Vertiv Holdings Co (VRT) Q2 2025 Earnings Call Transcript

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 second quarter 2025 earnings conference call. All lines have been placed on mute to prevent any background noise. Please note that the call is being recorded. I would now like to turn the programme over to your host today. Leigh and Maxina, to begin, please go ahead.

Great. Thank you, Barika. Good morning and welcome to VERDA's second quarter 2025 earnings conference call. Joining me today are VERDA's Executive Chairman, Dave Cody, Chief Executive Officer Gio Albertazzi, and Chief Financial Officer David Fallon. We have one hour for the call today. During the Q&A portion of the call, please be mindful of others in the queue and limit yourself to one question. And if you have a follow-up question, please rejoin the queue. 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 avertive. These forward-looking statements are subject to material risk and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. We refer you to the cautionary language included in today's earnings release. 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 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.merdiv.com. With that, I'll turn the call over to Executive Chairman Dave Cody.

Good morning, everyone. I have to say I'm pleased with how well we've performed midway through 2025. We continue to outperform and deliver strong results. Gio and the team are executing very well, continuing to build a strong track record of financial performance. And our investments in R&D and capacity are paying off today as planned and positioning us well for the future. The transformation at Vertiv continues to accelerate, and I am more excited today than I've ever been about what is ahead. We're in a digital revolution that's got a long way to go, and data centers remain fundamental to all of it. Our global scale and technology leadership aren't easily replicated, and we keep widening that gap. We maintain our proven strategy of driving growth through both organic expansion and strategic acquisitions to extend our market leadership. Our recent Great Lakes acquisition announcement showcases our disciplined approach to deploying capital, where we see clear strategic benefits and value creation opportunities. Our M&A pipeline remains robust, and we'll continue to take this same approach, moving decisively when we find opportunities that enhance our technology leadership, engineering capability, global capacity, and overall growth profile. Our ongoing investments in the ER&D and capacity expansion ensure we stay ahead of market demand while delivering the innovative solutions our customers expect. This digital age is just getting started, and Vertiv is poised to capitalize on the massive long-term opportunity. With that, I'll turn it over to Gio to walk through the details of our performance and outlook. I'm confident he and the team will continue to execute at a high level and deliver value for our shareholders.

