Earnings Call Transcript - VRT Q1 2024

Operator, Operator

Good morning. My name is Jordan, and I'll be your conference operator today. At this time, I'd like to welcome everyone to Vertiv's First Quarter 2024 Earnings Conference Call. Please note this call is being recorded. I'd now like to turn the program over to your host for today's conference call, Lynne Maxeiner, Vice President of Investor Relations.

Lynne Maxeiner, Vice President of Investor Relations

Great. Thank you, Jordan, and good morning and welcome to Vertiv's First Quarter 2024 Earnings Conference Call. Joining me today are Vertiv's Executive Chairman, Dave Cote; Chief Executive Officer, Gio 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.

David Cote, Executive Chairman

Well, we're pleased to bring a very good morning to our investors. Our performance continues to strengthen. Demand is clearly accelerating, and we're well positioned to capture the growth and to deliver great returns for our investors. We demonstrated the flexibility of our capital deployment strategy, initiating an opportunistic share repurchase in the first quarter, and our current cash flow generation profile provides wonderful opportunity. We've made great progress, but our focus is on how much further we still have to go. Gio and the team are working on process improvement everywhere. Hard work doesn't pay off with our results, so you will see the results in the orders and sales growth, profitability, and cash generation. We intend to build a track record of consistency over many years. We're well positioned to further differentiate and gain competitive advantage with the technology shifts underway in the data center industry. Our goal is not just to be better than we were last year or the year before but to be better than everyone at serving our customers and running our business at world-class levels. Essential to accomplishing that is creating a high-performance culture. We can't be great without it. That high-performance culture is starting to take hold, and we are still very early on this journey. I'm excited about the year ahead. It started off strong. And I'm more excited about 2025 and beyond and the opportunity we have to continue to create tremendous shareholder value. We haven't done yet. I'm also enjoying my discussions with Gio. He, in each meeting, is saying, for my next trick, and it's working, and I'm enjoying it. So with that, I'll turn the call over to Gio.

