Earnings Call Transcript - VRT Q4 2023

Operator, Operator

Good morning. My name is Brika, and I will be your conference operator for today. I would like to welcome everyone to Vertiv's Fourth Quarter and Full Year 2023 Earnings Conference Call. Please note that this call is being recorded. I will now 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, Brika, and good morning, and welcome to Vertiv's Fourth Quarter and Full Year 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. 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 our GAAP to non-GAAP reconciliations can be found in our earnings press release and in the investors 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, 2023 was a great year for Vertiv and our shareholders. We created tremendous value. Our stock price increased 252% in 2023, putting us well ahead of the #1 performer in all of the S&P 500, and it's up very well again so far this year. We announced the capital allocation strategy at our November investor conference is very flexible and we believe is structured well to provide additional benefits to shareholders and is a great reflection of the cash-generating capability of the company, a very nice and exceptionally promising change from where we were. We finished the year strong, quite strong, in fact, and we fully expect this to set us up well to continue to provide good returns for our shareholders in 2024 and beyond. So Gio and team were off to a very good start, but we still have work to do. You'll hear Gio talk about his focus areas for 2024 and what we plan to accomplish this year to deliver another good year for our investors. It's getting the important thing customer relationships, technology, BOS, organization resiliency, working capital, and capital deployment. We've demonstrated our potential in 2023, but we still have a long way to run, and that's all upside. So with that, I'll turn the call over to Gio.

Giordano Albertazzi, Chief Executive Officer

Well, thanks, Dave. Thanks a lot. As Dave mentioned, our stock was up 252% last year. And as they said, if we were in the S&P 500, we would have been the top performing stock. We believe we meet the criteria, and we believe Vertiv is a good candidate for S&P 500 inclusion. Let's go to Slide 3. We finished the year strong. Operational execution continues to improve. Q4 sales were up 12% organically. Growth continues to be led by the Americas. Orders grew 23% year-on-year and 18% sequentially, good across all regions. Additionally, book-to-bill was very strong at 1.3x, a demonstration of market strength that gives us confidence in what we believe will be a strong demand environment for '24 and beyond. Adjusted operating profit of $330 million and adjusted operating margin of 17.7%, clearly a step-function improvement and a demonstration of our sharpened operational execution. Our adjusted free cash flow was $305 million for a full year at $778 million, resulting in more than $1 billion improvement year-on-year. Our net leverage at the end of the year was 1.9x. So within our target range of 1x to 2x, and we were upgraded by both Moody's and S&P in December. In December, we announced the acquisition of CoolTera that further strengthens our technology leadership in high-density and liquid cooling. More to come on that in a few slides. I'm pleased with the strong foundation. As we enter 2024, coupled with strong market demand, we feel good about our trajectory for the year and beyond. And let's move to Slide 4. We take a look at the market environment here, and it's pretty consistent with what we have been seeing for a while. Cloud hyperscale continues to lead the growth with tangible signs of AI deployment and very strong build plans. We continue to see encouraging signs in enterprise with customers starting to develop AI plans for the business, be it either on-prem or cloud. Either way, it's good for Vertiv. Telecom, not a lot of news here. CapEx is tight and mainly focused on retrofit. From a regional standpoint, APAC remains soft, but continues to be a story of China and the rest of Asia. The China market continues to be weak, but we saw some small positive signs in terms of orders. We don't think the market is getting weaker, but recovery is slow-paced, if at all. In the rest of Asia, including India, we see significant investments happening across the market. Cloud colocation is certainly leading the pack, but enterprise customers are also investing. We moved commercial and industrial to green in APAC, really driven by India. The investment in infrastructure is accelerating. The India market is quite exciting, and we are well positioned. Overall, our pipeline formation is good and particularly strong in the colo hyperscale segment. Let's go to the next slide, Slide 5. I am pleased with the order strength we saw in Q4, 23% year-on-year and 18% sequentially. We entered '24 influenced by a strong 2H '23 booking, driven by large projects, reflecting also demand from AI. We continue to post record backlog which was up about $0.5 billion from the end of Q3, good visibility for '24 and beyond. We expect Q1 '24 orders to continue to be strong, up in the high teens on a year-on-year basis in the first quarter across the portfolio. We anticipate they will be down sequentially from Q4. This is just a normal business pattern. We are working in close collaboration with our customers and suppliers to make sure we have the capacity in place to support the likely strong demand environment for the foreseeable future. We inaugurated a new thermal management plant in India. We have significant capacity expansion underway for switchgear and bus bars across the thermal portfolio, including, of course, liquid cooling. As I mentioned at Investor Day, on a weekly basis, we look at evolving demand scenarios in a disciplined, rigorous, and focused way to make timely investment decisions. The backlog for AI orders continues to grow robustly. The acceleration of the overall order book related to AI is never an exact science, as I explained, matches the expected growth rate for the application, i.e. a growth uplift of 3% to 4% to the overall market, as we mentioned in November. I continue to caution what is and what is not AI is fungible to a certain extent. What matters is that we believe that traction is consistent with the market uplift from AI or perhaps a bit ahead, given our strong position in thermal and thermal is a clear differentiator. Continuing on the right side of Slide 5, we believe that supply chains have largely returned to normal, but I'd say normal in a post-pandemic world. We are focused on making sure that resiliency is constantly increasing across the supply chain to weather what a quite complicated world can throw at us. So a lot of focus here. Looking at material inflation, we expect materials pricing to be relatively stable year-on-year, but we are very mindful that things can change rapidly. And with that, over to you, David.

