Good morning. My name is Andrea and I will be your conference operator today. At this time, I would like to welcome everyone to the Vertiv 3rd Quarter 2020 Earnings Conference Call. Please note that the call is being recorded. I would now like to turn the program over to your host for today's conference call, Lynn, Maxeyiner, Vice President of Investor Relations.
Thank you, Andrea. Good morning, and welcome to Verde third quarter 2020 earnings conference call. Joining me today are Verde's Executive Chairman, David Cody, Chief Executive Officer, Rob Johnson Chief Financial Officer, David Fox, and chief strategy and development officer, Gary Nieder. Before we begin, I point out that during the course of this call, we will make forward looking statements regarding future events, including future legal and operating performance of service. These forward looking statements are subject to material risks and uncertainties that could cause actual results to differ materially from those in the forward looking statements.
We refer you to the which included in today's press 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 so we make today are based on assumptions that we believe to be reasonable as of the state. We undertake no obligation to update these statements as a result of new information or future events. During this call, we will also present both GAAP and non GAAP financial measures. Our GAAP results and GAAP to non GAAP reconciliations can be found in our earnings press release and in the investor slide deck found on our website at investors.
Vertive.com. With that, I'll turn the call over to Executive Chairman, Dave Cody.
Thanks, and good morning, everyone. When we spoke in August, the Verde team had wrapped up a very successful second quarter. I'm happy to say the team demonstrated excellent execution again in the third vertical continues to have a great position in a good industry. And I think the proof points of the last several waters demonstrate that it's not a fluke. Even during this COVID time, the data center market remains strong, and Vertiv continues to validate leadership position in the market.
While that he executed on both the top and bottom line over the past several months, They also continue to focus on seed planting. So we'll win not only in the short term, but also the long term. Initiatives such as the new Vertive product development activities, VPD, deploying the Vertive user experience or customer view and developing their 3 year strategic plan or just some of the ways the Vertive team is focused. On ensuring sustainable success. I am really impressed with the adaptability and the receptiveness of Rob and his team.
So overall, I'm just as excited today about the future Vertiv as I was a year ago, and I can't wait to continue working with the team. So with that, I'll turn the call over to Rob.
Good morning, everyone, and thank you, Dave. Your ongoing coaching and mentoring has meant a lot to both me and the team. I also want to say thank you to the entire Vertiv team for their efforts in Q3. Despite the challenges of the quarter, One of the positive comps has been the team's relentless focus on delivering to our customers. The learners team, creativity, energy and passion for serving our customers is always front and center.
Now let's look at the slides. Turning to Slide 3. Overall, the demand of the business was very promising, the sales were up 8.5% and orders were up over 15% as compared to Q3 last year. Additionally, this is the fourth quarter in the row where our backlog grows and hit yet another all time high. We will get point, our adjusted EBITDA was $179,000,000, which was up 31% from last year's Q3.
This result and adjusted EBITDA margin expansion of 270 basis points. This was driven by higher sales, higher contribution margin, lower fixed costs on a percentage basis. Our free cash flow at the end of Q3 was $129,000,000, which was $115,000,000 higher than last year's Q3. During our last earnings call, we mentioned that we would be working on a restructuring plan in Q3. We completed that activity and took an $80,000,000 restructuring charge for the programs.
These restructuring efforts will drive $85,000,000 of annualized run rate savings by 2023. David will share more details about our plans later in the presentation. Next, on this slide, we wanted to provide you some of the ranges for the expected outcome of Q4. We are anticipating the implications of COVID to continue to fluctuate, but based on our current visibility, we expect our organic sales to be up 6% to 8 percent and our adjusted EBITDA will be up 18% to 24% from the last quarter, Q4 last year. While these dynamics can change, we did want to share with you what we're currently seeing playing out in Q4.
Now all of this is clearly predicted predicated on COVID, not impacting our customers, and not impacting site access any more than what we saw in Q3. We'll discuss more on this topic later. Finally, I wanted to add a bit of color around 2021 as we see things right now that the NAND side is holding up and are fast log should be robust as we exit the year. On the cost side, we're keeping a close eye on fixed cost constant, but are continually looking at investments in VPDs, and other growth programs to ensure long term success. Turning to Slide 4.
