Earnings Call Transcript - VRT Q2 2024

Operator, Operator

Good morning, my name is Brica, and I will be your conference operator today. At this time, I would like to welcome everyone to Vertiv's Second Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. Please note that this call is being recorded. I would now like to turn the program over to your host for today's conference call, Lynne Maxeiner, Vice President of Investor Relations. You may begin.

Lynne Maxeiner, Vice President of Investor Relations

Great, thank you, Brica. Good morning and welcome to Vertiv's second quarter 2024 earnings conference call. Joining me today are Vertiv's Executive Chairman, Dave Cote, Chief Executive Officer Giordano Albertazzi, and Chief Financial Officer, David Fallon. Before we begin, I would like to point out that during the course of this call, we will make forward-looking statements regarding future events, including the future financial and operating performance of Vertiv. These forward-looking statements are subject to material risk and uncertainty 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.

Dave Cote, Executive Chairman

Good morning, everyone. I am quite pleased with our continuing trend of very strong financial performance. As I think about what attracted me to Vertiv, it was a great position in a good industry. Fortunately, it turned into a great position in a great industry. There was a lot of work to do to get the business moving in a direction to consistently drive value and increase returns to shareholders. I have to say, Gio and his team have done an excellent job starting to unlock this potential. Initial signs of progress are evident in the financial metrics, strong audits and sales, and substantially increased profit and cash flow. A better operating company delivers better results. It's an interesting time both in our industry and the world at large. Significant change is underway for both. The industry is rapidly expanding and evolving, and Vertiv is well positioned to strengthen its market leadership with increasing R&D and capacity expansions to further distinguish our unique position as an industry leader. We're gaining market share in a rapidly growing industry as a result of our new products and significantly improved operations. At the same time, we're strengthening the resilience of our organization. 2024 is shaping up to be a great year and sets a very strong foundation for future years to deliver sustained value creation. So with that, I'll turn the call over to Gio.

