Q1 2023 Vertiv Holdings Co Earnings Call
Good morning, My name is Stacey and audio conference for today.
This time I would like to welcome everyone to <unk> first quarter, 'twenty 'twenty trading and it was cool.
All lines have been placed on mute to prevent any background noise. Please note. This call is being recorded I would now like to turn the program over to your host for today's conference call Lynn <unk>, Vice President of Investor Relations to begin the trial. Let me. Please go ahead.
Great. Thank you and good morning, and welcome to Virtus first quarter 2023 earnings Conference call. Joining me today are verdicts executive Chairman, David Cody Chief Executive Officer, Giordano, Abra Topsy, Chief Financial Officer, David Fallon before we begin I'd like to point out that during the course of this call we will make forward looking.
Regarding future events, including the future financial and operating performance converted. These forward looking statements are subject to material risks and uncertainties that could cause actual results to differ materially from those in the forward looking statements. We refer you to the cautionary language included in today's earnings release, and you can learn more about these risks in our annual and quarterly reports and other.
Filings made with the SEC any forward looking statements that we make today are based on assumptions that we believe to be reasonable as of this date, we undertake no obligation to update these statements as a result of new information or future events. During this call. We will also present, both GAAP and non-GAAP financial measures, our GAAP results and GAAP to non-GAAP reconciliations can be found in our earnings.
Yes relief and then the Investor Slide deck found on our website at investors that burden of dotcom.
With that I'll turn the call over to executive Chairman, Dave Cody.
Yeah.
Well, it's one hell of a game, where a new CEO first quarter isn't that high.
Hi, I'm very pleased with the results we've delivered in the first quarter and our ongoing progress.
First quarter as CEO is under his belt and his operational focus on delivering results and creating a high performance culture is particularly noticeable especially in the Americas.
We over delivered in the first quarter compared to guidance.
Increased the midpoint of our guidance by $25 million in cash flow was terrific.
We entered the year with a very strong backlog, we were able to secure needed parts and we have capacity in place to deliver a high Q1 sales.
Order rates will be another metric that looks different this year do you have some detail in his prepared remarks to explain that we.
We are constantly focused on the orders rate.
Encouraged both by the pipeline activity and the pace of investment in our end markets.
I've said this for a number of years there is a true secular growth story at burgers and the work we've done positioning the company for growth and being able to leverage that growth in a meaningful way by getting after margin opportunities, while still protecting growth investment makes very uniquely positioned to create substantial value.
Years ahead.
What attracted me to this asset four years ago.
Even more excited today with the runway ahead, so with that.
Now I'll turn the call over to Jill.
Thank you Dave Thank you very much and good day everyone.
So we delivered a very.
Very strong first quarter sales up 35% organically led by <unk> up over 60% and EMEA up 25%.
We were able to ship more in Q1 than typical first quarter.
As we strengthen our supply chain and increased capacity across the world.
In particular in our Monterrey thermal management facility.
We had very high backlog, starting the year and we have the capacity to serve the growing demand of the industry.
Orders, excluding FX were down 23% from last year's first quarter.
This was in line with our expectations driven by the comparison with an exceptionally high Q1 'twenty two.
And consistent with the orders normalization trend, we referred to in February .
Book to Bill ratio was one times.
And backlog remained flat versus year end 'twenty two our historical peak.
Further elaborate on this when we review slide six.
Our adjusted operating profit was $176 million, which was $41 million higher than the top end of our guidance.
The beat was largely driven by additional volume and higher than expected variable contribution margin coming from a combination of manufacturing efficiency and supply chain efficiency.
We are raising our full year adjusted operating profit guidance by $25 million at the midpoint given the strong first quarter results.
Adjusted free cash flow was another good story.
With $25 million cash generation in the quarter.
<unk> hundred million dollars higher than our guidance.
Although we're pleased with our first quarter performance, we know very well there is still work to do.
We are holding the adjusted free cash flow guidance for the year at $350 million in the previous midpoint, but we understand there is ample opportunity for improvement.
And certainly in inventory.
We are continuing to strengthen our processes and operational rigor.
Trade working capital execution.
Overall, a good start and we are squarely focused on delivering the full year and that is one quarter at a time.
Turn to slide four.
We have no changes to the view on the market from two months ago at the end of February .
We are cognizant of the headlines around tag and the general uncertainty around macro environment.
We continue to see encouraging pipeline activity.
Some cloud hyperscale customers are digesting capacity others.
Using this as an opportunity to accelerate their build outs.
Some hyperscale is moderating capex growth that this moderate growth is still healthy growth.
