Morning, everyone. My name is Jamie, and I will be your conference operator today. At this time, I would like to welcome everyone to Vertiv's Call announcing the Eni Engineering Group Acquisition. All lines have been placed on mute to prevent any background noise. Please note that today's conference call is being recorded.
At this time, I'd like to turn the program over to your host for conference call, Lynn Maxheimer, Vice President of Investor Relations.
Great. Thank you. Good morning, and welcome to Vertiv's conference call to discuss of the acquisition of Eni Engineering Group and to provide an update on the business outlook. Joining me today are Vertiv's Executive Chairman, David Cote Chief Executive Officer, Rob Johnson Chief Financial Officer, David Fallon and Chief Strategy and Development Officer, Gary Niederboom. Call.
Before we begin, I point out that during the course of this call, we will make forward looking statements regarding future events, including the future financial and operating performance of Vertiv as well as the and conference call for questions. Please turn to the operator for questions. Thank you, operator. Thank
you,
conference call. And you can learn more about these risks in our registration statement, our proxy statement and other filings 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. Call.
During this call, we will also present both GAAP and non GAAP financial measures during the conference call and GAAP to non GAAP reconciliations can be found in the announcement relating to the acquisition and in the investor slide deck found on our website at investors. Vertiv.com. With that, I'll turn the call over to Executive Chairman.
Well, we have today a bit more of a complicated message because at the same time that we're announcing just a terrific acquisition, We have to take our numbers down because supply conditions have worsened significantly. Just a month ago, we were assured of supply by paying more, which we included in our estimates. A month later, that was no longer true. Now you can't get supply at any price and we have to adjust for that. It is unpleasant for you and for us, but then is the facts.
Importantly, 1, Demand remains very strong, reinforcing the perspective that we truly do have a great position in a good industry. And 2, The supply situation is a temporary phenomenon. The acquisition we're announcing today is just superb and will have a permanent conference call and 1 +1 equals 3 effect on the company. Ram and his team followed the rigorous approach to acquisitions that we've discussed in the past. Conference call.
Starting with identification, they early on identified this space as critical to providing a total system for customers. Looking for many months at many candidates, they settled on E and I as having the best, most flexible technologies, and a customer focused culture that matches ours and a CEO who really wants to keep winning. For the valuation step, the teams were able conference call to arrive at a fair price and payment approach. Additionally, while the sales synergies will likely far No sales synergies have been included in the financial model. We are also able to finance this in a way that maintains call.
The due diligence step has been intense and comprehensive covering financials, legal, environmental, etcetera. All the steps you would expect a high quality outfit to do. Given the significant rebound expected in 20 last week to see things for myself, talking to the CEO and his team and touring the facilities. The 4th and final phase integration is still largely to come conference call, and we are approaching it with the same process rigor used for the other steps. The full time integration team and what they need to do has already been identified and they are raring to go.
Ram is also setting up the review cadence you'd expect with reviews pre acquisition at 30, 60, 90 days and at least quarterly thereafter until fully integrated. I think when you've had a chance to hear more about it from Rob and his team, You'll be as excited as I am about where we're going. Permanent positive effect of this deal far Outweighs the temporary supply issue we have to deal with now. I really am psyched about where this takes us in 2022 and beyond. So with that, I'll turn it over to Rob.
Thanks, Dave. Today's message and communication is certainly a bit more intricate than normal. As we've demonstrated as a public company over the past 18 months, we want to be transparent and to ensure you see the business conference call as we see it. First, let me start by saying how excited I am about the acquisition of Eni. We've cultivated our relationship with E and I for quite some time and we've gotten to know each other very, very well.
As you'll hear from me, conference call. Dave, David and Gary during the remarks and probably again during Q and A. This deal squarely fits into our strategy and rounds out our portfolio. We have in common a very customer centric view of the world and have been accrete and will be accretive on almost every financial metric. Before we get further into the deal, I want to address the business conditions being felt by Vertiv.
Clearly, as Dave stated, no one wants ever lower guidance at any point. But based on what we are seeing in the supply environment, we think it's prudent to do it at this time. The supply issues will pass and the team is working night and day to source every part possible, but it's a difficult environment conference call. And it's gotten even more difficult in the past 30 days. Turning to Slide 5, I'll provide a bit more color.
The demand side of our business continues to be robust. The order rate in Q3 is up approximately 12% compared to the same time period last year. We see continued strength in the cloud and colocation market and the enterprise market is behaving as meeting. Our backlog has risen to a new high, reaching $2,400,000,000 at the end of August, which is 30% higher event at the end of 2020. Demand is strong.