Giordano Albertazzi, CEO

Thank you, Dave. We had a very strong first half of 2024. Q2 organic sales were up 14% led by the Americas, with strong growth in EMEA as well. We continue to see very strong orders growth, up 57% year-on-year, and up 10% sequentially from a very high level in Q1. Book-to-bill remains very high as well, with Q2 at 1.4x. More discussion to follow on this point on Slide five. Pipeline velocity has continued to increase and we are seeing acceleration in large orders. The same dynamics we shared with you in April are continuing for large orders. Customers require longer delivery dates than in the past. Hence, a lot of the orders are creating backlog in 2025 and beyond. Adjusted operating profit was $382 million and adjusted operating margins expanded 510 basis points to 19.6%. As Dave mentioned, better operating companies deliver better results. Our adjusted free cash flow is another good story, generating $333 million in the second quarter. We are converting our profitability to very good cash flow performance. Our net leverage was 1.8x at the end of Q2, so well within our targeted range of 1 to 2x. We again raised our full year guidance across all financial metrics and expect organic growth of 13%, adjusted operating profit of $1.435 billion, with margin expanding to 18.7%, and adjusted free cash flow of $875 million, up $50 million from previous guidance. Let's go to Slide four now. By and large, the market remains quite healthy and we see the continued acceleration of infrastructure built-out in hyperscale and colo markets. High-density and liquid-cooled chips are a reality, and this accelerates the demand for AI infrastructure. We see this happening in the Americas, but also starting in EMEA and Asia, with some positive market signs for co-location and cloud in China as well. Enterprise remains stable, yet we expect to see AI positively impact enterprise over time, and this is starting in the Americas. Telecom remains subdued, as CapEx spending has yet to fully rebound. Commercial and industrial markets are healthy, as there is significant infrastructure spending happening in the Americas and APAC regions. Overall, the market environment is encouraging, especially for data centers, which represent 75% of our end market exposure. We have heard feedback from investors about the data center market becoming a more conspicuous place these days from a competitive standpoint. This is true, but we believe we have competitive advantages that are tangible, quite unique, and being further reinforced. As data centers become more critical, I believe Vertiv becomes even more distinguished. We are not selling only one point product or only one small part of the thermal chain. We are selling the entire critical infrastructure for data centers. With power, cooling, and service data centers, we provide complete solutions. We act as the connective tissue between IT and facilities in a data center. It is a rare position in the industry, born of over 50 years of experience. We don't think this is easily replicated, and our orders are a good representation of our customers' trust in Vertiv. Certainly, there is intense focus on the liquid cooling portion of the market, and understandably so at this moment. Our advantages are clear. We have a comprehensive portfolio of liquid cooling technologies, direct-to-chip, immersion, in-row CDUs, in-rack CDUs. We adore heat exchanges, and we know how to integrate these key technologies into the entire thermal chain solution. This differentiates Vertiv. We continue to see direct-to-chip as our customers' prevailing technology of choice, and we have a complete portfolio of technology solutions ready for deployment. Surrounding this is a global service organization with almost 4,000 field service engineers. We're talking minutes and hours to get to a customer site. It is very important to our customers to have local service support. We see market participants emerging with point products in liquid cooling, a small part of the overall thermal solution for a bigger center, but they have a far different profile than Vertiv. We aspire to be an even bigger player in liquid cooling, and we have very good reasons to believe our ambition is indeed reasonable. Let's move to Slide five now. Another quarter of extremely strong order growth. Pipeline velocity increased, and we continue to see AI scaling, especially in the Americas. The strength of orders is across our portfolio. Power management and thermal management orders grew at very similar rates in Q2, and both convincingly strong. There is a strong correlation between power and cooling, and we would expect that balance of sales in our portfolio to continue over time. This quarter, we have introduced a trailing 12-month orders metric. As we have previously highlighted, there can be a natural variation to the timing of large orders in any quarter. Trailing 12-month is a good metric to assess order activity, smoothing some of the quarter-to-quarter push and pulls. We also know we have increasingly tough comparisons ahead, and we believe we still see low double-digit orders growth in Q3 on a year-on-year basis, but we expect a sequential decline in orders from an extremely high second quarter. This is where the trailing 12-month order metric can be helpful, as we expect to stay in the 30s range, indicating a very healthy and strong order trend, supportive of our financial guidance. Customer request dates elongated for large projects in the hyper and colo space in general, as the scale of deployments continue to increase. We view this as the industry wanting to manage this growth and technology transition in an orderly manner. As a consequence, a lot of the orders are for future years, and we feel good about how 2025 is shaping. Pipeline, orders, backlog, all three are positive in the same direction, and we like what we are seeing. We continue to focus on resilience to navigate an increasingly complicated geopolitical environment. Multi-sourcing strategies, risk identification, and mitigation plans are key to building supply chain resilience. We believe inflation is here to stay, as mentioned a few times. We price with this in mind and have a good process and governance in place to stay price-cost positive.

David Fallon, CFO

Great. Thanks, Gio, and good morning, everyone. Turning to Slide seven, this slide summarizes our second quarter financial results. Our organic net sales increased approximately 14%, slightly above the high end of our guidance, primarily driven by, once again, strong performance in the Americas where organic sales were up 17% from prior year. Adjusted operating profit of $382 million was $131 million higher than last year, driven by the higher volume and improved variable contribution margin, which benefited from both year-over-year price cost and significant productivity gains. This improved productivity, which has been catalyzed by the continued implementation of VOS principles in our plants and within our functions, and notably procurement, was the primary driver for the $57 million beat versus the midpoint of guidance and also a primary driver for the 510 basis points increase in adjusted operating margin to 19.6%. Just 40 basis points short of our long-term target. We are seeing the benefits of an intense focus on operational execution across all parts of the business, and the exciting thing is that there's still a lot more to do, so please stay tuned. Moving to the right, our second quarter adjusted diluted EPS was $0.67, $0.21 higher than last year, primarily driven by higher adjusted operating profit. We generated $333 million of adjusted free cash flow in the quarter, over $100 million better than last year, primarily due to higher profitability and improved working capital, which declined to 17.1% of annualized second quarter sales. Some of this trade working capital improvement was due to favorable timing, including advanced payments, which effectively shifted cash into the second quarter from the third and fourth quarters. Nonetheless, good progress with cash flow and working capital, but just like margins, still a lot more to do. Finally, on this page, net leverage was 1.8x at the end of the quarter within our stated leverage target range of 1x to 2x, and liquidity strengthened to $1.2 billion. Our balance sheet is strong and should remain strong based upon our expectations for free cash flow as we focus on flexibility to evaluate capital deployment opportunities.

