All right, I think we'll go ahead and get started. So good morning, and welcome to Vertiv's 2023 Investor Conference. We have a full house here today, as well as many webcast participants, so welcome again to everybody. We are thrilled to be hosting the conference today at the NYSE. We've had a long-standing partnership with them, and in fact, the NYSE is powered and cooled by Vertiv equipment, so very proud to have them as a long-standing, as a long-standing customer. A few quick formalities to cover. I would like to point out, and I better flip to that slide. Yep. I would like to point out that during the course of this event, we will make forward-looking statements regarding future events, including the future financial and operating performance of Vertiv.
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 presentation, 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 our conference, we will also present both GAAP and non-GAAP financial measures. Our GAAP results and GAAP to non-GAAP reconciliations can be found in today's press release and in the investor presentation found on our website at investors.vertiv.com. With that covered, let's look at the agenda for the day.
We have a lot of exciting topics to cover, including a panel discussion with our regional leaders, as well as three Q&A sessions, so we can answer your questions throughout the day. On the next slide, you will see the presenters for today. You will be hearing from leaders across our organization and seeing the depth of talent on our team. Additionally, there are Vertiv board members and executive leadership members in the room today. They will also have the white name badges, so easily identifiable. Just a few housekeeping points. So in terms of fire safety, there is a fire exit if you go out the doors here. There's a door on each side, and almost kind of behind the screen, there's a fire exit behind me, as well as near the registration desk that you were at this morning.
Additionally, we will have a lunch break scheduled today from 12:00 to 12:45 P.M. Eastern Time. Webcast participants, please stay connected to the webcast during that time. So it's fine to keep the webcast continuing to run. We will start back promptly at 12:45 P.M. to kick off the afternoon sessions, as well. For in-person attendees, we have a tech showcase, which you walked through this morning, that will be available for you to explore during lunchtime as well as after the event today. Following the presentations today, we will have light refreshments, and you'll have the opportunity to mingle with our executive team. The first presenter of the day is our CEO, Giordano Albertazzi, who will be taking the stage momentarily after a short video. With that, it is my great pleasure to welcome you all to Vertiv's 2023 Investor Conference.
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All right. Good, good morning. Good morning, everybody. Thanks for being with us today. It's always nice to start a day with some good news, is it not? So hopefully, you appreciate our new... last news this morning. For me, today is taking you through our portfolio, our model, our value plan, and making sure that you also familiarize with the leadership team today, and share our vision of the future. Exciting times for the industry, exciting times for Vertiv. We enable the critical digital world, a world that is accelerating, and we are very, very well positioned to power and cool, enable that acceleration across all the segments we serve. But let's start with a quick look at Vertiv today.
$6.9 billion guided revenue, 22 very focused factories on critical infrastructure, an amazingly large and competent service organization, the strongest in our space. A portfolio that is, as of now, 75% on data centers. And if we look at that 75%, really think about that 75% as half enterprise and a distributed IT, and half hyperscale colocation, and a geography with certainly a strong Americas business as Americas is accelerating fast lately. But it's also Vertiv very strong players with very clear leadership in specific parts of the market, like thermal, like UPS, like power distribution. We will talk more. We have a uniquely strong and broad portfolio. We will talk about our portfolio today.
We wanna make sure that, we share with you our vision, not only of where Vertiv will be, but also where the industry will be. We know this industry very well. We know the data center industry very well. We work with a lot of the customers and, partners in the industry to drive the industry in the, in the, in the direction, of the, of the future. And we wanna make sure that we're all on the same page with that. But our story goes back to many decades, and in these decades, we have developed a depth of knowledge of the, of the, of the sectors we serve, of the industries we serve, that is unparalleled.
But more important yet, is our future, is how we are obsessively focused on designing the future for the company, for the market, from a technology and from a business standpoint. We leverage competitive advantages that are clear and that our customers recognize. Our application expertise, our customer collaboration. You will hear us talk about that quite extensively. The most extensive portfolio, the continual innovation, and innovation is something that we have accelerated lately. We have superior, recognized superior quality and reliability. We are global. We're truly global. We can scale with the industry, and that's something that the customers and the partners recognize. Not all out there can state the same, can make the same statement. And again, a leading service, absolutely leading service organization.
But before we look into the future, I think it's important to reflect a moment on our recent past, and certainly there's some work to do back end of 2021. Work items back end of 2021 and 2022. Well, we worked on those items, and we have reinforced our foundation. We have worked across the board, the leadership team, more intense focus on strengthening our operating system, and I'll elaborate on that further. Focus on resiliency of the supply chain, internally of our factories. Systems maturity, digitization of our business enhanced a lot and stabilized a lot and more to come. Lean processes, focus, Vertiv Operating System, but also from an efficiency and driving and turning that efficiency into margin, into profit.
Certainly, much bigger focus and further strength in our ability to drive favorable price cost, a favorable price cost equation in 2023 and going further in the future. So a very solid foundation, and from this foundation, we look forward. But this foundation has certainly enabled the good news that I was referring to this morning or a very recent, but in general, a strong 2023, but also a very nice trajectory in 2022. Look at that trajectory as it continues, that we evolved from Q1 2022 all the way to delivering a strong 2023. The 22% organic growth, quite impressive. More than 700 basis points of margin expansion. Certainly, totally different ballgame when it comes to cash flow.
But the good news is that there is more opportunity out there. You know, there is more we can do as a company. We can be stronger, and we will be stronger, but also we operate in a market that is favorable to the story, as you know. So with a stronger balance sheet, with a stronger P&L, we certainly have the right foundation to continue our journey forward. So our journey forward is, of course, very much dependent on the strength of the leadership team. We were very deliberate today in making sure that the majority of the people that you see in this picture are in the room.
From many you will hear today, almost all you will have a chance to meet in person, as we want you to be exposed to them and them exposed to you. We have common attributes, you know, a sense of urgency, focus and obsession about execution, but at the same time, an ability to define the vision, the strategy, and then the ability to deploy that strategy. All characteristics, all attributes that are common to the team. And changes we made and the majority of changes you are aware of. So if I look back, and I look back a year ago, exactly, I was still in transition as a CEO.
One of the very first thing I did, together with the leadership team, is making sure that we have a very clear North Star that we can use over the years for the entire company to orient, for the culture of the company to realign, to evolve. We came up with five strategic priorities: financial strength, customer focus, innovation, operational excellence, and all driving and fostering a high-performance culture. Generic, you may say. Well, they are generic by design. This is not necessarily a strategy, this is the type of culture that we are driving, and we are being relentless in that- in driving that, that culture. Me, in the first place, accompanied by set of behaviors and core values and principles that we drive across the organization. This is far-reaching. This is a multi-year.
This is the type of DNA we want to build across the organization. Clearly, as an effect of that, and much else, so the strength and foundation and all the good work that we have done this year and the last 12, 18 months, you know, we have been lately rising the full year guidance, and you have, I'm sure, seen the news this morning. You know, if you compare the gray and the orange bars, a year-on-year improvements are quite, quite meaningful. We will go through them during the course of the day. Then let's look at 2024, albeit very preliminarily, but wanna make sure that we give you a sense of what we think when we think 2024.
We're thinking about an organic growth between 8%-10%, an adjusted operating margin of 16.5-16.9 range, and continues to be on the upper end of the cash flow conversion. And that, of course, will translate very nicely in a further reduction of our net leverage. That will be below two, we think between one and two. Hopefully, there was no water in that glass. So, I got distracted. Damn it! So, that's the range we're driving for, and again, finishing 2023 strong to accelerate into 2024. Let's look even further. And as we look even further, I think it's good to reflect, nothing dramatically new, guys, but reflect a little longer on what are the trends in the industry.
Certainly, an ongoing digitization, an ongoing transition, technology evolution. We know that the market, the data center and that data traffic is growing. That growth has been, is being compounded and accelerated further, of course, by the AI acceleration we are all aware of. But again, let's not think about the recent or last 12 months AI acceleration as something isolated. It compounds a trend that was already there in the market. Just like the change of habits, if you will, the social implication and the dynamics in the society that come from the broader digitization are in place, all elements or secular trends that point in the direction that we like. We definitely have more complex geopolitics to deal with than we had a few years ago, and that ain't gonna change.
Unfortunately, the recent events further corroborate my statement. So, the geopolitics, of course, are more complexity in terms of supply chain resilience, but also we can look at that trend as something that can benefit Vertiv. Data sovereignty, nearshoring, digital infrastructure, more digital infrastructure being built. So geopolitics can work both ways, and we think that there is a valuable part of it to our plans. Sustainability and energy transition. Certainly, something is happening. Everything is becoming electric. We have a very meaningful power management portfolio, the entire powertrain. You will, we will go through it.
But there is also an element of energy transition at the data center level, where in the growth trajectory of the industry, most likely, and we see that happening already now, the energy power availability can be a constraint, and that opens the door, opens an opportunity for us that we will elaborate upon. So energy transition as an opportunity for Vertiv to access adjacent part of the data center market. So all said, we see data growth acceleration, we see critical applications become more central to everything in broader economy, and and we see the energy and energy transition. Favorable, favorable secular trend. But let's now concentrate the focus, and let's talk specifically about the data center industry.
Not easy to call exactly what it will look like, but we have a model, and we want to share with you our model today. And our model is a model that accounts for all the information that is out there, our conversations with our customers, our conversations with the key players in the industry, that put together the data growth information, the expected growth in the GPU penetration in the market, the GPU market CAGR, and how that will influence the data center market. Data center IT expectations, incremental power forecasts. Put it all together, together with the incremental, let's say, third-party plans, and you will see the re-- the orange bar in the middle being pulled to our s orry, it's there. To our right.
At the same time, we want to be somewhat prudent because we know that the industry, the data center industry, this is all data center. It's not just hyperscale and colo, it's all data center. We know also that the industry is constrained. There are constraints in terms of power availability. You know, building data centers is not easy. They're big. They require a lot of field activity, and there will be a constraint, and there is already today a constraint in the ability to build at scale. I mean, there are phenomenal players in the market. So these phenomenal players are figuring things out, but still there is a constraint. And, of course, we are addressing that constraint with our modular solutions that you will hear about and I'll mention later. But constraints are there.
The other factors that we should not always discount is that. Now, this is a very early stage of a technology curve, and getting it exactly right is not necessarily easy. And, many in the industry have come to the same conclusions, so just want to make sure that we are not all telling the same story, there's no confirmation bias. But we think that net-net, the impact is there, the growth is there, the total data center market with the injection and the compounding of AI will grow at 9%-12%, so 300-400 basis points over and above the 7%, more or less, that you heard me talk about in the various earnings calls, recently. And mind you, this includes enterprise, this includes i.e., distributed IT.
If we think only hyperscale and colo, we think and we envisage a 14%-17% growth for that part of the market. And let me go there and talk specifically, talk more generally about all the the entire market that we serve. So, you can see here the total value data center, 9%-12% of $33 billion, more or less, 50/50, enterprise, distributed IT and hyperscale colo, but with the growth rate in the latter that outpaces dramatically the the colo the colo cloud. As I was saying, this balance between, colo and, colo cloud, hyperscale and enterprise, pretty much reflects our sales expected in 2020, in 2023. But the growth rates, of course, are different.
Communication networks, we continue to expect a soft for the years to come. If good news come, we will be happy. And commercial industrial as an opportunity, also an opportunity for penetration for us. Now, when it comes to the hyperscale and colo part of the market, you know, Vertiv's strengths exactly play to that market. Our ability to customize at scale, our relationship with some of the key players, and you will hear from some today. Our global service and ability to scale are exactly what this part of the industry, the part of the industry that is growing the fastest, needs.
So we think we are very, very well positioned to serve this industry from the giga campuses and, you know, giga campus is probably a new terminology, but we see scale that is absolutely unprecedented all the way to the edge, and the distributed edge, very, very small applications. What the industry will exactly do, you know, time will tell. But we are ready. We are ready not only for this scenario, but other scenarios, maybe even more optimistic scenarios.
One thing that we do obsessively at Vertiv, at the leadership level, at my level, is to on a weekly basis look at the market, look at the leading indicators, making sure that we have no latency between the moment in which someone sees something in the market, someone talks to a customer, and the moment a decision is made at my level or my colleagues' levels in this room. So that if the market will be faster than this, we are ready for a faster market. But this is the model, this is the growth that we incorporate in the model. And that model tells us that if we think out five years, our growth rate will be 8%-11%, so an above-market growth. Accelerating innovations continue to strengthen our data center leadership.
This model tells us that margin expansion will take us to the 20+ range in the 2026-2028 window. The ingredients are the operational leverage on the fixed cost, the continuous improvement on the price-cost equation, certainly pervasive implementation of Vertiv Operating System, and productivity, productivity, productivity across the board. Profitability, together with a discipline, but also very balanced CapEx management and improving working capital, will continue to generate very favorable, close to 100% cash flow conversion. We are delivering the margins, the strength and the ability to continue to grow and to outgrow the market. That's our expectation out there.
So if we think in terms of what are the pillars, what are the vectors, what are the vectors of this, of this growth? Then we think it along six building blocks, six vectors. One is certainly the leadership in the market and the continued growth in the market. We explained that. But it's about our ability to innovate, and continue to reinforce our portfolio, and continue to leverage our competitive advantages. I will go two to six individually in the next slide. Very, very important is our long-standing customer relationship and the relationship that we have with the other key players in the industry ecosystem, and specifically, chip manufacturers.
You and I know, you by now know that I am fixated, I'd say obsessively fixated, with operational excellence and execution. So, a roadmap to operational excellence is something that I personally, together with Anders and with Paul and the larger team, we work on day in, day out. And our operational excellence is that one of those things that you get to asymptotically, and that asymptote, you keep moving up. So don't think that we will ever get there, but the mindset is continue to improve and continue to raise the bar, and the company is, is learning that.
Margin expansion, of course, very important element, and with that, generating the cash flow that gives us the optionality for the capital allocation agility, some of which you, I'm sure, have seen the early signs in the press release this morning. Let me talk about our portfolio very briefly, because we have on stage people that know much more than I do about our portfolio. But I want to make sure that out of this room, when you leave this room or this building, we're all on the same page when it comes to our portfolio. So we think in terms of blocks here. One is the power management block, the thermal management block, the IT system block. Oh, I'm going the wrong way. I'm following this screen.
The IT systems block an infrastructure solution that embraces them all. Let me talk about the infrastructure solution for a moment. That's the modular, prefabricated. I was saying that one of the limiting factor for the industry will be the ability to build, not the ability of the Vertivs of the world to supply. Well, certainly not true for Vertiv, because we have capacity, as you heard me say in other occasions. But I would say the ability to make things happen on site. We've been in the infrastructure solutions and modular space for probably best part of two decades, and we are a world leader. We're one of the top players globally. And if we know that the majority, if not the
In almost entirety of the customer base is thinking or using today modular. And that's the way to build faster without being as dependent on field capabilities and infrastructure that is becoming more complex. Think about high density. You'll see some picture. You probably have seen that at the kiosks before. It's becoming so dense and complex, that making that infrastructure come together on site pretty daunting. So if we can move that in factory as much as possible, faster, more quality, more cost efficiency, and more time for us. Just like everyone's happy, our customers gain a lot, we certainly extend our perimeter.
But when we talk about our portfolio, we like to talk in terms of powertrain, so the end-to-end thermal chain, the end-to-end, and of course, IT systems, everything that is that is white space. So let's keep going and go through the various elements here. For a second here, this is the total data center architecture. This is an illustration of a high density. I will not go through the everything we have here for in the interest of time. So but you can tell from the picture how broad our portfolio is. And high density also enables adjacent business opportunities, that what you see in the what is bottom right side bottom right side of of this left sorry left side of this picture.
So, and it's, you know, the power management outside of the traditional space in which we operate, because we need to solve for our customers their power availability problem. So powertrain, from grid to chip. The acquisition of E&I was phenomenal from a strategic standpoint. A great team, great technology. Phil is with us today. You know, wonderful working with the team, and Phil is fantastic, and a great member of the leadership team. But we have an end-to-end solution. We are number one in the UPS space. We have capabilities to customize a scale that are pretty strong in the industry. So full portfolio, AI, yes, is making the whole powertrain more critical in terms of coordination.
AI means more net installed power, and we like it a lot. So from grid to chip is the entire chain. And similarly, it is the entire power chain that matters. The industry has been focused a lot lately on this part, as if this part could do the trick. This part doesn't do the trick. It's the entire chain that makes it happen. So think system, end-to-end. Vertiv is the leader in data center thermal management. Outdoor heat rejections, be them chillers, be them air handling units, John will elaborate on that. Room and the and the absolutely complete rack-level, service-level portfolio. But think in terms of the rack level as additive. Why additive?
Because right now, our business is this one, and the fact that we have high density has added a piece to the whole story without subtracting the other piece. If we think long-term, we're really thinking this moment around a total thermal market, in which about 20% will be the high-density liquid cooling stuff. So chillers, so air handlers, so room technology, very important. So let me move on. When we think in terms of IT systems, we think point products, of course, and the point products are single-phase UPS, racks, et cetera, are certainly our portfolio when we go to market through the channel. And we're pleased with the performance of that part of the business. It is accelerating. We are successful. We are taking market share.
But then there is an opportunity of integration of, at rack level of, or row or aisle level, and it's what you see here on the, on the, on the left. So either way, you can have this part of the portfolio, inside the white space of a data center or very distributed at the edge, at the edge, where we can enable AI through, systems that we can sell either directly or through the channel. So we see this part of the business, very synergistic with the, with the rest. We see the channel business and the white space level integration, very synergistic from a go-to-market and from a technology, standpoint. So, service. You know, we like to say that our technology scales, that we, are, we customize at scale.
All that means nothing without a service organization that can translate that into making it happen. We like to say that service is where scalability meets the road, and that's actually literally true. So, our service business is the biggest in our industry, with more than 3,400 engineers globally. And think about how more complex a high-density system is from what the traditional is, and the importance of digital services, remote monitoring, or condition-based management relative to what we have had historically.
So we see the service opportunity as extremely important to our value model, but also as an indispensable ingredient to support our customers' expansion. Not all competitors can, dare I say, boast the same type of credibility. We've been talking a lot about portfolio, innovation, technology, but innovation is absolutely central to what, to what we do. It's a discipline, it's fast innovation. It's an innovation where we have been increasing our R&D and engineering spend over the years, and where we plan to outpace our top-line growth, as you can see here.
Here are just some examples that you hear from my colleagues of things that are new to market, that comes not only from our engineering, but also come from the cooperation with the customers, that comes from the expansion, that kind of a target and expansion of further our TAM as the battery energy storage systems, or that take advantage of the fact that our portfolio, switchgear, UPS, et cetera, is now larger, and we can just combine everything, compact, delivering better footprint and faster installation time and a better coordination across all components. Again, enabled by what we have by the acquisition of ENI, among other things. Also, another important factor of success in long term of our model is the relationship in the industry.