And we see investment continuing.
Additionally, we see so a market reacceleration in the second half of the year, especially in China, which has been soft over the last several quarters.
As Dave mentioned, there is significant secular growth story in our industry.
<unk> is further demonstrated by the acceleration of everything artificial intelligence in the tech space. We're distinctly seen the first signs of the AI investment cycle in our pipelines and orders.
<unk> is uniquely positioned to win here, given our market leadership and deep domain expertise in areas like thermal management and controls which are vital to support the complexity of future AI infrastructures.
Let's move to slide five.
First and most importantly markets are in general healthy.
Investment continues across markets Hyperscale calls enterprise.
Project pipeline remains strong.
We review pipeline activity regularly and diligently and pipeline activity remains encouraging.
First quarter orders included the impact of foreign exchange declined 23%.
What are the dynamics that are important to unfold. So we have provided additional details in the next slide.
Since then.
Let me go back to the investment in AI you.
You may have heard it.
As generally characterized as the next infrastructure arms race.
<unk> benefits from these rates.
And as an agnostic partner of choice to the race participants the.
The acceleration in investments in AI will turn into a net infrastructure capacity demand acceleration.
And this starts to be visibility now pipelines.
AI applications demand and net capacity, increasing the industry higher power density a gradual migration to win air and liquid hybrid cooling environment and has transitioned to liquid ready facility designs I.
I do not believe there is anyone else in the datacenter and infrastructure space as well positioned as vertical given our expertise and.
It and technology portfolio.
And for such a system view and advanced control systems.
Already today.
Infrastructure orders are in backlog and we are encouraged by the potential of that AI represents for Virtu.
So supply chain. It is incrementally better there are still pockets of tightness in electronics.
But the relentless qualification of additional suppliers, we have driven in the last 12 months is helping us a lot.
Inflation.
We anticipate metal costs at lower levels in 2003 versus 22, although they are starting to trend upwards.
A more favorable environment on trade reduced spot buy activity that both trending back to historic levels and at our good offset.
I also like to remind that we have built up a robust pricing process. The houses in case of enduring inflation.
Andy.
Overall price cost is developing according to plan.
And consistent with expectations.
Let's now move to slide six.
Now, let me hear elaborate on future Q1 orders.
Order normalization and lead times.
Indeed last year's Q1, pauses and exceptionally challenging comparison with orders up 34% from the first quarter of 2021.
We will see some quarter to quarter variation due to timing of large projects, but last year's first quarter was exceptional in that sense.
We believe over the normalization is very real we talked about this in February 2022.
In February in two installments to the large hyperscale and Colocation customers were given us orders that covered their requirements for extended period as I mentioned, some going out 18, plus months due to the challenging supply chain and lead time situation in the industry. They wanted to secure the capacity they needed long.
Tom.
That behavior was particularly pronounced in our thermal line of business.
Now that our lead times are improving not yet where we want them to be but much better than last year. We anticipate they will continue to improve going forward now that our lead times are improving I would say and customers are more comfortable releasing orders at a much more normal cadence. This.
Create short term air pocket, but does not impact the volume or timing of what we will ultimately ultimately shipped to customers.
Order patterns, just normalizing this as healthy for our business and the industry.
So what does that look.
Levers.
<unk> encouraged that our book to Bill ratio is.
One tons.
Our backlog remains at the same level, we had at the end of 2022, even with an extremely strong shipment quarter in Q1, where organic sales were increased 35%.
<unk> signaling and approximately 12% three year CAGR that reflects good end market demand.
We believe that Q1 2023 will remain the most unfavorable year over year quarterly comparison in 2023.
We believe it improves from here.
We still anticipate a reduction in Q2, 'twenty three orders versus prior year.
But improving relative to Q1.
It is hard to have a crystal ball into second half of 2023, but with what I hear from customers, including what seems to be a full be forming into a substantial investment cycle for AI.
Mine optimistic that year over year orders will turn positive.
When we get to later quarters.
Having said that I'll pass it over to David who will walk us through the financials over to you David perfect. Thanks, Joe turning to page seven.
This slide summarizes our first quarter financial results as you can see we exceeded the high end of guidance for all metrics on this slide starting with sales, which were up organically $405 million or 35% from last year's first quarter.
<unk> and $5 million of this increase was from pricing and 300 million from volume.
Which was up approximately $100 million versus what we assumed in guidance.
A vast majority of this volume increase was based in the Americas as we continue to see significant improvements in supply chain and manufacturing efficiency and the two are related.