The supply side, however, is challenging us. Since our last earnings call at the end of July, We've seen the market tighten up significantly. In some cases, we can get parts just as normal. In other cases, we need to pay elevated prices on the spot market. What we're experiencing now is that, as Dave mentioned, just some parts aren't available.
Our pricing has continued to ramp. The backlog is healthy, but because of the way some of the shipments and timing occur, It looks like we'll capture more of the pricing in 2022 than in 2021.
The Verbit team continues to address these issues,
conference call. But there's no doubt the market
is more constrained now than it was 30 days ago. Despite the constraints, we continue to invest in product development in R and D to maximize our competitive advantage and innovation. With that, I'll turn it over to David Collin to discuss some of the financial implications. David?
Yes. Good morning, everybody, and thanks, Rob. Turning to Page 6, This slide summarizes our revised financial guidance for the Q3. As Rob mentioned, due to continued broad based supply conference call. We are revising our Q3 and full year expectations for both the top line and the bottom line.
In particular for the Q3, we are reducing projected net sales by $50,000,000 at the midpoint from $1,280,000,000 to $1,230,000,000 $40,000,000 of this reduction is related to parts availability and $10,000,000 is due to a combination of lower expected pricing, as Rob mentioned, and foreign exchange. We are lowering projected 3rd quarter adjusted operating profit by $30,000,000 of $16,000,000 driven by lower sales and $12,000,000 from higher input costs as we continue to strategically and we will continue to execute spot buys where we can, which we consider a near and long term investment in our customer relationships. In addition, we estimate that we will incur approximately $15,000,000 in M and A costs in the 3rd quarter, conference call, not included in our headline adjusted operating profit, in other words, adjusted out, but reflected in the far right bar in each of the charts on this page. Finally, we are reducing projected 3rd quarter EPS by approximately 0 point in adjusted operating profit. Turning to Page 7, this slide summarizes our guidance revisions for the full year 2021.
As implied, we anticipate 3rd quarter supply chain headwinds to continue through year end with the negative impact for 4th quarter sales and adjusted operating profit to be relatively consistent with what we anticipate in the 3rd quarter. In total, we are reducing full year net sales by $90,000,000 and full year adjusted operating profit by $60,000,000 We also anticipate approximately an additional $51,000,000 of M and A costs in the 4th quarter for approximately $66,000,000 for the full year. Based upon an assumed December 1 closing date, we project for the quarter. We are now ready to begin the Q4 from the E and I deal. Finally, on the far right, we are reducing our full year projection for free cash flow from of $300,000,000 in our previous guidance to $205,000,000 in our revised guidance, and this includes approximately $45,000,000 of cash expenses related to M and A.
With that said, I turn it back over to Rob.
Thanks, David. Turning to Slide 9. The acquisition of Eni complements our current portfolio and will expand our addressable market by nearly $7,000,000,000 It's a very attractive market with underlying long term market growth of 5 plus percent. VERTIVE's conference. E and I is a leader in the data center space.
They focus on vital applications where modularity, flexibility and the speed of deployment differentiate them from their competitors. Adding ENI products and services to our portfolio will significantly enhance Vertiv's overall offering for our customers. ENI for our customers. E and I win because of their technology, their flexibility, their deep domain knowledge and their customer responsiveness. They have the same type of engineering driven, customer focused culture that we have at Vertiv.
The 2 organizations are a natural fit. We believe this enhanced offering will provide significant new revenue and growth opportunities for Vertiv as we combine the portfolio with new relevancy for our cloud and colocation customers, the fastest growing segment of our customer base. Clouding co location customers demand edge deployment capability and Vertiv will now have the ability to bring them enhanced integrated critical digital infrastructure for their applications. From a geographic perspective, there's an opportunity to leverage Vertiv's footprint and expand E and I into Asia. E and I is a highly profitable business with industry leading margins over 25 percent EBITDA margin and strong cash generation.
Our model includes only cost synergies. We've not modeled in any revenue synergies, call, although we believe they will be very significant. The acquisition of E and I offers plenty of upside for Vertiv and is consistent with our disciplined approach to M and A. The financial benefits will be immediate, accretion to our growth, margins and EPS in year 1. With cash flow generated returning our leverage to slightly above current levels by about 1 year after close.
With that, David can walk through some of the pertinent details on their financials.