The relationship in the industry is multiplefold, but I want to focus today on the customer collaboration. And we have very intense collaboration, especially with co-locators and with the hyperscalers now more than ever, because of the very dynamic nature of the technology we all face. And you know, an example is our year-on-year expected growth of in the hyperscale and colocation space that will be expected around 40%-45% year-on-year revenue. So it's happening. And it's you know, balancing certainly accelerating more than the growth that you have seen when we were talking about the dynamics of the market. We're very proud of that. But also, as important is the relationship with the likes of NVIDIA.
or Intel, because it's there, especially now that the technology is changing so dramatic, that, you know, we create with the future. We design with our partners the future, the future of the industry. So, the industry relies on us for the future growth, to design, to design the future with them. I wanna go back to the operational excellence. Strengthening the foundation, as we said, happy about what we have done, pleased about what we've done. Not satisfied, we'll never be satisfied. We will always strive for more. And it's not just about what we have achieved today, but making sure that we excel in a very dynamic world. In terms of capacity, having the right capacity in place, I briefly described our decision-making model and mechanism, and we stay focused on that.
We wanna make sure that wherever the market goes, we are ahead of that market. But also, making sure that we have the flexibility and geographic presence that our customers, that our customers need. Resiliency. The resiliency was, in the past, making sure that all the critical components were dual sourced. Example, resiliency now means that and much more in terms of do you have a global supply chain, be it vertically integrated or not, that is gonna be resilient to the various perturbations that the world might have? Example. So certainly, that bar has been raised by us, but also that by the circumstances. And then productivity, productivity, productivity. So, talking about productivity, let me go directly and talk about our operating system.
I am absolutely kind of a very vigorous sponsor of our adoption of Vertiv Operating System. That started back in 2020 when we went public. Dave was, of course, an amazing sponsor, and continues to be of our VOS initiative, but I would say it's no more an initiative. It is the way we think and look at the business. Don't think for a moment that my message is we are there, and we're done. Now, we started at shop floor level, then we started to look at some end-to-end process, but we are not there in terms of full maturity of the operating system. But we're moving fast, and this is pervasive across the organization. I really like simple things.
I like simple things, and I really like to think in terms of lean, continuous improvement across every part of the organization. I like to think in terms of a very rigorous operating cadence, be it the cadence I have with my team, be it the cadence that the shop floor workers have every morning to go through their tier board meetings. So this is something that we are accelerating. This is a flywheel that is spinning but can spin much faster going forward. And it's best practice dissemination. We are starting in 2024 the implementation and the execution at scale of a VOS. So a lot of work to do. I'm very passionate about that. The entire organization is very passionate about that. A lot of drivers for productivity and efficiency.
Our growth trajectory is certainly very much reliant on the operational leverage that comes from making sure that our fixed cost structure is leveraged vigorously. Commercial execution excellence, translated into ability to price the value that we deliver to our customers, and you heard me talk about our pricing muscles being much more stronger than it has ever been. It's been reinforcing it further, and certainly, looking out, we continue to see a strengthening price-cost equation, and then manufacturing operations productivity and procurement and procurement productivity. We said, consequence of all this, combined with a lot of focus on working capital, and many in the ELT or the leadership team here are directly involved in the initiatives to drive our working capital improvements.
I am personally, with, with Anders, very involved and, and with David, very involved into the inventory part of that, of that equation. Also leveraging my, previous experience in, in operations. I love it, by the way. So driving that discipline, that will continue to strengthen our, our position from a cashflow conversion. That enables us to make kind of, dividend moves that, that you have seen, but even more importantly, go down the share repurchase, path that we, have, for example, announced this, this morning, that is, that is new to Vertiv. With, with, the board having approved $3 billion share repurchases over the next four years.
Anyway, we have additional cash and the agility and the wiggle room to go down the path of acquisitions or going down the path of redistribution, depending on what the situation will be. When we think, when we think M&A, we think about a an agile and yet very disciplined process. Okay, I spent, I already used my kind of, "I hope it was not full," "the glass was not full" joke, so I'm done. So, bolt-on acquisitions, that's the type of acquisition strategy we're, we're thinking about. We do not see. We do not think about something that will change the profile of the company. I think we were very, very happy with the decision to buy ENI, and that was a game changer.
This moment, we're thinking about acquisition around technology, go-to market, adjacencies. Of course, if something very meaningful will show up at the horizon, we will have the muscle to consider that. But think now our crosshairs on bolt-on opportunities. Very interesting for us are the technologies that are early stage. And what we do typically is partner, early-stage technology partner and go organic at the same time so that we can have you know balance the various odds and then decide what route to take. But clear criteria in terms of how we select, and clear criteria in terms of what it needs to mean from a financial standpoint. Basically, it needs to reinforce the value equation that you have seen earlier.
Importantly, we have, I think, learned a lot from the ENI acquisitions and strengthened our acquisition playbook. If we go there just a moment, not only has it strengthened our overall value proposition and portfolio, it has delivered the sales synergies that we were expecting and beyond. But it's also, as we have accelerated the decision-making and the implementation, it has started to deliver on the acquisition plan, and 2023, we will be on the acquisition plan, and we will beat the plan in 2024. We are adding capacity. We're definitely adding capacity. So, the world is changing, as we were saying. I wanna, before I get offstage, I wanna just remind everyone about the six pillars of our value proposition. One is leadership in a strong and accelerating market.
The market is going in the right direction. We are a leading innovator, and the leading innovation is particularly important, particularly important now that the big AI transition is happening. Oh, by the way, speaking about AI, you know, one of the questions I got more frequently when we, when we are having the various, earnings calls and questions, et cetera, is: What portion of your order book is AI-related? And I always answer, say, "Wait a moment. Hard to tell." For two reasons: There is a category of products, the cooling stuff that you see out there, some power distri- that are uniquely for AI. We can tell you more or less where we are with that. There is a whole host of technologies.
You saw the big picture with that, you know, representation of a high-density data center that, you know, the chillers, the air handlers, the switchgears, the UPS, they could go in a high density or a normal data center. We do not know necessarily. Not always do our customers tell us. Sometimes we do, sometimes we know. But so we said, "Okay, I think that being so generic, it might not really cut it." So I wanna go back to that. So at this moment, as we stand here today, our the volume of business, the AI volume of business, purely 100% unequivocally dedicated to AI applications, that part of portfolio kind of hit the $100 million mark.
But we estimate that everything that is more generic, and that is an estimation, for the reasons that I explained, is north of $250 million. So that is moving. I think that is consistent with the acceleration on the AI, sorry, on the colo and hyperscale that I was mentioning. But let's continue. So clear roadmap to operational excellence, margin expansion, and optionality in our capital allocations, ability to drive our capital allocation strategy that we did not have before. And I did not forget to mention box number three. No innovation happens in isolation.
That's why working with our customers is so important. But in the last few years, several years, working with customers is absolutely not sufficient. Working with the key chip manufacturers is key to a measure that was inconceivable in the past. So as an example, and a very important example, working with NVIDIA is absolutely important for us and has been a source of a lot of the technology development that you start to see outside here. So but, nobody better than NVIDIA themselves, and Jensen can tell the story. So here we go.
The world is transitioning from general purpose to accelerated in AI computing. Compute density, and therefore, power density, are increasing incredibly. Every aspect, from computing, networking, and software, are all groundbreaking computer science. The data center infrastructure is also incredibly complex. The most advanced cooling and power technologies are essential. Vertiv is the world leader. We've enjoyed a great partnership with Vertiv for many years, and our collaboration is growing in leaps and bounds. As every industry and region invest in building AI factories at enormous scales, our partnership with Vertiv is more important than ever. I want to congratulate Giordano and Vertiv on an extraordinary year. This is just the beginning of great things to come as we partner to put AI in the reach of every company and industry.
So fantastic, fantastic, partner for all of us, and it's great working with them. So this can't transition better to the technology part of our session today. So I invite on stage Stephen Liang. The stage is yours and the clicker. Thanks.
Thank you very much. So I'm very happy to be here this morning. Welcome, everyone. I'm gonna talk to you a little bit about what we're doing in terms of technology, in terms of collaboration. And with me today, as part of our presentation, are some key stakeholders in our company. Kyle Keeper, who's the senior vice president for our power business, AC power business. John Niemann, senior vice president of our thermal business, and Scott Armul, who's the senior vice president for Global Strategic Accounts. As you heard from Jensen, we've been doing a lot of work in the technology space, and I think key to understanding why they work with a company like Vertiv is because of our deep market and technology experience. We are a deep group of people. I have been in the company 30 years.
Many folks are like us in this industry, who have been focused on helping our customers operate seamlessly with regard to power and cooling. And so these knowledge base is not a shallow few people. It's ingrained deep into the organization, from our application engineering to product development to our service engineers. We are collaborating with customers around the world, and that makes us unique in our industry. I'm very happy to kind of say we are an engineering company full of nerds who work well with the other nerds at our customer base, 'cause that's what is really happening, right? I've gone into customers, basically, the funniest one was one of our customers. I sat down, and we exchanged name cards. This was a couple of years ago, when name cards were still being used.
Anybody with a title sales was excused, had to leave the premises, right? That's the kind of customers that we deal with, okay? And there were still enough of us left to have a good conversation. Okay, and so we are innovation-driven. I'm very happy to be here today, especially because since we listed the company under the leadership of our Chairman and our CEO, we've increased the intensity of our spend in innovation, in technology. And that's created a lot of energy in our organization, up and down, about creating and using innovation and using the latest technologies on behalf of our customers. And with that, we are expanding our portfolio very rapidly, and you're seeing some of the products out there. And we have a lot more because some of our stuff is huge and will never fit in this building.
And they keep getting bigger, is what I noticed. So the bulk of our business, the largest part, as Giordano has pointed out, is in data centers. Data centers, we kind of look at today in two pieces in terms of technology. Traditional data centers, which has, even before this AI activity, was growing pretty fast. We see a lot more data being created, and now it's being further accelerated by AI, right? And AI is very interesting because I think the current phase of AI you're talking about is learning models, large learning models. Everyone's familiar with that conversation. Learning models need data.... Right? So you need even more data.
What we're also seeing is that as people try to differentiate themselves in the AI world, they want to own their data a lot more and not put the data into the, into the what we call the public cloud, right? So the general feeling from us talking with our peers and with other experts in the industry is that both the basic data center, the traditional data center, is gonna explode even further, and this AI is just gonna be compounding that. What it does is provide us a large growth platform, but it also makes the environment that our customers work in much more complex, because that balance between traditional and AI is always gonna be there, and it's gonna flow back and forth.
Most of the data centers today are in place, are traditional, and so the initial portion of it, we're gonna see AI flowing into traditional data centers. It's a big opportunity for us 'cause we're the type of company who can work with customers to tailor solutions for their existing data centers. It's very important. Second piece of our business is really telco networks. We've always been very tight with the telecommunication operators as well as the equipment manufacturers. That business is a little bit cyclical in nature. You know, 3G, 4G, 5G is rolled out, a little tapering off a little bit. But what we see now is with all this data, all these data centers need to communicate at high speed. So the backhaul or the backbone of the data center network, which is the fiber and everything else, large growth in that section, right?
Then governments are supporting the movement of fixed or fiber to more rural locations to make it more equal in terms of access for high speed and compute. And finally, what we see in the, what we call the C&I area, is the general industry is digitizing a lot more. You're using data to operate, whether it be hospitals, factories, the bar down the street, right? These things are happening a lot more, and they are automated. There's more robots, there's more automation. These things cannot be down, and so they're having to deploy solutions that we have in place already to essentially move support services. We're doing that with hospitals, warehouses, and things like that. I'll go into a little more detail.
Like I said, data center, traffic, growth, AI, complexity, all of it's happening right now, right? Our organization is very well set to work with them. It, it is... As someone was talking to me earlier out here, nothing is set in stone right now. Things are in flux right now, and things in flux play well to our organization. The nerds work well with the nerds to understand how to deploy these technologies, so we can put the NVIDIA chips out there at scale. A very important part is at scale. We work with a lot of small companies that bring technologies to us.
We have large customers who want to use some of these technologies, but they wanna do it through Vertiv because we have the scale, the service, the 3,500 service engineers that, Giordano was talking about, that we're growing, have the expertise to be able to roll that out. And that's one of the reasons why NVIDIA is very interested in working with us. And then, like I said, complexity, complexity is difficult for the industry. Complexity is good for us. It plays well with our DNA. Communications networks, we see cycles in those things. A little bit down, it'll be coming back as usual. And what we do see is a lot of convergence.
So the IT solutions sector of equipment and solutions for us play well with the idea of having the edge of the cloud moving to remote locations, and that is done through the telco operators, typically. And on the C&I, simple things, those of you who go to hospitals, maybe use an MRI machine or a CT machine, those things oftentimes require backup power or are fairly clean or controlled operating environments. Those are the sectors we are in. Manufacturing, the production floor, automotive type factories with a lot of automation, and more and more automation and more and more data in how they manage the factories. Those are all good places for us to do growth.
My best fun example is Starbucks, somewhere like that, where they have their coffee shop or their confluence of a logistics center, where they have people coming in and out on the mobile apps with delivery of supplies all in real time, right? And so they are a really good edge application where we have deployments that really fit those solutions. Now, I wanna take you through a little bit about how we're structuring and developing a process. Have developed a process on bringing innovation into the company. And, probably about three or four years ago, we started this. We've always had innovation, but it's probably a little bit less structured and a little bit less invested than we are today.
From about three years ago, we started to identify sources of internal innovation, sources of technology, and that consisted of our vendor base, that consisted of universities, research organizations, and so we started ingesting a lot of technology. We use a process that's been laid out by NASA a long time ago, which is technology readiness landscape. So we flow technology through in a structured way, in collaboration early on when it's early research, and as it gets closer to being able to be productized and commercially viable, we bring it into our product development stream. That allows us to accelerate the speed at which we bring technologies into products. And, you know, as I tell our team, we are not doing technology for fun, although a lot of us like to do the technology for fun, but we're really here to help our customers.
So really important has been the collaboration with customers, and very different from us in the past, we have become very tight collaborators with hyperscalers, especially, and co-lo operators. So I dressed to be like a hyperscale guy today, because that's really what's happening. 'Cause they are the people who use the technology early, and because they have such large fleets, that they can try things. And for us to implement technology, you need to have someone who's willing to try. And then it became very clear that the chip people were forcing a lot of technology changes. And so what we started to do is, in the collaboration at the universities, we started working with NVIDIA and Intel on how they were gonna deal with their future problems that they were identifying.
Out of that, developed a very close relationship with them that, that is scaling to a large degree now. They really wanted to work with a company like ours, because when they sell a chip, it can go anywhere. So they need to have the ability to have that chip, which may need liquid cooling of a single phase or a two phase, we're showing back over here, to be able to deploy, serviced, right, installed, and that is something that is very unique to Vertiv. So we, we see a lot of activity in this space. You saw Jensen with NVIDIA, Intel, on for their AI chip development, we're equally working with them, and that group is also moving along very well.
So finally, I think, to Giordano' s point a little bit, and the guys will go through it a little bit more here. Traditional data center, about $2.5 million to $3 million worth of our products and services per megawatt delivered. When we get to the high density, that's even more opportunity for us, right? And the balance to switch back and forth is actually even other types of opportunities we have on top. And the guys are gonna go through it a little bit and show you that. So you saw this list, power management and thermal, two of our biggest pillars, and I'm gonna hand off to Kyle Keeper over here to give you an kind of an understanding about our power management, our powertrain portfolio, getting power from the grid to the chip.
Thank you. Thank you, Stephen. Good morning. So next, we're gonna turn our attention to the power management part of our business. We specialize in power systems for mission-critical applications, and key to our approach is ensuring very close collaboration and direct engagement between our technical subject matter experts and engineers and the customer. As Gio and Stephen have highlighted, when we're talking power management with customers, we're looking at the complete end-to-end power train, from the utility grid entrance all the way down to the server chip and mission-critical workload. And we see customers increasing challenges at both ends of the powertrain, and with it, an increase in the complexity of the power systems. But no two power systems are exactly the same. Our customers have different requirements, different architectures, depending on the location in which they're operating.
But our global capabilities in engineering, operations, and services, enables us to take global standard core technology platforms, apply late-stage customization, and deploy the system to the customer's specific requirements wherever they're operating around the world. So let's look at a few key areas where customers have turned to Vertiv to help them address their biggest challenges. The first one I wanna highlight is this area of increasing power demand to support these workloads. This is only accelerating with the introduction of high-density compute supporting AI. Working with customers, we've increased the size of the elements of the powertrain, and because we have a complete end-to-end view of the full power system, we've aligned the size of each element so that each can be fully utilized in eliminating stranded capacity within the system.
This has long been a challenge in this industry, with approaches that have tried to stitch together point products. With the increase in power demand, is ever-increasing pressure to bring that capacity online more quickly. We've worked with customers to pre-engineer and integrate portions of the powertrain, pulling work that's traditionally been done at the customer site into our facilities, where the assembly, design, and validation can be done by trained personnel with expertise in these products. Through this approach, we've seen significant reduction in customers' deployment time that they experience during commissioning at their site. In addition, Vertiv is able to add significant more value to the customer by eliminating the work that was taking place on site, and in many cases, the significant amount of rework that was required. The final area I wanna highlight is this increasing challenge around power availability.
So I talked about challenges at both ends of the powertrain. The higher power demanded, the higher density, but we're seeing growing challenges at the other end with the availability of grid power to support the amount of power required for high density. This is probably the biggest area where we're having the most collaboration today as customers plan their facilities for the future. And we're working with them to re-envision the role of the power system, expanding it from simply being conditioning power and distributing it to the workloads. But also, we've coined a term that's resonating with them called Bring Your Own Power, where they introduce local energy assets to fully support the amount of power required. I'm gonna come back to this challenge in a moment, but first, let's take a look at what this looks like in practice.
We're gonna start with a view of a traditional compute environment. You can see here a layout with a row of IT racks that house the servers and networking and storage equipment. When we look at the powertrain, it starts at the utility entrance with the incoming switchgear. From there, it's distributed to the mission-critical power elements like UPS, conditioning, and backup systems, power transfer switches that seamlessly can transition between multiple sources of power, without interrupting the load. We then distribute that conditioned power within the IT environment, coming down to the IT rack, feeding power overhead through busway, and then ultimately within the rack. We embed technologies within these products to enable the customer to meter and monitor their power usage, as well as give them control capability depending on their workload use case.
So how does this change with the introduction of high density? Well, first, you see the significance in the amount of power that these workloads demand. Another challenge that's been introduced is customers telling us they want to use every square inch of available white space that they have and apply it and use it for GPUs in high-density compute. We've worked with them to develop these integrated power modules, bringing together the switchgear and UPS and other power equipment, packaged together in a power module that can be deployed outside the facility, taking equipment that was traditionally in an electrical room, moving it outside the facility, gaining them available workspace. The other significant change we see with high density is the fundamental role of the power management and control system.
In a traditional compute environment, you might use this system to do alarm management for fault management, monitor power usage, and probably simple controls around use cases such as moving equipment into maintenance mode. High-density compute also changes the fundamental how dynamic the workloads are. Our customers have started asking us, "We may have one type of workload today and a different one three months from now. How can we use the same physical power infrastructure and apply the control system to distribute the amount of power required and the redundancy required for different types of workloads?" These are the kinds of capabilities that we've developed and are working on in collaboration with our customers.
Bringing that, again, conditioned power into the white space, again, as we've been talking about, we see significant increases in the amount of power that's required within the racks. We have developed and deployed higher capacity power distribution equipment at the row level, a higher ampacity busway overhead, again, distributing it into the rack to these high-density workloads. Let me go back now and talk about this growing challenge of power availability. We see the need for customers to introduce local energy assets into their facility. We have brought into our product portfolio battery energy storage systems to enable this use case. We are working closely with customers, industry partners, looking at technologies that are currently being employed in other industries and how we can apply our mission-critical expertise to bringing them into these types of environments.
