Vertiv Holdings Co
NYSE:VRT
US |
Fubotv Inc
NYSE:FUBO
|
Media
|
|
US |
Bank of America Corp
NYSE:BAC
|
Banking
|
|
US |
Palantir Technologies Inc
NYSE:PLTR
|
Technology
|
|
US |
C
|
C3.ai Inc
NYSE:AI
|
Technology
|
US |
Uber Technologies Inc
NYSE:UBER
|
Road & Rail
|
|
CN |
NIO Inc
NYSE:NIO
|
Automobiles
|
|
US |
Fluor Corp
NYSE:FLR
|
Construction
|
|
US |
Jacobs Engineering Group Inc
NYSE:J
|
Professional Services
|
|
US |
TopBuild Corp
NYSE:BLD
|
Consumer products
|
|
US |
Abbott Laboratories
NYSE:ABT
|
Health Care
|
|
US |
Chevron Corp
NYSE:CVX
|
Energy
|
|
US |
Occidental Petroleum Corp
NYSE:OXY
|
Energy
|
|
US |
Matrix Service Co
NASDAQ:MTRX
|
Construction
|
|
US |
Automatic Data Processing Inc
NASDAQ:ADP
|
Technology
|
|
US |
Qualcomm Inc
NASDAQ:QCOM
|
Semiconductors
|
|
US |
Ambarella Inc
NASDAQ:AMBA
|
Semiconductors
|
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
52 Week Range |
42.25
141.49
|
Price Target |
|
We'll email you a reminder when the closing price reaches USD.
Choose the stock you wish to monitor with a price alert.
Fubotv Inc
NYSE:FUBO
|
US | |
Bank of America Corp
NYSE:BAC
|
US | |
Palantir Technologies Inc
NYSE:PLTR
|
US | |
C
|
C3.ai Inc
NYSE:AI
|
US |
Uber Technologies Inc
NYSE:UBER
|
US | |
NIO Inc
NYSE:NIO
|
CN | |
Fluor Corp
NYSE:FLR
|
US | |
Jacobs Engineering Group Inc
NYSE:J
|
US | |
TopBuild Corp
NYSE:BLD
|
US | |
Abbott Laboratories
NYSE:ABT
|
US | |
Chevron Corp
NYSE:CVX
|
US | |
Occidental Petroleum Corp
NYSE:OXY
|
US | |
Matrix Service Co
NASDAQ:MTRX
|
US | |
Automatic Data Processing Inc
NASDAQ:ADP
|
US | |
Qualcomm Inc
NASDAQ:QCOM
|
US | |
Ambarella Inc
NASDAQ:AMBA
|
US |
This alert will be permanently deleted.
Good morning, everyone. My name is Jamie, and I will be your conference operator today. At this time, I would like to welcome to Vertiv Fourth Quarter and Full-Year 2019 Earnings Conference Call [Operator Instructions]. Please also note today’s event is being recorded.
At this time, I’d like to turn the conference call over to your host for today’s conference call, Lynne Maxeiner, Vice President of Investor Relations.
Thank you, Jamie. Good morning. Welcome to Vertiv fourth quarter and full year 2019 earnings conference call. Joining me today are Vertiv Executive Chairman, David Cote; Chief Executive Officer, Rob Johnson; Chief Financial Officer, David Fallon; and Chief Strategy and Development Officer, Gary Niederpruem.
Before we begin, I'd like to point out that during the course of this call, we will make forward looking statements regarding future events, including the future of financial and operating performance of Vertiv. These forward looking statements are subject to material risks and uncertainties that could cause actual results to differ materially from those in the forward looking statements. We refer you to the cautionary language included in today's 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 the 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 investors side deck found on our Web site at investors.vertiv.com.
With that, I'll turn the call over to Executive Chairman, David Cote.
Thank you, Lynn. And it's great to be on the inaugural Vertiv investor calls to announce our Q4 and full fiscal year 2019 results. So before I turn it over to Rob Johnson, our CEO, I want to begin with a few remarks about my level of excitement regarding the transaction.