Perfect. Thanks, Rob. And looking here at Slide 11, this page provides a nice overview of the ENI transaction with deal details on the left and financial highlights on the right. Purchase price at closing will be $1,800,000,000 including $1,170,000,000 in cash and $630,000,000 in Virtis shares. In addition, there will be a $200,000,000 earnings call.
We are now available in cash based upon full year 2022 EBITDA performance and we disclose the specific EBITDA conference call for the earnout on the next slide. The $1,170,000,000 cash component at closing is expected to be funded by $800,000,000 of new debt and $370,000,000 of cash from our balance sheet. Clearly, we structured the financing of this transaction to be friendly to our balance sheet. We are using equity as currency. While we are also strategically using liquidity, we have accumulated over the last 18 months, including proceeds from the redemption of public warrants at the beginning of the year.
Post transaction, we will still be in a strong liquidity position. Conference call. And while our net leverage at closing will increase to approximately 3.4x, we anticipate in 2022 at close to 2x. And this lower this reduction in leverage based on the expectation of continued conference call. We have received a financing commitment from Citibank to backstop conference call.
The debt portion of the upfront purchase price, which provides substantial financing certainty at closing. Looking ahead to 2022, we are projecting E and I net sales of approximately $570,000,000 conference call. More than 20.21 and EBITDA of $150,000,000 translating into a 26% EBITDA margin. Clearly, E and I is a well run profitable and this high EBITDA margin contributes to many of the favorable financial highlights on the right side of this page. As investors and analysts are well aware, a critical initiative for us is to expand our adjusted operating margin to 16 conference call.
We are pleased to report that we are pleased to report that we are pleased to report that we are We expect this acquisition to be accretive to adjusted EPS in the 1st year, and we have modeled a double digit ROI in year 5 based upon what we believe are rather conservative assumptions, including the emission of sales synergies, which conference call. This conference call could be substantial
and possibly impactful as
we exit 2022. Finally, as illustrated in the box at the far conference call. We believe we are executing this strategic acquisition at a fair price of approximately 11 times, conference call, which assumes expected 2022 EBITDA of $150,000,000 plus year 3 expected run rate of $18,000,000 on a purchase price of $1,900,000,000 which includes a $100,000,000 assumed earn out payment based upon 2022 projected EBITDA of $150,000,000 Turning to Slide 11, This page illustrates the strong historical growth profile of the Eni business. Conference call. From 2017 through 2020, as the company expanded its U.
S. Business and continued to take share in the busbar market, the top line grew at a 23% annual rate. Profitability growth followed sales growth with EBITDA increasing from $65,000,000 in 20.17 to $157,000,000 in 2020. Revenue, EBITDA and EBITDA margin for full year 2020 was opportunistically elevated due to several large highly profitable projects at the beginning of 2020. The net sales and EBITDA reduction from 2020 to the current year 2021 is driven in part by these larger 2020 projects, but also a slowdown in C and I orders in 2020, primarily due to COVID, impacted this year's first half.
In addition, revenue recognition in 2021 has been impacted by the timing of several longer cycle modular solutions being built this year. Looking forward to 2022, we are modeling a 23% top line increase with expected strong growth supported by an approximate $100,000,000 increase in current backlog versus this time last year. Expected 2022 EBITDA of $150,000,000 implies a 26 and EBITDA margin relatively consistent with prior periods excluding the spike in 2020. For avoidance of doubt, 2022 projections conservatively exclude any positive impact from sales synergies, which as Rob mentioned could be significant at some point within the year, but highly likely as we exit 2022. With that said, I turn it back over to Rob.
Thanks, David. Moving to Slide 12, E and I was founded in 1986 by Phil O'Doherty, who has grown the company since then with a very talented and committed team. Dave, David, Gary and I have spent a great deal of time with Phil and his leadership team. The relationship we have developed and the shared vision for growing E and I as a part of Vertiv are what drove this transaction. ENI is headquartered in Ireland with facilities there in the U.
S. And in the UAE and has over 2,000 employees. We are impressed with the manufacturing capabilities of the company. Their facilities are state of the art and the strength of their operations has been a key part of E and I's success over time. From a business mix perspective, you can see the current geographic footprint with Europe being the largest market, followed by North America.
We think there's ample opportunity to reshape this pie over time by growing in Asia. In terms of product, C and I has world class switchgear, busway and modular power solutions that are specifically geared towards data centers and C and I applications. Conference call. More on both of these points over the next few slides. Turning to Slide 13.
You've heard me and our Chairman use this phrase before, First, the switchgear busbar market, targeting data centers and C and I Vital applications is large, conference call, a $7,000,000,000 market, growing annually at 5%. The vital applications part of this is very important. Conference call. Where E and I plays is where customers will pay for quality and want only the best technology to ensure their success of their deployment. This is why product differentiation is so important.
