Morning. My name is Grant, and I will be your conference operator today. At this time, I would like to welcome everyone to Verbit's First Quarter 2021 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. Please note that this call is being recorded.
I would now like to turn the program over to your host for today's conference call, Lynn Mack Seiner, Vice President of Investor Relations.
Great. Thanks, Grant, and good morning, and welcome to Virtive's Q1 2021 earnings conference call. 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 during the quarter. 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. 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.
You are free to the cautionary language included in today's earnings release 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 based on assumptions that we believe to be reasonable as of this date. We undertake no obligation to update these statements as a result of new information or future events. During this call, we will also present both GAAP and non GAAP financial measures. Our GAAP results and GAAP to non GAAP reconciliation can be found in our earnings presentation and press release, also the Investors slide deck found on our website at investorschops.com.
With that, I'll turn the call over to Executive Chairman, David Cote.
Thanks, Lynn. This is now the 5th quarter we've reported as a public company and I think you can see what I've seen and talked about this entire time. This really is a great company in a really good industry with multiple ways to to improving the top and bottom line. Rob and his team, as you can see, are making great progress with new products, global growth and the process initiatives like the Vertiv operating system, Vertiv product development, customer view and functional transformation. And these process initiatives show that there are lots of areas to improve upon, and Rob and the team are focused on those.
But I think you'll also agree with me The Q1 results sure are something to be proud of and provide us a great start to the year. So with that, I'll turn it over to Rob.
Thanks, Dave. Thank you for your guidance that you provide to me and the executive team and the support for Vertiv that you always have given. We really appreciate it. To all of you on today's call, thank you for being here and I'm eager to share more about our performance for the first quarter, our outlook for the market and give you a glimpse of the few new products Dave just talked about that our talented and innovative teams at Vertiv have developed. Turning to slide 3.
There are 5 key messages I want to convey today, and we'll share them at a high call, and David will elaborate more on the financial details in just a few minutes. First, I'm pleased to report sales were up more than 22% And orders were up 21% versus Q1 of 2020. Growth happened in all regions across all major verticals And we ended the quarter with a record high backlog of $2,100,000,000 2nd, from a profitability standpoint, our adjusted operating profit was $112,000,000 which is up $92,000,000 or 4 50 percent from last year's Q1. This resulted in adjusted operating margin expansion of over 7.90 basis points, driven by higher sales and lower fixed cost on a percentage basis. 3rd, our free cash flow at the end of Q1 was $43,000,000 an improvement of 246,000,000 made possible by higher earnings and lower interest expense.
4th, the market is facing supply chain and commodity cost challenges and Vertiv is not exempt. We are aggressively working to secure supply needed so that we can provide on time delivery to first and foremost, while developing and executing strategies to share the cost with our customers where possible. Because of supply chain constraints coupled with inflation, we will see some incremental unexpected costs over the short plan. And 5th and the final key message, we are raising our 2021 sales guidance by 125,000,000 such that the new sales guidance is between $4,800,000,000 $4,900,000,000 And raising our adjusted operating profit guidance by $20,000,000 So our operating guidance is now $585,000,000
to $605,000,000
This demonstrates our confidence in the end markets and Confidence in our teams all across Vertiv to perform in accordance with our strategy and to meet the growing needs of our customers. Let me elaborate on these five key points using the next few slides. Turning to slide 4, we've been using this slide quarter to quarter to talk about our end markets and illustrate activity in each of our regions around the world. A red button on the slide indicates sluggish performance. A green bucket green button indicates strong performance and a yellow button indicates something in between.
Cloud and hyperscale and colocation markets have been very strong and remain strong across all regions. The demand for digital applications, online education, telemedicine, video and gaming is booming, benefiting our filed in colocation customers and driving a strong and growing need for Vertiv products and services around the world. In our enterprise small and medium business market, we're seeing signs of improvement as well. Our 2 reds have now turned yellow, call, but it's still not clear when the entire enterprise segment will open up. We are, however, encouraged to see things moving in the right direction.
The communication networks market stayed constant in Americas and EMEA. It improved in APAC over the quarter and we were able to see a shift in the market from yellow to green. Americas and APAC are performing strongly in this segment. Americas activity is driven by several large U. S.
Telecom carriers and the continued rollout of 5 gs. In the commercial and industrial market this quarter, EMEA has shifted from red to yellow. And because of that, we are now showing solid yellows across all regions indicating some positive movement in the commercial and industrial space. All the end markets we serve are in very good shape now, as illustrated by the arrays of yellows and green across the slide for Q1. Digital applications continue to increase their importance in everyday life.
There is no they are no longer nice to have, but a necessity for individuals and for businesses. The increasing needs means there is an increasing demand for processing, storage and transmission of data, which creates significant opportunity for Virtive, and we are perfectly poised to go after that opportunity. Moving to Slide 5. I'd like to make a few comments regarding supply and demand. As I mentioned earlier, The overall market demand is strong as evidenced by our order rates and backlog, which has resulted in us raising guidance.
Each of our REITs saw revenue growth in the Q1, led by continued strength in cloud and colocation markets. Our cloud and colocation customers continue to build data centers in an aggressive but balanced fashion, and we will continue to partner with them to meet the strong and growing demand. We continue to stay vigilant around COVID, keeping our employees, our customers and our partners safe, Wherever they are in the world, that is our main priority. We have made adaptations where necessary and have found solutions to business challenges brought by COVID. We remain confident in our ability to serve our customers and meet their needs.
Yet, similar to other companies, we are facing some supply chain issues due to market conditions. There are a couple of things that are going on here. First, we find ourselves dealing with some part shortages and materials. For the most part, we've identified solutions for those. 2nd, like many other companies, we are seeing cost increases on both material and the logistics side.
