Good morning. My name is Daisy, and I'll be your conference operator today. At this time, I would like to welcome everyone to Vertiv's First Quarter 2023 Earnings Conference Call. Please note, 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, to begin. So Lynne, please go ahead.

Great. Thank you, and good morning, and welcome to Vertiv's First Quarter 2023 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'd 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, it's one hell of a debut for our new CEO's first quarter, isn't it? I am very pleased with the results we delivered in the first quarter and our ongoing progress. Gio's first quarter as CEO is under his belt, and his operational focus on delivering results and creating a high-performance culture is particularly noticeable, especially in the Americas. We over-delivered in the first quarter compared to guidance and we increased the midpoint of our AOP guidance by $25 million, and cash flow was terrific. We entered the year with a very strong backlog. We were able to secure needed parts and we had capacity in place to deliver a high Q1 sales level. Order rates will be another metric that looks different this year. Gio has some detail in his prepared remarks to explain that. We are constantly focused on the orders rate, and we are encouraged both by the pipeline activity and the pace of investment in our end markets. I've said this for a number of years. There is a true secular growth story at Vertiv and the work we have done in positioning the company for growth and being able to leverage that growth in a meaningful way by getting after margin opportunities while still protecting growth investment makes Vertiv uniquely positioned to create substantial value in the years ahead. It is what attracted me to these assets four years ago, and I'm even more excited today with the runway ahead. So with that, I'll turn the call over to Gio.

Thank you, Dave. Thank you very much, and good day, everyone. So we delivered a very strong first quarter sales, up 35% organically, led by Americas, up over 60% and EMEA, up 25%. We were able to ship more in Q1 than a typical first quarter as we strengthened our supply chain and increased capacity across the world, in particular, in our Monterrey thermal management facility. We had a very high backlog starting the year, and we have the capacity to serve the growing demand of the industry. Orders excluding FX were down 23% from last year's first quarter. This was in line with our expectations, driven by the comparison with an exceptionally high Q1 '22 and consistent with the orders normalization trend we referred to in February. The book-to-bill ratio was 1x and backlog remained flat versus year-end '22, our historical peak. I will further elaborate on this when we review Slide 6. Our adjusted operating profit was $176 million, which was $41 million higher than the top end of our guidance. The beat was largely driven by additional volume and higher-than-expected variable contribution margin coming from a combination of manufacturing efficiency and supply chain efficiency. We are raising our full year adjusted operating profit guidance by $25 million at the midpoint, given the strong first quarter results. Adjusted free cash flow was another good story with $25 million cash generation in the quarter, $100 million higher than our guidance. Although we're pleased with our first quarter performance, we know very well there is still work to do. We are holding the adjusted free cash flow guidance for the year at $350 million, i.e., the previous midpoint, but we understand there is ample opportunity for improvement and certainly in inventory. We are continuing to strengthen our processes and operational rigor around trade working capital execution. So overall, a good start, and we are squarely focused on delivering the full year, and that is one quarter at a time. And let us turn to Slide 4. We have no changes to the view on the market from two months ago at the end of February. We are cognizant of the headlines around tech and the general uncertainty around the macro environment, we continue to see encouraging pipeline activity. Some cloud hyperscale customers are digesting capacity. Others are using this as an opportunity to accelerate their build-outs. Some hyperscalers are moderating CapEx growth, but this moderate growth is still healthy growth. And we see investment continuing. Additionally, we see some market reacceleration in the second half of the year, especially in China, which has been softer over the last several quarters. As Dave mentioned, there is significant secular growth story in our industry. This is further demonstrated by the acceleration of everything artificial intelligence (AI) in the tech space. We are distinctly seeing the first signs of the AI investment cycle in our pipelines and orders. Vertiv is uniquely positioned to win here given our market leadership and deep domain expertise in areas like thermal management and controls, which are vital to support the complexity of future AI infrastructures. Let's move to Slide 5. First and most importantly, markets are, in general, healthy. Investment continues across markets—hyperscale, colos, enterprise. Our project pipeline remains strong. We review pipeline activity regularly and diligently, and pipeline activity remains encouraging. First quarter orders, including the impact of foreign exchange, declined 23%. There are order dynamics that are important to unfold. So we have provided additional details in the next slide. More comments then. Let me go back to the investments in AI. You may have heard it as generally characterized as the next infrastructure arms race. Vertiv benefits from this race and is an agnostic partner of choice to the risk participants. The acceleration in investment in AI will turn into a net infrastructure capacity demand acceleration, and this starts to be visible in our pipelines. AI applications demand a net capacity increase in the industry, higher power density, a gradual migration to an air and liquid hybrid cooling environment and a transition to liquid-ready facility designs. I do not believe there is anyone else in the data center infrastructure space as well positioned as Vertiv—even with our expertise, broad technology portfolio, infrastructure system view, and advanced control systems. Already today, some AI infrastructure orders are in our backlog, and we are encouraged by the potential that AI represents for Vertiv. So supply chain, it is incrementally better. There are still pockets of tightness in electronics, but the relentless qualification of additional suppliers we have driven in the last 12 months is helping us a lot. Inflation—we anticipate metal cost at lower levels in '23 versus '22, although they are starting to trend upwards, and a more favorable environment on freight, reduced spot buy activity that is both trending back to historic levels and that is a good offset. I also like to remind everyone that we have built up a robust pricing process that helps us in case of enduring inflation. Any overall price cost is developing according to plan and is consistent with expectations. Let's now move to Slide 6. Let me here elaborate on future Q1 orders, order normalization, and lead times. Indeed, last year's Q1 poses an exceptionally challenging comparison with orders up 34% from the first quarter of 2021. We will see some quarter-to-quarter variation due to the timing of large projects, but last year's first quarter was exceptional in that sense. We believe order normalization is very real. We talked about this in February 2022. In February 2022, the large hyperscale and colocation customers were giving us orders that covered their requirements for extended periods. As I mentioned, some going out 18-plus months due to the challenging supply chain and lead time situation in the industry. They wanted to secure the capacity they needed long-term. That behavior was particularly pronounced in our thermal line of business. Now that our lead times are improving—not yet where we want them to be, but much better than last year—we anticipate they will continue to improve going forward. Now that our lead times are improving, I would say, customers are more comfortable releasing orders at a much more normal cadence. This creates a short-term air pocket but does not impact the volume or timing of what we will ultimately ship to customers. Order patterns are just normalizing. This is healthy for our business and the industry. So what does that leave us? We are encouraged that our book-to-bill ratio is 1x. And our backlog remains at the same level we had at the end of 2022, even with an extremely strong shipment quarter in Q1 where organic sales were increased 35%. Worth signaling an approximately 12% three-year order CAGR that reflects good end market demand. We believe that Q1 2023 will remain the most unfavorable year-over-year quarterly comparison in 2023; we believe it improves from here. We still anticipate a reduction in Q2 23 orders versus the prior year, but improving relative to Q1. It is hard to have a crystal ball into the second half of 2023. But with what I hear from customers, including what seems to be forming into a substantial investment cycle for AI, I remain optimistic that year-over-year orders will turn positive when we get to later quarters. Having said that, I'll pass it over to David, who will walk us through the financials. Over to you, David.