Customers are demanding and want customized solutions with the best engineering and integration capabilities. E and I has leveraged their capability to meet the customer demand to compete effectively against larger players, in many cases, winning business because of their strengths and their flexibility to deliver bespoke solutions. 2nd, from an operating perspective, D and I is also advantaged by its vertical integration approach. Conference call. Across 750,000 square feet of manufacturing, ENI leverages a vertically integrated approach to have the best product, conference call to provide solutions for their customers.
3rd, E and I have the capacity to handle more volume, and we know this is a market with significant organic growth opportunity. Slide 14 gives you a very nice Modular Power Solutions include related software as key areas of interest for Vertiv. From an M and A standpoint, We believe the complementary nature of the two businesses is what will allow us to have that, as Dave Cody said, 1 in 1 equals 3 type of outcome here. With E and I, we now have the ability to offer end to end integrated solutions that could be managed through a single software suite and installed and maintained by our own Vertiv service organization. We believe having all these elements together will allow us to continue to differentiate for our customers.
The next page, Slide 15, gives you a great feel for where the switchgear and busway conference call. It's utilized within traditional and modular data center deployment. ENI is a great fit for our existing offerings partly due to where the products are located. But there is also real areas of innovation where we can explore together, now that we have the entire power As we've discussed, in addition to the Switchgear and Bus Boy products, another huge benefit to this deal is significantly integrate in briefing our modular capability. More and more data centers are moving to modular type construction.
And while we do that today, E and I will bring another level of expertise in this rapidly growing area in both product and manufacturing locations. Turning to Slide 16. This slide demonstrates the revenue opportunities that are in front of While we've not used any of the revenue synergies in the financial model, we do feel really good and confident that there is meaningful upside.
Conference call. And as we've already discussed,
with this broad view of our power infrastructure portfolio, it will allow for core Vertiv's service businesses to start installing, maintaining the switchgear and modular solutions that ENI produces today. We have already touched on the modular piece several times, but this piece cannot be undervalued. Sometimes these modular solutions would be more set of offerings we are adding to Vertiv with his acquisition aligned very well to some of the fastest growing market areas with our cloud and colocation customers. Turning to Slide 17. From an integration perspective, as Dave mentioned, the planning has already begun.
We have work streams developed and key leaders identified who are dedicated and ready to go. Gary is going to lead our integration efforts. In addition to the pre acquisition integration reviews, we will be setting up 30, 60 90 day reviews and then a quarterly cadence thereafter to thoroughly examine our progress. We will certainly preserve the secret sauce Phil and his team have created around customers, solving complex issues, being flexible and being innovative. Phil will continue to lead the NI.
He will join the Vertiv's leadership team and will move forward directly to me. I'm excited to work alongside with him, taking the learnings from E and I and incorporating those in Vertiv where they could be We see cost synergies in procurement, manufacturing and office areas that should yield at least $18,000,000 by the end of year 3. Combining our purchasing power, making strategic in sourcing decisions, implementing BOS and E and I facilities and a host of other actions will lead to meaningful savings. From a revenue standpoint, we project we'll being able to completely to take the integrated solutions to all of our customers, particularly the cloud and colocation companies that will drive this incremental revenue. We can expand E and I's customers reach to broader set of switchgear and busway throughout the entire enterprise space as well.
We certainly see growing the E and I portfolio in the Asian region and it's a very significant opportunity which I'm very excited about. And finally, we expect to see growth in service revenue with a stronger Switchgear offering. As you can tell, the cost synergies are solid, conference call, but I'm really excited about the revenue synergy possibility. I'll now turn it back over to David to hit a few more financial highlights with this transaction. David?
Thanks, Rob. Turning to Page 19, this slide provides a good synopsis of the financial implications of the transaction. We expect the addition of E and I to be accretive to long term organic growth, adjusted operating margin and 2020 to adjusted EPS. Of particular importance are the benefits we expect to see with adjusted operating margin. Call.
Adding this high margin business should be 150 basis points accretive in the long run when including cost synergies, conference call. But it should also be immediately accretive by approximately 120 basis points next year without regard to cost synergies, as we continue to drive within our long term margin targets. Finally, on this page, the chart to the right illustrates strategic and inorganic growth. And this deal serves as a great example of how we intend to execute that strategy. While net leverage increases modestly to 3.4x at the date of acquisition, based upon the expected cash generation over the next year or so, We anticipate that net leverage should return closer to 2x by the end of 2022.