This is being tracked and managed and closely monitored, and we are taking actions to offset the increased costs. But nonetheless, This is a short term headwind. We've been planning to implement some footprint optimization programs. We have pivoted and decided to delay some of those programs to take advantage of the strong demand environment. The footprint optimization plan will be executed, that will happen a little bit later than originally expected.
Moving to slide 6, I've talked to you in the past about our Verdi product development process, VPD. And you all know about the allocations and resources we have made to research and development. So I wanted to show you a few of the new products. I can't tell you how thrilled I am with the progress that's being made in our engineering teams and all those that are responsible for executing our strategy to innovate, design and build products for the future. Here are some early results on this slide.
The first product shown in the upper left will formally be launched tomorrow and it's another way that we're helping our customers become more efficient and provide lower carbon offerings. It is a grid interactive UPS which will allow data center operators to use the UPS to power their data center and during low power times to inject power back into the grid to drive the efficient use of data center equipment. On the upper right is the newest addition to our thermal offerings. We continue to innovate in the thermal space to drive more efficiencies and to provide best solutions for our customers. This product provides liquid cooling for high density servers and racks, providing customers with an efficient way to cool their high density applications.
Finally, on the bottom of the chart, you will see 2 of our new edge offerings. The product on the lower left is a small UPS that's very efficient, very compact and utilizes the latest in lithium battery technology for a longer backup time. The product on the lower right is Our newest single rack data center, which includes integrated UPS, power distribution, thermal management and our secure switch. This is a preconfigured solution and is a great example of the type of product we are bringing to the market for distributed IT and new edge applications. I really could talk hours about the research and development at Vertiv, but wanted to highlight a few of the new products so you can understand How we're focusing our R and D efforts and allowing us to bring these innovative solutions and offerings to our customers and to the market.
With that, I'll turn it over to David
for a closer look at
the Q1 numbers and come back at the end with some final comments. David? Great. Thanks, Rob. First turning to Page 7, this slide summarizes our Q1 results versus last year.
Net sales were up $201,000,000 or 22.4 percent, 19.5 percent when adjusted for a $26,000,000 foreign exchange tailwind. We continued our strong momentum with orders, which were up 21% in the first quarter after increasing 10% in full year 2020. Adjusted operating profit increased $92,000,000 or over 4.50 percent, primarily driven by the profit flow through from the higher sales and a benefit From SPAC transaction costs in last year's Q1, all translates into a 7.90 basis point improvement in adjusted operating margin. Adjusted EPS of $0.21 is $0.86 higher than last year, Driven by the improved operations and a $0.54 benefit from the $174,000,000 loss on extinguishment of debt and $21,000,000 of stacked transaction costs in last year's Q1. Our sales and profitability performance converted into Strong free cash flow of $43,000,000 $246,000,000 higher than last year's Q1.
And we will review some of the drivers of this improved free cash flow in a couple of slides. So turning to Page 8, this slide summarizes our Q1 segment results. Net sales in the Americas were up $35,000,000 or 7.5%, driven by growth strong growth with hyperscale customers in our Critical Infrastructure and Solutions Products segment. Net sales in APAC increased written $33,000,000 or 60%, in part due to an approximate $15,000,000 COVID impact on sales in last year's Q1, But we otherwise experienced strong growth across most APAC subregions and market verticals, including data centers, telecom and commercial industrial. Net sales in EMEA were up $33,000,000 or 16% predominantly in the Critical and Solutions Products segment, driven by several larger colocation projects.
From a profitability perspective, adjusted operating margin improved across all three regions, primarily due to benefit of relatively flat or lower fixed costs on significantly higher net sales in each region, providing a practical example of the potential margin benefit of maintaining fixed cost constant while growing the top line. Next, Turning to Slide 9. This chart bridges 1st quarter free cash flow from last year. The $246,000,000 increase is primarily a result of higher adjusted operating profit, lower cash interest payments and improved trade working capital in addition to a $21,000,000 year over year benefit from SPAC cash transaction costs last year. The $43,000,000 of free cash flow in the quarter was higher than our internal expectations, Primarily driven by the timing of a cash disbursement of approximately $25,000,000 at the end of March due to a system implementation.
So we anticipated That cash outflow to occur at the end of March actually occurred at the beginning of April. Although it Does not impact free cash flow. We received $107,000,000 at the beginning of the Q1 pursuant to final public warrant redemptions. And this certainly facilitated a record high liquidity of 1 point $1,000,000,000 and a record low net debt leverage ratio of 2.3x at the end of the first quarter. Next, turning to Slide 10.
We wanted to address the change related to the accounting for our warrants. Last week, we issued a press release and filed an 8 ks providing more detail on this matter. Pursuant to new guidance released by the SEC on April 12, we changed the historical and prospective accounting for both our public and private warrants to record a liability for the fair value of these warrants and with any subsequent change in fair value adjusting the liability and recording a non cash non operating gain or loss in the P and L. When our stock price and we record a non cash loss. When our stock price declines, the liability declines and we record a non cash gain.
As a result of this change, we will file an amended 2020 10 ks in the coming days. Reflecting these changes, including recognizing additional non cash non operating expense of approximately 100 of $44,000,000 in fiscal year 2020 as our stock price increased significantly during the year. We also recognized a $14,000,000 non cash loss in the Q1. This warrant gain or loss is recorded below operating profit and it will not impact any of our non GAAP operating metrics, including adjusted operating profit, adjusted EPS and free cash flow. So next turning to Slide 11, looking forward, this page summarizes our 2nd quarter financial guidance.
