Good morning. My name is Andrea, and I will be your conference operator today. At this time, I would like to welcome everyone to the Vertiv Third Quarter 2020 Earnings Conference Call. [Operator Instructions] Please note that the 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. .

Thank you, Andrea. Good morning, and welcome to Vertiv Third Quarter 2020 Earnings Conference Call. Joining me today are Vertiv's Executive Chairman, David Cote; Chief Executive Officer, Rob Johnson; Chief Financial Officer, David Fallon; and Chief Strategy and Development Officer, Gary Niederpruem..

Before we begin, I 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 registration statements or proxy statement and other filings 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. .

Thanks, and good morning, everyone. When we spoke in August, the Vertiv team had wrapped up a very successful second quarter. I'm happy to say the team demonstrated excellent execution again in the third quarter.

Vertiv continues to have a great position in a good industry, and I think the proof points of the last several quarters demonstrate that it's not a fluke..

Even during this COVID time, the data center market remains strong, and Vertiv continues to validate its leadership position in the market. While the team executed on both the top and bottom line over the past several months, they also continue to focus on seed planting. So we'll win not only in the short term but also the long term..

Initiatives such as the new Vertiv Product Development activities, VPD; deploying the Vertiv User Experience or customer view; and developing their 3-year strategic plan are just some of the ways the Vertiv team is focused on ensuring sustainable success. I am really impressed with the adaptability and the receptiveness of Rob and his team..

So overall, I'm just as excited today about the future of Vertiv as I was a year ago, and I can't wait to continue working with the team..

So with that, I'll turn the call over to Rob. .

Good morning, everyone, and thank you, Dave. Your ongoing coaching and mentoring has meant a lot to both me and the team. I also want to say thank you to the entire Vertiv team for their efforts in Q3. Despite the challenges of the quarter, one of the positive confidence has been the team's relentless focus on delivering to our customers.

A Vertiv's team creativity, energy and passion for serving our customers is always front and center..

Now let's look at the slides. Turning to Slide 3. Overall, the demand side of the business was very promising. The sales were up 8.5% and orders were up over 15% as compared to Q3 last year. Additionally, this is the fourth quarter in a row where our backlog grows and hit yet another all-time high.

We will get a bit more into the specifics on the demand side of the business over the next few slides..

From a profitability standpoint, our adjusted EBITDA was $179 million, which was up 31% from last year's Q3. This resulted in adjusted EBITDA margin expansion of 270 basis points. This was driven by higher sales, higher contribution margin, lower fixed cost on a percentage basis..

Our free cash flow at the end of Q3 was $129 million, which was $115 million higher than last year's Q3. During our last earnings call, we mentioned that we would be working on a restructuring plan in Q3. We completed that activity and took an $80 million restructuring charge for the programs.

These restructuring efforts will drive $85 million of annualized run rate savings by 2023. David will share more details about our plans later in the presentation..

Next, on this slide, we wanted to provide you some of the ranges for the expected outcome of Q4. We are anticipating the implications of COVID to continue to fluctuate, but based on our current visibility, we expect our organic sales to be up 6% to 8%, and our adjusted EBITDA will be up 18% to 24% from the last quarter, Q4, last year..

So while these dynamics can change, we did want to share with you what we're currently seeing playing out in Q4. Now all of this is clearly predicted -- predicated on COVID not impacting our customers and not impacting site access any more than what we saw in Q3. We'll discuss more on this topic later..

Finally, I wanted to add a bit of color around 2021. As we see things right now, the demand side is holding up and our backlog should be robust as we exit the year. On the cost side, we are keeping a close eye on fixed cost constant, but are continually looking at investments in VPDs and other growth programs to ensure long-term success..

Turning to Slide 4. We used this slide last quarter and received good feedback on it. So we wanted to keep it in for consistency and also add our thoughts around the current market environment. The chart is simple, but it relays the real-time view we have on the demand side of things.

It is qualitative in nature and depicts our view on the level of health and activity in each of the markets we serve..

We continue to see strong levels of activity in every region in the cloud and colocation markets, as indicated by the 6 green buttons in the top 2 rows. Emerging vital applications such as online education, telemedicine, video and gaming are benefiting our cloud and colocation customers, as a surge in demand is benefiting us as well..