With that said, I turn it back over to Rob.
Thanks again, David. Coming full circle, while we don't To reiterate what Dave said in his opening remarks, parts are a temporary issue for us. Demand is strong and the acquisition of E and I positions Vertiv very well for the long term. To all the Eni employees listening, thank you for building a strong and highly desirable company. We welcome you and look forward to working together.
All the Vertiv employees listening, let's watch, listen and learn what best practices E and I can teach us as we start the integration process. The great combined team of ENI and Virtive, I look forward to continuing what each of us has already started and building an even greater company together. With that, I'll turn it over to the operator to open up the lines for any questions. Operator?
And ladies and gentlemen, at this time, we'll begin the question and answer session. Our first question today comes from Nicole DeBlase from Deutsche Bank. Please go ahead with your question.
Yes, thanks. Good morning, guys, and congrats on the deal.
So I'm going to ask one question
on the guidance update and then one question on E and I. So on the guidance update, I guess, Could you guys just provide a little bit more detail around what's going on with the pricing assumptions? And I mean, I think there's a timing issue here, but maybe just provide some more around why the pricing is pushing into 2022 and your conviction that price costs can turn positive next year.
Yes. Hi, Nicole, and thanks again for the question. What we're seeing around pricing, we continue to have headwinds as it relates and materials. We continue to drive pricing and what we're really saying here is that a lot of that will be recognized in 'twenty beginning of 2022 as we build that into the backlog. We're currently burning off our current backlog and as we do that, We won't see that pricing effect.
So it's kind of a delayed by a couple of quarters. But we feel good about our pricing process,
The only other commentary I'd add to Rob is with what we're seeing in pricing is it is really sticky. So the only piece here is not the fact that we Can't get prices, isn't exactly what Rob said. The large backlog and some
of the timing of the
shipments on the projects might slip out to where we have more meaningful call. Increase in pricing going into next year, but you can see the pricing ramping every quarter, every month as we track this and the pricing that we are getting, we do deal is really pretty sticky. So it's not really a can we get price, it's just more of a timing issue than anything.
Okay, got it. Thanks guys. That's helpful color. And then On E and I, as you've built your accretion assumptions, are there is there like a bit of a contingency in there for supply chain as well? And I guess maybe If you could go through what E and I is facing with respect to supply chain, if that's an issue for them as well.
Yes. Thanks, Nagal. And of course, the supply chain issues is a hot topic pretty much in every industry, every region. And it's one of the things that we have diligence with E and I. I'd say based on where they stand today, they are Not experiencing as significant of an issue.
They are seeing certainly seeing some headwinds, but they're not seeing as a significant issue as we are based on some of their regional supply base. However, I would say that that is a potential risk as we head into 2022. Conference call. But at this point, we're not highlighting that as a significant risk. And Rob, I don't know if there Anything you want to add on to the supply chain dynamics, Eddie and I?
No, David, I think you nailed it. I mean, the core products they use in their gear is Aluminum copper, steel, those types of things, breakers are certainly something. Traditionally, don't use things like IGBTs that we're using in parts. That's why you're probably seeing a greater kind of supply issue for Vertiv because the types of parts we use in our UPS and in our thermal management products, which they won't experience.
Got it. Thanks, guys. I'll pass it on.
Our next question comes from Jeff Sprank from Vertical Research. Please go ahead with your question.
Just a couple from me also. First, Rob, just picking up where you were on supply, IGBT, as
you just called out. On the Q2 call, you called out on kind
of more mundane things like fans and the like also. I guess the question really is how wide conference. Are the availability issues? And maybe elaborate a little bit on your view that it is temporary. I mean, I guess, over a long scope of time, it's temporary.
But how long is temporary in your view? Are we talking conference call. Months, quarters, maybe you're pursuing new sources of supply, maybe you're vertically integrating to address it yourself, but
a little more color there Good question, Jeff. And I'd love to be able to tell everyone today definitively when this is going to end. But as you can Absolutely correct. On last call, we talked about IGBTs, our fans, all those things are still consistent. Primarily, a lot of the industry and industries are experiencing is chip shortages in general.
Conference call. And you've seen announcements from several companies around that. That tends to take longer to be able to get that supply back up on plane. So when we say temporary, various parts of our business, whether it's high GVT, it might be a temporary thing, which could be a quarter or 2. Some of The chips and so forth could lag into latter parts of 2022.