We expect 1st quarter top line momentum to continue in the 2nd quarter with net sales up 20% at the midpoint with strong growth across all three regions. And our 2nd quarter sales is also expected to be up 10% sequentially from the Q1. We guide towards adjusted operating profit of of $125,000,000 at the midpoint, up 21% from last year despite a $30,000,000 headwind from one off COVID cost actions in last year's Q2 and a $25,000,000 increase in year over year growth in R and D Investments. Adjusted operating margin is expected to be relatively flat, with contribution margin percentage slightly lower than last year due to commodity and logistics inflation and despite higher year over year dollar fixed costs Last year's COVID actions and incremental investment spending this year, fixed costs as a percentage of sales should be slightly lower. Finally, adjusted EPS is expected to increase approximately 0 point percent at the midpoint, driven by the higher adjusted operating profit and lower interest expense.
Next, turning to Slide 12, we summarize our revised full year 2021 financial guidance, including higher net sales expectations to $4,900,000,000 up 12% from 2020 and and $125,000,000 higher than our prior guidance, dollars 60,000,000 of that from the first quarter and our $60,000,000 in the Q1 $65,000,000 over the remainder of the year based on our Strong first quarter orders performance and backlog. We are increasing our adjusted operating profit guidance to 595,000,000 Up $20,000,000 from prior guidance, and we will provide some detail of this increase on the next slide, including quantifying the expected net financial impact of the commodity and freight headwinds as Rob discussed. Full year adjusted EPS is expected to be 1.11 $0.07 higher than our prior full year guidance driven by higher projected adjusted operating process It's about $0.05 there and lower interest expense from our Q1 term loan refinancing about $0.02 Finally, we are increasing our full year projected free cash flow to $300,000,000 up $15,000,000 from our prior guidance of $285,000,000 Turning to Slide 13. This chart bridges our full year adjusted operating profit from Prior to current guidance, a net increase of $20,000,000 with a favorable $35,000,000 coming from the incremental $125,000,000 of net sales.
However, converting at a rate lower And our average contribution margin due to product mix and higher marginal manufacturing costs, including expedited freight in some cases as we manage our capacity to meet the higher customer demand. Partially offsetting these volume benefits is a $15,000,000 net headwind, including $25,000,000 from commodity and freight inflation, Approximately $15,000,000 from commodities and $10,000,000 from freight, both disproportionately impacting the Americas. This cost inflation is partially offset by an assumed $10,000,000 of incremental and we believe there is further opportunity for additional incremental pricing as we progress through the year. With that said, I turn it back over to Rob. Well, thanks, David.
Overall, I'm very proud of the Verdi team and what we've accomplished since coming public. We've been executing our strategy as Dave Cody has alluded, whether it's the VOS or the Burdiv product development, All the levers we've talked about and we feel really good about the next 2 or 3 years as we continue to execute that strategy. I believe our results for this quarter have demonstrated the hard work and the effort of the 20,000 employees we have around the world. As I look into the balance of 2021, we continue to anticipate above market top line growth, an increase in profitability and a strengthening balance sheet, all while continuing to invest in the strategic areas as we've talked about, R and D and sales and marketing. To all the employees on the call today, thank Thank you again for your dedication and your tireless effort to take care of our customers.
To all the investors, thank you for being on the call today and for your support over the past year. I'll now turn it over to the operator who will open up the line for questions.
Our first question today will come from Andy Kaplowitz with Citigroup. Please go
ahead. Rob, last
quarter you had
mentioned that you Thought order growth could sustain in the high single digit range, but obviously in Q1 you reported low 20 percent order growth. So Maybe give us some more color into what was the incremental upside versus your expectations. Was it more continued hyperscale and colo out performance or was it in enterprise beginning to come back? And has your order outlook improved for the next few quarters where you can sustain more of this double digit type order
growth? Great question. And you're absolutely dead on with the Colo and hyperscale. Typically, those don't fall into our flow rate business. So those orders come when they come.
I mean, we look them in the pipeline, But when they want to release them and typically we'll get those orders anywhere from 3, 6, 9 months in advance of deploying those. And What we've seen certainly is a tightening market and longer potential lead times. And I think as we look at the global build out continue, It's just stronger than we necessarily expected and probably saw people making sure they get in line to get their supply going forward. But I'm encouraged going forward and you've seen I know a couple others have released today, Google and Microsoft, and we're seeing Strong and continue to see strong growth there on a global basis. So I'm positive to that.
And as I mentioned earlier in the call or in my script I was going through, We are seeing signs of really good life in the enterprise. We'll see when that fully turns back on and that could be tip as we watch that come back to life.
Thanks for that, Rob. And then Dave, can you give us a little more color into the Q2 guide in the sense that You actually forecast Q2 sales to be up $100,000,000 versus Q1, but adjusted operating margin at the midpoint Looks relatively similar. So I think you said fixed costs would be lower as a percentage of sales versus a year ago in Q2. But what does that metric look like Versus Q1 and what are the headwinds sequentially? Maybe FX not as good?
Do you dial in more negative price versus cost and higher investments? And maybe you can go over the pieces for us a little bit, that would be helpful.
Yes, absolutely. Thanks for the question, Andy. So if you look at the Components sequentially. So Q1 adjusted operating profit was 112,000,000. We're guiding 120 $5,000,000 so $13,000,000 increase.
We do anticipate to see a straight pass through From a profit perspective on the higher sales, I think sales are up $110,000,000 or so sequentially. We do expect to see a 40% drop there on those additional sales. So we don't see any negative impact from a contribution margin percentage perspective in Q2 versus Q1. Really a little bit of a drag quarter over quarter, Q2 from Q1 is on the fixed cost side. So we anticipate probably about $20,000,000 Higher fixed costs in Q2 versus Q1.