Thank you, Dave, and welcome everyone. Thank you for joining us today. We go to slide three now. I am quite pleased with what we have delivered in Q2. Our adjusted diluted earnings per share was 95 cents approximately 42 percent up from second quarter 24. Primarily driven by higher adjusted operating profit. Our organic sales grew a very robust 34 percent year with strong performance in the Americas up in the mid 40s and APAC up in the mid 30s. EMEA delivered high single-digit growth. For the first time, we surpassed $3 billion in orders this quarter. Well, not bad at all. This is certainly promising in terms of long-term trajectory. Q2 orders were up approximately 15 percent from Q2 24, and certainly not an easy comp, and up 11 percent sequentially from 1Q 25. Our trailing 12-month organic orders growth was 11%. Our Q2 book-to-build ratio of 1.2 times is particularly encouraging. We continue to build backlog at very high levels. Momentum in our business is accelerating. Our Q2 adjusted operating profit was $489 million, up 28% during a year driven by higher sales. Our adjusted operating margin of 18.5 percent in line with guidance is approximately 110 basis points lower than prior years. This was primarily driven by the net impact of tariffs. Our updated guidance takes into consideration tariffs active on the 28th of July, reflecting a moderate improvement in the tariff situation compared to our Q1 guidance. The temporary costs of the supply chain and manufacturing transition to tariff-optimized footprint are higher than we initially estimated. We're also experiencing some temporary costs to deliver a steeper growth than expected and some execution of challenges in EMEA. We expect all these factors will significantly moderate during the year, and we believe they will be materially resolved by year-end. For Q3 and for the full year, we are raising our investment in ER&D and in growth compared to prior guidance. Our second quarter free cash flow of $277 million, though lower on a year-on-year basis, This corroborates a strong cash generation trend with adjusted free cash flow of $542 million in the first half, a robust growth of 24% year-on-year. This performance was driven by our improved operational execution, resulting in higher adjusting operating profit. We are raising the full-year adjusted free cash flow guidance to $1.4 billion. dollars. Our disciplined financial management is reflected in our strong balance sheet with a net leverage ratio of just 0.6 times at quarter end. We are raising our full year 2025 net sales guidance by 550 million dollars to 10 billion dollars. We expect organic growth to be approximately 24% for the full year. We are also raising our full year adjusted diluted EPS guidance to $3.80 or 33% higher than prior year. We are taking our adjusted operating profit guidance to just under $2 billion at the midpoint. So 2025 is shaping up to be a strong year. With that, we move to slide four. Our TTM orders organic growth and our sequential orders growth, both at 11%, are testament to very strong momentum in the market, particularly considering very strong orders in second quarter 24. Our backlog stands strong at $8.5 billion, up 21% versus per year, and 7% sequentially from Q1. supporting our increased guidance for the year. Our price is aligned with our expectations. We're seeing robust pipeline growth across all regions, well-balanced across our portfolio. And remember, these are tangible quoted opportunities. In a year, while 2025 full-year net sales are expected to be flat compared to 2024, we are seeing sequential growth in the orders pipeline, providing optimism for 2026 and beyond. The regulatory environment is becoming more conducive to AI infrastructure investment reflected in our customer discussions and pipelines. While we are on the topic of orders, let me briefly explain a change in how we'll communicate orders. As we have consistently said, orders in this industry can be lumpy, and this lumpiness can sometimes create unnecessary stock market reactions for Vertiv. Beginning on our Q4 and full year 2025 earnings call, we will provide projected full year orders rather than quarterly orders and backlog information. We believe this better aligns with how we run our business. We will provide updates on the full-year projections quarterly as we progress through the year and as we deem necessary. Let's now move to the right side of the slide. The tariff situation remains quite dynamic and fluid, with the tariff perimeter changing frequently. and this can create inefficiencies in the playbook and execution as we adjust to a changing landscape. This guidance is based on the tariffs in place on the 28th of July. We are vigorous executing tariff countermeasures. We believe tariffs will be materially offset exiting 2025. We are deliberately increasing spending in engineering and R&D capacity and go-to-market to fuel growth. We are fine-tuning our supply chain as suppliers accelerate their localization efforts to address the tariff situation. Our supply chain resilience is helping us well. As growth accelerates, our capacity expansion strategy continues to be two-pronged, strategic manufacturing and service investment ahead of anticipated growth, capacity liberation through vertive operating system productivity improvement. Let's now go to slide five. Gray space and white space no longer are separate spaces. Great space is the traditional critical infrastructure that powers and cools the data center. The white space is where the IT equipment, the IT stack lives, the rack service, the compute infrastructure. With increasing rack density, the physical integration and interoperability between these spaces has become absolutely evident and critical. Think about it. With hundreds of kilowatts per rack, the mechanical, electrical infrastructure and the IT stack are so intimately connected, sharing the same space, that they need to be thought of as one system. This is where Vertiv's trends really come into play. You have heard me describe Vertiv as the connective tissue between the gray and the white space, between facilities and IT, our traditional expertise in gray space is seamlessly becoming white space infrastructure expertise. White space deployment is becoming more complex, more time-consuming, more multidisciplinary. This is a unique opportunity for advanced prefabrication to dramatically reduce fit-out complexity, reducing deployment time by an order of magnitude. This is smart run, step change now we think about white space deployment allow me another angle the IT equipment has traditionally had frequent refresh cycles as density increases over time this may drive regular refresh cycles of the white space mechanical and electrical infrastructure let's now switch to the right side of slide five. Let's stay on this slide. We have announced a new acquisition, as you know, Great Lakes, which is expected to close this quarter. We anticipate that this transaction will bring us extensive portfolio of high-end rack solutions and innovation capabilities that are essential in today's increasingly demanding AI infrastructure wide space. Great Lakes portfolio includes custom racks, integrated cabinets, heavy-duty racks and cabinets, and enhanced cable management solutions. Great Lakes high-end infrastructure solution technology, capacity, and engineering expertise complement very well the rest of Vertix's capabilities in the gray and wide space. With manufacturing and assembly facilities in the US and Europe, we anticipate Great Lakes will enhance our ability to serve customers with speed and scale. We are enabling the end-to-end infrastructure for AI factories. We gain a growing presence in the wide space. Our understanding of the entire system from power to cooling to IT infrastructure position us uniquely to solve the complex challenges that our customers face. And with that, I'll turn it over to David.

