Q1 2022 Vertiv Holdings Co Earnings Call

It will be in Q3, when we expect to see the significant positive impact from our pricing actions that we've already taken.

In Q4 will more fully reflect our run rate adjusted operating profit.

Sets the stage for a strong 2023.

While this has been very painful for everyone.

I believe the actions that have been taken especially related to price.

<unk> as well to perform in the second half and next year.

Were taken this quarter at a time, we cleared the queue one hurdle and we are on track for Q2, which will be a step up from Q1 performance.

We still have to prove to you that we can do this and we are squarely focused on taking the appropriate actions to make sure we do that.

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

Thank you Dave.

It's all about our execution and we understand that.

Q1, as Dave said was the first step and we're driving incredibly hard to make sure we deliver on our commitments going forward.

Starting with some key messages on slide three.

Said this for a while demand remains very strong in simple terms.

Data growth drives our business and everywhere you look in business and in every day life everything incorporates data inverted plays an essential role in making sure those vital applications and society stay up and running.

Our orders were up 34% in the quarter, even considering significant price increases that were put in place in late 2021 in early 2022.

We are relevant with our customers. The order rates are good scorecard for the market share and clearly demonstrate we are winning in the marketplace.

In addition to reinforcing that more pricing as possible.

As Dave noted, we exceeded our first quarter guidance as anticipated our adjusted operating profit was under pressure in the first quarter, but we are encouraged by the overdrive on pricing performance.

Inflation or deflation lower in the quarter than expected.

That said with lessons learned from last year, we're taking a prudent approach relative to inflation assumptions for this year.

Even though we did better than anticipated in Q1 on pricing and inflation guidance assumptions, we are increasing the overall inflation for the rest of the year a $25 million.

We are also taking additional pricing actions, but have not included that benefit in our guidance.

Due to our large backlog that needs to ship, we expect to see more of this additional price show up in 2023.

While it's hard to predict inflation and price. This early in the year, we're taking a reasonable approach in light of what we're seeing.

We have modified our second quarter guidance to reflect some pull ahead of sales in Q1.

For Q2, we expect to continue to see some short term delays from COVID-19 shutdowns in China.

These are timing related shifts there not unexpected given the dynamic macro backdrop.

Supply chain issues are still a challenge or pain points continue in these areas of electronic parts fan breakers.

We are not sitting idle we are working daily on countermeasures to help US address these challenges and expect that the challenges will continue through 2022.

As I mentioned earlier 2022 is all about execution.

We are on track with the plan we presented for this year.

As mentioned Q1 came in slightly better we feel good about our trajectory of the quarters ahead, allowing us to deliver a strong second half and put them.

And a very very good position for 2023.

Turning to slide four.

This slide summarizes what we see any market by region.

There's no change in our cloud and Hyperscale market.

<unk> continues in Americas and EMEA.

The dynamic in APAC remains the same as we described previously.

China cloud and Hyperscale companies are working to utilize existing capacity to slowdown energy consumption.

We expect this to be a short term phenomena as data continues to grow in China and globally.

The co location market continues to be continues to be very strong in Americas and EMEA.

This can also be a read through to hyperscale screening that often used co location has capacity for hyperscale, both internationally and need for capacity in Americas.

We do see co location and parts of Asia.

<unk> driven by the same dynamic in China as just described in the cloud market.

Our view of the enterprise and small and medium market remained consistent from Q4 with particular strength in Americas.

Our communications market remains strong as technology upgrades continue, especially in <unk> deployments that are driving our activity.

In the commercial industrial market things remained consistent with previous view as well and we see good opportunities in this in this space as a number of vital applications continue to proliferate.

Moving to slide five.

As mentioned market demand remains very strong.

By our orders growth of 34% the secular drivers of our end market remain firmly intact and seem to be intensifying.

Proliferation of data continues at an extremely rapid pace.

This creates the need for additional capacity and we are happy with our position as a pure play in this market.

I also would say <unk> has key differentiators that customers do value.

We have always been a technology company and our increased investment in R&D has provided innovative solutions.

We see the product differentiator does matter to our customers and we are now getting paid for that.

Some examples of this is our new DSA thermal products that do not use water and our highly efficient.

Another example of innovation has been our launch of our new <unk> family of lithium ion UBS systems.

Along with the standard products that we deliver to market, we know that customers have specific needs with engineering needs for modular solutions to solve their problems. We work hand in hand, with our customers not only to provide standard products, but to provide custom products that fit their needs.

I'm very encouraged by our pricing realization of 4% in the quarter, which was largely based on backlog booked in 2021, including pass through pricing of things such as batteries and freight.

We saw positive price in all regions, including China.

We realize we still have a big hill decline for the second half, but we have taken an aggressive pricing actions to deliver the plan this year.

We are on track to deliver the pricing plan for the year.

First quarter as an important indicator of our ability to get price.

Supply chain as I said earlier continues to be a battle everyday and has constrained our ability to ship product.

The global commodity markets have been negatively impacted by the war in Ukraine.

Relative to our guidance, we were favorable to the inflation planned for the first quarter.

As I mentioned earlier, we're taking a prudent approach to the inflationary environment and we are adding $25 million more inflation into the plan for the balance of the year.

