Q4 2021 Vertiv Holdings Co Earnings Call
Orders were through the roof for Q with total company orders up 51% in the Americas up 114% in the first quarter is off to a good start even with the price increases.
Our short term performance, including anticipated first half 'twenty two result is unimpressive.
Our expected long term performance starting in the second half of 2022 will be quite impressive.
We get our heads finally on price inflation recovery.
Our orders are off the charts and market leading.
Supply chain should loose than.
We are favorably resolved the tax receivable agreement and two lawsuits and the product ramp up is just beginning.
Some of you may be wondering why I don't get more involved.
The answer is I have.
And Thats why you see much more aggressive inflation forecasting.
Implementation and other fixes that Rob will talk about.
The management is readily accepted and implemented these let's say suggestions and we'll deliver as presented.
I apologize for putting all our investors through this debt.
That being said if the short term issue that should turnaround in the second half.
The long term thesis is very intact, especially as performance begins in the second half.
You take the second half run rate into 2023.
You can see how intact that thesis is.
We know we have to prove it to you and we will.
So with that I will turn the call over to Rob.
Thank you Dave.
Management team and I share your sentiment about our Q4 results and the outlook for the first half of 2022.
But before diving into the key messages on the first slide let me comment on two topics first while David has been a good mentor to me over the last two years. Our relationship has certainly evolved over the past 60 to 90 days as his opening comments suggest he has become much more actively involved in the day to day aspects of the business both on the cost and.
Price side.
He is helping me almost daily basis to conduct reviews with our teams and host other business topics and has my full expectation that this level of involvement will continue through 2022.
Secondly, let me address our guidance Miss in the fourth quarter, but which I take full responsibility for.
In short, we screwed up and some of you undoubtedly are wondering how we could get so surprised we significantly underestimated the magnitude of the material and freight inflation in the fourth quarter forecast, mostly in Americas by approximately $36 million.
This under estimation of costs also contributed to our under pricing in the market in 2021. So it was a huge deal not only for cost but also price.
Half of the inflation Miss was related to unforeseen supplier decommit on critical components, and our need to execute spot buys and premium freight to meet customer commitments.
The other half is related to forecasting issue within Americas region heavily influenced by our ERP implementation, but also due to forecasting process issues within the region.
These regional costs.
Casting issues have been fixed and we feel very confident with our cost projections for 2022 as evidenced by our January costs being lower than what we were planning and that is why we are comfortable with what we have that we have it all corral. In addition, based upon better understanding of our underlying cost we have been <unk>.
Streaming aggressive with pricing in the last 90 days or so as you will see in today's presentation.
To more than offset the higher costs.
With this better understanding of cost and higher pricing, which we have seen in our year to date orders were confident that we will deliver strong financial result in the second half of 2022 and beyond.
Now turning to the key messages.
On demand.
<unk> products and services is very strong.
Our organic sales were up 4% from Q4 of 2020, the strength of our position in the market can be validated by our order rate, which was up over 50% in Q4 over last year and has pushed the total burn of backlog to over $3 2 billion.
Two profitability challenged primarily driven because of inflationary headwinds.
Not because of a flawed strategy our decrease in demand for our products and services, but due specifically to inflation that companies everywhere our battle.
Our fourth quarter adjusted operating profit was $94 million, which unfortunately was $58 million lower than last year's fourth quarter, we felt inflationary pressures most severely in Americas, but also across our other regions.
Our pricing actions increased as the year went on but they were exceeded by inflationary costs and created $135 million net headwind.
We continue to raise price at aggressive rates, even as recently as last month, and we will continue to do so to make sure we get ahead of inflation.
As you know.
Unfortunately, we are carrying a large backlog and it takes quarters for that pricing to be fully realized.
Fourth we don't we won't see the full impact of our pricing actions in the first half of 2022, but those actions will kick in during the second half and we expect the second half adjusted operating profit to be approximately $455 million $230 million over the second half of 2021.
Supply chain issues are real and challenging delaying product completion. The verdict team is battling parts on a daily basis. Our biggest challenge is with electro mechanical parts and fans critical component of many of our vertical products into.
Internally, we have launched countermeasures to address the shortages. However, we expect and have been prepared for supply chain pressures to continue for the majority of 2022.
Finally, and most important key message, although 2021 did not produce the results we expected for reasons I just shared.
<unk> is now well positioned for strong performance in the second half of 2022 and into 2023 due to our aggressive pricing actions in Q4 and early 2022.
Turning to slide four.
Recapping, our 2021 performance and then I'll provide some additional detail.
What's playing out for 2022 with regard to 2021, we continue to have strong demand for our products. Some of this demand is because we are in a strong growing market. Some is because we are winning with our go to market strategies and some as a result of our verdict product development efforts.
These three reasons are giving us an order rate, that's almost up 30% year over year and over 50% as I mentioned earlier in fourth quarter.
Admittedly, we believe the significant order growth rate in quarter. Four is an indicator that we could have even more aggressively and adding further confidence that our pricing actions over the next several months are appropriate and when we've received in the market.
Well a good portion of our $3 $2 billion backlog will ship in 2022 right now we are getting visibility in the customer plans for 2023 and beyond this.
This visibility is being provided in the form of forecast purchase orders, providing us greater visibility to our revenue profile.
Not only over the next several quarters, but into the future.
On the 2021 supply side, we fully expect to be challenge for most of the year critical parts availability is spotty and despite all the efforts to qualify second and third sources and redesigned products, where possible, we know part shortages or something our industry will grapple with throughout the year.
In addition to <unk>. In addition, 2021 inflation got ahead of our pricing just when we thought we had budgeted enough price inflation got worse. This happened several times, we have corrected it now and are being very conservative in our expectations that inflation will not go away in 2022.
The acquisition of Eni closed in November integration efforts are in full swing, we remain more confident than ever in our purchase decision verdict will reap the benefits from this complementary nature of Eni process and products and its ability to be accretive platform converted long into the future and 2021.
We invested significantly in R&D, just as we planned we launched several new and innovative products and evidenced by their order rates. These products have exceeded expectations of our acceptance from the market, allowing us to take share in certain categories.
In 2021.
We invested in R&D, a fundamental fundamental part of our long term growth strategy.
Now as we turn to 2022 outlook or demand environment remains strong, but deliveries remain constrained by parts shortages, especially in the semiconductors and the electromechanical parts that I discussed earlier.
We are planning to see meaningful we arent planning to see meaningful improvement in the supply chain this year.
We have new production capacity coming online in America to support our growing thermal business.
We are anticipating material and freight cost will continue to increase but our incremental pricing actions are expected to materially offset 2021, and 2020 to inflation by the end of 2022.
Pricing realization accelerates throughout 2022 and provided a net price cost tailwind by Q3.
We expect profit in the first half of 2022 will remain challenged.
But will markedly improve in the second half of the year as price cost turns positive.
Due to the pricing actions already initiated we expect to exit 2022, and a good position.
Turning to slide five.
This is a chart we used to illustrate what we're seeing in the market in each of our regions in each of our end markets.
In the cloud and Hyperscale markets. They remain strong represented by Green buttons in America and EMEA.
