our balance sheet.

When I look down the road at 2022 and beyond my confidence is bolstered by the conversations I've had personally with partners and customers around the globe about demand pricing and future pipelines to.

To our employees I'm grateful for you and the part you played in the past three months that have allowed me to provide today's earnings report. Thank you for your dedication and your tireless effort to take care of the customer.

To our investors. Thank you all for being on the call today. Thank you for your trust and support it's truly my pleasure to be leading burden.

I'll now turn the call over the operator to open up the line for questions.

We will now begin the question answer session in order to ask a question Press Star then the number one on your telephone keypad to withdraw your question Press Star then the number two well.

Pause for just a moment to compile the Q&A.

Yeah.

Okay.

The first question comes from Jeff Prague.

With vertical research you May go ahead.

Thank you and good morning, everyone.

Good morning, Jeff.

Good morning, Jeff Good morning, Hey, Jeff.

I'm, sorry, but I can say certainly enjoy hearing from Mr. Broad, yes, I've been called worse days.

But how are you doing.

Well sites.

No no worries here.

What.

Hey, first first on price, if we could and just a little more color on what you're thinking about for next year, it's kind of doubles in Q4 versus what you had in Q3, but I am just wondering if you can give us some sense of how much price is.

In backlog at this point.

And when you talk about pricing.

Two.

Are you talking on a.

Turning to at least meet on a dollar basis, but I wonder if you're also seeing it being positive on our margin rate.

Basis.

Yes, Hey, Jeff This is Rob I'll start first and then.

David and Gary can chime in.

First of all I'd like to start off by saying that we.

And it's on me have under forecasted what inflation was going to do and therefore, we haven't received the pricing levels necessary to offset inflation.

In previous quarters.

Initially going forward with our robust pricing actions and what we are doing now and we'll be doing in 2022 that we will be positive in price based on what.

We're executing on so again just wanted to let everyone know on the call today that under.

Under forecasted inflation, we understand where that's at.

Even assuming that it could get potentially worse, and we're making sure that our pricing actions now and going forward cover that.

David.

Yes, yes, thanks, Rob.

Good morning, Jeff So.

I think if you look at the numbers and where we stand or where we expect to stand at the end of the fourth quarter is that in a do not been scenario, which is not going to happen.

Do nothing scenario the wraparound effect of net.

Price inflation is probably a small tailwind in the <unk>.

$5 million to $10 million range.

So.

Certainly.

Encouraged with what we're seeing in the pricing environment here in the fourth quarter as you mentioned thats about $15 million step up from from Q3.

But we're certainly not satisfied as Rob mentioned.

We've left some dollars on the table this year, because we've underestimated inflation.

And we certainly arent going to be much more aggressive than we have current plans in action.

To continue.

Those price increases fairly significantly in the 2022, but.

From a wrap around the impact looking at the numbers.

A florida is probably a $5 million to $10 million tailwind and of course, we are in our pricing plans anticipating that inflation will continue to accelerate whether it does or not I don't think anybody knows but we're anticipating that it will accelerate and.

Of course, we.

Anticipate a much more significant.

Dollar tailwind then.

I appreciate your comment on.

The.

As it relates to recapturing the margin percent.

We do appreciate the math.

But not recapture the percentages, but.

Just to let you know we are looking at that dynamic as well and that certainly is our long term goal.

Very clear.

I wonder if.

We can just talk about a little bit more color on what youre seeing on <unk>.

<unk>.

A little color on the magnitude of the activity there in may.

Maybe anything you can.

Sure. Jeff This is Rob I'll start off and then Gary might add some additional color, what we're seeing right now and especially in.

In Americas as we mentioned is kind of a rebound of small to medium business and enterprise as they go back to work refreshing their networks their network closets. So we've seen that activity in the channel space for us.

Beginning to pick up and Thats why we moved it from yellow to Green were also seen in the enterprise areas people reconfigure in their data centers, taking the time projects they probably put on hold during the.

The pandemic and now they're getting back to some new build some reconfiguration unbilled.

As they build out their hybrid cloud strategies going forward and right sizing I guess I would say their current data centers that will be on Prem. So that's what that's what really gives us confidence led by Americas.