We used this slide last quarter and received good feedback on it. So we wanted to keep it in for consistency and also add our thoughts around the current market environment. The chart is simple, but it relays the real time view we have on the demand side of things. It is qualitative in nature and depicts our view on the level of health and activity in each of the markets we serve. As indicated by the 6 green buttons in the top 2 rows.
Emerging vital applications such as online education, telemedicine, video and gaming are benefiting our cloud and colocation customers as a surge in demand is benefiting us as well. In contrast, we see the enterprise and small to medium business still being challenged by COVID and indicated by the red and yellow buttons in row 3. This segment spending continues to be mixed. It's probably slightly more positive today than it was 90 days ago, but not significant in to upgrade any of with prior quarter. We continue to see 5G deployments in U.
S. And parts of Asia. While China is certainly deploying 5G, when we see a small pause at the moment as they digest some of their equipment. This is not surprising, and we expect that it will be short lived. Finally, as we've told you before, our While this segment has held up picture when you consider our mix of data center business, the applications people use every day to become more and more vital because those applications are needed to be processed, stored, transmitted, and this creates a great backdrop for our business.
Moving to Slide 5. To reiterate, the overall demand is strong as evidenced by our order rates and our record backlog. Led by EMEA and Asia. EMEA was particularly strong due to some larger projects, specifically in the colocation market. As I mentioned in the product chart, enterprise and IT channel markets are still not back to pre COVID levels, but there are signs of life as evidenced by our integrated RAC solutions business having positive growth in third quarter this year versus the same quarter last year.
Switching to the supply side now, I'm pleased to report that most of our facilities are operating normally. However, I will say that things continue to evolve very rapidly. We are being very cautious with our workforce as safety is our number one priority. We continue to navigate through these impacts on the operations and supply chain side but we have become creative problem solvers and experts in mitigating issues before they become concerns for our customers. Gaining access to sites for installation and services has proven to be an issue, but we continue to manage around any restrictions.
Countries like Singapore, Malaysia, Philippines are still struggling with COVID, and we've seen some of these countries in Western Europe tightening back up again. These unfortunate COVID related situations are outside of our control, and however, we continue to work closely with our customers to year to health and safety requirements and to make sure that our scheduling of our service departments are as flexible as possible to meet their needs. With that, I'll turn it over to David Fallon to walk us through the financials. David?
Thanks, Rob. Turning to Slide 6. This page summarizes our third quarter financial results versus last year. As you can see, net sales were up $91,000,000 or 8.5 percent, 8.3% when adjusted for a slight foreign exchange tailwind. We continued our strong momentum with orders, as Rob mentioned, which were up 15.5% in the 3rd quarter.
And 10% year to date. Adjusted EBITDA increased $43,000,000 or 31 percent driven by higher sales, improved contribution margin, and relatively flat fixed costs, converting into a 270 basis point improvement in adjusted EBITDA margin. Our sales and profitability performance certainly translated into strong free cash flow of $129,000,000, which was up $115,000,000 from last year's third quarter. We will review some of the drivers of this improved free cash flow in a couple size that our 3rd quarter adjusted EBITDA related margin and free cash flow figures are all record quarterly highs demonstrating our continued focus on profitable growth This slide summarizes our 3rd quarter segment results. Net sales in the Americas were down 14 $1,000,000 or 3 percent as growth in our Integrated Rack Solutions segment, primarily in the channel, was more than offset by lower large project sales in our Critical Infrastructure And Solutions segment, and lower sales in our Services and spare segment caused by COVID site access issues.
Net sales in APAC increased 50 $1,000,000 or 17%, primarily due to continued strong growth in China across most end markets, including data centers, telecommunications and industrials. Geographic locations outside of China in APAC were relatively flat as we continue to deal with some site access challenges in, some of those jurisdictions. Net sales in EMEA were up $49,000,000 or 24 percent with $7,000,000, driven by a stronger euro. The $42,000,000 or 21 percent organic growth, somewhat aided by the timing of large projects, was spread across several market verticals including co location improved in all three geographic segments, but notably in the Americas, where margin increased over 800 basis points from last year's third quarter, A portion and large project last year caused by poor internal execution, but the remainder of the increase was a result of higher contribution margin from strong execution of purchasing and pricing initiatives and driving lower fixed costs. On a year to date basis, adjusted EBITDA margin in the Americas has increased over 400 basis points from last year, illustrating the progress we have made with our margin expansion initiatives in a relatively short period of time.