In APAC, however, we see some slowdown as China's pushing cloud and hyperscale companies to maximize our existing facilities. We expect this to be a short term phenomenon.
When looking at our co location customers, we're not only seeing strength across the region, but increasing strength in Americas, and EMEA tier one tier two and tier three colors are building out data centers to serve their customers and we are participating in a very healthy way with these building out efforts.
Our enterprise small and medium business markets remained.
Constant for Q4 to Q1, we are experiencing good performance in each region. The pipeline is growing and Americas is leading the way.
The communication network market remains consistently strong with an uptick in Americas as <unk> deployment continue to accelerate.
In the commercial industrial market things remain a consistent in EMEA and APAC.
And we did see an uptick in Americas, allowing us to upgrade America's from yellow to green, while the commercial and industrial market is a smaller slice of our business the variety of products and services. We sell in this market continues to grow.
Moving to slide six.
We closed the Eni acquisition on November one and the integration team has been hard at work ever sent.
Eni has also faced and is facing supply constraints and inflation, which has temporarily affected the top and bottom line.
<unk> has a very healthy backlog.
We believe the pricing actions that we've taken in Q4 and will continue to be taken as needed will be realized in the back half of 'twenty to 'twenty two with Eni as well, we anticipate 2022 revenue from Eni alone to come in around $470 million with an adjusted operating profit of $80 million.
Customer reactions to the deal have been nothing short of Fantastic and this acquisition has increased our relevance relevancy with our customers we expect.
As 2022 progresses.
The synergistic leverage we will get from Eni will enhance our performance in 2023 and beyond.
So I might summarize Eni in 2022 is a tough year, but still a great deal.
Now I'll turn it over to David to walk through the financials David.
Thanks, Rob first turning to slide seven.
This slide summarizes our fourth quarter financial results.
Certainly fell short of our external guidance across most of these financial metrics.
Versus last year sales were up $105 million or 8%.
4% organic when adjusted for the $67 million of sales from Eni.
And we also had a $13 million foreign exchange headwind.
Our fourth quarter top line.
As Rob mentioned continued to be negatively affected.
By challenges with procuring parts.
The underlying market demand certainly was much stronger than implied in this year over year sales growth with orders up over 50%.
Compared to last year's fourth quarter, and it's definitely seen with a record high backlog at year end.
Without the supply chain constraints.
And this is a little bit hypothetical conceptual our sales growth percentage would have easily been in the double digits for the fourth quarter.
Adjusted operating profit of $94 million fell.
Significantly short of our external guide and it was primarily driven if not entirely by contribution.
Margin.
Which will summarize in a separate slide.
Short pit.
On this slide we captured the drivers of the $58 million reduction in adjusted operating profit from last year's fourth quarter <unk>.
Including $80 million lower contribution margin.
Which was primarily driven by a $60 million headwind.
On price cost.
Approximately $90 million of material and freight inflation only partially offset.
By $30 million of incremental pricing.
And of note that our pricing was actually.
Actually relatively consistent with our external guidance.
As we will discuss with 2022 guidance, we've addressed the $60 million for quarter.
135.
The $60 million for quarter $135 million full year.
2021 price cost imbalance.
With aggressive price actions taken in the fourth quarter and early 2022.
Okay.
Returning to fourth quarter, adjusted operating margin and adjusted EPS dropped consistent with.
Adjusted operating profit decline.
With adjusted operating margin about 500.
Basis points lower than adjusted EPS about 25 cents lower than last year's fourth quarter.
And finally on this page fourth quarter free cash flow was significantly lower than prior year, primarily driven by the lower adjusted operating profit.
But also timing of working capital and about $30 million of cash M&A expenses.
Turning to page eight.
This slide summarizes our fourth quarter segment results. The Americas region continues to be more impacted by supply chain challenges than the other two regions.
The supply chain challenges negatively affected both Americas top and bottom line.
With organic net sales up just $7 million or around 1% against a very strong regional market demand backdrop, where orders were more than two times last year's fourth quarter.
The left hand chart at the bottom of the page shows the $69 million year over year decline in adjusted operating profit in the Americas.
<unk> heavily influenced by price cost.
Approximately 70% to 75% of the overall verdict price cost headwind.
For 2021 and in the fourth quarter.
Is in the Americas, despite the Americas, representing less than 45% of total sales.
Freight inflation was particularly acute in the fourth quarter and accelerated significantly.
In the U S. As we progress through the end of the year.
Of course in response to disproportionate net inflation in the Americas, our fourth quarter and 2022 pricing responses have also been much stronger in that region.
All things considered APAC posted relatively good results in the fourth quarter with organic sales up almost 3% and adjusted operating profit and margin relatively flat with last year.
Although not completely immune from the current supply chain challenges relatively little of our 2021 net price cost headwind.
Came from APAC.
And finally on this slide moving to the right EMEA showed strong fourth quarter top line growth.
With organic sales up 11%.
Margins were down about 130 basis points from last year as leverage.
The leverage benefit from these higher sales was more than offset by.
A price cost headwind.
Next turning to slide nine.
This chart bridges fourth quarter, adjusted operating profit from our $176 million guidance to the $94 million actual and $82 million negative variance.
$46 million of this variance was due to higher than expected material.
<unk> and labor inflation, primarily in the Americas, and especially concentrated on freight.
Including premium freight for both inbound and outbound shift.
To protect customer deliveries, but also due to an increase in standard over the road rates, which were up over 30% from last year's fourth quarter.
As we will discuss shortly our 2022 guidance assumes that these four quarter inflationary headwinds.
Continue and trend even higher in 2022.
Moving to the right, we incurred approximately $10 million more than expected sales commission expense in the fourth quarter, primarily due to strong fourth quarter orders up over 50% from last year's fourth quarter.
Eni as Rob mentioned came in short of expectations in the fourth quarter.
And volume for overall <unk>.
<unk> was lower than expected.
Due to the parts availability that we discussed and finally on this page.
Pricing was materially in line with our fourth quarter expectations off about $2 million, but the approximately $53 million of pricing. We realized in 2021 has been sticking and as we will review in a few moments.
It is expected to accelerate significantly as we progress through.
2022.
Next turning to slide 10.
This page summarizes our full year 2021 results versus prior year.
We won't spend a lot of time on this slide as I'm sure everyone is anxious to understand what we see going forward in 2022.
But to summarize 2021, despite the supply chain constraints, we grew our top line organically.
By about 11%, which likely would have been over 15% without the supply challenges.
Our adjusted operating profit and margin were significantly affected by negative net price cost with almost $190 million of material and freight inflation, only partially offset by $53 million of pricing.
Although more aggressive pricing actions were taken at the end of 2021 and implied with the $53 million full year number realization in our income statement was certainly influenced by our significant backlog, which drives the timing lag between inflation and offsetting price hitting our P&L.
We certainly expect pricing to catch up with cost in 2022 and.
And finally on this page full year 2021 free cash flow.
Was about $27 million lower.
Then last year with <unk>.
<unk> hundred $92 million cash interest benefit from that restructuring more offset by an inventory build.
Cash M&A expenses, and higher Capex and cash taxes.
Now slipping at a couple of slides.
We transitioned from 2021 actuals to 2022.