In contrast, we see the enterprise and small to medium business still being challenged by COVID and indicated by the red and yellow buttons in row 3. This segment spending continues to be mixed. It's probably slightly more positive today than it was 90 days ago, but not significant enough to upgrade any of the regions in this particular space..

Switching to the telecom side of things. Most of our regions are pretty consistent with prior quarter. We continue to see 5G deployments in U.S. and parts of Asia. While China is certainly deploying 5G, we see a small pause at the moment, as they digest some of their equipment. This is not surprising, and we expect that it will be short-lived..

Finally, as we've told you before, our C&I business often tracks GDP over the longer run, but sometimes, the quarterly timing can be different. While this segment has held up better than expected, things remain relatively flat.

There is certainly some puts and takes, but overall, a decent market picture when you consider our mix of data center business, the applications people use every day to become more and more vital because those applications are needed to be processed, stored, transmitted, and this creates a great backdrop for our business..

Moving to Slide 5. To reiterate, the overall demand is strong, as evidenced by our order rate and our record backlog, led by EMEA and Asia. EMEA was particularly strong due to some larger projects, specifically in the colocation market..

As I mentioned in the prior chart, the enterprise and IT channel markets are still not back to pre-COVID levels. But there are signs of life, as evidenced by our integrated rack solutions business having positive growth in the third quarter this year versus the same quarter last year..

Switching to the supply side now. I'm pleased to report that most of our facilities are operating normally. However, I will say that things continue to evolve very rapidly. We have been very cautious with our workforce as safety is our #1 priority.

We continue to navigate through these impacts on the operations and supply chain side, but we have become creative problem solvers and experts in mitigating issues before they become concerns for our customers..

Gaining access to sites for installation and services has proven to be an issue, but we continue to manage around any restrictions. Countries like Singapore, Malaysia, Philippines are still struggling with COVID, and we've seen some of these countries in Western Europe tightening back up again..

These unfortunate COVID-related situations are outside of our control and, however, we continue to work closely with our customers to adhere to health and safety requirements and to make sure that our scheduling of our service departments are as flexible as possible to meet their needs..

With that, I'll turn it over to David Fallon to walk us through the financials.

David?.

Thanks, Rob. Turning to Slide 6. This page summarizes our third quarter financial results versus last year. As you can see, net sales were up $91 million or 8.5%, 8.3% when adjusted for a slight foreign exchange tailwind. We continued our strong momentum with orders, as Rob mentioned, which were up 15.5% in the third quarter and 10% year-to-date..

Adjusted EBITDA increased $43 million or 31%, driven by higher sales, improved contribution margin and relatively flat fixed costs, converting into a 270 basis point improvement in adjusted EBITDA margin..

Our sales and profitability performance certainly translated into strong free cash flow of $129 million, which was up $115 million from last year's third quarter..

We will review some of the drivers of this improved free cash flow in a couple of slides, but before leaving this page, we are proud to emphasize that our third quarter adjusted EBITDA, related margin and free cash flow figures are all record quarterly highs, demonstrating our continued focus on profitable growth and strong cash flow generation..

Turning to Slide 7. This slide summarizes our third quarter segment results.

Net sales in the Americas were down $14 million or 3% as growth in our integrated rack solutions segment, primarily in the channel, was more than offset by lower large project sales in our critical infrastructure & solutions segment and lower sales in our services and spares segment caused by COVID site access issues..

Net sales in APAC increased $56 million or 17%, primarily due to continued strong growth in China across most end markets, including data centers, telecommunications and industrials. Geographic locations outside of China, in APAC, were relatively flat as we continued to deal with some site access challenges in some of those jurisdictions..

Net sales in EMEA were up $49 million or 24% with $7 million driven by a stronger euro. The $42 million or 21% organic growth, somewhat aided by the timing of large projects was spread across several market verticals, including colocation, data centers, telecommunications and commercial and industrial..

From a profitability perspective, adjusted EBITDA margin improved in all 3 geographic segments, but notably in the Americas, where margin increased over 800 basis points from last year's third quarter.

A portion of this improvement was driven by strong product mix this quarter, but that was coupled with a lower margin large project last year caused by poor internal execution, but the remainder of the increase was the result of higher contribution margin from strong execution of purchasing and pricing initiatives and driving lower fixed costs..