Next, moving to Slide 8, this chart bridges 3rd quarter free cash flow from last year. The $115,000,000 increase is primarily driven by lower cash interest pursuant the debt pay down and refinancing in the first quarter, and that is coupled with higher adjusted EBITDA. After beginning the year with the use cash in the first quarter. If you recall, we used about $203,000,000 of free cash flow in Q1. But since then, we have generated more than $190,000,000 of free cash flow over the last two quarters really indicative of the strong cash generation potential of this business.
This free cash flow has allowed us pay down our ABL by $170,000,000 in the 3rd quarter, while improving our liquidity position from about $450,000,000 at the end of the first quarter to over $650,000,000 at the end of September. Next, turning to Slide 9. This page summarizes cost and benefits of a restructuring program which supports our continuing objective to maintain fixed cost constant while reinvesting in the long term growth of the business. Pursuant to this program, we recorded a $71,000,000 restructuring reserve in the 3rd quarter, which was primarily related severance for headcount efficiency and footprint optimization projects to be launched in the fourth quarter and over the next couple of years. In addition, we recorded a $9,000,000 intangible asset impairment charge for trademarks and developed technology in a small small business unit we are streamlining.
We anticipate additional, albeit smaller restructuring program expenses in both 2021 2022 that aren't covered by the 3rd quarter reserve. We estimate $84,000,000 net cash outflow to execute the restructuring program with approximately $60,000,000 of that in 2021. We expect $85,000,000 run rate savings from the program in full year 2023, with those gross savings ramping up in each 2021 2022. For next year, we expect over $40,000,000 gross savings from the restructuring program, offset by approximately $20,000,000 of additional restructuring expenses not covered by This page summarizes our financial guidance for the fourth quarter. And overarching any expectations for the next several months is the dynamic uncertainty with COVID, which is certainly worsening in many global jurisdictions.
Accordingly, our guidance for next quarter assumes that COVID conditions are not significantly changed from what we experienced in the third quarter. If conditions do become more challenged, our guidance here today could be significantly negatively impacted. Notwithstanding these changing COVID conditions, we do expect strong 4th quarter top line growth of 6% to 8% from last year's 4th quarter, and 7% to 9% sequentially from this year's third quarter as we continue to benefit from a record high $1,850,000,000 backlog at the end of September. Adjusted EBITDA margin is expected to improve approximately 165 basis points at the midpoint from last year's fourth quarter as contribution margin should increase from purchasing and pricing initiatives and fixed costs although slightly higher than last year, primarily due to growth investment, should decline as a percentage of sales. 4th quarter adjusted EBITDA margin, when looked at sequentially from the 3rd quarter,
should it should
be relatively flat quarteroverquarter despite the anticipated higher sales. And some of the drivers that include the anticipation of an approximately $30,000,000 increase in fixed costs in the 4th quarter versus the 3rd quarter as the benefits from our COVID-nineteen cost savings pro ramp down. And in addition to higher growth investment and public company costs, Once again, the 4 moving office slide, we certainly reiterate that these expected fourth quarter results could be significantly negatively impacted by any worsening COVID-nineteen's conditions. So with that, I'd like to turn it back over to Rob. Thanks, David.
Turning to Slide 11, here's a bit more detail regarding our perspective on 2021. We expect cloud colocation and telecom markets will continue to be healthy as we enter into 2021. Because of COVID, we're unable to anticipate what the enterprise market will look like, but we anticipate growth in the overall data center landscape. Our backlog should be slightly better heading into 2021 than we thought at the end of last quarter, which provides us good visibility and confidence on the revenue side for the first half of twenty twenty one. However, the uncertainty of COVID provides us applause today, more than we were thinking 90 days well.