Beginning with slide 12, but before we dive in you will see that.
We supply a lot of detail in our 2022 guidance, including first half second half and quarterly breakouts for.
<unk> sales adjusted operating profit and also pricing and inflation.
We're providing this detail because we realize that.
Absolutely realize we have likely damage.
Some of our credibility in 2021.
Notably with the quality of our external guidance and we want to be fully transparent.
With you with how we see the year unfolding.
And it is impossible to understand the dynamics within 2022.
With looking at only full year figures.
And as you will see our anticipated second half of 2022 is.
Much different and much improved.
From the first half in each quarter improved sequentially from the previous quarter.
This expected improvement both in the second half and with each successive quarter.
Is driven by accelerating price cost benefit versus 2021.
Of course, we understand that providing this level of detail likely creates the expectation.
For us to supply the same level of detail as we progress through the year and we are absolutely prepared to do that and we will update our assumptions and projections for all inputs as appropriate and we know that you will track with US every step of the way so with that said finally.
Getting to the content on slide 12.
This page summarizes our broad expectations for 2022 by splitting our guidance between first and second halves.
We expect first half to continue to be challenged by parts availability with underlying organic volume when you remove price to.
To be down 5% year over year. Despite the record year end backlog as we do not see significant supply chain constraints.
Lessening at all in the first half of 'twenty two versus what we saw at the end of 2021.
In addition, although price cost recovers as we exit the second quarter. It is still projected to be upside down by approximately $70 million for the full first half.
The second half is a much different story as we expect financial performance to improve significantly from the first half.
Assume.
6% higher organic volume once again, excluding price and part of that.
<unk> is based on a a.
Greater visibility to allocation of parts in the second half.
And this 2nd% higher organic volume.
Could be conservative based upon our backlog in the end market demand.
But once again the underlying driver.
Improved sales performance in the second half as pricing.
Based upon pricing actions that we have already taken we.
That $250 million of incremental year over year pricing in the second half alone.
And as a result price cost is expected to be a positive $170 million in the second half.
Significantly improve and adjusted operating profit with adjusted operating margin increasing to 14%.
Our expectations for a strong second half portends, a strong 2023 as we capture additional year over year pricing from actions already taken as virtually all sales in 2023 will be at the higher pricing.
While we have significant sales in 2022, as we mentioned from our existing backlog at lower historical pricing levels and we will further explain this dynamic in a couple of slides, but let's move on to slide.
13.
This is another slice of our guidance going from a first half second half perspective to a quarterly.
Perspective.
Net sales adjusted operating profit and adjusted operating margin are all projected to sequentially increase as we progress through the year.
As we mentioned on the prior slide the primary driver of this sequentially improving financial performance is the timing of price realization.
The chart at the bottom left illustrates the quarterly profitability trend for both 2021 and 2022.
Our price cost issues began in.
In the third quarter of 2021, and we anticipate them to be addressed after.
The second quarter of this year. So we're almost three quarters of our way through what we see is a four quarter issue.
As price cost turns positive for each of the last two quarters of 2022.
Finally on this page the chart at the upper right shows the relatively conservative volume assumptions inherent in the plan.
With full year organic volume once again, excluding pricing.
Yeah assumed to increased just 1% as we do not assume significantly improving parts availability.
As we progress through the year, and we will continuously re assess that assumption.
As we go forward.
Next turning to slide 14.
This page details our year over year quarter.
Quarterly price costs or net inflation assumptions for.
For 2022.
For the full year, we expect to generate $100 million favorable year over year price cost, including the assumption of $360 million of price.
Offset by $260 million of incremental inflation.
As discussed in the prior slides, our quarterly pricing increases sequentially as the proportion of sales from existing backlog declines.
As you can see in the chart at the bottom of the page.
Also very importantly should have significant carryover price benefit into 2023, as we expect 95% of next year's sales to be at the higher pricing levels.
In 2022, only 50% work.
And this drives an expectation for about $200 million of carryover pricing impact for 2023.
Now from an inflation perspective.
We assume that what we experienced exiting 2021 will continue through full year 2022.
That's an approximate $160 million year over year carryover negative impact.
In addition, we have assumed $100 million of new inflation in 2022.
As Rob mentioned 2021, actual inflation outpaced our expectations each step of the way and we believe it prudent to assume that inflation will continue to worsen.
In 2022, which drives the $100 million incremental assumption then we definitely will reevaluate this new inflation assumption as we progress through 2022.
Based on the foregoing going assumptions, we expect price cost to be neutral in the second quarter and as mentioned significantly favorable for the second half beginning in the third quarter.
Next turning to slide 15.
This page supply some color on our confidence that the $360 million pricing number.
For 2022 is achievable.
And we will stick.
The first.
As we saw on the previous page the first $125 million of the 360.
Is actually included in our year end backlog, so we risk assess that from highly probable to certain.
Now the second $235 million is based on pricing projections in new 2022 orders that will book and ship within the year.
Based upon the market acceptance of our fourth quarter price increase evidenced by the 51% increase in orders.
We certainly saw the opportunity.
To be much more aggressive with 2022 pricing.
In late 2021 in early 2022.
We initiated multiple waves of list price increases and this is across all product lines in all regions. Although we.
We certainly were a bit more aggressive in both the Americas and EMEA.
Where inflation has been more pronounced.
Based upon our order rates.
So far in January and February .
Which are in line or even a little bit higher than last year's order rates for that same period. It appears that our higher pricing is sticking in this high demand short supply market environment.
Of course, we will continue to reevaluate this assumption and reassess our pricing as we progress through the year.
As we have mentioned many times, we believe we operate in a great position in a good industry.
Data center demand for our equipment and more importantly, our technology is not abating anytime soon and it should continue to accelerate going forward.
With the backdrop of rising global cost and this long term market demand, we believe our price increases are justifiable reasonable and achievable.
In fact, one lesson learned is we manage price increases over the last nine months or so is that we have historically underestimated our ability to get price.
And based upon the success of our recent price actions.
We have absolute confidence that we will be able to drive consistent price increases going forward.
Next turning to slide 16, this page summarizes our full year 2022 financial guidance.
We provide added detail on the agenda in the appendix to eight analysts and investors with modeling.
Overall, we expect 13% top line growth, 8% organic.
Components of this organic growth or 7% price and 1% volume as our assumption is that the supply chain constraints do not significantly ease in 2022 and only in the fourth quarter if at all.
We will continue to reassess this possibly conservative assumption as we go through the year.
Full year adjusted operating profit is expected to increase $54 million or 11%.
With base further relatively flat and most of the increase coming from net acquisitions and divestitures.
There is an $85 million year over year increase in fixed costs.
And we provide some additional color on that increase in the appendix.
As we showed in prior slides quarterly adjusted operating profit and margin increased sequentially with higher pricing.
Fourth quarter operating.
Profit projected to be.
$255 million.
Fourth quarter adjusted operating margin expected to be 15.
And fourth quarter.
Adjusted EPS to exceed 40.
Sure so even though full year financial metrics are not overly impressive we should be exiting 2022 in a very good position.
Finally on this page, we summarize both adjusted EPS and free cash flow for 2022.
And once again, we supply under lying assumptions for each in the appendix.