David, over to you. Perfect. Thanks, Gio. Turning to slide six, let me walk you through our second quarter results. And starting on the left, another strong quarter for earnings growth with adjusted EPS of 95 cents, which is up 42 percent from last year. And that's primarily driven by higher adjusted operating trading profit and lower net interest. Once again, we delivered a strong organic sales growth of 34%, almost $300 million above prior guidance. And compared to last year, America's was up 43%, APAC up 37%, and EMEA, still influenced by a lag in AI infrastructure build, was up 7%. And as GEO stated, pipelines across all three regions continue to grow nicely, including EMEA. Our adjusted operating profit of $489 million was up 28% from last year and $54 million higher than guidance. Our adjusted operating margin of 18.5% was down 110 basis points from last year, but in line with guidance with the year-over-year decline primarily driven by tariffs as expected. Now, based upon operational leverage from the much higher volume, it would be reasonable to expect adjusted operating margin to be higher than the 18.5% actual end guide. However, as Gio mentioned, we experienced higher than anticipated operational efficiencies and execution challenges in the quarter in support of significantly higher volumes in addition to higher than anticipated supply chain and manufacturing transition costs to mitigate tariffs. We expect some of these factors to continue in the third quarter but be materially resolved by the end of the year and as we enter 2026. As implied in our full year guidance, we expect fourth quarter adjusted operating margin to be more than 23 percent keeping us on track with our targeted 25 percent full year adjusted operating margin by 2029 and finally on this page adjusted free cash flow was down 60 million dollars from last year's second quarter primarily due to favorable trade working capital timing last year but year-to-date adjusted free cash flow is up 24 and as you will see in a few slides, we are raising our full year guidance by $100 million to $1.4 billion. In short, you can likely check the box on free cash flow. Now moving to slide 7, looking at our segment results, America's had another strong quarter with organic sales up 43 percent, and that was driven by continued strength and co-location and hyperscale markets. And despite tariff headwinds, adjusted operating margin remained strong at 24%. APAC's 37% organic sales increase was driven by strong growth across the region. Margin expanded to 10.6%, primarily driven by operational leverage and a discrete expense in last year's second quarter. EMEA's top line grew 7% organically in the second quarter, lagging the other regions as we expect it. We anticipate EMEA sales will be down organically in the back half of 2025 and relatively flat for the full year. But as a reminder, EMEA was our fastest growing region in 2024, and we expect growth to re-accelerate based upon the healthy pipeline. Lower margin in EMEA is primarily driven by two things. First, we did have some operational execution challenges in the second quarter that we expect to address in the coming quarters. Second, we made a deliberate decision to invest in fixed costs in the region ahead of expected growth while expanding regional capacity pursuant to supply chain shifts to the U.S. in response to tariffs. While this investment in these supply chain actions contribute to excess capacity and costs in the near term, these should be absorbed when volumes re-accelerate in EMEA. As mentioned, pipeline remains healthy and we anticipate the strong pipeline to convert to top line as soon as 2026. Next, moving to slide 8, we guide third quarter adjusted EPS of 97 cents, 28% higher than last year. This improvement is primarily driven by an expected 22 percent increase in adjusted operating profit. On the top line, we expect another strong quarter of organic growth at 22 percent, with Americas in the mid-30s, APAC in the low 20s, and EMEA down upper single digits, in part driven by a challenging COP in last year's third quarter. We expect adjusted operating margin of 20%, relatively consistent with 2024, despite tariff headwinds, as we continue to leverage higher sales and drive positive price costs. Implied is 150 basis points sequential improvement from the second quarter, primarily driven by progress in resolving some of the operational inefficiencies and execution challenges. Moving to slide nine, let me walk you through our full-year financial guidance. We are raising projected adjusted EPS to $3.80, 33% higher than last year, primarily driven by higher adjusted operating profit and lower net interest. We are raising our full-year top-line guide by $150 million to $10 billion with $110 million of this increase from favorable foreign exchange. The resulting underlying organic growth of 24% is driven by expected continued growth in the Americas and APAC, while we expect EMEA to be relatively flat. For adjusted operating profit, we are raising our full-year guidance to just under $2 billion, up 28% from last year. As Gio mentioned, this guidance assumes tariffs active on July 28th. We expect all other things being equal, a possible downside scenario from potential August 1st tariffs as currently understood, and things are changing rapidly and somewhat challenging to quantify but we believe that would still place our full year adjusted operating profit within our guidance range for adjusted operating profit full year adjusted operating margin is projected to be approximately 20 percent at the midpoint 60 basis points higher than last year despite tariff headwinds and 50 basis points lower than prior guidance we continue to drive margin improvement including positive price cost and productivity and implied in our guidance is four-quarter adjusted operating margin in excess of 23 percent once again keeping us on track to attain our long-term target by 2029 and finally on this page we are increasing our full-year adjusted free cash flow guidance to 1.4 billion dollars up 100 million dollars from prior guidance driving full-year adjusted free cash flow conversion to 95% as we continue to drive initiatives to optimize trade working capital. And when you piece it all together, the growth trajectory, the margin progression, and the free cash flow performance, these numbers certainly demonstrate the continued strength of our execution and our ability to drive significant growth while expanding margins. We talked a fourth quarter guidance slide in the appendix, and if you look at the exit rates across all financial metrics, we believe we should be very well positioned for a strong start to 2026. And with that said, I turn it back over to Geo.

