Good morning. My name is Brika, and I will be your conference operator today. At this time, I would like to welcome everyone to the Vertiv's Fourth Quarter and Full Year 2022 Earnings Conference Call 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, Investor Relations.

Right. Thank you, Brika. Good morning, and welcome to Vertiv's Fourth Quarter and Full Year 2022 Earnings Conference Call. Joining me today are Vertiv's Executive Chairman, Dave Cote; Chief Executive Officer, Giordano Albertazzi; and Chief Financial Officer, David Fallon. 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 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 annual and quarterly reports and other filings made 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. With that, I'll turn the call over to Executive Chairman, Dave Cote.

Well, 2022 was quite a year of transformation at Vertiv, a year focused on driving price, Americas improvement and progress on a high-performing culture. After a very disappointing 2021, we developed an ambitious plan to turn around the performance of the business over the next four quarters. Fourth quarter results demonstrated marked improvement consistent with the profit profile we shared last February. Our adjusted free cash flow performance, however, was not what it should have been largely because of working capital. We have consistently said the fourth quarter '22 performance will position us well for '23, and we believe that it has. We are increasing our view on 2023 adjusted operating profit guidance primarily due to foreign exchange, and that represents an over 75% increase year-over-year. And our adjusted free cash flow is anticipated to improve significantly because of higher income and less working capital usage. The demand environment continues to look good, and we're entering 2023 with significant backlog. Gio's focus on improved execution on everything is already apparent, and it certainly demonstrated in the improved performance in the Americas. I'm very excited about where the company is headed with Gio's leadership. So with that, I'll turn the call over to Gio.

Thank you, Dave. I can confirm that since I took over as CEO, we've renewed our focus on execution and productivity, fostering a high-performance culture. In 2022, we experienced a challenging first half but had a very strong second half, especially in the fourth quarter, which was our best ever. Fourth-quarter organic sales grew by 22%, driven by robust growth in the Americas and EMEA, though our performance in Asia and China was impacted by COVID, which we expect to be temporary. We ended the year with a record backlog of $4.8 billion, supporting our growth projections for 2023. Our adjusted operating profit of $211 million was slightly below our guidance due to around $40 million less volume in China caused by COVID disruptions. E&I performance also fell short due to project cost overruns, but these challenges were somewhat mitigated by better-than-expected foreign exchange effects. We're pleased with our pricing efforts, having achieved $135 million of price increase in the fourth quarter and $365 million for the full year. We executed on our pricing commitment from earlier last year, and while there were skeptics, we've shown that delivering on commitments is the best response. We saw good cash flow improvement in the fourth quarter, although adjusted free cash flow was below expectations due to delayed collections and higher inventory levels from ongoing supply chain issues. We're working to instill more accountability in this area. Looking ahead to 2023, our guidance indicates a substantial step forward, with organic sales expected to rise by 15% year-over-year. We're raising our AOP guidance to between $750 million and $800 million, a significant increase compared to last year. We're also guiding for $300 million to $400 million in adjusted free cash flow as we optimize profit and working capital. We will provide more details as we progress through the presentation. Each quarter is crucial, starting with solid execution in Q1, details of which we will cover later. On the market front, we only made one adjustment since October, moving cloud hyperscale in EMEA from green to yellow due to signs that demand is stabilizing at high levels. The Asian market remains consistent with our previous views, and I'm encouraged by visits there, particularly in India, which is entering a significant investment phase. The Americas market outlook has not changed either; despite some cooling in cloud hyperscale, they are still growing and investing in ways that support our business trajectory. Some customers are digesting capacity, a normal part of the cycle, which tends to balance overall market impacts. Spending is increasingly shifting toward high-density needs such as AI, which requires more compute power and infrastructure. We're also seeing a normalization in orders as supply chains recover. While some order comparisons may appear negative, this reflects a wider normalizing trend. We remain cautious about the enterprise segment due to potential recessions in the U.S. but continue to feel optimistic overall, supported by high global data demand and positive trends in technology. Customer demand remains strong, confirmed by conversations with clients. We anticipated that fourth-quarter orders would decline compared to last year, which was the case, particularly given last year's extraordinary growth in the Americas. We expect similar challenges in Q1 2023 as we move towards normalized ordering patterns. Despite the anticipated decline in orders, we closed the year with a record backlog of $4.8 billion, representing a 49% year-over-year increase and covering over 70% of our 2023 sales guidance. This backlog reflects a tight supply chain still facing disruptions, and we believe we are beginning to normalize our backlog as customers experience better supply chain conditions. We met our pricing expectations and will continue to price based on the value we provide. While we expect inflation to be a headwind in 2023, we anticipate a net favorable outcome of around $100 million thanks to our pricing strategies. Supply chain conditions are improving incrementally, although challenges remain, particularly in power electronics. Overall, while signals in the macroeconomic environment are mixed, long-term demand for our business is solid. We have a favorable price-cost dynamic and start the year with a strong backlog. Although visibility remains uncertain, we are concentrating on controllable factors, and I feel positive about where we begin the year. Our fourth-quarter results position us well for a successful 2023, even amid potential macroeconomic challenges. We are enhancing our operational models and execution, especially concerning cash flow. Now, I’ll hand it over to David to discuss the financial aspects.