In that region and it all starts with and it's supported by a sound SIOP process.
Adjusted operating profit of $176 million was $163 million higher than last year's first quarter and.
And $41 million higher than the top end of guidance and this was primarily due to volume leverage and a higher contribution margin percentage driven by the improved manufacturing efficiency in our north American plants.
Once again supply chain issues continued to be addressed and process improvements take hold.
Of note at the very bottom of the second Gray box at the bottom of this page we recognized a $13 million charge for restructuring in the quarter and you can see that on the face of our income statement.
In the spirit of winning now and winning later, while we continuously invest in productivity and efficiency projects, we will overdrive these investments when opportunities present themselves.
Well in the first quarter and $8 million, one time gain related to the reversal of an indemnification claim pursuant to the Emerson carve out provided that opportunity.
Instead of dropping this gain to the bottom line, we accelerated restructuring projects costing $13 million, which should drive $20 million of annualized savings some of which should benefit. The later part of 2023.
Once again, winning now and winning later.
Moving to the right on this slide adjusted free cash flow of $25 million was $175 million higher than last year and $100 million better than the midpoint of guidance.
Improvement versus both last year and guidance was driven by higher adjusted operating profit.
And significant progress in driving advanced payments from customers.
As Joe mentioned, while there is still work to do across all trade working capital categories. We are pleased with the results for the first quarter and we anticipate continued improvement.
Going forward.
Finally on this slide.
If you look at the bottom right hand corner of that last box.
We exited the first quarter with a net debt leverage ratio of approximately four three times.
And that was down from five five times at year end.
While net debt did not significantly change our trailing 12 month adjusted operating profit increased approximately $163 million from year end.
As the $13 million from the first quarter of last year was replaced by the $176 million this year.
As we reminded folks in February although mechanical leverage calculations might have wrote Lee.
One could say, maybe even laser Lee classified us as higher leverage we do not believe that was consistent with the underwriting underlying reality, but more a product of timing and are challenged first half of 2022.
Based upon our updated guidance, we expected to be between three five and four times after the second quarter and.
And approximately three times at year end, which is at the top end of our two to three times long term target range.
Next turning to page eight.
This slide summarizes our first quarter segment results the.
The Americas region had year over year organic sales growth of 61% and that's not a typo.
Including volume of 48% and pricing of 13%.
Americas entered the year with a very strong backlog and with improvements in the SIOP process and the supply chain coupled with the continued capacity ramp up in our new thermal facility in Monterey, we were able to drive significant top line volume growth.
EMEA also benefiting from a strong backlog posted organic growth of 26%.
Including 17% from volume and 9% from pricing.
APAC.
It's somewhat of an outlier compared to the other two regions for the first quarter, while we had good growth in India and Southeast Asia, China continued to be impacted by the effects of the post COVID-19 recovery and related project push outs in the second quarter and back half of the year.
Based upon our visibility to an improving pipeline driven by the anticipated macroeconomic recovery.
And government sponsored actions that should benefit data centers, we remain optimistic anticipating mid to upper single digit organic growth in APAC.
2023, and good momentum heading into 2024.
At the bottom of this slide Americas continued its momentum from the second half of 2022 with adjusted operating margin of 22, 1% 11, three percentage points higher than last year's first quarter, and 160 basis points better than the fourth quarter.
Half of the improvement was driven by higher variable contribution margin, including a significant price cost benefit with the other half from fixed cost leverage as we continue to drive our fixed cost constant philosophy, while investing in capacity and technology.
EMEA adjusted operating margin also improved nicely from last year's first quarter by over 700 basis points with about half of that improvement from fixed cost leverage.
Finally APAC.
Our adjusted operating margin like its topline remained relatively flat from last year.
Turning to page nine.
This slide summarizes our second quarter guidance as as we mentioned in our press release.
Due to our strong beginning of the year backlog and an improved supply chain, we anticipate quarterly seasonality to look a bit different in 2023 compared with historic patterns.
As a result, we are not projecting as a significant incremental jump in top line from the first quarter to the second quarter like prior years, and we should see a more.
Uniform quarterly sales pattern, albeit increasing as we sequentially move through 2023.
For the second quarter, we anticipate organic sales growth of 15% with 9% from volume and 6% from pricing.
We are projecting adjusted operating profit of $190 million at the midpoint.
With pricing volume and productivity benefits, partially offset by inflation and growth investments with the resulting adjusted operating margin up 600 basis points from prior year.
We have not provided adjusted free cash flow guidance for the second quarter, but we expect positive cash flow in each of the remaining quarters with sequential increases.