On a year-to-date basis, adjusted EBITDA margin in the Americas has increased over 400 basis points from last year, illustrating the progress we have made with our margin expansion initiatives in a relatively short period of time..

Next, moving to Slide 8. This chart bridges third quarter free cash flow from last year. The $115 million increase is primarily driven by lower cash interest pursuant to the debt paydown and refinancing in the first quarter, and that is coupled with higher adjusted EBITDA..

After beginning the year with the use of cash in the first quarter, if you recall, we used about $203 million of free cash flow in Q1. But since then, we have generated more than $190 million of free cash flow over the last 2 quarters, really indicative of the strong cash generation potential of this business.

This free cash flow has allowed us to paydown our ABL by $170 million in the third quarter, while improving our liquidity position from about $450 million at the end of the first quarter to over $650 million at the end of September..

Next, turning to Slide 9. This page summarizes costs and benefits of a restructuring program, which supports our continuing objective to maintain fixed cost constant while reinvesting in the long-term growth of the business..

Pursuant to this program, we recorded a $71 million restructuring reserve in the third quarter, which was primarily related to severance for head count efficiency and footprint optimization projects to be launched in the fourth quarter and over the next couple of years..

In addition, we recorded a $9 million intangible asset impairment charge for trademarks and developed technology in a small business unit we are streamlining. We anticipate additional, albeit smaller, restructuring program expenses in both 2021 and 2022 that aren't covered by the third quarter reserve..

We estimate $84 million net cash outflow to execute the restructuring program with approximately $60 million of that in 2021. We expect $85 million run rate savings from the program in full year 2023, with those gross savings ramping up in each 2021 and 2022..

For next year, we expect over $40 million gross savings from the restructuring program, offset by approximately $20 million of additional restructuring expenses not covered by the third quarter reserve..

Next, turning to Slide 10. This page summarizes our financial guidance for the fourth quarter, and overarching any expectations for the next several months is the dynamic uncertainty with COVID, which is certainly worse than in many global jurisdictions.

Accordingly, our guidance for next quarter assumes that COVID conditions are not significantly changed from what we experienced in the third quarter. If conditions do become more challenged, our guidance here today could be significantly negatively impacted..

Notwithstanding these changing COVID conditions, we do expect strong fourth quarter topline growth of 6% to 8% from last year's fourth quarter, and 7% to 9% sequentially from this year's third quarter as we continue to benefit from a record high $1.85 billion backlog at the end of September..

Adjusted EBITDA margin is expected to improve approximately 165 basis points at the midpoint from last year's fourth quarter as contribution margin should increase from purchasing and pricing initiatives. And fixed costs, although slightly higher than last year, primarily due to growth investment, should decline as a percentage of sales..

Fourth quarter adjusted EBITDA margin, when looked at sequentially from the third quarter, should be relatively flat quarter-over-quarter, despite the anticipated higher sales.

And some of the drivers that include the anticipation of an approximately $30 million increase in fixed costs in the fourth quarter versus the third quarter as the benefits from our COVID-19 cost savings program ramp down, and in addition to higher growth investment and public company costs..

Once again, before moving off this slide, we certainly reiterate that these expected fourth quarter results could be significantly negatively impacted by any worsening COVID-19 conditions..

So with that, I turn it back over to Rob. .

Thanks, David. Turning to Slide 11, here's a bit more detail regarding our perspective on 2021. We expect cloud, colocation and telecom markets will continue to be healthy as we enter into 2021. Because of COVID, we're unable to anticipate what the enterprise market will look like, but we anticipate growth in the overall data center landscape..

Our backlog should be slightly better heading into 2021 than we thought at the end of last quarter, which provides us good visibility and confidence on the revenue side for the first half of 2021. However, the uncertainty of COVID provides us a pause today more than we were thinking 90 days ago.

Certainly, we're not in the business of making predictions on when there will be a vaccine, but we do see this as a very dynamic situation today, as David mentioned earlier. As we have seen during this entire pandemic, we are planning for the worst scenario and working and hoping for the best as things remain very dynamic even today..