Perfect. Thanks, Gio. Turning to Page 7. This slide summarizes our first quarter financial results. As you can see, we exceeded the high end of guidance for all metrics on this slide, starting with sales, which were up organically $405 million or 35% from last year's first quarter. $105 million of this increase was from pricing and $300 million from volume, which was up approximately $100 million versus what we assumed in guidance. A vast majority of this volume increase was based in the Americas as we continue to see significant improvements in supply chain and manufacturing efficiency, and the two are related in that region. And it all starts with—and it's supported by—a sound SIOP process. Adjusted operating profit of $176 million was $163 million higher than last year's first quarter and $41 million higher than the top end of guidance, and this was primarily due to volume leverage and a higher contribution margin percentage driven by the improved manufacturing efficiency in our North American plants as, once again, supply chain issues continue to be addressed and process improvements take hold. Of note at the very bottom of the second gray box at the bottom of this page, we recognized a $13 million charge for restructuring in the quarter, and you can see that on the face of our income statement. In the spirit of winning now and winning later, while we continuously invest in productivity and efficiency projects, we will overdrive these investments when opportunities present themselves. In the first quarter, we had an $8 million one-time gain related to the reversal of an indemnification claim pursuant to the Emerson carve-out that provided that opportunity. Instead of dropping this gain to the bottom line, we accelerated restructuring projects costing $13 million, which should drive $20 million of annualized savings, some of which should benefit the later part of 2023. Once again, winning now and winning later. Moving to the right on this slide, adjusted free cash flow of $25 million was $175 million higher than last year and $100 million better than the midpoint of guidance. Improvement versus both last year and guidance was driven by higher adjusted operating profit and significant progress in driving advanced payments from customers. As Gio mentioned, while there is still work to do across all trade working capital categories, we are pleased with the results for the first quarter, and we anticipate continued improvement going forward. Finally, on this slide, if you look at the bottom right-hand corner of that last box, we exited the first quarter with a net debt leverage ratio of approximately 4.3x, and that was down from 5.5x at year-end. While net debt did not significantly change, our trailing 12-month adjusted operating profit increased approximately $163 million from year-end as the $13 million from the first quarter of last year was replaced by the $176 million this year. As we reminded folks in February, although mechanical leverage calculations might have erroneously classified us as higher leverage, we do not believe that was consistent with the underlying reality but more a product of timing in our challenged first half of 2022. Based upon our updated guidance, we expect to be between 3.5 and 4x after the second quarter and approximately 3x at year-end, which is at the top end of our 2 to 3x long-term target range. Next, turning to Page 8. This slide summarizes our first quarter segment results. The Americas region had year-over-year organic sales growth of 61%, and that's not a typo—including a volume of 48% and pricing of 13%. The Americas entered the year with a very strong backlog, and with improvements in the SIOP process and the supply chain, coupled with the continued capacity ramp-up in our new thermal facility in Monterrey, we were able to drive significant top line volume growth. EMEA, also benefiting from a strong backlog, posted organic growth of 26%, including 17% from volume and 9% from pricing. APAC is somewhat an outlier compared to the other two regions for the first quarter. While we had good growth in India and Southeast Asia, China continued to be impacted by the effects of the post-COVID recovery and related project pushouts to the second quarter and back half of the year. Based upon our visibility to an improving pipeline driven by the anticipated macroeconomic recovery and government-sponsored actions that should benefit data centers, we remain optimistic, anticipating mid to upper single-digit organic growth in APAC for 2023 and good momentum heading into 2024. At the bottom of the slide, the Americas continued its momentum from the second half of 2022 with an adjusted operating margin of 22.1%, 11.3 percentage points higher than last year's first quarter and 160 basis points better than the fourth quarter. About half of the improvement was driven by higher variable contribution margin, including a significant price cost benefit, with the other half from fixed cost leverage as we continue to drive our fixed cost constant philosophy while investing in capacity and technology. EMEA's adjusted operating margin also improved nicely from last year's first quarter, by over 700 basis points with about half of that improvement from fixed cost leverage. Finally, APAC, their adjusted operating margin, like its top line, remained relatively flat from last year. Turning to Page 9. This slide summarizes our second quarter guidance. As we mentioned in our press release, due to our strong beginning of the year backlog and an improved supply chain, we anticipate quarterly seasonality to look a bit different in 2023 compared with historic patterns. As a result, we are not projecting a significant incremental jump in top line from the first quarter to the second quarter, like prior years, and we should see a more uniform quarterly sales pattern, albeit increasing as we sequentially move through 2023. For the second quarter, we anticipate organic sales growth of 15%, with 9% from volume and 6% from pricing. We are projecting adjusted operating profit of $190 million at the midpoint, with pricing, volume, and productivity benefits partially offset by inflation and growth investments, with the resulting adjusted operating margin up 600 basis points from the prior year. We have not provided adjusted free cash flow guidance for the second quarter, but we expect positive cash flow in each of the remaining quarters with sequential increases, and we reiterate our full year guidance on the next slide, which is a good segue. Moving to the next slide, Slide 10, where we summarize our full year guidance. We have raised our— as Gio mentioned, we have raised our 2023 adjusted operating profit guidance by $25 million at the midpoint, building on our strong first quarter performance. Although we experienced favorable supply chain dynamics in the first quarter, there remains uncertainty in certain pockets of our procurement, including notably power semiconductors. So we are approaching volume estimates for the rest of the year with caution. This may be perceived as conservatism, but we believe it is the prudent approach at this point based upon the supply chain volatility we have all seen in the last 18 months, as we know, things can change quickly. We are guiding full year adjusted operating margin of 12.3% as we continue our progress towards an anticipated 16% in the intermediate term and 20% in the long term. And as I mentioned, we are reiterating our adjusted free cash flow guidance for the full year of $350 million at the midpoint.