And we reiterate our full year guidance on the next slide.
Which is a good segue moving to the next slide slide 10.
Where we summarize our full year guidance.
We have raised our as Joe mentioned, we have raised our 2023 adjusted operating profit guidance by $25 million at the midpoint.
Building on our strong first quarter performance, although we.
Experienced favorable supply chain dynamics in the first quarter, there remains uncertainty in certain pockets of our procurement, including notably power semiconductors. So we're approaching volume estimates for the rest of the year with caution.
It may be perceived as conservatism, but we believe it is the prudent approach at this point based upon the supply chain volatility we have all seen in the last 18 months.
As we know things can change quickly.
We are guiding full year adjusted operating margin.
Of 12, 3% as we continue our progress towards an anticipated 16% in the intermediate term and 20% in the long term and as I mentioned, we are reiterating our adjusted free cash flow guidance for the full year.
Of $350 million at the midpoint.
With that said I turn it back over to Jeff well. Thank you. Thank you David.
Let us let us turn to slide 11, and let's summarize the key takeaways so very good first quarter.
Momentum is continuing.
Market remains healthy and we benefit from having a large backlog and that is supply chain and more capacity.
Raising.
<unk> guidance given a good Q1 performance.
I am very pleased to announce that it will be hosting its first investor conference on November 29.
New York Stock exchange more details certainly to come but already now hope your pencil down calendars and we hope you will be able to join us as Dave Dave Cote is known for saying the trick is in the doing and we're getting after.
<unk> been doing and that means a strong execution supported by a high performing team and culture.
Make sure there are no shortcuts no magic ones.
Doing is clarity of vision alignment and relentless focus on improvement and execution.
I am very proud of the step forward, we continue to take as an organization and I want to thank the <unk> team for the ever increasing focus and passion and execution.
We're still in the early stages about acceleration in.
After my first quarter as a CEO I'm more optimistic than ever about our path ahead.
With that we will now turn the call over to the operator, who will open the line for questions for us. Thank you very much.
Thank you.
If you would like to ask a question. Please press star followed by one on your telephone keypad. If you would like to withdraw your question. Please press star <unk> among preparing to ask your questions. Please ensure you Amit.
We'll pause for just a moment to compile the Q&A.
Okay.
Our first question today is from.
<unk> Kaplowitz from Citigroup. Please go ahead your line is open.
Good morning, everyone.
Alright, good morning morning.
Jill could you give us a little more color into your end markets and elaborate on your comments that you think orders could turn positive later this year I think some.
Some investors are probably surprised at cloud and Colocation markets in the Americas have hung in as well as they have so maybe more specific color on those markets and then how much of the incremental quarters or pipeline that you see or would you say more AI focused and what gives you the confidence that China is going to come back in the second half of the year.
Okay.
Thank you for your question Andy.
I would say that.
<unk>.
Many elements for this confidence one is what we see in the pipeline.
Pipelines are moving.
<unk>.
We are definitely pleased by our.
Book to Bill.
<unk> ratio at <unk>, one as we were saying, especially given the the overage in sales relative to Q1 guidance.
As I said.
The especially the Hyperscale is.
North stopping their investment we also heard some prominent type of scale is in the last few days.
And the messages about their infrastructure spend.
There is.
And Ah positivity in the year and again.
Results with our with our with.
With what we see in the in the pipeline now.
We talked last time about normalization and that's what we continue to see.
Do not be surprised.
When we will see still a second quarter that on a comparative basis will will be down year on year, but up in absolute terms versus Q1, as we were saying, but again.
The.
There is movement out there there is positivity now not all the Hyperscale is are exactly in the same place or all the coal those are in the in the same place, but many of the large ones are.
Continues to plan capacity expansion it is difficult to your point about.
Difficult to really draw a line between.
No.
<unk> investment, enabling investment and.
Other investments I would say that the line is blurring one would think that AI is it totally new thing.
Certainly generative AI is accelerating very rapidly.
But there are elements in AI in everything we do today already so if anything we see an acceleration.
Not.
<unk>.
A sharp transition to something completely new but we see AI in terms of the type of conversations.
Conversations.
And specifications that we see coming our way and again as I was saying when.
Going through the slides.
A lot about power density.
And a lot about.
Bigger capacity investments kind of bigger chunks and that's encouraging.
So again AI as a transition.
I invite everyone to think AI.
More in terms of the transition towards a higher density higher density compute and high density power as a consequence, you were asking about about China.
We believe China will reaccelerate in the second half.