Thank you, Gio. First, let's discuss our fourth quarter financial results as summarized on Slide 6. While our fourth quarter outcomes fell short of our expectations, a broader view reveals significant improvement compared to a year ago. As both Dave and Gio noted, we still have work ahead of us, but our fourth quarter adjusted operating profit of $211 million set a record—40% higher than before. Our goal is to make every quarter a record quarter, and we're in a better position today to achieve those results, largely due to our experiences over the past 18 months. Now, moving to the details of the fourth quarter, net sales rose 17% from last year’s fourth quarter and increased 22% organically. This organic growth was driven by 12% from volume and 10% from pricing while remaining comfortably within our sales guidance. Sales experienced a $40 million hit from COVID-related disruptions in China, limiting our production in the last two months of the year. However, this was somewhat balanced by a $30 million foreign exchange gain as the Euro, RMB, and British pound strengthened against the U.S. dollar. Our adjusted operating profit of $211 million fell short of our guidance due to lower volume in China, which we believe is a timing issue, and weaker results from E&I. In general, we benefited from $135 million in pricing during the quarter, in line with our guidance, although this was offset by a $55 million increase in material and freight costs, also consistent with our expectations. Consequently, we realized an $80 million favorable price-cost situation in the fourth quarter and a $60 million positive result for the full year. The increased sales volume contributed $50 million to our adjusted operating profit, while foreign exchange, though better than expected, remained a $15 million disadvantage year-over-year. The performance of E&I in the fourth quarter was below our targets, primarily due to cost overruns on several large projects and an unfavorable mix. These overruns stemmed from execution challenges and unclear cost visibility, mainly in a single manufacturing plant. Both issues are manageable and are currently being addressed as we integrate E&I into our Vertiv processes and systems. While it was a challenging quarter and year for E&I, we remain optimistic about this acquisition. There’s likely more tactical work needed than we initially expected, but we have previously mentioned on our last call that the potential for sales synergies is much greater than we modeled, as shown by a near 150% growth in E&I backlog during 2022. To support this volume, we're actively investing in capacity expansions at our existing facilities in Mexico and Slovakia as we push E&I products through our legacy sales channels. Finally, in the fourth quarter, we generated $143 million in adjusted free cash flow, which is $135 million more than last year's fourth quarter. Despite this strong year-over-year growth, the adjusted free cash flow fell below our guidance due to various factors, including delayed collections in China from COVID impacts, higher inventory levels as we manage supply chain issues, and postponed advanced payments for several large orders, which are likely to extend into 2023. Although our fourth quarter adjusted free cash flow did not meet expectations, we are making strides in addressing challenges. We burned through $380 million in adjusted free cash flow in the first half of the year while generating $150 million in the second half. We weren't alone in grappling with inventory challenges in 2022, with inventory increasing by $180 million in the first half but only $30 million in the second half. Much work remains, but as Dave and Gio both mentioned, optimizing working capital will be a key focus for 2023 for the entire company. We believe we have enhanced the P&L in 2022, and our attention will now shift to strengthening the balance sheet. Now, turning to Slide 7, this slide summarizes our segment results for the fourth quarter, highlighting strong organic sales growth in both the Americas and EMEA regions. APAC organic sales remained steady, mainly due to COVID; otherwise, they would have seen a 9% increase. In the Americas, we achieved 40% organic growth, driven by 26% volume growth and 14% pricing, which is impressive on its own. This volume growth was fueled by launching additional thermal capacity in Monterrey and tackling various supply chain challenges, including qualifying new suppliers. All regions showed significant improvements in adjusted operating margins compared to the same quarter last year, and for the first time, all regions achieved positive price-cost performance. The Americas showed the most notable improvement, as they were the first region last year to face inflation with an underpriced backlog, resulting in about $60 million price-cost positivity for the quarter, highlighting the effectiveness of our aggressive pricing strategy initiated at the beginning of the year. Both the Americas and EMEA regions had adjusted operating margins above 20% for the quarter, with APAC not far behind. Next, on Slide 8, we highlight the remarkable turnaround in the Americas region for 2022. Under Gio's leadership, we experienced significant quarterly improvements as that division focused on strengthening fundamentals, improving processes, and fostering accountability through a high-performance culture. While there’s