As many of you know, I was fortunate to be able to lead Honeywell for about 16 years. Those who invested with us made a great return. And that performance was marked by consistent annual improvements in the people, processes and portfolio of the businesses that comprised Honeywell. And we were able to do this by focusing our efforts on businesses with great positions in good industries, differentiating with technology. We implemented HOS or the Honeywell operating system. We drove functional transformation. We invested in new products and services. We built our software capability. We had a rigorous process for capital deployment. We steadily planted seeds for the long term. And importantly, we consistently delivered on our commitments.
Now on Slide 3 of the earnings deck, you could see that many of the attributes that drew me to Vertiv initially, this truly checks all the boxes. It is a great position, a good industry, able to differentiate with technology and has great potential upside for growth and margin expansion. So as you can probably tell, I'm pretty excited by this opportunity. And as I've gotten even closer to Rob and the team and the overall business, I'm even more excited today than I was even a few months ago. I've been very impressed with Rob's knowledge of the industry, his customer relationships and we've gone on some customer visits together and I've seen it firsthand and his drive to make Vertiv the first choice for our customers.
So now I'll turn the call over to Rob who can take us through the business in some more detail. Rob?
Thanks, Dave, and thanks for the great intro. And before I even begin, I just want to say what a pleasure it has been working with Dave these past few months. He's been a great coach and mentor for me, and he's provided invaluable guidance to the team as well. It's really just been a great start to our partnership. I would like to thank all the investors on the phone today and thank you for your support over the last several months. Additionally, I want to thank all of Vertiv employees who helped us get through our transformation over the last three and half years. While our journey is nowhere near complete, I'm very proud of the transformation efforts and our ability to deliver a very solid 2019 results.
Moving to Slide 4, as you know, we closed the deal with Goldman Sachs Acquisition Holdings on February 7th and followed up with a great ceremonial day on Friday, February 28th by ringing the bell on the New York Stock Exchange. Those events were fantastic and it continued to help the exposure of our Vertiv brand to the marketplace. Now on the financial side, we exceeded expectations for organic sales by growing 5.6% and for adjusted EBITDA by finishing at $542 million for the full year of 2019. Additionally, we had strong orders quarter in Q4 by booking over $1,170 million. And between January and February of 2020, our orders are up 8% for the same time period last year.
While estimates that the coronavirus could negatively impact the first net sales quarter by $70 million to $90 million and first quarter adjusted EBITDA by $28 million to $36 million, based on what we know today, we are confirming our previously communicated full year guidance of 4.5% to 5% organic sales growth and adjusted EBITDA of $595 million. Due to our expectations to partial recovery of these first quarter sales and earnings, our conservative planning process and additional cost actions put in place. While the impact of the virus is dynamic, based on what we know today, we do believe that our first quarter shortfall can be made up by the end of the year.
Finally, I'm happy to report we completed our refinancing efforts recently on our term loan, which will provide us 100 basis points reduction on the current term loan rate. So between our debt pay down with the SPAC proceeds and the refinancing, we have significantly improved our balance sheet and on a pro forma run rate basis expect to generate over $285 million into free cash flow.
Turning to Slide 5. Some of these events I mentioned on the prior slide, but I think it's important to highlight the major milestones we've guided the business through over the past few months. Since early December when we first announced the transaction, the entire team has been hard at work to close the deal, restructure our balance sheet and increase our visibility in the financial markets. VRT was officially listed, February 7th, and Dave officially became our Executive Chairman.
With the proceeds from the SPAC transition, we were able to significantly reduce our debt levels as an average level decrease from 6.5 times to 3.7 times on a pro forma basis. Without leverage reduction, we were able to improve our credit rating with both agencies. With Moody's, we increased three levels and with S&P, we better our position by one level. As a result of all these moves, we will lower our annual interest payment by almost $160 million, which is great for us.
