Good morning. My name is Matt and I will be your conference Operator today. At this time. I would like to welcome everyone to Vertiv's Fourth Quarter and Full-Year 2021 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..

Great. Thank you, Matt. And good morning. And welcome to Vertiv’s fourth quarter and full-year 2021 earnings conference call. Joining me today are Burton 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'd 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 burdens.

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 statement, our 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 @investors. vertiv.com. So with that, I'll turn the call over to Executive Chairman Dave Cote..

I and the Vertiv's team are disappointed and embarrassed by our second half, '21 and projected first-half '22 financial performance. We got behind on the inflation recovery curve with insufficient price and stayed there all year.

The past few months Rob and his team have implemented price increases that we expect will generate $360 million year-over-year price versus $260 million incremental inflation. Generating $100 million of favorable price costs for the full-year '22, because much of that price is in the backlog it takes.

Several months for the increases show in the financials. And, the vast difference between our expected first half and second half '22 performances. Our unimpressive financial performance was exacerbated by continued supply chain issues, which don't show much sign of abating at this point.

Like everyone else out there will hopefully be issued lessons in the second half, but we are counting on much less [Indiscernible]. On the past side our orders were through the roof and 4Q with total company orders up 51% in the Americas up a 114% in the first quarter is off to a good start, even with the price increases.

Our short-term performance, including anticipated first half '22 results is unimpressive. Our expected long-term performance starting in the second half of 2022 will be quite impressive. We getting heads finally, on price inflation recovery. Our orders are off the charts and market-leading, supply chain should loose them.

We have favorably resolved the tax receivable agreement in two lawsuits, and the product ramp up is just beginning. Some of you may be wondering why I don't get more involved. The answer is, I have. And that's why you see much more aggressive inflation forecasting, price implementation, and other fixes that Rob will talk about.

The management is readily accepted and implemented the let's say, suggestions and will deliver as presented. I apologize for putting all our investors during this.

That being said, if restructuring this year that should turn around in the second half, the long-term thesis is very intact, especially as performance begins in the second half, if you take the second half run rate into 2023, you can see how intact that thesis is. We know we have to prove it to you, and we will.

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

Thank you, Dave, the management team and I share the year sentiment about our Q4 results and the outlook for the first half of 2022. But before diving into the key messages on the first slide, let me comment on two topics.

First, while Dave has been a good mentor to me over the last two years, our relationship is certainly evolved over the past 60 to 90 days.

As is opening comments suggests, he has become much more actively involved in the day-to-day aspects of the business, both on the cost and price side, he is helping me almost daily basis to conduct reviews with our teams and host other business topics. And is my full expectation that this level of involvement will continue through 2022.

Secondly, let me address our guidance miss in the fourth quarter for which I take full Responsibility for. In short, we screwed up and some of you undoubtedly are wondering how we could get so surprised.

We significantly underestimated the magnitude of the material and freight inflation in the fourth quarter forecast mostly in America, by approximately $36 million. This underestimation cost also contributed to our underpricing in the market in 2021. So it was a huge deal not only for costs, but also price.

Half of the inflation miss was related to unforeseen supplier de -commits on critical components and our need to execute spot buys and premium freight to meet customer commitments. The other half is related to forecasting issue within America's region, heavily influenced by our ERP implementation.

But also, due to forecasting process issues within the region. These regional costs, forecasting issues have been fixed, and we feel very confident with our cost projections for 2022 as evidenced by our January costs being lower than what we were planning. And that is why we're comfortable with what we have that we have it all carryout.

In addition, based upon better understanding of our underlying cost, we have been extremely aggressive with pricing than last 90 days or so. As you will see in today's presentation. To more than offset the higher costs. With this, better understanding of cost and higher pricing, which we're seeing in our year-to-date orders.

We're confident that we will deliver strong financial results in the second half of 2022 and beyond. Now, turning to the key messages, on-demand, Vertiv products and services is very strong. Our organic sales were up 4% from Q4 of 2020.

The strength of our position in the market can be validated by our order rate, which was up over 50% in Q4 over last year. And has pushed the total Vertiv's backlog to over $3.2 billion.

Two, profitability challenge primarily driven because of inflationary headwinds, not because of a flawed strategy, or a decreasing demand for our products and services, but due specifically to inflation, that companies everywhere are battling.

our fourth quarter adjusted operating profit was $94 million, which unfortunate was $58 million lower than last year's fourth quarter. We felt inflationary pressures most severely in Americas, but also across our other regions.

Our pricing actions increased as the year went on, but they were exceeded by inflationary costs and created $135 million net headwind. We continue to raise price at aggressive rate even as recently as last month, and we will continue to do so to make sure we get ahead of inflation.

As you know, and fortunately, we are carrying a large backlog and it takes quarters for that pricing to be fully realized.

Fourth, we don't see the full impact of our pricing actions in the first half of 2022 but those actions will kick in during the second half and we expect the second half adjusted operating profit to be approximately $455 million, $230 million over the second half of 2021. Supply chain issues are real and challenging, delaying product completion.

The verdict team is battling parts on a daily basis. Our biggest challenge is with electro -mechanical parts and fans. Critical components of many of our verdict products. Internally, we have launched counter measures to address the shortages. However, we expect and have been prepared for supply chain pressures to continue for the majority of 2022.

Final and most important key message, although 2021 did not produce the results we expected for reasons I just shared. Vertiv is now well-positioned for strong performance in the second half of 2022 and into 2023 due to our aggressive pricing actions in Q4 and early 2022.

Turning to Slide 4, recapping our 2021 performance, and then I'll provide some additional detail, what's playing out for 2022. With regard to 2021, we continue to have strong demand for our products. Some of this demand is because we are in a strong growing market.

Some is because we are winning with our go-to-market strategies, and some is a result of our Vertiv product development efforts. These three reasons are giving us an order rate that's almost up 30% year-over-year and over 50%, as I mentioned earlier, in fourth quarter.

Admittedly, we believe the significant order growth rate in quarter four is an indicator that we could have priced even more aggressively. And adding further confidence that our pricing actions over the next several months are appropriate, and will be received in the market. But a good portion of our $3.2 billion backlog will ship in 2022.

Right now, we're getting visibility in the customer plans for 2023 and beyond. This visibility is being provided in the form of forecast, purchase orders providing us greater visibility to our revenue profile. Not only over the next several quarters, but into the future. On the 2021 supply side, we fully expect to be challenged for most of the year.

Critical parts availability is spotty and despite all the efforts to qualify second and third sources and redesigned products where possible. We know part shortages or something our industry will grapple with throughout the year.

In addition, 2021 inflation got ahead of our pricing just when we thought we had budgeted enough price, inflation got worse. This happened several times. We have corrected it now and are being very conservative in our expectations that inflation will not go away in 2022. The acquisition of ENI closed in November. Integration efforts are in full swing.

We remain more confident than ever in our purchase decision. Vertiv will reap the benefits from this complementary nature of ENI's process and products and its ability to be accretive platform from Vertiv's long into the future.