still a lot of work ahead, we are satisfied but not complacent about the progress made so far. Gio has adopted best practices from EMEA and implemented them in the Americas, leading to promising results. As a reminder, the adjusted operating margin in the Americas region was in the mid-20s just a couple of years ago, indicating there's still considerable potential for growth in the Americas and across all regions in 2023 and beyond. Moving on to Slide 9, this slide presents our full-year results. We adopted an ambitious framework for business transformation at the start of the year and achieved notable progress, which we'll discuss further in the next slide. Our financial performance resembles a tale of two halves, with a 4% organic sales increase in the first half and over 20% in the second half. Adjusted operating profit was $95 million in the first half, rising to $345 million in the second half. Adjusted operating margin improved from 3.7% in the first half to 11% in the second half, while adjusted free cash flow showed a burn of $380 million in the first half and a generation of $120 million in the second half. While full-year results are essential, understanding the trends and improvements throughout the year is crucial to grasp the Vertiv turnaround story, as illustrated on Slide 10. This slide effectively captures the turnaround achieved in 2022. Despite some challenges along the way, we executed according to the profile we outlined in February, consistently delivering improved performance each quarter, with an increase in adjusted operating profit of nearly $200 million from the first to the fourth quarter. Our fourth quarter results serve as a strong foundation for continued improvement in 2023 and beyond. In that vein, let's transition from reflecting on our past to looking ahead at Slide 12, which outlines our guidance for the full year 2023. We expect a 15% sales increase at the midpoint, with around 10% from volume growth and 5% from pricing, much of which will be driven by previously enacted price increases. Current market conditions are favorable, and we begin the year with a record backlog of $4.8 billion. Despite the recent strengthening of the Euro, RMB, and British pound against the U.S. dollar, we anticipate a full-year foreign exchange headwind of about $40 million, which includes a $70 million headwind in the first half, mitigated by a $30 million tailwind in the latter half. We have raised our 2023 adjusted operating profit guidance range to $750 million to $800 million, up from the previous $730 million to $750 million. This adjustment is mainly attributed to the strengthening of foreign currency since our last guidance update in October. The midpoint of our revised guidance reflects over a 75% year-over-year increase, which is significant. We included a bridge on Slide 31 in the appendix that highlights the factors behind this increase, which Gio will elaborate on later. Overall, the increase is fueled by higher sales, supported by our record backlog and additional pricing, predominantly carryover. These positive factors will be countered by an assumed $175 million in inflation, which encompasses $75 million in labor costs. Additionally, we plan to invest around $40 million in R&D and increased capacity to accommodate anticipated sales growth in 2023 and later. Adjusted EPS is projected to be $1.22, representing a twofold increase from 2022, driven chiefly by the improved adjusted operating profit. Our adjusted free cash flow guidance of $300 million to $400 million will mainly stem from a rise in adjusted operating profit and optimized working capital, which we aim to prioritize moving forward. Gio will provide insights on working capital initiatives shortly, and further details on the core assumptions that support our 2023 guidance can be found in Slides 31 and 33 in the appendix. Now, on Slide 13, we summarize our financial guidance for the first quarter. We expect significant year-over-year improvements across all financial metrics in the first quarter, though it's important to note that this is against a notably weak prior year first quarter. Our first quarter guidance reflects the continued positive trajectory set by a strong fourth quarter. However, it's worth mentioning that seasonality in our business usually results in the first quarter being our lowest and the fourth quarter our highest. As such, we aim for sequential improvement in each financial measure throughout 2023, similar to 2022. We anticipate first quarter net sales will rise 21%, or 25% organically, driven by growth in volume and pricing, albeit slightly offset by a foreign exchange headwind. The adjusted operating profit is projected to be $125 million at the midpoint, influenced by pricing, volume, and productivity, countered by inflation and growth investments. Improvements in adjusted EPS are primarily linked to increased adjusted operating profit. We expect adjusted free cash flow to show a cash usage of between $50 million and $100 million, which is about $75 million better than last year’s first quarter, even with $20 million in year-over-year headwinds from higher cash interest rates and payroll timing. Like many in the industry, our first quarter typically leads to cash usage, although we anticipate generating adjusted free cash flow in each of the remaining quarters of 2023. With that, I'll hand it back to Gio.