Lastly, hopefully many of you saw Dave, David, Gary myself and the rest of the management team ring the bell on February 28th on the New York Stock Exchange. It was a great morning for our company and those types of efforts coupled with all the analyst interactions we've had will lead to greater visibility for this great company of ours. Now I'll turn it over to David for a few slides -- to discuss a few slides on our segment results.
Thanks, Rob. Turning to Slide 6, this page summarizes our full year financial results for 2019 versus prior year. Starting at the left and moving right, net sales increased 3% and organic sales adjusted for $90 million foreign exchange headwind, increased almost 6% from 2018. Adjusted EBITDA increased $40 million or 8%, primarily on the strength of higher sales and 50 basis point improvement in adjusted EBITDA margin to 12.2% as lower adjusted SG&A as a percentage of sales was partially offset by reduction in adjusted gross profit percentage. Finally on this slide, free cash flow improved over $300 million from 2018, primarily driven by improved working capital and lower investments and restructuring initiatives, and the digital project as detailed on Page 19 of this presentation.
Next, moving to Slide 7, this page summarizes our 2019 financial performance for our regional segment. The solid top line organic growth in 2019 in each region led by 8% in EMEA was strongly supported by continued penetration of hyperscale and co-location markets. Year-over-year adjusted EBITDA also increased in all three regions, 6% in America's, 7% in APAC and an impressive 14% in EMEA. And with adjusted EBITDA growing faster than net sales in each region, adjusted EBITDA margin also increased across all three segments.
Americas is our most profitable region as you can see at 23.5% adjusted EBITDA and EMEA is lowest at 13.4%. However, we believe there is still significant opportunity for margin expansion in EMEA as their fixed costs as a percentage of sales is much higher than the other two regions. We've addressed some of these higher fixed costs over the last three years through restructuring efforts but we see significantly more opportunity from the benefits of implementing the Vertiv operating system in EMEA, as well as other regions.
Next, turning to Slide 8, this page summarizes our fourth quarter financial performance. Once again, starting on the left and moving right, our fourth quarter net sales equaled the record high in last year's fourth quarter and grew 1% on an organic basis despite the challenging comp. Fourth quarter adjusted EBITDA declined $8 million and adjusted EBITDA margin declined 70 basis points as the 130 basis point improvement in gross margin percentage was more than offset by 200 basis point increase in adjusted SG&A as a percentage of sales.
Lower SG&A in last year's fourth quarter was partially driven by lower incentive compensation expense as we fail to meet internal targets last year and several favorable discrete SG&A adjustments that did not repeat in this year's fourth quarter. Free cash flow increased $74 million primarily driven by $50 million reduction in working capital and \$17 million reduction in cash interest payments due to timing.
Next on Slide 9, this page summarizes our fourth quarter results versus 2018 for our regional segment. The overall 1% increase in consolidated organic sales was driven by 9% increase in organic sales in APAC, offset by 7% decline in EMEA. Americas was relatively flat. Solid growth in APAC was due to strong shipments in the telecom space and lower organic sales in EMEA was in part due to record quarterly sales in last year's fourth quarter supported by several large projects.
Adjusted EBITDA margin in Americas expanded 350 basis points despite flat sales as a result of productivity gains, pricing and fixed costs control. The 470 basis point decline in adjusted EBITDA margin in EMEA was primarily driven by lower sales and the associated fixed costs leverage and in addition to the negative impact of a larger low margin project.
Moving to Slide 10, we provide the components of our full year $302 million increase in free cash flow from 2018. Although, each major category of cash flow generation improved from last year, the two primary sources of higher cash flow were $135 million reduction in investment in restructuring initiatives and the digital project and we detail that on Page 19 of this presentation and also $74 million improvement in cash flow from working capital as we focused heavily last year on both inventory optimization and the collection of pass due accounts receivable. Despite the significant year-over-year improvement, free cash flow was still slightly below breakeven at negative $8 million. However, as we will discuss in a little bit more detail in a short bit, we expect 2020 free cash flow to be both improve and significantly positive.
So with that said, I turn it back over to Rob.