We have team diverted working diligently to qualify new suppliers and redesign products to alleviate some of the most critical pain points that we have.

In summary markets remain very healthy and I feel good about our order rates that continues to be strong even after implementing aggressive price increases globally.

Supply chain is a challenge, but we're working through many of these different with various strategies to navigate the tough environment.

Now I will turn the call over to David to walk through the financials David.

Thanks, Rob turning to page six this slide summarizes our first quarter financial results, which exceeded our guidance.

We provided at the end of February as Rob mentioned net sales were up five 3% from last year's first quarter.

And slightly up organically at <unk>, 4%.

There was an $88 million benefit from the Eni acquisition, a $15 million headwind from the divestiture of our heavy industrial upcs business and a $20 million headwind from.

From foreign exchange primarily in EMEA.

We are encouraged by the $40 million pricing benefit in the quarter as both Dave and Rob mentioned and that $40 million exceeded our forecast by approximately $10 million.

Most of the backlog that shipped this past quarter was booked in 2021 prior to the additional price increases implemented late last year and early this year. So this is a good signal that our initial price increases are sticking and we should continue to see our pricing translate.

Into bottom line going forward.

Adjusted operating profit for the quarter of $13 million was above guidance.

Primarily driven by $10 million of additional price and $15 million lower <unk>.

Material and freight inflation versus what was assumed in the guidance.

Versus prior year, the $99 million reduction in adjusted operating profit included the $40 million pricing benefit as well as a $9 million benefit from Eni, which was more than offset by $85 million of material and freight inflation.

We also had headwinds from foreign exchange.

Labor inflation and commissions, which actually came in below our expectations for the first quarter.

Assuming in the guidance.

Along with impacts from lower volume, a $10 million incremental investment in R&D.

We still expect price cost to be neutral in Q2, and a significant tailwind in the second half of the year as we will discuss in our guidance slides.

Adjusted operating margin was 910 basis points lower than last year and adjusted EPS declined 29.

Both reductions consistent with the adjusted operating profit deterioration.

Finally on this page first quarter free cash flow was significantly lower than last year's first quarter.

The business is typically a user of cash in the first quarter, but were negatively impacted by lower operating profit and higher inventory this year with inventory up about $160 million from year end.

Although we normally build inventory in the first quarter, we expected a $60 million to $70 million increase.

We were negatively impacted this past quarter by both large project timing and.

And as we mentioned on our previous earnings call and in perfect SIOP process.

In the Americas, which drove an inventory increase much higher than our internal expectations.

We unnecessarily built inventory in the Americas based upon a higher sales plan, which drove the purchase of significantly more raw material than needed to satisfy first quarter shipments.

We continue to address interlock issues within the America side and as a result, we believe that inventory and shipments will balance out over the remainder of the year consuming most if not all of the first quarter inventory build.

The negative cash impact from higher inventory in the first quarter versus our internal expectations was offset by better than expected EBITDA and higher cash inflow from.

From deferred revenue, resulting in first quarter free cash flow in line with internal estimates.

And last on this page liquidity at the end of the quarter remained strong at $720 million.

Next turning to page seven this slide summarizes our first quarter segment results.

The Americas region continues to see outsized impacts from supply chain and net price cost challenges.

The supply chain challenges constrained the topline again in the first quarter was $17 million of organic growth of three 3% driven entirely by price realization.

And we anticipate price will continue to be a main contributor to organic growth.

Throughout 2022.

Americas adjusted operating profit of $58 million was again dragged dragged down by price cost but.

But we anticipate that relationship moving to neutral to favorable in the second quarter and providing a nice tailwind in the back half of the year, giving.

Given our strong pricing response in the Americas.

Moving to APAC organic sales were down six 7%, primarily due to lower wind power sales.

And Covid Lockdowns in.

Certain parts of China.

Adjusted operating profit of 42 million was down $11 million versus prior year, primarily due to deleverage on lower volume as well as unfavorable mix.

Price cost was neutral in APAC in the first quarter as we continued to see lower levels of inflation reading through the APAC region.

Moving to the right EMEA continues to lead in regional growth with organic sales up over 5% with a good portion of that coming from price.

The price cost headwind in EMEA accelerated in the first quarter a trend that commenced in December and has been further negatively impacted by higher cost of certain commodities, resulting from the you create more.

We have implemented aggressive pricing actions in EMEA as in all regions and expect price cost to provide a nice tailwind in the second half of 2022.

Next turning to page eight.

This slide provides an updated look at our second quarter 2022 guidance very much in line with our previous guidance. We believe the second quarter will be the next step up in financial performance as we execute our plan to deliver a strong second half of 2022.

Our next hurdle to clear and we feel good about the core assumptions in the second quarter plan, including inflation and pricing assumptions, which are unchanged from previous guidance.

We anticipate net sales to be up 6% from last year's second quarter.

With organic sales flat on lower volume offset by pricing.

Our expected adjusted operating profit of $70 million to $90 million assumes neutral price cost in the second quarter.

Turning to page nine.

This slide summarizes our full year guidance for 2022 like.

Like Q2 or full year guidance is largely unchanged from what we previously provided with some timing adjustments, resulting from our first quarter beat.

We are holding our full year assumptions, rather than letting the upside from Q1 flow through.