Giordano Albertazzi, CEO

Thank you, David. So I'm very pleased with our strong first half performance. The executional strength of Vertiv continues to improve, and we see that translating into our financial performance, including sales growth, profitability, and free cash flow. It gives us confidence to raise guidance again for 2024 and continues to strengthen our view on the next year. The market is evolving and becoming more critical, and that plays into Vertiv's strengths very well. Technology, global scale, portfolio breadth and depth, services, these attributes matter to our customers. We stay humble and focused. Every day we work hard to enforce our competitive advantages. I said that on the last call, we fully intend to keep winning. We are in a good place now. We can always do better. There is absolutely no room for complacency. We are making substantial progress, but our full potential is much bigger and keeps growing, and the entire Vertiv team is very excited about this. An important point on this Slide, we plan to have an investor event on November 18th in conjunction with Supercompute24. So more details on this will follow, but I want to make sure that this is on your calendars and radar screens.

Operator, Operator

Thank you, Gio. We will now start the question-and-answer session. Our first question comes from Amit Daryanani with Evercore ISI. Please go ahead, Amit.

Amit Daryanani, Analyst

I will speak to the one question rule. I'm wondering if you could just help us frame the order trajectory expected in the September quarter. Will you help us understand maybe what's driving the deceleration in September to being 10% to 15% versus the high 50%, 60% we saw in the first half? And then crucially, just how do you see these orders converting to revenues over time for the company? It would be really helpful to frame that as well.

Giordano Albertazzi, CEO

Thank you, Amit, and very good day to you. I think I stated at the end in the script, we are happy with the pipelines that we see. And those pipelines, of course, are reflecting a positive trajectory for the market and our overall view of the market continues to be positive. If you go back to April, we had certainly a more prudent view of the Q2 orders, but there are a lot of big orders and individual peers in this market. Sometimes, it can be a question of timing whether they happen in one quarter or another or another quarter. So overall, our view of the market continues to be very positive, very, very positive. We're very happy about the trajectory of orders so far, but we are also aware of the fact that timing can be an element here, all about timing. That's why we want to make sure that we do not just talk about orders in one quarter, but we took a broader metric like the trailing 12-month that we have introduced now. When it comes to the second part of your question about order timing and translation in revenue. It's pretty much what we said last time already, for the upper part of the market, meaning that the larger part of the market, larger doses of the Cloud and Colocation. We are thinking now in terms of 12 to 18 months on average, it can be very specific. Individual orders can have different dynamics. But on average, we think about an elongation that we already described last time around. Hence, considering Q2 and Q3, the majority of that will sit in future years, so 2025 and beyond. But again, nothing particularly strange or different than what we observed before.

Operator, Operator

Thank you. We now have Steve Tusa with JPMorgan. You may proceed.

Steve Tusa, Analyst

You mentioned the 30% to 35% trailing 12 months. Is that a good trend to think about here going forward given how positive you are in any comments on how the pipeline is trending year-over-year? And then just lastly, as a follow-up to that on orders, how do you book campuses or like a phased order where you may be working on 3 buildings or something or 3 data centers in a certain campus, and you may be contracted to do all of that? At what point do you actually book that order? Is it booked all at once? Or as the shovel goes into the ground? Thanks for any color on all of that.

