Vertiv Holdings

Great, thank you, Matt, and good morning, and welcome to VRTA's fourth quarter and full year 2021 earnings conference call. Joining me today are VRTA's Executive Chairman, David Cody, Chief Executive Officer, Rob Johnson, Chief Financial Officer, David Fallon, and Chief Strategy and Development Officer, Gary Niederprum. 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 VRTAs. These forward-looking statements are subject to material risk and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. We refer you to the cautionary language included in today's earnings release, and you can learn more about these risks in our registration statement, our proxy statement, and other filings with the SEC. Any forward-looking statements that we make today are based on assumptions that we believe to be reasonable as of this date. We undertake no obligation to update these statements as a result of new information or future events. 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.vertiv.com. So with that, I'll turn the call over to Executive Chairman Dave Cody.

I and the Vertiv team are disappointed and embarrassed by our second half 21 and projected first half 22 financial performance. We got behind on the inflation recovery curve with insufficient price and stayed there all year. In the past two months, Rob and his team have implemented price increases that we expect will generate 360 million year-over-year price versus 260 million incremental inflation, generating $100 million a favorable price cost for the full year 22. Because much of that price is in the backlog, it takes several months before the increases show in the financials. Hence, the vast difference between our expected first half and second half 22 performances. Our unimpressive financial performance was exacerbated by continued supply chain issues, which don't show much sign of abating at this point. Like everyone else out there, we'll hopefully issue lessons in the second half, but we aren't counting on much lessening. On the plus side, our orders were through the roof in 4Q, with total company orders up 51% and the Americas up 114%. And the first quarter is off to a good start, even with the price increases. Our short-term performance, including anticipated first half 22 results, is unimpressive. Our expected long-term performance starting in the second half of 2022 will be quite impressive. We get ahead finally on price inflation recovery. Our orders are off the charts and market leading. Supply chains should loosen. We have favorably resolved the tax receivable agreement in two lawsuits, and the product ramp-up is just beginning. Some of you may be wondering why I don't get more involved. The answer is I have. And that's why you see much more aggressive inflation forecasting, price implementation, and other fixes that Rob will talk about. The management has readily accepted and implemented these, let's say, suggestions and will deliver as presented. I apologize for putting all our investors through this. That being said, it's a short-term issue that should turn around in the second half. The long-term thesis is very intact. especially as performance begins in the second half. If you take the second half run rate into 2023, you can see how intact that thesis is. We know we have to prove it to you, and we will. So with that, I'll turn the call over to Rob.