Well, thank you, David. Thanks a lot. We go to slide 10. There we go. So, So some key thoughts are here to wrap up. Growth is certainly ongoing and it is here to stay. We have demonstrated the ability to meet our customer needs and to gain market share, delivering a 30% sales growth in the first half of 25. While this has required accelerated investment in engineering R&D, capacity and go-to-market, We are aligning execution to this speedier growth rate. We are vigorously addressing temporary margin challenges. This has my and my team's attention. I'm confident we will see constant improvement. We have raised 2025 guidance for adjusted diluted EPS, net sales, AOP, and adjusted free cash flow. The speed of technological evolution isn't abating, and the industry is changing quite dramatically. We're driving this change and helping to shape the future of data center infrastructure. Lastly, let me highlight two particularly exciting developments that demonstrate our technology leadership and innovation in the market. Let's start with our collaboration with CoreWeave, which showcases Verti's position at the forefront of AI infrastructure. With CoreWeave and Dell, we were the first to launch and deploy NVIDIA's GB300 NVL72. This follows our head start with GB200 NVL72 reference designs. Our infrastructure offering is always at least one GPU generation ahead, which is absolutely critical for our customers. And let me continue with our collaboration with Oclo. With the data center industry keenly focused on accessing increasingly large sources of power, power generation, our collaboration with Oclo is about making access to advanced nuclear power plants easier. data, working on power and thermal reference architectures tailored to Oklo's great advanced nuclear power plant technology, we will enable this to happen at scale and in ways that significantly enhance the overall data center efficiency. These collaborations demonstrate how Vertiv is actively shaping the future of the data center infrastructure working with the innovative partners to solve the industry's most pressing challenges while maintaining our focus on efficiency reliability and sustainability i conclude by saying that the industry is effervescent optimistically tense and driving acceleration we're raising our full year guidance and we are confirming our long-term margin objective. We are making sure we continue to lead the industry forward through this acceleration for the years to come. With that, let us start the Q&A session and over to you, Bricka.

Thank you, Gio. We will now begin the question and answer session. And if you would like to ask a question, you can do so by pressing star followed by one on your telephone keypad. In the interest of time, please limit yourself to one question And if you have a follow-up, please rejoin the queue. We will pause for a moment to compile the Q&A. The first question comes from Steve Tuzza with JPMorgan. Your line is open, Steve.

Hey, guys. How's it going?

Doing very well, Steve. How are you doing?

So just on the margin side, I think you're going to be exiting the year at like a mid-30s incremental margin, which I think is, you know, relatively, you know, something that we would target, I think, over the long term, and you guys have talked about. I know you're continuing to invest every year, and there's always some incremental friction as you're delivering at this rate, which is, you know, pretty dramatic. But is there any reason why we wouldn't think about 26 as, you know, a more normal year on margins, given your, you know, kind of easy comps in that exit rate?

Certainly, the direction of speed coming out of 2025 is encouraging in terms of the long trajectory, long-term trajectory. I was vocal in the script thinking in terms of continue to believe that our objectives in terms of long-term margins are correct. So I would think that you're not probably too far from what we think the future could look like. Thank you.

Thank you. Your next question comes from Amit Daryani with Evercore. Your line is open.

Thanks a lot. Good morning everyone. I guess, you know, I was hoping, Gio, you could spend a little bit of time on the strength that we're seeing in both your backlog and orders right now. And maybe just touch on two fronts. One, are you seeing a shift in duration of your orders right now? Or maybe just talk about the range of what that order book or backlog looks like. That would be really helpful. And then secondarily, can you just touch on the diversity of this backlog? You mentioned CoreView, I think, at the end of your comments. And certainly the NeoCloud seem to be ramping up in a much bigger way.