Now turning to slide 17.
This page summarizes our first quarter financial guidance.
As we previewed in prior slides our performance in the first quarter, we will continue to be challenged by negative price cost without.
About $70 million in the quarter and.
Supply chain constraints will unfavorably.
Affect year over year organic volume, we estimate by about $45 million now the net impact is not great as shown by the expected $20 million adjusted operating loss.
But these first quarter results should be the nadir.
For our quarterly financial performance.
As we project consistent quarterly improvement as we go through 2022 based on actions, we have already initiated including by delivering $360 million of higher pricing for full year 2022.
But also.
Pricing actions should deliver.
Additionally, a carryover impact $200 million into 2023.
Now with that said.
Ill turn it back over to Rob.
Thanks, David.
Let's turn to slide 18.
I know this quarter's earnings report is not what you expected from US and is not what we expected from ourselves we got caught up in supply chain challenges that are perplexed most of the world and we did not appropriately anticipate inflationary pressures, we would experience as we tried to obtain parts we needed to manufacture our products.
We have a great position in a good industry, we have world class products and service offerings. We have a talented team we are relevant to our customers. We are cultivating our relationships and we are investing in our future and we have a clear line of sight to our margin expansion goals.
While I am extremely disappointed in our performance in Q4.
I am confident in our ability to deliver on our 2022 commitment and.
And how the new actions, we have taken have set us up to deliver a very impressive 2023.
And in our success for 2022 and beyond is highly dependent on our ability to deliver pricing commitments that we have communicated today.
And I have the confidence that we'll be able to deliver that.
I take personal responsibility for this.
Two vertical employees around the world. Thank you for the work you've done and continue to do.
The support you've provided to.
To each.
Other and to our customers.
But that said I want to thank all of you for listening today and I'll now turn the call over 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 Press Star then the number one on your telephone keypad, we'll pause for just a moment to compile the Q&A.
Our first question will come from Scott Davis with <unk> Research. Please go ahead.
Hey, good morning, everybody rough day for everyone, but.
Okay.
I wanted to get a sense of whether you need to change your sales commission structure or kind of.
Looks like your sales force is getting paid.
Two.
Look unprofitable contracts how jeanine.
Do you need to change that or am I misreading. It just trying to get a sense of the incentive system.
Internally and how it may need to change in 'twenty two.
No.
So to be clear are theyre not pay too.
To book unprofitable business, we actually have and it really instituted over the last 60 to 90 days, even tighter controls. So they don't have the ability just to discount to grow the backlog and grow the business. We have a very tight rigorous process. It goes all the way up to certain levels and including myself, depending on what discounts are trying to do so we hold that.
Tight from that perspective, so that they don't have the freedom to adjust discount to build backlog or to go book orders and different parts of the world We have <unk>.
<unk> ability as part of our.
The overall sales compensation so.
Again, the answer would be no they're not they're not paid to book unprofitable business.
Rob.
From a cultural perspective, it seems like <unk> is a place where maybe bad news doesn't travel up as fast as it should I mean, you guys reported on October 27th you already had one of the three months of the quarter and in your back pocket.
How did how did you guys Miss it.
From a rate of change perspective at least.
What was the breakdown is it financial controls as their cultural challenges, they're learnings from this that because we cover a lot of companies and you guys are an outlier.
At the extreme end of really getting hit here.
Yes, so couple of things I'd have to say there you kind of said in my opening comments.
We did have.
Some issues upfront with our ERP in Americas to.
To be clear, we didn't see the rate of inflation that we are actually experiencing till later in India in the quarter and the later months. We did however, see an increase in spot buys and.
<unk> freight in order to counter.
Supplier Decommit. So when we came out in our last earnings call.
Supply for us with certain suppliers with our products actually got worse, and decommit happened and accelerated throughout the quarter. So it really wasn't necessarily I would say a cultural issue as more of a system issue and our ability to see that as we change over ERP.
And secondly, we consciously made the decision to pay expedited freight and drive spot buys.
In order to counter the decommit from our suppliers.
Okay. That's helpful. All right I'll pass it on.
Now if you don't mind, Scott This is Dave Cody and I'll probably ask.
They found interject volatile.
75% of our ratio of approximately is the Americas.
And I think were off as being a little too kind <unk>.
In the Americas, there was a cultural issue between the sales guys and operations guys.
Fully understanding what was going on.
When.
The October results were actually okay.
November looked.
A little bit worse, but not distressingly so.
And.
<unk>.
We got the report that December was going to.
Recover.
When we got the December results, that's where all of a sudden everything seem to crash.
And we didn't really know all the details of it until we got to the latter part of January and spent a good part of February trying to figure out.
What the heck was going on.
What we had to do.
And Robin I got significantly more involved with what did we have to do to resolve.
The cultural issues that did exist in the Americas and that's been addressed.
When it came to inflation. It was clear we had been under forecasting what was going to happen with inflation.
And I would argue some of that was a cultural issue also which we have addressed.
And that's why we've been so aggressive on the pricing side.
And if you take a look at our Americas orders they were up 117% in the fourth quarter, which as Dave pointed out is an indication that we.
We could've been pricing a lot better than we did.
And we have adjusted that and Thats why were pleased to see that as we go into January at least from what we can see February so far.
Orders in the Americas are continuing to grow.
Even over what was the.
Good first quarter of 'twenty one.
But we've had to get much more heavily involved in resolving these issues.
Confidence they have been resolved and they will continue to work with the new process.
And it's why I am encouraged by what I see for the second half, which I think gives us a very good lead in to the future and it gets us back where we should have been all along I think Dave's right.
One of our learnings from all of this is how we underestimated our ability to get price historically, not just currently but historically.
And that's another dynamic that's going to change. So yes, there has been a significant amount of change that's occurred over the last 60 days and I think Rob Rob Dave I don't know if there's anything else you want to add there.
So I think those are fair comments, Dave I think there are fair comments.
Thank you good luck guys will pass it on thank you.
Our next question will come from Nicole <unk> with Deutsche Bank. Please go ahead.
Thanks, Good morning, good morning, Nicole.
So I guess, maybe so.
So I guess, maybe you can just elaborate on you know everything you guys, just pad, where I'm struggling a little bit is understanding how you'd make such big cultural changes and the scope of two months.
Maybe you could give some examples to kind of help us and what has changed about the planning process in 2022 to give you our investors confidence that this isn't going to happen again.
So I'll I'll address some of the cultural issues upfront and Dave can talk a little bit about the and I will talk a lot about the planning process and they can come in over the top.
As it relates to cultural issues again.
The organization, probably not probably organization didn't it wasn't set up to drive a lot of price previous years, we've shown 2000 $25 million in price and what we really had to do really top down Dave myself and others in the management team is really drive all the way down to the salespeople.
What it means to get price how to get price and not to be afraid to lose orders as we go through that so that's something culturally losing orders was something that we had to overcome and say it's okay.
From the perspective of we've got to drive price and it's proven out that that works and that we were able to get price as Dave mentioned.
Probably should have could have got more price in Q4 in Americas with the with the order backlog that we saw the other cultural issue that Dave talked about is really the F&I IOP process for Americas, and really having that tighter pulled together so that the demand and the supply.