Havent seen parts of Asia, we didn't talk much about because Asia is still being plagued on and off with Covid. We expect hopefully going into Q1 next year Q2 that those activities and Covid would clear itself up and we did see enterprise going in the right direction, there and in Europe.

We continue to execute on our channel strategy, there to drive more and more enterprises, but in generating back into the office.

Great. Thanks.

Your next question comes from Scott Davis.

With Melius research you May go ahead.

Hi, good.

Good morning, everybody good.

Morning, Scott.

The tone of your.

But the tone of your comments Robert meaningfully more positive than just a month ago I imagine that's somewhat purposeful but.

That's not Mike.

A question.

The.

You kind of alluded to the reality that these projects are being announced it may get pushed to the right because of lack of kind of labor and materials.

How does that look.

Just to quickly what does that mean for you guys.

Does it mean that orders get.

<unk>, it's that simple or does the customer because of lack of supply kind of taken.

Want to take delivery anyways, just warehouse things.

So that they don't have further delays once they get kind of brick and mortar down how does that kind of logistical work or were just got or do we not know yet.

No Scott asked absolutely and I think you've kind of nailed it.

While we don't know exactly which sites are going to be impacted.

What we are seeing is customers willing to take that inventory in some cases in warehouses. So they have it when that site does turn on so they don't lose their production slot or they don't lose their equipment.

Somebody else that being said, that's more of a new phenomenon and as they reach out to more of our large customers.

More and more of them are wanting some type of program to have inventory.

Go ahead and take it off our hands and take the responsibility of it but it's a really dynamic situation and even things as roofing systems, which you think would be simple have gone out to 44 weeks in lead times. So they are being stressed not by necessarily the equipment manufacturers. If I look at the lead times yesterday have gone out, but not near as far.

And if some of these other based building materials.

We will experience insight difficulties from time to time do the trades labor and so on.

Okay. That's super helpful and then when you've missed a sale.

For the last quarter because of supply chain.

Has there been instances where that sale is.

It's been able to supply it or is the entire.

Higher market, just so tight that the stuff just gets moved into backlog and everybody is.

Everybody is comfortable with the fact that deliveries or just be a little late.

Places, where we've seen somebody had to have something and somebody was willing to jump the line and maybe a competitor and knock another customer out.

Humble with what we've told our customers.

And we've not played that game.

So I'd take while that's happening it's very little I mean, the market is tight for everybody and we've seen without going into detail youll smaller competitor.

There is an even larger competitors.

<unk> as you know we are one of the first companies to come out and talk about this issue and we did it around the announcement of the acquisition because we felt that was fair and honest ill. Let you guys know exactly what we're seeing but I don't think we're penalize any worse than anybody else and backlog will continue to grow and quite honestly <unk> ability and I mentioned that.

You will earlier in my discussion I would like the visibility where getting the industry has traditionally not shared that because they feel it's a competitive issue because we work with a lot of competitors.

To our customers and they want to make sure but what we're finding is building those relationships and that collaborative relationship we were able to get even a longer.

Best of luck the rest of the year I'll pass it on.

Thank you Scott.

The next question.

Any with Evercore you May go ahead.

Perfect.

Morning, and thanks for taking my questions.

I guess I have two as well.

Slight headwinds that we have in the September quarter, I think you talked about between $25 million in December.

Tom.

We feel confident that that should be this should be the peak number and as we go through 'twenty two that number should start to become positive.

By the way.

Yes, thanks for that.

Absolutely confirm that.

We anticipate <unk> to be the peak.

Net price inflation imbalance and.

Q3's, 40 million I think it was $25 million.

In Q2.

We anticipate inflation to stay at the same level in Q4, but pricing to ramp up about $15 million so that imbalance should.

It dropped to $25 million.

For Q4.

And.

If you look at just pure wrap around effect.

It would be a $10 million.

Imbalanced in Q1 of 2022, but of course, the debt that does not contemplate any additional pricing.

Facing actions and we would anticipate to get to a point where.

Those two elements offset one another sometime.

In the first quarter.

Perfect and then hop.

If I can just.

Shift gears, a little bit and when I think about this market environment chart slide the colt hub.