So I'd love to just understand, you know how do you have the duration of this backlog and then also the customer diversity that's perhaps starting to happen over here uh i mean i will take this as a one question let's move this way so uh two two aspects of your one question one is the um what what is the duration and what is the um the the mix in terms of uh uh time time frames of uh of our backlog and um and uh pipeline uh backlog is pretty much uh similar to what we have seen historically there is no kind of a either dramatic elongation or dramatic uh um shrinkage of uh of the backlog if anything what we see and it's uh it's quite reassuring we like it uh is that um Some of our customers would like to have staff earlier, and there is an appetite for us to deliver, if you will. When we can deliver, and we can deliver as we have demonstrated in the second quarter, we have increasing the customer base that is ready to receive. That's a good sign for the industry as at all. When it comes to orders, let's say top pipeline more than orders because orders and what I say backlog is pretty much like for like when the order is received. In a pipeline, we have a little bit of an elongation, which is a positive elongation. Don't think about anything that distorts the shape between, for example, what is next six months or next 12 months vis-a-vis beyond the next 12 months. But there is a little bit more elongated visibility. But again, nothing that dramatically changed the shape. We have a nicely kind of actionable pipeline that supports our growth ambition. There was an aspect about diversity. I'd say that clearly if we think about the part of the market that grows the fastest, We certainly think in what we call the core hyperscale. And you know that that is quite a large container for us. That includes certainly hyperscale, traditional co-location, sovereign, and definitely new So it's a well-balanced in that respect. Yeah, ready for the next.

Thank you. We now have Jeff Sprague with Vertical Research Partners. Please go ahead.

Hey, thank you. Good morning, everyone. I'm going to sneak an unrelated two-parter in here, too, if I can. Just first on tariffs and inflation, just given this kind of remarkable demand pulse you're seeing, do you have kind of the commercial leverage to fully recover tariffs? We're just talking about some kind of delay in terms of moving through the order backlog and converting to sales. And then I'm sorry, Gio, could you just maybe address a little scare through the market a couple of weeks ago on, you know, AWS, you know, delivering some kind of or developing some kind of liquid cooling application, how you put something like that in context to your business?

Well, I really have a hard time, Jeff. We can sign these two questions into one. So let me start from the AWS one. So in general, think in terms of hyperscalers having certainly a very strong opinion on how they want their infrastructure to be. Now, no two hyperscalers have the same behaviors. No two hyperscalers have the same design philosophy. But certainly, with every single hyperscale, you need to have a very strong relationship. And you have to be involved in the technology that very often, together with them, is developed. So I don't want to over-elaborate on the specific case, because I let AWS talk about that. But in general, think about us being always connected with hyperscalers. And as I said several times, it's very important to be in the labs with them, to have our engineers and their engineers working together. And that will bring good things about. That could be kind of a customization of products that are in our portfolio or us working on the technology exactly the way they want it. So I don't think there should be any scare. This is not an anomaly in the way the market works. And we are here to scale with our hyperscale customers. We are here to co-engineer with them.

Thank you. We now have a question from Nigel Coe with Wolf Research.

Thanks. And Gio, I promise I'll keep this to one question. No two-parters within one question, just one question, I think. Let's see.

Let's see.

Let's see. You be the judge. So can we just talk about wind rates? There's obviously a lot of speculation around the evolution to liquid cooling and lots of new entrants and the like. So just wondering, you know, in terms of your win rates, especially on the AI infrastructure side of things, how is your win rate comparing to the last two or three years? And here comes the end. Is there any change in the way that the hyperscalers are procuring equipment? And I'm just wondering if the system-wide approach is starting to gain traction as opposed to RFPs for specific components of the system.

So, in general, we will not go in the details of wind rates for AI infrastructure, not AI infrastructure. Remember that already, probably a year ago, we were saying, hey, being too analytical about what is AI, what is not AI, is false precision. But in general, we see good stability in our wind rate. Now, we should go project line by project line. We should go view by view, but in general, when we see things in aggregate, we have stability of wind rates, which is, of course, if you combine wind rates and pipeline, it's sort of a good sign. And we don't see a dramatic way or any significant way in which hyperscalers go about procuring their infrastructure component or their solutions and systems. And again, there are some hyperscalers who have been historically very much, oh, I want to design it and, yeah, consult with you as I design, and then you will be part of our, let's say, supply chain for the specific system. And there are others that sit with you and say, hey, these are my needs. what you want to do, how do we design around my needs, what you have around my needs. Clearly, most people think in terms of suppliers as multi-source for resilience, but then again, in that case, from that point of view as well, it is a customer-by-customer type of decision So, in general, nothing dramatically different, even as the technology of what they buy is moving with the technology of the industry, the technology of the industry.

Okay, thank you.

Thank you. We now have Scott Davis with Moneus Research. Please go ahead when you're ready.