And a lot of that is driven by the timing of R and D and growth investments. In fact, we had planned $10,000,000 of R and D and growth investments in the Q1 And a good portion of that actually slipped into Q2 because of timing of hiring And the launching of a few projects. But the other element that has an impact Sequentially is the annoying FX gain and loss dynamic. So we had a $7,000,000 FX transaction gain in the Q1 based on the weakening of the euro at the end of quarter. The euro has since recovered from $1.17 up to close to $1.21 So we probably have about $10,000,000 headwind from that FX transaction, gainloss dynamic in Q2 versus Q1.
So all that flushes out relatively flat adjusted operating margin, right around 10.2%, 10.3 But as a result of the timing of some of the fixed costs, the actual dollar increase in Adjusted operating profit is probably lighter than what some expectations are.
Very helpful color. Thanks, Dave.
Thanks, Jamie.
Our next question will come from Mark Delaney with Goldman Sachs. Please
go. Yes. Thanks very much for taking the questions. The company mentioned that product mix and higher Marginal manufacturing costs are impacting margins this year.
I was hoping you could be
a little bit more specific on what those issues are. And are you expecting those to be more temporal issues or is that something that could continue into next year?
Yes. Thanks, Mark. This is David. I'll I'll start and Rob and Gary can add on. So we called out an additional $15,000,000 and this is current guidance versus prior guidance as it relates to these additional mix and incremental manufacturing costs.
From a product perspective, if you look at our product segments, Our Critical Infrastructure and Solutions product segment is relatively lower margin than the other 2. And some of that or a good portion of the $125,000,000 incremental sales are in that product segment. And
so if
you look at incremental 15, probably half of that is related to that product mix. The other half is related to satisfying the demand of our customers. So I mentioned in my comments, We have in order to meet customer demands, in certain cases, we've had to enlist expedited freight. In addition, we have ramped up our capacity in some of our facilities, including adding shifts and temporary labor. And as a result, some of these marginal incremental sales are coming in at a little bit lower contribution margin than we would otherwise anticipate.
We would expect These additional manufacturing costs certainly will be temporary. We do have a long term capacity planning project that is ongoing, which will support the higher growth and we believe we'll be able to transition away from a lot of these higher incremental costs in the second half of the year. So a lot of this incremental cost that we're seeing, we do anticipate in the second quarter.
Thank you for that. That's helpful. And a follow-up question, I was hoping to better understand how the company is thinking about deploying free cash flow going forward. I mean, there's been really good progress Reducing debt, lowering your interest expense and the opportunity has been discussed that at some point in the future, perhaps the company could Return to doing some tuck in M and A or perhaps even larger scale M and A, which there's been some success with historically. I know there's a few acquisitions the company has been pretty happy And I think investors are interested in what potential there may be to do that type of acquisitions going forward.
So any updated thoughts you can Share about how you're thinking about deploying free cash flow going forward and is M and A something that you're considering?
Yes. Hi, Mark. This is Rob. I Appreciate the question and I'll start and then throw it over to David. But as we've talked about before in past calls, we do have an active funnel of Potential companies that we think would make sense to be part of our portfolio.
As Dave Killeen has always said, opportunities And present themselves not necessarily in timing, not when you want them to. And so we continue to work through that list and keep those type relationships and have eyes on things. As we've talked about before, it's always been about deleveraging first and I think we've done a pretty good job doing that and And have ourselves in a pretty good position to do some things if the opportunity positions itself. And we are actively always actively looking, but nothing that's imminent that we can talk about today. David?
No, Ajay, I totally agree, Rob. And I would say this is a very pleasant position to be in as a CFO. So I think pre STACK transaction last year, we were over 6 times levered. So to get that down closer to 2 really demonstrates The free cash flow, D and A of this business and it absolutely provides us the flexibility to be strategic With our balance sheet, we certainly don't have a strategy to do a deal because we think we need to do a deal, but we will be patient And we certainly have the flexibility to do something relatively quickly if the right opportunity arises.
Our next question will come from Amit Dhanjani with Evercore ISI. Please go ahead.
Thanks a lot for taking my question. Good morning, everyone. I have 2 as well. First off, when I think about this 10% organic Growth, we're talking about the calendar 'twenty one. Can you perhaps provide some dimensions on how do you think about the various segments you're in the hyperscale enterprise communication is doing?
And Maybe what I'm really trying to get to is I want to understand what happens to your growth vectors if enterprise goes from yellow to green over the next quarter for you.
Well, listen, Amit, thanks for the question. Gary and I will work this one together with you. But I would say in general, The way we've looked at things is conservatively seeing enterprise come back online. Although I've been talking for a couple Quarter is the thing that gives me the comfort that it will is the quoting activity and the level of quotes. So I would say that as we see the enterprise You turn from yellow to green.
Certainly, there's potentially some upside from that perspective. But I would say in general, We continue to see the strength in the colo and the hyperscale. And as I mentioned in my comments, we think they're being very diligent about the build outs as they go forward based on capacity needs that we see kind of along the globe. Gary, any thoughts?
I think that's right, Rob. I think Amit, We were pleased to be able to upgrade that enterprise segment from red to yellow. We know we had a lot of conversations around that in February. So we've definitely seen enough strength throughout Pointing the quoting in the pipeline where we felt comfortable upgrading that segment to go from yellow to green. I think we need a little bit more.
And maybe towards the end
of the year, we'll get there. It's a little bit
unclear, but certainly feel squarely comfortable that that enterprise is coming back in the segments that we would traditionally talk about.
Got it. And then if
I can just follow-up the fiscal 'twenty one guide from a profit dollar basis, I think there was $65,000,000 and B. That's called out. I'm curious, is this do you think
Operator, we probably want to move to the next and see if Amit gets back in the queue. I think we lost him.