David Fallon, Chief Financial Officer

Thanks, Gio. Turning to Page 6. This slide summarizes our fourth quarter financial results. We finished the year quite strong. Our organic net sales increased 12%, 5% from volume, 7% from price. And America continues to be the growth engine, which Americas was up 22% in the quarter. Our sales performance was within the guidance range, but slightly below the midpoint which was mainly attributable to a weaker China and some project delays in EMEA. Adjusted operating profit was $330 million, up $120 million from last year's fourth quarter, and that was mainly driven by favorable price cost and the higher volume. We beat the midpoint of our implied fourth quarter adjusted operating profit guidance based upon good commercial execution and material inflation below our modeled assumptions. Our adjusted operating margin was 17.7% in the quarter, a 500-basis-point improvement compared to last year. And that certainly was driven by our continued relentless focus on operational execution, and that clearly showed in the results. As we move to the right, our fourth quarter GAAP diluted EPS includes a $115 million nonrecurring tax benefit related to the release of a valuation allowance, and we have removed that from adjusted diluted EPS. And we provide additional detail on that valuation allowance release on Page 28 in the appendix. But otherwise, the year-over-year increase in adjusted diluted EPS was driven by higher adjusted operating profit. To the far right, another very strong quarter for adjusted free cash flow as we generated $305 million in the quarter, more than doubling last year. Certainly, higher profitability contributed to this result, but working capital is also an important part of the story with plenty of opportunity for continued improvement. As Gio mentioned, net leverage declined to 1.9x within our target long-term leverage range of 1 to 2x and down from 5.6x at the end of 2022. This leverage level supports the capital deployment framework provided at our investor conference and gives us significant flexibility and optionality to deploy excess cash. Turning to Page 7. This slide summarizes our fourth quarter segment results. The Americas region, as I mentioned, continues to fuel the growth engine with organic net sales up 22% in the quarter. The improvement in adjusted operating margin in the Americas continues, up 640 basis points from last year to 26.9%, with the increase primarily driven by favorable price cost and fixed cost leverage. APAC sales increased 3% organically, but continues to be weighed down by China, where sales were relatively flat year-over-year, but below expectations included in our quarterly guidance. APAC adjusted operating margin declined 220 points with unfavorable mix and the timing of fixed cost contributory factors. EMEA grew 1% organically in the fourth quarter, which was lower than anticipated primarily due to delays on several larger projects. However, we did see an 18% sequential sales increase from the third quarter, which is encouraging and EMEA experienced strong year-over-year fourth quarter orders growth, both of which provide confidence for us to project low double-digit organic growth in EMEA for the full year 2024. EMEA delivered a strong adjusted operating margin of 28.3% in the fourth quarter, an increase of 750 basis points from last year's fourth quarter, although they did benefit from a $6 million nonrecurring gain from an asset sale in the quarter. And as Anand Sanghi, our Americas President, has emphatically reminded us, without that gain, the adjusted operating margin for the Americas and EMEA would have been approximately the same as those 2 regions continue to push each other for highest regional adjusted operating margin. Next, turning to Page 8, a summary of full year 2023. I can safely say it was a very strong year. It's always a good thing when the orange bars on this slide are significantly higher than the gray bars, and that is the case for all financial metrics for this past year. 2023 produced a step-function change in financial performance from 2022 that is not often seen in a 12-month period. This significant improvement is a result of a relentless focus on operational execution, which very clearly reads directly through to our financial results. Our full year organic sales up 21% reflects a great position in a strong end market. Adjusted operating margin of 15.3%, an improvement of 760 basis points from last year, certainly provides a strong foundation to surpass our midterm adjusted operating margin target of 16%, which we expect to do in 2024, with about 110 basis points to spare at the midpoint. We did well in converting the improved