I wish I had the perfect crystal ball for that, but we are seeing real time in the last 30 day suppliers, decommit from commitments that they've already made and our willingness to actually spend more money to get those parts. And then the parts aren't there, We're not able to ship them. So when I say temporary, we'll look at it and we take it part by part. Our engineer It's an issue for us. We're really working hard to second source, third source and get other suppliers back on online.
But the chip thing in general, as you read in the news and hear everywhere, is something that's going to take a little bit of time for the fabs to come up to speed. The demand is Vertiv's conference. Unfortunately, a lot of the parts that we share or have in our products are shared across many of the electronics, whether it's the auto industry, whether it's other areas, and we're all vying for those vital components conference. But as I said, I feel confident that this will pass, and we continue to see the strong order growth and We're fulfilling and taking care of our customer demand the best we can.
And then secondly, unrelated, David
mentioned a
couple of times what the deal does for your margins. I think the impression we all had was getting to 16 sent and then ultimately the 20 was in the scope of the internal levers that you had at your disposal, the multiple things you've talked about. Is that still the case?
Obviously, the arithmetic of
this deal moves the margins, but
that internal target opportunity that you
Yes. Great question, Jeff. We can absolutely confirm that the opportunity that we see internally from margin expansion is the same after this deal as it was before the deal. And mathematically, we got to get to 16% one way or the other first and then the 2020. But as we look across the many opportunities that we've talked about over the last 18 months, we We remain very optimistic that those are still intact and we'll continue to drive those.
And This will help us at least from a numbers perspective to get there more quickly. But from a overall and the ability to get to that 20% in the long run based on internal levers. We still remain
Our next question comes from Lance Vitanza from Cowen. Please go ahead with your question.
Thanks guys for taking the questions and congratulations on the transaction. I too have one question
on the supply chain and then one on
the merger. With respect to the supply chain stuff, what is the risk that your competitors would be better able to
Hi, this is Rob. That always Could be a possible risk, but I believe the global nature and the local nature of our supply chain that we're getting our fair share plus. I know as I look at the numbers and our growth rates are up, greater than what we had originally expected and we know that we're getting conference call. So I don't wake up at night or wake up worried about that. I just want to take care of the customers that we have orders from today and get those shipped out.
So we're really aggressive and the team is honestly not sleeping, working around the clock. So I feel like from a competitive perspective. We're going to be as competitive as anybody else getting those parts and supplies. And like I said earlier, we're continually looking at conference
call. Okay, great. And then with respect to the merger, Rob, you mentioned that E and I isn't yet in Asia. Do you think you can take them there? Is that the primary source of the potential revenue synergies you alluded to?
And could in any case, Could you discuss sort of like the rough timing of your entry into Asia? And are there specific obstacles that you'd expect to face as you look to do that and penetrate that new market. Thanks.
Yes. So Actually, I see a global opportunity. I highlighted Asia because they have some work that's being done actually in Australia. We look at that as something that within 2022, we'll be taking orders and doing business over there, whether that all shifts from local sources in Asia, which takes time to bring factories online. But we'll be able to take our collective customer base and bring of E and I capabilities to that.
What really excited me about the deal is the fact we have customers in the enterprise space that we've had strong relationships for years and in the colo space, where maybe they haven't been as strong, where we can immediately bring this opportunity and capability together. So I really look at the entire globe as an opportunity with Asia being kind of a supercharger for us to get the revenue growth. The combination of bringing the entire powertrain together, the innovation that we can do together now having the conference call. I think puts us at a different level and allows us to compete quite well.
Our next question comes from Nigel Coe from Wolfe Research.
This is Brandon Raghavan from Nigel. I'm going to do the sort of the same style that everyone else has been doing, 1 on guidance and 1 on E and I. I'll start with guidance. The drop in free cash flow is something that sort of came as a surprise to us. And other than the I think you point to like a $45,000,000 hits free cash flow for the transaction.
But is there any other working capital pressures coming in inventory or is it just really accounts receivable and is this going to sort of liquidate and normalize as we go into 'twenty two when the cadence of inventory and supply are normalized.
Yes. Great question. Thank you, Brandon. This is David. So if you look at the $95,000,000 take down, we bullet point that out on Slide 7, dollars 50,000,000 related to the operations directly attributable to the $60,000,000 reduction in the adjusted operating profit.
It's not the full fix, Steve, because of course from a timing perspective with the working capital in the 4th quarter, those sales wouldn't have been received in the Q4 anyhow. So that would actually negatively impact the beginning of next year. Your question about inventory is a good one. And we Have included some provision in our updated numbers for increased investment in inventory based on where we are with the supply chain. So we have pretty much put our internal inventory metric conference call.