On the margin side, as we've mentioned previously, we are firm believers in the strategy of holding fixed cost constant. This concept is being practiced today, but as mentioned previously, we will continue to invest in R&D and growth investments that will be key for our long-term success.

So while we're not providing specific 2021 guidance at this point, we did want to refresh the commentary we provided to you last quarter..

Now turning to Slide 12. Our backlog, fixed cost constant approach we have implemented, and our liquidity position are in great shape. We hold a leadership position in a growing industry, and the demand for digital infrastructure to support the vital applications the world needs has never been stronger.

We will continue to invest for the future while simultaneously managing for today, so we are prepared to be even more successful as we emerge from this pandemic and the world adapts to a post-COVID life..

Thank you for being on the call today. Thank you for your support. I'll now turn the call over to the operator, who will open up the line for questions. .

[Operator Instructions] The first question comes from Andy Kaplowitz of Citigroup. .

Rob, thinking about -- just early thoughts about 2021 you gave us, you've mentioned you expect to see strong demand from cloud and colocation, healthy telecom, and then it's too early to call on the enterprise stuff.

But it seems like when you put that together with your backlog and you consider the easy comparisons you have, at least in the first half of '21, does it give you at least some confidence that Vertiv could see the type of organic growth you are recording in the second half of '20 lasting into '21, despite the increased COVID risk you're concerned about?.

I think it's really too early to call what -- again, the recovery on the enterprise, the small to medium business. So I would say that as this business has over the last 4 years, Andy, there is a digestion period and then there is a building period. And we can't really predict what that's going to look like.

So I wouldn't be projecting you and saying that we guarantee or we have this same level of growth. But we are seeing a robust market out there, and we're participating, and we're winning our fair share. .

That's helpful. And then you mentioned the $20 million of incremental benefit in Q3 that came from increased productivity, pricing mix. Maybe you could talk more generally about the progress in implementing the Vertiv operating system.

Where are you in the process? How do we think about the incremental opportunity in terms of pricing and productivity as we go into '21? As we go into '21, do the benefits actually accelerate as you continue to improve your focus over the next few quarters?.

Sure, Andy. Great question. So our Vertiv operating system, and we've talked about this is -- it's something that takes time, right? It's not something that we actually get done in a year or 2 years, but it happens over a period of time as we roll that out and deploy that.

And the benefits from some years maybe 50 basis points, next year maybe 100 basis points..

We feel good about the pilot plants that we have running now and our progress that we've made so far, as it relates to rolling out the Vertiv operating system. And again, we do see long-term benefits from that..

From a pricing perspective, we continue to get in various parts of the world pricing, and we expect to get pricing again next year as we go into 2021, whether it's on products or services, or our differentiated product sets that we're coming out with.

And that's part of the reason why we're investing a lot of money in the -- what we call the Vertiv Product Development, is to bring those features up and have those innovative solutions that customers are willing to pay a better price or give us a better price for that. So we're not just competing on a commodity level product for product. .

And just one more quick one for me. The lower contribution margins that you estimate for Q4 versus Q3, it's really just a function of that $30 million in higher fixed costs and then just continued investment. There is nothing else really to lead into there other than that. .

Yes, Andy, this is David. That certainly is a headwind for us in 4Q, the higher fixed cost. We certainly have to point out that we see that higher fixed costs as investment in the long term. A lot of that is driven by VPD spend, R&D spend and continue to invest in some of the growth markets.

But we also anticipate contribution margin to dip a little bit in Q4 versus Q3, which is separate from fixed costs, and that's driven in part by product segment mix.

So we see healthy growth, Q3, Q4 on the topline, but it's probably a little bit overbalanced to the critical infrastructure and solutions product segment, which has a little bit lower margin than the other 2 product segments. .

The next question comes from Mark Delaney of Goldman Sachs. .

Congratulations on the strong third quarter results. So I'd like to better understand the commentary on the hyperscale market. And of course, as discussed, the company had very good orders in that segment and is expecting some strength to continue there.

Can you elaborate a little bit more on that end market in particular? And I asked because some of the semiconductor and technology companies have been seeing a slowdown in data center spend. It doesn't seem like that's Vertiv's outlook.

So maybe you could help us understand a little bit more what you're seeing in that market and why Vertiv's business may be a little bit different?.