Sounds good. We'll take the next one. Amit, are you there?
Yes, I'm here.
Can you hear me? Yes, we can hear you now. Welcome back.
Perfect. We'll blame it on the mute function. I was going to ask you on the fiscal 2021 operating profit guide, and you talked about the $65,000,000 of investments in growth in R and D. I'd love to understand, How do you think about payback from these investments? And do we think about this $65,000,000 kind of a 1 year thing or could it sustain for figures.
Yes, great question. First, I'll answer the last part of that and then get to the first. We have talked about In our strategy that we want to get to about 6% overall for R and D. And so we've seen Some ratchets up over the last couple of this year and last year and even next year to get to that 6%. And we plan on kind of holding it at that based on the need, right?
Really what we're doing is taking a look at the funnel of projects, The collaboration that's needed by our customers and doing what we need to do to really drive innovative solutions that will help us Outpace the market growth and take share as we go forward. Certainly, there's not a lack of activities That we believe we can do to create more value for our customers and ultimately more value for the share owners. But as you think about it going forward, you think about it getting to about 6% level and we think that will be sufficient with the growth rate that we're going to have, which would give us additional R and D dollars every year just holding it 6%. David, any other thoughts? No.
Just from a numbers perspective, so that $65,000,000 it's At least for 2021, dollars 35,000,000 of that is R and D and with the remainder $30,000,000 related to Sales and marketing. And to Rob's point on R and D, last year we spent $230,000,000 on R and D, Add another $35,000,000 this year, that's $265,000,000 And based on the most recent top line guidance, that's 4.5% to 5%. So to get the 6%, there's certainly going to be some additional debt changes over the next couple years. And of course, the dollar amount also increases, all other things being equal, just with the top line increasing. And the one thing I can tell you is that this is not a capital rationing exercise.
There are plenty of projects out there. So There is an efficiency and productivity perspective, you can only do so many. So there the ability to increase this dollar spend, We're not chasing the last hour. So there is plenty of opportunity for us to continue to invest and All of these projects have really, really good returns and that's probably was the first question. And that payback period is anywhere from 12 to 24 months depending on the specific project.
Our next question will come from Nicole DeBlaser with Deutsche Bank. Please go ahead.
So can we start with the outlook for revenues for the year? When you think about where organic growth is getting better expectations, particularly with respect to like 2Q to 4Q. Can you talk about that by segment? Any color you give on the second quarter?
Nicole, you were cutting in and out a little bit. Is it possible to restate that question? You were getting every third word here.
Yes, sorry about that. Is it better?
A little bit, yes.
Okay. I was just looking for color on full year organic
This is David. And I can ask Rob and Gary to add some color. We don't Yes, provide guidance as it relates to a product segment perspective and we can give some color on that. But certainly from A regional perspective, if you look at Q2 this year versus last year And the 17% expected organic growth give or take, that's going to be pretty strong across in all three regions. So probably low single digits in the Americas and both APAC and EMEA somewhat over a 20% growth.
So this is not a situation the reason we And that is this is not a situation where we anticipate another 40% or 50% growth in one region and all The other two regions are single digits. So we're expecting strong growth in Q2 across all three regional segments. Now when you look at first half versus second half and All the numbers are out there, so everybody can do the math. It certainly does imply lower organic growth in the second half for the year. So organic growth in the first half of between 15% 20%, That would imply low single digits in the second half of the year.
What we can tell you is We did not expect that low single digit to be uniform in Q3 and Q4. We do anticipate Q3 from a percentage growth perspective to be higher than the year over year growth that we see in Q4. So Q4 last year, if you recall, presents a very, very challenging comp, right? We had sales over dollars 1,300,000,000 including exceptional sales in EMEA based on the timing of some larger projects And also APAC. So there could be some conservatism built into our guidance in the 4th quarter.
We just don't have the visibility at this point to really lean forward too much on Q4. And we do anticipate that to have More information related to orders and pipeline when we update our guidance in Q2.
Okay, got it. That's really helpful. Thank you. Just for my follow-up, I know you guys are trying to offset some of these extra costs of pricing. Can you just talk about the general pricing environment and maybe the competitive landscape?
That's a great question, Nicole. We have, as we've talked about before, been able to get price the last year, couple of years. I I think we're getting pretty good at doing that. When we've had times before where freight costs have gone up like they have been, we've been able to institute surcharges. Sometimes that's lagging and I mentioned a few in some of my comments some of the lagging to pick that up.
And then based on contracts and orders, working with our customers, everyone understands that commodity prices are going up, steel's doubled, that type of thing. Our customers are pretty good about working with us and going through that. Certainly, we're able to go forward, price things at that higher cost rate. And we're able to get that. So we feel good.
We have $10,000,000 I think David showed in his bridge of incremental additional pricing this year. While that's something we're striving for, we think we could probably do better than that. But Based on what we see, based on where we're at, that's kind of what we built into our plan. But no, we've got a pretty good process now and our ability to drive prices through with our customers on a global scale.
Great. Thanks. I'll pass it on.
The next question will come from Scott Davis with Melius Research. Please go ahead.
Good morning, everybody.
Good morning, Scott.
Appreciate the commentary as usual, but I'm going to go back to a few questions ago on the enterprise side, small, medium segment. What's your sense of the age of the installed base in that category? Meaning, When you go from yellow to green, is it going to be kind of green on steroids because not only is everybody back in the building, but they're back in the building with old equipment that's It's going to age out pretty quickly. Is that a fair way to think about it?