Good morning, everybody. I want to drill down if we can into the operational inefficiencies and just, Gio, if you can just talk a little bit about root cause. You know, are these the standard things of kind of, you know, premium freight and overtime labor and third shift inefficiencies and stuff like that? Or are there other kind of hiccups that you're having while you're adding capacity as far as getting components, getting, you know, getting tooling and stuff like that? I mean, just a little bit more granularity, I think, on where you're seeing those inefficiencies, I think, would be helpful. Thanks.

Yeah, I think it's a combination of things, Scott. And we have addressed that as we're going through the slides, but I really like to think about it in three ways. One is there is a tariff transition. I mean, we talked about tariff, setting tariffs, et cetera, and a steady state. But when you transition from a certain footprint of supply chain and manufacturing to another one that is more adjusted to the tariff, you have to involve new sources. Sometimes you have to have new certification. You move a backlog from one place to another. you have stops and goes that of course inject inject inefficiency and some of that of course you can fight and and you and you and you do and we do some other is what you have to face if if if you then think in this ongoing anyway but ongoing and overlapped uh to a situation in which we're growing at 34%, then you have that compounding with exactly what you were saying. So you have to enable that growth more over time. You have premium freights, and that is the premium freight for that, is the premium freight for the tariff reconfigurations, probably a combination of the two. So clearly, all these two elements, both these elements, sorry, both these elements of the tariff transition and the strong acceleration are normalizing, and are normalizing as we make more capacity available, as we design the way we operate and align the way we operate to a higher level of growth. So you were talking about retooling. Let's talk about retooling. That would probably be more a tariff transition, using it to get extended a little bit the definition of that. But then there will certainly be the overtime, the backlog movements, the the, um, that, that, that, the phrase. Um, we talked about, uh, some other EMEA specific, uh, um, uh, operational, uh, um, executional, uh, uh, challenges that, that are specific to, um, to, to, um, a part of our business that we are addressing, you know, with, uh, with, with focus and, dare I say, with my direct involvement on certainly more than a weekly basis. All things that, as I was saying, we believe will be in full control.

Thank you, guys. I appreciate it.

Thank you.

Thank you. Your next question comes from Andrew Obin with Bank of America.

Yes, good morning. Hey. Good morning, too. Yeah. So one of the things that sort of came up last quarter during various channel checks is that there are a lot of teething pains on liquid cooling systems in the industry. And I would guess that this sort of bodes well for service contracts. And any color or commentary on growth rates for thermal service contracts or liquid cooling, because I think at the analyst day last year, people have sort of thought that this could be an attractive growth opportunity for Vertif.

Yep. Thank you, Andrew. So certainly, let's say, if you think about the cooling, and you go back to what I was saying when we're going through slides, the degree of intimacy interoperability between a cooling system, liquid cooling system, and a multimillion-dollar rack is enormous. And the system is quite complex from a technology standpoint, from a calibration balancing standpoint. So we are fully convinced, and we see that indeed being the case, that our service strength is really making a difference in the deployment of liquid cooling at scale. Let's not forget scale. It's a big element here, but also during the life cycle of the liquid cooling system. So, yes, the answer is straight, yes. We believe that um uh liquid cooling is helpful and will uh uh be certainly favorable in terms of our thermal services thermal contract uh growth is an area we we truly believe will be will be strong going forth thank you thank you we now have michael elias with td cowell on the line great thanks for taking the question.

Just curious, as you think about the evolution of what goes into the data center, i.e. increasingly looking at taking a medium voltage directly to the rack and rack densities getting up to one to two megawatts per rack, how do you think about your current product footprint and any ways that you need to evolve your offering in order to keep pace with the evolution inside the data center? Thank you.

Well, thanks, Mike. I think this is certainly something that is happening is very clearly in our roadmaps. And you're right. Just as we saw the thermal or the cooling infrastructure evolve, and it's not finished, of course, and continue to evolve, by the same token, the same will happen on the power side of things. You heard us, you probably heard us, people heard us vocally support NVIDIA's plan to have a higher, let's say, voltage type of rack power distribution in general. But this, of course, will have reverberations across the entire power infrastructure. So, yes, the portfolio is evolving. What we are really happy about and we nurture very carefully and very intensely is the relationship we have with the key players, be them silicon or hyperscalers, by which we together define what the future will be like one, two, three years out and align our portfolio and our technology. If you think about this kind of a higher voltage DC power, that's something that, of course, leverages very well our decades-long DC power technology. But you can think about this evolution, again, I want to stay on the power side, as something that is even broader. So as data centers will become more and more self-sufficient from a power generation standpoint, and we know that that is certainly a trend, not the sole trend, but it's certainly a trend, well, then you'll see, back to my point earlier, as you see that the power train, the power infrastructure will need to be very well orchestrated exactly from power generation all the way to inside the rack and there will be various architectures that really will depend on again the type of philosophy and also the type of views of a certain data center how much flexibility you want to have two different type of loads so long story short the system is becoming more important the system is becoming more complex and this is an exercise that that we are of course engaging in and we are very excited about thank you thank you we now have Nicole de Blais with Deutsche Bank please go ahead yeah thanks good morning guys good morning um i just had a question on margin so you