And those constraints, we're working closely together coupled by an exacerbation of that of a new ERP system that came in that we had lack of visibility for a period of time, which is now since then fixed.
From that perspective.
So that's kind of on the cultural side and then on the process side, we are well in and.
And beyond the implementation of our ERP as it relates to add by evidenced of January's results, we have visibility into what our <unk> and our price purchase variances and have a good handle on what inflation is looking like so we were behind.
The quarter as Dave mentioned got into December .
Recognize what was going on and have implemented both.
Our process changes as I talked earlier on pricing pricing levels of approval as well as our process levels with the integration of American's operations and supply and sales any other comments, David talent or David Cody.
Hello.
100% agree with your comments, Rob and.
Nicole oftentimes when it comes to forecasting it if it's a lot of blocking and tackling and.
I would say we have instituted.
A lot of rigor in the last 60 days.
Specifically around the Americas forecasting process to the extent that last Thursday, both Rob and I were effectively in and out of a meeting that lasted from nine a M. In the morning to 10 P. M at night.
So we are putting a lot of diligence and could this and we understand our credibility was harmed as it related to forecasting and we will not let that happen again, and we are confident with the steps and processes, we put together for that specific issue.
Okay, and just to add a little.
Just to add a little just to add a little more.
Nicole.
America's cultural issue was always there.
It's just it wasn't visible in a stable cost and supply chain environment.
It became extraordinarily visible as we started to run into those two problems.
And to date balanced point.
Rob pulled together.
To Jesus meeting.
The Americas operations and sales folks to say this is not happening anymore.
I'm not going to be the arbiter of your issues youre going to sorted out just like we were able to be Europe and APAC.
On your own.
And we want to figure out where exactly are we now and how do we have a better process going forward.
And to Dave's point that went on all day, then Robin Dave came in at the conclusion.
And we adjusted what we thought was going to happen for 'twenty two as a result of that.
Negatively, but it allowed us to be able to figure out where the bottom was a lot better than we had in the past.
You have changed the process that they're going to use going forward both culturally and.
Mechanically.
And Rob and Dave are going to be very involved going forward and understanding that reconciliation every month.
To make sure that we truly understand what the Hell is going on.
So, yes, I'm confident that.
We've addressed that at this point, but this is this is going to take more than just a one time meeting it's going to require robin Dave's constant attention to make sure that it sticks and theyre doing that.
Okay. Thanks, that's really helpful color I appreciate all of that and I'll just ask a quick one to follow up to give someone else a chance. So the order activity was obviously really strong this quarter.
What did it look like excluding Eni and maybe you could comment on organic backlog as well like split out the Eni contribution probably underlying brighthouse.
Yes, Nicole so.
Order rate percentages are all without Eni.
Because we haven't tried to proxy what orders, where our would've been in the fourth quarter of 2020.
So that order rate is all excluding eni, but if you look at the backlog the $3 2 billion.
Backlog does include Eni and.
I think Eni is just a little bit short of 300 million at year end.
So the base.
<unk> backlog is somewhere between two nine and $3 billion.
Very helpful I'll pass it on thank you.
Yes.
Yes.
Our next question will come from Jeff Sprague with vertical research. Please go ahead.
Thanks, Good morning.
Not to beat a dead horse on that last thread.
Just wanted to come back.
To aid the ERP system and if in fact, all the Kinks are worked out.
And B.
A little concerned that you are kind of the comment that the teams are left to figure it out and we'll monitor them.
<unk>.
It sounds like it requires.
<unk> more direct marching orders perhaps.
That has happened, but it was conveyed in that answer.
I think we're all still looking for some level of assurance. If you will that we've righted the ship.
And everybody is kind of rowing in the same direction here.
Hey, Jeff This is Rob.
Couple of couple of things the comments and others can chime in.
Let's be clear the teams arent left to just go figure it out on their own.
Combination of myself, Dave Cody being involved and David Fallon.
They have given strict marching orders of what needs to happen.
They need to make it happen. So it's not a go figure it out and income report out to us we've given specific instructions as to what they need to do what needs to happen I guess, what Dave is saying that they need to drive that make that happen. So we will monitor that but we.
No doubt.
From top down we're driving that message to the team the three of us.
Secondly on the ERP system as you know all ERP systems are difficult in their own ways and in this particular, one well things went cut over we were able to continue to ship and do the basic business functions that you would expect to do that it's some people get caught up we didn't have that problem. It was more of an under.
Standing of the price variance and things that we didn't didn't get till later on we have since then fixed that as any ERP system. You do have things you fixed after the launch and Thats, where we got caught up in kind of got behind on the visibility and then begin to better understand that as we got into December and really towards the end of January .
And it took us a little bit longer to assess where we were at and making sure that we now understand our PPV.
Any other comments from Dave <unk>, Dave Allen.
Yes.
Monitor I guess is not a strong enough word.
I'll I'll leave it to David Rob to use whatever strong reward is required but theyre going to be.
More involved in understanding the reconciliation work the way it was supposed to.
As to having the team figure it out.
And the approach that we took.
This is a tool that I generally use and I've talked about in the past because.
You can't have the.
CEO always having to tell people will just work together.
They have to do with the half to recognize the problem and they have to fix the processes themselves and have to come up with here's how we're going to do it going forward.
It starts with they've got to recognize they have a problem, which they have done.
And fixes that they've developed didn't just fix what we have is the current forecast.
But it's going to get fixed going forward.
And like with any new process, you don't just set it up and walk away you still have to monitor or use a stronger word be involved to understand that it's happening and I can assure you both Rob and Dave we're committed to making sure that that happens that way.
You addressed a lot of cash but thanks.
Thanks for that could you just address free cash flow for us and obviously youre, taking a big hit here working capital and other things.
You are trying to get us to think about 'twenty three in your exit rate.
Because it takes some points on the board before.
People want a fully underwrite that but I'd love your thoughts or commentary on kind of what the normalized free cash flow. This company should be may be presented as a or.
And the.
Kind of in the framework of maybe a free cash flow margin free cash flow to sales for example.
Yeah. Thanks, Jeff This is David so.
Yes, I would say our guide for 2022, it's certainly uninspiring I think $150 million.
There are some elements of that guide that.
Might be one off and so for example, our capex for.
2022 is projected to be about $130 million.
That's probably a little bit elevated number one some of the 'twenty one capex split into 'twenty, two but we do have some capacity expansion in there as well I would say a more normalized capex number on an annual basis is probably around $100 million herself. So.
That's one element the number one driver of the free cash flow.
In the long term is going to be the EBITDA.
And.
The full year EBITDA.
Certainly.
Not what it should be for 2022, but if you look at what we're going to do in the second half notably in Q4.
You annualize that that is going to be a direct contributor.
To much higher free cash flow and I think our guidance.
At the beginning of 'twenty one.
$285 million.
I would say based on where we are especially after the pricing.
Increases go through our run rates should be much higher than that.
It's a little bit of a hypothetical but our overall goal is to get 100%.
Free cash flow and.
Yeah.
Conversion on net income.
The other operating I would add Jeff.
Sprog.
Is that.
If you.
As a good indicator I think of operating cash flow.