profitability to cash with an over $1 billion improvement year-over-year. And let me repeat that, an over $1 billion improvement in adjusted free cash flow year-over-year, with this improvement driven by the higher profitability and improved working capital management while continuing to invest in CapEx to support growth. Adjusted free cash flow of $778 million drove an adjusted free cash flow conversion of 114%, with this improved conversion benefiting from a significant increase in deferred revenue primarily from advanced customer payments, which increased $280 million or 80% in the year, while sales were up 21%, which we estimate contributed about 30 percentage points to that conversion. While we expect continued growth in deferred revenue, there are many market dynamics at play, and we should not expect similar growth in 2024, which is one of the primary reasons we are guiding to adjusted free cash flow conversion in the low to mid-90s for full year 2024. We have much work to do, and there's plenty of opportunity for continued improvement, but 2023 certainly demonstrates our potential and helps build credibility and confidence that we can execute upon our long-term strategy and deliver the financial targets we introduced at our Investor Conference. Pivoting to 2024 and moving to Slide 9. This is a look at our first quarter guidance. We are expecting first quarter sales to be up approximately 5% organically, with Americas up high single digits, APAC's up mid-single digits, and EMEA relatively flat. Adjusted operating profit between $200 million and $220 million and adjusted operating margin of 13.1%, up 160 basis points from last year's first quarter. And that is driven by price/cost tailwinds and productivity programs, partially offset by continued growth investments. As you likely have noted in our slide deck, we have not provided the detailed split between price and cost/inflation for 2024. As we emphasized at our Investor Conference, our ambition is to cover all inflation, including labor inflation with price and being price cost positive is an important lever for us to attain our long-term adjusted operating margin target of 20% plus. As you will see on the next slide, we fully expect to be price/cost positive in 2024, and we expect that to be the case each year going forward. We will continue to price our products commensurate with the increasing value we provide our customers. However, for commercial and competitive reasons, we are not disclosing the specific quantified pricing figure going forward, but rest assured that commercial excellence actions are a core tenet of our continued profit improvement program, and we believe we are well positioned in a favorable market to continue to execute upon our long-term plans. Next, turning to Slide 10, our full year guidance, higher across all metrics from the view presented at our November Investor Conference. Organic net sales growth is expected to be 9% to 11%, up from the 8% to 10% we shared in November. We are increasing the midpoint for adjusted operating profit from $1.25 billion to $1.3 billion, with adjusted operating margin at 17.1%, well above the previously established midterm target of 16%. And as a reminder, our long-term margin target is 20% plus, and we believe we will take all the necessary next steps in '24 on our path towards that target. Our projected 2024 adjusted diluted EPS of $2.23 at the midpoint is approximately 25% higher than 2023, primarily driven by higher adjusted operating profit and partially offset by taxes and a higher share count as the higher share price drives more accounting dilution for employee stock options. We have included some estimates for share repurchases and share price in our estimated '24 diluted share count, but we are not prepared at this point to share specifics for either, but we believe the 393 million shares estimate for full year diluted share count is a reasonable and balanced guidance, but certainly subject to change based upon several variables. Moving to the right on this slide. We are projecting adjusted free cash flow between $800 million and $850 million, representing 94% adjusted free cash flow conversion at the midpoint. As mentioned, this is lower than 2023 conversion primarily due to assumptions with deferred revenue and higher investment in CapEx. And finally, as we introduced at our Investor Conference, there will be a couple of external reporting changes in 2024 to align with how we run the business. We summarized these changes on Slide 31 in the appendix, and we have provided a historical recasting for these changes going back to 2020 in Exhibit 99.2 of our earnings release. And with that said, I turn it back over to Gio.