Well, I guess, yes, the way to kind of think about it, Scott, would be that During COVID period, people haven't been spending and that equipment will. I can't give you an exact what the installed base would definitely look like and That ramp would be. What we are seeing early signs of is people upgrading their closets as they drive more to cloud and colo, Upgrading their network closets, refurbishing old gear, certainly where there's batteries and that type of thing. So Certainly, when it goes to bright green, we would expect to see probably stronger than traditional growth in that enterprise because there's been And the reason I say that is we see the quoting activity, we see what's happening at the engineering side of things and we do believe when that frees up, I don't know if it all happens overnight or if it's a slow kind of like we saw in this last quarter, slowly easing back into it. I mean, I think a lot of it's going to be determined around And what happens with the back to work with COVID vaccine, which we can't predict, but I think those things can be correlated and tied to people saying, I Feel good about spending again.
People are back in the office. They're used to this level of service at home now with the mill working. They're going to want to make sure that their gear in the offices is where it needs to be.
Okay. That's helpful. And then as a Just a point of clarification, is there anything in your covenants or kind of structure, This is my first back coverage to be fair. That would preclude buybacks of any magnitude?
This is Dave. Scott, there is not.
Okay. So if your leverage ratio were to get, let's say, under 2 turns or something and you wanted Do a buyback, that's in the cards, correct?
That is one of the options on the table for us, absolutely.
Okay. Fair, fair. Thanks. I'll pass it on. Good luck.
Our next question come from Jeff Spong of Vertical Research. Please go ahead.
Thank you. Good morning.
First question maybe actually related to Scott's services in Americas. At what point do we start to see some traction there? Does it end up being actually tied to Kind of new equipment on the enterprise side, I wouldn't think it's directly related, but they kind of seem to be tracking similar.
Yes. Hey, Jeff, it's Gary. So I would say, I think there's a couple of things. One is, 1st quarter in Americas with service was down a little bit, Primarily because of 2 main issues. 1 is, if you remember, we had those horrible storms that rolled through most of the U.
S, a lot of it in the Southeast and Texas area. So That prevented some slight access and pushed some jobs out a little bit. The other portion of it was we have a decently large commercial and industrial service business in the U. S. And that was lagging just because a lot of that is vectored towards utilities, oil and gas, which obviously were depressed from an order standpoint last here.
So that business is coming back online. Now we see really pretty strong order rates there, number 1. 2, clearly, the weather issue is Temporal and that is behind us. So we would expect to see acceleration in that service business, particularly in the Americas as the year goes on. Great.
And on the new 3 phase product, one of
your competitors Scott, something similar that they're talking about and as part of what they're talking about developing with that is actually A bit of a SaaS model too where they can share with the utility on some of the savings of selling back to the grid. Is that sort of thing available with your product? Are you exploring new business models like that? Maybe you could just elaborate a little bit more on that particular product and anything else interesting in the pipeline?
Great, Jeff. Hi, this is Rob. Yes, absolutely. So when we get Where we are in the belief that good interactive, we've actually had pilots going for months and even over a year over in Europe where we'll do that kind of sharing model, revenue sharing model with the utility where you'll go on battery And inject power back on the grid and or just free up power for the grid. So there's a couple of different revenue sharing models there.
So as we get more sophisticated and people realize that, hey, it's still reliable infrastructure even though you're on battery, and people get more comfortable with that, We think that that grid and in order to the grid interaction is going to play a big part of it. In order for People to drive more carbon friendly, they're going to have to be doing those types of things as well. So we see that in Interacting with the grid, whether it's behind the meter storage or in front of the meter, and I've talked about this before, as an area, an adjacency and a growth area as we go forward. So as it relates to we will continue to focus, as we have talked about in the past, Thermal management requires draws most of the utility expense within a data center And we continue to drive more efficient, effective solutions utilizing software controls, AI around So expect to see things like that in the future from us that will just drive that and helping that carbon get to that carbon neutral position. Great.
Thanks. I'll leave it there. Much appreciated. Thanks, Jeff.
The next question will come from Lance Vitanza with Cowen. Please go ahead.
Thanks guys for taking the questions. I have 2. The first is last fall, you announced that you would be collaborating, working with Honeywell to improve sustainability for data center operations. And I'm wondering if you could talk a little bit about how that effort has rolled out. Have you seen results yet?
Or are we still in the planning or preliminary stages? Are you in the market with joint offerings? How, if at all, does this partnership or this collaboration differentiate
Hi, Lance. Good morning. We're really happy with the progress we're making with Honeywell expiration. And that collaboration, we talked about a few different things. I think the first thing we talked about was kind of a software and controls thing to drive more efficiency.
We're piloting that. So we're more than just the planning phase. We've got some pilots. I think a bigger part of the collaboration is us working together globally and Bringing Honeywell into areas that they necessarily haven't been into with their software offering, which is very, very Robust offering along with our equipment and to drive more efficiency as we go through the data center. So We are the teams are working together globally and you'll expect this isn't something that happens overnight, but expect over time You'll see more and more of kind of the Honeywell Vertiv solution showing up in data centers driving really driving efficiency and then joint collaborating on customers they may have that we aren't currently doing business with and vice versa.
Thanks. And then just maybe one last one for me on Slide 13 where you lay out the bridge and focusing on the cost pressures and sourcing and so forth. You show the $10,000,000 kind of recovery from passing price throughs and this $25,000,000 if from commodity and logistics headwinds. And I guess my question is, how are those two numbers related? In other words, if it turns out that the Modity and logistics turns out to be maybe a $50,000,000 headwind.
Should we assume that you can pass on perhaps $20,000,000 of the costs? Are they variable in that way or no? Is it sort of like a hard stop? You think it's going to be tough to pass on more than 10. So we just need to hope that the impact from the logistics isn't much greater than that or could you comment on that?