And 2021, we invested significantly in ERD just as we planned, we launched several new and innovative products and evidenced by their order rates, these products have exceeded expectations of our acceptance from the market, allowing us to take share in certain categories.

In 2021 we invested in ERD of fundamental part of our long-term growth strategy. Now as we turn to 2022 outlook. Our demand environment remained strong, but deliveries remain constrained by part shortages, especially in the semiconductors and electro -mechanical parts that I discussed earlier.

We aren't planning to see meaningful improvement in the supply chain this year. We have new production capacity coming online in America's to support our growing thermal business.

We are anticipating material and freight costs will continue to increase, but our incremental pricing actions are expected to materially offset 2021 and 2022 inflation by the end of 2022. Pricing realization accelerates throughout '20 to '22 and provide a net price cost tailwind by Q3.

We expect profit in the first half of 2022 will remain challenged, but will market re-improve in the second half of the year as price cost turns positive. Due to the pricing actions already initiated, we expect to exit 2022 in a good position.

Turning to Slide 5, this is the chart we used to illustrate what we're seeing in the market in each of our regions and each of our end markets. And the cloud and hyper scale markets, they remained strong, represented by Green Buttons in America and EMEA.

In APAC however, we see some slowdown as China is pushing cloud and hyper scale companies to maximize our existing facilities. We expect this to be a short-term phenomenon. When looking at our collocation customers, we're not only seeing strength across the regions, but increasing strength in Americas and EMEA.

Tier-1, Tier-2, and Tier-3 colors are building out data centers to serve their customers. And we are participating in a very healthy way with the building out efforts. Our enterprise, small and medium business markets remained constant for Q4 to Q1. we're experiencing good performance in each region.

The pipeline is growing and America is leading the way. The communication network market remains consistently strong with an uptick in Americas as 5G deployment continue to accelerate. The commercial industrial market, things remain a consistent in EMEA and APAC. And we did see an uptick in Americas allowing us to upgrade Americas from yellow to green.

While the commercial and industrial market is a smaller slice of our business, the variety of products and services we sell in this market continues to grow. Moving to Slide 6, we closed the E&I acquisition on November 1st, and the integration team has been hard at work ever since.

E&I has also faced, and is facing supply constraints and inflation, which is temporarily affected the top and bottom line. E&I has a very healthy backlog. We believe the pricing actions that we've taken in Q4 and will continue to be taken as needed, will be realized in the back half of '22 with E&I as well.

We anticipate 2022 revenue from E&I alone to come in around $470 million with an adjusted operating profit of $80 million. Customer reactions to the deal have been nothing short of fantastic. And this acquisition has increased our relevancy with our customers.

We expect as 2022 progresses, the synergistic leverage we will get from ENI will enhance our performance in 2023 and beyond. So I might summarize ENI in 2022 as a tough year, but still a great deal. Now I will turn it over to David to walk through the financials. David..

Thanks, Rob. First turning to Slide 7.

This slide summarizes our fourth quarter financial results, which certainly felt short of our external guidance across most of these financial metrics versus last year sales were up a $105 million or 8%, 4% organic when adjusted for the $67 million of sales from E&I and we also had a $13 million foreign exchange headwind.

Our fourth quarter top-line, as Rob mentioned, continued to be negatively affected by challenges with procuring parts. As the underlying market demand certainly was much stronger than implied in this year-over-year sales growth, with orders up over 50% compared to last year's fourth quarter.

And it's definitely seen with our record high backlog at year-end Without the supply chain constraints and this is a little bit hypothetical, conceptual, our sales growth percentage would have easily been in the double-digits for the fourth quarter.

Adjusted operating profit of $94 million fell significantly short of our external guide, and it was primarily driven, if not entirely, by contribution margin, which will summarize in a separate slide in a short bit.

On this slide, we captured the drivers of the $58 million reduction in adjusted operating profit from last year's fourth quarter, including $80 million lower contribution margin, which was primarily driven by a $60 million headwind from price cost.

Approximately $90 million of material and freight inflation only partially offset by $30 million of incremental pricing. And of note that our pricing was actually relatively consistent with our external guide.

As we will discuss with 2022 guidance, we've addressed the $60 million fourth quarter and $135 -- the $60 million fourth quarter, $135 million full-year 2021 price cost and balanced with aggressive price actions taken in the fourth quarter and early 2022.

Returning the fourth quarter adjusted operating margin and adjusted EPS drop consistent with the adjusted operating profit decline. With adjusted operating margin about 500 basis points lower and adjusted EPS about $0.25 lower than last year's fourth quarter.

And finally on this page, fourth-quarter free cash flow was significantly lower than prior year, primarily driven by the lower adjusted operating profit. But also timing of working capital, and about $30 million of cash M&A expenses. Turning to Page 8, this slide summarizes our fourth-quarter segment results.

The Americas region continues to be more impacted by supply chain challenges than the other two regions. The supply chain challenges negatively affected both America's top and bottom line.

With organic net sales up just $7 million or around 1% against a very strong regional market demand backdrop where orders were more than two times last year's fourth quarter. The left-hand chart at the bottom of the page shows the $69 million year-over-year decline in adjusted operating profit in the Americas.

Of course, heavily influenced by price cost. Approximately 70% to 75% of the overall [Indiscernible] price cost headwind for 2021, and in the fourth quarter is in the Americas despite the Americas representing less than 45% of total sales. Freight inflation was particularly acute in the fourth-quarter and accelerated significantly in the U.S.

as we progress through the end of the year. Of course, in response to disproportionate net inflation in the Americas, our fourth quarter and 2022 pricing responses have also been much stronger in that region.

All things considered APAC posted relatively good results in the fourth quarter with organic sales up almost 3% and adjusted operating profit and margin relatively flat with last year, although not completely immune from the current supply chain, challenges, relatively little of our 2021 net price cost headwind came from APAC.

And finally on this slide, moving to the right EMEA showed strong fourth quarter top-line growth with organic sales up 11% however, margins were down about a 130 basis points from last year as the leverage benefit from these higher sales was more than offset by a price cost headwind. Next, turning to Slide 9.

This chart bridges fourth quarter adjusted operating profit from our $176 million guidance to the $94 million actual and $82 million negative variance.

$46 million of this variance was due to higher-than-expected material freight and labor inflation primarily in the America and especially concentrated on freight, including premium freight for both inbound and outbound shipments to protect customer deliveries, but also due to an increase in standard over the road rates, which were up over 30% from last year's fourth quarter.

As we will discuss shortly, our 2022 guidance assumes that these fourth-quarter inflationary headwinds continue and trend even higher in 2022, moving to the right, we incurred approximately $10 million more than an expected sales commission expense in the fourth quarter, primarily due to strong fourth quarter orders up over 50% from last year's fourth quarter.

E&I, as Rob mentioned, came in short of expectations in the fourth quarter and volume for overall Vertiv's -- base Vertiv was lower than expected due to the parts availability that we discussed.

And finally, on this page, pricing was materially in line with our fourth quarter expectations off about $2 million, but they approximately $53 million that pricing we realized in 2021 has been sticking. And as we will review in a few moments, it is expected to accelerate significantly as we progress through 2022.