The best indicator.
Indicator two indicators that that's what we see other other market other industries in China in general in the economy.
In and trending towards but also we see it quite clearly in our in our pipeline our pipelines are strong accelerating in China.
To answer the question.
You did an ias in four parts.
Just a little more color on free cash flow.
Obviously much better than your initial expectations for Q1, we know it's.
One of your top focuses if youre not your top focus this year. So you didn't raise the guidance. You said is that just sort of prudent and what have you really change so far this year about collecting cash.
Yes.
Multi faces its question ill ask also David.
Two.
Chip and in certain stage, but I would say that when we look at Q1 is really a combination of.
Better better better.
Better better profit has certainly helped and the other.
R R.
Our payments advanced payments that that help.
We know that we have work to do on the trade working capital and.
And we are focusing on that for us that means.
Concentrating, especially on on inventory and.
For us industry inventory reduction and inventory optimization means.
Working intensely on supplier lead time reduction execution and everything that is a sigh of material.
Planning and material management production planning vendor management.
In general we are activating a lot of vendor managed inventory agreements all things that will go in the direction of shortening the cycle.
Michael Shortens our inventory go down.
I was talking about supply chain resiliency, that's a big element supply performance is a big element because we can reduce our.
Safety stock without impacting our service level et cetera. So it's it's a system, it's not array of actions and I think that touched upon the most the most important.
David anything anything else to add of course, it's not just inventory there are many faces.
Yes, I think the important thing Joe mentioned the beat in the first quarter was driven by higher profitability and the advanced payments. The advance payments were super focused on that but that's a matter of timing, we have to prove that execution over and over as we get through the year or it will just be accelerating cash we would have.
We're seeing later in the year into the first quarter. So we'll have a better update in in three months from now and <unk>.
At this point, we're still very comfortable with that $300 million to $400 million guide.
I appreciate all the color guys.
Thank you.
Thank you.
Our next question is from Nicole <unk> from Deutsche Bank Nicole. Please go ahead. Your line is open.
Yeah. Thanks, good morning, everyone.
Good morning, Nicole earnings call.
Maybe we could just start with the Americas, obviously like the biggest source of debate and really really impressive growth. This quarter can you just talk maybe about how you see that phasing throughout the rest of the year, because I expect that 60% plus organic growth probably isn't sustainable.
Yes.
I would tell you that we.
We have been able to over perform in.
In India Americas.
We were talking about if it was a 60% if you think about the.
The details Dave David gave us with with a 48% volumes. So I would think about almost 50% 50% volume is.
It's certainly a reflection of a much more.
Reliable supply chain.
Absolutely not perfect yet has ever seen but.
Very very importantly.
And the availability of capacity.
We did not have before so we have more capacity.
Now than we had in the past and certainly a lot more capacity to serve an industry that needs.
Capacity.
We in the Americas have done.
We have approached the improvements in America has many many angles.
Alignment talent leadership capacity processes.
Supply chain, a lot of price for Australia, but we continue to have a strong.
We continue to have a strong.
Backlog in the Americas.
Now competitiveness will be a little bit.
More challenging, but we continue to see growth for the rest for the rest of the year. So the strength of the first quarter was not a fluke.
Was it simply.
Okay, let's say simply a reflection of.
All the hard work and the investment.
And and.
And the transformation of our business and our culture to towards the strength that we did not.
Certainly have a year ago.
Got it so maybe it's fair to say that if you guys are making the claim that for the whole business. There is less seasonality this year and revenue can be kind of stable throughout the year versus what you reported in <unk> that comment may also apply to the Americas is that a fair characterization.
Very much so very much so.
Our business normal business, if the reps, which I think is kind of a pre COVID-19 normal.
It would've shown always kind of a.
Very steep second half or towards last quarter type of seasonality.
It will be much flatter.
Here.
Across the across the year and in particular for the Americans don't know, David if you want to add.
Nicole just to help with your modeling you have all the components to look at first half second half we definitely.
We see it.
You'll see a 250 $300 million increase in sales in the second half versus first half.
We do anticipate more uniformity.
Than in prior years, if you will get it from a regional perspective, most of the lift that youll see in the second half will come from APAC and.
The Americas and EMEA would be relatively uniform.
Okay. Thank you that's helpful and just as a follow up with all of the news about potential credit Crunch can you guys. Just talk about how concerned you are about a tighter financing environment potentially impacting project activity in the data center space. Thank you.
Sure.
Yes.
In this moment again.
The thing that we keep an eye on is really.
What.
Customers.