The introduction of these local assets, and it also fundamentally changes the relationship and role between our customers and the grid, moving them from a bulk consumer of power to one of interoperability, where through the use of these local assets, they can provide grid stabilization, demand response, and peak shaving capabilities back to the grid. This is the future of mission-critical power systems. I've taken you through the full end-to-end powertrain, talked about the higher level of power that these workloads require. With the increased amount of power required, is a significant increase in the amount of heat generated, requiring new approaches and solutions for thermal management. To address that, I'm going to turn it over to John Niemann.
Thanks, Kyle. Similar to power, all the thermal systems in the data center are connected to be able to collect all the heat that's produced at the server, from the chip, all the way to outdoors. If we talk about the thermal chain, we look at three elements of the thermal chain. Giordano talked about it earlier with the first step of the chain, being able to collect that heat at the server and rack level. Stepping to the next level of the chain, catching the rest of the heat at the row and the room, all the way to rejecting that heat from the facility to the outdoors. As we think about the thermal chain, it's critical to also think about managing the control and overall system of the chain. Vertiv is the leader in the data center thermal management market.
Having all aspects of the thermal chain puts us in a unique position to be able to help our customers solve challenges like increasing demand and density, to be able to look at the entire solution and be able to solve that problem as more, compute and AI workloads are entering the data center. The high-density compute that we're seeing at the server and rack level is introducing new opportunities for Vertiv to be able to capture that heat with our extreme density product solutions, many of which that you can see in the tech showcase today. We have a wide variety of solutions to be able to provide adaptable solutions for customers that are trying to implement these workloads into these data centers, making it very unpredictable as they work to plan for the future.
Having that wide range of portfolio, from air to liquid solutions, leveraging various heat rejection technologies, from chilled water to our refrigerant-based direct expansion solutions, that leverage our industry-leading EconoPhase technology to drive energy efficiency for the thermal system. This unpredictable workload environments as we look to the future. Steve talked about working with our partners like NVIDIA and Intel, to really develop that next generation of technology, to be able to further enable AI and drive the power of the GPUs higher. As we look at the future and thinking about scaling up the capacity within the data center, we see growing variation in the solutions that need to be deployed for our customers. While our customers are scaling, they're trying to standardize on products, but variation in site conditions and environmental conditions based on location require customization.
Vertiv's thermal business is built on 55 years of experience in providing custom solutions and engineer-to-order products to be able to solve those problems for our customers. The last piece, as we talk about complexity, is looking at tying all these systems together to be able to effectively control, manage, monitor, and operate the system. Vertiv's iCOM controls do just that, at the unit level as well as the system level, to tie the whole system together, to make it easy to implement, start up, commission, as well as to be able to optimize the performance of the entire system. Similar to Kyle, we're gonna go ahead and look at this in practice, take you a walk through the thermal chain, starting at the chip inside the server. We have two examples here. We have a low-density, traditional compute, CPU-based server, and a high-density compute AI GPU server.
One of the things that you'll notice is that air cooling is needed for both of these applications. Pay close attention to the GPU server on the right, where we have the addition of liquid that's going into the server, to collect the heat off of the processors that are the hottest components within the server. Air is still needed to be able to cool all the rest of the components within that GPU server, power supplies, memory, and other electronics that are inside the server. This is an incremental heat load that now has to be handled across the entire data center. The other thing, and I think Steve hit on this, as we look at AI workloads, and in the examples that we're gonna be showing, are really idealistic.
We're looking at low-density data centers deploying 100% traditional compute and a high-density data center that's 100% high density. The reality is, we see a mix of these compute workloads inside the data center, creating extra complexity for our customers to have to manage the thermal profile of these systems. Transitioning to the next level of the thermal chain, we're gonna go ahead and look at the back of the rack, where the hot air in a traditional workload is being blown into the room. We see a high-density application, where we're providing air cooling with a rear door heat exchanger. Vertiv provides a full portfolio of rear door heat exchanger solutions to be able to cool up to 50 kW per rack. We have various options for passive and active solutions to be able to address a wide range of IT applications.
As we look at a liquid-cooled solution, that liquid that was introduced into the rack, in combination with the air, now needs to be removed from the rack. We have a full network of quick connects and rack manifolds to be able to collect that fluid and pipe it to the cooling distribution unit that's at the end of the aisle. That cooling distribution unit provides that critical control of temperature of the liquid to the servers, as well as protect the server and facility with the fluid quality. Vertiv's XDU coolant distribution also offers an extra level of protection by monitoring the fluid chemistry, to make sure that it's properly maintained to further protect the IT equipment.
As we zoom out on the data center and look at heat collection at the row and room level, you'll notice with a traditional data center, we have perimeter room air conditioners that are collecting the heat from the IT equipment. In the high-density data center, we also have those room cooling air conditioners that are collecting that residual heat off of those GPU servers. In addition, we've got the cooling distribution units at the end of each aisle, with modular headers that are connecting to the racks to be able to collect all that fluid off of each of those rack manifolds and pipe it to the cooling distribution units.
One key thing to point out, as we see the densification and power increase in the data center, the amount of air cooling to handle that workload also increases, going from 6 air conditioners to 10, to be able to take care of that incremental heat load from those higher density servers. Pay attention to looking at the close space constraints, and I think Kyle talked about this a little bit. The space constraints within the data center as we densify that workspace, where the being able to place the perimeter units on the air conditioning units along the perimeter, along with the power systems, is very constrained. Having various options to be able to take care of that air cooling in the data center is critical to being able to solve this densification for our customers.
We have a various range of portfolio to collect that heat in the air, whether it's with our CRV row-based products or our room-based products in chilled water or DX. We'll go ahead and transition this out and look at the entire facility. What you'll see now we're showing the powertrain as part of the overall thermal system. Vertiv's portfolio is broad, and we cover the entire data center, also cooling the powertrain, as well as the IT equipment. All the heat that's collected inside the data center eventually needs to be rejected to the outdoors. Vertiv has a complete portfolio of heat rejection solutions to be able to connect to the indoor units and reject that heat outside. We have air-cooled free cooling chillers.
We have our condensing units that use our EconoPhase free cooling technology, and we also have the ability to package our solutions, taking the indoor heat collection and the outdoor heat rejection, and package that as a complete solution, effectively a thermal chain, all condensed into a single solution. One of the things that I did wanna point out is that our chiller portfolio continues to expand. We just recently announced an expansion of the portfolio into the Americas market. We've been in the air-cooled chiller business in EMEA and Asia for over 15 years, and we're very excited to be able to now offer the chillers in the North America market. As we look at this data center increase in density, you can see all the equipment that builds up in the data center.
We talked about the heat rejection at the rack level, at the row level, at the room level, but now all that heat has to be rejected to the outdoors, where we have the incremental addition of the chillers to be able to reject that heat. As we look at the complexity that exists in all of the thermal chain, being able to control and manage that complexity with a system-level monitoring is very critical. Vertiv's iCOM system provides that capability to tie the entire thermal chain together and simplify the connectivity, to be able to speed up the time to deploy, as well as provide system optimization of all the elements of the thermal chain. When thinking about high density, some of you, hopefully, were able to visit the tech showcase, we don't see a single solution addressing the needs of all AI workloads.
There's gonna be variation in solutions that are gonna be needed, from air cooling to liquid cooling, to address the needs of high density. Vertiv has a full portfolio of both air cooling solutions for high density, as well as liquid cooling. You see the rear door heat exchanger here as an example that we saw in the animation earlier, but we have other options to be able to provide high-density air cooling at the rack level. Similarly, for liquid cooling, we have a complete portfolio, starting from single-phase direct to chip using water-based solutions, single-phase direct to chip using refrigerant and DX-based solutions, leveraging our EconoPhase technology. We also have two-phase solutions. We've been working with industry partners like Intel to be able to really develop and handle the workloads of that next, next-generation GPU. Finally, we have our immersion technology that we're seeing as the
for applications on the edge, as customers are looking to deploy liquid cooling and high density. Just kind of summarizing things, Vertiv has the full coverage of the entire thermal chain. We have the adaptability and flexibility in our portfolio to help our customers plan for the data centers for now and in the future. One of the things that we wanted to show is kind of bring this to life. We've been showing these animations of a data center, which is actually relatively small scale as compared to what we do for some of our customers. What you're seeing on the screen here is actually a 96-MW data center. This is 100 times larger than the examples that we showed in the animations previously. So we are doing this at scale for customers on a global basis.
Kyle and I talked about the powertrain and the thermal chain in isolation. One of the strengths that Vertiv brings to the market is our ability to integrate not only the power, the thermal, but our IT systems, and provide complete solutions to our customers to be able to simplify deployment as they look to scale. We can't forget about service. Vertiv is very strong in our service portfolio and is able to provide the service across all of our portfolio globally, seven by 24, 365. I'm gonna go ahead and turn it over to Steve, who's gonna talk about our solutions and services portfolio.
Good job. So, I think Giordano referred to it a little bit. One of the issues that our customers are facing, one is, you know, just people, right? This industry is growing so fast, getting the workforce is necessary, at the deployment sites is difficult. More of our customers want to convert more of the space that they have for data racks versus infrastructure equipment. That's where our modular solutions have become very powerful and is a very rapidly growing piece of our business. By going through a modular prefabricated process, they can reduce the deployment time by up to 50%. The fact is that a lot of our modular solutions are using our own technologies, as Kyle and John have talked about.
We can integrate that more tightly, tightly couple them, and actually reduce the amount of square footage that's needed to house the infrastructure equipment, thereby giving more space back to the data center operator for what he really wants to do, house servers. So this is a very strong piece of the business. We've been in this, probably 30 years now, and it's a rapidly accelerating business. And we've also deployed some innovations. So a week ago, we announced a very sustainable first in the first-of-a-kind, wood-based data center, right? So it's very renewable, and it's received quite a bit of acclaim already by our customers as they move toward the sustainability goals that they have. And secondly, I think Joe's referred to our IT systems.
These consist of the single products like rack PDUs, rack UPSs, rack cooling, so accessories and monitoring that go with the rack. They're sold individually through our channel partners and to some large customers, but more and more, we're providing integrated solutions that help customers, again, deploy very quickly and consistently. End result of the modular solution, as well as these type of integrated racks, is higher quality, higher reliability, and more rapid deployment. And again, even on this type of level, we're able to make our solutions much smaller, much more integrated, and really moving toward, to some degree, some automation in this process, right? So instead of having a system integrator, making every one different, we can bring that together, and we can integrate the controls across it.
As John’s referring to, the service is a really core piece of our business. I mean, it really sets us apart from all of the competition. It is what our customers need from us, and that’s the ability, at the beginning, to work with them on how they should design their data centers, right? And also project managing the installs and the startups and the commissioning, as well as warranty and normal service of the products in operation. But more important, these data centers are gonna run for 20, 30 years. The technologies that are in there keeps changing. We work with them to upgrade their technology that they purchase from us, so they can keep their data centers fresh and in use over that period of time to maximize their returns. So this services organization is very critical.
We are investing technology in our service tools, in our service software, so that we can use information that customers have agreed to let us have to make our service much more intelligent and be much more... I don't like to use the word predict, but able to kind of see what's happening in the future. So before anything bad happens, that we can start taking action in advance, and that helps reduce their downtime, as well as reduce the overall cost of delivering those services. So these are things that are very key to our differentiation in the customer base today. And then, in this customer relationship side, I would like to introduce Scott Armul. He's gonna kind of talk to you a little bit about how we work with our customers. It's very key to our success.
Thank you, Steve. I guess I feel some sense of obligation to our customers that may be watching on the webcast to apologize for our Chief Technology Officer for calling you all nerds. We’ve talked a lot about the collaborative approach we take with customers. I think as we talk about sales and account management, it’s important for us to really, truly delineate how it is we engage with customers. The fact that we’re at this very interesting, very dynamic inflection point in the industry takes what Vertiv is very good at in our approach to account management, and it just amplifies the necessity and the need to engage with our customer base in this way. My scope and purview is our global strategic account.
Major hyperscalers, the large colocation companies, the OEMs that are driving the technology in the industry. Our approach to customer engagement, like Steve and Gio alluded to, it's not sales, it's truly account management, and it's wrapping the customer in all facets and functions of the business. It's early-stage engineering and development and engagement with our R&D team. It's bringing together operations and supply chain to the customer conversation. It's jointly engaging in a two-way dialogue, engineer to engineer, technology to technology, around what are the problems in the industry? What solutions can we potentially cook up or conceptualize? Some things that will turn into very interesting opportunities, some things that will fizzle and won't be feasible.
But as we think about the scale that the industry is operating at, the new design challenges that high density are facing and proposing to the industry, this approach, we feel very strongly is the right one. We've had that reaffirmed multiple times, and we're continuing to invest more customer-facing technical resources, more engineering and R&D, getting out from behind the desk and actively in front of our customers on sites, solving real, tangible problems. 'Cause the way in which we look at a development project at Vertiv is the most successful ones, the most sure things are the ones we have co-developed or jointly developed around a known problem with an existing customer. So very important approach. That consultative and dynamic relationship is part and parcel and paramount to what we do.
Just to give you guys a little bit of color on some examples or what I mean by that. So as we've talked about kind of the advent or the introduction of liquid cooling and high density. When you talk about it at the scale of 30 MW, 60 MW, 90 MW at a site, it takes on a kind of a different connotation. You also have to think about the legacy footprint that a lot of our operators have. There's 10, 15, 20 GW of legacy capacity that's direct evap cooling, traditional air handling, those types of things. We're actively engaged across multiple hyperscalers and key accounts right now on how do we transition a direct evap legacy site into the world of liquid cooling? And the technology is interesting, and there's some ideas being thrown around. There's some whiteboarding sessions, there's some co-development.
But just as importantly, in that engineering and development conversation with the customer is: How do we pivot and go to scale very quickly? So it's not just a sales conversation, it's not just an engineering conversation. We need to have operations and our factory and our procurement team at that same table so that we can credibly and feasibly talk about how we take conceptual ideas to scaled reality very quickly, very efficiently, and very effectively. We talk about services. We talk about our service portfolio, our foundation, our broad breadth and expertise.
One of the active engagements we have going on right now is when we're talking about a new product that enables a transition from air to liquid or a site to do both air and liquid. We're talking about, yes, a new product, but we're also talking about what needs to be bundled around that product or offering in terms of services content. In order for us to support and service a site that's potentially 300 megawatts at a campus, it's a different model. It's a different scale of people, of resources, of dedication that's needed at a site that's different than what we've done before, and it's, quite frankly, a very interesting challenge for the industry to figure out. We have the scale to talk credibly about those types of opportunities right out of the gates and right from the get-go.
So we'll hear some more examples as we go through this around services models and how we pair that with co-located folks on site, how we jointly talk with the customer around what would it look like if we dedicated people to your facility permanently? What happens if we then pair that with condition-based maintenance and data and analytics to kind of more encompass a holistic solution? And that's a sales conversation, yes, but that's, it's a solution conversation that we're effectively having, and we're structuring with our most strategic clients as we go. I get asked a lot about, like, why Vertiv? Why can't someone else come in and do this? Why do customers approach you or lean on you for these types of conversations?
We've hit you with kind of the differentiators and some of the key foundational elements of what Vertiv does well. I can't point to any one thing, but in these conversations, it really is the confluence or the piecing together of these five pillars. It's that deep application, expertise, and domain knowledge we've talked about quite a bit. The end-to-end robust portfolio, you pair that with a track record and a long history and scale of reliability and quality in both the product set as well as the commissioning, the execution, and the services, with a global presence and a services foundation that is truly unmatched. And you bring all of those things together, and you have a very credible conversation of a partner that can figure out how to enable solutions to problems that the industry is facing.
We talked a ton about complexity. Complexity continues to be music to our ears. When we think about designs that need to change, the industry needs to pivot, we need to think about sustainability solutions, we need to think about how we can ramp to scale, those are inflection points, or those are areas where we need to do something different, and that's where we truly believe we shine, is helping our customers navigate through doing different. So you guys can hear me talk about this until I'm blue in the face. I think there's really no better way to kind of articulate maybe the approach that Vertiv takes, the message we deliver, than to hear it from a customer ourselves. So I'm pleased to introduce Chris Crosby via video, CEO of Compass Datacenters.
Compass Datacenters combines advanced construction and manufacturing processes with innovative technology, designing and constructing data center projects for some of the world's largest hyperscalers and cloud providers. Founded in 2011 by Chris Crosby, Compass prioritizes end-to-end environmental impact, from design to post-delivery performance, and holds continuous improvement as a core conviction. As of November 2023, it has delivered over $5 billion in data center projects, capitalizing on its locations in major data center markets like Milan, Toronto, Phoenix, Virginia, and Dallas.
You know, being an entrepreneur and starting a business, you always go through different cycles. I am at the growth phase now. That's. This is the fun part. I've known Vertiv for a long time. They've been a partner of mine, both at my previous company as well as at Compass. I've been very excited to have them as a partner, as a global provider for us. They've been there all along the way. We've been able to spend a lot of time with Vertiv on the product development side of things. Best part about it is the creativity. You know, we come with an idea, and then they come back with other ideas, and it's a collaborative effort.
Whether it be their service models, how we're gonna do from a product perspective, how we procure things differently, we're continuing to create and come up with new ideas, and that's. It's great to have a company of their size to be as nimble as they are and as creative as they are. We really like the package unit designs that Vertiv has come up with, and we've worked jointly with them to develop that. We're looking forward to, you know, not only the air-cooled solutions that we have today, but also moving towards some of the liquid as well as we move towards the future.
And the future-proofing that we feel like we've got, we're very excited about it. One of the great things about Vertiv's global capacity is that we develop global product ourself. Yes, we have a 50 Hz version for the EMEA side of things, whether we're in Israel or we're in Italy, but we also have the 60 Hz product in the United States and Canada. Having that flexibility to have a consistent team, consistent account management, and really making sure that we cover those gaps has been really a big benefit to Compass.
With AI and the boon of AI, there's a lot coming, but we're right there at the forefront with our client base, and Vertiv's right there as our partner along the way. We're continuing to develop solutions that future-proof the way that we can do things. Understanding the tailwinds of what's going on in the cloud and AI world right now, it's really hard to fathom the amount of gigawatts of capacity that are coming online over the coming years. Vertiv is a key player in the industry, and, you know, I think they're gonna continue to develop the products that and the service models that really help people like Compass.
All right.
Till then.
We will have a Q&A session now, standing between here and lunch. It seems like there's already a few questions, so I like seeing that. I'll invite the presenters from this morning to the stage. So we'll put them up there to ask questions about the morning presentations. I think we have about 15 minutes, so we'll run Q&A till about noon for this session. So, myself, I have a colleague in the back, we'll kind of switch back and forth. So, with that, I'll open up here, first question.
Perfect. Thank you very much. Amit Daryanani from Evercore. Thanks a lot for the presentation, really informative. I just have two questions. One, Gio, for you. When I think about this 8%-10% guide for 2024 and the longer-term guide you provided as well, how do you think about pricing within that equation? How has pricing changed from perhaps the prior targets you've had? So I'd love to just understand how is pricing evolving for you.
And then, Gio, maybe a little bit more on the technical side. You talked about these hybrid solutions and, you know, thermal chain and the need for all these air cooling equipment as well. My understanding is, if you use full immersion, it takes care of 100% of the heat, and then you don't need a room full of coolers, potentially. Is that accurate? And could you maybe just contrast where does immersion help versus direct-to-chip, potentially? Thank you.