Certainly, we're not in the business of making predictions on when there'll be a vaccine, but we do see this as a very dynamic situation today, as David mentioned earlier. As we have seen during this entire pandemic, we are planning for the worst scenario and working and hoping for the best as things remain very dynamic even today. On the margin side, as we mentioned previously, we are firm believers in the strategy of holding fixed cost This concept is being practiced today, but as mentioned previously, we will continue to invest in R&D And Growth Investments that will be key for our long term success. So while we're not providing specific 2021 guidance, at this point, We did want Our backlog, fixed cost constant approach we have implemented and our liquidity positions are in great shape. We hold a leadership position in a growing industry the demand for digital infrastructure to support the vital applications the world needs has never been stronger.
We will continue to invest for the future while simultaneously managing for today, so we are prepared to be even more successful as we merge from this pandemic, and the world adapts to a post COVID life. Thank you for being on the call today. Thank you for your support. I'll now turn the call over to the operator who will open up the line for questions.
We will now We will pause for The first question comes from Andy Kaplowitz of Citigroup. Please go ahead.
Good morning guys. Thanks for all the detail.
Good morning, Andy.
Rob, I've been
thinking about just early thoughts about 2020 when you give us. You've mentioned you expect to see strong demand from cloud and colocation, healthy telecom, and then it's too early to call on the enterprise stuff but it seems like when you put that together with your backlog and you consider the easy comparisons you have, at least in the first half of twenty twenty one, does it give you at least some confidence that Verta could see the type of organic growth you are recording in the second half twenty twenty lasting into 'twenty one, despite the increased COVID risk you're concerned about?
I think it's, it's really too early to call, what, you know, again, the recovery on the enterprise, the small to medium, business. So I would say that, as this business has over the last 4 years, Andy, there is a digestion period and then there's building period. And we can't really predict what that's going to look like. So I wouldn't be projecting you and saying that we guarantee that we have this same level of growth, but we are seeing a robust market out there and we're participating and we're winning our fair share.
That's helpful. And then you mentioned the $20,000,000 of incremental benefit in Q3 that came from increase productivity, pricing mix. So maybe you could talk more generally about the progress in implementing the Vertive operating system. Where are you in the process? How do we think about the incremental opportunity in terms of pricing and productivity as we go into 'twenty one's as we go into 'twenty one, can benefits actually accelerate as you continue to improve your focus over the next few quarters?
Sure, Andy. Good question. So our Vertive operating system, and we've talked about this. It's something to time, right? It's not something that we actually get done in a year or 2 years, but it happens over a period of time as we roll that out and deploy And the benefits from some years may be 50 basis points next year, may be 100 basis points.
We feel good about the pilot plants that we have running now and our progress that we've made so far as it relates to rolling out the Vertive operating system. And again, we do see long term, benefits from that. From a pricing perspective, you know, we continue to get in various parts of the world pricing, and we expect to get pricing again of next year as we go into 2021, whether it's on products or services or our differentiated products set that we're coming out with. And that's part of the reason why we're investing a lot of money in the, in the, what we call the vertical product development is to bring those features up and have those innovative solutions that customers are willing to pay a better price or give us
a better price for that.
So we're not just competing on a commodity level, product for product.
And just one more quick one for me. The lower contribution margins that you estimate for Q4 was Q3. It's really just function of that $30,000,000 in higher fixed costs. And then just continued investment, there's nothing else really to lead into there other than that.
Yeah, Andy, this is David. That certainly is a headwind for us in 4Q, the higher fixed costs. We certainly have to point out that we see that higher fixed cost as investment in the long term. A lot of that is driven by VPD spend, R and D spending and continue to invest in some of the growth markets. But we also to pay contribution margin to dip a little bit in Q4 versus, Q3, which is separate from fixed costs.
And that's driven in part by, product segment mix. So we see healthy growth Q3, Q4 in the top line, but it's probably a little bit overbalanced to the critical infrastructure and solutions product segment, which has a little bit lower margin than the other two product segments.
The next question comes from Mark Delaney of Goldman Sachs. Please go ahead.
Yeah, good morning, everyone. Congratulations on the strong quarter results. And thanks very much for taking the question. So I wanted to better understand the commentary on the hyperscale market. And of course, as discussed, the very good orders in that segments and is expecting some strength to continue there.