Giordano Albertazzi, Chief Executive Officer

Well, thank you. Thanks a lot, David. And we go to Slide 11. Thank you. You saw this slide at our Investor Conference. We are the market leader in thermal management for data centers. We have the most complete portfolio of thermal management solutions, including liquid cooling to lead the industry as a transition to GPU accelerates. We can do this customizing at scale, and we believe we are in a very strong position. This slide here shows also our high-density liquid cooling portfolio. In November, the technology was both owned and partnership-based, now it's fully owned. We can go to Slide 12. The 8th of December, we closed the acquisition of CoolTera, which has industry-leading liquid cooling technology. We have now secured that technology with full ownership. We have been close partners of CoolTera for years. Now take CoolTera's premier technology, certified and approved by key chip manufacturers, combine that with Vertiv's reach and you can scale the technology at a pace that will support our customers' aggressive AI deployment plans. We have already started to manufacture CoolTera's CDUs in one of the Vertiv plants, and we expect to have capacity quadrupled by the end of Q1. We are executing on a plan to scale the production of our liquid cooling solutions more than 40 times by the end of this year. We truly want to make sure we have capacity to cover the most aggressive GPU growth scenarios. That is what Vertiv means by scaling technology, activating our global manufacturing and supply chain footprint. Let's go now to Slide 13. This is where we obsessively focus to deliver another very good year. It starts with the customers. We plan to continue leveraging our far-reaching and deep customer relationships and have the technology, the portfolio, the innovation, and the capacity to meet their demand. We spoke about the capacity expansion underway. We have allocated additional investments to CapEx to support our customers. Global scale matters and will continue to differentiate us. Vertical Operating System is foundational across the organization, helping us to realize productivity improvements in general and giving us speed. We have started to make progress on trade working capital, but there is more work to do. We are not optimized. It continues to have my full attention, and we are improving. Our capital deployment framework provides much flexibility driven by good cash flow generation. So a lot to do in 2024. And the short work is fully underway to continue to execute well on all these focus areas. Now to Slide 14. We started 2024 in a strong position. Orders in Q1, backlog at the end of the year were very strong. Orders in Q4, backlog at the end of the year were very strong. End markets continue to signal strong and increasing demand for the foreseeable future certainly driven by AI. We expect to have the capacity to support our customers, that is our commitment to them. Investments in capacity and R&D to support the growth of the business will continue. Our foundation is stronger today than ever before. Our focus area will continue to strengthen that foundation and increase the resiliency of the organization to navigate, again, an increasingly complicated world. VOS, Vertiv Operating System is a cornerstone for that, a robust, resilient operating system deployed globally. I am pleased with the progress, but I see even more opportunity than I did when I stepped into the CEO role, much more. There is work to do, and we look forward to updating you on our progress, and we look forward to your questions now. So over to the operator. And thank you very much.

Operator, Operator

We have the first question from Andrew Obin of Bank of America.

Andrew Obin, Analyst

I have a question regarding the pace of savings you are forecasting for next year, as it looks like there will be a significant slowdown compared to 2023. Additionally, we received questions about pricing. While I understand you may not be able to discuss this for competitive reasons, you have previously provided pricing information for 2023. If we consider a reasonable pricing estimate for 2024, the projected $60 million seems quite conservative, especially considering your achievements in the fourth quarter. Could you provide some insight on this?