Thank you, Dave. The management team and I share your sentiment about our Q4 results and the outlook for the first half of 2022. But before diving into the key messages on the first slide, let me comment on two topics. First, while Dave has been a good mentor to me over the last two years, our relationship has certainly evolved over the past 60 to 90 days. As his opening comments suggest, he has become much more actively involved in the day-to-day aspects of the business, both on the cost and price side. He is helping me almost daily basis to conduct reviews with our teams and host other business topics. And it is my full expectation that this level of involvement will continue through 2022. Secondly, let me address our guidance myths in the fourth quarter, for which I take full responsibility for. In short, we screwed up, and some of you undoubtedly are wondering how we could get so surprised. We significantly underestimated the magnitude of the material and freight inflation in the fourth quarter forecast, mostly in America, by approximately $36 million. This underestimation of costs also contributed to our underpricing in the market in 2021, so it was a huge deal not only for costs but also price. Half of the inflation miss was related to unforeseen supplier decommits on critical components and our need to execute spot buys and premium freight to meet customer commitments. The other half is related to forecasting issue within America's region, heavily influenced by our ERP implementation. but also due to forecasting process issues within the region. These regional cost forecasting issues have been fixed, and we feel very confident with our cost projections for 2022, as evidenced by our January costs being lower than what we were planning, and that is why we are comfortable that we have it all corralled. In addition, based upon better understanding of our underlying costs, we have been extremely aggressive with pricing in the last 90 days or so, as you will see in today's presentation, to more than offset the higher cost. With this better understanding of cost and higher pricing, which we are seeing in our year-to-date orders, we are confident that we will deliver a strong financial result in the second half of 2022 and beyond. Now turning to the key messages. On demand, verted products and services is very strong. Our organic sales were up 4% from Q4 of 2020. The strength of our position in the market can be validated by our order rate, which was up over 50% in Q4 over last year, and it's pushed the total vert of backlog to over $3.2 billion. Two, profitability challenge primarily driven because of inflationary headwinds, not because of a flawed strategy or decreasing demand for our products and services. but due specifically to inflation that companies everywhere are battling. Our fourth quarter adjusted operating profit was $94 million, which unfortunately was $58 million lower than last year's fourth quarter. We felt inflationary pressures most severely in America, but also across our other regions. Our pricing actions increased as the year went on, but they were exceeded by inflationary costs and created a $135 million net headwind. We continue to raise price at aggressive rates, even as recently as last month, and we will continue to do so to make sure we get ahead of inflation. As you know, and fortunately, we are carrying a large backlog, and it takes quarters for that pricing to be fully realized. Fourth, we won't see the full impact of our pricing actions in the first half of 2022, but those actions will kick in during the second half, and we expect the second half adjusted operating profit to be approximately $455 million, $230 million over the second half of 2021. Supply chain issues are real and challenging, delaying product completion. The Vertiv team is battling parts on a daily basis. Our biggest challenge is with electromechanical parts and fans, critical components of many of our Vertiv products. Internally, we have launched countermeasures to address these shortages, However, we expect and have been prepared for supply chain pressures to continue for the majority of 2022. Final and most important key message, although 2021 did not produce the results we expected for reasons I've just shared, Vertiv is now well positioned for a strong performance in the second half of 2022 and into 2023 due to our aggressive pricing actions in Q4 and early 2022. Turning to slide four. Recapping our 2021 performance, and then I'll provide some additional detail what's playing out for 2022. With regard to 2021, we continue to have strong demand for our products. Some of this demand is because we are in a strong growing market. Some is because we are winning with our go-to-market strategies, and some is a result of our verdict product development efforts. These three reasons are giving us an order rate that's almost up 30% year over year and over 50%, as I mentioned earlier, in fourth quarter. Admittedly, we believe the significant order growth rate in quarter four is an indicator that we could have priced even more aggressively, and adding further confidence that our pricing actions over the next several months are appropriate and will be received in the market. Well, a good portion of our $3.2 billion backlog will ship in 2022. Right now, we are getting visibility in the customer plans for 2023 and beyond. This visibility is being provided in the form of forecast purchase orders, providing us greater visibility to our revenue profile, not only over the next several quarters, but into the future. On the 2021 supply side, we fully expect to be challenged for most of the year. Critical parts availability is spotty, and despite all the efforts to qualify second and third sources and redesign products where possible, We know part shortages are something our industry will grapple with throughout the year. In addition, 2021 inflation got ahead of our pricing. Just when we thought we had budgeted enough price, inflation got worse. This happened several times. We have corrected it now and are being very conservative in our expectations that inflation will not go away in 2022. The acquisition of E&I closed in November. Integration efforts are in full swing. We remain more confident than ever in our purchase decision. Vertiv will reap the benefits from this complementary nature of ENI's process and products and its ability to be a creative platform for Vertiv long into the future. In 2021, we invested significantly in ER&D, just as we planned. We launched several new and innovative products, and evidenced by their order rates, these products have exceeded expectations of our acceptance from the market. allowing us to take share in certain categories. In 2021, we invested in ER&D, a fundamental part of our long-term growth strategy. Now as we turn to 2022 outlook, our demand environment remains strong, but deliveries remain constrained by part shortages, especially in the semiconductors and the electromechanical parts that I discussed earlier. We aren't planning to see meaningful improvement in the supply chain this year, We have new production capacity coming online in America to support our growing thermal business. We are anticipating material and freight costs will continue to increase, but our incremental pricing actions are expected to materially offset 2021 and 2022 inflation by the end of 2022. Pricing realization accelerates throughout 2022 and provides a net price cost tailwind by Q3. We expect profit in the first half of 2022 will remain challenged, but will markedly improve in the second half of the year as price cost turns positive. Due to the pricing actions already initiated, we expect to exit 2022 in a good position. Turning to slide five. This is the chart we use to illustrate what we're seeing in the market in each of our regions in each of our end markets. In the cloud and hyperscale markets, they remain strong. represented by green buttons in America and EMEA. In APAC, however, we see some slowdown as China is pushing cloud and hyperscale companies to maximize their existing facilities. We expect this to be a short-term phenomenon. When looking at our co-location customers, we are not only seeing strength across the regions, but increasing strength in Americas and EMEA. Tier 1, Tier 2, and Tier 3 COLAs are building out data centers to serve their customers, and we are participating in a very healthy way with these building out efforts. Our enterprise small and medium business markets remained constant for Q4 to Q1. We're experiencing good performance in each region. The pipeline is growing and Americas is leading the way. The communication network market remains consistently strong with an uptick in Americas as 5G deployment continue to accelerate. In the commercial industrial market, things remain consistent in EMEA and APAC. And we did see an uptick in Americas, allowing us to upgrade Americas from yellow to green. While the commercial and industrial market is a smaller slice of our business, the variety of products and services we sell in this market continues to grow. Moving to slide six. We closed the ENI acquisition on November 1st, and the integration team has been hard at work ever since. ENI has also faced and is facing supply constraints and inflation, which has temporarily affected the top and bottom lines. E&I has a very healthy backlog. We believe the pricing actions that we have taken in Q4 and will continue to be taken as needed will be realized in the back half of 2022 with E&I as well. We anticipate 2022 revenue from E&I alone to come in around $470 million with an adjusted operating profit of $80 million. Customer reactions to the deal have been nothing short of fantastic and this acquisition has increased our relevancy with our customers. We expect As 2022 progresses, the synergistic leverage we will get from E&I will enhance our performance in 2023 and beyond. So I might summarize E&I in 2022 as a tough year, but still a great deal. Now I'll turn it over to David to walk through the financials. David?