know the guidance implies like a 10 basis points year-on-year decline in margins in the third quarter and then a pretty big step up to like over 200 basis points of expansion in the fourth quarter so probably a question for david but can we kind of walk through some of the puts and takes that give you guys confidence in that step up. Thank you.

Yeah, I think it's two things, Nicole. Number one is the benefit of operational leverage. So, and you can get our exact Q4 numbers in the appendix, but there's a over $200 million increase in sales expected in Q4 versus Q3. So that definitely, you know, provides the benefits of operational leverage. And the other bucket is simply addressing the operational inefficiencies and execution challenges that we've seen in Q2 into Q3. Once again, we believe all of these should be resolved in Q4. So it may be oversimplifying things, but I think those are the two buckets that drive the improvement from Q3 to Q4.

Simple is great. Thanks, David.

Thank you. We now have Amrit Matura with UBS. Yolani is open.

Thanks, Operator. Good morning. Good morning, everybody. Just, Gio, at the front of the call, you had talked about the regulatory environment getting better for AI infrastructure, and that was being reflected in your pipeline. Can you just give us a little bit more color on that and, you know, what specifically is getting better? And also just, you know, I know you don't like commenting on orders for obvious reasons, but you have been quite generous in talking about trailing 12-month orders and the expectations there. We're getting past these tougher comps here where I think there looks like a possibility for TTM orders to reaccelerate. I'm wondering if you would engage with me in that type of conversation.

Another case of a very clear two questions disguised as one. So let me address the regulatory environment and be patient with me. So this is in general true. If we think about the U.S. environment, of course, we see a lot of attention from the administration for the sector. is not just the sector in terms of data center as not itself, but elements that are then conducive very much to data center growth that is all around power and power grid and power generation. So that's what I referred to. But also, my comment was a little bit oriented towards me, where we see national governance, the EU, but also places like the UK, more aware of the importance and the strategic importance of AI. So that is slowly, as we said, slowly, but surely starting to head in the right direction. One thing that I haven't mentioned this time that I'm fully convinced about is that one of the reasons why Europe is maybe a little lagging, you know, we're talking about a coil spring, is that so much kind of attention and time and resources are really focused on North America and the U.S. Sometimes they're the same players, and the same players that play both in the U.S., North America, and Europe. And it's even more so true than it is, if you will, with Asia, its own dynamics and positive dynamics, I'm going to say. So you will see that a lot of the attention is absorbed by what happens in the U.S., and we believe times will soon be mature for an acceleration in Europe and India. what about the trailing 12 months that's the second question that's like that's that's the second uh question uh and uh as as we said we we we would i would be guiding i would be guiding uh um orders and that's not what we did all right thank you and it was the second question be patient with it thanks thank you we now have a question from chris schneider with morgan

Stanley, your line is open.

Thank you. I wanted to ask on gross margin, which has obviously come under some pressure in the first half, after a period of very healthy expansion. Is this only a function of tariffs and some of the inefficiencies discussed earlier, or are there also headwinds from whether it be mix or new technologies ramping, i.e. liquid cooling? And when you guys look at you know, the backlog, is the expectation that gross margin returns to expansion in Q4 and that kind of helps provide that operating lift, or is that still a little bit further out?

Thank you. A couple of things I'd like to please add. We are happy about the new technologies, and I think the new technologies corroborate our value story and certainly our margin story. As we explained, there are tariff elements and certainly growth, inefficiency in the operational aspects that we, I think, discussed. Those are really the main elements. And when it comes to margin and the backlog margin, because we do not go in those level of details, but certainly we factor the margin in our backlog when we talk about when we give guidance in general. i don't know if you want to add anything yeah just on the topic of mix you know mix could be a factor quarter to quarter it you know um you know based on larger projects but i i'll tell you for the full year um margin will not have a negative i'm sorry mix will not have a negative impact on our margin if anything it will be slightly positive thank you appreciate that

Thank you. We now have the next question from Andy Kupulowicz with Citigroup. Please go ahead, Andy.