It seems to us at least at some of the key political upside to inflect higher up I think Facebook on the Hyperscale side pulpwood Capex below 65% next year in 2000 team and then enterprise Ice's, Brent I think equally started to pick up but the bigger enterprise company.

It's all of the data would suggest that growth if you're levered to data centers should accelerate and be better in 'twenty two versus <unk> 21.

I wonder if you'd agree with us broadly what would you do.

Deferred and then it's kind of.

Falls in line with what we're saying about enterprise and enterprise should be stronger next year.

As we began to see things pick up and continue to grow our channel business as it relates to and we get asked this all the time and that's what's happening.

There's always been a build and fill situation, where we have this absorption going on and what's different why is it different now.

Please.

Hello.

More money is being important.

And to that <unk>.

Utilization rates are high.

What's going to be the limiting factor for further growth not necessary orders growth, but growth and on the sales side and delivery is going to be that material and labor shortages on probably there and that at the end of the day the appetite.

As far as I can see out and we typically have 18 to 24 months look ahead on the pipeline and things like that looks very robust and that's why I'm very bullish right now that get these supply issues behind us, which are a big nuisance for all of us and moving forward the market needs more clinical data centers.

Perfect. Thank you.

Your next question comes from Nigel Coe.

With Wolfe research.

Go ahead.

Thanks, Good morning.

Promissory note minimal price cost questions.

So.

I think thats been vetted quite well so.

The backlog fundamental growth.

Exiting the year I mean, just the simple math gets you.

Double digit growth.

For your 2021.

Which I know is not the right way to think about it but I'll ask the question anyway. So does that imply double digit growth in 2022.

From the backlog.

Then.

Within that are we seeing any change in China, because the tech companies.

Get a defenestrate.

In China. So just curious if that's having any impact on that capex plans or capacity plans in any way.

Okay.

Nigel This is Rob I'll start off here, while we are seeing a robust backlog it'll again, a lot of 2022 is going to be dependent on supply and site site site readiness and capability so that ready to go.

At our backlog and the orders growth.

It certainly would imply a robust 2022, assuming we can deliver.

Okay.

What's going on with China.

Scale activities.

Certainly the power.

Power outages because of the coal issues, which currently right now because we are deemed essential and will continue to run as we provide.

It is a dynamic environment over there.

And as you know China decides to do something in and put a stimulus.

Like they did in the beginning of the year for <unk> growth and some other things, we do see a higher than average growth.

But in general we feel good about our position our focus.

On product development being local there and continue to to grow or grow our share there.

Great. Thanks, Rob and then a follow on is on the EMEA margins.

19% pretty extraordinary in the current environment and you also had.

That's a 20 handle last quarter.

So just curious if you know.

Number one what's driving that margin strengthen and then secondly, I'll be sort of moving to a new plateau.

In Europe.

Yes. Thanks, Nigel this is David.

Number one thank you for recognizing that.

I would say, there's two things that are driving the enhancements and margins we feel that this year.

One is definitely centered on.

The fixed cost constant.

Philosophy so.

We continue to not only keep fixed cost constant in EMEA, but we've actually been able to take costs down.

As it relates to the investment in some of the restructuring so.

We certainly.

See a benefit there from the leverage so with sales up as significantly as they are there.

Our anticipation for the full year is that.

It should be in that upper teens sales growth.

We certainly are benefiting from.

That.

Fixed cost leverage.

The primary driver I mentioned on the call that.

The supply chain environment in EMEA.

<unk>.

<unk> has.

It's been a little less disruptive than the other two regions, but they still are negative from a mark a contribution margin perspective as it relates to net price cost.

Most of the lift we've seen this year is because of the fixed cost dynamic.

Great color Thanks, David.

Yes.

The next question comes from Lance Vitanza with Cowen You May now go ahead.

Thanks, guys. Thanks for taking the questions I had a couple of questions. The first actually is back on the supply chain.

I'm just trying to understand the accelerating order growth that you saw which was quite noticeable to 17% year Brian here.

How much of that is would we say organic or is that just reflecting the price increases that you are putting in place I'm just trying to get a sense for.

Volume picking up as well at least from a demand perspective, I know obviously there are issues with respect to your ability to fulfill.