Giordano Albertazzi, CEO

Thank you very much, Dave, and good day, everyone. We go to Slide 3. And as Dave mentioned, we had a good start to 2024. Q1 sales were up 8%, and we saw high single-digit growth across the three regions. Our orders grew 60% year-on-year and 4% sequentially. More to come on Slide 4. This is an indicator of good market demand and our very relevant market position. The strength in order drove a very strong Q1 book-to-bill at 1.5x. It's important to note that most of the orders overage in Q1 is for deliveries beyond '24. Most of the acceleration comes from large orders, which typically have longer customer-requested lead times. Adjusted operating profit was $249 million, corresponding to an adjusted operating margin of 15.2%, a significant $73 million and 370 bps improvement year-on-year, which demonstrates we are progressing on our roadmap to operational excellence, as explained at our Investor Day. Our adjusted free cash flow was $101 million, an improvement of $76 million from Q1 last year. In Q1, we repurchased 9.1 million shares at an average weighted price of $66 a share. This included buying back approximately $8 million of the shares from Platinum Advisers as they exited their position in Vertiv. We deployed $600 million of cash to do those share repurchases. We believe it was a favorable time to do so. Our net leverage at the end of the first quarter ticked up slightly to 2.2x driven by the opportunistic share repurchase in Q1. Our '24 guidance suggests that we will return comfortably to our targeted 1x to 2x range as we make our way through the year. We again raised our full-year guidance and expect full-year '24 organic growth of 12% and adjusted operating margins to expand to 17.7%. Overall, good progress towards our long-term target of 20-plus percent. I am pleased with the start of the year and I'm very encouraged by what we see in the data center market and our positioning within that. Let's go to Slide 4 now. As you may have noticed, we did not include the market environment slide this quarter, as it becomes difficult to differentiate shades of color for the market over very short periods of time, and our last call was just about two months ago. We will continue to provide a view on how we see the market in our future earnings releases and in our accompanying remarks. Certainly, we have seen a very strong data center market environment, and we feel we have a unique vantage point: our profile of 75% data center exposure and our decades of experience serving the industry. It is an industry that has reliability at its core. And during times of technological transformation, as the one underway now with AI, our customers lean on the knowledge strength Vertiv can offer. Advanced technology, deep domain expertise, global scale, and 24/7 local service globally; these are true differentiators we have built over the decade serving the data center industry and understanding its truly unique requirements, which is not easy to replicate. So if we look at the left side of Slide 4, we see extremely strong order growth, as we said. Pipeline velocity clearly increased, as evidenced by backlog being up $800 million in the first quarter. This acceleration brought into Q1 some orders we expected for future periods. It is also clear that AI is starting to scale, and that's particularly true in the Americas. We already explained the accelerated dynamics of large projects. So it is no surprise that most of the impact is on future years, which gives us better visibility as we think about the years ahead. We anticipate orders will remain strong, but I want to caution that 60% order growth is not the new expectation. There are reasons specific to Q1 that supported that very high level of order growth. For example, Q1 was our easiest comparison given that Q1 '23 orders were down 33% year-on-year. The comparison will get tougher as '24 progresses, and precise timing on orders can fluctuate. So while I don't want to suggest false precision, seeing orders down Q1 to Q2 sequentially would not be a surprise. It is expected and not particularly worse given the very high absolute value of Q1 orders. We are anyway expecting good order growth year-on-year in Q2. Our book-to-bill of 1.5 is very strong. Also here, we're not anticipating that this is the new normal. We believe book-to-bill should remain above 1x throughout the year, which suggests that the absolute dollar of orders we are anticipating remains at high levels, given the sales guidance range we provided. How that looks quarter-to-quarter depends on multiple factors like pipeline velocity and customer build schedules. On capacity, I'm comfortable with the investments we are making, and it will support our customers. As a reminder, we have 22 manufacturing plants globally. As explained in the past, we have a stringent cadence in spending and a rigorous process to manage capacity expansion decisions. We previously provided a $75 million to $200 million range for CapEx this year. We expect to be at the high end of that range. So please assume $200 million CapEx in '24, still comfortably within the 2.5% to 3% range of sales we provided at our investor conference. The ramp-up of production of liquid cooling globally continues as planned, and I'm happy to report we have production underway already at two of the three plants we shared with you we were planning to activate in '24. We are on track with the capacity ramp-up as shared in February. We continue to see strong momentum with AI-related orders. While we are not disclosing specific details on our liquid cooling orders, or more broadly AI-related orders, we did see the pipeline for AI projects more than double in the last two months. We are starting to see AI scaling in North America, consistent with the GPU road maps, whereby next-generation chips will require liquid cooling. The pipeline is reflecting that technological shift, not only in terms of liquid cooling but in terms of the whole powertrain and thermal chain. We are working closely with our customers to get their infrastructure ready for what is ahead. Now to the right side of Slide 4 still. Supply chains continue to operate as expected, not without an occasional bump, but that's where our constantly improving supply chain resilience comes into play. We continue to build out our supply chain to support deployment of liquid cooling technology with the same rigor and resilience we have built in our existing supply chain. The geopolitical environment is becoming increasingly complex. We are working to constantly increase the resilience of our business. Looking at material inflation, it is a mixed bag, but we know things can change quickly. We continue to believe we are in an inflationary world, and the price/cost plans we're executing reflect that. Let's now turn to Slide 5. There is an intense focus on thermal management lately, and rightfully so. As the market leader in data center cooling, we are uniquely positioned for that opportunity. But power is also very central to the evolution of data center design and to enable AI deployment and fuel the overall market acceleration. Vertiv has a complete power offering, the whole powertrain to serve the data center market. We are quite relevant in both the power distribution and power quality segments of the data center market. The acquisition of E&I expanded the Vertiv portfolio to include medium-voltage switchgear, low-voltage switchgear, and busway offerings. We often get asked about capacity. We talked about liquid cooling in February, and we want to spend a minute on power now. We are expanding our operational capacity significantly across the powertrain to support customer demand. A good example are busbars and switchgears. We have already doubled our capacity since we acquired E&I at the end of '21, and we are on track to double it again by the end of '25 to support the growth we see ahead. You heard me talk about continuing to maintain a circa 25% capacity we have room to cover demand peaks. This is on average how we continue to manage capacity. The ability to operate end-to-end across the powertrain similar to what we do with a thermal chain is a testament to Vertiv having the most complete digital infrastructure solution. This is an important reason why we are a partner of choice for our customers and work with them on designing the infrastructure for the high-density future. And with that, David, over to you.