Well, thank you, David. Thank you very much, and we turn to Slide 14. We know that this guidance may look aggressive to some. It may as well look conservative to others. But I want you to share some points that supports our assumptions about our guidance. I'll start with adjusted operating profit. And let's look at the volume assumptions. We are at the highest backlog coverage point in our history over 30%. Additionally, there is always a lot more book and ship time and materials, services, spare parts, flow business. Parts of the business that transact on a very short cycle and provide additional volume on the year. Our Q4 book-to-bill ratio was 115% and high levels that have characterized the entire 2022. Obviously, some moderation in our book-to-bill ratio is expected going into 2023 as customers return to a more normalized, as I said, order pattern. This supply environment has been improving, and this should lead to a decrease in our need to do spot buys. We believe we have conservative estimates for inflation. We have a pricing plan that is largely already in backlog or based on actions that have already been taken and we have demonstrated our ability to get the price. Let's look at the cash flow now. You have heard all of us speak directly about adjusted free cash flow. We know we did not execute well in this metric in 2022. Certainly, the improved adjusted operating profit starts off at a very different point for 2023. We have reasonable assumptions for elements that typically do not vary too much like interest back CapEx and we have strong working capital initiatives. This is a top priority for the organization, and we are managing this very closely. I would reference how we approached price last year. It was all hands on deck, rigor around the process accountability and focus on execution. And we executed well. The same rigor is around executing the working capital initiatives and the adjusted free cash flow generation. Let's now turn to Slide 15. Our focus areas for 2023 are clear, clear reflection of our priorities. We won the entire team pulling in the same direction. We are working on the culture fostering a high-performance culture where we do what we say, where ownership is clear where we hold ourselves accountable for delivering the results and we reward performance. Culture doesn't change overnight. It is a process. But as we strengthen our focus, we have seen signs that the high-performance culture is starting to take hold and we see that through improved financial results. I've been visiting many parts of the organization lately, including China, India, Mexico, Slovakia, Ireland, the Middle East. I have met many people at all levels. And I'm very encouraged by what I see. People who love and care for what they do and care for the company. We have a lot to do, but I feel the energy of the organization. Again, pricing, supply chain resiliency and trade working capital optimization are primary focus areas, and we will continue to build those muscles, continue to institutionalize this in the organization. This is what high-performing companies do. We still have great potential to operate in a more efficient and effective way across the company. There is no magic wand. It's constant focus on the things that matter and strong operational execution, rigorous, relentless, pragmatic execution at all levels and starting from the top. I am encouraged by the finish to 2022. The year was certainly not perfect but there are signs of real progress permeating throughout the organization and most importantly, showing up in our financial results. Dave started off the call today by indicating 2022 was a year of transformation so, I wholeheartedly agree, and it is just the beginning. With that said, we will now turn the call over to the operator, who will open the line for questions.