We have a challenging but manageable hill to climb in the second half of 2022 and are committed to making sure we deliver that plan.

We reiterate the adjusted operating profit guide of $525 million at the midpoint and we feel good about this plan and the key assumptions included.

Delivering the second half will set us up for.

Set us up very nicely for a strong 2023, and we are laser focused on critical levers to make that happen.

Next on Slide 10, we provide an update of the quarterly sales guidance.

Compared to our previous guide this effectively updates the slides, we illustrated in our fourth quarter call.

Our February guidance as noted at the bottom of the slide in our updated guidance is at the top of the slide.

We have reflected slightly higher sales for the full year, primarily in the second half driven by higher expected volume and a smaller expected headwind from foreign exchange.

We continue to expect a volume ramp ramp as we progress through the year.

This is the normal historic pattern, but we also expect some of the work we're doing on redesign and qualifying new suppliers to take hold and we expect to see some incremental benefit from those actions, which will support the additional second half volume.

Still an overall conservative estimate on volume this year that we will continue to assess but we're mindful that supply chain challenges are not expected to abate anytime soon.

Turning to page 11.

This slide is an update of quarterly adjusted operating profit guidance.

The previous guidance from February as noted at the bottom of the slide and the updated guidance provided today.

At the top of the slide.

We have provided ranges for adjusted operating profit for each quarter for the remainder of the year with the midpoint for the full year remaining at $525 million.

Price cost will be the biggest driver to sequentially, improving quarterly performance and we have confidence in our ability to realize the pricing plan based upon what we have realized year to date and what we see in the order book.

Quarterly price cost assumptions are summarized as we turn to the next slide slide 12.

Our first quarter guidance assumes negative price cost of $70 million, while we actually delivered negative $45 million with price and inflation, both favorable compared with our first quarter assumptions.

We are maintaining assumptions for neutral price cost in the second quarter.

We have increased expectations for inflation in the second half by $25 million as there continues to be significant uncertainty with both material and freight inflation, notably in the Americas and EMEA.

We are working diligently to avoid situations like last year, where we were chasing it growing inflation number for most of the year.

We are also initially initiated additional pricing actions given this higher expectation for inflation in the second half, but given the long backlog.

History wide, we are not relying on that materially impacting 2022.

For the year, we anticipate price cost being a $90 million tailwind, including $135 million tailwind in the second half.

This tailwind will set us up very well as we turned the corner into 2023 further enhanced by the year over year wrap around impact of our aggressive price actions.

Finally for me.

It's very clear we are working hard to repair that credibility.

That was damage with our Q4 performance.

Q1 was the first step in doing that and we will continue to provide detail on our assumptions and projections to allow for a transparent dialogue on how we are progressing.

We know you are watching closely and it is on us to make sure we execute well and deliver that 2022 plan.

With that said I turn it back over to Rob.

Thanks, David and just to reiterate what you said there at the end of first quarter was the initial step in delivering the 2022 plan.

We did what we said we're going to do and are working hard as David said to earn back the credibility and really unleash the value of this business.

The value drivers of this business are very much intact and in many respects being accelerated.

We have worked hard to address the key shortcomings from Q4.

I've mentioned, including taking aggressive price actions enhancing our Americas culture, making changes in key management positions and implementing core business process improvements the key actions to make the 2022 plan have been put in place and we are encouraged by the progress to date.

I have confidence we are on track to deliver in our full year commitment as we deliver on these commitments. This will set us up very nicely for nice 2023, we are determined to accomplish this and I take this personally to make sure. This happens.

With that said I want to thank you and I'll turn the call over the operator 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.

The first question comes from Jeff Sprague with vertical research partners. Please go ahead.

Thank you good morning, everyone.

Morning morning.

Yes.

<unk> pricing related questions for me just first could.

Could you address in a little more detail price on orders and.

If there is any way to kind of frame that relative to kind of.

How margin in backlog.

As developing just kind of the underlying question is theres a little bit of uneasiness here that the orders are quote unquote, two strong because theres not enough price.

And the orders so maybe you could maybe we could start with that.

Hey, Jeff This is Rob I'll address your second part of the question first and then David will come in over the top but I.

I would say that if you take out.

Two very large orders.

That we had which we did get price on.

Our orders growth rate was about 12% that being said you are correct that we believe and we've mentioned that earlier that there is still more price to be had as we do this and we said we are and continue to do that throughout the year, we're going to do it more specific to where product lines in areas of growing where we have the ability.

To deliver and where we have differentiation. So we do believe there is more price.

But in the 34% there was two very very large orders that had year over year price that we were very happy with which would have taken that orders right down to 12, but that being said we believe there is more price there and we'll go after David.

Yeah and just to.

To quantify some of that.

Heading into this year in order to hit our 2022 plan for price and.

Yes.

We had five mid single digit pricing in the backlog heading into 2022.

But we also realized we needed to get low double digits.

As it relates to pricing on.

Book and ship orders. So those are the orders that will.

Progressively shift in Q2, Q3, and I think 85% of our shipments in Q4 will be based on book and ship. So orders that we book Post 12, 31, 21 and we.

We are very much on track too.

<unk> realized that debt.

Low double digit pricing low teen pricing.

In orders that we booked so far this year.

Great and then on the kind of shorter term pricing.