Can you elaborate a little bit more on that, end market in particular. And I ask because some of the semiconductor anti hardware companies have been seeing a slowdown in data center spend, it doesn't seem like that's Vertu's outlook. So maybe you could help us understand a little bit more of what you're seeing in that market and why Vertu's business may be a little bit different.
Yes, Mark. Hi, this is Rob, and thanks for the question. Thanks for being on today. What I'd say is a couple of things. We are seeing strength globally in the colocation and hyperscale market.
What tends to happen though is, what you might hear from the chip manufacturers doesn't necessarily correlate or connect directly to the demand that we're seeing, partly because while we're building, they're not filling. And so there's some timing differences as the data centers get built and get deployed and from them then filling with the IT equipment from that perspective. So I don't think we use those as necessarily indicators of where are going because they're a little bit lagging what we're seeing on the front end of the business.
Got it. That's helpful. I just wanted to ask on free cash flow and as we're thinking about 2021 modeling. I know it's still early, but should we think about incremental EBITDA dropping through into incremental cash flow? Are there any, investments in working capital or CapEx we should be cognizant of as you're thinking about it at this point?
And And the company just announced that dividend, but if you could also talk about it, you guys are driving that higher free cash flow, how should investors be thinking about the use of that free cash flow?
Yes. Thanks for the question, Mark. So first on free cash flow, I think a, a good starting point to understand 2021 is to go back to our beginning of the year guidance for 2020. And this was all pre COVID, but on a pro form a basis, when you adjust for some of the transaction related expenses and also adjust for some of the benefits that we started to receive at the end of the first quarter from the debt refinancing and paydown. We had set a pro form a free cash flow for 2020 was in that $285,000,000 to $300,000,000 range.
I think that's a really good starting point for next year. There certainly will be some moving pieces and one of those is related to the cash outlay pursuant to the restructuring program, which we said was about $60,000,000, we should receive some benefit from the lower expenses from the restructuring. I think that's probably a really good the starting point, as it relates to what we are going to do with the cash, At this point, our intention is to pay down debt.
That's helpful. If I could just sneak one last follow-up then. Around that restructuring. If I recall correctly, at the last quarter's call, the company talked about potential savings $50,000,000 to $70,000,000 in 20.21, and not today talking about a higher number in 2023, but if I'm understanding correctly, 20 savings is maybe a little bit lower. I don't know, David, if you could or anyone on the team could clarify a bit more on how to think about the trajectory of savings the, for the program?
Thank you.
Yes. Great question. So apples to apples, the $50,000,000 to $70,000,000 that we us at the end of second quarter, after we have completed the initial planning is likely going to be in the $40,000,000 range. So that's a gross savings number. The reason that has declined from when we talked about it 3 months ago is primarily related to some of the planning on the footprint optimization.
So, of course, A primary goal of the restructuring is to take costs out, but we have to do that with very minimal impact on our customers. So, as we looked at the plan, these moves some of the planning out on some of the footprint projects, from mid to late 2021 into 2022. And so the savings have not changed. The expected savings have actually increased a little bit, but just the timing has moved out from 2021 into 2022.
The next question comes from Amit Dariani of Evercore. Please go ahead.
I guess maybe to start with, as I think about the September quarter growth numbers at 8% growth and I guess when I take the December quarter midpoint growth as well. You guys will do 7%, eight percent organic growth in the back half of this year. How do I think about that outperformance versus longer term growth, you've talked about at 3% to 4%. Is that coming more from share gains or better end markets? And sort of the durability of that as we go report.
Hi, I'll start with that. This is Rob Ahmed, and thanks for the question. I think it's a combination of both. The end markets are strong as it relates to co location and that was one of our key strategies that we kind of put in place to take share there. And we've done really well on a global basis, And that end market itself is fairly robust today, and again, driven a lot by, COVID and people working from home and just not having enough capacity from that perspective.
So I think the over performance there are strong performance is really driven by those 2 things. We feel good about our position against the competition.
Perfect. And I guess maybe you want to just follow-up on the Americas performance, which was down 1% organically versus overall up 8. Look at the delta, was that really all attributed to the timing of large projects? Or I guess maybe how much was that versus some of the other factors? And do you expect to catch separate performance in the December quarter?