Yes. Mark, this is Rob, and thanks for the question. Thanks for being on today. What I'd say is a couple of things. We are seeing strength globally in the colocation and hyperscale market.

What tends to happen though is, what you might hear from the chip manufacturers doesn't necessarily correlate or connect directly to the demand that we're seeing, partly because while we're building, they're not filling.

And so there is some timing differences as the data centers get built and get deployed from them, then filling with the IT equipment from that perspective. So I don't think we use those as the indicators of where things are going because they're a little bit lagging, what we're seeing on the front end of the business. .

Got it. That's helpful. And I just wanted to ask on free cash flow, and as we're thinking about 2021 modeling.

I know it's still early, but should we think about incremental EBITDA dropping through into incremental free cash flow? Are there any investments in working capital or CapEx we should be cognizant of, just thinking about it at this point? And the company just announced the dividend, but if you could also talk about it, as you are driving that higher free cash flow, how should investors be thinking about the use of that free cash flow?.

Yes. Thanks for the question, Mark. So first, on free cash flow. I think a good starting point to understand 2021 is to go back to our beginning of the year guidance for 2020.

And this is all pre-COVID, but on a pro forma basis, when you adjust for some of the transaction-related expenses and also adjust for some of the benefit that we started to receive at the end of the first quarter from the debt refinancing and paydown, we had set a pro forma free cash flow for 2020 was in that $285 million to $300 million range.

I think that's a really good starting point for next year..

There certainly will be some moving pieces, and one of those is related to the cash outlay pursuant to the restructuring program, which we said was about $60 million. We should receive some benefit from the lower expenses from the restructuring. I think that's probably a really good starting point..

As it relates to what we are going to do with the cash, at this point our intention is to paydown debt. .

That's helpful. If I could just sneak one last follow-up in, around that restructuring. If I recall correctly, at the last quarter's call, the company talked about potential savings of $50 million to $70 million in 2021, and now today, talking about a higher number in 2023. But if I'm understanding correctly, '21 savings is maybe a little bit lower.

I don't know, David, if you could -- or anyone on the team could clarify a bit more on how to think about the trajectory of savings from the program?.

Yes. Great question. So apples-to-apples, the $50 million to $70 million that we discussed at the end of the second quarter after we have completed the initial planning is likely going to be in the $40 million range. So that's a gross savings number.

The reason that has declined from when we talked about it 3 months ago is primarily related to some of the planning on the footprint optimization..

So of course, a -- primary goal of the restructuring is to take costs out, but we have to do that with very minimal impact on our customers. So as we look at the plan, we've moved some of the planning out on some of the footprint projects from mid- to late 2021 into 2022. And so the savings have not changed.

The expected savings have actually increased a little bit, but just the timing has moved out from 2021 into 2022. .

The next question comes from Amit Daryanani of Evercore. .

I guess, maybe to start with, as I think about the September quarter, growth number is at 8% growth. And I guess, when I think the December quarter, midpoint of growth is [indiscernible] you guys will do 7%, 8% organic growth in the back half of this year.

How do I think about that outperformance versus your longer term growth? You've talked about at 3% to 4%.

Is that coming more from share gains or better end market? And sort of the durability of that as we go forward?.

I'll start with that. This is Rob, Amit, and thanks for the question. I think it's a combination of both. The end markets are strong as it relates to colocation, and that was one of our key strategies that we've kind of put in place to take share there, and we've done really well on a global basis.

And that end market itself is fairly robust today, and again, driven a lot by COVID and people working from home and just not having enough capacity from that perspective. So I think the overperformance there or a strong performance is really driven by those 2 things. We feel good about our position against the competition. .

Perfect. And I guess, maybe I want to just follow-up on Americas performance, which was down 1% organically versus overall up 8%.

If you look at that delta, was that really all attributed to the timing of large projects? Or I guess, maybe how much was that versus some of the other factors? And do you expect to catch up that performance in the December quarter?.

Yes. This is David. So I think you hit it right on the head. So the impact of the large project was somewhere between 400 and 500 basis points of growth. So that alone would have turned that negative 2.5% to a positive.

But if you also look at the product segment results for the Americas, there also was a headwind for services, which probably contributed about 200 basis points. And in addition, Americas also had a foreign exchange headwind.