Giordano Albertazzi, CEO

Thank you for your question. So certainly, we call a 30% to 35% trailing 12 a strong trajectory and one that can sustain our growth long term. So we certainly like that range a lot, and it's a range that reflects strength in the market for Vertiv. To your question about how we book campuses, I've been vocal about the fact that it's very, very important to be in the first part of a campus or a development as that capacity gets expanded over time. But the way we do is PO-by-PO, there's no other way. We get a PO, we build a PO. And we call an order only what is actually truly legally binding. So it's really about what customers order actually from us.

Operator, Operator

Thank you. We now have Nicole DeBlase with Deutsche Bank. You may proceed, Nicole.

Nicole DeBlase, Analyst

I want to spend some more time on orders just because I think this is a big investor concern and what kind of reflected in the market today. So I guess the assumption that you get to 10% to 15% growth in the third quarter implies like a 20% step down sequentially. Like what is that founded in? Are you guys just kind of making a conservative assumption that, hey, we've had a few quarters of really strong large project orders and that may not continue? And then, are you actually seeing large orders in the pipeline start to diminish because you've booked so many large orders? Just trying to get a sense of how you come to that 10% to 15% growth year-on-year. And if we could be sitting here 3 months from now with another positive surprise from an order perspective. Thank you.

Giordano Albertazzi, CEO

Thank you for the question, Nicole. Certainly a little bit paradoxical to think that the concern is orders after 2 quarters of almost 60% year-on-year. But I hear you. As I said, the pipeline continues to be strong. Again, the pipeline reflects the dynamics of the market and a testament to the strong visibility that we have in the market commercially, and just the way we understand the market. But again, the message is not different than the message we gave, if you will, a quarter ago. It's just that it's that message with more good news on top of that as the good news is strength in the second quarter actual orders. So I continue to be very, very optimistic about the way the market is evolving and our position in the market. We like the trajectory of our pipelines. We like also the way pipelines are shaping up in the rest of the world. Of course, we know that's very, very strong in the Americas. AI dynamics are playing in a favorable manner. That said, again, sometimes receiving an order, the kind of first day of the quarter or the last day of the quarter can swing things around. So again, let's not be too obsessed about the individual quarter. It is important. We are very proud about what we printed in the second quarter, and let's make sure that we keep an eye on the long-term trajectory, and the long-term trajectory is very strong.

Operator, Operator

Thank you. We now have Mark Delaney with Goldman Sachs on the line.

Mark Delaney, Analyst

Yes. Thank you so much for taking my question which is on pricing. Vertiv has been expecting a bit more than $60 million of net price cost positivity for this year. Can you speak just qualitatively on how the pricing environment has evolved? And are you seeing that pricing become any more competitive in new programs that come up for bid, given increased competition in certain parts of the industry? And if so, is that potentially limiting the degree of price cost positivity over the longer term? Thank you.

Giordano Albertazzi, CEO

Absolutely. We continue to operate in a market that is favorable from a demand and supply balance standpoint. We have very strong competitive advantages in the market, so we feel good about what we're doing. We feel very good about the pricing muscles and strength that we have built over the last 2 to 3 years. So things continue to be encouraging in that respect. Of course, we operate in an environment that is mature as a market. Our customers are sophisticated players. So we continue to be adamant about the fact that our price-cost equation will continue to be positive in the future, and we feel good about our position in the market and our ability to price the value that we deliver in terms of technology, in terms of service level, in terms of access to capacity to our customers.

Operator, Operator

Your next question is from Andy Kaplowitz with Citigroup.

Andy Kaplowitz, Analyst

David, you talked a lot more about productivity. And so maybe Gio or David, you could talk a little bit more about the opportunities you see there. Is there any risk that you could lose any of those productivity improvements as you continue to ramp in areas such as liquid cooling? And then if there is a lot of room on the productivity side, pricing is still improving, you keep leveraging double-digit revenue. Could you end up with a margin way higher than that 20% target you have for '26?