David Fallon, CFO

Thanks, Gio. Turning to Page 6. This slide summarizes our first quarter financial results, a strong performance to start the year. Organic net sales increased 8% with all three regions growing relatively consistently in the high single digits. Sales were above the high end of guidance with EMEA being the primary driver of that overperformance. Adjusted operating profit of $249 million was $73 million higher than last year's first quarter mainly due to favorable price/cost and higher volume. We exceeded the high end of guidance driven by the sales beat and higher productivity than expected in our model. Our adjusted operating margin increased 370 basis points to 15.2%, further demonstrating our continued focus on operational excellence, and that is certainly driving results. But as we have mentioned, there's still plenty of opportunity and much to do. Moving to the right. Our first quarter adjusted diluted EPS was $0.43, $0.19 higher than last year, primarily driven by the higher adjusted operating profit and also a small tailwind from income taxes. On the far right, adjusted free cash flow was $101 million for the quarter, which was four times higher than last year's first quarter with the higher profitability flowing through to free cash flow. As Gio mentioned, net leverage was 2.2x at the end of the quarter. And despite the $600 million share repurchase, net leverage is only slightly higher than the 1.9x at year-end as we continue to expand EBITDA while generating cash. Based on forward expectations, we anticipate net leverage to decline to 2x or lower in the third quarter, if not sooner. As mentioned, the $600 million, 9.1 million-share repurchase in the quarter included $525 million and approximately 8 million shares from Platinum as they exited their position. All in, we repurchased shares at an average price of $66, which looks pretty good at this point. Turning to Page 7. This slide summarizes our first quarter segment results. We had relatively balanced growth across the regions. Americas grew 7%, driven by hyperscale and colocation. This growth was on top of an extremely challenging comparison to the first quarter of 2023, where Americas grew over 60% from the prior year. Adjusted operating margin in the Americas expanded 340 basis points from last year's first quarter to 20.3%, with the increase primarily driven by favorable price/cost and also productivity. APAC sales increased 9% organically, a stronger number than we have seen in this region in quite a while with this growth driven by continued strong market demand in India and the rest of Asia, with both those subregions growing low double digits. Although not as strong as the rest of the region, China sales grew low single digits in the quarter, which is encouraging. As we see China stabilizing, albeit at low levels, we expect China growth to remain stable but muted throughout 2024. APAC adjusted operating margin increased 380 points driven by fixed cost leverage and improved contribution margin in China as we continue to focus on costs given the market headwinds there. EMEA grew 10% organically, which was higher than anticipated, partially driven by strength with switchgear and busbar. EMEA adjusted operating margin expanded 510 basis points to 18.4%, driven by fixed cost leverage and improved contribution margin both from price cost and productivity. Corporate costs of $40 million increased $7 million from last year's first quarter, primarily driven by a one-time benefit last year. For the full year, we expect corporate costs to be in the range of $150 million to $160 million. Next, moving to Slide 8. This is a look at our second quarter guidance. We are expecting organic sales growth of approximately 12%, with Americas up mid-teens, APAC high single digits, and EMEA low double digits. We anticipate an $18 million year-over-year foreign exchange headwind in the second quarter as the U.S. dollar has strengthened against most foreign currencies over the last several months. We expect second-quarter adjusted operating profit between $315 million and $335 million and adjusted operating margin of 16.9%, up 240 basis points at the midpoint with expected benefits from price/cost partially offset by continued growth investments. Next, turning to Slide 9, our full year '24 guidance. Based upon a favorable start to the year and visibility into a strong sales pipeline for the rest of the year, we are increasing estimates for organic sales growth from 10% at the midpoint to approximately 12%, with higher expectations across all three regions. In addition, we are increasing the midpoint of adjusted operating profit guidance from $1.3 billion in our prior guidance to $1.35 billion, primarily driven by contribution margin on incremental sales. As a result, we are increasing midpoint guidance for adjusted operating margin to 17.7%, with the primary driver there being fixed-cost leverage. The 17.7% full-year adjusted operating margin guidance demonstrates our continued relentless focus on operational improvement across the business and is a stepping stone on our path to 20%-plus. But as always, we are pleased but never satisfied. Our projected 2024 adjusted diluted EPS of $2.32 at the midpoint represents over a 30% increase compared to last year, primarily driven by the higher adjusted operating profit. Now there is some noise in our adjusted EPS and effective tax rate calculations for the first quarter and also for the full year, to a lesser extent. These are primarily driven by accounting requirements around the $177 million first-quarter charge from the change in fair value of warrant liabilities. Instead of investing valuable time on this call, we provided additional information on Slides 21 and 22 in the appendix, and we'll be more than happy to answer questions and review this information with analysts and investors after this call. Lastly, moving to the far right on this slide. We are holding the midpoint of our adjusted free cash flow guidance at $825 million, which is approximately 92% free cash flow conversion for the year as we expect higher adjusted operating profit to be offset by higher taxes, higher net cash interest as we use cash for first-quarter share repurchases. As Gio mentioned, we are increasing our full-year estimate for CapEx to $200 million to further support capacity for future growth. And with that said, I turn it back over to Gio.