Next, turning to Slide 10, this page summarizes our full-year 2021 results versus prior year.

We won't spend a lot of time on this slide as I'm sure everyone is anxious to understand what we see going forward in 2022, but to summarize 2021, despite the supply chain constraints, we grew our top-line organically by about 11%, which likely would've been over 15% without the supply challenges.

Our adjusted operating profit and margin were significantly affected by negative net price costs with almost $190 million of material and freight inflation, only partially offset by $53 million of pricing.

Although more aggressive pricing actions were taken at the end of 2021 than implied with the $53 million full-year number realization in our income statement was certainly influenced by our significant backlog, which drive the timing lag between inflation and offsetting price hitting our PNL.

We certainly expect pricing to catch up with costs in 2022. And finally on this page, full-year 2021 free cash flow was about $27 million lower than last year with a $92 million cash interest benefit from debt restructuring, more offset by an inventory build. Cash M&A expenses in higher capex and cash taxes.

Now, flipping a couple of slides, we transition from 2021 actuals to 2022 guidance beginning with Slide 12. But before we dive in, you will see that we supply a lot of detail within our 2022 guidance, including first-half, second-half, and quarterly breakouts for expected sales adjusted operating profit, and also pricing and inflation.

We are providing this detail because we realize -- absolutely realized we have likely damaged some of our credibility in 2021, notably with the quality of our external guidance. And we want to be fully transparent with you with how we see the year unfolding.

It is impossible to understand the dynamics within 2022 with looking at only full-year figures. And as you will see, our anticipated second half of 2022 is much different and much improved from the first half. And each quarter improved sequentially from the previous quarter.

This expected improvement both in the second half and with each successive quarter, is driven by accelerating price cost benefit versus 2021. Of course, we understand that providing this level of detail likely creates the expectation for us to supply the same level of details we've progress through the year.

And we were absolutely prepared to do that and we will update our assumptions and projections for all inputs as appropriate. And we know that you'll track with us every step of the way.

So with that said, finally, getting to the content on Slide 12, this page summarizes our broad expectations for 2022 by splitting our guidance between first and second half. We expect first half to continue to be challenged by parts availability with underlying organic volume when you remove price to be down 5% year-over-year.

Despite the record year-end backlog as we do not see significant supply chain constraints lessening at all in the first half of '22 versus what we saw at the end of 2021. In addition, although price costs recovers as we exit the second quarter, it is still projected to be upside down by approximately $70 million for the full first half.

The second half is a much different story as we expect financial performance to improve significantly from the first half, we assume 6% higher organic volume. Once again, excluding price and part of that is based on a greater visibility to allocation of parts in the second half.

And this second percent higher organic volume and -- could be conservative based upon our backlog and the end market demand. But once again, the underlying driver of improved sales performance in the second half is pricing.

Based upon pricing actions that we have already taken; we expect $250 million of incremental year-over-year pricing in the second half alone. And as a result, price cost is expected to be a positive $170 million in the second half. Significantly improve in adjusted operating profit, with adjusted operating margin increasing to 14%.

Our expectations for a strong second-half pertains, a strong 2023 as we capture additional year-over-year pricing from actions already taken, as virtually all sales in 2023 will be at the higher pricing.

While we have significant sales in 2022, as we mentioned, from our existing backlog at lower historical pricing levels and will further explain this dynamic and a couple of slides. But let's move on to slide 13. This is another slice of our guidance going from a first-half, second-half perspective to a quarterly perspective.

Net sales adjusted operating profit, and adjusted operating margins are all projected to sequentially increase as we progress through the year. And as we mentioned on the prior slide, the primary driver of this sequentially improving financial performance is the timing of price realization.

The chart at the bottom left illustrates the quarterly profitability trend for both 2021 and 2022. Our price cost issues began in the third quarter of 2021 and we anticipate them to be addressed after the second quarter of this year. So we're almost three quarters of our way through what we see is a fourth quarter issue.

As price costs turns positive for each of the last two quarters of 2022. Finally, on this page, the chart at the upper right shows the relatively conservative volume assumptions inherent in the plan.

With full-year organic volume, once again, excluding pricing, assume to increase just 1% as we do not assume significantly improving parts availability as we progress through the year. And we will continuously assess that assumption, as we go forward.

Next, turning to Slide 14, this page details our year-over-year quarterly price costs or net inflation assumptions for 2022. For the full year, we expect to generate $100 million favorable year-over-year price costs, including the assumption of $360 million of price offset by $260 million of incremental inflation.

As discussed in the prior slides, our quarterly pricing increases sequentially as the proportion of sales from existing backlog declines as you can see in the chart at the bottom of the page. Also very important, we should have significant carryover price benefit into 2023 as we expect 95% of next year sales to be at the higher pricing levels.

While in 2022, only 50% were, and this drives in an expectation for about $200 million of carryover pricing impact for 2023. Now from an inflation perspective, we assume that what we experienced exiting 2021 will continue through full-year 2022. That's an approximately $160 million year-over-year carryover negative impact.

But in addition, we have assumed $100 million of new inflation in 2022. 20 -- as Rob mentioned, 2021 actual inflation outpaced our expectations, each step of the way, and we believe it prudent to assume that inflation will continue to worsen in 2022, which drives the $100 million incremental assumption.

And we definitely will reevaluate this new inflation assumption as we progress through 2022. Now based on the foregoing assumptions, we expect price cost to be neutral in the second quarter, and as mentioned, significantly favorable for the second half beginning in the third quarter.

Next, turning to Slide 15, this page supplies some color on our confidence that the $360 million pricing number for 2022 is achievable and will stick. The first as we saw in the previous page, the first $125 million of the $360 is actually included in our year-end backlog. So we risk assess that from highly probable to certain.

Now the second $235 million is based on pricing projections in new 2022 orders that will book and shift within the year. Based upon the market acceptance of our fourth quarter price increase, evidenced by the 51% increase in orders. We certainly saw the opportunity to be much more aggressive with 2022 pricing.

In late 2021 and early 2022, we initiated multiple waves of list price increases. And this is across all product lines in all regions. Although we certainly were a bit more aggressive in both the Americas and EMEA, where inflation has been more pronounced.

Based upon our order rates, so far in January and February, which are in line or even a little bit higher than last year's order rates for that same period. It appears that our higher pricing is sticking in this high demand, short supply market environment.

Of course, we will continue to reevaluate this assumption and reassess our pricing as we progress through the year. As we have mentioned many times, we believe we operate in a great position in a good industry.

Data center demand for our equipment, and more importantly, our technology is not abating anytime soon and it should continue to accelerate going forward. With the backdrop of rising global costs. In this long-term market demand, we believe our price increases are justifiable, reasonable and achievable.

But in fact, one lesson learned as we manage price increases over the last nine months or so, is that we have historically underestimated our ability to get price. And based upon the success of our recent price actions, we have absolute confidence that we will be able to drive consistent price increases going forward.

Turning to Slide 16, this page summarizes our full-year 2022 financial guidance. We provide added detail in the appendix to aid analysts and investors with modeling. Overall, we expect 13% top-line growth, 8% organic.