Giordano Albertazzi, Chief Executive Officer

Thank you, Andrew. I'll begin, and David can add if he’d like. We have consistently highlighted the strength we’ve developed in our pricing over the past year. We still believe we are in a price-favorable environment, although the incremental price increases are likely to decrease due to our current inflationary context. However, the majority of our business operates under a favorable demand-supply balance, so we still anticipate price growth, albeit at a slower pace. I'm not sure if you want to add anything, David.

David Fallon, Chief Financial Officer

No, just for avoidance it out, that $60 million certainly is a price cost or price inflation number. And when we look at price cost, we include labor inflation in that number, which we have disclosed previously, that's in the $100 million range, and we certainly expect both material and freight to contribute some inflation next year. So you got to take that into consideration when you're looking at that price/cost dynamic including looking at price.

Andrew Obin, Analyst

Got you. And just a follow-up question on North America. You are guiding North America revenue up high single digits in the first quarter, but 22% growth in the fourth quarter, orders up 23% in the fourth quarter of '23. Is there any specific dynamic taking place in the first quarter? Why you think North America is only going to be up high single digits given the strength in the fourth quarter?

Giordano Albertazzi, Chief Executive Officer

We continue to believe that we have a strong business in North America, and the pipeline looks very encouraging. It's important to note that last year's first quarter in North America was particularly strong, especially as we were coming out of 2022 with a significant backlog. For these reasons, we feel very positive about our business in America.

Operator, Operator

We now have Lance Vitanza of TD Cowen.

Lance Vitanza, Analyst

Congrats on the performance. It looks like book-to-bill not only improved in the fourth quarter, but accelerated. So I'm thinking about the organic sales growth guide for 2024, which certainly terrific in an absolute sense is obviously a lot lower than what you achieved in 2023. So I'm wondering to what extent does the guidance for '24 reflect potential bottlenecks, both from the standpoint of perhaps your customers' ability to source permitting and utility power on the one hand. And then also, of course, your own supply chain with respect to fans and IGBTs and breakers and so forth?

Giordano Albertazzi, Chief Executive Officer

Thank you, Lance. We are pleased with our book-to-bill ratio and our backlog. Our orders in the second half of 2023 were strong, which is reflected in the overall shape of our backlog. We do not currently face any supply chain bottlenecks on our end. While constraints do exist, they primarily stem from large projects that require longer lead times from our customers. This is part of the natural cycle. We have been vocal about the industry's need to address issues such as power availability and permitting, and I believe that the pace of build-outs and site development over the next 12 to 18 months will align with what our customers are requesting.

Operator, Operator

We now have Nigel Coe of Wolfe Research.

Nigel Coe, Analyst

I'll keep it to 1 question. So if I'm doing the math right, it looks like $2.4 billion of orders in the quarter, up from $1.9 billion in the third quarter. I'm guessing you're going to say America is hyperscale, et cetera, but maybe just give us some context on what drove that sequential acceleration. But more importantly, can you maybe talk about the front log of the funnel, the fund log where you want to call it of opportunities you see coming up in the next quarter or two? And then David, just maybe just address this very specifically. You said deferred revenues will continue to grow in '24. Does that indicate that backlog continues to expand from here.

Giordano Albertazzi, Chief Executive Officer

I'll start by addressing your three questions together. Clearly, we're pleased with the acceleration in orders. As you recall, we have previously emphasized the strength of the pipeline during the earnings call in October and at the Investor Day in November, and that remains the case. We have positively observed an increase in the velocity of the pipeline, which we believe will maintain its capacity rate moving forward. This growth is evident globally, especially in the Americas, EMEA, and many regions in Asia. We see significant opportunities ahead. Would you like to add anything about the other question?

David Fallon, Chief Financial Officer

Yes. Yes. So as it relates to deferred revenue, and I may oversimplify this, but deferred revenue can grow for 2 reasons. One, is, as you mentioned, backlog grows. The other is just improved execution and further penetrating customers with those advanced payments. And frankly, we would hope for both. But we feel pretty good that we'll see continued growth in those customer advanced payments.

Operator, Operator

Your next question comes from Amit Daryanani of Evercore.