If you take a look at our fourth quarter run rate.
And then the $200 million of price carryover in 'twenty three that Dave referenced earlier.
That puts us in a very good position.
That is the biggest driver of what free cash flow will be.
Got it thank you.
Our next question will come from Mark Delaney with Goldman Sachs. Please go ahead.
Yes, thanks very much for taking the questions first is about the assumption of a $100 million of incremental inflationary cost off of the December run rate, maybe you could elaborate on how youre coming up with that number and how much of that based on what suppliers are saying They may Institute in terms of pricing and what you're you're having good line of sight into and how much is.
Just trying to be more conservative on the inflationary metric, even if it's not cost issues you've already.
Out of the team.
Yes, I think Mark this is David.
I think it really is a combination of all of the things you mentioned.
Is there.
I would not be completely honest, if I said.
That there isn't.
As an element of conservatism included in that and Thats based on our lessons from last year every time.
We put it.
A spike in the ground.
As it relates related to inflation it got worse.
And we saw that especially in the Americas as we progress through the year.
And most notably in EMEA.
As we exited the year.
So there is a provision for conservatism, but certainly a part of that $100 million in.
Based on what we are seeing.
Currently.
So it would be hard for me to handicap.
A specific dollar for what we're seeing and how much. It is this conservatism.
But.
That's something that we will better be able to reassess as we go through the year and we can provide an update on that.
At the end of the first quarter.
And have any of the input cost stabilize that give you confidence $100 million is a conservative number or why wouldn't it potentially just keep going up at the same rate that it to investor.
Yes, we've actually there are there is some good news out there right, notably with some of the commodity prices in particular.
With steel in the U S.
Our pricing for steel, which is our most <unk>.
Evelyn commodity.
The index based on an average price for the quarter before.
Steel prices have come down.
Fairly nicely since the mid fourth quarter, we've seen some of that benefit in our Q1 pricing, but yes, the lower steel prices hold through the end of Q1.
You definitely see a benefit.
In Q2, we have not built into any of our forecast.
Any in any.
Specific component or commodity improving next year.
So that would be an excellent example.
Sample of.
A specific piece of conservatism built in to our forecast.
Okay and then my other one just on the procurement strategy for 2022 to what extent is vertically locking in contracts that.
Prices Thats, giving you visibility into what your expenses will be.
But also hoping you could touch a little bit on your ability to get that supply you mentioned decommissioned are occurring.
Have you taken steps to go.
Change in procurement strategy to have better.
Certainty in how you are able to deliver.
<unk> to the <unk>.
Financial community, but also your customers. Thanks.
Hey, Rob.
Rob a couple of things there as it relates to getting getting price and getting that in the contract. There is a couple of things we've changed too.
Is getting that price, but also putting.
Escalators in there if commodity east change outside of certain boundaries. So that's something we've done and put into into the contract. So it wasn't in all of our contracts.
Fire so well.
We're looking at a we can never predict where it's going to go and we believe with David has said, but I would say as a as a backstop the ability to get additional price if necessary if things continue beyond.
A threshold from that perspective.
As it relates to supply I mentioned earlier.
My discussion was.
We've done a few things we're not just sitting here, saying Oh, we can't get it we've either qualified additional suppliers.
A modified or re.
<unk> engineered certain parts.
And allowed for.
Additional supply base to help us out so as it relates to we keep continue to talk about fans being a problem with qualified additional vendors there and also have changed some of the design there that uncoupled. It from maybe some of the constraints that we have so we look at that whether it's displays whether it's <unk>.
Qualifying additional IGT vendors, which is a big part of our power conversion products in the DC power one of the things Youll see from us is that.
From a <unk>.
GBT perspective, which is the power conversion, we have a DC power business that most of our competitors don't and so we buy a significant amount of those and so getting additional supply base additional suppliers and a lot of this got started even.
Pre all of this inflationary and supply constraint. It was really as Covid hit and it taught us a lesson to kind of qualify and drive additional suppliers and we'll continue to do that even as hopefully at some point in time, who knows when inflation goes.
Deflation in the other direction or strategy is still to make sure that we have multiple suppliers all the way down to our design process. So that we don't single source.
And those suppliers arent just in one particular region that they have multiple regions because we've learned that while it may have multiple suppliers and they might be fan vendors out of Germany that could cause a problem. So I need to have supply base in different parts of the regions.
Thank you.
Yeah.
Our next question will come from Lance Vitanza with Cowen. Please go ahead.
Thanks, guys for taking the questions.
On slide 13, I'm looking at the adjusted operating profit guide for 2022, and I see the $200 million in Q3, and the $2 55. In Q4. My question is is there any seasonality baked into that trajectory I mean, I'm trying to figure out what I think about the run rate.
<unk> point for 2023, do I want to think about Annualizing, the back half or or no. Do you think we really should be thinking about annualized in Q4 as a run rate to start from from from in January 23.
Hi.
There's likely some seasonality.
In Q4 projections for 2022.
But not nearly what we normally would have.
So I would take Q4 is certainly a better run rate projection.
For 2023 with that said Q1, 2023 is probably going to be lower than Q4 of 2022, but it's a lot easier to annualize that Q4, 2022 number that would be to do that in any other year and thats because we are.
Assuming continuing all our continued supply constraints in that number and of course, we are hopeful that some of that actually gets rectified as we enter the second half.
Okay and with the stock.
11, 12 Bucks a share.
Can we expect to see suite management to be buying shares in the coming days and how about <unk>.
The company buying back some stock is there any opportunity to do that based on your liquidity profile covenants and so forth.
Yes.
I certainly can address from a from a vertical perspective.
We look at.
Alternative uses for our cash.
On a continuous basis.
Certainly based on the stock reaction today.
A stock buyback would.
Definitely.
Be more attractive than it was yesterday so.
Got it.
Not making any commitments whatsoever, but it is something that we would.
Strategically evaluate.
And the last question for me is on the balance sheet could you talk about your plans to Delever pay down debt and then really from a liquidity standpoint.
I see the free cash flow target for the year, but could you could you talk about when you expect your cash plus available borrowings when does that bottom out and at what level.
Are there any maintenance covenants, perhaps in your revolver that could further crimp liquidity or maybe even trigger a potential default as we progressed through the year.
Yes.
On the last one no issues on any covenants I think theres, one covenant within the ABL.
Fixed charge coverage ratio and we have ample room for that that debt will not be an issue this year.
As it relates to use of cash.
Essence is.
And maybe 2021 was the exception but.
We generally have our lowest.
Free cash flow in Q1, we.
We had positive free cash flow last year. This year, we will definitely use cash so similar to the financial projections that free cash flow should perk.
Aggressively improve as we go through the year as well I would.
Say some time.
Early third quarter would be.
The bottom point as it relates to liquidity, we do have.
As we mentioned we resolved.
Tax receivable agreement there is a $50 million payment at the end of June and September .
I think soon after that $50 million payment at the end of the June would be the bottom part.
With the I'm, sorry, the bottom of our liquidity and then it should improve thereafter.
Thanks very much.
Yep. Thanks Elias.
Our next question will come from Nigel Coe with Wolfe Research. Please go ahead.
Thanks, Good afternoon, and thanks for taking the extra time here.