Components of this organic growth are 7% price and 1% volume, as our assumption is that the supply chain constraints do not significantly ease in 2022 and only in the fourth quarter if at all, we will continue to reassess this possibly conservative assumption as we go through the year, full-year adjusted operating profit is expected to increase $54 million or 11%.

With base Vertiv relatively flat, and most of the increase coming from net acquisitions and divestitures, there is an $85 million a year-over-year increase in fixed costs. And we provide some additional color on that increase in the appendix.

As we showed in prior slides, quarterly adjusted operating profit and margin increased sequentially with higher pricing. With fourth quarter operating profit projected to be $255 million. Fourth quarter adjusted operating margin expected to be $0.15. And fourth quarter. adjust EPS to exceed $0.40 a share.

So even though full-year financial metrics are not overly impressive, we should be exiting 2022 in a very good position. Finally, on this page, we summarize both adjusted EPS and free cash flow for 2022, and once again, we supply underlying assumptions for each in the appendix.

Now turning to Slide 17, this page summarizes our first quarter financial guidance. As we previewed in prior slides, our performance in the first quarter will continue to be challenged by negative price cost, about $70 million in the quarter and supply chain constraints will unfavorably affect year-over-year organic volume.

We estimate by about $45 million. Now, the net impact is not great as shown by the expected $20 million adjusted operating loss.

But these first quarter results should be the net year for our quarterly financial performance, as we project consistent quarterly improvement as we go through 2022 based on actions we have already initiated, including by delivering $360 million of higher pricing for full-year 2022, but also pricing actions should deliver an additional carryover impact of $200 million into 2023.

Now with that said, I turn it back over to Rob..

Thanks, David. Now let's turn to slide 18. I know this quarter's earnings report is not what you expected from us and is not what we expected from ourselves.

We got caught up in supply chain challenges that reflects most of the world and we did not appropriately anticipate inflationary pressures, we would experience as we tried to obtain parts, we needed to manufacture our products. We have a great position in a good industry. We have world-class products and service offerings. We have a talented team.

We are relevant to our customers. We are cultivating our relationships, and we are investing in our future. And we have a clear line of sight to our margin expansion goals.

While I'm extremely disappointed in our performance in Q4, I'm confident in our ability to deliver on our 2022 commitments and how the new actions we have taken have set us up to deliver a very impressive 2023.

In the end, our success for 2022 and beyond is highly dependent on our ability to deliver pricing commitments that we have communicated today. And I have the confidence that we'll be able to deliver that. I take personal responsibility for this to. To Vertiv employees around the world. Thank you for the work you've done and continue to do.

And the support you provided me to each other and to our customers. With that said, I want to thank all of you for listening today, and I will now turn the call over to the operator who will open up the line for questions..

We will begin the question-and-answer session [Operator Instructions]. We'll pause for just a moment to compile the Q&A. Our first question will come from Scott Davis with Melius Research, please go ahead..

Hey, good morning, everybody. Rough day for everyone, but -- look I want to get a sense of the -- whether you need to change your sales commission structure or looks like your sales force is getting paid to -- to book unprofitable contracts.

How -- do you need to change that or am I misreading it? I'm just trying to get a sense of the incentive system internally.

And how it might need to change in 2022?.

No, so to be clear, are they're not paid to book unprofitable business. We actually have an unruly instituted over the last 60, 90 days, even tighter controls, so they don't have the ability, just a discount to grow the backlog and grow the business.

We have a very tight, rigorous process that goes all the way up to certain levels and including myself, depending on what discounts are trying to do. So we hold that tight from that perspective, so that they don't have the freedom to just discount, to build backlog or to go book orders.

And in different parts of the world, we have profitability as part of the overall sales compensation. So again, the answer would be no, they're not paid to book unprofitable business..

Rob, from a cultural perspective, it seems like Vertiv is a place where maybe bad news doesn't travel up as fast as it should. You guys reported on October 27th, you already had one of the three months of the quarter in your back pocket, how did you guys miss it from a rate of change perspective, at least.

What was the breakdown is financial controls is that as their cultural challenges, they are learning from this that -- because we cover a lot of companies and you guys are an outlier at the extreme end of really getting hit here?.

Yes. So a couple of things I'd have to say here, kind of said in my opening comments, we did have some issues upfront with our ERP and Americas. To be clear, we didn't see the rate of inflation that we're actually experiencing till later in the quarter and the later month.

We did however see an increase in spot buys and expedited freight in order to counter supplier decommit. So when we came out in our last earnings call, supply for us with certain suppliers, with our products actually got worse and de -commits happened and accelerated throughout the quarter.

So it really wasn't necessarily, I would say a cultural issue as more of a system issue and our ability to see that as we changed over ERP. And secondly, we consciously made decisions to pay expedited freight and drive spot buys in order to counter the de -commits from our suppliers..

Okay, that's helpful..

Yeah. If you don’t mind Scott, this is David Cote and I will probably ask Dave Fallon to interject also. 75% of our issue approximately is the Americas. And I think we're obviously being a little too kind. In the Americas there was a cultural issue between the sales guys and operations guys truly understanding what was going on.

When the October results were actually okay. November looked a little bit worse, but not distressingly so. And we got the report that December was going to recover..

When we got the December results. That's where all of a sudden everything seemed to crash. And we didn't really know all the details of it till we got to the latter part of January and spent a good part of February trying to figure out what the heck was going on and what we had to do.

And Rob and I got significantly more involved with what did we have to do to resolve the cultural issues that did exist in the America s, and that's been addressed. When it came to inflation, it was clear we had been under forecasting what was going to happen with inflation.

And I would argue some of that was a cultural issue, also, which we have addressed..

And that's why we've been so aggressive on the pricing side.

And if you take a look at our Americas ' orders, they were up 115% in the fourth quarter, which as Dave pointed out is an indication that we could've been pricing a lot better than we did and we have adjusted that, and that's why we're pleased to see that as we go into January, at least from what we can see February so far, orders in the Americas are continuing to grow even over what was a good first quarter of '21.

But we've had to get much more heavily involved in resolving these issues. confident, they have been resolved and they will continue to work with the new process. And it's why I'm encouraged by what I see for the second half, which I think gives us a very good lead into the future and gets us back where we should have been all along.

I think Dave's right. The -- one of our learnings from all this is how we've underestimated our ability to get price. Historically, not just currently, but historically. And that's another dynamic that's going to change. So yes, there has been a significant amount of change that's occurred over the last 60 days.

And I think Rob -- Rob Dave, I don't know if there's anything else you want to add there?.

No. I think those are fair comments, Dave. I think they are fair comments..

Thank you. Good luck, guys. Will pass it on..

Thank you..

Our next question will come from Nicole DeBlase with Deutsche Bank. Please go ahead..

Yeah, thanks. Good morning..

Good morning, Nicole..

So I guess maybe just elaborate on everything you guys just said. Where I'm struggling a little bit is understanding how you'd make such big cultural changes in the scope of two months. So maybe you could give some examples to kind of help us.

And what has changed about the planning process in 2022 to give your investors confident that this isn't going to happen again?.