Amit Daryanani, Analyst

Gio, could you discuss your AI activity? You mentioned it's performed broadly in line or slightly better than expected. How much of your current orders or backlog do you believe is driven by AI? As you engage with cloud customers, do you notice a preference for direct-to-chip solutions or full immersion? I would love to understand what your customers are looking to build with their data center technology moving forward.

Giordano Albertazzi, Chief Executive Officer

Thank you, and good day to you. As I've mentioned before, it's challenging for us, and likely for everyone, to be precise. Determining what is utilized in AI applications is not an exact science. There are product lines that are clearly intended for high-density GPU AI, like high-density cooling or liquid cooling, and certain aspects of in-rack power distribution. However, we want to avoid getting into excessive detail, particularly from a competitive perspective. We are pleased with the progress of our backlog and pipeline. The majority of our portfolio is quite flexible, and much of what is currently being developed is not strictly one or the other. Data centers need to be inherently hybrid as they will accommodate both traditional CPU and GPU, with configurations that will evolve. The load mix within the same data center changes. The challenge for the entire industry, which is why we collaborate closely with hyperscalers and major cloud providers, is designing systems that allow for this transition and building in intrinsic flexibility. This makes it difficult for me to provide a clear answer to your question. I encourage the industry to adopt a less black-and-white perspective on this issue, as I believe it's not feasible. That said, we are pleased with the trajectory, particularly regarding what is clearly designated for AI, as well as the emerging AI-driven opportunities in our pipeline. In terms of direct-to-chip versus full immersion, we have seen more interest in direct solutions, but that doesn't mean there isn't room for full immersion. A significant and engaging part of our job today is collaborating with leading global companies to shape the future, which involves a cooperative effort. I apologize for the lengthy response, but I hope this provides clarity.

Operator, Operator

We now have Scott Davis with Melius Research.

Scott Davis, Analyst

Congratulations on the year. This might be a bit challenging to answer, but do you have any insights or projections regarding the percentage of liquid cooling in the mix over the next couple of years? I'm trying to get a sense of its size and significance.

Giordano Albertazzi, Chief Executive Officer

Scott, we do not significantly differ from what we discussed at Investor Day. Looking back at those thought processes, we anticipate that liquid cooling could account for about 15% to 20% of the overall thermal aspect over time as it develops. However, it is still somewhat early to provide definitive insights.

Scott Davis, Analyst

Okay. And again, I know you've got a lot of different SKUs, but can you give us a sense of your capacity utilization by region? And maybe the real question I'm trying to get at is how much did lack of capacity kind of slow down your growth in '23 or perhaps impact your growth in even the first couple of quarters here at '24 before your new capacity comes online?

Giordano Albertazzi, Chief Executive Officer

Capacity and capacitization are ongoing. The major developments have been the openings in India and Monterrey. Following that, we are focusing on gradual expansion, which includes adding lines, shifts, improving utilization, increasing output, and investing more in assembly lines and tools. Currently, we do not see capacity as a limiting factor for 2024 and beyond in any significant way. As I mentioned, we make capacity decisions nearly on a weekly basis because we have never encountered such a dynamic market. We are committed to having a robust process in place to ensure we can provide our customers with the necessary capacity.

Operator, Operator

We now have the question from Jeff Sprague of Vertical Research.

Jeffrey Sprague, Analyst

Maybe just coming back to the Slide 12, Gio. Just help us get our head around what exactly this means. Obviously, you're increasing capacity off a very, very low base. But if we go back to the Investor Day, you said you had $100 million of really direct AI revenue exposure. And there was another $250 million, which was kind of in that fungible category that was maybe AI, but you didn't know for sure. I don't think you're telling us here that $100 million is going to $4.5 billion, multiplying it by 100 by 45. But what are you telling us here? It's obviously a pretty dramatic chart.