Well, thank you, David. Let us then turn to Slide 11, and let's summarize the key takeaways. So a very good first quarter. Momentum is continuing. The market remains healthy, and we benefit from having a large backlog and a better supply chain and more capacity. We are raising our AOP guidance given a good Q1 performance. I am very pleased to announce Vertiv will be hosting its first Investor Conference on November 29 at the New York Stock Exchange. More details certainly to come, but already now, hope you will pencil that down in your calendars, and we hope you will be able to join us. As Dave Cote is known for saying, 'The trick is in the doing, and we are getting after the doing.' And that means strong execution, supported by a high-performing team and culture, making sure there are no shortcuts, no magic wands, the doing is clarity of vision, alignment, and relentless focus on improvement and execution. I am very proud of the staff and the progress we continue to take as an organization, and I want to thank the entire Vertiv team for the ever-increasing focus and passion and execution. We are still in the early stages of our acceleration, and after my first quarter as CEO, I'm more optimistic than ever about our path ahead. With that, we will now turn the call over to the operator who will open the line for questions for us. Thank you very much.

Our first question today is from Andy Kaplowitz from Citigroup.

Gio, could you give us a little more color into your end markets and elaborate on your comments that you think orders could turn positive later this year? I think some investors are probably surprised that cloud and colocation markets in the Americas have hung in as well as they have. So maybe more specific color on those markets? And then how much of the incremental orders or pipeline that you see— or would you say more AI focused? And what gives you the confidence that China is going to come back in the second half of the year?

Okay. Well, thank you for your question, Andy. I would say that many elements for this confidence. One is what we see in the pipelines, and pipelines are moving. We are definitely pleased with our book-to-bill ratio at 1, as we were saying, especially given the overage in sales relative to Q1 guidance. But as we said, especially the hyperscalers are not stopping their investment. We also heard some prominent hyperscalers in the last few days sending messages about their infrastructure spend. So there is positivity in the year. And again, that resonates with what we see in the pipeline. Now we talked last time about normalization, and that's what we continue to see. So do not be surprised when we will see still the second quarter that on a competitive basis will be down year-on-year, but up in absolute terms versus Q1 as we were saying. But again, there is movement out there. There is a positivity. Now not all the hyperscalers are exactly in the same place or all the colos are in the same place, but many of the large ones continue to plan capacity expansion. It is difficult to your point about AI. It's difficult to really draw a line between AI investment, enabling investment, and other investments. I would say that the line is blurring. One would think that AI is a totally new thing. Certainly, generative AI is accelerating very rapidly. But there are elements in AI and everything we do today already. So if anything, we see an acceleration, not a sharp transition to something completely new. But we see AI in terms of the type of conversations and specifications that we see coming our way. And again, as I was saying when going through the slides, a lot about power density and a lot about bigger capacity investments, kind of bigger chunks, and that's encouraging. So again, AI as a transition, and I invite everyone to think of AI more in terms of a transition towards a higher density, higher density compute and high-density power as a consequence. You were asking about China. We believe China will reaccelerate in the second half. The best indicators—two indicators. That's what we see in other markets, other industries than China in general trending toward a recovery but also we see it quite clearly in our pipeline. Our pipelines are strongly accelerating in China. Hope I answered your question.

You did. I asked it in four parts. So Gio, just a little more color on free cash flow. Obviously, much better than your initial expectations for Q1. We know it's one of our top focuses, if not your top focus this year. So you didn't raise the guide, as you said. Is that just sort of prudent, and what have you really changed so far this year about collecting cash?

Yes. Multifaceted question. I'll ask also David to chip in at a certain stage. But I would say that when we look at Q1, it is really a combination of a better AOP, better profit certainly helped, and the advanced payments that helped. We know that we have work to do on the trade working capital, and we are focusing on that. For us, that means concentrating especially on inventory, and for us, inventory reduction and optimization means working intensely on supplier lead time reduction, execution in everything that is a size of material planning, material management, and production planning. Vendor management in general, we are activating a lot of vendor-managed inventory agreements, all things that will go in the direction of shortening the cycle. As the cycle shortens, our inventory goes down. I was talking about supply chain resiliency; that's a big element. Supply performance is a big element because we can reduce our safety stock without impacting our service level, etc. So it's a system; it's an array of actions. And I think that touched upon the most important. David, anything else to add? Of course, it's not just inventory; there are many facets.