I'll address some of the culture issues upfront. Dave, can talk a little bit about -- and I'll talk a little bit about the planning process and Dave can come in over the top. As it relates to cultural issues.

Again, the organization probably -- not probably, organization didn't and wasn't set up to drive a lot of price previous years, we've shown $20, $25 million in price. And what we really had to do really top down. Dave, myself, and others in the management team is really drive all the way down to the sales people.

What it means to get price, how to get price, and not to be afraid to lose orders as we go through that. So that's something culturally losing orders with something that we had to overcome and say, it's okay from the perspective of, we've got to go drive price.

And it's proven out that that works and that we were able to get price as Dave mentioned, probably should have and could have got more price in Q4 and Americas with the order backlog that we saw, the other cultural issue that they talked about is really the FIOP process for Americas, and really having that tighter pulled together so that the demand and the supply and those constraints, we're working closely together, coupled by an exacerbation of that, of a new ERP system that came in that we had lack of visibility for a period of time which has now since then fixed from that perspective.

So it's on the culture side and then on the process side, we are well beyond the implementation of our ERP as it relates to and by evidence of January's results, we have visibility into what our PPV is and our price purchase variances and have a good handle on what inflation's looking like.

So we were behind throughout the quarter, as Dave mentioned, got into December, recognize what was going on and have implemented both process changes as I talked earlier on pricing levels of approval, as well as a process levels with the integration of Americas, operations and supply and sales, and any other comments, David Fallon or David Cote?.

I 100% agree with your -- your comments. Rob and Nicole oftentimes when it comes to forecasting, it's a lot of blocking and tackling. And I would say we have instituted a lot of rigor in the last 60 days.

Specifically, around the Americas ' forecasting process to the extent that last Thursday, both Rob and I were effectively in and out of a meeting that lasted from 9:00 AM in the morning to 10:00 PM at night. And so we're putting a lot of diligence into this and we understand our credibility was harmed as it related to forecasting.

And we will not let that happen again. And we're confident with the steps and processes we put together for that specific issue..

Okay [Indiscernible].

Just to add a little more color, Nicole, the Americas ' cultural issue was always there. It's just, it wasn't visible in a stable cost and supply chain environment. It became extraordinarily visible as we started to run into those two problems.

And to a date balance point, Rob, pull together a come-to-Jesus meeting with the Americas operations and sales folks to say, this is not happening anymore, I'm not going to be the operator of your issues.

You're going to sorted out just like we were able to in EMEA and APAC on your own and we want to figure out where exactly are we now and how do we have a better process going forward? In today's point I went on all day and then Rob and Dave came in at the conclusion and we adjusted what we thought was going to happen for '22 as a result of that, negatively, but it allowed us to be able to figure out where the bottom was a lot better than we had in the past.

And they have changed the process that they're going to use going forward, both culturally and mechanically. And Rob and Dave are going to be very involved going forward. In understanding that reconciliation every month to make sure that we truly understand what the hell is going on.

So yes, I'm confident that we've addressed that at this point, but this is -- this is going to take more than just a one-time meeting. It's going to require Rob and Dave's constant attention to make sure that it sticks, and they're doing that..

Thanks. That's really helpful color. I appreciate all of that, and I'll just ask a quick one to follow up to give someone else a chance, so the order activity was obviously really strong this quarter. What did it look like, excluding E&I? And maybe you could comment on organic backlog as well. I put out the E&I contribution from underlying part of --.

Yeah, Nicole so the order rate percentages are all without E&I because we haven't tried to approximate what orders were or would've been in the fourth quarter of 2020. So that order rate is all excluding ENI.

But if you look at the backlog, the $3.2 billion of backlog that does include the ENI, and I think ENI is just a little bit short of $300 million at year-end. So the base Vertiv backlog is somewhere between $2.9 and $3 billion..

Very helpful. I'll pass it on. Thank you..

Yeah..

Our next question will come from Jeff Sprague with Vertical Research. Please go ahead..

Thanks. Good morning. Not to beat a dead horse on that last thread, but I just wanted to come back to A, ERP system, and if in fact all the kings store worked out and B, I was a little concerned to hear the comment that the teams are left that figure it out and we'll monitor them.

It sounds like it requires much more direct marching orders, perhaps that has happened and it was a conveyed in that answer. But I think we're all still looking for some level of assurance, if you will, that we've righted the ship and everybody's kind of rowing in the same direction here..

Hi Jeff. This is Rob. A couple, a couple of things, comments and others can chime in. It's because the teams aren't left to just go figure it out on their own. Combination of myself, Dave Cote being involved and Dave Fallon have given strict marching orders or what needs to happen. They need to make it happen.

So it's not, they go figure it out and come report out to us. We have given specific instructions as to what they need to do, what needs to happen, guess what Dave is saying is they need to drive that, make that happen, we will monitor that, but no doubt that from top down, we're driving that message to the team, the three of us.

Secondly, on the ERP system, as you know, all the ERP systems are difficult in their own ways and in this particular one, while things went cut-over, we were able to continue to ship and do the basic business functions that you'd expect to do that some people get caught up. We didn't have that problem.

It was more of an understanding of the price variance and things that we didn't get to later on. We've since then fixed that as any ERP system, you do have things you fixed after the launch.

And that's where we got caught up and kind of got behind on the visibility and then begin to better understand that as we got into December and really towards the end of January, and it took us a little bit longer to assess where we were at and making sure that we now understand our PPV.

Any other comments from Dave Cote or Dave Fallon?.

Yeah. The -- monitor, I guess is not a strong enough word. And I will -- I'll leave it to Dave and Rob to use whatever strong word is required, but they're going to be much more involved in understanding did the reconciliation work the way it was supposed to.

As to having the team figure it out, and the approach that we took, this is a tool that I generally use, and I've talked about in the past, because you can't have the CEO always having to tell people just work together.

They have to do it, they have to recognize the problem, and they have to fix the processes themselves, and have to come up with, here's how we're going to do it going forward. And it starts with, they got to recognize they have a problem, which they have done.

And the fixes that they've developed didn't just fix what we had as the current forecast, but it's going to get fixed going forward. And like with any new process, you don't just set it up and walk away. You still have to monitor, or use a stronger word, be involved to understand that it's happening.

And I can assure you, both Rob and Dave are committed to making sure that that happens that way..

You address a lot of cash. But thanks for that. Could you just address free cash flow for us? And obviously you're taken a big hit here, working capital and other things.

They are trying to get us to think about 23 and your exit rate that's probably going to take some points on the board [Indiscernible], before people want to fully underwrite that, but I'd love your thoughts or commentary on what the normalized free cash flow where those companies should be maybe presented as or in the framework of maybe a free cash flow margin, free cash flow to sales for example?.

Yes, thanks Jeff, this is David, so I would say our guide for 2022, it's certainly uninspiring. I think $150 million. There are some elements of that guide that might be one-off. So for example, our capex for 2022 is projected to be about $130 million.

That's probably a little bit elevated, number one, some of the 21 capex split into 22, but we do have some capacity expansion dollars in there as well. I would say a more normalized capex number, on an annual basis is probably around a $100 million or so. So that's one element.