Giordano Albertazzi, Chief Executive Officer

What we are saying is that over the next 12 months, our plan is to ensure we have the necessary demand to meet the industry's direct-to-chip liquid cooling needs, and to support our customers' growth in this area. We are starting from a relatively low base, referencing the $100 million mentioned at Investor Day, which doesn't solely pertain to liquid cooling. This backlog is spread out over several months and quarters, meaning we are not expecting a peak realization at the beginning of the year. The reality is we begin from a low base, but we believe we can provide the capacity the industry requires. This involves activating three vertical plants across all continents, leveraging a broad supply chain efficiently. In summary, while I can't disclose specific numbers, I want to emphasize that we will have the needed capacity and we already possess the technology, which is why we are seeing a lot of discussions and a growing pipeline at this time.

Operator, Operator

We have the next question from Nicole DeBlase of Deutsche Bank.

Nicole DeBlase, Analyst

Just maybe on EMEA. You guys alluded to some shipment delays that took place in the fourth quarter. And I guess, can you talk a little bit about maybe quantify that, talk about the impact if you can kind of recoup all of that in the first quarter. And talk about the quarterly cadence of growth to get to low double digits for 2024.

Giordano Albertazzi, Chief Executive Officer

The line was quite unclear. I think we have understood your question. For Q4 in EMEA, it was mainly about customer and site readiness rather than internal capacity. In terms of the sequence of quarters leading into 2024 for EMEA, it might be a bit early to provide details. We will certainly face a tough comparison in Q1. The acceleration we mentioned will occur in Q1. Overall, we are pleased with the pipeline and specifically excited about our order intake in Q1. We see this as an opportunity. There is some noise around this. Brika, are you still with us?

Operator, Operator

We will move on to the next question of Mark Delaney of Goldman Sachs.

Mark Delaney, Analyst

Yes. Backlog grew 16% to reach a record high of $5.5 billion. Can you talk about how much of the backlog is supporting sales in 2024? And how much is for 2025? And as you think about the order of backlog strength, does that imply that in the next few years, where this revenue would be at the higher end or maybe even above the 8% to 11% long-term revenue CAGR target provided at the Investor Day?

Giordano Albertazzi, Chief Executive Officer

Our long-term vision remains as we presented at Investor Day. We're pleased to have a strong Q4, with backlog growth of 16%, which definitely makes us happy and indicates we're moving in the right direction. In terms of this year compared to future years, I would say we don't anticipate a significantly different distribution than what we experienced last year under similar conditions. So, I expect a fairly typical split this year and next year. Is the backlog good? Yes. Is it encouraging? Absolutely. You are aware of our long-term outlook and our 2024 plan.

Operator, Operator

We now have Sahil Manocha of Citi.

Sahil Manocha, Analyst

This is Sahil Manocha on for Andy Kaplowitz. It's now been roughly 3 months since the CoolTera transaction, and you mentioned that asset integration and vigorous production acceleration will continue through 2024. To the extent possible, could you please clarify the impact of the CoolTera acquisition has had on the '24 guide since the Analyst Day was pre-acquisition. More specifically, what is the revenue and cost impact of the CoolTera acquisition on the '24 guide?

Giordano Albertazzi, Chief Executive Officer

We completed the CoolTera acquisition on December 8th. Although it hasn't been three months yet, I want to emphasize that our plans and vision outlined on Investor Day included a significant push towards liquid cooling and AI, which was already part of our offerings. The acquisition enhances our confidence in our capacity and speed to implement this plan. While there isn't anything groundbreaking or drastically different, we are indeed in a stronger position because we have secured something that seemed likely but was not guaranteed.

Sahil Manocha, Analyst

And just one more. I see that your views for the Communications segment end market was unchanged, and you mentioned that CapEx remains tight. Could you please provide a bit more color on what you're seeing in the end market in terms of outlook for '24? How are you seeing the still elevated rate environment impact your telecom-related customers? Any further color there would be much appreciated.

Giordano Albertazzi, Chief Executive Officer

Yes. The telecom is, let's say, it ebbs and flows depending on the technology waves. 5G, of course, created acceleration a few years ago and then slowed down. And that's typically the type of cycle that business is. We do not see any imminent cycles, and hence, we continue to believe that, that market will be pretty slow. We do not think that would be shrinking. In the future, there will be new technology, new acceleration, certainly an area where a very distributed edge could, at a certain stage, have a positive impact, and we're there with the technology, with the presence with the go-to-market, with the capacity. But again, in our guide and our vision for the future, we are very prudent with this space.