Is there more scope there on.

Kind of shorter cycle parts of the business in the channel and I think it typically pass through battery, which was part of the equation, but have you done something incremental on freight or other surcharges.

What are kind of truing up the numbers and give me a little bit of additional cushion here relative to what you originally thought.

Yeah, a couple of areas to recognize you mentioned channel and channel continues to be one that we watch and we'll continue to look at the various product lines, there as well and it can get continue to get price.

As it relates to the channel Thats typically a faster moving in quarter.

But or at least at quarter or two ahead.

Other areas of surcharges you mentioned on freight.

Sure.

Better at driving that in passing that along.

And then I would say the other area.

We talked about this more shorter cycle is service and service renewal contracts. So those are some other levers that we have and continue to utilize as we as we drive for price.

Got it thanks I'll pass it on.

Mr. Brock I hope you noticed if we.

Third time through we got your name right.

Yes. Your question Mr. <unk>, Thank you very much.

[laughter].

The next question comes from Andy Kaplowitz with Citigroup. Please go ahead good morning, everyone.

Morning.

Can you give us a little more color into your commentary regarding Q2 as you said your sales and operating profit guide is slightly lower than your original guide so how much in the way of sales with pull forward and can you talk about the delays in shipments youre seeing given China lockdowns, what's the risk to get worse versus getting get better and how have you factored that into your guide.

Yeah. Thanks, Andy So overall, we took.

<unk> down in Q2 by about $5 million.

About $15 million of that was volume some was pulled into Q1.

But some was also pushed into Q3 now we did take overall volume up for the full year.

A lot of that is sitting in Q3. So the increase in Q3 is more than just the push from Q2.

But in Q2, we also had benefit from.

Lower foreign exchange than we anticipated and we also took.

Ni sales up about five.

$5 million.

If you look at the overall adjusted operating profit take down.

That's about $10 million at the midpoint so.

We had previous guidance at.

$90 million in our range currently has 70% to 90 with 80 at the midpoint.

About half of that is related to that $15 million lower volume and the other half just relating to timing of some fixed costs.

Thanks for that and then maybe just shifting gears a little more color into inflation expectations you obviously.

Just your provision for the year.

$10 million I think you had that run rate of 160 <unk> moved up to 110 from 100, you mentioned the changes result of uncertainty and commodities freight.

But you are also being more prudent have you seen more issues crop up crop up yet or is this just more of a preemptive call given the volatility of the global supply chain.

Yes.

I think the key word in your question is uncertainty and I am sure you are hearing that on every call.

We did beat the inflation number implied in our guidance for Q1, but we certainly are not celebrating.

We overlaid a $100 million.

At the beginning of the year in our guidance versus what the carryover impact was so that's the math youre talking about so we had $160 million of carryover and 10 or $100 million of additional inflation.

We used $10 million of that in the first quarter.

It resulted in a beat but we also understand the dynamics of inflation, and especially where we are today it generally accelerates.

And what we have done for that overlay, we have increased the full year from $100 million to $110 million and we also re timed.

The impact of that 110, so in our previous guide, we had assumed a flat $25 million per quarter.

And we told everyone. We would update that after the first quarter after we understand.

The updated dynamics, but in our updated guide that 110 is now time $10 million in the first quarter $25 million in the second quarter $35 million in the third quarter and 40.

In the fourth quarter. So that's definitely reflective of barring anticipation of the possibility of an inflation to continue to ramp up.

We.

Generally talk about inflation in two buckets material.

And freight and to anticipate a question on the first quarter beat.

Most of that was in material and.

The freight inflation, we saw in the first quarter, notably in the Americas and also to certain extent in EMEA.

Higher than we expected. So we certainly think there is risks and uncertainty across both material and freight but certainly the freight aspect of what we saw in the first quarter was higher than we anticipated.

It's helpful cover Dave Thank you.

Yes.

Our next question comes from Scott Davis with Melius Research. Please go ahead.

Hey, good morning, guys.

Good morning, Scott.

I wanted just to dig in a little bit take a step backwards and talk about mechanically how you get price.

There's a couple of different ways to do it you can kind of browbeat people, where it can change compensation schemes you can.

You could command and control how are you guys kind of doing the push pull on.

Getting our sales force aligned and getting of your compensation schemes and everything.

So this isn't all this done.

Does it come back and haunt you in a few years.

Yes, Scott this is Rob I'll start off first of all a couple of things, we do to get price.

Certainly there is there is an approval process I think we've talked about this before that.

Under a certain multipliers in which people try to sell the product.

They can go and adjust price for the customer we've tightened up those approval processes and taking those to a much higher level. For example, David and I are seeing much lower dollar amounts that we are improving so we've taken the management team across the globe.

And really have driven that pricing <unk>.

Acceptance to be there. So we can control that and that's how we know we're going to get price from that perspective, and depending on where we are in the world and how the sales team and all the teams are getting compensated give you. An example, a large portion of our U S compensation.

Through our partners and so forth as they get paid more if we get paid more so it really is in their best interest to go go seek more.

But each each part of the market's a little bit different you want it when you go to pricing our.

Service contracts are spare parts.

We look at each one of those and understand what we need to get we believe inflation could be and then price above that.