Yes, this is David. So, I think you hit it right on the head. So the impact of the large project was somewhere between 400 and 500 basis points of growth. So that alone would have turned that negative 2.5 to positive But, if you also look at the product segment results for the Americas, there also was a headwind for services which probably contributed about 200 basis points. And in addition, America's also had a foreign exchange headwinds.
The other two regions had a tailwind in the third quarter, but because of the Mexican peso, the Brazilian real, that was about a 1% headwind. And looking forward into the 4th quarter. And I think we bullet point this on the guidance slide. We are anticipating a low single digit growth in the Americas in the fourth quarter. So we do anticipate a little bit of a rebound there, versus what we saw year over year the third quarter.
The next question comes from Nicole DeBlase of Deutsche Bank. Please go ahead.
Good morning, Nicole.
So I just wanted to follow-up on, one of the questions asked earlier on the new structuring program. So I think, you know, the 40,000,000 gross savings get that part. I guess what I'm missing is, I think you guys have talked about about $60,000,000 of temporary cost benefits in 2020 that you were looking to offset. I guess, is the expectation that that full $60,000,000 does come back next year, that's creating a net headwind or, you know, how do we think about that?
Yes, Nicole. So really good question. So what we would say is we really have to look at these things independently. So when we look at the restructuring, we do anticipate, $40,000,000 of gross savings. We will have additional restructuring expenses of $20,000,000.
So there's a net net $20,000,000 savings next year related to restructuring. Separately, we do anticipate some headwinds pursuant to the COVID cost saving program we put in place. If you recall, we anticipated that to be $60,000,000 this year, and we're certainly on track. But of that $60,000,000, we believe $40,000,000 is going to come back into the business. So those two things certainly offset, but when you look at all of the savings initiatives and the headwinds, our goal and our target is to keep fixed cost constant.
And we purposely, on the 2021 slide, we provided some indication that we actually anticipate fixed costs to increase in 2021 versus 2020. And a big driver of that is related to the size of the reinvestment back into r and D and growth investment in the market. So we kind of look at all these puts and takes fundually. And when it all boils down to what our fixed costs do in next year, we actually anticipate those to increase a little bit because of that growth investment on a net basis.
Got it. That's really, really helpful to clarify that. I guess one follow-up, when you guys think about restructuring costs, are you going to add those back to adjusted EBITDA? I'm just trying to think of the right way to model this.
Oh, we are not. So, going forward, we the only item that we will adjust will be for the intangible amortization and that would be, reflected adjusted EPS, adjusted net income. But going forward, any restructuring expenses, will be included in whatever we guide and whatever report for adjusted EBITDA or whatever financial metric that we'll be reporting.
Okay, got it. Thanks. I'm just going to squeeze one more in. I guess, back to the point on R and D also related for 2021, any idea yet about the magnitude of R And D growth next year or step up in investment? Maybe it's too early.
And then I guess like longer does R and D need to continue increasing from here beyond 2021?
Nicole, hi, this is Rob. I'll take the first part of that and Dave can sure of, some guidance or some, not guidance, but some numbers. We, you know, part of our strategy as we stated was to, take our R and D up to around 6%. So we expect that to increase every year as we look at the adjacent I would call markets or adjacent product areas and, and continuing to fill out the product line and, and driving, driving that innovation in both the edge and continued in the in the colo and hyperscale. So we look at continued investment as part of Our vector differentiation going forward is to continue that development cycle and new products.
And we we measure that and take a look at revenue from new products and how that, how that helps us grow. So I would expect for the next couple of years as we ramp up to the 6% and we'll continue to spend at that level and that will be a key differentiator for us.
Thanks for the time. I'll pass it on.
The next question comes from Lance Vitanza of Cowen. Please go ahead.
I guess I wanted to drill down a little bit on the Americas EBITDA margin, obviously, just really strong in the quarter. And then even if you were to look over a 9 month the last 9 months is pretty impressive. I know you mentioned you've got some just costs that are coming back in Q4 Should we assume that that is that sort of the big driver of that big margin improvement? And then is it possible to sort of think about what that margin would have been kind of on a go forward basis? And just more generally, I guess, do you think about that level of margin as ultimately sustainable or achievable?