Yes. I think the important thing Gio mentioned is that the beat in the first quarter was driven by higher profitability and the advanced payments. The advanced payments were super focused on that. But that's a matter of timing. We have to prove that execution over and over as we get through the year or it will just be accelerating cash we would have seen later in the year into the first quarter. So we'll have a better update in three months from now. And at this point, we're still very comfortable with that $300 million to $400 million guide.

Maybe we could just start with the Americas. Obviously, like the biggest source of the beat and really impressive growth this quarter. Can you just talk maybe about how you see that phasing throughout the rest of the year because I expect that 60% plus organic growth probably isn't sustainable?

I would say that we have been able to overperform in the Americas. We were talking about, of course, 60%. If you think about what the details David gave us with a 48% volume, so you think about almost 50% volume is certainly a reflection of a much more reliable supply chain. It's absolutely not perfect yet, as I was saying, but very, very importantly, in availability of capacity that we did not have before. We, in the Americas, have approached the improvements at many angles—alignment, talent, leadership capacity processes, fixed supply chain, a lot of pricing, but we continue to have a strong backlog also in the Americas. Now comparatives will be a little bit more challenging, but we continue to see growth for the rest of the year. So the strength of the first quarter was not a fluke; it was, simply put, a reflection of all the hard work and the investment and the transformation of a business and a culture towards a strength that we did not certainly have a year ago.

Got it. So maybe it's fair to say that if you guys are making the claim not for the whole business, there's less seasonality this year. And revenue can be kind of stable throughout the year versus what you reported in 1Q, that comment may also apply to the Americas. Is that a fair characterization?

Very much so. Very much so. And our business—norma business, is there such a thing as kind of a pre-COVID normal—would have shown always kind of a very steep second half towards last quarter type of seasonality; it will be much flatter here across the year, in particular for the Americas. I don't know, David, anything you want to add?

Yes. And Nicole, just to help with your modeling, you have all the components to look at first half, second half. We definitely see a $250 million to $300 million increase in sales in the second half versus first half. We do anticipate more uniformity than in prior years. If you look at it from a regional perspective, most of the lift that you'll see in the second half will come from APAC and the Americas, and EMEA would be relatively uniform.

In this moment, again, the thing that we keep an eye on is really what customers or our customer's customers tell us and what we see in the pipeline. It's hard to—it's hard for us to speculate on the consequences of the consequences. It's hard to say—what we think is that the biggest portion of our market, say, everything related to hyperscale but not only colocation, seems not to be extremely bothered by this at this stage.

Good to see your stock price up. But let's—if you don't mind, Gio, I'd love to go back to AI, because this is also new to so many of us, and the materiality of the comments is always hard to really get our arms around. But when you think about the faster—the thermal management, the faster speed switches, and all the stuff that might be necessary. Is—are your orders just for a different mix or a higher end mix of new or are you talking about retrofit, and there's some demand there to go back into existing data centers and upgrade perhaps at a faster clip than you'd anticipated prior?

Hello, first of all, Scott, thank you for the question. I say you quite an insightful question in a sense that at this moment, it's predominantly a new infrastructure conversation. But I—as CEO, Vertiv as a whole, we're extremely intrigued by the opportunities out there because there is a lot of large data center stock, of course. And thinking that all the high density will be brand new into an existing data center infrastructure, which certainly happened. But it's solely happening in that dimension. No, we believe that the opportunity for retrofit will be there, though it is a bit premature, I must say. But one thing I'm sure we are extremely well positioned there, because in the existing stock of data center globally, we have a big installed base. So no one better than the current vendor can help you transition to the new technology, but also again, because if you think about our global presence of service domain knowledge. And one thing that is interesting, as I alluded to, probably a little bit too rapidly when we were going through the slides is that when I talk to them, our customers, rarely do they think binary in terms, 'Oh, it's all AI,' 'Oh, it's all—the new infrastructure is all very high density.' Most think about an infrastructure that needs to be resilient over time and enable a transition of technology they probably had for the last ten years. So this mix and change of mix is very intriguing and very promising for us.

Of course, it’s not just inventory. There are many facets. When you think—when you talk about an order that's coming in, in a facility that needs to manage the power density of AI, are you talking about a larger bill of goods or with a higher margin mix or can kind of help us understand and what magnitude is it? Is it 10% more intensity of Vertiv products? Is it double? Is there some sort of way to think about TAM as it relates to what may happen here and the changes necessary to accommodate AI?