Giordano Albertazzi, CEO

Well, thank you, David. Let's go to Slide 10. I was at the Data Center World Conference last week. I would say the excitement was absolutely palpable. There were very clear signals from the data center market when it comes to demand. Our thought leadership was on display in power, thermal, and specifically liquid cooling as we shared insights and collaborated with some of the industry's technology leaders to chart the roadmap for the future of digital infrastructure. The value of know-how strength in serving this market today is unprecedented in my long industry experience. We like that a lot as we become more central to the enablement of AI deployment. We are scaling our global capacity to match the ambitions of the industry. And you need broad shoulders to keep up with that pace. We are moving fast and mobilizing around the globe. Our ability to continue to execute well is grounded in the high-performance culture we are creating and in the Vertiv Operating System we are continuing to deploy. The intensity of what we do is rapidly increasing, and the organization, let's continue to do things right and fast. This is the expectation I am driving every single day with a relentless focus, holding the entire Vertiv team, and me in the first place, accountable to deliver results. So the winners will be determined by their portfolio and their strength of execution. I believe you may, we fully intend to keep winning. With that said, over to you, Jordan, for the Q&A.

Operator, Operator

Our first question comes from Jeff Sprague of Vertical Research Partners.

Jeffrey Sprague, Analyst

I wonder, Gio, if you could just give us a little bit more color on how the AI complexion is playing out as it relates to your suite of products. You've said in the past, it's early days, and it's a bit early to know what really changes in your customers' configurations and the like. Is there anything that you would point out or add incrementally from your general opening comments there?

Giordano Albertazzi, CEO

Jeff, thank you for the question. So as I said, we see an acceleration that is certainly quite convincing in the whole AI space. When I was referring to doubling pipeline size in the last two months, that in and of itself is a very strong signal. The type of demand that we see is certainly around liquid cooling. And when we think about liquid cooling, we think something that is consistent with the capacity curve that we provided a couple of months back. But truly, the demand is across the board. It's across the board in terms of the entirety of the powertrain and thermal chain. So just like we were expecting, there are some technologies that are specific to high-density compute or anyway GPU-based compute, but there is a market demand expansion that is simply more megawatts being deployed, which is impacting the entire range. Again, it's not just one piece of the portfolio; it's the entire range. It's still early in many respects for the industry, and the industry and the design of future structures is still unfolding, but we are pleased to be able to follow our customers and support them across the entire spectrum of their decision-makings.