The other 2 regions had a tailwind in the third quarter, but because of the Mexican peso, the Brazilian real, that was about a 1% headwind..

And looking forward into the fourth quarter, and I think we bullet point this on the guidance slide, we are anticipating low single-digit growth in the Americas in the fourth quarter. So we do anticipate a little bit of a rebound there versus what we saw year-over-year in the third quarter. .

The next question comes from Nicole DeBlase of Deutsche Bank. .

So I just wanted to follow-up on one of the questions asked earlier on the new restructuring program. So I think the $40 million gross savings, get that part. I guess what I'm missing is, I think you guys have talked about, about $60 million of temporary cost benefits in 2020 that you were looking to offset.

I guess, is the expectation that, that full $60 million does come back next year, thus creating a net headwind? Or how do we think about that?.

Yes. Nicole, so -- really good question. So what we would say is, we really have to look at these things independently. So when we look at the restructuring, we do anticipate $40 million of gross savings. We will have additional restructuring expenses of $20 million. So there is a net $20 million savings next year related to restructuring..

Separately, we do anticipate some headwinds pursuant to the COVID cost-saving program we put in place. If you recall, we anticipated that to be $60 million this year, and we're certainly on track. But of that $60 million, we believe $40 million is going to come back into the business..

So those 2 things certainly offset, but when you look at all of the savings initiatives and the headwinds, our goal and our target is to keep fixed cost constant. And we purposely -- on the 2021 slide, we provided some indication that we actually anticipate fixed costs to increase in 2021 versus 2020.

And a big driver of that is related to the size of the reinvestment back into R&D and growth investment in the market..

So we kind of look at all these puts and takes fungibly, and when it all boils down to what our fixed costs doing next year, we actually anticipate those to increase a little bit because of that growth investment on a net basis. .

Got it. That's really, really helpful to clarify that. I guess one follow-up. When you guys think about restructuring costs, are you going to add those back to adjusted EBITDA? I'm just trying to think of the right way to model this. .

We are not. So going forward, we -- the only item that we will adjust will be for the intangible amortization and that would be reflected in our adjusted EPS, adjusted net income.

But going forward, any restructuring expenses will be included in whatever we guide and whatever we report for adjusted EBITDA or whatever -- what other -- whatever financial metric that we'll be reporting. .

Okay. Got it. I'm just going to squeeze one more in. I guess, back to the point on R&D also related for 2021, any idea yet about the magnitude of R&D growth next year or step-up in investment? Maybe it's too early.

And then, I guess, like longer term, does R&D need to continue increasing from here beyond 2021?.

Nicole, this is Rob. I'll take the first part of that, and Dave can share some guidance or some -- not guidance, but some numbers. We -- part of our strategy, as we stated, was to take our R&D up to around 6%.

So we expect that to increase every year as we look at the adjacent, I would call, markets or adjacent product areas and continuing to fill out the product line and driving that innovation in both the Edge and continued in the colo and hyperscale..

So we look at continued investment as part of -- our vector of differentiation going forward is to continue that development cycle and new products. And we measure that and take a look at revenue from new products and how that helps us grow.

So I would expect for the next couple of years as we ramp up to the 6%, and we'll continue to spend at that level, and that will be a key differentiator for us. .

The next question comes from Lance Vitanza of Cowen. .

Congratulations on the quarter. I guess, I wanted to drill down a little bit on the Americas EBITDA margin. Obviously, it is really strong in the quarter, and then even if you were to look over a 9 month -- the last 9 months, it's pretty impressive. I know you mentioned you've got some fixed costs that are coming back in Q4.

Should we assume that -- is that sort of the big driver of that big margin improvement? And then is it possible to sort of think about what that margin would have been kind of on a go-forward basis? And just more generally, I guess, do you think about that level of margin as ultimately sustainable or achievable?.

Yes. Thanks, Lance. This is David. So first, I want to reiterate how pleased we are with the progress that we're seeing, not only in Americas but in all the regions as it relates to margin expansion, but in particular, in the Americas.

Certainly, the 800 basis point improvement versus the third quarter last year was very impressive, but it also improved about 200 basis points from Q2, which is probably more comparable..

