Good morning. My name is Rocco, and I will be your conference operator for today. At this time, I would like to welcome everyone to Vertiv's Second Quarter 2020 Earnings Conference Call. 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, Lynne Maxeiner, Vice President of Investor Relations.

Great. Thank you, Rocco. Good morning, and welcome to Vertiv's Second Quarter 2020 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 Officer, Gary Niederpruem. Before we begin, I would like to point out that during the course of this call, we will make forward-looking statements regarding future events, including the future financial and operational 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 made 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. With that, I'll turn the call over to Executive Chairman, David Cote.

Thanks, and good morning, everyone. The last time we spoke in early May, everyone was still trying to determine what the implications of COVID were going to be and exactly what type of recession we were going to have. Well, today, three months later, while some things are clearer, there are also many things that are still not clear. What is clear, however, is how Vertiv is executing during this time. As many of you know, one of my mantras in business is growing while holding fixed costs constant. And while that's easy in theory, it's not so easy in practice. What I can tell you is that both Rob and Dave Fallon have fully embraced the concept and are deploying it within Vertiv in an aggressive manner. One of my other beliefs is achieving two seemingly conflicting objectives at the same time. Where this seems difficult, it is, in fact, very doable. Inside of Vertiv, we're employing the same mindset by managing our costs very closely, but at the same time, we've been ramping up R&D spending so we continue innovating for our customers today and tomorrow. We're also working on strategy development. Just a few weeks ago, Rob's team went through a week-long strategy review that I participated in for its entirety. Don't worry, it was all remote. There is absolutely no shortage of ideas on how to grow our top and bottom line. Now, there's a lot of work to do to bring this to life, but it sure was a great starting point for the company. We can't know for sure the economic environment globally over the next several months, but I am very confident in our ability to navigate these waters and come out the other side a significantly better company. So with that, I'll turn the call over to Rob.

Thank you, Dave, and good morning, everyone. Before I get into the slide, I want to tell you about how proud I am of the Vertiv team. Serving customers during the pandemic has not been without its challenges. Employees across the company and located in countries around the globe have addressed issues of all kinds brought on by COVID. And they've done it creatively, energetically, and passionately. I couldn't ask for a better team, and I'm truly grateful to them for how they have always put the customer first. Let's get into the slides. On Slide 4, overall, the demand side of our business held up as orders were up 5% organically from Q2 2019. Last quarter, we talked about exiting with an all-time high backlog of $1.6 billion. And now I'm proud and happy to report that our backlog is even greater than that at approximately $1.8 billion. We will talk over the next few slides about both the supply and the demand side of our business. From a profitability standpoint, we delivered $145 million of adjusted EBITDA, which is relatively flat from last year's Q2. Although Q2 had $128 million lower sales than Q2 of 2019, we managed our contribution margins very well and held our costs in line, as Dave Cote mentioned in his opening comments. We had approximately $30 million year-over-year of favorable cost actions delivered in the quarter, which David Fallon will elaborate on later. From a liquidity standpoint, we had a very strong quarter, ending at $530 million, and we generated over $60 million of free cash flow. Next, on this slide, we do want to provide some range for expected Q3 performance. We are anticipating implications of COVID to continue to fluctuate, but we expect our organic sales to be up between 4% and 6%, and our adjusted EBITDA will be up 10% at the midpoint from Q3 of last year. So while the dynamics can change, we did want to share with you what we are currently seeing playing out in Q3. More on this topic later. Finally, we want to add just a bit of color around 2021. As we see things right now, the demand side is holding up, and our backlog should be robust as we exit the end of this year. We know the dynamics with COVID could ultimately change the top line, but what is in our control is our cost. In Q3, we will be announcing restructuring activities that will save us approximately $50 million to $70 million in 2021, with a cash cost to execute of approximately $50 million to $70 million. We are fine-tuning the details, but we feel confident about the programs that underpin these numbers. Turning to Slide 5, we used this slide with our Board last week as a heat map of sorts to illustrate the pockets of strength within each region. 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 fixes our view on the level of health and activity in each of the markets we serve. We continue to see a strong level of activity in every region in the cloud and colocation market, as indicated by the six green buttons in the first two top rows. Emerging vital applications such as online education, telemedicine, video, and gaming are benefiting our cloud and colocation customers, and that surge in demand is benefiting us as well. In contrast to the cloud and colo business, we see the enterprise and small to medium business continuing to be challenged by COVID, as indicated by the red and yellow buttons in row three. This segment is spending some money. We have started to see a resurgence from the segment in China, but overall, this classic customer is not spending as they did prior to COVID. Switching to telecom side of things, both Asia and the Americas are strong right now. China has gotten on the 5G bandwagon in a major way, and our telecom customers in the U.S. continue to invest in their networks, as you can see, indicated by the two green buttons in row four. Finally, our C&I business, more often than not, as we've always said, will track closely with GDP over the longer run. But sometimes, the quarterly timing can be different. While this segment has held up better than expected, things are relatively flat in this space. So certainly, some puts and takes, but overall, when you consider our mix of data center business, Vertiv is seeing positive growth. The applications people use every day continue to be more and more vital following the onset of COVID, and those applications need to be processed, stored, and transmitted. And all of this continues to be a great backdrop for our business. Moving on to Slide 6. To reiterate, the overall demand is strong and evidenced by our strong order rates and record backlog. While our channel business is soft due to the enterprise and small and medium business segment being down, our larger project-based orders rates are on track. One thing I haven't touched on yet, though, is site access. Site access in some of the markets is very challenging. We see this continuing to be an area of uncertainty as governments control access to countries and localities, and ultimately, customers control our ability to deliver and install. Singapore, for example, continues to be almost entirely shut down from a data center standpoint. In India, things fluctuate on a day-to-day and sometimes even an hour-to-hour basis. On the supply side, the majority of our operations are running normally, and we continue to ramp production. My prior comment on India is appropriate from both the standpoint of demand and supply, and Mexico continues to be a daily work item for us as we address the labor issue. Our customers are experiencing constraints from trade industries, which we continue to work through. COVID has strengthened our proficiency in anticipating potential roadblocks and proactively mitigating issues before they become a concern. With that, I'll turn it over to Dave Fallon to walk us through the financials.