And then the next question is should we expect the above average inventory build that we saw in the third quarter. How long does that persist does that sort of through the first half of 'twenty, two as well and is that kind of 40% to 45 million of incremental build per quarter is that is that a good run rate to model or is that.

Or is there something else, we should be thinking about there.

Hi, Brian. Thanks for the question. This is Rob I'll take the first half and they'll give David.

The second half on that.

As it relates to the growth and I think we talked last time, when we announced the NII acquisition, we're posting up around 12% orders growth. We did see an acceleration I would say, it's hard to kind of break out I'd say right now the price and that certainly there is some price in there, but we're seeing a strong.

Strength in demand part of that is people are placing pose as we are as a company little further ahead in the future so that they make sure they get in line, but in general the market is pretty robust.

As you see begin to see the comment I made earlier around the.

The capex, yet the Hyperscale orders and Colo companies are spending.

There is some price in there for sure but there is also just a strong underlying growth in the market.

David second half.

Thanks, Rob and thanks for the question Lance so as it relates to inventory.

Youre absolutely right. So if you look at year to date inventory, it's probably up.

$130 million from the end of last year.

And with approximately.

$40 million build in the quarter.

It's not unusual for us to build inventory during the year and then have that.

Come down in the fourth quarter.

Based on what is usually a very strong sales quarter.

I think we're going to see a little bit of that dynamic this year, but probably a little muted.

Anticipate year end inventory declining somewhat but very much dependent upon the dynamic out there as it relates to the.

Part shortage, we certainly are not artificially constraining ourselves to hit any internal.

Inventory days are turnover targets, if we can find the parts were.

We're making the right business decision and we will buy the parts and parking and inventory to protect.

Deliberately delivery for 2022.

With that said, we're very mindful of the impact that inventory has on free cash flow.

Very important metric for us and we are implementing.

Actions to optimize.

That inventory level so.

I would anticipate a dip in Q1, but we could see an additional build.

I am sorry, a dip in Q4, and we could see an additional build as we go through the first half of next year.

Thanks for the.

The color I appreciate it.

Yes.

Your next question comes from Nicole <unk> with Deutsche Bank, You May go ahead.

Yeah. Thanks, Good morning, guys good.

Good morning, Nicole.

So I hope that people it seems like your name has come in for some variation also.

I'll answer I don't even try anyway.

Yeah.

Well. Thanks for the question guys I guess, maybe starting with I do have a follow up on price cost if you don't mind.

When you were answering jeffs question about the floor on pricing the five to 10 or price cost of $5 million to $10 million for 2022 does that include the pricing actions that you've taken to date I assume it does but I just trying to check on that and then I guess like with the view that <unk> is the worst behind you is that based on your view of that.

Inflation kind of gets worse in the fourth quarter or is that assuming normal spot rates.

Inflation is kind of peaking just wanted to understand the philosophy behind that.

Yeah. Thanks, Nicole this is David.

I'll get to your second question first so our assumption is that inflation in Q4 is consistent with inflation in Q3, and if you want to put a specific number to it I think everybody at some point able to triangulate all all these numbers on a quarterly basis, but.

We're assuming $55 million of.

Year over year gross inflation in Q4.

That was the same number that we saw in Q3.

So we don't anticipate that inflation gets any better or worse in Q4.

Versus Q3, and Thats consistent with what we've seen so far in the month of.

The month of October.

As it relates to the wrap around effect for 2022, it's a little bit of a math exercise. So that's just looking.

At.

If you look at that $55 million inflation number we see in Q4.

You wrap that around for the full year based on what we've seen in 2022, you end up with an additional 60 million dollar headwind for.

For inflation, if you'd do the same thing for pricing and so to your point that would only include actions that we see in the P&L in Q4 2021. So that's about $30 million. If you wrap that around you get a $65 million tailwind for pricing and Thats the <unk>.

$5 million to $10 million that we referenced it's kind of a pure math exercise just to give comfort that that's really the floor that we would see on a base case.

But of course that does not contemplate pricing actions that we've taken in Q4 that have not been recognized in the P&L yet.

And it also assumes that inflation does not get worse, but we thought that would just be kind of a helpful.

Gauge for what.

For a number would be.

That is super helpful. Thank you for walking me through that.

Detail I really appreciate it.

And then when you talked about the revised outlook for E M.