Giordano Albertazzi, CEO

I would say this is certainly premature. We know that 20% has always been a 20% plus, not necessarily silly. We are very happy about the trajectory we're on right now. But quite adamantly, we have been vocal about that forever, and certainly in the introductory comments here, we are far from fully realizing our potential. But when we look at the way, for example, liquid cooling is ramping up, the way the top line is heading as reflected in the current guidance, all elements that play in favor of us being able to be more effective in achieving our efficiency, leveraging volume, etc. So, I'd say that productivity is a big element in our value equation, not the sole one, of course, but an important one. The improvements and gains that we see being realized are encouraging in that direction. But again, we are certainly operating the company much better. There is so much more we can do, and that will be our forever mantra no matter how strong we can be.

Operator, Operator

We now have Scott Davis with Melius Research.

Scott Davis, Analyst

Good morning. You devoted a whole slide to service, so obviously, you think there's a lot of potential here. I guess my question is what is the key KPI here? Can you price around guaranteed uptime? Is it just having field service guys on site, you can just price of that labor? I mean what is the value to you guys and to the customer, I guess, more explicitly? I know it's a big topic overall, but it wasn't 100% clear to me off the slide. And then also just the potential, I mean, if you devote all slide to it, clearly, you think it can become pretty material, pretty, I would assume by 2025. So anyway, I know there's a lot there, just answer what you want, and I'll pass it on. Thanks.

Giordano Albertazzi, CEO

Yes. I think certainly, a question that warrants a market-positive conversation. I'll try to go to what are the key metrics here. I think there are two dimensions to that. First, for us, clearly, recurrent revenue is an important aspect of having a large installed base and being able to attach to that installed base. All things that we measure obsessively. We track and make sure that we operate very well from both a commercial and delivery standpoint. I call our service business very mature in that sense. With the current revenue and the attach rates, it's quite valuable set of revenue that delivers for us in terms of margins and profitability. But there's another element that service is a differentiator. That makes a difference and plays a very important role in our market share. The example I made at a high level, obviously, given the time constraints when we were going through the slides is a liquid cooling system. Here, we have probably a $2 million rack that is kept alive, if you will, by a secondary so-called liquid-cooled circuit. You have to be able to see things before they happen and when you see something, be able to intervene in seconds. The value is really the utilization and the resilience of our customers' infrastructure. There is an inertia on that, and the stakes are becoming significantly higher. The nature of the load is becoming more unforgiving, and telemetry, predictive services, and the ability to have experts on-site in minutes or hours is essential. We are training our global service engineers proactively to be a partner of choice to help our customers navigate this complexity.

Operator, Operator

Thank you. Your next question comes from Michael Elias with TD Cowen. You may proceed.

Michael Elias, Analyst

When I look at the underlying data center market, I see that supply and demand are meaningfully imbalanced. And when I take a look at spot data center market pricing, I see it's up about 20% year-over-year over the last few years. Then when I drill that down into the unlevered yields that data center operators are generating, they're seeing yield expansion to the tune of 100 to 150 basis points year-over-year, which says to me that their returns are expanding faster than their cost to build and their cost of capital. So, when we think through the price-cost dynamic for Vertiv, my question for you is, should price grow linearly with the increase in underlying data center spot market pricing, given that, that kind of price increase to the end customer would actually have no impact on their underlying returns? I just want to get a better sense of how to think about the relationship between data center price strength and your ability to price to the data center operators.

Giordano Albertazzi, CEO

I think it's really specific customer-by-customer and technology-by-technology. Different technologies may have a different profile of supply and demand balances. It's hard to define a general rule here. Certainly, what we see is a market environment where vendors and especially a player like Vertiv with a strong value proposition can translate that into value to our customers and translate that into price. We'll go through all the aspects of your question and further reflect on that. But I'd say that we continue to operate in an environment that is favorable, but with players that are certainly very savvy, especially large colos and hyperscalers in their buying dynamics.