Aside, in this environment, and we will continue to invest in inventory. If we can get our hands on parts, We will make that investment and you could see that inventory balance increase as we get through the year. The other component or the other half of that takedown is for the full year free cash flow is based on the M and A expenses and 45 of the 65 approximately are cash related. The other 20 is pursuant to some purchase accounting non cash entries that we expect in the 4th quarter associated with the transaction.
Perfect. Thanks. And then just one quickly on E and I. In the past, E and I had been a choir at one point or another to Schneider. And I was just in both the U.
K. And the U. S, I was just wondering if there's going to be any sort of cannibalization of potential Vertiv all in sales, if United continues to support the Schneider project pipeline. I
think the short answer probably is we would not expect any dis synergies at that point. I mean, there's always a little bit of a buy between all of our peer companies and whether that's finished good level or at a breaker level or a UPS level, there's always some So I would not expect any dis synergies at this point in time.
Perfect. Thank you.
Our next question comes from Andrew Obin from Bank of America.
Please go
ahead with your question.
This is David Ridley Lane on for Andrew Obin. Wondering what the biggest factors behind ENI's revenue growth over the last 4 years And is there a specific product group that has been growing much faster, maybe a geographic expansion that they've done that's gone very well?
Hi, David. Good morning. Thanks for your question. This is Rob. What I'd say is the secret sauce is very similar and that's why we like the company.
They are very intimate in collaboration and innovation with their customers. And what I'd say as and the base of colors and hyperscale, want more bespoke solutions, want things their way. They really value the collaboration and engineering innovation conference. That's where E and I has really, really done a great job. As you mentioned, they have expanded their footprint in Americas and have had success with taking that same model that they were very successful in Europe and bringing that to the Americas, which excites us because we've seen that now replicate and they've done it in the Middle East and we'll do it in Asia as well.
So I think they continue to be customer focused, continue to drive innovation as a core value and collaboration with Speed is everything, the quality as well, and that's all the things that B and I represent, and that's why they're winning.
And then what's the aftermarket and services mix for E and I? Is it similar to Vertiv, And then is there an opportunity to leverage your own existing service footprint for E and I products?
Yes. Hey, David. It's Gary. Yes, I think that last part, you probably answered it even more succinctly and eloquently than I could. We do see that service piece as a huge lever here.
So traditionally, the Vertiv's conference. So traditionally,
the A
and I business does not have a lot of service that's attached to it. And we have a relatively large couple of $100,000,000 service business within our larger service business that is focused on switchgear, both installation, maintenance, deployment, aftermarket spares. And so we think there's a real opportunity to be able to take that capability and go to market along with the product side, so we should be able to have a fully integrated product set as well as be able to wrap that with our service business as well.
Our next question comes from Amit Dayani from Evercore. Please go ahead with your question.
Thanks a lot. I guess I have 2 as well. Maybe first on the E and I side, if you could just talk about when I look at this 20% plus growth rate of the company historically, I think he's talking about that in 2022 as well. I guess, A, is that all organic number? It comes from a historical basis that they've had.
And is this unlikely to think about this business longer term at a 20% CAGR?
Yes. Thank you, Amit. What I'd say is it is all organic. And what E and I has done a really good job of is playing off their kind of foundation of Buspar, Busway and other solutions. So what they've really done is taken their core, what I would call custom modular switchgear and the busway and now jumping into more complete solutions, what we call Power SKZ houses are called on a global basis.
They've done a really good job of adding more value to the customer, delivering more complete solutions. We've talked about in the past and where the market's going, on a global basis because the shortage of talent is more solutions built in a factory and less assembly done out on-site. So they just continue to grow within the adjacencies of their market space, adding also software and roles around all of that. So all of it's organic and we continue to see them taking share and growing as this category expands of modular data center solutions because of their real close collaboration with customers and the innovation and meeting in which they move.
Perfect. Thank you for that. And then if I could just follow-up on the revised full year guide. And you said 2 components of this, but on the revenue side that you're lowering your revenue expectations by, Just talk about your conviction that this is all going to go into perhaps a backlog and yet realize at some point perhaps in 2022 conference. It's gone away competitively to someone else.
So just where do you see those orders going in the backlog or somewhere else would be helpful to understand. And then I'm still maybe just talk on pricing capabilities, right? Like even with a part even how tight the demand environment Supply environment is in how the demand is. You would have more pricing power versus not. So just why is that taking a bit longer to realize versus not?