For the full year, I guess any change to the way Youre thinking about North America or Asia Pacific.

Yes. This is David I can start.

<unk> can speak so.

I would say if you look at the dynamics of both pricing and inflation for 2021.

Americas is certainly.

<unk> been impacted more than the other two regions.

And once again I'm Ben.

Revenue growth.

Sorry.

Okay.

Nicole I will take that from.

From a revenue growth perspective EMEA.

EMEA has had.

Add some.

I would say very good tailwind basically produced by our what we call our global accounts team that we've pulled together so we've seed.

An aggressive build out across Europe.

Partially due to data sovereignty, partially due to.

Some of the Brexit activities early on and just everyone wanting data center, so you're seeing a tremendous amount of builds happening in Europe as we as we speak today that being said the outlook as we look forward and look at our pipelines as I mentioned, we've got pretty good views I expect robust growth to be happening really.

Around ground around the globe I expect Americas.

A lot of people think Americas has done and built out.

That is not the case.

There is more data centers needed than we currently have today and I think youll see an acceleration of growth in 2022 for that.

Both Colo and Hyperscale and enterprise recovers and then if you look at Asia.

Southeast Asia, specifically, they've been here Covid has really slowed them down from the ability to build deliver projects. So I think when that gets unlocked.

Youll see a nice set of growth there and then you commented on China earlier, I cant I wish I had a better crystal ball exactly what was going to happen over there, but we continue to see that as a good market for us.

Thank you I'll pass it on.

The next question comes from Mark Delaney with Goldman Sachs. You May go ahead.

Yes, thanks for taking my questions. The first one on the Eni acquisition, you spoke to positive customer feedback that you're receiving can you elaborate a bit more on what youre hearing from customers and I think some of the value proposition is being able to sell a broader set of products.

If you could talk specifically to what you're hearing from customers on your ability to provide a broader set of solutions.

Sure Mark this is Ralph Thanks for the question, yes in general the excitement as it actually fills out the portfolio, while we've talked about it in the past that switch gear with necessarily something we had to have.

As the systems get more tightly integrated as we put the controls and drive efficiency modularity, which we've been talking about for a while.

These modular integrated data center.

It is becoming more and more part of it. So they are excited the fact that a company of various size with our service organization.

And I didn't have a lot of service organization, we can really kind of complete that entire deal for them.

<unk> category was something that we didn't.

Really participate much in and Eni as a global leader in providing bus bar and the excitement I would say when we talked to a lot of the global Colo and Hyperscale is the fact that will help accelerate and bring these products to all places in the world P&I Hasnt really been a very present.

At all they don't have factory in India, and China are our rest of Asia. So the fact that they can now get global consistency global products.

And the modularity side of it is a big one that Eni has been just an incredible job in Europe, providing modular power skids.

They've got the new facility opened in South Carolina.

Which had been receiving orders for modular so it gives us that capability.

In some areas, we do ourselves like for example in Europe, Croatia, but in areas in the U S. We would sub debt out maybe to a third party and have them assemble our equipment and pull that together now we will have that in house capability and that core thing so in general.

Anything to do with the exception of C&I.

C&I is a great company now, it's even better with the backing of products services and global sales and <unk> global reach.

That's helpful.

She was on supply chain.

And maybe a two part question there first.

Excuse me.

In terms of supply chain compared to when you gave the business update in September or is it kind of incrementally better incrementally worse any change over the last month or so and then the second part is you are expecting supply chain to be tight through at least the first half of 2022 can you elaborate on what youre hearing from your suppliers, what's most difficult.

To procure and what's behind that comment around supply chain being tight through first half next year. Thank you.

Sure. This is.

Ever ever changing environment. So we have been speaking in the past.

About fan situations, our engineering teams work diligently to qualify additional fan manufacturers.

To bring into our build and bring into our products. So some of the things have eased up and actually beginning to get better as we bring some new suppliers on.

I would say that.

Still neutral on where we talked about chips working with our chip manufacturers and that capacity coming online the end of the year coming into Q1, Q2 again VIX bag on what people are seeing in the market, but as we talk to our suppliers there they feel like they will have.

The capacity beginning to come on.

Middle Middle Middle to the end of Q2 from that.