Operator, Operator

Thank you. Your next question comes from Jeff Sprague with Vertical Research Partners.

Jeff Sprague, Analyst

I was wondering if we could just maybe put a finer point on share and how you're measuring it. Obviously, there's a lot of concerns about competition. You've heard before you're hearing on the call. But when we look at your order growth rate and the like, it doesn't appear to me there's a share issue. But you did mention you believe you're gaining share. So I wonder if you could just tell us how you're measuring that? How fast do you think the market is growing? Are you thinking about the answer to this question in terms of dollars per megawatt or some other metric? And just help us get a little more comfortable with how your business is performing relative to the competitive set.

Giordano Albertazzi, CEO

Certainly, well, thank you for your question, Jeff. Our order trajectory is encouraging from the point of view of the signals that it gives us in terms of market share. There are parts of the market that are relatively new, as well as parts of the market that are quite mature in terms of adding access to all the market information. The answer should be specific to the technology. But in general, if we think about what we gave in November in terms of growth of the Cloud/Colocation in the 14%, 17%, our orders are encouraging. Market share is always something that is a little bit measured ex-post, but the trajectory we are on certainly suggests that the outlook is positive in that respect. You were asking as well about dollars per megawatt, let's say, vision or thoughts right now at this stage, not very different from what we shared with all of you in the past. So I think, again, the 2.5 to 3 non-AI and 3 to 3.5 million per megawatt of TAM for Vertiv in the AI space. So that is for us still valid, let's say, order magnitude.

Operator, Operator

Thank you. I would now like to hand it back to Giordano Albertazzi for some closing remarks.

Lynne Maxeiner, Vice President of Investor Relations

Yes, operator, I think we have time for a couple more questions. There's a few more in queue. Go ahead and take those.

Operator, Operator

Absolutely, I apologize. We now have Nigel Coe with Wolfe Research.

Nigel Coe, Analyst

Thanks for saving that I was drowning. Wow, okay. Yes. So look, I would like to, I think, take Jeff's kind of line of thought a little bit differently. Obviously, I tend to agree with the view that your front-end capability service network is a big advantage. The other side of the coin is you've got a bunch of Asian server OEMs sort of trying to integrate around the server, and they're there with CDUs, etc. Maybe just talk about their ability to do that. And maybe just maybe a bit more specifically, what sort of win rate are you seeing on liquid cooling right now?

Giordano Albertazzi, CEO

Yes, I'll go back, thank you for your question and Nigel. Again, as mentioned when we were going through the slides, it's not just about having a widget. It's about having first of all, very strong technology, as we do, but then having very strong controls that are an important part of the liquid, especially CDU direct-to-chip equation. Having the right manufacturing processes, the ability to scale, and services. We always evaluate our competitors very, very seriously. But when you think about the system integrators or other players in that space, we should not necessarily look at them as necessarily competitors. Very often, they play a hybrid role, and they can be a route to market as well. Things are a little bit more nuanced than they may appear at first glance. When it comes to win rates, will not go with the details of the win rates at this stage. But I think it's important to say that we are very, very happy with the trajectory of orders and backlog that we have in the liquid cooling space across a concerned portfolio, but in particular in the CDU space. Very, very, very happy. Yes, but I will not go into that at this stage.

Operator, Operator

Thank you. Your next question comes from Noah Kaye with Oppenheimer.

Noah Kaye, Analyst

So with enterprise on-prem migration of workloads to the cloud, perhaps getting into a little bit more of a new equilibrium here. You mentioned an uptick in the outlook for enterprise in the Americas. To what extent was that contemplated in the sort of 3% to 5% outlook you gave at the November Investor Day? Could we potentially be seeing growth starting to pick up versus that rate, and is that something that you're seeing in the pipeline currently?