Yes, Lance, This is David. So I'll start and Gary and Rob can jump in. I would definitely say the 2 are correlated, right? The higher the commodity and logistics headwinds and inflation is, the more data we have and to reasonably take price up consistently with competitors, right? So there's definitely a high correlation.
The one thing that we're seeing here is that there's generally a lag. So we will see the negative impact from commodity and logistics sooner in our costs then we do have the ability to pass that through for higher pricing. Now one thing that we did see, which Turns this into somewhat of a positive. The last time we saw significant commodity and logistics headwinds, What we found is that the pricing is actually a little bit sticky upwards. So we actually Look at this strategically as a way to get additional price.
And then if the commodity and logistics headwinds debate at some point this year or even early next year, generally the pricing that we We see remains where it's at. There's always some give and take. But on the way up, that Pricing opportunity is certainly going to be correlated with the headwinds we're seeing. And the other thing that I Probably want to point out on this slide and remind folks is that this is versus prior guidance. So this is the overlay for additional commodity and logistics headwinds versus our beginning of the year assumptions.
If you looked at this for a full year, we had about $20,000,000 of headwinds for commodity and freight inflation in that beginning of the year guidance. So if you add the $20,000,000 the $25,000,000 you get about $45,000,000 We also had assumed about $15,000,000 of pricing in that prior guidance as well. So full year pricing expectations are now right around $25,000,000 And if there is additional inflation, we do believe there's opportunity To take those pricing assumptions up as well.
Thank you so much. It's super helpful. Great. Thanks, Lance.
The next question will come from Steve Tusa with JPMorgan. Please go ahead.
Hey, guys. Good morning.
Good morning. Good
morning. Almost good afternoon.
Just rounding out the rest of those bridge items, I think you had had like positive 45,000,000 For productivity, for kind of a that would be kind of
a net
$40,000,000 contribution margin, I think. Now it looks like it's $10,000,000 for contribution margin, but first half is negative $20,000,000 So I guess the second half kind of has to flip. Are you guys assuming that things I mean like what can you maybe round out the other portions of the annual kind of year over year bridge
for us? Yes. This is David, Steve. And I think everybody has had some time now to kind of put the Sudoku Puzzled together and I'd say you did it correctly. So yes, the implication for margin is that there'd be about a 30 $35,000,000 favorable year over year variance in the second half and that offsets about $20,000,000 unfavorable variance in the first half.
So the reason you see favorability in the second half is because of the timing of some of these initiatives. We do assume that pricing will ramp up as we go through the year. So the $25,000,000 in total, there's Probably a relatively small number in the Q1 and that will ramp up as we go through the year in addition to our productivity opportunities. And a lot of those are around the purchasing side, completely independent from price. And those as well ramp up as we go through the year.
So and almost sequentially. So Q4 is also significantly higher than what we're seeing in Q1.
And are you making any explicit call on kind of like the movement in Any of these inflationary items like the price of freight or the price of commodities, things like that?
We do assume that what we're seeing today pretty much continues through the remainder of the year, Probably with a little bit of a throttle down in the 4th quarter. We think it always could score. Steel is up 115% in Q1 this year versus last year. If you listen to the experts out there, a lot of that price is based on a Ramp up in demand and a slower response from the supply as they kind of ramp up mills. So I think Everybody anticipates that it can't get much worse from a steel pricing perspective, which is are most exposed commodity, but I guess it could.
But we feel pretty good with the provision we've included in the forecast as it relates to commodities and we do assume it pretty much extends through the rest of the year.
Got it. Okay. Any dynamics in the back half on mix? I guess services, if that kind of flips positive, That could be a positive mix driver and anything on that front?
There's Two elements of mix we look at. We look at product mix and we also look at regional mix. So certainly We had a little bit of a headwind in Q1 from a regional perspective based on the significant growth in APAC year over year. That will update as we go through the year. But If you look at individual quarters, it likely is not going to be a significant player.
From a product perspective, we do believe that I think in the Q1, The Critical Infrastructure and Solutions business was probably 50% of our total business last year. I think that ramped up closer to 60% in Q1. We don't see a similar dynamic through the remainder of the year. But as we're seeing some of the Additional sales we added to our guide are skewed a little bit more to that CI and S. So Mix could be different each quarter, but we don't see it as significant of a headwind over the remainder of the year as we saw in the first here and somewhat in the Q2.
Our next question will come from Andrew Obin with Bank of America. Please go ahead.
Hey, I guess, good afternoon now.
Good afternoon.
All response to BLA question number 10. So the first question for me on your E channel, big growth initiative for you guys. There's been some consolidation. How do you view Even the acquisition of Triplebyte, does it really change the end market that much from your perspective?
Andrew, hi. Rob Johnson here. I really don't want to necessarily comment on what the competitors are going to do or not do. Consolidation sometimes Gives an opportunity for companies like ours to be able to be in that top 2 or 3 bidding perspective. So they usually like To have 3 bidders and so I see that as a potential positive for us as we go forward.
We're really focused on our innovative Solutions that we're bringing to market are thermal management and kind of that total solutions approach in the channel, which We think globally we've got a really good position and strong there. So while not necessarily focused on Triplebyte and what's going on there, we're really focused on Bringing those new products to market and driving innovation against our competitors to gain share. And as you can see in our IRS business. We did have decent year over year growth. We've seen that for the last several quarters now and expect to continue to see that Grow as we introduce more products into that venue.
And not all IRS business is in the channel, so it's not necessarily indicative of the channel because we do saw The C and I business as well falls within that channel space.