The number one driver of the free cash flow, in the long-term is going to be the EBITDA. And the full year EBITDA is certainly not what it should be for 2022, but if you look at what we're going to do in the second half, notably in Q4, you annualize that, that is going to be a direct contributor to much higher free cash flow.

And I think our guidance at the beginning of '21 was $285 million. I would say, based on where we are, especially after the pricing increases go through, our run rate should be much higher than that. It's a little bit of a hypothetical but our overall goal is to get a 100% of free cash flow and the conversion on that income.

The other thing I would add, Jeff for Mr. Sprague is that if U -- AOP is a good indicator, I think of operating cash flow. And if you take a look at our fourth-quarter run rate, and then the $200 million of price carryover in 23 that Dave referenced earlier, that puts us in a very good AOP position.

That is the biggest driver of what free cash flow will be..

Thank you..

Our next question will come from Mark Delaney with Goldman Sachs. Please go ahead..

Yes, sir. Thanks very much for taking the questions. First is about the assumption of $100 million of incremental inflationary cost off of the December run rate.

Maybe you can elaborate on how you're coming up with that number, and how much of that based on what suppliers are saying they may answer to it in terms of pricing, and what you're having good line of sight into, and how much is -- you're potentially trying to be more conservative on the inflationary metric, even if it's not cost issues you've already been seeing..

Yeah. Thanks Mark. This is David and I think it really is a combination of all the things you mentioned. I would not be completely honest if I said that there is an element of conservatism included in that. And that's based on our lessons from last year. Every time we put a [Indiscernible] in the ground.

As it relates -- related to inflation, it got worse. And we saw that, especially in the Americas as we progress through the year. And most notably in EMEA, as we exited the year.

So there is a provision per conservatism, but certainly a part of that $100 million is based on what we're seeing currently, so it would be hard for me to handicap a specific dollar for what we're seeing and how much it is conservatism, but that's something that we will better be able to reassess as we go through the year and we can provide an update on that at the end of the first quarter..

In any of the input costs stabilize that give you confidence a $100 million, is it conservative number or what, why wouldn't have potentially just keep going up at the same rate that it did last year?.

We've actually -- there are -- there is some good news out there, notably, with some of the commodity prices, and in particular, with steel in the U.S. Our pricing for steel, which is our most prevalent commodity, the -- is indexed based on an average price of the quarter before.

And steel prices have come down fairly nicely since the mid fourth quarter. We've seen some of that benefit in our Q1 pricing. But if the lower steel prices hold through the end of Q1, we should definitely see a benefit in Q2. We have not built into any of our forecast. Any -- in any specific component or commodity improving this year.

So that would be an excellent example of a specific piece of conservatism built into our forecasting..

There was just on the procurement strategy for 2022 to what extent is Vertiv locking in contracts that prices that's giving you visibility into what your expenses will be, but also you could touch a little bit on your ability to get that supply or you mentioned de -commit were occurring.

Have you taken steps to changing procurement strategy to have better certainty and how you're able to deliver both to the financial community, but also your customers? Thanks..

Hey, this is Rob, a couple of things there as it relates to getting price and getting that in the contracts, there is a couple of things we've changed to is getting that price, but also putting escalators in there if commodities change outside a certain boundary. So that's something we have done and put into the contracts.

It wasn't in all of our contracts prior, so we're looking at we can never predict where it's going to go and we believe what David just said, but I would say as a backstop, the ability to get additional price, if necessary, if things continue beyond a threshold from that perspective.

As it relates to supply, I mentioned earlier in my discussion was, we've done a few things, we're not just sitting here saying how we can't get it. We've either qualified additional suppliers, we've modified, or re-engineered certain parts and allowed for additional supply base to help us out.

So as it relates to, we keep continue to talk about fans being a problem with qualified additional vendors there and also have changed some of the design there that uncouples it from maybe some of the constraints that we have.

So we look at that, whether it's displays, whether it's qualifying additional IGBTs vendors, which is a big part of our power conversion products and the DC power, one of the things you'll see from us is that from a IGBT perspective, which is the power conversion, we have a DC power business that most of our competitors don't.

We buy a significant amount of those. So getting additional supply base, additional suppliers. And a lot of this got started even pre all of this inflationary and supply constraint. It was really as COVID hit, and it taught us a lesson to qualify and drive additional suppliers.

And we'll continue to do that, even as, hopefully at some point in time, who knows when inflation goes in the -- we have deflation in the other direction. Our strategy is still to make sure that we have multiple suppliers all the way down through our design process so that we don't single source.

And those fires aren't just in one particular region, they have multiple regions because we've learned that, while I may have multiple suppliers and they might be fan vendors out of Germany, that could cause a problem. I need to have supply base in different parts of the region..

Thank you..

Our next question will come from Lance Vitanza with Cowen. Please go ahead..

Thanks, guys, for taking the questions. On Slides 13, I'm looking at the adjusted operating profit guide for 2022 and I see the $200 million in Q3 and the $255 in Q4. My question is, is there any seasonality based into that trajectory? I'm trying to figure out what I think about the run rate, the starting point for 2023.

Do I want to think about annualized in the back half or not? Do you think we really should be thinking about annualized in Q4 as a run rate to start from in January 23?.

I -- there's likely some seasonality in Q4 projections for 2022, but not nearly what we normally would have. I would say, Q4 is certainly a better run rate projection for 2023. With that said, Q1 2023 is probably going to be lower than Q4 2022, but it's a lot easier to annualize that Q4 2022 number than it would be to do that in any other year.

And that's because we are assuming continual -- our continued supply constraint in that number. And of course, we're hopeful that some of that actually gets rectified as we enter the second half..

Okay, and with the stock, 1112 bucks a share, can we expect to see suite management to be buying shares in the coming days? And how about the company buying back some stock? Is there any opportunity to do that based on your liquidity profile covenants and so forth?.

Yeah, I certainly can address from a Vertiv perspective. We look at alternative uses for our cash on a continuous basis. Certainly, based on the stock reaction today. A stock buyback would definitely the more attractive than it was yesterday. So it's not making any commitments whatsoever, but it is something that we would strategically evaluate..

And the last question for me is on the balance sheet.

Could you talk about your plans to de -lever pay down debt and then [Indiscernible] from a liquidity standpoint, I see the free cash flow guidance target for the year, but could you talk about when you expect your cash plus available borrowings? When does that bottom out? And at what level? And are there any maintenance covenants perhaps in your revolver that could further crimp liquidity or maybe even trigger a potential default as we progress through the year?.

Yes. On the last one, no issues on any covenants. I think there's one covenant within the ABL. It's fixed charge coverage ratio and we have ample room for that, that will not be initiative this year.

As it relates to use of cash -- and maybe 2021 was the exception, but we generally have our lowest free cash flow in Q1, we had positive free cash flow last year. This year, we will definitely use cash so similar to the financial projections, the free cash flow should progressively improve as we go through the year as well.