Quite honestly I think the market and our customers have understood. It's not necessarily a price thing now it's availability thing and it's the ability to get it so that environment has helped us as well.

Live through it but I am confident where we are today with our pricing process with our view process, which incorporates the entire management team on a weekly basis, we look at new orders coming in.

See it coming while we haven't we can't jump up and celebrate and say we beat in it and we've got it all done we feel very confident that we're going into right direction.

Okay. That's helpful and then just as a follow up.

Yes, Scott if I could just interject I would say at.

At least in my history.

Prospect of getting price increases on a decentralized basis to comp schemes or.

Telling the sales force this is something that needs to get.

Really have a low success rate and one of the reasons that Rob and his team are being successful here.

As they have largely centralized control.

Whether it's dictating what the price increases.

The multipliers.

Approving deviations.

And just not letting any of that come through.

Sales forces in general are your worst enemy when it comes to trying to get a price increase.

And if that more centralized drive with dictate as to what it will be.

And making sure it's showing up in orders pricing is making all of the different scores.

That's really helpful. My second question is on that good so I'm going to pass it onto the next Guy I'll talk to you guys. Later, thank you. Thanks.

Thanks, Scott Thanks, Scott.

Our next question comes from Steve Tusa with Jpmorgan. Please go ahead.

Hey, guys good morning.

Good morning, see alrighty, sorry, Im not sure my question is going to be much better but.

Yeah.

The.

Carryover now on kind of price cost into next year does that incremental inflation this year.

Tempered all your view of of <unk>.

What happens next year with a run rate off of the <unk> margin, but I think you guys have talked about.

Yes, I would say the way, we handicapped that internally, we talk about a $200 million carryover impact for pricing into next year.

Just on some of the additional pricing actions, we've taken just in the last two to three weeks.

I would certainly take the over on that $200 million.

Yes, as it relates to inflation I think that's still uncertain, but.

They're there.

Likely would be some carryover impact there but.

Net net versus.

What we were expecting internally.

<unk>.

Just 60 days ago for 2023 is unchanged right.

Yes.

Bottom line for Q3 Q4.

Remains relatively consistent and that's going to set us up for.

A very strong 2023, regardless and the bottom line is if inflation continues to go up we'll continue to price for it and we're very confident we can do that based on what we've seen over the last 90 days or so.

What's the.

Variability to the margins if you guys Miss on volumes in the second half you know you have a bit of a step up there on volumes if that doesn't come in like what's more important.

Yeah.

Price kind of cost scenario or.

The volumes for every kind of percent of volumes, what should we kind of assume the.

The drop through would be on a mess.

Yes so.

We've talked a lot about variable contribution margins historically and historically those have been in the 40% range.

Based on.

The price cost dynamic we've seen over the last.

Year, or so and it's going to continue at least through.

Q2.

<unk> neutral in Q2.

In the lower thirties.

<unk>.

For every dollar of loss volume, we would lose in that.

30 to 35 cents.

Range of.

Okay.

Right.

Okay. Thanks.

Thanks I appreciate it.

Yes.

Our next question comes from Amit <unk> with Evercore. Please go ahead.

Yes.

Good morning, good afternoon, Thanks for taking my question.

I guess the first one.

Just talk a little bit about the free cash flow number for the quarter I think was negative $150 million it was below.

Below what I had modeled I think I would love to understand how does that stack up versus your expectation and then do you sort of expect free cash flow to be positive for the remainder of the next three quarters.

22 targets.

Yes, so the $150 million was almost spot on with our internal expectations. Now there are some puts and takes and we talked about one.

In the prepared remarks that with inventory so inventory came in higher than what we anticipated and we're working on the issues there, but we did get favorability as it relates to the profit performance or the cash impact from EBITDA and also we.

We had favorability related to upfront cash in the door from customers, which.

It shows up in the balance sheet as deferred revenue. So that $1 50 number was consistent with internal expectation now for the full year, we still.

Are comfortable with the $150 million positive guide.

If you look at that from a quarterly basis, we do anticipate a another cash burn in Q2.

It should not be as high as what we saw in.

In Q1.

But we do anticipate significantly positive free cash flow for both Q3 and Q4.

Got it that's really helpful color this follow up.

Your perspective on put up their applications from China locked out of pocket, China getting locked down.

Revenues were down six 5%, so maybe just touch on what the implications of that from a demand perspective, and perhaps more importantly, do you see any supply chain implications from micro China being shut down as well.

Yes, Hi, Rob Johnson there.

I'll start out on the China situation.

Anticipation.

<unk> been shut down and then where we're headquartered has now opened back up again.

Shanghai is where a lot of the ports are for export.

To watching that carefully, but we believe that.

What we can't predict what's going to happen with the Covid Lockdown, we believe that they've gone through a pretty rigorous process and towards the second half of Q2 things will open up we'll see additional shipments so.

Back really to two things that impact and one was COVID-19 and one was some of our our wind power business, which can be come in cycles, so from that perspective, but.

We are.

Can't say.

Uh huh.

Victory on uncovered we'll see what happens there, but in general our expectations I will pick up anything thats happened in March or April I'll pick that up in late May and June .

Perfect. Thank you.

Thank you.

Our next question comes from Nicole <unk> with Deutsche Bank. Please go ahead.

Yeah. Thanks, good morning, guys.