This is David. So first I want to reiterate, how pleased we are with the progress that we're seeing, not only in Americas, but, in all the regions it relates to margin expansion. But in particular, in the Americas, and, certainly the 800 basis point improvement versus the third quarter last year was very impressive, but it also improved about 200 basis points from Q2, which is probably more comparable. And from our perspective heading into Q3, the performance that we saw from Americas from a EBITDA margin perspective of around 30 percent probably was at the upper range of what we anticipated. And there were a lot of things that went the right way in Q3, including product mix, not necessarily between product segments, but within product segments.
So as we move to the fourth quarter, we would not end anticipate to see a EBITDA margin in Americas comparable to Q3. We still would see very nice growth from Q4 last year, but we would anticipate, EBITDA margin in Q4 to be more close to Q2 and one of the drivers there for Q4 is that a lot of our growth that seen in Americas and also the other 2 segment is in that Critical Infrastructure And Solutions segment, which does a little bit lower margin as it really pertains what's to come for that segment and the business in general. But just looking out 1 quarter, we would anticipate that drop back a little bit.
Thanks. It's helpful. If I could just get one more in, a quick one. You mentioned in the slide deck, the definition of your free cash flow definition includes dispositions of PP and A. I don't think that
that was material in Q3.
Do you expect that that will be material going forward at any point?
Certainly not this year. I think we had about $5,000,000 last year. I'm not sure we've had anything here, year to date. So we wouldn't anticipate anything significant for Q3 or I'm sorry, for Q4. However, related to the restructuring program, we do plan to self facility some equipment and, that probably would, be timed in 2020 2.
It could slip into the end of 2021, but, we wouldn't anticipate anything for at least significant, anything significant for at least a year.
Have those, prospective potential inflows been kind of netted against the numbers that we're talking about in terms of your spend over the course of the next year?
It is. So when we, well, for the lifetime of the program, we're expecting $84,000,000 net cash outflow is net in that number. And it's somewhere between $20,000,000 $25,000,000. So the growth the gross cash outflow is over $100,000,000, but we do anticipate to get between $20,000,000 $25,000,000 for these asset sales. And And once again, most of that, we anticipate to come in 2022.
The next question comes from Andrew Obin of Bank of America. Please go ahead.
Yes. Good morning.
Good morning, Andrew.
I think a lot of my questions have been answered, but Just one question just to clarify. So it's fixed cost to go into the increasing in 'twenty one versus 'twenty twenty. So should we think about incremental EBITDA margins coming in below gross margins? So target contribution margin 40, 45 percent, but maybe thinking low to mid-30s contribution, is that still reasonable?
No. So I think from a contribution margin perspective, what we have spoken to was, you know, general range between 40% 45% it depends on the region. It depends on, customer mix and market vertical mix, but we still generally plan internally for that range, and that's what we would speak to, externally. What I will say from a fixed cost perspective, and, I want to caveat all this, we are providing guidance for 2021 yet. We are still going through the planning process ourselves.
But we saw that prudent to provide some expectations that we see a lot of good R and D and VPD projects for next year. Quite frankly, more projects than we have resources to complete. And we thought it was prudent, to, continue to invest in those. And as a result, because of the, the size of that investment, we anticipate fixed costs increase, but from a margin perspective, we would not believe that to be a tailwind. So, from a impact on margin, we don't believe fixed cost is going to increase as a percentage as, as high as the top line will increase year over year.
So even though it's possible increase, we don't think that would be a significant headwind as it relates as it relates to EBITDA margins.
Got you. And just another question, just to clarify, on enterprise versus sort of Small and medium business. I think one of your competitors commented actually that they were somewhat more bullish on enterprise outlook, both near term and medium term. And I just want to parcel out if you did talk about sort of big projects slippage. Was that on the enterprise side or was that sort of on the Colo cloud side?
Just want to understand just Yes. So that's a good question. And maybe then just a little bit more color on what's happening in Small and medium business side of things.
Yes, sure. This is Rob. Couple of things. The large projects are colo and hyperscale. So, that kind of covers that area.