Yes. And bigger picture, Thank you for that answer. And a bigger picture question, right, I mean, if you think you have technology focused global business, It does seem if you look at the legislative action, there are pretty big bills cooking up in Congress in regards to China, In regards to incentivizing technology R and D investment in the U. S. And To optimize your existing manufacturing footprint, right, and just drive high and high volume.
Does this Sort of change your thinking, the sort of bifurcation of the tech world perhaps into, I guess, President Biden uses the term techno democracies and techno autocracies. Have you guys thought about it? Does it change your approach to manufacturing footprint, your sourcing, pretty open ended question, but it seems there are sort of Big headlines at least coming on this topic and you guys in the middle of it just given what you do for a living. Thank you.
Andrew, thank you for your question. I don't think it really changes. We a little bit different than maybe some of our competitive Companies out there have always been kind of more or less an in country for concern or in region for region. What we did do over the last Couple of years from an R and D perspective is really drive to a matrix and put center of excellence all over the world, not necessarily in best Cost locations but in the right place to be developing those products. So I think you'll find both our R and D investments which Point 4 in the US and in the Americas and in Europe and in Asia Pac, and I think you'll find that fairly balanced.
And so we were already doing that. I think COVID has taught us a lesson about second sourcing vendors and making sure that we have more in region and we've made some moves based on COVID To be even more regional from that perspective, which probably plays in the hands of some of the stuff Biden is doing. But in general, I don't think that's driving our thoughts right now. But I feel really comfortable with the footprint we have from a development perspective. And as we look at how we do things, we're in some cases, a highly engineered product and freight and everything is important and speed to market is important.
So being closer to our customers, not just using an Asian source and bringing that in has been part of our strategy and will continue to be that. Thank you. Thank you so much for your answer. I appreciate it. Appreciate it, Andrew.
Our last question will come from Nigel Coe with Wolfe Research. Please go ahead.
Thanks. Good afternoon. I think I actually am question number 10. So Yes, Matt, it's Andrew's strong point, so I'll take that further. So obviously, we're pushing well past the hour mark here, keep us pretty I want to go back to the pricing.
You covered that very well, so I'm not going to retrain any new ground here. But $0.25 of additional price doesn't seem like a shoot to the new scenario, but how does the backlog play into the pricing equation for Second half of the year, you've got $2,100,000,000 of backlog. It's about 2 quarters worth of sales, not quite 2 quarters. But are we thinking here that The price increases are mainly in the 4th quarter given that backlog coverage. Or is there some mechanism in the backlog To push on some additional price.
Yes. Hey, Nigel, it's Gary. So I'd say the answer is mixed and varied. I mean, obviously, it's a little bit easier to get price on new orders. But by no means are we just taking a look at that $2,000,000,000 The backlog and saying, well, there's nothing we can do.
It's already in backlog. So we do have some other mechanisms sometimes in larger contracts that have material clauses in them. Certainly, freight is another lever that we can utilize. That is a real time mechanism. There's been times when we've instituted surcharges as well.
So I would say that, yes, it's easier to get price on new orders coming through the door, but by no means are we going Just discount the $2,000,000,000 that we have and say there's nothing we can do with it. We're looking at that, taking action on that as well. With all that said, I do think price probably continues to ramp throughout the year, as David mentioned earlier. So I think in general, that pricing will ramp. But those are the different ways we're looking and trying to That pricing and freight scenario.
That's great. And then my follow on question is around NOK share. And we We don't really have a lot of good information from your competitors in terms of their growth rates. It's always double digit growth and strong growth. There's no complication.
So I'm just curious, obviously, you see the bids and quotes in the RFP activity. How do you feel your share is tracking Relative to the last 12 or 12 months. And where do you think you're gaining or losing share?
Hi Nigel, this is Ralph. I'll let Gerry follow in. And one thing I think all of us on the call need to remember is typically people talk about Couple the big 3 are 4. But as you look at the pie charts we've shared in the past, there's a lot of gray area, which is smaller, more regional players that play into this from that perspective. So you got to be careful just watching us versus some of the other competitors that are Our side and really look at how we think about things and part of our strategy was taking share from those more local Mom and pop, where we failed to innovate early on or provide a solution and now can provide a solution and provide that globally.
So I think we feel across the board, we feel really good about where we're at from a thermal position And from a power position as well. And again, you'll have some local players that we go up against and then we'll go up with some of to the global players. But overall, with our strong growth that we've actually posted in the last couple of years, we think we've been outpacing the industry, which would mean either we get more of our fair share and taking some share from that perspective. But when you look at it, just kind of a broader question is There's a whole another 50% of the pie that's made up of a bunch of small mom and pops pieces that are moving around. I don't know, Gary?
Yes. Nigel, I think Rob said it beautifully. Just analytically, you're right. That's sort of the maddening one of the maddening things about the market is you can't just I get to a specific number of this is what the market grew or shrank. To the best of our ability, if you go back to 'nineteen, We think the market probably grew low to mid single digits in 3%, 4%, and we grew at 6%.
And then if you take a look at last year, The best sources we think that the market probably shrank 4% -ish and we were down 1 point organically. So you take those 2 different data points and you say, okay, it's consecutively back to back years now. We think we've pretty squarely outperformed the market by that 1.5 times goal that we've Established and certainly with a strong start to Q1 don't have any signs of letting up at this point by any means.
That's great. Thanks very much.
Thank you, Nigel.
This concludes our question and answer session. I'd like to turn the conference Back over to Rob Johnson for any closing remarks.
Well, thank you. And I appreciate everyone attending our call today. As you could tell, we're really excited about the Q1 results, but really the go forward and the execution of the strategy that we set out and shared with all of you, and we'll continue to drive that as we go forward. Again, appreciate that support. Thank you and have a great day.
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