The background noise I'm shopping, but I just want to go back to pricing.
Maybe just.
Maybe address how have you changed the incentive structure is around price specifically to make sure that.
That behavior change is sort of getting hardwired in comps and then maybe just address the order strength in the Americas and <unk>.
<unk> I mean, how confident are you that that wasn't related to upcoming price increases and therefore.
Pre buying ahead of that and perhaps also if you could just I know this is my question, but if you could address maybe the pricing on current orders entered backlog relative to some sort of built into your guide.
Okay.
Thanks for the question. This is Rob I'll answer the first two and then David Fallon kind of come over on the on the on the third one.
You mentioned earlier that some of the behavioral changes that we've put in place across the world is really authority and approval one of the quickest ways to get there is stopped discounting.
We've raised we've raised list prices appropriately.
But you can lose price through through through discounting. So we've changed those thresholds across the globe, we changed the level in which those those decisions can be made all the way up to myself and David as CFO . So that we don't give away the pricing that we were getting through through discounting so that is a.
I'd call it a cultural thing and a change that we implemented.
Over the last over the last 60 to 90 days.
We believe that's very effective although painful for the organization. It is the right thing to do to guarantee that we get this price.
If you take a look at specifically Americas.
What's the dynamic that's going on there and our market overall is it supply constraint in general lead times have gone out for whether it's generators, whether its breakers whatever it might be and I think what we saw is in what will continue to see as people are putting orders and to get their slots to make sure they get supply where it used to be maybe they will.
Orders six months in ahead three months ahead.
In some cases, they're ordering and looking at 12, maybe 18 months as we go forward. So the demand is extremely strong on a global basis.
And that's why you're seeing that that uptick overall.
Overall, it wasn't a rush to get it before price because a lot of that had pricing actions that were taken in November back in October or September and then more recently.
In December .
The strength for us really comes from.
A lot around the Colo cloud, but also even in the channel.
<unk> seen growth as we continue to.
To increase price here, we continue to see growth around the <unk> product offering David on the third one.
Gary.
Yeah, Thanks, Rob Hey, Nigel it's Gary.
Your last question was specifically around pricing in the backlog and so.
The pricing in the backlog as we entered January 1st was right around $125 million give or take a little bit so probably just north of 445% somewhere in that range and if you look at the momentum the pricing that we that we had in 2021 every quarter got stronger Q.
Q4, being the high point, so we feel good what everyone's comments have been up to this point in time that it really is.
We had to believe it ourselves almost in order to be able to take that next step function. So we saw that step function in Q4 between that data point between the data point.
125 ish million dollars of pricing in the backlog going into this year's number two and number three even with what we've seen in January so far in early February .
The price increases that we put out at the end of Q4 and even in Q1 doesn't seem to have materially changed the order input rate at this point in time, so all of that gives us confidence of.
How we're going to continue to build up pricing as the year goes on.
Okay, I'll ask two questions and I'll leave it there thanks a lot.
Thanks, Andrew.
Okay.
Our next question will come from Steve Tusa with Jpmorgan. Please go ahead.
Hey, guys. Good afternoon I guess.
Okay and is safe.
Yes.
So just on this whole pricing discussion.
How will this change like next year and the year after that when we kind of go back to what this industry has really been historically, which is <unk>.
Generally negative price on the equipment and then a little bit of price on services I mean.
The fact that kind of youre changing these.
These discounts in the fourth quarter of 2021 win like.
It was pretty readily apparent to everybody early last year that they were going to be issues here I don't know what your competitors are doing because theyre kind of buried in there.
Larger organizations, but I mean do you see the same kind of behavior from them as well or is this something kind of unique and specific to you guys. I guess, Mike. My question is just how are you. So confident that you can kind of maintain a spread like that in an industry that is typically had very challenged pricing to begin with.
Steve This is Rob.
Thanks for the question.
And traditionally I think culturally you may have heard earlier and we didn't think David said, we didn't think as a company we could go out and be strong with a price, but what I really see is happening where we're getting prices, where we're differentiated where we're developing.
You can call them unique our innovative products and solutions and the organization, you're absolutely right in kind of the industry culturally Hasnt Hasnt gone there.
Because a lot a lot a lot of areas haven't been.
Providing innovation, so where we have innovated and.
In certain areas like thermal management and so forth those are areas that we found and learn through this we can actually get price and continue to get price for innovation and that's the basis of our thesis and reason we've been driving our R&D up business fundamentally we believe with innovation providing.
Longer products to customers, we can get that price, we can get a higher price than those that aren't innovating in those sections and as you May know, we don't compete I know a lot of people think it is just.
The big guys that are part of big conglomerates, we compete with a lot of locals that you wouldn't know that don't report out and those also are experiencing these commodity.
Specific price.
Cost issues as <unk>.
Well, so we've seen people follow and we look at the different parts of the market and as we've gone to it what we found is where the products are preferred where we have that innovation pricing sticks and people will pay us more so we learned something through this process and we'll continue to apply that throughout the years and the other yes.
Yes, you mentioned like thermal I guess, so just so that's all in kind of like the HVAC side, yes.
Thermal management products areas of certain power distribution.
Eni.
Other PD use where we have strength and again, you're absolutely right in the past it hasnt been but as we've driven innovation and as we've gone through this process.
The team is really kind of reset its mind and understanding that hey, we can get paid for the things, we do where we differentiate and that's what we'll continue to focus on that differentiation to drive that price and hold that price for the future got it and then just wanted to clarify the cash side.
Yeah.
Yes, if I could just interject something building lots cultural point.
I'd say historically, we also underestimated the value of that differentiation that already existed.
And we had a predisposition or a deference to not lose the order.
And if you approach it that way you will generally on the price.
And this process has shown us that not only is our new innovation.
It's more than we thought.
The innovation that already exists in our products has been historically underpriced.
This is Ben.
I think a really good learning for all of us in the business that we've got a lot more capacity for price than we ever realized right right.
Just on those orders you mentioned that there are some people who are ordering.
12 months to 18 months out I mean, how much of your orders do you think are kind of unusually timed. If you will I know some companies have said like 10% to 15%.
How much are unusually time that you think.
We'll kind of not be there in their normal cadence as we move through the year if things normalize.
What we're seeing right now and from the pipelines and the discussions I'm, having with most of our large customers.
We continue to see a robust environment of orders.
I think this goes well well beyond 'twenty two into 'twenty three 'twenty four I think there is just an enormous appetite for.
Data center space on a global.
Basis, Steve we have not seen.
This kind of level normally it's EMEA is growing fast or if it's Asia or its Americas. This phenomenon that we're seeing now and experiencing is global expansion of data centers in all parts of the world and so there's a lot more.
Companies involved in the tier two tier three colo lot more building going being done for the hyperscale or so but I would tell you is it wasn't just an unusual time of one off I continue to see the market to be capacity constrained because of the volume of data centers that are needed to be built and as we look at our pipeline <unk>.
24 months ahead.
It's more robust than we've ever seen got it alright, good luck through the beginning of the year here. Thanks. Thanks, Dave.
Our next question will come from Amit <unk> with Evercore ISI. Please go ahead.