And from our perspective, heading into Q3, the performance that we saw from Americas from an EBITDA margin perspective of around 30%, probably was at the upper range of what we anticipated. And there were a lot of things that went the right way in Q3, including product mix, not necessarily between product segments but within product segments..

So as we move to the fourth quarter, we would not anticipate to see an EBITDA margin in Americas comparable to Q3. We still would see very nice growth from Q4 last year, but we would anticipate EBITDA margin in Q4 to be more close to Q2.

And one of the drivers there for Q4 is that a lot of our growth that we're seeing in Americas and also the other 2 segments is in that critical infrastructure & solutions segment, which does have a little bit lower margin than the other 2 segments..

So we're very hopeful that, that contribution margin and the EBITDA margin we saw in Americas is -- really portends what's to come for that segment and the business in general. But just looking out one quarter, we would anticipate that to drop back a little bit. .

That's helpful. If I could just get one more in, a quick one. You mentioned in the slides that the definition of -- your free cash flow definition includes dispositions of PP&E. I don't think that, that was material in Q3.

Do you expect that, that will be material going forward at any point?.

Certainly not this year. I think we had about $5 million last year. I'm not sure we've had anything year-to-date. So we wouldn't anticipate anything significant for Q3 -- I'm sorry, for Q4. However, related to the restructuring program, we do plan to sell facilities, some equipment and that probably would be timed in 2022.

It could slip into the end of 2021, but we wouldn't anticipate anything for at least -- significant -- anything significant for at least a year. .

Have those prospective potential inflows been kind of netted against the numbers that we're talking about in terms of your spend over the course of the next year?.

It is. So when we -- well, for the lifetime of the program, we're expecting $84 million net cash outflow to support the savings. The anticipated sale of assets is net in that number, and it's somewhere between $20 million and $25 million.

So the gross cash outflow is over $100 million, but we do anticipate to get between $20 million and $25 million for these asset sales. And once again, most of that we anticipate to come in 2022. .

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

I think a lot of my questions have been answered, but just one question just to clarify.

So if fixed costs are going to be increasing in '21 versus 2020, so should we think about incremental EBITDA margins coming in below gross margins, so target contribution margin, 40%, 45%, but maybe thinking low to mid-30s contribution, is that still reasonable?.

So I think from a contribution margin perspective, what we have spoken to was a general range between 40% and 45%. It depends on the region. It depends on customer mix and market vertical mix, but we still generally plan internally for that range, and that's what we would speak to externally..

What I will say from a fixed cost perspective, and I want to caveat all this, again, we are not providing guidance for 2021 yet.

We are still going through the planning process ourselves, but we felt it prudent to provide some expectations that we see a lot of good R&D and VPD projects for next year, quite frankly, more projects, and we have resources to complete. And we thought it was prudent to continue to invest in those.

And as a result, because of the size of that investment, we anticipate fixed cost to increase..

But from a margin perspective, we would not believe that to be a tailwind. So from an impact on margin, we don't believe fixed cost is going to increase as a percentage as high as the topline will increase year-over-year. So even though fixed cost will increase, we don't think that would be a significant headwind as it relates to EBITDA margins. .

Got you. And just another question, just to clarify on enterprise versus sort of small and medium business. I think one of your competitors commented actually that they were somewhat more bullish on enterprise outlook, both near term and medium term. And I just want to parcel out, you did talk about sort of big project slippage.

Was that on the enterprise side or was that sort of on the colo, cloud side? Just want to understand -- just, yes. So that's a good question. And maybe then just a little bit more color on what's happening in small and medium business side of things. .

Yes, sure. This is Rob. A couple of things. The large projects are colo and hyperscale. So that kind of covers that area. On the enterprise side, what we look at as we really go to this hybrid world of on-prem and cloud, they might be referring to some of the Edge strength that we are seeing in some of the enterprise.

Certainly, we're seeing a lot of activity in the enterprise from an engineering perspective. And so when we say, we're not -- enterprise still hasn't recovered, they're just not pulling the trigger. But there is certainly a lot of activity out there that we have visibility to of projects that we'll break at some point in time..

From the small to medium business, we did see a little bit of growth in the, what we call, our IRS business, which is driven by the channel side of things.