Customers customers tell us what we see in the pipeline.
It's hard to.
It's hard for us to speculate on.
On the consequences of the consequences.
<unk>.
It's hard to say what we what we think is the biggest portion of our market to say everything related to Hyperscale burden only co location.
And not to be extremely bothered by this at this stage.
Thanks, I'll pass it on.
Okay.
Thank you.
Next question is from Scott Davis from Melius research.
Please go ahead your line is open.
Hey, good morning, everybody.
David Atlanta in.
Mr Cody.
Good to see the stock price up but.
Hi.
Let's if you don't mind, Joe I'd Love to go back to AI and because this is also new to so many of us.
The.
The materiality of the comments as always hard to really get our arms around but.
When you think about the faster the heat map theres thermal management that faster.
The.
The fastest speed switches and all the stuff that might be necessary.
Are your orders just for.
A different mix of our higher end mix of new.
Or are you talking about retrofit.
And there is some demand there to go back and to existing data centers and upgrade.
Perhaps at a faster clip than you'd anticipated prior.
Hello first of all Scott and thank.
Thank you for the for the question I would say a quite.
Quite an insightful question.
It says that in this moment.
It's predominantly.
A new infrastructure conversation.
Yes.
But I.
Relative as a whole.
Extremely intrigued by the opportunities out there because there is a lot of.
Large data center stock of course.
And thinking that.
Thinking that.
All of the high density will be brand new into.
An existing data center infrastructure, which certainly happen, but it's slowly happening that I mentioned.
No.
We believe that the opportunity for retrofits.
We will be there.
Sure.
<unk>.
But.
One thing I'm sure.
Extremely well positioned there.
Because in the existing stock of data center globally, we have.
A big installed base.
So.
But then.
Current vendor can.
Help you transition to the new technology, but.
So again, if you think about our global presence of service.
<unk> knowledge and one thing is interesting.
Alluded to probably a little bit.
Too rapidly in when we're going through the slides.
Is that.
When I talk to the to our customers.
Rarely do they think binary in terms or at all.
Oh, so the new infrastructure at a very high density the more think about an infrastructure that needs to be.
Resilient over time and enable the transition of technology, though from Los Angeles.
This.
Mix and change of mix is very.
It's very intriguing is very interesting and very promising for them for us.
And Joe just to view.
Clear, yes I'm.
I'm sorry go ahead.
We're going to jump in there David or.
I'm, sorry, I must have bad connection, but let me.
Just.
I hate to.
Ask a question I think I know the answer and then maybe stupid, but.
When you think when you talk about <unk>.
And order that's coming in in a facility that.
It's to manage the power density.
Of AI are you talking about a larger.
Bill of goods.
Or with a higher <unk>.
Margin mix or kind of help us understand.
And what magnitude is it is it is it 10% more intensity of <unk>.
<unk> products as a double or is there some sort of way to think about Tam.
As it relates to what what may happen here in the <unk>.
Changes necessary to.
Comment on AI.
I would say the.
Investment is not marginal in terms of a portion of.
Infrastructure and I would say that.
The total accessible market is not certainly not shrinking certainly not shrinking if anything expanding because again you have to think system.
Not just.
Individual piece of technology.
More and more in the future than today, and we can think system.
Okay, Alright I appreciate it. Thank you guys best of luck to you.
Yes.
Yes.
Thank you.
Our next question is from Nigel Coe from Wolfe Research Nigel. Please go ahead. Your line is open.
Okay.
Thanks, Good morning, everyone.
So we've had a pretty decent conversational AI. So I wanted to switch to more prosaic enterprise market now.
We've seen some negative data points on enterprise it spending so just curious.
Recognizing the fact that your outlook hasn't changed by end market.
On balance <unk> seen them more cautious.
Enterprise customer out there, maybe just bring us up to speed in terms of where we are on the migration path from on Prem to cloud.
The migration plan from <unk>.
Hello, and good day, Nigel first of all that the migration.
<unk> is continuing but again has no trauma.
100% on Prem 100%.
Cloud I'd say that there are elements of stabilization clearly.
Migration continues.
We see the.
Enterprise business.
Growing our single digit in this moment.
More or less that's what we see also through our channel.
Panel business that by the way.
Isn't.
Good good to Hausa right now.
So and think about the enterprise business also.
Just data center, but we see also enterprise demand on the commercial and industrial part of the business.
As a consequence of.
Trends like like near shoring, So we see good good level of activity that.
Okay. So it doesn't sound like you've seen any deterioration there okay.
And then maybe just talk about the pipeline.