I would say sometime probably early third quarter would be the bottom point as it relates to liquidity. We do have as we mentioned, we resolve the tax receivable agreement. There's a $50 million payment at the end of June and the September. I think soon after that $50 million payment at the end of the June would be the bottom part.

With the -- I'm sorry, the bottom of our liquidity and then it should improve thereafter..

Thanks very much..

Yes, thanks, Lance..

Our next question will come from Nigel Coe, with Wolfe Research. Please go ahead..

Thanks. Good afternoon. And thanks for taking [Indiscernible] time here. I apologize for background noise in chirping.

But I just want to go back to pricing, maybe just if you bigger address, how do you change incentive structures around price specifically to make sure that that behavior change is getting hardwired in comps? And then maybe just address the order strength in Americas in 4Q.

How confident are you that that wasn't related to upcoming price increases and therefore, pre -buying ahead of that and perhaps also if you could just -- I know it's a multipart question, but if you could address maybe the pricing on current ordered engine backlog relative to 77 drop prices into your guide..

Nigel, thanks for the question. This is Rob. I'll answer the first two and then David Fallon can come over on the third one. As I mentioned earlier, some of the behavioral changes that we've put in place across the world is really authority and approval. One of the quickest ways to get there is stop discounting.

We've raised these prices appropriately, but you can lose price through discounting. We've changed those thresholds across the globe. We've changed the level in which those decisions can be made all the way up to myself and David as CFO so that we don't give away the pricing that we were getting through discounting.

So that is a I'd call it a cultural thing and a change that we implemented over the over the last 60, 90 days. And we believe that very effective, although painful for the organization, it's the right thing to do to guarantee that we get this price.

Could you take a look at specifically Americas, what the dynamic that's going on there and our market overall is -- it's a [Indiscernible], constraint in general, lead times have gone out for whether it's generators, whether it's breakers, whatever it might be.

And I think what we saw is -- and what we'll continue to see is people are putting orders and to get their slots to make sure they get supply where that used to be maybe they order 6 months ahead, 3 months ahead. In some cases, they're ordering and looking at 12, maybe 18 months as we go forward.

The demand is extremely strong on a global basis, and that's why you're seeing that uptick overall. It wasn't a rush to get it before price because of a lot of that had pricing actions that were taken in November, back in October or September, and then more recently in December.

The strength for us really comes from -- a lot around the Colo Cloud, but also even in the channel. We've seen growth as we continue to increase price there. We continue to see growth around the Vertiv product offering. David on the third one? Or Gary..

Thanks Rob. Hey Nigel, it's Gary. Thank you, your last question was specifically around pricing in the backlog, and so the pricing of the backlog, as we entered January first was right around $125 million give or take a little bit. So probably just north of 4%, 4.5% somewhere in that range.

And if you look at the momentum with the pricing that we had in 2021, every quarter got stronger with Q4 being the high point. So we feel good to whatever one’s comments have been up to this point in time that it really is. We had to believe it ourselves almost in order to be able to take that next step function.

So we saw that step function in Q4 between that data point, between the data point of $125 - ish million of pricing in the backlog going into this year as Number 2 and then Number 3, even what we've seen in January so far in early February, the price increases that we put out at the end of Q4 and even in Q doesn't seem to have materially changed the order input right at this point in time.

So all of that gives us confidence of how we're going to continue to build up pricing as the year goes on..

Okay. [Indiscernible] say questions. I'll leave it there. Thanks, you all..

Thanks Andrew..

Our next question will come from Steve Tusa with JP Morgan. Please go ahead..

Hi, guys. Good afternoon, I guess..

Good afternoon, Steve..

Just on this whole pricing discussion, how will this change next year and the year after that when we go back to what the industry has really been historically, which is generally negative price on the equipment and then a little bit of price on services? I mean, the fact that you're changing these discounts in the fourth quarter of 2021, when it was pretty readily apparent to everybody early last year that there were going to be issues here.

I don't know what your competitors are doing because they are buried in larger organizations.

But I mean, do you see the same kind of behavior from them as well, or is this something unique and specific to you guys? I guess, my question is just, how are you so confident that you can maintain a spread like that in an industry that is typically -- had very challenged pricing to begin with?.

Steve, this is Rob. Thanks for the question. Traditionally, I think culturally you may have heard earlier, we didn't think -- David said, we didn't think as a company we could go out and be strong with a price.

But what I really see is happening, where we're getting prices, where we're differentiating, where we're developing, call them unique or innovative products and solutions. And the organization -- you're absolutely right. The industry culturally hasn't gone there because a lot of areas haven't been providing innovation.

So where we have innovated in certain areas, like thermal management and so forth, those are areas that we found on learns to this. So we can actually get price and continue to get price for innovation. And that's the basis of our thesis.

And reason we've been driving our R&D up is, fundamentally, we believe with innovation providing stronger products with customers we can get that price, we can get a higher price than those that aren't innovating in those section and as you may know, we don't compete, I know lot of people think it's just the big guys that are part of big conglomerates.

We compete with a lot of locals that you wouldn't know that don't report out. And those also are experiencing these commodity are specific price cost issues as well. So we have seen people follow and we look at the different parts of the market.

And as we've gone to it, what we found is we're Vertiv products are preferred where we have that innovation pricing sticks and people will pay us more. So we've learned something through this process and we will continue to apply that throughout the years. And the other --.

Thank you. Yes. You mentioned like thermal, I guess, so that's on like the HVAC side..

Yeah. Thermal management products, areas of certain power distribution E&I.

Other PDUs where we have strength and it again, you're absolutely right, in the past, that hasn't been but as we've driven innovation and as we've gone through this process, the team has really reset at mind in understanding we can get paid for the things we do where we differentiate and that's when we'll continue to focus on that differentiation to drive that price and hold that price for the future..

Got it and then just wanted to clarify the cash side. I guess --.

Steve..

Yeah..

If I could just interject something, a building on Rob's cultural point is I'd say historically we also underestimated the value of that differentiation that already existed. And we had our predisposition or deference to not lose the auto. And if you approach it that way, you will generally own the price.

And this process has shown us that not only is our new innovation worth more than we thought, the innovation that already exist in our products and it's been historically under-priced, and this has been a really good warning for all of us in the business. So we've got a lot more capacity for price than we ever realized,.

Right. And just on those orders, you mentioned that some people are ordering 12 months to 18 months out. How much of your orders do you think are unusually timed, if you will? I know some companies said like 10% to 15%.

How much unusually timed do you think will not be there in the normal cadence as we move through the year as things normalize?.

What we're seeing right now and from the pipelines and the discussions I'm having with most of our large customers, we continue to see a robust environment of orders. It -- I think this goes well beyond '22 into '23 into '24. I think there is just an enormous appetite for datacenter space on a global basis, Steve. We have not seen this kind of level.

Normally, it's -- IMEA is growing faster, or it's Asia or it's Americas. This phenomenon that we're seeing now and experiencing is global expansion of data centers in all parts of the world. There's a lot more companies involved in the Tier 2, Tier 3 colos, a lot more building going -- being done for the hyperscalers.