So let me take the first part of the question. Thank you for your question. I would say that price and growth going forward are pretty, pretty fungible. So just like the market projections incorporates elements of price, so is our projection. So as I've said several times today as well, but in the various earnings earning calls, we see an enduring inflation going forward, clearly much more tamed than we have seen in the past. And we think that, you know, there is a path to continue to have our value, it, you know, incorporated, the value that we deliver to the- to our customer, incorporated in our plans. So it's... The two are part of the same kind of a growth equation. Who wants- who takes the thermal? John, you take the
Yeah.
You take it? Go ahead, man.
In regards to the question around the direct-to-chip versus immersion, we, as we highlighted, we have all the technologies, and we're working with customers. I think as we think about immersion technology, it's more of an emerging solution. It requires specialized IT to be dunked in the tank. We're not seeing as high level of interest, especially at scale, because of the disruptiveness that that has for the data center operation and the IT equipment. So we are seeing for scale deployments, really, the direct-to-chip solution is the example that we highlighted in the screen, and that's why we focused on that, 'cause that's really where we're seeing scale being deployed.
All right, great. The one at the back. Go ahead.
Mark Delaney from Goldman Sachs. Thank you very much for doing the presentation today. Maybe we could stick on the topic of these GPU-specific cooling technologies. You spoke about it being early in customers coming to you and innovating, trying to solve problems, and not having one-size-fits-all solution. Can you talk a little bit more around your own product portfolio as you're trying to solve some of these hard problems? How comfortable are you with the admittedly broad set of products you have? Do you have the technology you need, or do you need to continue to innovate and maybe bolster some of that organically or inorganically? And as you're getting some of this feedback, can you talk a little bit around your market share and how you see that tracking in GPU-specific cooling technologies?
So, yeah, I can take that one. So in terms of the high-density solutions that we talked about, the technologies that we have today are addressing the challenges of the workloads that we're seeing enter to the data center market. A lot of the things that we talked about is in terms of the future, are really new technologies that are helping NVIDIA and Intel look at their next generation GPU technologies. So I think if you didn't get a chance, I encourage you to look at the tech showcase.
We have some examples of the products in the back that we're shipping today to be able to help customers solve these problems. In terms of market share, it's very early in the liquid cooling market. It's fairly diffused with a lot of small players, and we're just now starting to see the inflection point as these higher power GPUs are entering the market. So to really give you a number on what share we have in that space, it's very difficult because of the broad portfolio we have in addressing that heat load from the GPU.
One more question, just on margins. You spoke a little bit on the margin bridge on slide 30. How should we think about AI-related margins? You know, of course, there's going to be a lot of operating leverage, and you see that as a big driver out into that longer-term EBIT margin target. But is there any sort of mixed dynamic with AI margins versus the corporate average investors should be aware of? Thanks.
I can take this. You know, you heard it several times during the day today. There is a lot of complexity in the high-density space, be it on the thermal or the power side. That's an area where we like to play, because that's an area where value is recognized by our customers. So, what we see happening in the high density is certainly corroborating the margin plan that you have seen here. So, we like what we are seeing right now.
All right, here you go.
Hey, guys. Thanks for the day here. The Vertiv operating system, Gio, what does it really mean to you? I mean, you talked about it kind of high level from a cultural perspective-
Sure.
and continuous improvement, but what are the KPIs, and what does good look like in kind of year three, year four, of the road to the VOS?
There are KPIs, of course, but there are also a type of mentality. The KPIs at a high level for me is in terms of productivity, customer service level, utilization of our resource. It could be a shop floor utilization and continuous improvement in utilization of that shop floor. It could be the dollar it takes to transact an order, you know, beginning to end. So I like a lot to think in terms of, I like a lot to think in terms of what the metrics of the individual underlying processes are, and the culture that teaches people to identify those metrics, those KPIs, and follow them.
But really, when we talk in terms at a high level, it on-time delivery, it is elements of productivity, quality, everything related to quality. But then there are the usual, you know, metrics that we use to run inventory. Lead time of suppliers, our lead time. So it's a multitude of metrics out there.
Are you benchmarking those KPIs against some sort of level of best in class? Is it internal against internal and kind of historical, or are you looking externally?
Well, we certainly look externally, especially when it comes. Although it's never exact science. It's not that we are in a panel of a kind of peers, or maybe unrelated and comparing, and that's something that we could do. As I was saying, Scott, we are not fully mature in our trajectory, but that's something that we- that is good, and we will do going forward. In this moment, we measure ourselves, for example, on lead times and on-time delivery against what we know the rest of the industry is doing, or even more importantly, what our customers' requirements are. But there is a lot of internal benchmarking going on.
And again, we are at the beginning of a journey. And I know you know this aspect of running a business quite well. Incredible and strong operating system is not built in a year, it's not built in two years, is a longer trajectory. So we are pretty early in that trajectory as well, which it is an opportunity and good news, and certainly a lot of work to do. So in this moment, we are not there yet. We're not there yet in terms of full potential dissemination of best practices. We are not there, and that's good news, by the way, because there is headroom for us. A lot of what we measure is around the performance, the productivity, and service level, and the quality that we deliver to the market.
Thank you.
Thanks.
Do you want to probably get the next one?
Yeah, thanks. Brett Linzey , Mizuho. Just want to come back to service. A lot of investment and a lot of, you know, focus on the durability there. Just curious how you're thinking about the, the long-term growth rate in the context of the, the total framework. And then currently, what is your attachment rate on service with new deployments?
When we think about the 8%-11% long-term growth, we believe that our service growth will be aligned to that. So, and that's true for the project part of our services, as well as for the life cycle part of our services. Really, kind of, it would be a lot of details going into the attach rates, but suffice to say that we see the part that is accelerating the most, so the hyperscale and colo as a good source of service revenue. That is very critical. That is very critical infrastructure.
We have good relationships with the various players. You heard it from Chris Crosby, and he was saying we are designing together the business model. The business model that we have with a, with the large players is more embedded, as Scott was mentioning, alluding to that, is more we build together the solution simply because some of the data center that you saw require permanent Vertiv expert crews on site the whole time. So that part of the market, we touch very well.
Yeah, and just one follow-up on the convergence of the SIOP to the single system by 2026. How are you thinking about, you know, expense versus capital commitment, and what the phasing of that's gonna look like through the horizon period?
We are in a quite advanced stage when it comes to consistency of our ERP and IT technology across the board. Never perfect, but we do not have a lot left. We still have to make steps in that part of the ENI integration, and they're all schedules, scheduled and ongoing, and then we have a couple of odd factors. So we see that unfolding, yeah, during the course of over the next three years. But, you know, we'll not accelerate or just stick to that, you know, roadmap, kind of no matter the cost. We know how delicate the steps there are, and every time we will make a step, pull a trigger, we'll make sure that that is very, very safe and it's very, very well thought through.
All right, next question.
I think you guys had said in your orders in the third quarter that you were getting kind of like a, you know, still mid-single digit type of price in those orders. Are you guys putting through incremental price in the fourth quarter? What's the price volume split for 2024 in that 8%-10%?
Dave, you wanna address that?
Yeah. So, we are definitely, we continue to get price. On a year-to-date basis, we've driven, I think, 5-6% of price in our orders, which should be delivered going forward. So we would expect to continue with getting price year-over-year with fourth quarter orders. As it relates to split price volume for next year, within that 8%-10%, too premature at this point in time to disclose that. I think what we have been very consistent with as it relates to pricing, and we really look at that more as a margin contributor as opposed to a growth contributor, and we are very confident going forward that we should be, as Gio mentioned, price cost positive. So we would expect to do that in 2024 as well.
Well, I mean, I would hope with 5%-6% price, you'd be price cost positive. I think before the pandemic, you guys had talked about a 35%-40% incremental or something like that. There was a real focus on, you know, kind of the Honeywell mantra of holding fixed flat and letting things rip on the upside. The outlook, the guidance here suggests you're kind of in the mid-30s, even though clearly the pricing environment is, like, much better today. Obviously, maybe a little bit more inflation, but why is it why would it be any less than what you would, what you guided to pre-pandemic?
Yeah, and I guess I could do my presentation right now. But we definitely anticipated that question. You're right. If you crunch the numbers, I think the incrementals for next year are about 34%-35%, right? And we'll address this later this afternoon. We will continue to invest in the business. Yes, we continue with the fixed cost constant philosophy. We'll continue to drive productivity and manage costs, but we will reinvest into the business as it relates to innovation, so in the form of R&D, and also expanding capacity. And Gio mentioned capacity expansion today related to switchgear and busbar.
If you need to drop a number in a model, it would be about $100 million related to R&D and capacity expansion for 2024, and we assume that going out through 2028 in what we model, that's required to need it, you know, for that 8%-11% growth. So our incrementals from a variable contribution margin basis, those will grow next year, right? But the operational leverage that we're gonna get is gonna get dissipated somewhat because of that reinvestment into the business. But to get that growth, we need to reinvest. It's gonna be focused on innovation and capacity.
One last quick one, just on the technology. It seems to me that most of the content upside is coming from HVAC, right? I mean, is when you look at those two types of businesses, the power and the HVAC side, what is kind of more rich as we move further into AI for you from a, you know, dollar-per-megawatt perspective? What drives the most kind of content upside for you guys, or are they both the same?
I would say that, you saw the numbers, you saw the acceleration. There are two elements and two contributing factors in the equation. One is the net installed power: power that needs to be cooled, power that needs to be powered. So, that is the that is a big, big driver. Certainly, as we saw, looking at the thermal chain, there is a piece that was not there before, so that, that contributes. And we, as I was saying in my presentation, we estimate that when things stabilize, that will represent pretty much 20% of the total, TAM of a thermal, thermal TAM.
So, yeah, the rest, the rest is math. But we're very, very excited about the opportunities that we have in the power space, and especially, you know, going beyond, if you will, the perimeter of the data center as the power constraints become more stringent for the industry. So battery storage, energy storage, grid interoperability, all elements that will contribute to the growth of our power business.
All right. Great. Great Q&A. I know there was a lot of questions we haven't gotten to yet. The good news is, is we have 2 more Q&A sessions, this afternoon. So thank you very much, to the panelists up here. Just a few housekeeping points. We are gonna take a lunch break from 12:00 P.M. Eastern to 12:45 P.M. Eastern Time. Webcast participants, please stick with us. So continue to let the webcast run, and join back at 12:45 P.M. Eastern Time.
We'll start, and then, for the folks that are here in the room with us, lunch is outside in the lobby area. Please explore our tech area. As Steve pointed out, our technologists, sometimes they're a little nerdy, but I think nerds are cool. They're out there to answer a lot of great questions. So please take a look around at our technology, grab a lunch, bring it back in here to enjoy your lunch, and we'll reconvene at 12:45 P.M. There's a short video I'm gonna play, so you can watch on your way out. So with that, cue the video.
You don't see it, but it's there. Behind every automation, behind every transaction, behind every app, the chip, the heart of every digital system. Today's processing units generate more heat, require more power, and need more protection than ever before. That's where we come in. At Vertiv, we enable this rhythm for every step of the powertrain and thermal chain, enabling infrastructure to be ready for what's next. We keep things cool and controlled with next-level air and liquid cooling solutions. Limits are pushed. Vertiv works to enable continuity, scalability, efficiency, and resilience, backed by relentless innovation, powering the demands of new AI applications. Solutions are here, ensuring the world's critical digital infrastructure never misses a beat.
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Every year, we consume more and more digital content and services, which are powered by an ever-growing global network of data centers. Companies need a quicker data center construction solution to help cope with demand. Fortunately, innovators like Vertiv can offer prefabricated modular solutions that can be integrated into existing data center infrastructure or used as building blocks for a new data center. Prefabricated modular data center solutions dramatically shorten time to market, and using a modular data center approach can also mitigate risk. Omdia recently surveyed 228 companies from many diverse industries across the globe who operate their own data center.
The survey revealed that more than half have already deployed prefabricated modular data center solutions, but nearly all companies indicated they would consider utilizing the technology in their future data center strategy nine in 10 respondents reported that they would even use a Prefabricated Modular Data Center solution as their default construction strategy. The leading ways companies use Prefabricated Modular Data Center are for expansion of an operating data center or upgrade or retrofit of an existing data center. Top drivers for adoption of PMDC were scalability, followed by services and support, modularity, standardization, and sustainability. Respondents also cited the desire to follow hyperscale data center operator innovation.
Scaling the global network of data centers will require a fresh approach to how we build new data centers and expand existing ones, and Vertiv has the experience to lead the way. Visit our website to learn more about our prefabricated modular data center solutions. These days, no matter what industry you're in, you're really in the business of data. And now, more than ever, powering, cooling, and monitoring your data center infrastructure are vital to your company and its bottom line. Of course, with rapidly growing demands, challenging environments, and severe space limitations, this can be easier said than done. Vertiv micro data centers are the all-in-one solution you're looking for.
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Vertiv has solutions optimized for commercial, retail, and office environments that are compact and deploy quickly. Vertiv also has micro data centers built for rugged industrial conditions, like factory floors, which offer a secure enclosure, protecting sensitive equipment from particulates and unauthorized access. Vertiv's micro modular data centers are built for distributed edge sites that require multiple racks, like schools, universities, and financial institutions. All Vertiv solutions are designed to work together and arrive as one solution for setup in minutes, not weeks. Once up and running, they are designed to operate efficiently. No matter what your industry, your infrastructure has never been more important. Whether it's retail, with the explosive growth of e-commerce and in-store digital experiences, increasing remote interactions in healthcare and education, the financial sector's ever-expanding data demands, or industrial environments where IoT and automation are becoming standard.
Backing the Black and Gold means more than cheering from the sidelines. For Vertiv, it's being the official data center equipment provider for the Columbus Crew. It's architecting the data center systems that fuel the fan experience and enable continuous power to a soccer powerhouse. From frictionless entry, faster food and drink, and firing up the fans with the video boards, Vertiv's connectivity helps make it happen. But the action doesn't stop at the stadium. Our critical switching solutions allow broadcast engineers to deliver soccer action seamlessly to your viewing device. From the gates of Lower.com Field, to the control room, to your living room, Vertiv solutions bring us together in support of our team, our crew. Discover your crew and discover Vertiv today.
With high-performance computing on the rise, high-density IT environments are creating cooling challenges that are increasingly difficult to manage. Air cooling may no longer be effective or efficient. Enterprises need alternative cooling technologies, and fast. Liquid cooling is emerging as the answer, but data center managers have very specific requirements about introducing liquids into the rack. The new Vertiv Liebert XDU 450 and 1350 usher in the next generation of liquid cooling technology, designed to seamlessly fit into your IT environment, engineered to reliably and efficiently manage your high-density thermal loads. First, the Liebert XDU supports rear door heat exchange or direct contact liquid cooling, giving you the flexibility to meet the needs of your unique application and the efficiency to manage power-dense hot spots up to 450 kW or 1,368 kW of heat.
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While the smart system automatically maintains precise temperature, flow rate, and pressure, you're always in complete control of your operational parameters. Centralized management capabilities provide real-time visibility and advanced monitoring, teaming options to support availability and effectiveness, and alerts to notify you instantly about leaks or other system problems. With industry-leading Vertiv service and support, installation and maintenance are worry-free, too. Confidently take control of your high heat loads with the Vertiv Liebert XDU, and be ready for whatever the future of computing has in store. Data centers and infrastructure providers want to create more business value. With Vertiv energy power management systems, you can monitor, manage, and control energy consumption, create visibility for the unseen, and improve operational efficiency.
Maintain uptime for your mission-critical business. With over 60% of power failures costing companies over $100,000, this solution becomes crucial. Share costs, charge customers for energy usage, determine losses and how this affects your carbon footprint and impacts your ESG company strategy. Drive revenues by offering new services and pricing models. Vertiv energy power management systems provides the infrastructure you need to deliver software and digital services that converts energy into a powerful driver of business value. Consult a Vertiv expert to get started. For decades, uninterruptible power supply systems have provided data and system security when the power goes out.
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New applications allowing UPS systems to interact with the grid can facilitate the integration of variable renewable energy, as well as decrease the dependency on fossil fuels. Batteries can store electricity from renewable energy surplus and then supply it when electricity generation is low. Using stored energy instead of generating additional energy from fossil fuel plants is better for the environment. Data center operators can also benefit by earning revenue on stored power. Vertiv UPS units support grid stability and flexibility because the user's energy demand is reduced. Bottom line, grid interactive UPS systems contribute to more efficient and sustainable power demand management, make hybrid renewable power possible, and add to system flexibility.
Your IT team is partnering with the business to drive digital transformation forward. That means overseeing a growing distributed network, supporting computing-intensive applications, and delivering an exceptional experience. This means carefully evaluating the technology you purchase for data center and edge sites. Backup power systems must provide incredible visibility, reliability, and performance to keep your business systems up and always available. Here's how the Vertiv Liebert GXT5 UPS meets your demanding requirements for edge and distributed IT applications. Liebert GXT5 UPS has a double conversion topology, completely isolating it from incoming power disturbances. There's zero transfer time from the primary power source to the UPS, so you can provide the high availability your business craves. Need a sustainable solution? With lithium-ion batteries, Liebert GXT5 UPS fits the bill. Lithium-ion batteries last up to three times longer than VRLA and don't contain lead, decreasing the total number of batteries used.
That reduces recycling waste and total cost of ownership. Make UPS maintenance simpler with better options. The 5-10 kVA version of Liebert GXT5 UPS offers an integrated bypass. As a result, you can work on the UPS without dropping power loads. If you need more support, we offer remote monitoring, power assurance, and power emergency through Vertiv Life Services. Managing diverse edge sites? Liebert GXT5 lithium-ion UPS solutions are now available. The 1-3 kVA version has an internal battery and 2U rack height, making it a good choice for space-constrained locations. The 5-10 kVA version is powered by a 1U external lithium-ion battery cabinet for a higher power density solution. Each model is rack tower convertible and supports extended runtime with up to eight external battery cabinets, making your UPS an operational powerhouse. However, your teams can't manage what you can't see.
Vertiv Power Insight provides a single pane of glass for managing UPS and PDU devices remotely. With real-time dashboard views and customizable text and email alarm notifications, you'll be aware of UPS conditions across all the sites you manage. You can also use the serial connection point to integrate with Vertiv Avocent ACS, streamlining out-of-band management. Yes, UPS management can get even simpler. Use the innovative algorithm to plan battery replacements. The algorithm reviews current conditions and predicts a replacement date, so that you can manage this process proactively and avoid overspending on inventory. Business is demanding, but UPS management doesn't need to be. Vertiv Liebert GXT5 UPS solutions support your digital business, no matter where your sites are located or how much computing power they have. Get peace of mind by deploying the advanced, high-performance online UPS that will keep all systems up and available. Learn more today.
It's our new data center in a box. Compact, integrated, secure, and easy on the wallet. Let me introduce you to the SmartCabinet 2M. When we say compact, we mean compact. The SmartCabinet 2M is an edge solution with 17 U of usable IT space, and it can live just about anywhere. This micro data center is fully integrated with 1.5 kW of inbuilt cooling, PDU, access alarm, and a UPS. So you don't have to worry when this happens. With data protection and security front of mind, you can rest easy with the SmartCabinet 2M, giving you the option to store your most sensitive data right where you can see it. Plus, we've improved the security features with rack space access and control. There's optional on-site intrusion prevention and detection, as well as video surveillance.