You took a very encourage a pipeline.
Especially in China in the second half of the year, but when you think about the visibility and your confidence.
In future backlog growth would you say that the Americas is still a place where you feel more confident in the outlook.
More confident than other places.
Or you're asking pipeline is stronger.
Where you see the most vibrant pipeline.
I would say that clearly.
The pipeline is different in different regions, reflecting the markets that we that we serve.
We see pipeline, particularly.
So <unk>, if you will in China, and in Asia, and we and we see good level of of our pipeline supporting our plans and the other in the other parts of.
All of Us in Europe and.
In EMEA and the Americas, So I would say that I am.
Positively encouraged I'm encouraged by the size of the pipeline on by the speed at which we are creating new pipeline.
Great. Okay. Thanks, Thank you Greg.
Okay.
Thank you before we take our next question I'd, just like to ask everyone to kindly ask one question. So we can allow everyone the chance to ask that.
Our next question is from Mark Delaney from Goldman Sachs. Martin. Please go ahead.
Yes, thanks for taking the question and congratulations on the good results.
One on the pricing outlook for 2023, so as you are now expecting a bit higher pricing.
And as of last quarter, and you're doing it with less volume.
<unk> seen a little bit more on where the pricing is coming from and what's leading to the higher price for 2033.
Yeah. Thanks, Mark So youre right, we took our full year pricing guide up from $2 75 to 300.
We hit the number in Q1, but there is always a little bit of art as it relates to defining what pricing is.
When we look at our backlog and run the numbers versus last year.
Theyre coming up higher and we continue to.
Be successful with our new pricing.
I think the incremental 25 came from a recalculation of the carryover, but the big thing with the pricing is it's not turning the other way so the.
The pricing in the market.
Certainly in the Americas and EMEA.
It's sticking and we're.
We continue to be out there and we think we're kind of at the right price point, but we will continue to push it a little bit.
Thank you.
Yes.
Thank you.
Our next question is from Jeff Sprague from that co management, Jeff. Please go ahead. Your line is open.
Hello, Good day, everyone.
Just wanted to say Hey, Jay.
If we're going to do one maybe just go their free cash flows.
David you pointed out maybe people were a little too nervous about your leverage but I just wanted to just get to the point of conversion.
Your your free cash flow the EBITDA is about 40% or so.
A lot of companies in my group kind of operate in the 60% range or so so how do we.
Kind of get that conversion relative to your EBITDA higher are there.
Anything in particular that need to happen.
Working capital is probably a big chunk of it but maybe you could bridge us to potential improvement in the out years on that metric.
Yes, we talked about this a little bit on the first quarter call.
Our long term goal of course every industrials get get to 100, that's very dependent upon growth because trade working capital is the biggest drag.
I think if you look at the metric.
Yes.
Based on 2020.
Three and you have to look at adjusted net income.
It's probably 75%.
The two biggest drags versus getting to a 100 is working capital and then also we're over investing this year with Capex. So our depreciation. It include software amortization is probably close to 90% $95 million, but we have $140 million of cap capex.
A lot of that which is supporting additional capacity so.
In the long run that past the stabilized just mathematically so that will probably close maybe a little less than half of that gap, but in the long run. Your point is absolutely right on it has to be worked.
With working capital and.
We've made some progress here in the first quarter and we project that that will continue to make.
Our progress over the rest of the year, but in the long run to hit that target, we're going to have to continue to optimize inventory and balance out.
Great. Thank you.
Yes.
Thank you.
Next question is from Amit <unk> from Evercore.
Please go ahead your line is open.
Thanks for taking my question.
I guess my question is really on the backlog side, the $4 8 billion backlog I'd love to understand how do you think that looks into year end I'm, just trying to get a sense of how much of the growth do you think this year is going to come from backlog conversion versus not and anything you would call out in terms of cancellations something would be really helpful. And then separately I'm, hoping you could talk a little bit on the AI dynamic.
Lot of the Hyperscale companies I think at this point are debating if they want to do 100% immersion liquid cooling or hybrid cooling.
Do you think your value proposition is as attractive.
In the emerging liquid cooling market exits on the hybrid side. Thank you.
Well in many questions in one.
Thank you take care of it so first of all backlog.
Clearly for $8 million is.
Good number as we were saying at the beginning but let's go back to February when we were saying we are entering 2022.
With more than 70% backlog coverage and Thats.
Not normal quote unquote.
We still believe that that is the case I mean, if you go back to whatever the normal would be.
Would be probably around 50%.
Or below 50% backlog.