Thank you I have two questions I guess, we'll start thank you for all the details are on calendar 'twenty two.
You spent a fair amount of time talking about all the issues and challenges how you intend to fix them, which has been helpful. Al maybe you could spend a few minutes talking about how does incentive compensation will get aligned to fix these challenges and maybe you could talk about on the sales side, where you seem to have solutions and then also on the management level loved in the sunbelt incentive comp change at all to rectify some of the challenges.
Hi.
Sure.
This is Rob I'll start out there as it relates to management and we are completely aligned with that.
The shareowners and what we want to deliver and Thats really earnings and profitability as we go forward and as we look at goals and then set for 2022.
Pricing is absolutely in there from a management not just my team, but my team's teams below and pricing is one of those what we call okay ours or objectives for the year that we need to hit as mentioned earlier.
Tenant from the sales side and again, depending on the part of the world.
Is it primarily right now driven by <unk>.
Their ability to discount or not discount rate sales.
Need to get sales with price they get more.
Core quota at the higher price I guess in general the higher price they get the more quota attainment, they retire and it's true for if I take a look at the selling.
Regime that we have in America today.
The salespeople or incentive to get a higher price because they get a higher multiplier at a higher commission.
When it comes to that.
And so I'd say that we feel like the areas, we needed to really shore up was where that price leakage could happen on big deals and other areas and really push back on that and put higher levels of approval.
So that we're not giving price away kind of further down.
In the organization, so I feel confident that both sales and management throughout the globe understands.
Understand and get the price and understand what it's going to mean to them ultimately in their wallet.
The other thing and then yeah I'm sorry, sorry go ahead.
Yes, the other thing I would add.
Is as.
As you might expect.
Rob is recommending to the board.
Is significantly lower than what our normal payout would be.
Rob is also recommending that he and his team take a zero bonus this year.
I don't know how much more of an incentive you need that to make things work.
It also.
Their comp is largely focused on equity.
And a big part of this is driving making sure the stock price goes up.
So they're heavily incentive to make sure that all of these things get fixed.
Perfect.
Very helpful.
If I could just follow up.
A lot of the expectations for 'twenty two are predicated on how good. The order book is how good the backlog is multi billion I think is what you mentioned.
Can you just talk about your conviction that there's not a lot of double ordering or the quality of the backlog is.
Good.
Is there any way to think about what's the duration of this backlog today versus what it would normally be potentially.
Yes, so as we think about it.
We look at each order when it comes in and it's not just a a blanket order for this many units our orders are specific sites specific jobs specific locations, where they need to go so that gives us confidence and this question has been asked over the last couple of years of backlog increases or has the order rate increases or people.
Double and triple ordering.
We don't believe that's the case whatsoever that people who are just putting in blanket orders just to cover themselves. These are these are specific projects.
As we go forward if you take a look at the duration of the backlog we used to say, maybe it's nine to 12 months or 9% to 15, maybe it's a little bit longer than that are six to nine months now it's 99% to 15, something like that but it's not you know things don't get into backlog. If there are two years out that type of thing we.
While people are looking to drive orders to us for that what Youll see is the duration hasn't moved that much maybe by let's say a quarter or three months type of thing based on what we've what we've seen I know, Gary you're seeing anything different than that.
I think thats exactly right Rob.
No indication of it.
Double ordering anywhere.
And you're right, we would always say the backlog everything we have in backlog and about a 12 month period of time, maybe thats slightly elongated a 15 to 18 months.
Just because even our customers are having a hard time getting tradespeople and site Friday, all that type of stuff, but if you look at our backlog of David Hollaway.
Only 5% to 10% of it that is scheduled out in 2023 and really customers are telling us that they would take the product as soon as I can get it. So there is nothing in the 2024 and 2025 by any means.
Got it thank you.
Our next question will come from Andrew Open with Bank of America. Please go ahead.
Hi, guys good afternoon.
Good afternoon.
Just sort of taking a longer picture.
The medium term growth for adjusted operating margin was 15% plus so how do you think about the bridge from the 22 midpoint of nine 3% up to 15% sort of.
You highlighted more aggressive pricing.
But also how much do you think what's happening is structural in nature right. One questioner environment going forward more labor shortages et cetera, et cetera are you guys just sort of putting out fires or have you sort of consider how to restore this long term bridge. Thank you.
Yes, Andrew.
Lot of things.
Very much dependent upon pricing, which we feel very good.
That is sticking.
And I think the focus instead of looking at a 20.
'twenty, one or 2022 mid point is to look at the adjusted operating margin in the fourth quarter.
Which is 15% and as we discussed with Lance it's not fair to just annualize that from a operating margin perspective into 2023, but it's a great start.
And.
We would say we would be.
Right back on track, where our plans were.
Let's say six months ago.
With our with the timing of getting the.
Near term adjusted operating margin up to 16%, So I would say as we exit 2022.
I'd say things are back to normal and.
Even to a certain extent maybe.
Little bit more accelerated than where we thought especially with.
Eni.
Adjusted operating margin.
Also returning to the levels that we expected.
Got you and just to clarify Ken. Thank you for that color just a clarification on slide 13.
Just understanding 110% of pricing in the first half.
Versus us.
120, 830 in Q3 Q4.
Just I'm, just I don't quite understand how year over year comps work as well right because it's sort of a weak comp off of an easier comp and then we have a strong comp of strong comps in the second half maybe I missed something on the call I apologize for that but just to understand why it's only 110 in the first half given that the comps alone given that we got 130% to 120%.
Q3, and Q4, respectively.
Yeah.
Yes, great question, Andrew the biggest dynamic there.
Addressed on slide 14 at the bottom.
No.
Yeah.
Pricing is driven by.
What we're able to sell out of backlog and based on what we're able to sell on our bookings.
Book and ship basis and the pricing.
That we get.
For book and ship deliveries.
Certainly higher than what's in the backlog.
So the dynamic that it's.
$110 million in the first half and much higher in the second half.
Directly driven by the amount of sales that come out of backlog in the first half and the amount of sales that come from book and ship in the second half.
So that implies that there was a lot more book and ship in Q3, and Q4 and now we're just shipping out of backlog is that just a temporary financial I'm sorry.
Yes, when we progress through 2022.
Specifically for Q3.
70% of the sales that we anticipate in Q3 will be based on new orders placed in 2022, which will be at a price point much higher than those coming from backlog and there is still about 30% of our sales in Q3, which will be based.
Out of the 12 31 21.
Backlog, but that you can see that sequentially improves as we go through the year and.
Yeah.
As important I think Q4, we still have 25% of our sales.
<unk> are based on.
Orders that were in the backlog at the end of 'twenty, one if you've progressed the 2023, almost 95% of our sales.
In 2023 are going to be based on this higher pricing that we get not only in 2022, but also in 2023.
Alright got you. Thanks, so much.
Thanks, Andrew.
This concludes our question and answer session I would like to turn the conference back over to Rob Johnson for any closing remarks.
Sure.
Again, I want to apologize to all of you for our Q4 performance as you know, we're not happy Youre not happy with it.
We have a handle on the issues I hope you saw that through our presentation today and need to prove it to you throughout this year.
We will earn your trust back.
I want to thank you and have a good day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.