The unit is very simple to install with our industry-leading deployment services and standardization, which enables IT managers to streamline processes and centrally manage all services. With application across a wide range of industry sectors, there's a lot to love about the SmartCabinet 2M. Not to mention, it's soft on the wallet and energy consumption, making it an intelligent solution, and it's available now. Thermal management in today's complex data centers is no longer just about ensuring uptime. While that continuity is critically important, companies that get thermal management right are able to save up to 35% on their energy costs.
Enter Liebert iCOM S, advanced thermal monitoring and control software from Vertiv. Whether you're running a colo, enterprise, or hyperscale facility, there's always room to improve performance. Your data center and facility team can use iCOM S to improve automation and control of all your Vertiv equipment. iCOM S auto-recognizes your Vertiv devices and easily integrates device and building management system, or BMS data, helping your teams optimize thermal conditions and maximize device uptime and energy savings. The iCOM S puts you in control with robust reporting and modeling, such as mass unit modeling, where you can go from system to sensor visibility in only three clicks and find critical points of interest.
When you use iCOM S, you gain measurable ROI. That includes increased efficiency and a significant reduction in thermal energy use and costs. iCOM S supports diverse deployment scenarios. Choose hardware or software-based, compatible with servers and virtual machines. Use wired or wireless sensors to meet your business and operational needs, and gain direct or distributed redundancy where you need it. Manage your data center with iCOM S, software that makes it simple to scale and save. Get iCOM S today. Step into the future of digital continuity with the Vertiv Avocent DSView solution. Designed for shifting workloads in an ever-evolving market, the Avocent DSView solution features all digital architecture and offers secure and scalable building block solutions for IT management. As part of the Avocent DSView solution, the management platform provides simplified access and control for virtual and physical infrastructure.
Efficiently make changes to IT devices through secure and auditable access. Automate deployment and configuration tasks through the use of APIs. The enterprise-class RackManager is a secure, resilient, and open platform that supports 100+ simultaneous users for management and control of IT infrastructure. Connect to a diverse set of devices, minimize costs through PoE, and get fast remote access performance. Increase productivity through the highest quality video experience with the Vertiv Avocent 4K IP UHD KVM. Offering flexible connectivity, the Avocent DSView solution delivers richer color depth and flexible connectivity with native USB-C connection. From simple to complex, from edge to enterprise, the Avocent DSView solution is designed to support the ever-changing needs of the data center.
Enhance KVM access to your enterprise and edge IT devices with the Vertiv Avocent IPIQ IP KVM, providing high-definition video performance for remote access. The IPIQ can be powered from the host or an external power adapter. Connect to the server video port and remotely access over the network. Increase productivity with high-definition KVM performance, simplifying remote access to servers. The latest innovation from Vertiv, the Avocent DSView solution, provides agility, scalability, and the best performance and control in managing IT devices anytime, anywhere. The Vertiv Powerbar iMPB is a data center busbar system that allows you to quickly and confidently transform your data center power distribution infrastructure over time.
The Vertiv Powerbar iMPB flexes with business needs, modular, multiple configurations, and integrates with other Vertiv power solutions. An adaptive busway design delivers continuous power and the ability to add tap-off boxes anywhere for cost-effective and rapid scalability. The Vertiv Powerbar iMPB is manufactured by E+I Engineering, a leader in power distribution. The Vertiv Powerbar iMPB offers ease of install without requiring special tooling, and is designed to be hot swappable. The Vertiv Powerbar iMPB busbar has an IP2X3X safety rating for finger-safe installation. The optional aluminum conductor is lightweight for easy deployment and highly recyclable. Vertiv Powerbar iMPB gives data center managers flexibility, control, and peace of mind when changing and adapting to keep pace with hardware demands.
Oh, thank you for y eah, those animations are winning, are definitely winning.
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All right. Hello, everyone, and welcome back. Welcome back everyone in the room, as well as on the webcast. As you can see, the agenda for the afternoon, we have great presentations ahead, so we'll get to that momentarily. We do have one other video, another customer video that we're really super excited to share, so please enjoy.
A lot has changed for QTS since it was founded by Chad Williams in 2003. The data center solutions provider has gone from a single location to a footprint of mega-scale infrastructure that spans more than nine million sq ft across North America and Europe. Powering the growth of the Blackstone portfolio company is its people and partners. Its differentiation comes from the speedy delivery of available inventory to its co-located and hyperscale customers, while concurrently being a responsible steward of the environment.
I learned a long time ago, even though we started as a very small business with a single data center, that, the equipment that's in the data center becomes a foundational piece: our people, our equipment, our process, our operational maturity. And, you know, from a very early stage, the first data center we powered was powered by Vertiv. We've relied upon every aspect of their product line, and they've been there to take care of it since the very beginning. You know, some of our most efficient, or if not the most efficient, data centers we have are powered, with Vertiv technology, whether it's the DSE units, cooling units that are industry-leading in their innovation and their simplification and their execution on what they do for us. It's just across the board, they deliver, and they deliver on innovation and sustainability too.
It's a transformational period of time in the industry, and I think that what people think is going to be big growth, I think it's going to be a lot bigger. Vertiv's size and scale differentiates them in the marketplace. Their decades-long experience in this industry and the many talented people that they have is helping them innovate at a faster pace. When you put scale and innovation and an exciting industry all together, you get big opportunities.
We're at this transformational period where we're going to see densities and cooling technologies adapt and change for the future. You know, call it AI, digitization, all these different things that are happening. And I think with the Vertiv partnership, we're going to be setting standards, deploying new next-generation, best-of-breed, efficiency, and sustainable equipment. We're going to be doing that at a speed and pace that others will have to work hard to keep up with. I think that's going to be the strength of the partnership.
Good. It's exciting to see those videos, see the scale. I always like to see it, the real examples. When we say scale, what scale looks like. So, those are always fantastic. So with that, we'll pivot to the regional dynamics panel discussion, and I am pleased to be joined by my colleagues. So, Anand Sanghi, President of Americas, Karsten Winter, President of EMEA, and Gio Albertazzi, will be filling the role for APAC on the panel. So he'll do what he can. All right. All right, so we'll start with the question, What are the top two or three things that have your relentless focus right now? Anand.
Thank you, Lynne. Good afternoon, everyone. Great to be here. Honor and absolute pleasure. For the Americas, our first and foremost priority i s to deepen the relationships we have with our customers, and to ensure we continue to deliver a superior customer experience. They look to us to be their trusted advisor and partner of choice, and we have to keep that going. Secondly, we have a strategy called See More, Win More. There's a richness of opportunities across market segments, and we want to capture all of that. And thirdly, it's what Gio talked about this morning, relentless execution, driving operational excellence, making sure that we are utilizing the Vertiv Operating System, not just in our plants, but across all functional areas, and driving governance in our pricing and our cost management. So those would be my top three.
Great. Karsten, what about you?
So it's not really, thank God, it's not that different from what we're seeing in Americas. We have, I would say, for quite a while, actually, been extremely focused on the way we are driving margin expansion. I would say that the number one focus we have at the moment is to consistently to try to even do that to a more professional extent for what concerns ensure we get productivity and efficiency in all our variable and fixed cost measures.
And that goes all the way down from in what we do in sales and presales, engineering, what we do with procurement, in the way we actually drive resiliency, squeezing more square meters out of the plants, making sure the cycle time is right and shortened as much as possible, making absolutely certain that our deployment is accurate and according to the customer's needs, and all the ways into the commissioning and obviously the maintenance or life cycle service management. And that will actually lead me to the second element, which is pretty much all around making sure that we deliver the customer value. I believe Scott Armul was actually alluding to that earlier.
There is a lot of ways during the customer journey where we can actually drive a lot of value that actually makes us differentiate compared to our competitors. And when we are able to do so, we actually are also able to actually claim a premium. The premium will actually help us to get in the right side of that so-called price cost variance, and it also has this fantastic effect that actually also drives a better pipeline and higher win rate. So that's the second element. And then the third one is a very important one, which I don't think anyone of us should forget, is that this company, as Giordano mentioned at the very beginning, is driven by people.
The one thing that actually will help us to ensure that we are relentlessly driving those measures I was talking in point one and two, is actually to make sure that we always educate, attract, educate, maintain, the right skills in every bucket of our people, so we can drive that high-performance culture that will make sure that we also, in a sustainable manner for the 3, 5, 10 years to come, will be able to actually to continue the journey of growth.
Great. Great, thank you. Anand, why would you think AI will be led first in Americas?
Yeah. You know, here, here, what we are seeing is the cloud service providers and enterprises rush to take advantage of the opportunity generated by, you know, as we kind of look at generative AI, a lot of new opportunities. This is starting first in the Americas, okay? We have a very well-established ecosystem here. If you start with the hyperscalers, we are seeing the hyperscalers invest in their large language models, build out their offerings. We have the colocation providers of the required scale, and more importantly, the capital to be able to deploy. We have the IT technology providers who are working through the application stack. We saw the chip and the silicon guys who are based here, and of course, the enterprises and consumers who are rushing in to kind of, you know, have use cases and deploy AI.
Most of these companies have their regional headquarters and the technology teams based here. And we are also based here, so which is great. So you end up having those discussions. And this is pretty normal, right? They will learn here, they will do their engineering, they will do their first deployments, and as they start building and scaling out, they will expand to the other parts of the world. So I really believe that, you know, this is where the action is for now, and it's starting here.
That makes a lot of sense. Is the Americas region ready for the AI wave?
Absolutely. You know, and I'll answer this in three parts. The first part is back to technology. If you look at the presentation this morning from Giordano, Stephen, and team, we have increased our spending on engineering and driven velocity in our new product development and introduction. This has helped us build out our portfolio for both the powertrain and the thermal chain, so which is great. From a solutions perspective, in my 29 years, I think this is the best we've been and very well positioned, you know, across that whole spectrum. And you know, you would have seen it outside in the gallery. You've seen some of the presentations today. So I think the technology part is very well covered.
Then it gets down to the deep relationships we have with our customers, especially the hyperscalers and the colocation providers. And Stephen talked about the nerd-to-nerd discussion. You know, I can be a nerd, but I can also be a salesperson. Recently, we had a large hyperscaler visit us in Columbus. So we spent a day, you know, at our academy talking to thermal. Most of the discussions start with thermal. Now, as you look at saying, "Okay, I go from 30 kilowatts per rack to 50 kilowatts per rack, to 70 kilowatts per rack, what happens?" There's that fine balance of the art of what is possible and what's practical. You know, and with this particular hyperscaler, we spent 2 hours discussing the liquid manifold, okay? I mean, just the nature of the discussions.
The next day, you know, we visited Kyle and what Kyle has in Delaware with the best systems and how we are setting up for dynamic power. It's a great discussion, and they happened to see a modular solution we had for another customer. We started talking; these discussions become really rich. The engineering conversations that we have lead to really helping us kind of figure out what the customers are looking for and design data centers and architectures for AI-ready data centers. Those are two elements of it. The third piece of it comes down to supply chain and how we're able to handle the customers.
You'll hear a lot more from Paul and Anders in a few minutes, but we've done a lot of work in the last two years and built in a lot of resiliency, whether it's how we do our BOM health checks, looking at alternate power sourcing, designing for multiple sourcing around the world to reduce risk, expansion of capacity. We are adding capacity across our plants. You saw the capital numbers that David and Giordano talked about, but you know, we built our largest flagship facility in Monterrey just last year, and we're expanding that. We're having chillers coming in there. In Anderson, we have our switchgear busway expansion, Reynosa. So across the region, we're putting in the required capacity, and our customers are talking to us not just for 2024, but looking ahead to 2025 and 2026. We are ready.
Good. It sounds like it. Karsten, we heard some great growth opportunities by Anand. What are some unique growth opportunities in EMEA?
There's a lot of great opportunities and trends within EMEA. The first one I would highlight is essentially that in EMEA, we have traditionally been very close to the colocators. We have been doing a lot of our business with the hyperscalers through the colocators traditionally. We believe the hyperscalers, let's say, footprint of self-build will increase quite significantly also in EMEA, obviously partly driven by AI and high density. So what we have spent a lot of time on, for some time now, is actually to make sure that we have the right relationships locally, obviously utilized as well through the American and global relationships we have, to make sure that we actually capture our fair share of that business that we will see, coming, from the hyperscale self-build.
Another one is EMEA, unlike many other regions, is actually consisting of a tremendous amount of different countries. And within EMEA, within EU, but also within other countries within EMEA, there is legislation essentially forcing all the data in a country to be stored locally and managed locally, and there is not enough capacity to actually perform that action. So that calls for simple expansion of capacity, even in the traditional compute space as well. Then there's a couple of regions where we're seeing some exponential opportunities, which is a little bit above the average, which actually lies in, for instance, in the region of Africa.
Africa is a huge continent, has recently been connected through submarine cables, and that actually allows a lot of countries on the continent to enable digitalization, to actually get connected, to make sure that they actually are able, whether the businesses or private, to get connected to the internet of everything, and that obviously calls for a great demand. We have actually spent a lot of time in this year and also last year, already investing in specific regions of Africa, but we believe that a lot of that business will actually take place and make sure that we're top ready for that. Then there is, and it was alluded to a little bit earlier when we talked about technology, but we do see a tremendous uptake in the need for speed.
And I'm talking here not necessarily need for speed of what happens in the rack, but actually what happens in terms of deployment. We enjoy to be the market leader in Europe for what concerns our prefabricated solutions. Stephen Liang was talking about the latest announcement that we actually did, which was basically to announce a timber model, which is basically a prefabricated solutions actually built out of timber. It has such a beautiful element to it that we are able to actually design a lot and actually deploy a lot in the module on the factory. That will actually enable us actually to put it on site, and the end-to-end cycle time from actually starting conversations all the way to actually have a finished, a finished operation and deployment can be actually, done by a factor two, so actually at half the time.
And that is something we definitely see that's actually also attracting a lot of demand. And then I will essentially just say that, of course, everything I just mentioned obviously encompassed, by, the great advantages and opportunities we see with AI. In EMEA, we believe we are probably nine to 12 months behind what we actually are seeing from our colleagues in America, but we've already started a lot of these conversations, and we know that we will have a lot of those, great opportunities also for AI in EMEA. Of course, some of that, I talked about before, will be somewhat fueled additionally by simply AI or high density needs as well in EMEA.
Awesome. This sounds like great opportunities. How about in Asia? Gio, what do you see in Asia?
Well, Asia, of course, we have to look at Asia in three parts, basically. China, we know China has been quite soft as a market as a whole, and we are no exception to that. China continues to be a very interesting market for us. We are China's competitor in China in terms of the self-sufficiency, in terms of the supply chain, in terms of the technology. We continue to play, and we continue to be convinced that's the very important market to be in because that keeps you fit in the most competitive market that is out there. And what we learn there is something that we can benchmark whether from a technology standpoint, from a design, from a philosophy standpoint across the world.
But if we think about the planning horizon that we saw before, we continue to be relatively prudent in our expectation for China. If China comes back strong, happy days. And we are strong in that market, and we will be there to accelerate with the market or market plus, as in general we do. India, a very interesting subcontinent for us. We have decided earlier this year to have a person dedicated to running a regional manager for India, reporting to me directly and working directly with the rest of the leadership team, because we want to have focus in a market that is increasingly important.
As a market, we expect specifically for data center, the market to probably the installed power over the next few years to double from a data center standpoint. But this is a market where we are quite strong from a C&I standpoint. So we have a long tradition. We have been there for decades. We are strong, but what is new for us is that we are building and expanding our capacity in India. And we see India as a source, a supply chain source, if you will, be it where we buy or where we manufacture, that can serve the world. So a lot of attention in a continent that also gives us an opportunity for geopolitical resilience. So very important.
And then there is, let's say, the rest of Asia. The rest of Asia is Southeast Asia and Australia and New Zealand. We see good demand there. We see a good data center market. We see an okay market for C&I, and that part of the market is definitely very much influenced by China and by India. We see that as a destination, a market for what we manufacture in China and in India. What we see, especially Southeast Asia, is very promising. I would say, still with a kind of a delay in terms of AI acceleration that we were explaining about EMEA, relative to the jump-start, let's say, of North America. I would see the same there, but a healthy market altogether, and a good presence in our case.
A very multidimensional story to it.
As multidimensional as that region is.
Anand, there's great excitement around AI. Some have wondered if AI is a bubble. What do you think?
Yeah, clearly, there's a lot of excitement. I think, you know, we, we've seen that AI has captured the imagination of businesses and consumers alike. You know, but I really believe that the demand for AI is real. You know, this is across the stack, whether it's the GPUs and the hardware, or you look at the compute, and the data models, look at the application layer. And most importantly, I think, you know, the usability and the ease of use, the user interface for this technology, is leading to consumers and enterprises trying out more and more use cases, right?
So, which is great. And we have a process where Giordano talked about this morning. We're looking at our pipelines, we're looking at SIOP, and readjusting, and we are seeing the demand, right? So those pieces are happening. And, for us, ourselves, within our own business, we feel that this is a huge productivity play. And the good part is that with AI, because of the productivity play, money is coming in. People know how to monetize it, which means that the base layer of this IT stack, the data center piece, is getting investments, right?
So now you have investments coming into the data center layer and supporting the entire stack. And within Vertiv, we're looking at how we can deploy AI, whether it is, you know, driving speed in our software development, or looking at simulation for new products, price optimization, or even looking at scheduling for condition-based services. These are all pilots that we're working through that we'll take to production. So it's still early days in the S-curve, and I think there's runway ahead. So I do believe that the demand is real, and it's not a bubble.
Awesome. We certainly see that in our business. So, K arsten, we have heard some great customer testimonials today, and we've talked a lot about working closely with customers. What's an example or how does that look for Vertiv?
So, rest assured that we have as good customer relationships in EMEA, as you have seen an example here in today of Americas and globally. I would highlight a couple. One that I am particularly proud of is with a Norwegian colocation in Oslo called Green Mountain. They happen to be a profile of being a colocation, very focused on renewable way of running what they do. And actually last year, we've issued a press release, if you're interested in that, I think it came out twenty-sixth of September.
There is even a video which is a similar character of what you're seeing here, where Gaia, the CEO, who I know well, is actually also confirming the good relationship we have. We're actually helping them, deploying a lot of, a lot of power solutions in as big as a 150 MW site outside Oslo. You remember that, I think it was John or, or was it Kyle, that actually shared a small video that said, "This is a 96 MW"? You remember how big that looked like? I'm talking about a 150-megawatt site, where we have actually,
Or helped them actually develop a lot of that power solutions that they actually are deploying. They're deploying actually the first 30-megawatt this month. And the collaboration actually included us, not only just, you know, opening an entity, but actually also hiring and implementing on their side a lot of project management capability and people, as well as field service people, to actually work closely together with the Green Mountain people throughout the entire deployment of that. And it's been so successful that we are obviously already discussing the next projects. They really appreciate our engagement and how close we actually work with that client. So that's a brilliant story.
It also happens just to be a fantastic story because the whole site actually is intended to be entirely fueled by hydropower, which i s not something that happens every day, by the way. I'll tell another example, which is an undisclosed client and is an ongoing project. But, as part of this need for speed of deployment quickly, and actually to meet the demand of a high density, we have a client who's actually asked us to do a proof of concept, in which we actually, out of prefabricated solutions, are building modules that essentially will enable the client to roll out as that client see fit with a super fast pace. And, as you all know, in EMEA, we have great facilities for prefab in Letterkenny, in Ireland.