Thanks, Rob. Turning to Slide 7. This page summarizes our second quarter financial results versus last year. Net sales were down $128 million or 11%, including $28 million due to unfavorable changes in foreign currency, as most global currencies are weaker versus the U.S. dollar compared to last year, including the euro and the RMB, which represent approximately 60% of our foreign currency exposure. The remaining $100 million reduction in net sales was primarily driven by the Americas and EMEA, each organically down double digits as a result of COVID-19 and the year-over-year timing of larger projects. Despite the $128 million reduction in net sales, second quarter adjusted EBITDA declined just $2 million and actually increased $5 million when adjusted for foreign currency. Fixed costs were down $35 million from last year's second quarter, primarily as a result of COVID-19 cost actions implemented at the beginning of the quarter, and we still anticipate an approximate $60 million full-year benefit from COVID-19 cost actions compared to our beginning of the year guidance, including $35 million in the second quarter, $15 million in the third quarter, and $10 million in the fourth quarter. Second quarter contribution margin improved year-over-year due to continued progress with both pricing and productivity initiatives. Adjusted EBITDA margin improved 150 basis points from last year, primarily driven by this improved contribution margin percentage. Second quarter free cash flow, as we move farthest to the right, improved $128 million from last year's second quarter, in part due to $59 million lower cash interest resulting from the significant debt paydown pursuant to the SPAC transaction and the subsequent debt refinancing. We will review other drivers of higher year-over-year free cash flow in a couple of slides. Next, turning to Slide 8. This page summarizes our second quarter segment results. Organic net sales in the Americas were down $79 million or 14%, primarily driven by the continued negative impact from COVID-19 and from the normal variability of year-over-year timing of larger projects, estimated at about $8 million. It was a very similar story in EMEA, where organic net sales declined $32 million or 13%. EMEA was also negatively impacted by COVID-19 and by approximately $15 million from normal variability of larger projects. Organic net sales in APAC increased $11 million, with between $15 million and $20 million of this increase due to the timing of larger projects. Otherwise, relatively flat year-over-year organic net sales in APAC were driven by double-digit growth in China, which represents between 60% to 70% of APAC's top line, and this growth in China was offset by double-digit declines in the rest of Asia, including India, demonstrating that although China seems to be transitioning from the negative effects of COVID-19, certain other geographies within APAC continue to be challenged. From a profitability perspective, adjusted EBITDA, as a percentage of sales, increased across the board in all regions, primarily driven by improved contribution margin in both the Americas and EMEA and from lower fixed costs as a percentage of sales in APAC, as fixed costs in that region declined while net sales were relatively flat. Next, turning to Slide 9. The chart on this page bridges second quarter free cash flow from last year. But before reviewing free cash flow, we do want to reiterate our direction from the first quarter earnings call that we continue to hold no concerns related to liquidity, and we're actually incrementally more optimistic based on the $84 million increase in liquidity during the quarter. We anticipate our liquidity position to grow sequentially at the end of each of the third and fourth quarters based on our expectation of strong free cash flow generation in the second half of the year consistent with timing in prior years. Now, returning to the chart, second quarter free cash flow of $62 million increased $128 million from last year's second quarter, driven by $45 million higher net income despite a $22 million increase in noncash charges, including a $12 million ERP impairment. A significant driver of higher net income was lower interest expense, driven by the SPAC transaction and subsequent debt refinancing. And of course, we had a related $59 million reduction in cash interest, which certainly contributed to the higher year-over-year free cash flow. Cash used for working capital declined $44 million, but a good portion of this benefit in the quarter was due to the timing of favorable cash receipts at the end of June, we estimate between $20 million and $30 million that we otherwise expected to receive in the third quarter. Second quarter free cash flow also benefited from lower capital expenditures, but a good portion of this reduction was also due to timing as we deferred CapEx investment to the second half of the year based on the COVID-19 uncertainty we were managing at the beginning of the quarter. Next, turning to Slide 10. This page summarizes our financial guidance for the third quarter, as we illustrated in the earnings release. Although uncertainty surrounding COVID-19 has certainly mitigated since we spoke in early May, there is still a lack of sufficient visibility to provide specific financial guidance beyond a few months. Accordingly, we provide our expectations for only the third quarter, and this guidance assumes that what we experienced in July continues through August and September, which, of course, is subject to change based upon uncertainty with COVID-19. We are effectively approaching financial guidance for this year, one quarter at a time. Based upon what we know today, we expect third quarter organic net sales to increase between 4% and 6% from last year's third quarter. And although projected organic growth from the prior year differs by region, with the Americas expected to be relatively flat and APAC and EMEA expected to grow mid- to upper single digits, all three regions should grow sequentially from the second quarter in upper single digits. This sequential growth is not driven by seasonality as our third quarter net sales declined sequentially from the second quarter in each of the last two years. Of course, we expect third quarter net sales in all three regions to continue to be negatively influenced by COVID-19, and our top line results will be dependent upon access to customer sites and our customers' ability and willingness to accept shipments. We expect third quarter adjusted EBITDA of approximately $150 million at the midpoint, 10% higher than last year's third quarter, and adjusted EBITDA margin to expand approximately 90 basis points at the midpoint, primarily driven by relatively flat fixed cost, fixed cost constant, while the top line is growing mid-single digits. Comparing our third quarter guidance to our second quarter results, although the top line is expected to grow approximately 10% sequentially at the midpoint, adjusted EBITDA is expected to expand less than 5%. Relatively lower profit growth is driven by higher projected fixed costs in the third quarter versus the second quarter, primarily due to a $20 million reduction in the benefit from COVID-19 cost actions. In addition, we plan that despite the uncertainty related to COVID-19 to continue the ramp-up of R&D and growth initiative spending in the third quarter. Third quarter contribution margin as a percentage of sales is expected to remain relatively consistent with the second quarter.