On the enterprise side, what we look at as we really go to this hybrid world on prem and cloud. They might be referring to some of the edge strength that we are seeing in some of the enterprise Certainly, we're seeing a lot of activity in the enterprise from an engineering perspective. And so when we say we're not enterprise still hasn't recovered. They're just not pulling the trigger. There's certainly a lot of activity out there that we have visibility to projects that, that will break at some point in time.
From the small to medium business, we did see a little bit of growth in the, what we call our IRS business, which is driven by the channel side of things. So we're really happy with the execution that we're doing there. But we just haven't seen and if you see some of the numbers out with CDW and so forth, people are still experiencing negative about beginning to see potential light at the end of the tunnel. That being said, if COVID continues to persist, I think that affects that that particular area as we go forward. Our plan there as a company was to take share in the channel grow.
And I think that's how we were able to kind of, I would say, outperform what most of the companies are doing as it relates to channel by taking share with innovative new products.
And the next question will come from Nigel Coe of Wolfe Research. Please go ahead.
Wanted to pick up on the enterprise question from Andrew, so to explore there. Obviously, when we see reds and yellows there, it raises the not critical versus structural kinds of pressures. And I'm just curious, do you think that the current market? It sounds like you're seeing some good activity and sounds like you're sort of encouraged by that. Do you think that there's been any change in the sort of the balance between on prem and colo versus clouds for the enterprise segment?
And would you expect 2021, obviously, still very much at the near, but do you think there's a shot enterprise can come back next year.
Yes. Hey, Nigel, thanks for the question. What we'd say is, yes, we have been seeing some life wanna say life, we've been seeing a lot of activity in the enterprise side of things, which would indicate at some point in time when they pull the trigger things will move forward. We haven't really seen a drastic move one way or the other to the cloud or are on prem. I mean, certainly things like Teams and Zoom and BlueJeans and things like that are driving a lot of internet traffic.
Which is driving the need for more demand and bandwidth and latency perspective. But we continue to see that the enterprise looks at various applications and those ones that are readily and easily moved to the cloud, they do. And still seeing the advent of on prem and the edge data centers. Do you have other phenomena that we talked about in the past is really this, data, kind of staying within the country or within the region. So seeing a lot of builds in Europe and other parts of the world for, for people basically keeping that data certain sets of data within their region, within their country, that type of thing.
So we'll continue to see those types of builds as well. But I think what we're all waiting for and looking to is once there's a vaccine, whatever that might be, and enterprise gets back and we have kind of a new way of, I would call it even a hybrid working from home and working from the office. We'll drive those projects and begin move those off bid center.
Great. That's helpful. And then I wanted to talk about the announcement with Honeywell folks that was announced earlier this in October. They had it in their slides in don't think you've got it in your side, which I think is interesting, but how do you view this strategically? What is this kind of what problem does this solve for Vertives?
And how do you see this progressing? And kind of like, I think strategically the question is, how does this help you and strengthen you going forward?
Yes. So we're, we're actually really excited about it. So not having it in our slides, there's no indication of our excitement of working with them. We see, Honeywell And Invertive, 1 in 1 kind of make 3 for the customers. Honeywell is very strong in the software.
In the management side of the data centers and really driving efficiency and algorithms around performance of equipment. And our announcement that we talked about, the first product that we're working together on is really about using multiple source in kind of a micro grid fashion for data centers. So we select whether it's solar or whether it's, use fuel cells or pull off the grid. And we see this just as the beginning of some of the collaboration and good things that we believe we can do together. So I think when you put Vertive, and Honeywell together, both with our global footprint, we can offer the customers and take advantage of a lot of the really good software that Honeywell has and management systems coupled with our equipment, and get better performance and help people reach their PEs and and reach, you know, head of their carbon footprint as well.
And would this be more in the hyperscale and colo segment? So do you see there's much broader than that?
I think it's much broader than that. I think it did scales from hyperscale, Colo Enterprise and certainly down to the edge as the edge increases with 1000 and millions of devices, Honeywell's got a really good strong portfolio of software for managing those and tying that in with our intelligence can allow us to smartly, begin to do more of that predictive failure analysis, roll trucks when we need to. So again, I think it really spans both edge and cloud and
This concludes our question and answer session.
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