We have it in Ras al-Khaimah, in the Emirates, and then we actually have also a strong manufacturing site in Rugvica, outside Zagreb in Croatia. And all those three sites are serving us nicely and well, and in my humble opinion, better than anyone else. In actually in order to be able to, together with that client, develop that solution, and actually already soon have that first proof of concept ready, that will enable the client to actually take a decision and being able, on a quarterly basis, to literally roll out as they see fit in terms of the demand and capacity they need. It is a very strong example of how we are working extremely close with our clients in the actual development and design and the development phase.
And then the last one I will, I will share is a, is a client we actually have, as well in Middle East, Meeza. They had a very specific and very tight physical footprint. They only had a certain amount of months by which they could actually deploy and actually commission a data center. We built a lot of that, again, by prefab. We rolled it out at half of the time it took to do on a brick-and-mortar site, and the client was very happy.
And we, again, here, actually developed a lot more business with that client also, both today and actually in, in, in terms of plans for the future. So, I can confirm as president that we are actually working extremely close with our clients in EMEA, and that actually helps us, of course, to enjoy the position we have and create that customer value that we want to deliver as a differentiator.
And the excitement is tangible about working with customers. So I know we could continue to tell stories around that close customer collaboration. I will save a question from Q&A. I'll ask it here for the panel: Which region will have the highest margin during the planning period?
Well, it's probably not gonna be Asia. Although we are the engine for many of the things that happen in Asia and the rest of the world. You know, we are trending nicely. We're trending very nicely, and we're proud where we're going. I think that it will be a race, continue to be a race between EMEA and the Americas. Well, let's hear from the man.
You know, right back at about my colleague and friend, Karsten. I think he's a little ahead, but we have momentum. We've done a lot of good work over the last couple of years and continue to do that. You know, with the high-performance culture and what Gio is driving, we're learning from each other. So I've learned a few of Karsten's tricks. You know, Dave, our chairman, always tells us, you know, "Master and apprentice change positions," and within this planning period, I hope to be the master.
And I will, in the spirit of one-upmanship, we all enjoy actually when we are actually developing nicely. And obviously, no one is more happy than the development we've seen in Americas, and of course, also being proud about the development we do overall as a company. And I really. Of course, we'll do everything we can in EMEA, try to support any other region, and I will still reserve the right to assume that we will do a little bit better than anybody else.
That's a good place to wrap it, but we'll be closely watching. So thank you, gentlemen.
Thank you, guys.
Thank you very much.
Thanks.
Thank you.
Thank you.
All right. So with that, I think, back to you, Gio.
Well, thanks, thanks a lot. We continue on. I will move this before we stumble into it. So, you heard me talking a lot about execution. An important change to our organization during the course of this year, with Anders running globally operation, and coordinating operations globally, and with Paul doing the same with procurement. Oh, the clicker. So, very, very, very happy with the job and what we have started to do together. Very excited. And as I said, there is more ahead of us, that it's more what we can do than what we have done. From a VOS standpoint, from a procurement standpoint, from a procurement productivity, manufacturing productivity standpoint, from a service level, et cetera.
But, you know, these are particularly complex times, if you will. So it's good to have a good foundation, like the one, the foundation we have reinforced during the course of the last 12 to 18 months. But, you know, we are in a very dynamic moment from a market standpoint, from a technology standpoint. So it can't be more important to have the right kind of robust stability, the right foundation. The other is that, you know, we are, we have growth ahead of us. So no one should think that this growth can come at the expense of efficiency and productivity in operations.
Indeed, I firmly believe that the two things need to go hand in hand, and while you grow, while we grow, we have to continue to reinforce our, and double down on our operational excellence, on our Vertiv Operating System efforts. And you will hear it from both Anders and Paul. And then, you know, it's here, together with service, as I say, service is where execution at scale meets the road, but it's here in operations, in procurement, where really the execution at scale happens. So with that, Anders, please join me here, or I leave the stage to you and the clicker, and off you go.
Thank you. Thank you. Hello, everybody, Anders, I'm running the global operations now since a couple of months back. I have been running APAC, EMEA, and before, and also Americas over the last year. Very exciting to be here, and I can tell you we are on a very exciting journey going forward to reach operational excellence in the global footprint we have today. In the past year, we worked very hard to stabilize the foundation for operations over the last 12-14 months, as Giordano mentioned, and we are in a kind of much improved level than we were last year. We are not there yet. We are working very hard to really reach where we want to be in the future.
We have reviewed the core processes that we've started, like, one year ago, and one of the processes we focused most of was the SIOP process. We extended the SIOP process up to 24 months now in Americas, and we have same time horizon in EMEA, and we're also working to have the same setup in the rest of the world. This will give us a much more improved visibility and operation readiness, so we are much more ready for the future. We can plan our future in a completely different way, and it's not only for operation, it's also for all our suppliers, and that's a completely different scenario. At the same time, we also start focusing much more on our global capacity rather than the regional capacity. So we're optimizing now the global capacity to meet our global customer demand and also our regional demand.
More about this later. Same time, we're utilizing our Vertiv Operating System, by using the lean methodologies in all our plants to unlock incremental capacity in our existing plants. And we have some very good example in some other plants where we have improved the throughput time with up to three times for our product, and we continue pushing this methodology all over our plants, but not only in our plants, also to other processes. We have add additional capacity, strategically located, based on all these demand signals Giordano talked about before. We have a thermal plant in Monterrey you heard about before, but we also increased capacity in our Mexicali plant for the AC power and also in many other plants.
We have reshaped the organization and strengthened the regional and the global teams with talents, and we reviewed the team members, make sure we have the right leadership. We also increased the organization structure and established a function called material management and capacity planning, to helping me to optimize the 12 months horizon globally. Where are we going to produce? How are we going to produce? What will be the benefit for us? At the same time, we have another function looking into the 3-year planning, make sure we're building the capacity for the future based on the demand, projected demand signals we're seeing in these weekly meetings. So some ongoing transformation and delivering results, definitely. We have increased the thermal capacity globally, around 55%. We also improved the delivery performance in Americas with 25%, around 25%. Are we there? No.
We have so much more things to do before we are where we're going to be. So we'll focus on the future a little bit more, and we focus on three areas: capacity, resiliency, and productivity. As mentioned before, we are completely focusing now globally, regional approach, customer approach, but regional optimization also, to understand where do we have the capacity, how much do we need globally? So we are deploying the right capacity in the right place. And one example is chiller production, that we're now producing in most of the regions. We are originally produced in EMEA. We start producing in Monterrey in a couple of months, and we also have started production in India. We're also analyzing, do we need it in more places or not?
So this is very important for us when we're reviewing different scenarios weekly, including in the SIOP, to be ready for the future demand, to really, really try to be ahead of the game, and that's what we're doing weekly. We're also doing different supply solutions and rapid supply scenario implementation, and with our best practices, and how do we set this up? What is the best solution, and how do we rapid deployment that one? One good example of this one is switchgear, where we are ongoing rapid deployment, an increase in the capacity, both in Americas, in EMEA, and in Middle East, to really meet the market demand. Digitalization, operation digitalization is critically important for us to be in the future, where we want to be in the future.
So we are now working with a globally harmonized manufacturing execution system, MES, based on Industry 4.0. We will have a system where we can manage our manufacturing footprint globally from one place, from many places. We have the same processes, same way of operating and managing it globally to really, really be ahead of the game. At the same time, we just kicked off a global planning project. We call it AI-Enabled Planning globally, to make sure we have one global planning tool taking us to the future. Number two is resiliency. Resiliency, we have talked a lot about. So we're focusing really understanding our global, resilience plan is our commitment to stability and growth, regardless of the environment outside our control. So we are focusing on make sure we have sufficient redundant manufacturing capacity and also from our suppliers.
Paul Ryan will talk about that later in supply base. But we will make sure we have a redundant capacity where we need it. We cannot be too tight. We know that our customer demand don't come in flat. We need to be able to take peaks, and we need to make sure we have more solutions, more productions for the same products. Operation sustainability, we are extending our sustainability thinking in all our plans now, focusing not only on energy, but also on emission and water usage. We're rolling out that globally now to really be a sustainable company. Risk management, strengthen and improve risk assessment, and continuous to plans. And one of the examples here, thermal production in many location for the same product. So if we have problem in one plant, we can be ready in another plant to support that one.
Productivity, we are obsessed in productivity. We need to make sure we are productive in the way we do our operations. So we are kind of obsessed in running our VOS adoption in our plants, really, really focusing on the lean methodology to be where we want to be. At the same time, we're using our best practices around the world. So one solution in EMEA or in APAC, which is better than any place in the other world, we're copying in place, and the best practices will always be approved. It's never best practices. It will always be the next level. Innovation acceleration is very important for us to work together with Stephen Liang's team and Paul Ryan's procurement team to really make sure we are part of this design process. So design for manufacturing is critical for us to make sure we are part of it.
We're designing it for manufacturing. We have the suppliers involved and the whole, the, LOB team, the development team in place, to really make sure we can boost our efficiency and we put this in the productivity area. Last but not least, our most valued, valued assets is our people. We will make sure that we can retain our talents and recruit new talents all the time. We need to make sure that we have the correct skill set to take us to the future. We need to make sure we are using those people to make sure they are helping us, taking us to the future. I will, by then, hand over to Paul Ryan, our Chief Procurement Officer, who will talk more about the suppliers. Thank you so much.
Thank you, Anders. Hopefully, everybody can hear me. I think you can. So, this is clearly the presentation everybody's been waiting for, right? To hear a guy talk about procurement. But hopefully, you'll find some interesting elements here to what we have been working on. It's just the tip of the iceberg, but some very important programs within the procurement organization. I think nobody in this room was unaffected by the pandemic over the last couple of years, and certainly supply chains and global supply chains bore a significant impact over the last two years. So one of the areas we've been, I want to say, maniacally focused on, has been building resiliency into our sourcing processes.
So making sure we have redundancy of supply, multi-sourcing, long-term volume and supply agreements with the suppliers of the key and core technologies that go into the solutions that Kyle and John and Steve talked about earlier in the day. So a huge area of focus for us, as part of that, making sure that we are seeking out and reducing areas of niche technology. Niche technology that is difficult to source, difficult to find from our design. So working closely with Steve Liang and the engineering teams, working really hard on what we call standardization, okay? Making sure that when we design a product, we design a BOM, that we are designing in standard, readily available components, and that we have multiple sources for those components, okay? So that as demand increases, as requirement for additional supply grows, we are ready.
We have a supply chain that is designed and positioned to support that. In addition to that, efficiency, right? Efficiency in how we conduct our business. Moving more towards a digital environment. One of the, I, I would say, big strides we've made in the last 12-24 months, has been digitizing our supply chain and engaging our supply base in a digital way, in a more collaborative way, in a more efficient way, that supports our goals of being fixed cost constant within the procurement organization. All of that has got to be underpinned by the Vertiv Operating System, making sure that we have processes and systems that repeatably support what we do, okay? That it's not a one-off event, or it's not a 12-month event, or it's not an 18-month event, but that sustainably, we can sustain these performance levels as the business scales.
That's the fundamental basis of the Vertiv Operating System and the procurement operating model. There's really three pillars to those areas of focus. There's capacity, resilience, and margin expansion through productivity, and I'll touch on each one of those briefly. When we talk about growing our supply base capacity, it's not just about adding additional suppliers. It is working with Gio and the rest of the leadership team in terms of looking ahead and understanding the demand projections for the business in each area of the business. And we do that on a weekly basis, and we take that information, and we feed that back into our supply chain and make sure that that supply chain is ready and positioned to support that demand as and when it arrives. We're standardizing parts to make sure that the availability of components is higher.
If you're using standard parts, lead times are shorter, availability is greater, embedded capacity within the supply chain is higher, okay? So capacity expansion comes not just from having additional suppliers, but making sure that we are using standard, readily available components in our designs. And Steve and the engineering teams have been a huge, huge partner in that activity over the last number of months. Resiliency, I mentioned, okay? But not just resiliency in terms of, you know, design or having multiple sources, but also geopolitical resiliency, okay? Making sure that we have a supply chain that is positioned around the globe to deal with what is becoming an ever more complex geopolitical environment in which to operate. And then margin expansion through productivity. It's a multifaceted activity.
One area I'm particularly proud of over the last 12-18 months is the level of collaboration we have between the procurement team, the engineering teams, and suppliers of core technology to Vertiv, right? We have a very deep collaborative process with our core suppliers through our advanced technology partner program. And that really, if you think about that, that's like an extension of our R&D efforts. It's like an extension of our engineering capacity, where we work closely between our CTO office and our key suppliers on influencing their roadmaps and their technological development plans, so that we're bringing their latest technology to market first, and in a way that helps us solve problems for our customers.
We've significantly ramped up the amount of competitive bidding we can do within our supply chain, and we've increased by 85% just this year alone, the amount we are putting through electronic sourcing and bidding processes. Again, you know, I mentioned digitalization, right? The more we can do digitally, the more we can utilize those digital tools to run our supply chain, the more efficient we're gonna be, the more effective we're gonna be, the more accurate we're gonna be. And also related to productivity, but also resiliency, is making sure that we are locking in, where appropriate, pricing with our supply base to protect our backlog, to protect our business into the future.
Very, very important, and in conjunction with Dave Fallon and the treasury team and the finance team, it's an area in which we've made great strides over the last 12-18 months. As a final comment, what I'll say is, again, all of this has to be repeatable, okay? It's not through individual effort. It is embedded in our procurement operating model, which is driven by the Vertiv operating system. And I'm gonna hand you back now to Anders Karlborg , who's going to talk to you a little bit more about the Vertiv operating system. Thank you.
Thanks, Paul. So you heard throughout the day many people talked about VOS, and especially Giordano mentioned it many, many times, and I will say it again. It's so important for Vertiv to really focus on the Vertiv Operating System. Vertiv Operating System is the way we operate and the big drive for operational excellence. Traditionally, we have focused on the manufacturing, successfully done so over the last couple of years, and but we're moving this into the future and start focusing more on the service and sales, the whole NPDI area
And then also our cross-functional processes like procure to pay, opportunity to order, and the SIOP. I mentioned SIOP before. We're rolling out that globally now to make sure we have the same process, same time horizon for it. So, with VOS, we aim at achieving 100% process ownership and constant improvement, matched with waste management and cycle time reduction. So, thank you so much, and I will hand over to Lynne.
All right, another opportunity for Q&A. So I would invite the speakers and panelists, so you don't get to leave yet, Anders, from this afternoon, if you can join up on stage. We'll do another round of Q&A for a few minutes. I'm gonna implement a real-time VOS program for my own Q&A. So I would ask initially, if you can ask one question, we'll try to get through as many questions as possible, and certainly, if we have time, we'll take additional. So with that, I'll open the floor for Q&A. All right.
Thank you. Jeff Sprague , Vertical Research. You know, one of the things we heard on the international panel, and I don't know if you used the term sovereignty, but there's kind of a data sovereignty thing going on. See it in semiconductors also. I was wondering to what extent does that maybe apply at the enterprise level, too? I think one of the early presenters said something about AI investments. Maybe people want to hold them close to the chest. So, a larger question around that, and really, at the core of it, is why wouldn't that enterprise growth maybe be a little bit better over time than the 3%-5% we got in the high-level projection?
Let me comment on that. When we looked at the enterprise in the past, it was a little bit lower than the 3-5 that you have seen today. We believe that the AI acceleration that is happening at hyperscale and colocation will pull, if you will, kind of the draft, will pull also the enterprise. Simply because what happens in the cloud, what happens in a hyperscale, will eventually translate into more data traffic at local level. But also, there are generally important AI applications also at the enterprise level.
There is, and there will be quite some, let's say, private AI deployments. So, our three to five is up from what we saw before. The speed at which will happen and the intensity at which will happen is in this moment hard to fathom, but we expect that eventually it will, it will happen. And if it happens faster or more intensely than we have projected right now, we'll happily support that demand and adjust our aim.
I think Lynne knows when she asks, tells us to ask one question, that means we'll, that means we'll ask two instead of three, okay?
You know, it's improvement. I'll take it.
Just, just one quick one on China, if you would. To what extent are you seeing indigenous Chinese competition come out of China? I wouldn't expect that to show up in North America, but maybe in some of these, Southeast Asia, India markets you're talking about, to what extent is Huawei and others, a competitive factor? Thank you.
Well, I would say that Anand, your experience is very important. So, you know what? Why don't you take it, Anand?
Sure.
the details you were running Asia
Yeah
Up until six months ago or so, but in the dynamic, you know very well the dynamic, but the answer is, it's happening.
Thank you. Yeah. Absolutely. It is, and it comes from three different places. One was initially a lot of them went with the telco rollouts, right? So Huawei's core was the telco, and as they build the telco networks, and in Asia, a lot of the telco networks are also data center operators. So that was one way where they went out. Secondly, when they went into the colos, they had their cloud. So they were bringing their equipment to support their cloud, but they were able to penetrate into some colos. Then you have the Chinese hyperscalers and enterprises are going out, and the GCs, so they bring some of the Chinese competitors with them. But as you mentioned, us being in China, and being a local company in China, we're able to compete effectively. Having that local service network, understanding local code.
Southeast Asia is a battleground, and we win more than our fair share by having that ability to have the local connections, the local relationships, but the technology and the engineering from China. So that's how it works. In India, we're local. We've been local for a long time. We started with a joint venture with the Tatas. We have strong footprint and presence, local engineering, manufacturing, service, and we compete very well there. Our prime competitors there are more the global players who are also in India. So little different dynamics, and obviously, you know, other countries like Australia and elsewhere, where some of the Chinese competitors are not allowed to play, so.
All right, great. Other questions? I'll pass the mic down, if you don't mind. Thank you.
All right, so Jeff set the tone here. I'll keep it a quick question. So, in terms of the, like, the mix of revenues by region, is there a material difference between Americas, Europe, and Asia? My bias is that Asia's more telco, maybe Americas is more hyperscale. So any material differences? And when you think about that 8%-11% five-year look, how does that look by geography?
I can definitely the intensity of data center is higher, if you will, in EMEA and in the Americas. In Asia is more balanced, and specifically in China, is more balanced between telco and data center and C&I. But then sometimes the definition and the parameters are blurred, and that's particularly true for Asia, where a lot of the telcos are in the data center business. And drawing an exact boundary between what is telco and what is data center is very hard. But if we look at the number crudely, what you say is the case.
If we think about the way we've modeled the future, then we would say that the growth is predominantly on the data center, and eventually we expect some growth on the C&I. Mix across regions, we see continued acceleration in the Americas and probably at a year lag in terms of acceleration for EMEA. So that will shift a little bit the mix towards the Americas, but then probably stabilize. But it's guessing.
All right. My arms are very short. Okay. Other questions? All right, I'm gonna go to this corner real quick.
You're in the duck's point.
You don't need a mic. I started with you. Started with you.
Thanks, everyone. Vlad Bystricky from Citigroup. So just wanted to ask, given all of the tailwinds within the business, your global footprint, your service organization, and your increasing R&D investments, is there anything that would hold you back from outgrowing the market even more than the 1% that's embedded in the outlook?
Well, let's say that we are doing the right things to grow and grow fast. Are there limits necessarily, and reasons why, you know? Are there any limiting factors? Well, it's, I would say not necessarily. I think that our plan today is a balanced plan, a reasonable plan. We always like to think that if we can do better, we will do better.
All right. Other questions? Hands.
Amit, you've been forgotten.