Good morning, Michael.

So just maybe to talk a little bit about what youre seeing in Asia on that slide where you guys like do you like the green and yellow.

<unk>.

I know Carlisle it makes sense why you're moving it to yellow, but I guess when you guys see these digestion periods.

And is that how long does that typically last so.

Over what timeframe can we maybe return to green.

Sure. So there are a couple of dynamics I'll start with and then Gary can give you probably some more color as we look at Asia. When we break that out we just talked about kind of COVID-19 and the absorption of the current data centers I mean, China has put a big clamp down on building new data centers until the current data centers get utilized I think thats a quarter or two.

Phenomenon.

Maybe maybe maybe a little bit longer could go go through the end of the year.

As it relates to which is part of our Asia Pac Australia to India, we see actually strong growth there in Colo and Hyperscale. So it's kind of separate that out that's an area of what we will see all of extreme growth going going forward in a good position there Singapore is kind of similar to China, where they are.

Kind of can locked down on the number of data centers built.

Get the utilization up get the <unk> up so there's some dynamics there and again that's short lived a couple two or three quarters, but that's that's kind of kind of our perspective on a given any other thoughts, yes, I think thats exactly right, Rob Hey, Nicole the only other comment I would add to what Rob said is what we're finding and what the team is pivoting towards really wrap.

But even in those areas, where maybe they are not doing as much greenfield build there is an awful lot of upgrade retrofit brownfield work that is being done there which is really good for aftermarket for service for all of these other ideas that we can take the market now so maybe the the large power large thermal business suffers in China.

A little bit, but we should see a really active service retrofits.

Things that we can do it with existing facilities to help them up there and thats, where a lot of that offset is going to occur.

Okay got it that's really helpful. Thank you and then just maybe a shorter term question.

When you guys put together the TQ outlook, just anything you'd highlight with respect to growth or margins by region that we should be considering like the bifurcation of the regional performance.

Yes so.

<unk>.

Overall organic sales are flat to prior year.

If you look at that from a regional perspective.

It's.

The overall organic growth is probably going to be outpaced in APAC and positive in EMEA Americas flat.

Down.

Right and.

But price will be positive.

In each of the three regions.

What is driving that overall sales differences is related to the volume with volume up in APAC and volume likely down in the other two.

From a price cost perspective.

In Q1.

APAC was neutral and.

The Americas.

Was about $35 million.

Negative in EMEA was about $10 million.

A negative if you fast forward to Q2.

Overall, we're anticipating.

The neutral price cost versus the second quarter of last year.

And.

Likely.

Positive in both the Americas and.

And in APAC and slightly negative in EMEA.

So.

Not.

From a price cost perspective.

Not.

Really significant differences across the three regions.

Thank you.

Okay.

Our next question comes from Dan.

Drew open with Bank of America. Please go ahead.

Yes, good morning.

Good morning, Andrew oriented.

Just the first question.

I, absolutely am aware of your chairman's reputation for delivering the numbers.

Dave, but just to understand your guidance. So you did very well in Q1, but if I look at slide 11, Q2 operating numbers operating profit at the midpoint was cut by 10% Q3 by 5% in Q4 by 5%.

You sort of talk about the commitment to the numbers.

And I just wanted to understand is it just pure conservatism or how.

How much margin of safety is there and this guidance versus where do you guys have given us to February because the tone on picking up is that.

It does sound like it's pure conservatism, yes, things have gotten better but you had enough cushion in the original guidance that you just don't want to raise for the year sorry for this whole bumps, but I am just trying to understand what the messaging here.

Hi.

I don't semantically I'm not sure what the right words are but were certainly being cautious.

We have reasons to be optimistic based on our Q1 performance with both pricing and what we saw with inflation, but.

As I mentioned earlier, we're not celebrating the inflation performance because we saw what happened last year.

When we consistently underestimated what we saw with inflation.

And.

That is our caution and.

Yes.

In any regard it's hard to take the first quarter and make broad assumptions with what the full year is going to do and Thats in <unk>.

So called normal year. So we certainly don't want to get out over our skis based on what we did in Q1.

And we still remain very optimistic.

Optimistic about hitting the full year plan, but we have introduced caution and I think you see that with our assumptions for inflation, we beat by <unk>, but we took the back half up by 25.

<unk>.

Some are looking at that as an <unk>.

I've heard the word cushion used and we do not see that as a cushion we see it as a provision.

Sure.

Possibility of higher expected inflation at the end of the day, we don't know, but we think it's the prudent thing to do from a macro perspective.

Yes look I just want to make clear I appreciate the track record of operating team.

Your chairman, so I don't want to dismiss that.

Question number two.

Are you seeing any incremental commits from suppliers.

Just I'm thinking about motor is coming out of Germany, given what's happening in the Ukraine.

China, Covid Lockdowns, just to understand that or have things smooth out there. Thanks, so much.

Yes, Andrew this is Rob no. We're not we're not seeing any incremental be commenced in the way we kind of set the year was based on what suppliers could deliver in Q4. So that's why again looking at not necessary, what they are telling us they could deliver but what they are actually delivered and that's how we really set our set our plan. So we are.

There is various things here and there but for the most part some of the big things we're talking about.