I would say the investment is not marginal in terms of the portion of infrastructure. And I would say that the total accessible market is not shrinking; it is certainly not shrinking. If anything, it is expanding because, again, you have to think system and not just individual piece of technology more in the future than today. And we can think system.

So we've had a pretty decent conversation about AI. So I want to switch to the more prosaic enterprise market now. I mean, we've seen some negative data points on enterprise IT spending. So just curious, recognizing the fact that your outlook hasn't changed by end market. But on balance, are you seeing a more cautious enterprise customer out there maybe just brief up to speed in terms of where we are on that migration path from on-prem to cloud?

The migration plan from on—Nigel, first of all, the migration is continuing, but again, it's not from 100% on-prem to 100% cloud. I'd say that there are elements of stabilization. Clearly, migration continues. We see the enterprise business growing at single digits in this moment. More or less, that's what we see also through our channel business that, by the way, is in good health right now. And think about enterprise business also as not just data center, but we see also enterprise demand on the commercial and industrial part of the business as a consequence of trends like nearshoring. So we see good level of activity there.

Okay. So it doesn't sound like you've seen any deterioration there. Okay. And then maybe just to talk about the pipeline. You talked about a very encouraging pipeline, especially in China in the second half of the year. But when you think about the visibility and your confidence in future backlog growth, would you say that the Americas are still a place where you feel more confident in the outlook?

I would say that clearly, the size of the pipeline is different in different regions, reflecting the markets that we serve. We see pipeline particularly strong in China and in Asia. And we see a good level of pipeline supporting our plans in the other parts of Europe and EMEA and in the Americas. So I'd say that I am positively encouraged. I'm encouraged by the size of the pipeline and by the speed at which we are creating new pipeline.

Yes. Congratulations on the good results. I had one on the pricing outlook for 2023. So you're now expecting a bit higher pricing than you assumed as of last quarter and you're doing it with less volume. So can you see a little bit more on where the pricing is coming from, and what's leading to the higher price for 2023?

Yes. Thanks, Mark. So you're right. We took our full year pricing guide up from $275 million to $300 million. We hit the number in Q1, but there's always a little bit of art as it relates to defining what pricing is. And when we look at our backlog and run the numbers versus last year, they're coming up higher. And we continue to be successful with our new pricing. I think the incremental $25 million came from a recalculation of the carryover, but the big thing with the pricing is it's not turning the other way. So the pricing in the market, certainly in the Americas and EMEA, is sticking, and we're continuing to be out there, and we think we're kind of at the right price point, but we'll continue to push it a little bit.

Just wanted to—if I'm going to do one, maybe just go to free cash flow. David, you pointed out maybe people were a little too nervous about your leverage. But I did want to just get to the point of conversion. Your free cash flow, the EBITDA is about 40% or so. A lot of companies in my group kind of operate in the 60% range or so. So how do we kind of get that conversion relative to your EBITDA higher? Are there any things in particular that need to happen? I think working capital is probably a big chunk of it, but maybe you could bridge us to potential improvement in the out years on that metric.

Yes. We talked about this a little bit on the first quarter call. Our long-term goal, of course, every industrial has to get to 100. That's very dependent upon growth because trade working capital is the biggest drag. So I think if you look at the metric based on 2023, and you have to look at adjusted net income, it's probably 75%. The two biggest drags versus getting to 100 is working capital. And then also, we're over-investing this year with CapEx. So our depreciation, if you include software amortization, is probably close to $90 million, $95 million, but we have $140 million of CapEx— a lot of that, which is supporting additional capacity. So in the long run, that has to stabilize just mathematically. So that will probably close maybe a little less than half of that gap. But in the long run, your point is absolutely right; it has to be with working capital. And we made some progress here in the first quarter, and we project that that will continue to make progress over the rest of the year. But in the long run, to hit that target, we're going to have to continue to optimize inventory and balance out AR and AP.

I guess my question is really on the backlog side. The $4.8 billion backlog, I'd love to understand how do you think that looks into year-end? Just trying to get a sense of how much of the growth do you think this year is going to come from backlog conversion versus not? And anything you would call out in terms of cancellations, something would be really helpful. And then separately, Gio, I'm hoping you could talk a little bit on this AI dynamic. A lot of the hyperscale companies, I think, at this point, are debating if they want to do 100% immersion liquid cooling or hybrid cooling. Do you think your value proposition is as attractive in the immersion liquid cooling market as it's on the hybrid side?