Jeffrey Sprague, Analyst

And then just kind of widening the lens on supply chain. So it sounds like yours is where you need it to be. I'm sure you're working hard to keep it that way. But just kind of the general big picture here, Gio, in terms of site preparation, craft labor, utility feeds to deliver these megawatts and the like. What are you seeing or hearing from the field in terms of the ability to drive revenues higher into 2025 and 2026? It seems like the demand is there, right? My question is really about being able to put the product in the ground.

Giordano Albertazzi, CEO

Jeff, I'll be very brief considering your second question. The situation has not dramatically changed from what we were saying last time. Again, the industry is growing. Could there be a bigger growth in absolute terms? Yes, but let's not forget that this is about building data centers. This is about getting permits and getting power. So there is a lot of public debate about this. So I'll refer to that.

Operator, Operator

Our next question comes from Amit Daryanani of Evercore.

Amit Daryanani, Analyst

I guess, Gio, I was hoping you could put some context around the order growth number at 60%, which is extremely impressive. I get the compares a bit easier. But nonetheless, I was wondering if you could talk about how much of this growth you think is driven by the duration expanding versus unit uptick that's happening. Is there a way to think about those two metrics? And then as you think about these orders becoming revenues, should we start to think about revenue growth accelerating versus your longer-term targets in '25 and beyond at this point?

Giordano Albertazzi, CEO

Well, good one. Amit, thank you for the question. Certainly, we're very happy about our order number. The majority of the order overage, as I was saying when we were going through the slides, is indeed coming from large projects. What we have seen in the large projects is that there has been some extension of the requested lead time or delivery date. So in the past, I was more talking about a 9 to 18-month window in terms of requested delivery. Now what we are serving is a little bit longer. So think in terms of 12 to 18 months or so. That has been a change in the window of coverage. But it's good. I mean we have more visibility on what our customers are doing, and that gives us the opportunity to execute more orderly and punctually. What does that mean in terms of the future years? It's probably premature. But again, while we stick to the conversation we had at Investor Day in terms of the general dynamics of the market, what we see today is fairly on the upper end of the ranges that we shared with you. So there's positivity in that respect.

Operator, Operator

Our next question comes from Steve Tusa of JPMorgan.

C. Stephen Tusa, Analyst

Just a question on the market, I guess. What's your estimate of the quarterly rate of gigawatt adds for the industry here in the U.S., the kind of the run rate we're at just roughly?

Giordano Albertazzi, CEO

Look, going into this detail would require giving an updated view of what we shared with you back in at the end of November. So I will return to comments I made answering Amit. We see that the projection and expectations that we shared with you are still valid. We gave some headwinds. We see that the tailwinds that we shared are happening. We're happy with what we see. There is so much debate and literature about how many gigawatts have been deployed in North America and other parts of the world, I think it's better we reference that as the market is still in a very dynamic situation right now.

C. Stephen Tusa, Analyst

Okay. And then just on orders, I would assume from this level that backlog will absolutely continue to grow every quarter. I mean you talked about the book-to-bill of 1.5 not being sustainable, but that's kind of a wide range. Should we assume that it should remain above 1x every quarter? And then just I know you're not going to get particular here. But is the price at this stage now decelerating, stable or accelerating relative to what you guys have talked about in the fourth quarter?

Giordano Albertazzi, CEO

So second and third question. On the orders and backlog, we believe for the remainder of the year, we'll be on or above 1x when it comes to book-to-bill. Whether that happens every quarter, it's a little premature to say. There are a lot of dynamics at play. Price, I go back to the comments we made in February. What I said then was that we're not disclosing price. We're talking about price/cost. We're satisfied with the price/cost that we see and certainly is consistent with the guidance we are providing now.