Thanks, David. As we look at Slide 11, these are some areas that Dave Cote, myself and the rest of the management team are focused on. As I mentioned earlier, Dave has brought another level of coaching and guidance for the entire leadership team and given us great advice and counsel on many business topics over the past few months.
I won't walk through each one of the bullets, but I would like to comment on a few specific ones. First, we are really focused on increasing our R&D efforts to allow us to differentiate the technology. We have a great position in almost all of our product and service areas, but we know there's plenty of opportunity to do more. We've already begun with this effort in several areas where projects have been scoped, resourcing people being hired and plans are being executed. While most of these programs will not come to market till 2021, this effort has really fired up our product managers and our engineers to know that we are investing and we'll continue to add those investments over the next few years. On the margin side, we are already working to hold fixed costs constant. Now while I tell you the concept is very easy in theory, but it's not easy in practice, but we are developing that muscle and are using this principle as one of our core foundational pieces as we move forward.
Lastly, I want to touch on the Vertiv operating system, or as we call it moving forward, VOS. We took the team of over 25 people, including my direct reports to Honeywell, for a full week understand their operating system. I want to thank all the Honeywell associates who hosted us during that week, and it was one of the most education week in my professional career. I will get into more details on their approach to rolling out the operating system over the next few quarters. But needless to say, it will be one of the most powerful tools we'll add to our toolkit. The concept of VOS and everything that comes with it certainly will help us bridge the 500 basis points of Delta and the margin between ourselves and our peers. So between our top line and our bottom line initiatives, we have a lot of new areas to explore to drive growth that we know we can achieve.
Now turning to Slide 12, we feel good about how we closed out 2019 with organic sales growth of 5.6%. We achieved an all time high in orders during Q4 and our pipeline continues to grow. Where we sit right now we expect sales growth to be between 4.5% and 5% with most of that growth biased in the second half of this year. As I stated in my opening comments, the impact of the coronavirus is still dynamic. But based on what we know today, we believe we can still grow organically between 4.5% and 5% range for the full year due to our expectations to partially recover the lower first course sales and overall conservative planning process. We are certainly monitoring the entire situation very closely and are staying in constant contact with our customers and believe based on all of that that we can maintain full year guidance.
Now in terms of long-term trends, we believe the market to be fundamentally solid and the data growth and the edge developments will be our primary drivers. There will always be ebbs and flows in our business. But through the cycle, we expect the macro backdrop would be very positive. Engineering and contracting activity is continuing to pick up and our record order rate in Q4 and from what we've seen in the first part of Q1 provides solid proofpoint. The edge is in its early stages with key critical verticals, such as retail and education where we're beginning to see really good traction.
Finally on the communications side, 5G rollouts will continue to increase over the next few years. There are pockets of rollouts in parts of the U. S. and Asia but the really big bulk of deployments are expected to start in later part of 2020, and will go for a few years depending on the regional rollouts.
Now as it relates to coronavirus, let's turn to Slide 13. Before I even comment on the business impact and what we've been doing about it, I want to reiterate that our employee health and safety is our top priority. China is a great market for us and it's important we are leader in following the safety and precautions. We have made sure we work closely with the government to provide the safest workplace possible and to-date it's been working. Almost all of our employees are back to work at our facilities in China, and have been ramping up production since then.
We jumped aggressively on this issue, not only from a safety perspective but also from a supply chain and logistics perspective. In many instances, we helped our suppliers with mask and other items to help them open-up. And from a logistics standpoint, we’ve bought ahead to make sure we have the freight lanes available when the recovery begin. While we generally manufacture in region for region, similar to most multinational companies we have a global supply chain with several components and subcomponents that do come from China.
So between the supply chain, our manufacturing facilities and some of the China demand side, we're projecting between $70 and $90 million top line for Q1. Please realize that the situation continues to be very dynamic globally and this is our current estimate of the impact. We're monitoring and actively managing the situation on a daily basis, so this has the highest visibility in our company.