Giordano Albertazzi, CEO

Thanks for the question. Good point in the sense that when we talked about that 3% to 5%, we're saying that may be augmented by the implications of AI as AI matures and becomes more readable and not just on card and colo. It's still a little early stage, but we gave a different color for a reason on Slide 4, and it is exactly that pipeline starting to indicate that things may be better in the enterprise part of the market than we had in our November model. But it's yet a little bit premature within aspects of the model, but it's something that we do constantly. Yes, we see positivity in the pipeline and certainly in the direction of a faster growth in enterprise than originally expected.

Operator, Operator

Thank you. We now have Steve Tusa with JPMorgan.

Steve Tusa, Analyst

Just a question on cash. Seasonally, you guys usually kind of flat from the second to third and then up nicely in the fourth. I know that there's some timing on down payments involved with the contract or the deferred revenue, however you want to call it. Why are you guys not expecting that this year? Is there some timing around that?

David Fallon, CFO

Yes. I think there's timing. If you look at our advanced payments, and you can look at the deferred revenue line in the balance sheet, that was up $150 million in Q2 and not surprising based on the quantum of the orders we had in Q2. So effectively, that's a prepayment and that would impact the cash flow timing going forward. So I think I mentioned we would expect about $440 million for the rest of the year, and that should be pretty uniform. But similar to orders, there is an element of timing and lumpiness, especially with some of these advanced payments. But I think we're comfortable with the $220 million for Q3 and Q4.

Operator, Operator

Thank you. Your next question comes from Nigel Coe with Wolfe Research.

Nigel Coe, Analyst

I just wanted to talk about the margins in APAC mainly. It's good to see the Americas and EMEA having this competition. Just wondering when APAC is going to get involved in this competition. As we see the inflection in APAC coming through, what kind of incremental margin should we expect as we go over the next couple of years?

David Fallon, CFO

I think if you look at APAC, they're probably not going to be an active participant in the regional high, and there's some market differences there, notably with China. But if you look on a year-to-date basis, even though they were down in Q2 versus prior year, some of that was driven by the one-time expense. But on a year-to-date basis, they're still 100 basis points higher than they were last year. We think that year-over-year variance will expand in the second half. VOS principles work in APAC, just like they do in the Americas and EMEA. We are doing the same things in APAC as we are doing in the rest of the world. Even though from a relative basis, maybe a step below APAC and America, we expect expansion of operating margins in APAC for the rest of the year and also going forward.

Operator, Operator

Thank you. Our final question comes from Brett Linzey with Mizuho. You may proceed.

Brett Linzey, Analyst

You noted in the slides managing timing constraints around construction and power availability. I guess, is there a way to mention how much of the current backlog is permitted, resource-ready to break ground versus the portion that might be a little bit more data uncertain? Just trying to get a better sense for the visibility in the next year.

Giordano Albertazzi, CEO

Thanks for your question. When we talk about permitting and power constraints, we talk about in general, the industry as a whole. So it's not something that necessarily applies to our backlog. What we have in backlog reflects our customers' requested delivery dates already accounting for all those aspects. It could be a little adjustment depending on the needs, but nothing unusual and nothing different than what has happened in the industry for 4 years. Going back to some expectations in the market for growth, a strong double-digit growth in the industry and infrastructure in general, we've said that, again, we said that already in our November Investor Day. There are aspects influencing factors reducing exuberance to levels of market growth that, cloud and colocation, is really about 15%, 16%, 17% CAGR. Growth rates that are very, very respectable in many respects. But my comment did not have to do with our backlog. Our backlog is based on the requested delivery dates that we get on the PO that we receive from our customers, and it could be a minimal adjustment depending on the needs. Hopefully, addressing your question and concern.

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, CEO

Thank you, Brica. Thanks, everyone, for joining us today. A big thank you for your questions. First and foremost, I would like to thank the Vertiv team for another quarter of strong performance. I really appreciate everyone's support and have a great rest of your day today.

Operator, Operator

Thank you. The conference call has now concluded. Thank you for attending the presentation. You may now disconnect from the call.