Operator, Operator

Our next question comes from Scott Davis of Melius Research.

Scott Davis, Analyst

So I know this is a little bit of an obvious question perhaps, but a little color would be helpful. And as it relates to your book-to-bill, is the percentage of cooling as a percent of your backlog increasing proportionally with these new chips like the B200, the GB200, these NVIDIA chips that I don't know much about, but I read about them? It seems that they require significant cooling, as you said in your Investor Day, but are you seeing that exact dynamic in your book-to-bill?

Giordano Albertazzi, CEO

Yes, without going too much into the details, the direction the industry is going is certainly not defined by a single quarter's worth of orders mix. We are happy with the trajectory of liquid cooling. But when we look at the mix of our bookings, we see it balanced across our portfolio: the cooling, power, modular, and service. So a pretty balanced picture. Think back to what we were saying; there's an element of TAM expansion on the thermal side, the cooling side, as we mentioned, moving between $2.5 million and $3 million per megawatt to $3 million to $3.5 million. So that is probably also something that one may assume is underlying. But again, it's early to judge based on just one quarter. Regardless, we are happy with the trajectory of our liquid cooling orders.

Scott Davis, Analyst

Okay. That's interesting. And Gio, as a follow-up in your liquid cooling capacity, is there anything particularly complicated about the production processes or manufacturing? Is this kind of in your wheelhouse? Or is it a little bit of a different animal raising the risk profile of adding capacity?

Giordano Albertazzi, CEO

We've been manufacturing, engineering, and designing thermal management products across the board, whether it's liquid or refrigerant, whether it's small or large chillers or whatnot. It certainly requires our know-how, but we see this knowledge as being consistent with our experience and certainly also benefiting from the experience of the team we onboarded recently. Overall, we feel confident in the consistency of this technology with what we have learned over the decades.

Operator, Operator

Our next question comes from Andy Kaplowitz of Citigroup.

Andrew Kaplowitz, Analyst

Gio, can you talk about what's going on by region? You mentioned some encouraging low single-digit growth in China. So has it turned the corner there? And then is India becoming big enough now that it matters for your Asia Pacific growth moving forward?

Giordano Albertazzi, CEO

Well, in general, we clearly closed 2023 with about 55% of revenue in the Americas. So the Americas is and continues to be the biggest region. If you think about AI, it is predominantly in the Americas, particularly North America, and the Americas will continue to be very strong. We like what we see in Asia. David was explaining the situation in China; so some encouraging early signs, but it's early to say. EMEA may be a little behind in AI. That's something I commented on earlier, estimating around a 9 to 12-month lag. Again, we are seeing some positive movement in Asia. India is an important location for us, both in terms of manufacturing capabilities and capacity. Thus, we are pretty optimistic that AI will activate the region.

Andrew Kaplowitz, Analyst

And Gio, just a quick follow-up. I think we know what hyperscalers are doing. In November, you mentioned the split in revenue, which was 50-50 with enterprise. Is that now tipping more to hyperscalers given their growth? What are the enterprise customers doing?

Giordano Albertazzi, CEO

Just to caveat that question, when we talk about hyperscalers, we typically combine hyperscalers and colocation. We do not provide separate numbers. That's kind of the big players. A lot of acceleration, as I said last time, is happening in that part of the business. Also, back in November, when we provided projections of market dynamics, we saw that part of the market accelerating the most. We still see much of that happening. I am convinced the AI acceleration will eventually also benefit the enterprise part of the market. But when that happens is still a bit premature to say.

Operator, Operator

Our next question comes from Mark Delaney of Goldman Sachs.

Mark Delaney, Analyst

I think incremental margins are now tracking to be in the high 30% range for 2024 based on the new annual guidance compared to the mid-30% range that had been assumed previously. Is that type of leverage sustainable beyond 2024, especially with Vertiv's bookings and backlog coverage giving it more visibility and putting it in a better position to execute on price/costs?