Backlog coverage.
So.
I'd like to think in terms of a percent not necessarily absolute number so probably when we go into 2024, we will be more on that.
We will be most likely we will be in a lower coverage down to 70%. We saw were sold last year.
Now it's delivery premature really to say how everything will.
Will pan out but.
<unk>.
But think in terms of a lower backlog coverage.
Going forward again, that's normal we we talked about lead times, we talked about the reduction of lead time and with the.
That reduction of lead time, and the levels of backlog coverage that we had the beginning of 2023 are incompatible so simply the industry will adjust again clearly a lot of all of the revenue trying to 'twenty three it comes from.
Backlog conversion, but thats just just in the in the math in the numbers.
You were talking about cancellations nothing out of the ordinary and let me talk about.
Cooling technology.
I was saying earlier it will be a hybrid world from cooling technology standpoint, and the degree of the mix between traditional and liquid will probably change overtime very very small percent of liquids at the beginning and then increasing.
In the next years.
I would say certainly not months.
<unk>.
You were talking about a mesh and cooling motion Cooney is just one of the liquid cooling technologies.
There are a lot of technologies that in this moment.
<unk>.
In the technology landscape that is not mature yet and.
We are working with some of the biggest <unk> and some of the biggest.
Chip manufacturers to really make sure that.
We align our technology to their evolution and then we make sure that we enable.
They are scaling their solutions out in the market.
Perfect. Thank you.
Thank you.
Next question is from Lance Vitanza from TD Cowen.
Please go ahead your line is open.
Thanks, guys.
Nice job on the quarter. My question is with respect to Eni as the supply chain has continued to improve as eni drag still or has it become a tailwind in the first quarter results and how do you see that playing out and then related to that strategically are there are there any other potential acquisitions out.
They're perhaps tuck ins that would allow virtu to further improve the scope of its product offering and its competitive positioning versus some of the other larger players.
We are happy we are here.
<unk> with <unk>.
With the progress.
On the Eni side.
All of the business.
I think it was February when I was talking about.
Making sure that we accelerate integration we have taken steps in that direction. In particular, we are embedding the American part of the Eni organic.
In our organization.
In the.
Americas.
<unk> business also operationally so we're satisfied.
With the progress with the progress that when it comes to.
Portfolio management in general.
It would be premature, but but be sure rest assure that this is this something we keep a keen eye on.
And it's part of <unk>.
Our management cadence and processes, we certainly.
Alright.
We are constantly looking at opportunities out there.
They are mature they are not mature, but thats part of what we do.
Thank you.
Sure.
Thank you.
Our next question is from Patrick Baumann from JP Morgan Patrick. Please go ahead. Your line is open.
Alright, Thanks, David maybe a quick one for you.
The free cash flow in the quarter I think you said there was an advance payment benefit maybe thats reflected as deferred revenue I don't know in the cash flow statement.
It sounds like this could be timing related based on some of your comments that would be helpful to get a sense on.
Second quarter second quarter second quarter expectations for free cash flow.
Not something that you gave in the slides, but you typically give kind of the forward quarter outlook.
Yeah, So first of all.
Advance payment could be timing, if we do not execute and we have every intention and plan to execute so you're absolutely right in the balance sheet.
Hits deferred revenue.
And we have programs in place, notably in Americas to continue that program with larger orders and it's something that.
We are embedded in the process. So we're very optimistic that that will continue.
But.
To embed that into the guidance, we're going to we're going to wait for three three.
<unk> three months another quarter to kind.
Kind of reassess that.
As it relates to.
Individual quarterly guidance for free cash flow I think historically, we have not provided that we did last year.
We are not doing that just because of the lumpiness in some of the variability around free cash flow for individual quarters. As we mentioned in the past, we have $40 million to $50 million check runs that could go out one day versus the next.
And swing a quarter so.
I wouldn't read much into that we're still very confident with the free cash flow program. We do in anticipated to sequentially increase as we move through the year and we will reassess that guidance as we get to the end of the second quarter.
Okay. Thank you.
Yes.
Thank you. This is all the questions. We have time for today, so I'd like to hand back to Giovanni <unk> for any closing remarks.
Well, thank you very much and thank you for.
Your questions.
We are starting off the year with a strong quarter.
We certainly intend to continue to build on that momentum as we.
Make our way through 2023.
So we definitely look forward.
To discussing our progress with you I appreciate your support and for guests looking forward to seeing you on the 29th of November so with that thank you very much.
Thank you everyone for joining today's call you may now disconnect your lines and have a lovely day.