Operator, Operator

You now have Steve Tusa of JPMorgan.

C. Stephen Tusa, Analyst

I have a question about the orders outlook. Do you expect to increase orders in 2024? I believe you mentioned that the deferred balance would grow, but at a slower rate than the 80% growth seen this year. I have a follow-up question as well.

Giordano Albertazzi, Chief Executive Officer

Yes, we believe that orders will increase. We mentioned that the first quarter will show growth compared to last year, specifically in the high teens, as outlined in the presentation. Overall, we expect that the year will show an upward trend.

C. Stephen Tusa, Analyst

And the deferred balance? And then I have a follow-up to that.

David Fallon, Chief Financial Officer

Yes. We would generally expect that deferred balance to be very much correlated with the growth of sales or orders, one being the proxy for the other. So we would expect growth in that account commensurate with what we see the growth being in both orders and sales.

C. Stephen Tusa, Analyst

Got it. And I appreciate you guys talking about pricing in a little bit more of a sensitive way. But then you were pretty clear that like supply/demand remains relatively favorable. You guys are offering greater value for the customer. Are you guys planning on getting just roughly any sequential price increases in orders this year?

Giordano Albertazzi, Chief Executive Officer

We are talking about an environment going forward with price cost is up. And we believe in an environment in which price remains positive, as I explained. That necessarily translates in the same equation being true for orders. Otherwise, that would be a short-lived statement.

C. Stephen Tusa, Analyst

But I guess is there any time this year that you would expect price declines in orders year-over-year?

Giordano Albertazzi, Chief Executive Officer

We do not expect that.

Operator, Operator

We have the next question from Nigel Coe, a follow-up, of Wolfe Research.

Nigel Coe, Analyst

Thanks for the second part of the cherry here. So yes, my question is actually partially addressed by Jeff but the 45x increase in capacity on the CoolTera CDUs, mean any kind of conservative read of your current capabilities would suggest you're planning for $1 billion plus kind of revenue line here in 2025. Just wondering if that complete your base. But just more broadly, on capacity, it seems to me that adding second shift would be a big meaningful increase in your capacity capabilities. So just curious what you're seeing and what you're doing along partnerships across your overall footprint.

Giordano Albertazzi, Chief Executive Officer

Sure. Let me begin. I'm not entirely clear on the first part of your question. Regarding capacity, it isn't just about adding a second shift or increasing shifts in general; it's about enhancing capacity and utilizing our assets more effectively. Our capacity growth involves a combination of increased square footage, better utilization, and higher investment levels. You've noticed that our CapEx projections have been rising year-on-year. The Vertiv Operating System significantly contributes to productivity, allowing us to make better use of the available capacity at any given time. This approach aligns with what we previously communicated in October and at Investor Day. We have flexibility in this area, which we are actively leveraging. However, I didn’t quite grasp the first part of your question, so if you could clarify quickly, I would appreciate it.

Nigel Coe, Analyst

Yes, look, Slide 12, the 45x increase. It seems like $1 billion plus of capacity is what you'll point to here, but just wondering if there's any more detail on that.

Giordano Albertazzi, Chief Executive Officer

So I think we are reading too much into that, read it like the industry has a growth rate in direct-to-chip. We want to make sure that we provide capacity over and above that growth rate so that whatever the industry needs, we will be able to cover that.

Operator, Operator

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

Giordano Albertazzi, Chief Executive Officer

Thank you very much, and thanks to everyone for your questions. I look forward to more interaction in the coming days. I want to express my gratitude to the Vertiv team globally for their hard work in 2023; we have executed well. As we've mentioned previously, we are transitioning our culture toward a high-performance mindset. While this transformation doesn't occur overnight, it is gradually taking place at Vertiv, although there is still much work to be done. We are moving in the right direction, and we are developing a stronger sense of urgency throughout the organization, which is evident. As I often say, I am pleased, yet never satisfied. 2023 has been a good year, and I anticipate an even stronger 2024 with tremendous potential ahead. Thank you all for joining us, and I look forward to speaking again soon.

Operator, Operator

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