As we think about breakers.

Which we all use baker's when there's a few sort of brick and manufacturers on a global basis that seems to have gotten worse.

From a supply perspective.

<unk>.

First is when we talked before I think im not sure that it's bottomed out, but I think it probably is getting close to that from a lead time going out and then some of the things that maybe are getting better, but still still spotty as the <unk>, which we've talked about in the past and some of that was just due to the fact that COVID-19 was.

Affecting some of the factories in Vietnam and other parts of the World and we will see them coming back online. So in general maybe a few parts.

A little more detail, you're probably one of few parts getting a little bit worse from a lead time perspective, and Trump things improving in <unk>.

Again, our thoughts are while we don't have a perfect crystal ball if all the things, we're telling them being told from the supply base things should should begin to get better for the second half, which we've talked about for next year.

Thank you.

Your next question is from Andrew <unk> of Bank of America, You May go ahead.

Hi, guys good morning.

Good morning.

Hi, good morning.

Yes.

Okay. Thank you for answering a lot of questions but.

Have your win rates on new projects trended year to date, particularly given the capacity constraints.

And any quantification you can give around the benefit from new product introductions.

I'll start with the second one first and then Gary can comment a little bit about some of the win rates, but what I would tell you that we're very excited about some of the new products that we've talked about in the past that have launched have been received quite well one area that I've been excited about is in our thermal management area.

We continue to be a world.

Leader in the global supplier of that.

The dynamics of changing of what people want to use in the data center.

While a lot of people are staying away from water. We have we have a really good system that is waterless very efficient that helps them drive towards there.

Neutral.

Platform.

That would be one example.

<unk> talked about in the past and we've seen it.

Better than expected uptake of that so people are liking the innovation liking, what we're bringing out I would say on the channel side of things as well.

The solutions that we've been bringing to the channel whether it's the first in some of the lithium ion battery products are guys kind of award winning power distribution product line is at several launches that have picked up so.

In General I guess I am.

More than thrilled with with.

What we've delivered so far and really excited as Dave mentioned.

We continue to pour gas on the fire for innovation and we will continue to deliver those products both in channel and then.

And the Colo Hyperscale enterprise space.

Yes, Andrew it's Gary So I think that in terms of your first question.

The two things we do watch clearly are.

How is the pipeline trending and then what is our what is our win rate by product line by region and for the most part pretty good visibility into both of those pipeline continues to accelerate particularly if I look at where we sit today versus even a year ago. At this time and then the win rates are also worst case flat, maybe even a little bit better in some areas largely.

Due to the new product introductions that Rob talked about so those are very much tied hand in hand, so for where we sit today I think the order rate is certainly commensurate with pipeline activity, increasing as well as win rates, probably even inching up versus what we would have seen a year ago.

Great. Thank you.

Maybe to build on this.

As you talk about I think people brought up the industry, perhaps even on pricing.

'twenty two.

Why don't you know we're hearing a lot of staff Friday here Hyperscale are sort of starting to come off with proprietary technology.

I think a couple of years ago three months' highlighting.

On proprietary illiquid for calling I'm not sure what happened there.

Talk about things sort of shifting from edge to the cloud from cloud to the edge.

Big picture, one of the big themes and new exciting stuff on the horizon and how are you guys positioned.

Can take a longer term for you. Thank you.

Great Great question, and a lot of people read into Hyperscale orders and what Theyre doing and certainly one of the areas that the Hyperscale is have spent time in innovation on is around the servers themselves the servers storage and doing a lot of that development themselves doing their own chips several have announced that.

As it relates to infrastructure, we do a lot of collaboration with them Theres, certainly hyperscale or Soma want things down exactly the way they want them and so where our collaborator provider.

Using our IP and in.

In some cases, a mixture of join IP, but for the most part our IP. So.

We don't see them going in a big way into into our space as it relates to large power large thermal but we do see them influencing our various.

Product development as we go forward.

From that perspective, as it relates to technology, which you're referring to with three M is really there are two phase emerging cooling.

Fluid that they talked about and we see that really originating in bitcoin operations, where there is really high density Super high density.

Servers, and emerging cooling shift yet another way to take the heat out in a high density situations. If you think about the landscape and we will continue to evolve.