Thanks, David. Turning to Slide 11. Here's a bit more detail regarding our perspective on 2021. From our radar screen right now, we see the cloud, colocation, and telecom markets continuing to be pretty healthy entering into 2021. It's clearly too early to call what the enterprise market will look like, but in the total data center landscape, we are still expecting to see growth. Our record backlog of $1.8 billion gives us good visibility and confidence on the revenue side. And towards the back half of 2021, we will start seeing the R&D investments pay off with even more products and solutions hitting the market. On the margin side, as we've discussed several times, we are firm believers and practitioners of holding fixed cost constant, and those efforts will be in full swing during 2021. To this end, we plan to announce restructuring actions in Q3, which we expect to reduce fixed costs by approximately $50 million to $70 million, plus additional variable cost benefit. These projects are varied and are entering into the final scoping stages. So while it's too early, we did want to provide you with a glimpse of what we potentially see playing out in 2021, at least based on what we know today. Now turning to Slide 12 and in closing. I want to thank you for your support over the past quarter and in the quarters to come. We participate in a great industry where we have a leadership position, and never has critical digital infrastructure to support vital applications been so important as it is now. Our backlog, the fixed cost constant approach we have implemented, and our liquidity positions are in great shape as we continue to operate during this dynamic time. We continue to invest in the future while simultaneously managing for today. This strategic approach will prepare us to be even more successful when we emerge from this pandemic, and the world adapts to a new normal. Thank you for your support. Stay healthy. I'll now turn the call over to the operator, who will open it up for questions.