With that, I'll turn it back over to David for the next few slides.
Great, thanks, Rob. Turning to Slide 14, we hinted earlier of our expected improved and significant positive free cash flow for 2020. Certainly a big driver of this improved cash flow is significantly lower cash interest from two things; one, the $1.5 billion debt pay down from SPAC proceeds and the recently restructured debt composition of our capital structure through the paydown of three high interest rate notes through the proceeds from a new term loan that we just closed last week priced at LIBOR plus 3%, 100 basis points lower than our former term loan.
In addition and not reflected on this slide, we will also benefit from a seven year floating to fixed interest rate swap associated with the new term loan, and that will lock in fixed 4.1% rate on 1.2 billion notional over the first 12 months and $1 billion per year thereafter. In the end, the SPAC transaction was truly transformational for our capital structure as we lowered our net leverage from 6.2 times to 3.7 times, and we improve both our Moody's and S&P credit ratings. And we reduced our annual run rate cash interest by almost $160 million, as reflected at the bottom of this slide. And with the strong free cash flow characteristics of our business, we certainly have a clear pathway for continued deleveraging going forward.
Next, moving to Slide 15, this page summarizes our 2020 financial guidance. We expect organic sales growth of 4.5% to 5% and adjusted EBITDA of $595 million, and both those figures are with the projections we provided in our road show presentation late last year. We estimate adjusted EPS of $0.89 and we do provide a detailed reconciliation from GAAP to adjusted EPS on Page 22 of this presentation, and that's also included in the earnings release.
We expect 2020 free cash flow on a GAAP basis, as reflected on this slide, of $130 million to $150 million. And let's turn to Slide 16 as well. This 2020 free cash flow estimate at the midpoint is almost $150 million higher than 2019 free cash flow. But if we adjust this free cash flow projection for items we do not expect to repeat going forward, such as transaction costs associated with the SPAC merger, that's the $21 million green bar to the right and also adjusted for the timing of our debt refinancing, we illustrate here a 2020 pro forma annual run-rate free cash flow of approximately $285 million. So we call this the money Slide in the presentation and it really demonstrates the strong cash flow generation potential of our business going forward.
So with that said, I turn it back over to Rob for final thoughts prior to opening up for Q&A.
Thanks, David. In closing, we are pleased on how we executed in the fourth quarter as we finished out a very strong year with organic top-line growth of almost 6% and bottom line growth of around 8%. Additionally, we're excited to have Dave Cote as our Executive Chairman to provide his inside, perspective and good advice.
The coronavirus outbreak will dampen the Q1 results but we will continue to attack this topic aggressively, while also balancing the safety of our employees, which is paramount. We anticipate our growth plan coupled with our restructured balance sheet will lead to good cash generation. We see good demand drivers and are excited to execute our 2020 plans. Thank you for your support. I will now turn the call over the operator to open up the line for questions.
We will begin the question and answer session [Operator Instructions]. And our first question today comes from Lance Vitanza from Cowen. Please go ahead with your question.
Could we start with the revenue target that you've set for yourselves at 1.5 times industry wide revenue growth? Could you help us think through that opportunity there? Is that taking share? And if so, is it mostly from the half to two thirds of the market that's fragmented still? Or do you have -- or do you perceive a pricing opportunity? I guess any sort of granularity on how you get to that premium revenue growth would be helpful.
This is Rob Johnson. Thank you for the question. What we would say is it's a combination of the thing that you were pretty good straight man on answering what's driving it. Taking share in colo and hyperscale, as many of you recall over the last three years that was not initial area that was focused on under previous ownership, so taking share, be aggressive with, what I’d call joint development and in collaboration.
The second part of our growth area is coming from what we call the white space and more edge devices. We've expanded our product lines over the last year, year and half, two years, to have a complete set of products. So we expect to take share and also participate in that edge growth. And finally you mentioned pricing. We were able to get price in 2019 and we will continue to exercise that muscle as we go forward, and we're excited about that and our ability to get price.