I'll start off and then let Gary jump into the pricing side. But as it relates to backlog, we've always talked, our backlog It's really sticky, meaning when we get a purchase order, it's followed up with a contract and so on, so that We very rarely, if at all, see any of the backlog kind of go away. Typically, these jobs are custom in nature and designed around our products. And while we're doing everything we can to get product out to customers on time, everyone understands that the environment today is different than what it was, call it 6 months ago and even 30 days ago. So we see it's very sticky.
We see our customers continue to place orders as evidenced by the order growth rates that we mentioned for the 1st 2 months of this quarter. So we feel real confident about that sticking and driving forward and just continue Heads down taking care of the questions. Gary, talk a little bit about price?
Yes, sure Rob. I mean, I think on the pricing side, there certainly is that the transactional flow business that we have, that stuff has been priced in for The only part that is being delayed is some of the project stuff. And again, it's not from an issue of very open minded. So we are executing the plan and the actions really pretty well. It's just a matter of it's probably going to be Some of it's going to be a quarter delay primarily because of the large backlog we have and then the execution project timing.
Our next question comes from Patrick Bowman from JPMorgan. Please go ahead with your question.
Organic growth expectations. Can you walk through what drives that? I think it also shows core Vertiv at 6.5%. And I was thinking at least in prior communications core Vertiv was being presented as more like 5%, which is 1.5x3% to call. So just if you could walk through that, maybe Slide 19, kind of that long term organic growth math from core Vertiv to the pro form a Vertiv.
Yes. Hey, Patrick. It's Gary again here. So good catch, I'd say 2 things. 1 is, We think the long term maybe the long term sort of through the cycle market growth is probably squarely in 4.5% range at this point in time.
So maybe just a little bit north of what we were even thinking a year ago when we communicated those market growth rates. So we're calling that 4% to 4 percent through the cycle growth and 1.5 times the market is still the goal for core Vertiv. So that's one piece of it. The reason why it goes up above 50 basis points is we truly believe that the switchgear busway modular solutions market is going to grow in that more mid to upper single digit range from a market standpoint. And we would have the same expectations for ENI, They would be able to grow 1.5 times that market as well.
So you sort of do that math and you say, okay, we think that for the most part, we should be in that 7% growth range. Some years will be more, some years it will be less as we've always talked about, but it really is. We've upped a little bit the lower end of the guidance from a market growth standpoint and then you layer on the slightly faster growing areas where he and I as we blend those out and that's how
In the upper single digit number you just mentioned, I'm going back to 5.13, it's showing a 5% CAGR for the market, but you're saying mid to upper single digit. Is the upper single digit like, I don't know, is that like Including some synergies or just kind of curious what you why you're framing it that way? Yes. Call. Maybe said definitely as well, like what is the expectation for ENI's revenue growth ex synergies over the next for Q2.
Like what's the CAGR you expect?
Yes. So I'll break it into a couple of parts and David can chime in as well here. So I think That 5% market growth is really around the known switchgear busway market that we can clearly wrap our arms around. The reason why we think it's going to go a little bit north of that is all the modular business that Rob mentioned earlier. And quite honestly, it's just difficult to get your arms around what is that market modular power stage modular data centers right now.
But whatever the size of that market is, that's going to grow north of that 5% number. So therefore, we put that range in there. In terms of E and I longer term revenue projections, I don't know, Dave, if you have any thoughts about that.
Yes. So we've had to make certain assumptions when we did our ROI calculation. And I can tell you, we For the out years, we are assuming upper single digit. We will have a benefit, of course, in 2022, a little bit higher than normal. But over the next 5 years, 2022, let's say, to 26, we are very definitively assuming upper single digits.
Okay. So you don't think 2022 is something like 2020 where the business benefited from some opportunistic projects and timing around that stuff. Do you think 2022 is a good run rate to grow off of?
Absolutely. That's absolutely correct.
Okay. That's helpful. And then my last one also on E and I and just kind of the portfolio now, Dan. I mean, do you see yourself as kind of competitively well positioned versus like Eaton and Schneider and Core Electrical or do you think there's more work to do on that front?
I really believe that we've got the powertrain that we need for our customers. He and I really feel
And ladies and gentlemen, with that, we'll conclude today's question and answer session. I'd now like to turn the floor back over to Rob Johnson for any closing
and it strengthens our position as a pure play critical digital infrastructure space. We appreciate all of your support and thank you and have a great day. This concludes the call.
Ladies and gentlemen, the conference has now concluded. We thank you for attending today's presentation. You may now disconnect your lines.