David Fallon, CFO

Yes. So this is David. For the full year, our incrementals are estimated to be right around 40%. It was 62% in the first quarter. We guided 38% in the second quarter. It ramps down as you go through the year, primarily driven by some more challenging comparables from a contribution margin year-over-year in the second half. However, we are pleased with those incrementals we're guiding to. Consistent with what we said in the November Investor Day, our long-term target is to achieve 20%-plus AOP in the timeframe of '26 to '28. If we reach that earlier in that period, in '26, we estimate mid-30% incrementals, maybe a little below, but those incrementals become more challenging each year that we increase that contribution margin. Regardless, we are still very optimistic that we'll be able to hit that long-term range in that timeframe.

Mark Delaney, Analyst

That's helpful context. My other question was thinking about the addressable market opportunity. You talked about the full powertrain on Slide 5 of your deck and showed a variety of opportunities to address. Can you help us understand how much of that addressable market Vertiv can serve today? Are there areas you can augment with either R&D or perhaps tuck-in M&A to improve the segment you're addressing?

Giordano Albertazzi, CEO

Two aspects. We've been vocal about what we think the TAM per megawatt is probably the easiest way to say it. We believe it will be available for us. I want to remind everyone that we believe we have the most complete portfolio of digital critical infrastructure. But again, regarding a TAM related to traditional data center design, it's estimated between $2.5 million to $3 million per megawatt, going up by $0.5 million as we include AI and high density. We continue to invest in engineering and R&D at a CAGR of approximately 13%. Acquisitions, as we've demonstrated with CoolTera that enabled us to add technologies to our portfolio, is part of our capital allocation strategy. However, these opportunities are not binary; they often align well, and instead of speculating about the future, I would refer back to what we did with CoolTera in liquid cooling, where we orchestrated both organic and inorganic strategies.

Operator, Operator

Our next question comes from Andrew Obin of Bank of America.

Andrew Obin, Analyst

You guys put out a press release on the NVIDIA relationship. Can you comment on the nature of the relationship? Are you being standardized from that product? Also, how are you getting ready for the Blackwell product? Do you need to do anything technologically to be ready for higher-power conduction there?

Giordano Albertazzi, CEO

Well, it's a multifaceted relationship. In a nutshell, I would say that it's certainly been a part of the partner network of NVIDIA, which is essential from a commercial and go-to-market standpoint. There is an element of certification of our liquid cooling, but very importantly, we have a working relationship at the engineering level. So that's significant. When it comes to future technologies and specifically Blackwell technology, it's clear that this technology requires liquid cooling. The fact that we have a clear leader in the market with liquid-cooled chips will drive liquid cooling further. Regarding our portfolio, we are well-prepared for the next generation. There will be more generations, and we discussed moving towards two-phase liquid cooling instead of just single-phase.

Andrew Obin, Analyst

Got you. As we think about the ramp of this new technology, right? Because I think as of last year, it was a fairly small percentage of your portfolio. While I completely understand how you are positioned strongly from a technology standpoint, is this ramp in technology something that requires investment? Given that it's brand-new technology, should we expect it to be margin-dilutive at least in the first stage as you ramp up to full production?

Giordano Albertazzi, CEO

The fact it was small in the past generally reflects that current generations can very well be air-cooled. Most GPU deployments were air-cooled with existing infrastructure. I'm not just referring to Vertiv here. As for the investment in CDU capacity, I refer back to our February earnings call; that has been well explained, and we are progressing in that capacity growth. When it comes to margins, this new technology's margin profile aligns with our thermal business, certainly consistent with our long-term trajectory to achieve 20-plus percent as our goal.

Operator, Operator

Our next question comes from Nigel Coe of Wolfe Research.