The first question we have from the phone line comes from Scott Davis of Melius Research.

I really just have one main question, and it's just related to the order cancellation of the hyperscale customer. Could you give us a little bit more color around that? And is it your experience that these things tend to be one-offs? I mean, I would think that if one customer is canceling, it could be kind of a start of a trend. If you will, I'm not trying to be paranoid here, just. A little bit of color there, I think, would be helpful.

We understand that being cautious is important. We try to incorporate a level of caution in all aspects of our business operations. However, we cannot disclose specific information about our customers. It's not uncommon for customers to make changes to their infrastructure. That said, we remain vigilant regarding our order dynamics. So far, we have not observed anything unusual in those dynamics. We will continue to maintain a strong focus in this area, but there’s nothing out of the ordinary to report.

Okay. And just as a natural follow-up, I mean you've had a quarter now of kind of order normalization. Historically, does that typically last 2 to 3 quarters? Or is it something that is a little quicker than that?

It's hard to refer to history here because I do not think that I've been in the industry, as you know, for quite some time. I have never seen anything like what has happened in the industry in the last 1.5 years, 2 years. The magnitude of the combination of lengthening lead times and demand growth has driven a, let's say, desire to cover longer and longer demand periods of our customers. That is absolutely unprecedented. All in general, not just Vertiv customers in the industry in general. So, being able to say how that will undo or normalize, it's very, very hard. But our expectation is that it will probably take 6 months. But hey, this is a guess. We'll keep our eyes open and try to understand how it exactly unfolds. And I'll probably be able to tell better in it.

That's very helpful. Okay. Best of luck this year. I'll pass it on.

Your next question comes from Nigel Coe of Wolfe Research.

Just David, going back to the raised guide for '23. You mentioned FX which makes total sense, of course, with the dollar movements. But then you mentioned E&I as a timing issue, the larger timing issue. Are you assuming that sort of the lost EBIT at E&I comes through into '23? Any help in terms of the path of recovery there would be helpful.

Yes. I wouldn't necessarily call the E&I issue from the fourth quarter a timing issue. We were referring more to the sales timing for China related to COVID. All those sales were based on orders that we have in hand, and no guarantee we'll make that up in Q1, but that's certainly just a timing. As it relates to E&I, we certainly expect improvement in 2023 versus what we saw in 2022. I think full-year adjusted operating profit for E&I was between $50 million and $55 million. We anticipated $80 million at the beginning of this year, and we certainly would anticipate something north of $80 million for full year 2023.

Okay. That's great. And then I think if you look at your 1Q sales guide, I think 21%, 22% of your midpoint sales coming through in 1Q as a portion of the full year. That's actually the highest proportion we've seen since Vertiv as a public company going back to 2018. So obviously, we like front-end loaded guidance, but does that indicate sort of an inherent in the way you built up the plan? Or does it indicate some of the expectation of a slowing in the back half of the year relative to norms?

Yes. That's a good question. I would say if you look at the risk from a sales perspective in our plan for 2023 and very consistent with what we said at the end of the third quarter. It's not going to necessarily be backlog, but it will be related to the availability of supply. And in particular, we have continuing challenges with power semiconductors and electronic components. So there may be a bit of a hedge in the back half of the year because we don't have great visibility in that market, similar to everybody who is trying to get their hands on those power semiconductors. In addition, there is still a healthy amount of book and ship that is out there for the back half of the year, and we'll have better visibility into that at the end of the first quarter and probably much better at the end of the first half.

So just to be clear, you still expect there to be supply constraints in the back half of the year?