We think we've got it at a steady state in and at some point in time things will get better chips are going to take time, that's going to be in the 2023.

Late 'twenty three maybe 24 other things we're working through alternative solutions on fans and all the other things like that so as we get more diverse supply base.

Have a better ability to even show up in any potential decommit because of some well disaster something that hidden and punched with a lot of different things last year and continued to see some of those but for the most part we feel we feel good about where the supply base is.

As of today, and we cannot realistic approach and what they are capable of doing.

Thanks, a lot good luck.

Thank you Andrew.

Our next question comes from Mark Delaney with Goldman Sachs. Please go ahead.

Yes, thanks very much for taking my questions. The first one on pricing of the $360 million of pricing assumed in the 2022 revenue guidance I think as of the last earnings call $125 million of that had been already booked in was in backlog and there was 235 million that you still need to book of higher pricing and.

On a schedule for 'twenty two delivery of that $2 35 can you give us an update on how much of that has been achieved and is there any store remaining thats needed to be booked at the higher prices.

Yeah. Thanks, Thanks, Mark we can give an update on that so your numbers were.

Spot on so.

Heading into the year, we had $125 million in backlog 235 was just go get in book and ship, if we snap the chalk line at the end of Q1.

Of course, we had $40 million in actuals.

And.

We also.

We're able to actually.

No.

And include additional pricing in backlog from orders so.

At the end of Q1, we had about $155 million of pricing in backlog that we would realize over Q2 through Q4, and then we had $165 million.

That is to go get and book and ship. So if you take the 360 that Hasnt changed we had $40 million in actual $155 million in backlog at the end of Q1 and the book and ship number is 165 for the full 360.

Got it thanks David.

My follow up question was on the inflationary environment and what Youre seeing for cost.

If I understood correctly as of the.

Last earnings call the $260 million of cost inflation that was assumed for the year. It was $160 million based on what you were seeing at spot and then there was a $100 million that was just the buffer for potential future.

Cost increases now now at 270 I wanted to check on the composition of that and clarify one is at $2 70, reflecting spot because we've seen some big moves up in things like steel and freight so I didn't want to make sure that that that is reflected in this $2 70 number and then the second part of it is there any conservatism now.

Yes.

Cost increases maybe you havent seen or is there anymore.

Buffer and it's just based on the spot moves thanks.

Yes, I think it's a combination of what we're seeing today and the expectation that inflation should continue to accelerate so.

The 100 provision we had four new inflation in.

2022, we increased that to 110, but as we mentioned.

Of note is the timing so we had.

About $10 million of favorability in Q1.

I am sorry, $15 million of favorability in Q1, but we took the back half of the year up by $25 million.

Now.

We do have some internal.

Breakdowns of.

Where we expect to see that from a regional perspective, and a breakdown between material and freight, but we certainly are understand the fungibility and the uncertainty as it relates to inflation. So.

We certainly have provision and we do not use terms like cushion or buffer.

As it relates to our approach to this inflation. We are assuming that this is going to happen and that's very critical and key for us as we continue to price for it.

So we're all hopeful and I think every company out there so call that inflation.

Does not accelerate from where we are today.

But we are not making that assumption, we're going to continue to assume that it gets worse and if you look at that ramp.

Of that 110, as we mentioned we used 10- Q1 .

We have provided for 25 in Q2.

35% in Q3, and <unk> 40 in Q4 so.

We will be happy if the things that do not.

And up like that but we are absolutely assuming that it will.

Okay.

A brief follow up on that just to make sure I understand this so even if steel were to be sustained at the kind of spot prices. It's been at recently in the cost of shipping things around the world stays at these levels or perhaps even gets a little bit worse, you guys still feel like your cost estimate for inflation. This year as is appropriate.

We certainly don't have a crystal ball, but.

Based on what we're seeing today with inflation.

We are very comfortable with that that 110 are there scenarios it could come in and hire absolutely. We saw that last year. When we were trying to handicap probabilities of higher prices.

But we are certainly expecting continued acceleration, but we believe what we have provided for in the 110 should cover a realistic expectation of inflation for the rest of the year and Mark will continue as we've mentioned pricing isn't a one and done thing. It's a daily weekly activity for all of us So as we.

See anything we'll continue to.

To drive the pricing up accordingly.

We go forward.

Thank you.

Our next question comes from Nigel Coe with Wolfe Research. Please go ahead.

Thanks, Good morning.

I wanted to circle back to two orders you called out two large orders.

I don't recall, maybe I'm wrong here, but I don't really recall larger would've swinging the number that much. So my question is are we seeing here. Some evidence of increased project scope with Eni.

Coming through on some of the orders here.

Maybe just talk about Eni, how that's been tracking.

Sort of in line with your FY 'twenty plan so far.

But margins I think thats still tracking well below.

The M&A time was I'm, just wondering what the recovery time, it looks like for Eni margins.

Hi, Joe I'll take the first part of that as Rob and then Gary the second as it relates to a couple of large orders.

We've mentioned before.

Talked a little bit about the innovation some of our new innovations have really taken traction and people will hadn't bought those solutions in the past are buying those and in some cases, securing more than a quarter's worth of.

Actual supply.

We're seeing 12 months.

<unk> orders pace for that so yeah. So.

We kind of.