What I'd say is, it wasn't just an unusual time or one-off. I continue to see the market to be capacity constrained because of the volume of data centers that are needed to be built. And as we look at our pipeline, 18, 24 months ahead, it's more robust than we've ever seen..

Got it. Good luck through the beginning of the year. Thanks..

Thanks, Steve..

Our next question will come from Amit Daryanani with Evercore ISI. Please go ahead..

Thank you. I have two questions, I guess. Close up. Thank you for all the details are on calendar '22. You spent a fair amount of time talking about all the issues and challenges, how you intend to fix them, which has been helpful.

Maybe you could spend a few minutes talking about how does incentive compensation get aligned to fix these challenges and maybe you could talk about on the sales side where you seem to have some issues and also on the management level.

What [Indiscernible] the incentive comp change at all to rectify some of the challenges you had?.

Sure. This is Rob, I'll start out there as it relates to management. I mean, we are completely aligned with the share-owners and what we want to deliver. And that's really the earnings and profitability as we go forward.

And as we look at goals and [Indiscernible] set for 2022, pricing is absolutely in there from a management, not just my team, but my team teams below and pricing is one of those, what we call okay-or-us, objectives for the year that we need to hit. As mentioned earlier, the incentive from the sales side.

And again, depending on the part of the world, is primarily right now driven by their ability to discount or not discount. Sales -- they need to get sales with price to get more quota at the higher price. I guess in general, the higher price they get, the more quota attainment they retire.

And it's true for, if I take a look at the selling regime that we have in America today, the salespeople are incented to get a higher price because they've got a higher multiplier and a higher commission when it comes to that.

I'd say that we feel like the areas we need to really shore up was where that price leakage could happen on big deals and other areas and really push back on that and put higher levels of approval so that we're not giving price away further down in the organization.

So I feel confident that both sales and management throughout the globe understands and gets the price and understand what it's going to mean to them, ultimately, in their wallet..

The other thing -- I'm sorry. The other thing I would add is. as you might expect, what Rob is recommending to the Board is significantly lower than what a normal payout would be. And Rob is also recommending that he and his team take a zero bonus this year. I don't know how much more of an incentive you need than that to make things to work.

But also, their comp is largely focused on equity. And a big part of this is driving -- making sure the stock price goes up. So they're heavily incented to make sure that all these things get fixed..

Perfect. That's really helpful. Let me just follow up, a lot of the expectations for '22 are predicated on how good the order book is, how good the backlog is multi billion, at least what you mentioned, can you just talk about your conviction that there's not a lot of double-ordering or the quality of the backlog is good.

Is there any way to think about what's the duration of this backlog today versus what it would normally be potentially?.

As we think about it, we look at each order when it comes in, and it's not just a blanket order for this many units. Our orders are specific sites, specific jobs, specific locations where they need to go. That gives us confidence.

And this question has been asked over the last couple of years of, as the backlog increases or as the order rate increases, our people double and triple ordering. We don't believe that's the case whatsoever, that people just put in blanket orders just to cover themselves..

These are specific projects as we go forward. If you take a look at the duration, the backlog, we used to say maybe it's 9 to 12 months or nine to 15, maybe it's a little bit longer than that or 6 to 9 months. Now it's 9 to 15, something like that, but it's not -- things don't get in the backlog if there are two years out, that type of thing.

We are -- while people are looking to drive orders to us for that, what you'll see as the duration hasn't moved that much, maybe by, let's say, a quarter or three months type of thing based on what we've seen.

Gary, you see anything different than that?.

I think that's exactly Rob. Right Rob, there's no indication of double order in anywhere I met. And you're right, we would always say the backlog -- everything we have in backlog turn in about 12-month period of time. Maybe that's slightly elongated to 15-18 months.

Just because even our customers are having a hard time getting trades people on site Friday, all that type of stuff. But if you look at our backlog today, there's probably only 5% to 10% of it that is scheduled out in 2023. And really customers are telling us that they would take the product as soon as they can get it.

So there's nothing in the 2024 or 2025 by any means..

Got it. Thank you..

Our next question will come from Andrew Obin with Bank of America. Please go ahead..

Yeah, guys. Good afternoon..

Good afternoon..

Just taking a longer picture. The medium-term goal for adjusted operating margin was 15% plus.

How do you think about the bridge from the '22 midpoint of 9.3% up to 15%? You highlighted more aggressive pricing, but also how much do you think what's happening is structural in nature? One place in the environment going forward, more labor shortages, etc.

Are you guys just putting out the fires or have you considered how to restore this long-term bridge? Thank you..

Yeah. Andrew. Like a lot of things, very much dependent upon pricing, which we feel very good. That is sticking. And I think the focus instead of looking at 2021 or 2022 midpoint is to look at the adjusted operating margin in the fourth quarter, which is 15%.

And as we discussed with Lance, it's not fair to just annualize that from a operating margin perspective into 2023, but it's a great start. And we would say we would be right back on track where our plans were, let's say, six months ago with our -- with the timing of getting the near-term adjusted operating margin up to 16%.

So I would say as we exit 2022, I would say things are back to normal and even to a certain extent, maybe a little bit more accelerated than where we thought especially with E&I adjusted operating margin also returning to the levels that we expect it..

Thank you for the call out. Just clarification, slide 13, just understanding 110% of pricing in the first half versus a 120%, 130% in Q3, Q4. It's just -- I'm just -- I don't quite understand how a year-over-year comps for it because well, right.

Because it's sort of a weak comp of an easy comp and then we have a strong comp of strong comps in the second half, maybe I missed something on the call, I apologize for that but just to understand why it's only a 110% in the first half, given that the comps are low or given that we got 130% and 120% in Q3 and Q4, respectively. Thank you..

Great question, Andrew. The biggest dynamic there is addressed on Slide 14 at the bottom. The pricing is driven by what we're able to sell out of backlog, and based on what we're able to sell on a book and ship basis. And the pricing that we get for book and ship deliveries is certainly higher than what's in the backlog.

The dynamic there, it's $110 million in the first half and much higher in the second half, is directly driven by the amount of sales that come out of backlog in the first half and the amount of sales that come from book and ship in the second half..

And so that implies that there was a lot of more book-and-ship in Q3 and Q4. And now, we're just shipping out of backlog? Is that just as in-flight financial? I'm sorry..

Yeah. When we progress through 2022, specifically for Q3, 70% of the sales that we anticipate in Q3 will be based on new orders placed in 2022, which will be at a price point much higher than those coming from backlog and there's still about 30% of our sales in Q3, which will be based out of the 12, 31, 21 backlog.

But you can see that sequentially improves as we go through the year. And as important, I think Q4, we still have 25% of our sales that are based on orders that were in the backlog at the end of '21. If you progress the 2023, almost 95% of our sales in 2023, are going to be based on this higher pricing that we get, not only in 2022, but also in 2023..

Got you. Thanks so much..

Thanks, Andrew..

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

Sure, again, I want to apologize to all you for our Q4 performance. As you know, we're not happy, you're not happy with it. We have a handle on the issues. I hope you saw that through our presentation today, and need to prove it to you throughout this year. We will earn your trust back. I want to thank you. And have a good day..

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