Specifically, as it relates to electronic components, and Gio can speak to the supply environment. But one of our objectives on this call is to make it clear that we're not through the supply chain issues, right? And I would say many components we purchase are much better than they were 3 months ago, 6 months ago. But there are certainly still challenges on very critical components that we have to procure across our entire product line, whether that's AC power or thermal. One in particular is the power semiconductors. And there's long lead times there, and we don't have great visibility. We do anticipate that improving as we go through the year. But our visibility there probably is a matter of quarters, not a matter of looking out what a year is going to potentially look like?

Yes, I can provide additional comments. Thank you, David and Nigel. On the supply side, we are focusing on two key aspects simultaneously. First, we are strengthening our processes and making our supply network more resilient by utilizing multi-sourced components and suppliers. However, while the market is improving, it has not yet returned to normal, particularly concerning power semiconductors. These semiconductors are integral to many of the components we use, not just standalone items. We believe we have made significant progress throughout 2022 and are better prepared to handle the current challenges. Nonetheless, it's important to note that the market remains complicated, and while we are better equipped, it's not a perfect situation.

Your next question comes from Steve Tusa of JPMorgan.

Can you talk about maybe some of the levers on cash into '24 and kind of where normalized free cash would land for you guys in the next couple of years? Or not normalized, but where you think you can get to on that number beyond this year?

Yes, this is David. If you examine our guidance for 2023 and review the components detailed on Page 33 in the appendix, you'll see how it is structured. The key starting point is adjusted EBITDA, and there is an expectation for debt to reflect if it exceeds or falls short of our targets. Setting aside working capital, the other three components mentioned by Gio have some variability potential, but it's not significant. If we become more profitable, taxes will increase, which is standard. I'm quite confident that our CapEx will remain within a reasonable range of our guidance. Interest rates may fluctuate, but any significant positive or negative shifts are unlikely to be tied to those three components. They will likely stem from the working capital aspect. Regarding the $75 million projected for the full year 2023, we are clearly anticipating success in some of the working capital initiatives Gio spoke about. Working capital itself will pose a challenge due to the 15% organic growth. However, it won't amount to hundreds of millions; rather, it could be a headwind of around $100 million to $200 million, depending on our sales expectations for the fourth quarter of 2023 compared to the same quarter in 2022. While we've accounted for some success in optimizing working capital in our projections, this might be a conservative estimate due to lingering complexities and an unstable supply chain. We are optimistic about the guidance we have shared. In terms of adjusted net income for the full year, we expect to reach around 75% to 80% of our target of $350 million. Over the long term, we aim to be in the 90%-plus range. It's challenging for an industrial company to achieve 100% conversion of free cash flow while aiming for 10% to 15% growth per year. Nonetheless, we believe our guidance of $300 million to $400 million is reasonable, with potential for upside if we can implement our working capital initiatives more swiftly than currently projected.

Right. So the short answer to that is 90%. You view as being normalized, 90% of that income.

That would be the long-term goal. Yes. 90% of adjusted net income.

Can you get there in, do you think '24?

I believe we can. And if you look at our issues, they're all very fixable, right? Inventory increased this year, that was probably up $250 million. It was definitely somewhat of a chaotic environment, but we have a game plan for this year. And that also goes for many of the components of working capital. So AR, we had some complex larger orders that we had to process in 2022 with multiple deliverables, very tactical issues that we can address. So I feel fairly confident we can get to that 90% number in '24 and go forward. But let us get through 2023 first, and then we'll provide some insight on what we think the timing would be for that number going forward.

Your next question comes from Jeff Sprague of Vertical Research.

I wanted to follow up on what Steve mentioned regarding the deleveraging process and if there are any discrepancies in the figures. Although there tends to be fluctuations at the end of the year, it appears that net debt has only decreased by about a third of the free cash flow for the quarter. It seems there may be other uses for the cash that I haven't identified yet. Given that we expect to generate $350 million in free cash flow in 2023, can we anticipate a corresponding improvement in net debt within that range?