All right, I'm gonna go right to Amit then. Damn!
This better be a good one.
Yeah.
I thought this treatment was reserved by my wife at home, but... You know, I guess two questions maybe are, you know, on the GI, either one of you can take this. But, when it comes to hyperscalers, can you just talk about how has your relationship or your engagement with them evolved with these AI high compute data centers versus historically? Because, I think one of the knocks that we always get is, you know, what Vertiv does is fairly commoditized.
It's a very swappable asset. So we just talk about how is your engagement different with AI workloads versus what used to be? And then maybe secondly, around this topic, you can talk about the risk of someone like Meta, for example, that's, I think, trying to build their own cooling solutions in-house. Are you seeing that happen in a more pervasive manner, or is that a one-off example?
It is up to you.
You go ahead.
Okay. Yeah, great, great question, and I think comes back a little bit
Stephen.
comes back to a little bit of what Scott was talking about earlier this morning. I think with AI and especially when you start discussing thermal as an example, right? That's the first point of pain, when people start kind of figuring out what we want to do here. And we are seeing more and more of our customers come and work with us jointly as they want to address those problems. And as we talk to that whole ecosystem and the relationships we have, what Stephen described with the chip manufacturers, as we're working on their roadmaps for the future, we're already engaged with them early, right? So there's a natural affinity for the hyperscalers to come and talk to us about what we've done with the chip guys, how do we take that to market?
I think it's healthy, it's good, and you know, it is forward-looking, and that's across the board. In terms of you know, being able to have their own solutions or parts of it, I think that's healthy too, because if some of the demand numbers are to be believed, I think it'll be just a massive ask for any one company in the world to take 100% of that market, right? So there will be multiple solutions that people work through. And this morning at the gallery, there was a discussion at a simplified level, Gio talked about that inner loop within the rack. In the past, that used to be a fan, right? It was a fan. Anybody could make a fan, and then we did everything else around it.
But now, with liquid in it and so on, there's a little bit more technology. There's a little bit more of a IP discussion that happens there, and I think that's where we have an edge. You know, it's not just one or two years. It's many years of IP that we had in that space that's carrying on, that we can work through. So that inner loop connecting to the rack, connecting to the room, with the support and services and engineering, positions us well. So I feel it's a good, healthy place, and as they develop, you know, point solutions, they will feed into what we do, and the industry will evolve.
All right, I think we will hold off now. We're gonna have to move to the next presentation. We will have a longer Q&A after the next presentation, so please save your questions, and we'll, we'll get to them after that. So without further ado, I think I will introduce Mr. David Fallon, our CFO
I believe you.
who will be presenting financial strength and our value proposition.
All right, perfect. And, I know Paul said that was the presentation everybody was waiting for. That was not true. It's this presentation right here, and, I think I see everybody... They're setting up cocktails out there, so I'm the last presenter prior to that. So I'll be quite efficient. My objective over the next 25, 30 minutes, is to take everything that you've heard today related to strategy, innovation, manufacturing, and demonstrate how that all translates into financial figures, including our long-term targets. So this slide does a pretty good job of summarizing the key areas that we'll focus on. We'll start with a little bit of history. Our focus is definitely going forward, but sometimes it makes sense to take a step back. And, we've had some challenges since going public, but you can see the numbers.
Our stock price has been very, very strong, up over 300% from the time we went public, and that's significantly better than any major index in any... You can come up with any basket of peers, significantly better than any basket of peers. Above-market organic growth, there's not much more I can add versus what's already been said, but, as Gio mentioned, and others, our expectation is to grow somewhere between 8%-11%. We expect the market to grow 7%-10%, which implies that we expect to take market share, and that's based on a very strong product portfolio, innovation, and very strong relationships with customers. We've done a really good job, and we'll get into a little bit of detail in a few slides, in improving profitability over the last 12, 24 months.
So adjusted operating margin up about 700 basis points in 2023 versus 2022, but you can see our long-term objective is 20% plus. And we've always talked about that 20% as the long-term target. We've added the plus in there. So, we'll get into a little bit of the dynamics there in a few slides. And we definitely believe that we should be able to convert that profitability into very strong cash flow, and we'll go into the dynamics of our adjusted free cash flow conversion targets as well. And finally, this is after five years, we can have a very robust discussion about capital deployment, and that is based on the confidence of what we've done with cash flow over the last year and what we expect to do going forward.
The key takeaway there is that based on the market that we participate in, that strategy is gonna be anchored in flexibility. I think Gio used the term optionality. So that's gonna be the key as it relates to our capital deployment. Before leaving this slide, I just want to point everybody to the banner at the bottom, and this may seem trite, or dare I say, facile, but it is something that we talk about all the time within the four walls of Vertiv on a daily, weekly, monthly basis. That's the fact that sales, it means nothing unless it translates into profitability. Profitability means nothing unless it translates into cash flow. And finally, and the third or the fourth variable, free cash flow means nothing unless it translates into long-term shareholder value, and that's where we are all aligned.
We are shareholders as well, and hopefully, after the next 35 or I won't go 35, Lynne, where you are, 25-30 minutes, you'll appreciate that our focus is the same as yours, and that's to continue to build shareholder value. Okay, we said we would start with a little bit of history. What this slide does is shows our significant improvement in profitability over the last 8 quarters, and that's both from a dollar perspective, that upper chart on the left, and from a percentage perspective. So very significant improvement, and it's hard not to look at these two charts and not be pleased. But as Gio mentions all the time, "It's okay to be pleased, but never satisfied.
So there's still plenty of opportunity to go, going forward, plenty of work to do to get to our long-term target, which is that 20%+. But it's important to look at history because hopefully that generates the trust and, and I'll say, reestablishes the credibility, that when we look at a long-term target, that we have the capability of doing that, okay? And maybe just one last thing before leaving this slide. And something that you need to appreciate is we believe we are a very different company today than we were in 2021. And one of the primary drivers, if not the primary driver, and I'm not buttering up to my boss, but is Giordano's presence. So he's mentioned on any number of occasions today about operational execution.
I assure you that he has an absolutely relentless, intense focus on a cadence of operational execution. You can ask anyone at Vertiv; they would absolutely agree with that. He's had a great mentor, an okay mentor in Dave Cote, the Jedi master, but it is in Gio's DNA, and he took that philosophy of an operational cadence to the Americas in the beginning of 2022, and very quickly and significantly turned around that operation. Now he's taken that same philosophy and has incorporated it within all the regions, all the functions within Vertiv, and it's a big driver of the improvement that you see here, and it will be a big driver for us to continue to improve and reach our 20%+ margin targets. So this next slide, still dealing with a little bit of history.
As I said, sales mean nothing unless it converts into profitability, which we saw in the prior slide. Profitability means nothing unless it converts into cash flow. If you look at the chart, the upper left chart, we've had some challenges in 2022. We actually burned about $260 million of cash. Some of that was related to supply chain dynamics, and we weren't on an island from that regard, but we were also suboptimal as it relates to our planning, and execution on, you know, many aspects of working capital. We addressed many of those things, or some of those things in 2023. We expect improved performance this year, about $625 million of cash expected to be generated.
But once again, similar to profitability, and just about every metric we'll talk about today, still tons of opportunity, tons of work to do, and we'll get into that in a little bit more detail when we talk about free cash flow conversion. Before I leave this slide, I would be remiss not to spend some time on that chart on the bottom left, and without question, my favorite chart in the entire presentation. So net leverage. You can see net leverage peaked in the second quarter of 2022, almost 9 times. Some of that was related to timing, due to debt we brought in with the ENI acquisition and a lag in generating EBITDA.
But based on our ability to generate cash, which you see in the upper chart, plus being able to generate EBITDA, which was on the previous slide, we've been able to very quickly and significantly de-lever the business to the point that we expect to be at 2.1 times at the end of this year. And I can tell you, as a CFO, Lynne can tell you as a treasurer, that helps us to sleep a little bit better, not a lot, but a little bit better at night, and it really establishes a foundation for everything that we intend to do from a capital deployment perspective. This slide illustrates our target for organic sales growth. I think we've hit this like 10 times today, so there's not a whole lot of additional color that I can add.
I think I will spend half a minute on the point, the bottom right, which was a question Steve asked today, and I think Amit about pricing. So, this 8%-11% organic growth rate is inclusive of pricing. The 7%-10% market growth rate, there is a dynamic of fungibility between price and volume in that, and I would say that's the same thing for our assumption. And as I mentioned earlier, we really don't look at price as a dynamic of growth, although we'll take it. We look at it as a dynamic of profitability, and we intend to be price cost positive on a go-forward basis.
That's based on a better tool set, if you will, that we have today versus in the recent past, as it relates to pricing from a strategic perspective and data-driven. And we had some early warning signals as it relates to inflation, where we anticipate instead of react. But once again, we look at price in relation to cost and look at that as a driver of profitability, which is a good segue into this next slide, where we illustrate a path to 20% adjusted operating margin sometime in the next 3-5 years. And I had some questions at the various breaks on what that exactly means. Kind of means what it says. It's gonna be sometime in the next 3-5 years.
If things go well, if we're able to execute from an operational leverage perspective, and Paul and Anders successfully execute their initiatives, we could get there in 2026. But we are confident that this business is a 20% adjusted operating margin business. We're gonna get there. We put the plus in because we're not looking at 20% as a ceiling. We think there's opportunities above 20%, but let us get to that 20% first. So I mentioned the significant improvement this past year with adjusted operating margin, up 740 basis points from 2022. About 500 basis points of that was related to improvement in variable contribution margin, okay? Inclusive of price cost.
About 240 basis points of that was driven by operational leverage, and we expect that operational leverage to continue. You can see it's the largest bar in the bridge. We anticipate about 300 basis points of the 500 basis points of margin improvement to come from that operational leverage, and that is while we continue to invest in the business, okay? So we know to make money, you have to invest money. We are operating in a very dynamic market. It's gonna be growing in that 8%-11% range, at least our organic sales line. We have to be prepared to invest.
If you look at the bullet point, the upper right hand, what we have modeled to support that 8%-11% growth is investment somewhere between $75 million and $125 million per year, combined between R&D and operation, operational capacity. It could be at the lower end some years, could be at the upper end in other years, and this is something that we will revisit on an ongoing basis. And that's a good reminder as well. This is presented as a static model based on the market that we're participating in and any number of outcomes. This is gonna have to be updated on a continuous basis, but you got to pick a point, and this is where we are at this point in time.
To address the question about operational leverage earlier today, that could be a little bit of a drag, but we need to be prepared to make that investment to enjoy that growth at 8%-11% and also have the ability if the market grows even faster. Commercial execution, we already talked about price cost. We think we have an enhanced tool set as it relates to pricing. But what Paul has done with the procurement organization has been incredible in a short, very... a very short period of time, to the extent, as I mentioned, that we can actually anticipate inflation instead of trying to scramble and react.
The last two bars and, and not to shortchange those at all, but I think, Paul and Anders did a pretty good job of describing the initiatives that they'll be driving, and those combined are about 100 basis points of the 500. So before exiting this slide, once again, everything that we see here as it relates to driving margin improvement is absolutely anchored upon that very intense cadence of operational execution. And that goes beyond just the P&L. It also includes free cash flow and trade working capital, which we share our view of adjusted free cash flow conversion on this slide. So not to belabor 2022, but it happened, right? We actually burned $260 million of cash in 2022, and that translated into a negative 129% free cash flow conversion.
You know, certainly nothing to be proud of, but we were able to address many of the issues, not all of the issues, but we were able to address many of the issues and put a much improved performance on the board for 2023. We expect to generate $625 million of cash, which translates into a 95% adjusted free cash flow conversion. Now, how were we able to do that? We refocused attention on inventory turns. Anders' team has done a good job. You notice I'm not saying great job, but has done a good job. And that's the case for everything as it relates to working capital. There's still tons of opportunity, but we did address some past due issues and some timing of billing cycles and worked a little bit on supplier terms.
But a big driver was also the introduction of an advanced customer advance payment program in the Americas, and Gio instituted that in 2022. We started seeing the benefits in 2023. To the extent, and maybe a good way to kind of understand the quantum, I think Stephen talked about engineering nerds. Well, there's accounting nerds as well, so just give me some leeway here. So if you look at the face of our balance sheet, there's an account called deferred revenue. Included in that deferred revenue account, that's where the customer advanced payments sit. So that balance on a year-to-date basis is up 50%. Our sales on a year-to-date basis, this is through the end of September, they're up only 25%. So that translates into an excess...
You know, assuming that customer payments otherwise would grow consistent with sales, in excess about $90 million of free cash flow, and that converts into or explains about 15 percentage points of that free cash flow conversion. So you adjust for that 15%, our starting point for 2023 is probably closer to 80%, right? Which is important because you can look at the 95% in our long-term goal and say, "Well, you're already there." We still have work to do. There's still plenty of opportunity to take that 80% and increase it to that 95%, to a 100% range. But we have confidence that we have plans in place. A lot of work to do to take the good to the great, but it also gives us confidence to be able to show this next slide.
And the title pretty much says it all. Since we've gone public, our target net leverage ratio has been between two and three times, okay? Based on the cash flow we generated this year, plus our expectations going forward, we have all the confidence that we can run this business effectively while continue to invest, while continuing to or maybe starting to return cash to shareholders, that we can operate in that 1-2 times level. And, maybe the only other footnote that I'll add to this slide is our expectation of paying down some debt here in the next couple of years. We, we have a $2.1 billion term loan. About $1 billion of that is at a fixed rate, a really good fixed rate at 4%.
We put a swap in place in March of 2022. That's looking really, really good right now. But we also have a variable portion, which is about $1.1 billion. That's over 8%. Our target over the next two years is to start paying that down. And we say somewhere between $500 million and $1 billion over the next two years, which should put our balance sheet, from a debt perspective, in a good position to finally talk about capital deployment. I know everybody's probably already seen this. You guys may know these slides better than I do by this point in the day.
But I have to remind everybody, before jumping into the details, that based on the market that we're operating in and any number of potential outcomes as it relates to growth, that the cornerstone of this strategy is to retain flexibility, okay? And that's flexibility to continue to reinvest in the business, and that could be either organically or inorganically, and the flexibility to return cash to shareholders, either through dividends or through share repurchases. But bottom line, based on where we are today in the market that we operate in, our absolute focus is on flexibility.
With that said, we estimate, based on what we're modeling, to have about $6.5 billion of capital to deploy over the next five years, and that's based on our estimates of free cash flow, which, by the way, include provision for this higher investment that we're projecting for R&D, for operations capacity and also CapEx. I didn't mention on the slide, I should have, also included in our expectations for cash flow is an increase in CapEx investment. Historically, we've been at 2%, maybe a little bit lower in some years. Going forward, what we have modeled to support the growth is CapEx in the 2.5%-3% range. Just like the other elements of growth investment, that higher investment in CapEx is inclusive within the $6.5 billion.
The top gray portion of the bar on the left, that is our estimate of additional debt capacity available at 1.5 times levered, which is the midpoint of our one to two times range. So what are we gonna do with this capital? That's the bar on the right, okay? This illustrates our current model for projected use of capital. Starting at the top and moving down, I think everybody at this point in time saw our press release from earlier today. We announced a $0.025 dividend payable in December. That's our annual dividend for 2023. That's an increase from the $0.01 a share that we paid previously.
We also expect going forward, and I'm looking at my general counsel, dependent upon board approval, is that right? We expect to increase our annual dividend to $0.10 per share in 2024. And from a cadence perspective, that we will begin to pay that out quarterly. So not super aggressive, but we believe it's the right next step for us, while retaining the flexibility that we've been focusing on in this conversation. So the next bucket is share repurchases. And once again, I think not a surprise at this point. I had intended for this to be the big reveal, but I think this is eight hours old or whenever we released it. But we announced a $3 billion share repurchase program earlier today over the next four years.
And we, you know, we can start repurchasing shares immediately. Not saying we're going to do that, but that authorization was approved last night, and we do intend to repurchase shares. Now, we don't have any set annual targets as it relates to the number of shares or the dollar amount we're going to expend. We're going to look at every opportunity on its own merits based on where we are with liquidity and based on other opportunities that we may have with capital deployment. Last on this slide, $3.3 billion of additional capacity, and this is the epitome of flexibility, right? Now, we will first target using this capital for bolt-on acquisitions, as Gio mentioned.
And we believe, based on the market that we operate in, that there are opportunities out there to supplement our current portfolio of technology and products. But if the right deals are not available, we'd be perfectly content to either return this cash to shareholders through additional repurchases, maybe increasing the dividend, or holding that cash for reinvestment into the business, whether that's y ou know, to support a scenario where we may be growing above that 8%-11% range. Maybe the final takeaway here is the appreciation that we could invest this entire $6.5 billion. So let's say we do $3 billion in share repurchases, we take the $3.3 billion, invest it somewhere, we're still very conservatively levered.
We're still at 1.5 times, and that doesn't consider if we do an acquisition, the EBITDA that we would get from that acquisition, which would actually take us lower than 1.5 times. But bottom line, at this point, our objective is to retain flexibility and optionality. So let me pivot quickly to some more near-term matters. Once again, this was in the press release earlier today, so not new news, but this chart, you should be familiar with. It closely mimics what we share in earnings releases. The orange bars are 2023, the gray bars are 2022. Anytime the orange bar is higher than the gray bar, that's a good thing. The trends are very similar to what we reviewed at the end of the third quarter.
The change is the increase in guidance. So we took sales up $45 million, and all the other metrics, effectively, there's a flow through there. So AOP up $15 million at a midpoint, adjusted operating margin up slightly. So that's enough for 2023. Preliminary guidance for 2024. You can see the organic sales growth range, between 8% and 10%. Once again, we expect that to be higher than the market growth rate. This does include provision for continued challenges, in China. Adjusted operating margin at a midpoint of 16.7%, which, by the way, is in excess of our midterm target. So we've been talking about a midterm 16%, long-term 20%. I think we can officially check the box on the midterm target in 2024.
Adjusted free cash flow conversion, we expect to take that next step from an adjusted number of 80% this year up to 85% next year. Then the final slide, which is just a recap. But once again, as we run the business on a daily, weekly, monthly basis, our focus is to take that top-line growth, make sure that converts into profitability, make sure that profitability converts into free cash flow, and now we can add that bottom section, which, what are you going to do with that cash? We have presented today what we believe is a very prudent, I won't use the word flexible again, capital deployment strategy. And once again, all of this is in the interest of driving shareholder value, and that's our intense focus on a daily, weekly, monthly basis. So with that said, I will turn it back over to Lynne.
Thank you. Well, thank you. I think that was meant for you also, but once in a while. But, I thought that was a great way to really finish the day in terms of presentations. Everything we've been working very hard on, for a very long time, building into the value creation, has been exciting. Has been very exciting. So, with that, we will have a longer Q&A. Hands are already up, so excited about that. So, we'll go ahead with your questions.
We can't bring in other people to help?
Ah! You know, we can. I won't rule it out. So if you have a question for some of our other team members, we'll bring them up.
Thanks, Lynne.
Yeah, of course.
Thanks, both of you. Lance Vitanza from TD Cowen. On the bolt-on acquisitions, I mean, you've $3.3 billion of potential incremental capacity. It's a big number. Could you put some any sort of limitations around how much of that might be spent in total around bolt-on acquisitions? I mean, should we think that there will be no more than, I don't know, $1 billion spent on bolt-on acquisitions over the next few years? Or no, is it possible that it could be a much bigger number?