So I think it's a combination of market share, taking some more of that gray space and eliminating some of the smaller competitors globally, and then driving hard on the edge and white space.
If I have time for a second question, I wanted to ask you a little bit more about China and the coronavirus impact, and I thought slide 13 was really helpful. But could you talk about your direct exposure to China in a little bit more detail, perhaps the total number of facilities, the percent of product that is supplied from China? Is that product being served? Is it going just to your China revenue base, or is it going worldwide to other revenue areas, et cetera?
Yes, so I'll start, give some color and then let David kind of fill in. First of all, you know we have two facilities in China, Zhaoxin and Mianyang, none in the Hubei Province. So that’s why we're out backup and running from an exposure perspective, what I'd say is China made up in 2018 about $669 million or 15% of our net sales as a company. The impact that we're seeing, as I mentioned earlier, while we're pretty much in region for region for final assembly and test like most global multinational companies, we get a lot of components, sub-component from the China region. As far as the breakout of how much is local versus global, David, I don't know if you have a few comments on that.
Yes, just very broadly, our direct material purchases in any given year, are about $1.8 billion and I would say less than a third of that come from China, whether is sourced through external suppliers or internally from our plant sourcing the other two regions. So there is certainly a supply chain impact in both the Americas and EMEA related to the situation in China.
[Operator Instructions] Our next question comes from Mark Delaney from Goldman Sachs. Please go ahead with your question.
The first question was on the coronavirus and trying to better understand the supply chain ramifications. On the one hand, I heard you guys talking about having its employees back to work in your facilities and you've been able to pre-purchase components, but you're also talking about some potential supply chain disruption. So just I want to better reconcile some of those comments and understand, are you already seeing an ability to ship some product? Is it more just conservatives, just any kind of reconciliation on some of those comments and just better understanding your ability to manufacturer?
This is Rob, I'll start off and David can drive a little bit further into it. We're back to work. We do rely on the supply chain base for PCB boards, discrete components and things like that. And while we're pretty much back to full strength, other suppliers are not and we're working with them to help get back online. So that's really kind of where I would say the suffering is coming from, there's not really our ability to get things done but it's the subcomponent suppliers that just aren't fully back to speed. Dave?
Yes, I would just echo what Rob is mentioning. The larger components, the EMS power modules, we feel in pretty good shape. At this point what we know today with that supply, it’s really those smaller suppliers that are having, at this point, a pass through effect in Americas and to a lesser extent with EMEA.
And my follow up question or second question was on the order strength that the company reported, which was very nice to see. Can you talk about the breadth of those orders? I know there's times where the company has some large projects. And so was this broad base order strength that Vertiv was seeing in the fourth quarter, or was it more specific to that a large project or two? Any color you can give on the orders in terms of what markets may be driving it. Thank you.
This is Rob I’ll start and then let Gary follow through. I’d say in general, it was just kind of broad based across all the segments that we participate, and we just saw strength in whether it's telecom or consumer and industrial and our hyperscale and even traditional enterprise and edge. So it was not, I wouldn't say, one big area that stood out as we go forward. As you know and we talk about it, a lot of our ITI businesses, it’s traditionally been really kind of project based and that ebbs and flows overtime. We’ve been working and driving the channel to make it more of a consistent flow business. So we'll continue to do that. But we saw \pretty much strength around, kind of around the globe and in all the verticals. Europe certainly stands out as probably one of the stronger areas for us from a order perspective coming out of the gate this year.
Ladies and Gentlemen, with that we'll conclude today's question and answer session. I'd like to turn the conference call back over to Rob Johnson for any closing remarks.
Thank you, operator. I'm going to close the call by saying how excited I am about being a public company and the great path ahead for Vertiv. I'd also like to thank our 20,000 employees around the world for working hard every day to take care of our customers. We appreciate everyone's time today, and we look forward to speaking to you soon again. Thank you.
Ladies and gentlemen, the conference has now concluded. We do thank you for attending today's presentation. You may now disconnect your lines.