Nigel Coe, Analyst

There are a lot of investor questions out there on the backlog aging. How much of the backlog is set for 2025 and beyond? A bit of color on that would be helpful. My question was really more about maybe some color on the on-prem. Gio, you mentioned that the focus right now is on the AI GPUs and the hyperscales. But what have we seen on the on-prem side? Finally, the capacity increase on switchgear caught my attention, so I'm just wondering what that doubling in capacity underwrites in terms of your outlook for E&I over the next couple of years.

Giordano Albertazzi, CEO

Three questions in one, thank you, Nigel. Regarding backlog aging, we won't go too deeply into details about it; the indication we have is about strategy on requested delivery dates and lead times that is making our coverage longer. On-prem versus hyperscale, we see the acceleration dominantly in hyperscale and colocation for high density and AI. At Data Center World, which was predominantly an enterprise show, there was a very high attendance. As for switchgear and busbars, we're very happy; it reaffirms the importance of the acquisition to ensure we have the entire portfolio and powertrain, from medium-voltage switchgear to distribution and inside-track PDUs.

Operator, Operator

Our next question comes from Nicole DeBlase of Deutsche Bank.

Nicole DeBlase, Analyst

When you have received orders related to AI so far, has that been mostly focused on upgrades of existing data centers? Or would you say it's kind of a balance between that and actual new AI data center construction?

Giordano Albertazzi, CEO

We feel a bit of both, but it's still predominantly for new data centers for the time being.

Nicole DeBlase, Analyst

Okay. Got it. That's clear. With respect to the outlook for order growth, I know you mentioned that you're expecting like sequentially down Q-on-Q, which makes sense. What gives you conviction that there was a pull-forward? Obviously, every time we look at data center CapEx, it continues to rise higher. Why do you think it was a pull-forward into Q2? Is that based on customer comments? Any other color on quantifying the level of order growth you're expecting in Q2?

Giordano Albertazzi, CEO

Absolutely. The commercial side of that is not an exact science. We try to make the science statistically relevant using pipelines and stacks. We call an order that lands in Q2 probably very granted, but there are things not necessarily within our control. What we do is be very diligent in managing our pipeline and analyzing it statistically. This characterized our pipeline last quarter in Q4, and I was vocal about that acceleration. The time it takes for opportunities to become orders has increased statistically. We are happy with our pipeline's size. However, making an exact forecast regarding the future is difficult. Our comments about pull-ins are statistically based on things happening more rapidly than historically they have, if that makes sense.

Operator, Operator

Our next question comes from Noah Kaye of Oppenheimer.

Noah Kaye, Analyst

I would like to revisit Mark's question about the relationship between longer lead time on the orders and margins. The company has done significant work over the last year-plus to improve management processes around pricing and sourcing. As we see this backlog grow, how are you protecting margins in backlog? Do we indeed have higher visibility to the margin profile?

Giordano Albertazzi, CEO

We have repeatedly indicated and have been vocal about our strengthened and continuously strengthening pricing muscle. This also includes factoring in dynamics on the material cost side and aligning with our targets for price/cost positivity, as well as better contractual terms that allow us to react to unforeseen circumstances. We're much stronger than we were, and we are pleased with the actions and mechanisms we have implemented for pricing approvals.

Noah Kaye, Analyst

Okay. A related housekeeping item: The guidance last quarter was for $60 million positive price/cost for the year. Has that assumption changed? What was it for Q1?

David Fallon, CFO

Our expectation for the full year has not changed significantly from what we shared in the first quarter; if anything, it is trending a little more favorably, but not significantly different.

Operator, Operator

This concludes our question-and-answer session. I'd like to turn the conference back over to Giordano Albertazzi for any closing remarks.

Giordano Albertazzi, CEO

Well, thank you, everyone, for your questions. I appreciate the multiple inquiries. First and foremost, I want to thank the Vertiv team around the world. The focus on innovation, customer service, and execution is certainly very palpable and strong. Thank you for the progress. Thanks for joining us today. We really appreciate your support, and have a very good day.

Operator, Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.