I wanted to take those two orders out that were around some of the new products. We've had to say, okay. Our actual growth rates around 12, but that being said, we still very feel confident that there is more price more price to go yet.

And normally we don't talk about losing orders come in from and what we are beginning to see larger orders in the past and then.

From the adoption of some of our new technologies.

That people hadn't used in the past and shifting shifting away from some of the traditional <unk>.

Methodologies of let's say thermal management as it regards to the Eni Gary.

Yes, absolutely Robert Hey, Nigel.

We are pretty happy with the traction on the Eni side. So some of that incremental revenue that comes in some of it flows through the Eni delivered closer to vertically and help but it's a lot of the solutions orientation that we're getting but able to couple switch gear and possibly into the broader solutions were also being pretty effective at it.

This point of ramping up the sales forces, particularly in that tier two colo space the enterprise space to sell additional busway and switch gear. So all of that is is in flight and on that side, probably tracking a little bit even faster than what we thought being offset a little bit because it's just tough to come by some of the cost synergies clearly.

As fast as we thought with the supply chain and inflation piece of it but if you take all of that and then it out we're pretty much right on plan and if you look at no different than the core vertical Q4.

You look at the Eni Q4, there'll be in the low 20% type of run rate.

Which bodes really well it goes back on plan to where we should be into 2023, So all things considered pretty happy with how the integration is going the culture the <unk>.

Sales force the customer responsiveness.

Pricing Eni got a late start on and we were very open about that even on the last call, but if you look at what they've done over the last couple of months.

Good momentum there. So so overall really pretty pleased with the way that's pointed out.

That's great News and then my follow on question is maybe you can talk about the efforts around.

The qualifying new suppliers and reengineering products.

That was a big initiative kind of.

At the end of 2021, so just wondering if.

We've made much traction there and whether that's having any discernible impact in terms of supply chain.

Sure Nigel this is Rob.

Absolutely and we continue to do that today, it's not an effort.

<unk> completed some of these redesigns or spend a new board and a new code for different chips.

Longer right those don't necessarily happen within a quarter, we see we see good progress on that some focus areas for us is some diversification and some of the breakers that we use and well.

Well through the qualifications of that and that should.

That should help us.

As we go through this and continue to work.

Really hard on the fan supply and looking at and qualifying and bringing on more suppliers, there and different different designs as well so I feel good about that and I feel like that.

Some of those.

After we get through release to manufacturing and the volumes can be hit by some of these new suppliers.

Yes, it could be it could be a positive a positive thing for at least towards the end of the year going into 2023. So I think what we've done a lot of that work will benefit from.

In the latter part of this year really kind of into next year.

As we go forward.

Okay, great. Thanks, a lot.

Thanks, Andrew.

Our next question comes from Lance Vitanza with Cowen. Please go ahead.

Hi, guys. Congrats on the quarter I have a two part question regarding price increases in inverted competitiveness versus its peers.

No surprise, but I'm hearing some anecdotes that some of your customers or none to pleased and in some cases have threatened to move business from verdict to other suppliers in the first chance. They get now again, no one likes to pay more than we all like to complain when we're forced to pay more so who knows what eventually happens but my question is a D.

Do you worry that your price increases may ultimately leave you in a less competitive position versus your peers and b. What if anything does this feedback suggest about your ability to maintain price when the supply chain eventually eases.

This is rob thanks for the question I appreciate you joining today.

What I would say as it relates to the competitiveness.

And the pricing what we found something that we've learned really through all of this which has been a good thing when we innovate when we have a superior solution out there in the market, we can get price for that and so as we think about our pricing and it isn't just across the board price increases.

What we've found with some of our leading innovative products that typically compete against I would say more small regional mom and Pops is that people are willing to pay for that they want a global supplier. So we feel good about that price sticking for the value, we're delivering I would say, we probably underpriced.

On some of these innovative solutions with the value that they bring to our customers and maybe some frustration youre hearing out there because we're not seeing.

We're seeing and areas and finding areas, where actually our prices were lower than they should be lower than than than competitors.

Market is frustrated in general about delivery and delivery timeline, because the growth that we're seeing is unprecedented so I would say maybe some of the some of the noise at least as I hear it is hey, we want to get those products, we want to it's not a.

It's not an issue of the price its an issue of delivery and we need those products sooner rather than later and so our thesis has always been and will continue to be as an innovator and continue to provide more value to our customers.

The market will pay for that for example, some of the stuff that we're doing on our thermal units in China.

One of the view of not only manufacturers now in China that can meet the government mandated <unk> coming forward. So we'll continue to differentiate on innovation and continue to drive price as it relates to that yoga in areas that.

That probably more commoditized.

We rely on there and it works is our service organization and people will pay more for products that they can get the Virtus service behind that so that's another I would call key differentiator for us and we're seeing that through these tough times.

One of our service.

Yeah.

Thanks.

Okay.

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.

Thank you operator.

While the macro environment remains volatile I feel good about the actions we have taken to deliver on our commitments.

I understand we are still in the process of earning back your trust, but believe our Q1 performance is the first step on that path.

And I look forward to doing the same over the next several quarters.

I want to express my appreciation to all of our employees partners customers and investors for their continued support and.

I wanted to say, thanks to everyone for being on the call today.

Concludes our call.

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