Today's first question comes from Scott Davis with Melius Research.

It looks encouraging, the results look encouraging. Outlook looks encouraging. So happy about that. Anyway, I want to get color on a couple of things, if you don't mind, and I hope you can hear me okay. We still have a power outage here in where I live in the Northeast, but –

We can hear fine.

Good. The $60 million cost out for the year, that – is there any of that $60 million that you think you could hold on to in 2021? I assume these are mostly like lower T&E and things like that, lower comp accruals. But are there parts of that you think that could become permanent, not temporary?

Yes, Scott, this is David. Absolutely. So you hit it on the head, about $20 million of that is discretionary related to T&E, and that is certainly the bucket of costs that we are targeting to effectively keep out of the business heading into next year. And we certainly have learned a new way of doing our business while doing things virtually. So that $20 million, we certainly would target to keep out of the business. But just a quick point. With the macro goal of keeping fixed costs constant, we will target to offset the other $40 million. So that $40 million, if it does come back into the business, our planning heading into 2021 would be to identify other reductions to offset it, effectively realizing the benefit of the full $60 million heading into 2021.

Okay. Helpful. And then just a kind of technical question here. The 5G projects, I would imagine they would be somewhat lumpy, maybe not as visible as traditional data center, but I really don't know. It's a newer market, obviously. But can you help us understand what those projects typically look like? And how they might differ from a traditional data center project?

Sure. This is Rob Johnson. What we’re observing is that during COVID, China announced part of their stimulus focused on advancing 5G. They invested tens of billions of dollars into this initiative. While these projects are typically smaller in scale, they involve tens of thousands of sites. With 5G, it’s necessary to upgrade the power systems in cell towers since 5G requires more power, and sometimes to enhance the thermal systems as well. This presents a significant opportunity for us, enabling us to work on many small sites, amounting to tens of thousands overall. We are definitely seeing this trend in China, where we are performing strongly in the 5G rollout. Similarly, in the U.S., networks are becoming increasingly constrained due to the shift to remote work and schooling, prompting upgrades and maintenance of equipment. The race for 5G deployment is ongoing between China and the U.S., and we are benefitting from this competition. I anticipate that this trend will continue steadily, rather than in a lumpy manner, over the next few years.

Okay. Good luck, guys. And congrats, Dave Cote, on the book. It's a great read. I loved it.

You're very kind, Scott, and I appreciate the plug for the book and please, I have to admit I enjoyed yours also, especially that Honeywell chapter. And we hope that in the next book you write, Vertiv will show up.

I hope so. Good luck. I hope it works out.

And our next question today comes from Nicole DeBlase with Deutsche Bank.

Yes, I found the framework for the third quarter helpful, particularly regarding the regional performance in the top line. Following that, can you clarify whether you expect to see EBITDA margins increase year-on-year across all three regions as you did this quarter? Or should we be aware of any potential fluctuations?

Yes. Nicole, this is David Fallon. I would say, although we don't want to necessarily give guidance in particular by region, our expectation would be that would be spread across all three regions. Implicit in the guide is effectively that fixed costs will be flat this year versus last year. And based on the leverage across the three regions, we would anticipate EBITDA margins to increase globally. And that's even with contribution margin likely staying relatively flat. So we would anticipate higher adjusted EBITDA margins to be spread across all three regions.