Yes. So the significant use outside of free cash flow in the fourth quarter, Jeff, was related to the tax receivable agreement. There was a $75 million payment in the fourth quarter which takes that off our books completely. If you look at the leverage, if you look at the math at year-end, and you look at a trailing 12-month EBITDA number, I think our net debt leverage is about 5.6%, which certainly is much higher than we would like. But if you look at that same ratio looking at a forward-looking EBITDA number, meaning the approximately $865 million of EBITDA anticipated for '23. It's about 3.5x levered. And then if you assume the $350 million of expected free cash flow is used to delever, whether sitting in cash on the balance sheet or to pay down debt, the net leverage gets down to 3x. So if we execute upon our plan in 2023 there's a relatively quick path to that deleveraging. And our long-term goal is to keep leverage between 2x and 3x that we're willing to go either below or above that range for specific reasons. But in general, if we execute what we have on paper here in '23, we should be closer to 3x levered as we exit '23.

Great. And then just back to just kind of business conditions. Back on Slide 5, just to comment that the pricing environment remains favorable in many of our product segments sort of implies it's not favorable and others. Could you just maybe talk about the tenor of price on new incoming orders? And where there might be softness if you're implying there is some softness in that statement.

Well, there are two different dynamics at play. One, what I mentioned as our pricing muscle so an ability to better price for the value that we deliver. We deliver to our customers. So that's something that will always be there. and something that we did not have at least not with the efficacy that we have now in the past. So that stays. I think that shouldn't read the phrase on the negative side. The message is despite an environment in which we see on the cost side in general, a moderating inflation, but inflation nonetheless, we still see that in many parts of our business, we can continue to work the price lever. And that's what we're doing. When it comes to 2023, in particular, a big chunk of our price is already in backlog. And that price in our backlog, of course, is very important for us to deliver on our guidance. But also the price that is not yet in the backlog is a price that we see being realized with the orders that we are in taking. But we expect over time a normalization also in terms of price. And when that happens, and it is not necessarily now in the market because, again, the inflationary trends are still there. When that happens, we are better equipped with an ability to price for value.

Your next question comes from Lance Vitanza of Cowen.

I have two questions. First, regarding the market environment presented on Slide 4, could you provide more details about the EMEA cloud hyperscale, which has shifted from green to yellow? Gio, can you explain what is driving this change? Is it related to concerns about an economic downturn, or has the market simply reached a saturation point? Additionally, do we believe the next move is more likely to be from yellow to red, or could it potentially shift back to green?

We are closely monitoring all signals at this time when order dynamics are quite fluid. As I mentioned earlier, we do not currently see any indicators suggesting trouble beneath the surface. However, we remain vigilant in case circumstances change. Regarding the EMEA region, we are observing a shift in the mix between cloud and colocation services. This reflects the differing needs of hyperscalers and cloud providers for their own infrastructure versus what they outsource. I wouldn’t interpret this as a significant negative change; rather, it’s consistent with the order normalization I’ve previously noted, and we’ll see how it unfolds.

Okay. Lastly, you mentioned that there might be a need for some additional tactical work in E&I. Could you provide more details on that? Also, regarding the backlog, you mentioned it increased by over 100 percent. Could you break that down in terms of the U.S., EMEA, and Asia Pacific?

We may not have time to discuss the backlog details by region. However, I want to emphasize how pleased we are with the sales leverage we are achieving by adding the E&I portfolio to our broader go-to-market strategy. We've also been pleasantly surprised by the strong market response. As David mentioned, we are vigorously expanding capacity specifically for E&I. Our focus now is on accelerating integration and ensuring that the same rigorous execution approach we apply to Vertiv as a whole is also applied to E&I while continuing to drive pricing.

Thank you. This concludes our question-and-answer session. I would like to turn the conference back over to Giordano Albertazzi as for any closing remarks.

Well, thank you. Thanks to all of you for joining our call today. I really appreciate the support and very much looking forward to reporting out on our Q1 2023 progress. So stay tuned. And again, a big thank you.

Thank you. The conference has now concluded. Thank you all for attending this presentation. You may now disconnect.