And while we're involved with immersion balloon and I think I've talked about this before with the single phase III two phase we're involved in both of those as part of our R&D and we're deploying and we have partners. There I think if you think about where where the industry will continue to change and evolve as one of our sweet spot and thats. The thermal that we will continue to weather.

It's immersion, whether it's cold plates and some cooler.

Cooling at the chip level all of those things Virtus engaged with and very forward thinking on things that are going to be two to three years out. So we feel good we feel good about that the other area that I think you'll see a focus on his generators right generators is an area that creates a lot of concern and theyre not.

Looked upon as favorable for siting and so forth. So maybe alternate ways of doing tighter integration with renewables.

Even things such as fuel cells, which I wouldn't have thought in my lifetime would become.

Began to become more mainstay, but with fuel cells and solar and wind and battery storage. Those are some of the things I think if you look at the future.

<unk> been talked about by by a lot of the Hyperscale orders and clothes and certainly <unk> with its increased R&D budgets are participating in collaboration and making sure. We have a we have a place in that game.

Thank you for a great answer.

Okay. Appreciate it thank you Andrew.

Again, if you would like to ask a question Press Star then the number one on your telephone keypad.

Your next question comes from Steve Tusa with Jpmorgan you May go ahead.

Hey, guys.

Yes, good afternoon at this stage for me.

Yes.

Just looking maybe this is just parsing the numbers a little bit too much but.

When you look at the numbers, we were assuming for December contribution from <unk>.

An ideal.

And we multiply those by 12, we got pretty close to your guidance for that for 'twenty two.

When we look at the numbers Youre, giving now on kind of November and December.

Taking those two months and then annualized.

I guess it kind of.

Numbers that are <unk>.

<unk> below what you had guided to.

Any seasonality around these numbers that one one month is an equal kind of to the other as we get towards the end of the year just seems like the contribution you are now forecasting is just a little bit light of what we were expecting around year end or maybe theyre, having supply chain issues as well.

Hey, Steve its Gary So I think there's probably a little bit of all of that what you just said.

First and foremost is probably what rob's comments earlier alluded to in terms of site readiness. So whether that is literally getting concrete poured for some of these new sites and are having trade labor on the other hand to be able to receive it in voice, but in time. So there are some things that were probably going to ship at the end of December that most likely are going to push to January. So there is certainly a site readiness.

This issue would be one of them there is a little bit of supply chain and there are no different than what we're speaking about to what Rob mentioned electronic parts. A few times. So they are not immune to that so there's a little bit of that and then maybe third is that there is a little bit of seasonality, but I think most of it is really just chalked up to primarily site readiness with a little bit of a supply chain constraints.

Okay. So when we look out like the $571 40 for next year is that still intact is that a little more backend loaded like what's the.

What's the update there.

Yeah. This is David I would say nothing.

That we've seen with Eni up to this point has changed our view.

For 2022, and our expectations for financials.

Certainly give an update and include that in our guidance.

We announced our Q, but I would say.

Nothing we have seen has changed our expectations for next year, Okay, and then just one last one.

Pretty strong backlog, obviously on a relative basis I would've expected, though with orders up 17%. It would have been our calculus kind of getting us to north of two and a half.

Obviously, there are some puts and takes and how you calculate backlog but.

There is there anything there to that stuff some stuff move out as other stuff.

Moved in.

Or is the couch just nodded areas.

Backlog minus sales plus orders.

Yes. This is David Steven we can we can work with you on that.

Sometimes an element of rounding in there as well so our backlog was up close to 200.

Yeah.

In the quarter the book to Bill was clearly over on that 150% to 120% range, but we have made.

No significant adjustments as it relates to the backlog meaning.

Booked orders coming out there is sometimes a.

Ex component to it that create some noise but.

I would say there is nothing significantly that has changed with how we calculate backlog okay. Great. Thanks for all the color I appreciate it thanks.

Perfect.

There are no further questions at this time.

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

So again, thank you for being here today and thank you for your continued support as you can tell we're pretty excited about what we're going into for 2022, we'll get through the supply issues and we'll continue to invest in our R&D and continue to bring new products to market that has the innovation that our customers are looking for so thanks.

Again.

Have a great day.

Yeah.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.