Got it. Okay. And then totally understand the lack of visibility here in the current environment. But just as we're framing our models into the fourth quarter, what kind of seasonality do you guys typically see that we should be aware of? And I guess on top of that, the large project lumpiness, is there anything to think about with respect to year-on-year versus 4Q '19?

Yes, Nicole, I'll start, and then David can add to that. Generally, the second half of the year performs better than the first half, and the fourth quarter is usually our strongest quarter. The larger projects vary in timing; for instance, we had a significant project in EMEA this year, which did not recur. However, we are experiencing strength, especially in hyperscale projects that are typically larger, and this trend is evident across all regions. Looking ahead to the second half, it will be crucial to manage site access, delivery, and the availability of trades to ensure we can meet our commitments. Our backlog indicates a strong demand, but we may face challenges with trade constraints and site access. Overall, we anticipate a larger third quarter and an even larger fourth quarter.

And our next question today comes from Lance Vitanza with Cowen.

I would like to better understand the adjusted EBITDA guidance for the third quarter. Considering the strong performance in the second quarter and the positive revenue outlook for Q3, the adjusted EBITDA guidance appears slightly low, especially since margins are projected to decrease by about 75 basis points despite sequential sales growth. I know you mentioned the COVID-related cost actions that benefited the second quarter, which amounted to $30 million. I would have expected some of that to carry into the third quarter. Could you clarify whether you're allowing some flexibility here, or is there a specific reason for the anticipated margin performance in the third quarter?

Yes, thank you, Lance. This is David. I'll start by saying that we generally prefer the midpoint of our guidance. While we may provide ranges, we feel comfortable at that midpoint. Regarding the $150 million adjusted EBITDA at the midpoint, it’s an increase from the $145 million in the second quarter. As a finance person, I aim to quantify things clearly. We project about a $100 million increase in sales from Q2 to Q3, and applying a 40% to 45% contribution margin to that gives us a benefit of approximately $40 million to $45 million. However, we expect headwinds on the fixed cost side, which we mentioned earlier, potentially exceeding $35 million. Of that, $20 million relates to the reduced benefits from COVID-related actions, which helped us in Q2 but won't contribute in Q3—such as furloughs and certain government subsidies we received in some regions. This explains a significant portion of the increased fixed costs. Additionally, we are committed to investing in strategic initiatives, which we discussed in previous calls. Our plan this year has been to keep increasing our R&D investments as a percentage of sales, targeting markets with higher growth potential and profitability, including channel development. We are also continuing to invest in digital projects. The spending on these strategic initiatives will rise in Q3, contributing to the sequential increase in fixed costs from Q2 to Q3.

If I could ask one more question about liquidity. You mentioned that you're even less concerned about liquidity now, given the strong cash flow performance in the second quarter. This suggests that the $60 million in cash was not brought forward from what you would have expected to generate in the second half. While you've stated you still anticipate a solid second half, it seems like this is truly just an addition to what you had originally budgeted at the start of the year. Is that correct?

I think that's partially fair. Mr. Cote always reminds us how conservative finance guys can be. And when we look at cash flow, we certainly err on the side of being a little bit more conservative. But our second quarter free cash flow performance certainly was encouraging. I think at this time in May, we hinted towards maybe a slightly negative free cash flow for Q2. So we certainly outperformed that. I did mention some of the favorable performance was based on the timing of cash receipts. So we received between $20 million and $30 million literally in the last day of the month that we had anticipated to receive sometime mid-July. So that's helped and certainly would borrow from Q3. But even with that taken into account, our Q2 free cash flow was better than what we anticipated and certainly lends to the optimism that we have both for liquidity and related free cash flow generation for Q3 and Q4.

And Lance, to provide some additional insight, I believe you mentioned feeling less concerned. We are not worried about our liquidity. In fact, we have a positive outlook on our liquidity position as we navigate this COVID-19 period. We have no concerns, and we expect it to strengthen as we move through the rest of the second half of the year.

There are no further questions at this time. So that ends the Q&A session. I would like to turn the conference back over to Rob Johnson for any closing remarks.

Thank you, operator. I'm going to close the call by thanking our 19,000 plus employees around the world for their hard work that they're doing every day to take care of our customers. We appreciate everyone's time today. As I said earlier, please stay safe, and we look forward to speaking with you again. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect, and have a wonderful day.