Good morning, everyone. Hi, Andy. Gio, I think in the past you said that the market and Vertiv are trending toward the high end of your 15% to 17% growth, CAGR, Fibra, Scalar, and Co-location revenue growth through 29% and your 12% to 14% growth for Vertiv. But given the recent order momentum, are we thinking that growth could be even higher, mostly higher rates, especially given you're seeing a broadening of AI spend, I think, into sovereigns or enterprise? Or would you say the order ramp has been more what you've been expecting, maybe just slightly faster?

I think it would be early to think in terms of, let's say, a correction or a change in our, let's say, market growth expectations. I think it would be premature. Certainly, we like what we're seeing in terms of market demand. And certainly, going back to the punch, we're making that range for hyper and colo that we gave, the 15%, 17%. We're probably thinking about the upper end. As usual, we continue to look at the market, to evaluate the market, and now it would be premature. Sure. Certainly, as we're saying, in this market, we are taking market share, and yes, we are happy with the trajectory. But again, we're not even shocked in terms of that, because we've been talking about our pipeline getting stronger for quite some time. And again, not commenting on any specific quarter because of the lampiness that we have several times discussed. We think that from a trailing 12, the momentum is the right one. It is momentum that certainly implies market check-in.

Well, I tried. Thanks to you.

Thanks.

Thank you. We have a question from Mark Dennelly with Goldman Sachs. Please go ahead.

Yes, thank you very much for taking my question. You said you expect to generate about $1.4 billion of free cash flow for this year and plan to use about $200 million for the Great Lakes acquisition. Can you speak to your priorities for the rest of the free cash flow and if you expect M&A to become a more regular part of your capital allocation framework from here?

Well, thank you, Mark. But certainly M&A is an important element in our capital allocation strategy and certainly in our value, more broadly speaking, value creation model. And we've been very vocal about that. We're happy about what we have recently announced. So it is an important part. So, again, it's an important part that we address with keen focus. We have a strong process and a very active pipeline. What exactly will happen would be obviously super premature to say, but we're not shy and we'll not be shy if the right timing and the right thing mature to the point that we can action. So I am certainly pleased with how much stronger our engine in this respect is. So I don't want to predict anything right now, but certainly we have the means, we have the credibility and we have the process in place. Thank you. Thanks a lot.

Thank you. Our final question, I apologize. Our final question comes from Noah Kay with Oppenheimer. Your line's open.

Oh, thanks. So, Gio, you talked at DCB earlier this week about the trend toward modular and prefab solution as really kind of accelerating. And I would love to understand to what extent your backlog has started to remix in that direction and perhaps whether we can even tie that trend to the demand acceleration you're seeing.

Well, thank you. That is certainly a trend that we see. We know that the industry needs speed, and speed in construction is paramount for success for our customers. But also, as I said several times, this is the construction industry. And if you have to build very, very complex systems like data centers on site at speed, then there certainly are challenges, shortages, manpower, skilled labor shortages, and surely things can be done better in a prefabrication setup and mode. So, yes, we see an acceleration in the modular business. Don't think the modular business as something else from what we do. for us, modular business is prefabricating a lot of our technology. So we're not just a regular kind of a integrator. We indeed are absolutely not an integrator. We are prefabricating the technology that we own. And that makes a big difference. So it's not like, ooh, thermal is going down, power is going down, and prefabrication is going up. No, it is really integral. It's almost like a wrapping around in our technologies and one that can create a lot of value to our customers. And this can be multiple things. If you take our smart run, our smart run that I was talking about earlier, you will have power racks, power distribution. You will have secondary fluid network. You can include there everything liquid cooling, busways, the controls, you name it. So it's really a way to package increasing the value that we deliver to our customers.

That's very helpful. Thank you. Thank you.

Thank you. This concludes our question and answer session. And I would like to turn the Back over to Geo for any closing remarks.

Well, thanks a lot. And thank you for all the questions and the time today. Certainly, it's worth reiterating how exciting I am that we are about future of Verti. We are demonstrating our ability to deliver a strong growth and profit, even in the face of a complex operating environment. Certainly, I'm pleased we have progress. and, but you know, never, never satisfied. The market opportunity at the head of us is significant, certainly driven by the accelerating digital transformation and the insatiable, there I say, demand for data center infrastructure. We believe Vertiv is uniquely positioned to capitalize on this opportunity with our complete portfolio, deep customer relationships, and strong execution capability. So overall, I want you to know that I and the Vertiv team remain laser-focused on delivering for our customers and investors. The future has never been brighter, and I'm excited to continue this journey with all So thank you, and have a great rest of the day.

Thank you. This concludes today's conference call. Thank you for attending today's presentation, and you may now disconnect.