Well, many questions in one. So—thank you, Amit. So first of all, backlog. Clearly, $4.8 billion is a good number as we were seeing at the beginning. But let's go back to February, when we were saying we are entering 2022 with more than 70% backlog coverage, and that's not 'normal.' We still believe that is the case. I mean if you go back to whatever the normal would be, we would be probably on a 50% or below 50% backlog coverage. So I'd like to think in terms of percent, not necessarily absolute number. So, probably when we go into 2024, we will be more on—we will be—most likely we will be in a lower coverage than the 70% we saw last year. Now it's a little bit premature really to say how everything will pan out. But think in terms of a lower backlog coverage going forward. Again, that's normal. We talked about lead times, as we talked about the reduction of lead time, and with the reduction of lead time and the levels of backlog coverage that we had at the beginning of 2023 are incompatible. So simply, the industry will adjust again. Clearly, a lot of the revenue in 2023 comes from backlog conversion; but that's just in the math, in the numbers. But you're talking about cancellations—nothing out of the ordinary. And let me talk about cooling technology. As I was saying earlier, it will be a hybrid world from a cooling technology standpoint, and the degree of the mix between traditional and liquid will probably change over time; very, very small percent of liquid at the beginning and then increasing in the next years, I would say certainly not months, years. You're talking about immersion cooling; immersion cooling is just one of the liquid cooling technologies. There are a lot of technologies that, in this moment, are competing in a technology landscape that is not mature yet. And we are working with some of the biggest hyperscalers and some of the biggest chip manufacturers to really make sure that we align our technology to their evolution and we make sure that we enable their scaling, their solutions out in the market.

Nice job on the quarter. My question is with respect to E&I. As the supply chain has continued to improve, is E&I a drag still? Or has it become a tailwind in the first quarter results? And how do you see that playing out? And then related to that, strategically, are there any other potential acquisitions out there, perhaps tuck-ins that would allow Vertiv to further improve the scope of its product offering and its competitive positioning versus some of the other larger players?

We are happy with the progress on the E&I side of the business. I think it was February when I was talking about making sure that we accelerate integration; we have taken steps in that direction. In particular, we are embedding the American part of the E&I organization into the bigger Americas business also operationally, so we're satisfied with the progress there. When it comes to portfolio management, in general, it will be premature, but rest assured that this is something we keep a keen eye on, and it's a part of our management cadence and processes. We certainly are constantly looking at opportunities out there. Sometimes they are mature; sometimes they are not, but that's part of what we do.

David, maybe a quick one for you. The free cash flow in the quarter, I think you said there was an advanced payment benefit. Maybe that's reflected as deferred revenue, I don't know, in the cash flow statement. It sounds like this could be timing related based on some of your comments. So it would be helpful to get a sense on second quarter expectations for free cash flow. It's not something that you gave on the slides, but you typically give kind of the forward quarter outlook.

Yes. So first of all, advanced payments could be timing if we do not execute, and we have every intention and plan to execute. So you're absolutely right. In the balance sheet, it hits deferred revenue. And we have programs in place, notably in Americas, to continue that program with larger orders. And it's something that we have embedded in the process. So we're very optimistic that that will continue. But to embed that into the guidance, we're going to wait for three months, another quarter to kind of reassess that. As it relates to individual quarterly guidance for free cash flow, I think historically, we have not provided that. We did last year; we are not doing that just because of the lumpiness and some of the variability around free cash flow for individual quarters. As we mentioned in the past, we have $40 million to $50 million check runs that could go out one day versus the next and swing a quarter. So I wouldn't read much into that. We're still very confident with the free cash flow program. We do anticipate it to sequentially increase as we move through the year, and we'll reassess that guidance as we get to the end of the second quarter.

Thank you. This is all the questions we have time for today. So I'd like to hand back to Giordano Albertazzi for any closing remarks.

Well, thank you very much, and thank you for your questions. We are starting off the year with a strong quarter. We certainly intend to continue to build on that momentum as we make our way through 2023. So we definitely look forward to discussing our progress with you. Appreciate your support. And don't forget, looking forward to seeing you on the 29th of November. So with that, thank you very much.

Thank you, everyone, for joining today's call. You may now disconnect your lines, and have a lovely day.