So we're really happy with the execution that we're doing there, but we just haven't seen -- and if you see some of the numbers out with CDW and so forth, people are still experiencing negative growth, but beginning to see potential light at the end of the tunnel..

That being said, if COVID continues to persist, I think that affects that particular area as we go forward.

Our plan there, as a company, was to take share in the channel and grow, and I think that's how we were able to kind of, I would say, outperform what most of the companies are doing as it relates to channel by taking share with innovative new products. .

[Operator Instructions] And the next question will come from Nigel Coe of Wolfe Research. .

I wanted to pick up on the enterprise question from Andrew to explore that. Obviously, when we see reds and yellows, it raises the question of physical versus structural kinds of pressures. And I'm just curious, do you think with the current market -- it sounds like you've seen some good activity, and it sounds like you're sort of encouraged by that..

Do you think that there's been any change in the sort of the balance between on-prem and colo, but with cloud for the enterprise segment? And would you expect -- 2021, obviously, still very much [ up in the air ], but do you think there is a shot that enterprise can come back next year?.

Yes. Nigel, thanks for the question. What we'd say is, yes, we have been seeing some life. When I say life, we've been seeing a lot of activity in the enterprise side of things, which would indicate at some point in time when they pull the trigger that things will move forward.

We haven't really seen a drastic move one way or the other to the cloud or on-prem..

I mean certainly, things like Teams and Zoom and BlueJeans and things like that are driving a lot of internet traffic, which is driving the need for more demand and bandwidth and latency from that perspective.

But we continue to see the enterprise looks at various applications and those ones that are readily and easily moved to the cloud, they do, and still seeing the advent of on-prem and the Edge data centers..

The other phenomenon that we've talked about in the past is really this data kind of staying within the country or within the region. So we're seeing a lot of builds in Europe and other parts of the world for people basically keeping that data, certain sets of data within their region, within their country, that type of thing..

So we'll continue to see those types of builds as well.

But I think what we're all waiting for and looking to is, once there is a vaccine, whenever that might be, and enterprise gets back and we have a kind of a new way of, I would call it, even a hybrid working from home and working from the office, we'll drive those projects and begin to move those off data center. .

Great. That's helpful. And then I wanted to talk about the announcement with Honeywell that was announced early this -- in October. They had it in their slides, and I don't think you've got it in your slides. I think it's interesting.

But how do you view this strategically? What is this -- kind of what problem does it solve for Vertiv? And how do you see this progressing? And kind of -- I think strategically, the question is, how does this help you and strengthen you going forward?.

Yes. So we're actually really excited about it. So not having it in our slides, there is no indication of our excitement of working with them. We see Honeywell and Vertiv one-on-one kind of makes 3 for the customers.

Honeywell is very strong in the software and the management side of the data centers and really driving efficiency and algorithms around performance of equipment..

And our announcement that we talked about the first product that we're working together on is really about using multiple sources in kind of a microgrid fashion for data center.

So we select whether it's solar or whether it's used fuel cells or pull off the grid, and we see this just as the beginning of some of the collaboration and good things that we believe we can do together..

So I think when you put Vertiv and Honeywell together, both with our global footprint, we can offer the customers and take advantage of a lot of the really good software that Honeywell has and management systems coupled with our equipment and get better performance and help people reach their PUEs and reach out of their carbon footprint as well. .

And would this be more in the hyperscale and colo segments? Or do you see that's much broader than that?.

I think it's much broader than that. I think it scales from hyperscale, colo, enterprise and certainly, down to the Edge.

As the Edge increases with thousands and millions of devices, Honeywell has got a really good strong portfolio of software for managing those, and tying that in with our product intelligence can allow us to smartly begin to do more of that predictive failure analysis, roll trucks when we need to.

So again, I think it really spans both Edge, and cloud and colo. .

This concludes our question-and-answer session. I would like to turn the conference back over to Rob Johnson for any closing remarks. .

Thank you, operator. I'm going to close the call by thanking our 19,000-plus employees around the world, who're working very hard every day to take care of our customers during this unprecedented time. We appreciate everybody's time today. We appreciate your support. Please stay safe, and we look forward to speaking you -- to you again soon.

Thank you very much. .

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