We are in a very dynamic market right now, Lance. It's hard to tell the next 3, 4, 5 years. So in this moment, deliberately, we didn't want to cap, sorry, put a cap to what the number is. Clearly, bolt-ons are not enormous in their very nature. That'd be a little bit surprising, but enormous value, or a value transaction bolt-on, but it would be premature to try and think that further.
Just one quick follow-up on that. Should we be thinking about specific regions where you are more or less likely to make these potential bolt-on acquisitions? Thank you.
Well, in general, if we think about technology, technologies are global in their very nature. There could be some bolt-ons that open routes to markets or adjacency. We would just go opportunistically, following the region where the opportunity is, and then stretch it out to the globe. Typically, bolt-on are such that we can use the technology or specific market expertise, and we can scale it to globally, following the footprint of Vertiv. So, think about a global footprint in that respect, wherever there is market and wherever there is technology.
All right. Lisa?
Thanks. Nicole DeBlase from Deutsche Bank. I'm going to ask one and a half questions, if that's okay. So the half question, you guys have been pretty generous in giving us an update to 2023. I'm going to go a step further and ask if you have anything to say about how orders are progressing in the fourth quarter. And then the full question is: just remind us, is there any structural reason why you can't close the margin gap versus peers over time? Just thinking about the + sign and the 20%+ margin outlook. Thank you.
I don't know which of the two was the half question. There's
Orders. Orders were the half.
So orders were the half question. I will give you a half answer and I'll go back to what we indicated, Nicole, at the last earnings call. So the situation was well characterized then. Do you want to take the second part?
I have the full question.
The full question.
Yeah. I would say, I mean, if you look at our competitors, and there's no perfect peer or comp out there, but if you look at where we participate and where they participate within the data center space, there's no structural difference between our business and theirs as it relates to margin. You know, we have a very robust services business, which is higher margin. Many of our competitors have nothing there and may have a little bit of something. So we have some advantages, and they have some advantages. But overall, I think, you know, from a structural perspective, there's no reason why we can't get to where they are and above. I think our competitors are good operators, maybe not great operators, so I think there's plenty of opportunity for us to even surpass where they're at. Yeah.
All right. Other questions? I'm trying to do a quick scan to make sure we have everyone, first question. I'll do one back here. I don't think they had a chance to ask yet. All right. How about this? Here we go.
Thank you. David Ridley-Lane from, B of A. So, you know, you mentioned that the AI architecture isn't really set yet, right? That there's a range of outcomes, and there's a range of applications. So when you gave that slide, that, you know, your content goes from $2.5 million-$3 million per megawatt in a traditional setting, up to $3-$3.5 million in an AI setting, what are some of the assumptions you're making? What are some of the forms or use cases that would drive that content higher or lower?
We do not think lower. When we say that the high-density architecture or AI data center structure is not set. It doesn't mean that we do not see the technologies that are coming about. Indeed, we see them very well. We participate with the NVIDIAs of the world in the design. We work with the hyperscalers that are typically ahead of the pack in terms of conceptualizing how the solutions need to be designed. We work with them intensely. What we were saying is that there is not one approach that covers all needs.
John, for the thermal part, John Niemann was mentioning that, you know, you would have different technology choices of the portfolio, per each of our—or let's say, no two solutions at hyperscaler level are equal. So we gave a range exactly to factor in the fact that there could be different types of approach. So I wouldn't say that everything is fluid. I would say that we have a portfolio of solutions, and the way the different players will configure their solutions will be specific to their needs, to what they think, and maybe 3-4 years from now, there will be a convergence, or maybe not. Maybe their load will be slightly different, and they will stay on their paths.
What is still ongoing and will always be ongoing is that the evolution of the technology. We briefly mentioned using liquid cooling as the example. We briefly mentioned about kind of a single-phase direct to chip, two-phase direct to chip. Subtle difference, but in terms of the problem that it solves, quite different, because you can't use a single phase above a certain power per chip, and that part is being developed. We are developing it, we have a product, we have shown a product as well on the two-phase, but that part is still developing. So the industry will continue to develop.
So that three to five per megawatt is our current view with what we know, with the portfolio that we know, with a potential permutation of mix of solutions, and also thinking and factoring in the developments that are reasonably near in our roadmap. But, you know, we're talking about three to five years out, and there is certainly room for further technology development.
Thank you.
All right. Other questions? All right, now you guys are going back and forth, I think, just in front of that. Here you go, Jeff.
Thank you. Hey, just to come back to the cash flow, cash deployment, and leverage, why target lower leverage? You know, one, 1-1.5, 2 sounds kinda suboptimal. Maybe it's just the interest rate environment, but maybe, you know, maybe more importantly, are you being flexible to a fault here? If you believe the forecast, and I think you do, and I believe it, why wouldn't you wanna hit the share repurchase much harder, say, you know, in year one or year two, instead of kinda dribbling it out over four years or so? So that's kinda the first question.
Yeah. So as it relates to the share repurchase, our ability to repurchase shares is gonna increase with time, right? So we're in a decent position as it relates to liquidity and debt today, but we're no you know, you should not expect, we don't have the liquidity today to go out there and buy $500 million of shares. So our ability to repurchase shares just from the availability of cash, is gonna increase as we go forward. You know, from the perspective of, of the, the leverage ratio range, one to two, I do believe some of that is absolutely correlated with the interest rates. If we are still in a low interest rate environment, maybe the perspective would be different. That's a hypothetical question, I guess.
But it also gets in a range where we can start thinking about investment grade and getting a lower interest on the debt that we would have. But what I would say is, you know, it's an indicative range, and just like when we were between two and three, we were comfortable going above the three range if it made sense to do that, right? And we also wouldn't look at cash as a hammer looking for a nail, right? If we dip below one times, we won't be compelled to feel that cash is burning a hole in our pocket. We have the ability to be patient and retain that flexibility.
So if we need to go over two for the right, you know, opportunity or go below 1 just because that opportunity isn't available, we'd be more than prepared to do this. And you know, nature of flexibility is also related to the strategy as well. You know, we're at the very beginning of this. We're at the very beginning of a very dynamic market. We're also at the very beginning of a capital deployment strategy. So this is something, even with flexibility, that we will reevaluate that on a continuous basis going forward. But we do believe a $3 billion
You're the first one I heard say, "Why isn't it more than that?" I mean, others are questioning, "Man, that's, that's a lot.
I like to take the lead.
Yeah, that's right. But we'll continue to evaluate that continuously going forward.
Thank you. I appreciate that. Gio, this is maybe a little related to the prior answer you just gave, but back to your bridge of how you're building up to AI. There's that bottom bar that's kind of looks like a detraction of 300-500 basis points. Was it clear to me from what you said, is that cannibalization or atrophy somewhere in your base? It sounds like no, 'cause I've heard liquid is just all incremental, and there's no cannibalization of air. That seems to be your position. So if you can just kinda confirm that and, and really what that bar means in a little more detail.
I confirm that, and that bar just represents a cautionary view on the industry itself and the dynamics that could be counter the tailwinds that we see, that we saw in the upper part. So, the GPU growth rate, the investment, the CapEx growth rate in the industry. And it's simply to say, okay, let's remember, there could be some and there are things that we see today in terms of, in terms of possible limiting factors to the growth. One limiting factor is power availability, and that's very real. As we were saying here, discussing with some of you during lunch, you know, the ingenuity in the industry will solve that problem.
You saw elements of our portfolio enabling that flexibility outside the traditional, let's say, the traditional way in which data centers are powered, so pure, pure grid. You know, we talk with some customers, and customers talk about micro nuclear. There certainly is an opportunity with fuel cells and microgrids, all things that will develop. What we do not know is the speed at which that will happen. And there will be other limiting factors. Permitting was another one that was listed there. You know, sometimes, especially in densely populated areas, getting the right permit for a large diesel genset deployment, tricky.
So, that could be another element of a headwind to the industry. So we just want to be realistic. We've been in this industry for quite some time. We have seen, probably never seen a tailwind of this magnitude. We like it a lot, but we also know that you can build only so many 250-megawatt campus a year, and find the right people that can man a construction site. So those are, that's what that bar represents.
All right. Yep.
Well, Jeff's now, I think, asked five, so I'm gonna catch up to him, despite the bullying. So just on the trajectory, you're guiding eight to 10, but you're guiding to eight to 11 over the long term.
Yep
Eight to 10 in 2024. Should we expect it, this is nitpicking, but should we expect it to kind of, like, accelerate in 2025 and then stabilize? Or because of these constraints, it's gonna kind of ramp in the back part using the high end of the ranges?
Hey, look, we're talking about eight, 10, eight to 11. So I think we would be just with such a fine-tooth comb, talking about exactly what that 0.5% growth would represent, that it's a little let me say, it's a little bit premature to be able to accurately answer the question.
Well, I guess, then why'd you put it there if that's the case? I mean, like, why don't just make it eight to 10 for the next, like, you know
Well, because of f ive years. You know, it's about the acceleration that we still believe is there to come. So, and the acceleration could very well be further acceleration in 2025 or in 2026.
Okay, and then just
It's not just a back end, all of a sudden, it goes off the chart in 2028 and poof! Up. No, that's not.
Then just with this capital deployment, are you... Could there be a point where you're gonna be doing, like, more real technology deals, where you decide, "Hey, this is the liquid cooling technology that we think is the killer app, and we're gonna spend a decent amount of money on something that has no earnings?" Or, you know, are these technologies, you mentioned something about backup power or grid-related type of stuff. I mean, like, And I guess, as part of that, what is your strategy on this liquid technology? It sounds like you're gonna just partner and kind of keep an open mind here, but, I guess just a little bit more flavor on-
Absolutely
What type of assets.
First of all, in general, just like everything we do, our productivity of R&D and engineering is improving. At the same time, you saw an investment projection in R&D spend projection that is 13% CAGR, so outpacing growth. That is already fueling future opportunities. Just like everything, that is true for liquid cooling. It is a combination of partnership and us having the IP. So that's the philosophy we apply in general, and all the time.
The same is true with the more, let's say, grid interacting or microgrid or a battery energy storage solution for the power side of the equation. So we are already doing that. We're already spending R&D dollars for things that can be a little bit more out there, but for which we see a tangible opportunity, certainly in the planning, in the planning period. And in the end, you know, we want to own, and we own the IP of what we sell.
So Gio, I think you referred to ENI as a quote, unquote, "game changer." So maybe talk about how it's really improved, you know, Vertiv's go-to-market strategy, adding that switchgear capability. And is there more to do in switchgear, or are you pretty happy right now in your positioning versus a Siemens or, you know, Schneider?
It's a game changer because it moves us from being a point product type of power player, albeit quite, quite a few products, UPS, some elements of power distribution, to the entire power train. But is there more opportunity? Yes, there is more opportunity. I believe, and we believe, and we know, for example, that our penetration in the commercial and industrial part of the powertrain market, if you will, is still very, very small. So there is an opportunity for further growth there. Is it something that we will kind of jump on tomorrow morning? Probably not. Our focus on data center right now is essential.
Because we want to make sure that we, we capture the growth and we capture the growth plus, as we, as we gain, as we gain market share. But longer term, and we're still already working internally, having projects for further expansion of our coverage in, in other markets. So the answer is yes, there is more we can do, and we, have that in our roadmaps.
Great. And then it strikes me the biggest challenge that your customers face is the path to net zero over the next, you know, 10, 15 years. To what extent do you think Vertiv can actually be a player in actually achieving those targets and providing solutions to your customers? And does your 5-year, you know, kind of growth taker, does that anticipate any additional solutions you can provide to your customers?
I'd say that a big element is the role, the most important role we play is around the efficiency. So the efficiency through our thermal management solutions, and when it comes to the fact controlling the entirety, the orchestration of the entire power chain is a big element, a driver of efficiency and the efficiency in the technology of the individual products, but also from a powertrain standpoint, the ability to open the data center to other sources of energy and alternative renewables, micronuclear, if you wanna call it. It certainly is not a CO2 generating technology, that one, but our technology, the powertrain as a power management, the heart of the power management is what we enable.
We have a very important central role to play in their plans.
All right. Other questions? Oh, Site.
Oh.
Hi, Taylor Harrington with Digital Bridge. I have a question about how you think about capacity expansion and how. What, what's your framework for determining, you know, what's the right amount of capacity to bring online on an annual basis? I think at one point you talked about 15 GW of deliveries in aggregate over the next five years. You know, I ask this question in context of, you know, if NVIDIA is going to deliver as many chips as everyone thinks they will, that's three GW of capacity annually just with GPUs. Then you've got AMD's platform, which is, you know, supposedly incremental to that. And then you've got the TPU platform at Google, you've got all the custom silicon platforms at AWS, and Microsoft is working on their own custom silicon as well. So you add all that up, and it's way more than three GW of delivery a year. So, like, how do you think about, are you bringing on enough capacity?
I go back to what I was saying earlier today. We have capacity that we can utilize. We are investing in capacity right now across the spectrum of the technology, thermal, power, the various parts of power. We have beefed up our investment and our CapEx plans, but we can accelerate further if needed. We very diligently look at what signals our pipeline is giving us, but the pipeline in and of itself sometimes is too short-term-oriented. So we, on a weekly basis, almost, I would say the drum beat is weekly.
We look and we collect all the information for them from the market, so that the longer lead time decisions, like expanding a factory, more footprint are taken early in the process. Some of those decisions have been taken or are being taken as we speak. From what we see today, from the direction in the industry, we are seeing and we are hearing from our partners, as you have seen, and our customers, pretty relevant players in the market, I think we are paced in the correct way for making it happen.
All right. Other questions? Oh, hi. I'm gonna take that one. I know, I love this. I'm gonna have more hors d'oeuvres after. Ah. You're welcome.
Between legal and finance, I think we've managed to muddle our dividend policy message. So Gio, just looking for confirmation that what the board has agreed to is an increase from $0.01 a year to $0.10 a year. It just so happened to start this quarter at $0.025, which is consistent with that $0.10 a year policy, correct?
That is correct, Dave. Confirmed.
Thank you.
You don't have a follow-up? There's a lot of follow-ups. Mr. Sprague?
Thank you. Just come back for seconds here. Just on the cash flow, David, getting to that 95% or so, what else does need to happen? I mean, can you roll out this advanced program to other regions? Can you just kind of bridge us to what you think kinda gets you there, is question one.
Yeah. It is broad-based across all areas of working capital. So inventory is one area. I think our turns right now are in mid-single digits. It's better in some areas, but you know, our goal is to get to 10 turns at some point in time. And you can go down the list. You know, from a accounts receivable perspective, we have some complicated order arrangements with customers. We have to work through those, reduce past dues, with better debt position, better leverage position, hopefully better credit ratings if our Moody's and S&P folks are here.
But we should be able to leverage you know, longer supplier payments as well. And then, as you mentioned, the advanced payments, that is something that we're not gonna stop, right? So, we penetrated a good portion of the customers in the Americas in 2023, but there's further opportunity there, plus in other regions. So there's some form of advanced payments throughout, but there's still plenty of opportunities going forward. So, I wouldn't say there's one area of focus. It is pretty broad-based, you know, across all the components of working capital.
Just to your guide on 2024, why would 2024 margins just be equivalent to the second half of 2023?
That's a good question.
I'm surprised no one's asked it yet.
Yeah. Some of that is related to seasonality and the operational leverage that you get in a first quarter and a second quarter, similar to most industrials out there. And we talked a little bit about seasonality in first half and second half, in the third quarter. We do anticipate our first quarter to continue to be the lowest quarter from a sales perspective, and that would impact the operational leverage in 1Q versus what we saw in Q3 and Q4. So you should see a step down, and that should sequentially improve as we go through the year. So it's more of an average. So there is nothing fundamentally different between what we're doing in Q1 versus what we did in Q3 and Q4 to drive those higher margins.
It's just a factor of the top line.
Thanks for taking the follow-up questions. I had a couple of clarifications on some of your comments, Gio, in your introductory section. So you broke out the data center revenues at about half hyperscale and colo, half enterprise. Just wanna make sure I understood what you were referring to. Was it 4Q annualized revenue, 2023 revenue orders? Like, what exactly is 50/50?
We were talking about. I think it was my second slide, when we were saying, Vertiv at a glance, that is, 2023 expected revenues as per the latest guidance. So 75%, 50/50.
Okay. And then, similar comment, you said over 100 million GPU specific and over 250 when you count other products that you know for sure support AI. You know, it's the same question: Is that for 2023 in total, or, you know, the exit rate or order?
That's more a backlog and volume business.
Okay. Last question for me was just how you think about services versus product revenue. You know, I noticed in the appendix, you plan to change your segment disclosures going forward, and should we think about faster growth in products and maybe leading what services will grow at relative to that, organic growth rate that you targeted? Thanks.
Now, we expect service and service to grow at the same speed of product in this 8-11 projection. So, constant mix in that respect.
All right.
Hi, it's Melanie Maslin from STM Pension Fund in Montreal, Canada. So I have a pretty broad and large question. What would you say is your big- would be your biggest challenges or what could go wrong? You have a nice plan, it's a great Investor Day, but what keeps you up at night?
Well, I sleep very well at night, probably because my days are very, very intense. So I tend to collapse. I get up early, by the way, so they start early. But having said that, all joking apart, is what you heard, keeping the organization tensioned on making sure that what you heard here is happening. That we progress, that our innovation continues apace relentlessly, and that we continue to be capturing every signal from the market. Be it making sure that we do not miss out on a growth opportunity, or making sure that there are no technology changes somewhere out at the horizon.
And again, central to what we do is continue to be relentless on our operating system implementation, Vertiv Operating System implementation, and operational excellence trajectory. So these are the things, not one thing that keeps me awake at night. It's just, you know, you saw our model and our plan is pretty orchestrated across the various components. So it's always been, you know, making sure that tension and orchestrations continue to vibrate across the organization.
Just a follow-up question: in terms of pricing, are you concerned about pricing normalization? I mean, when there is a new solution, usually it's a higher price, but in 2028, where do you see pricing for your solution?
Well, I think talking price all the way to 2028 is a little bit is a little bit difficult. We'll restate what we're saying. We, we see it throughout the period, a favorable price price cost equation. We believe that the value that we, that we bring to our customer is being recognized by our customers, and I, and I strongly believe that we have good plans when it comes to productivity in general, and that will- the, the ratio price cost will, will be in favor across the board.
All right. Good questions today. Thank you very much. With that, we're gonna go ahead and turn it back over to Gio. So Gio, please.
Very good. So, you know, I will be quick, and I'll close the session today. Thank you for being with us, today. Thank you for your time. Really appreciate it. But before we part or before we have some drinks together, dare I say, just let me walk you through again the vectors of our value model and our value equation. A market that is going in the right direction, and we continue to be the leaders. And remember, you know, the whole data center market on a 9%-12%, and the hyperscale and colo on 12%-17%. So there are two parts of the market and two different speeds there. Innovation, innovation, innovation.
We have the most competitive portfolio, and we have plans to continue to drive that leadership for the years to come. Customer relationships, I think, couldn't have been stated more, let's say, poignantly today. I talked extensively about our roadmap to operational excellence, and we believe we have robust plans for margin expansion and a very viable and still flexible capital allocation plan that is fueled by the free cash flow expansion and the free cash flow position that is certainly new for us, and we'll continue to improve as we go forward. So with that, thank you very much. I'm sure you share the excitement about the industry and excitement about Vertiv. So thanks a lot for being with us, and looking forward to continue our conversation later.