Vertiv Holdings Co

NYSE:VRT

Good morning. My name is Nadia, and I'll be your conference operator today. At this time, I would like to welcome everyone to Vertiv's First Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note, 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, Nadia. Good morning, and welcome to Vertiv's First Quarter 2025 Earnings Conference Call. Joining me today are Vertiv's Executive Chairman, Dave Cote; Chief Executive Officer, Giordano Albertazzi; and Chief Financial Officer, David Fallon. [Operator Instructions].

Before we begin, I'd like to point out that during the course of this call, we will make forward-looking statements regarding future events, including the future financial and operating performance of Vertiv. These forward-looking statements are subject to material risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. We refer you to the cautionary language included in today's earnings release, and you can learn more about these risks in our annual and quarterly reports and other filings made with the SEC. Any forward-looking statements that we make today are based on assumptions that we believe to be reasonable as of this date. We undertake no obligation to update these statements as a result of new information or future events.

During this call, we will also present both GAAP and non-GAAP financial measures. Our GAAP results and GAAP to non-GAAP reconciliations can be found in our earnings press release and in the investor slide deck found on our website at investors.vertiv.com.

With that, I turn the call over to Executive Chairman, Dave Cote.

[indiscernible] to say I'm pleased with how we kicked off 2025. Growth and great execution are a powerful combination. Despite the market noise out there, we continue to outperform and deliver strong results. Our position in the market keeps getting stronger. You and the team are executing very well, and our investments in R&D and capacity are paying off. You've heard me talk many times about the importance of seed planting. We have consistently planted seeds at Vertiv and that seed planting is paying off.

As we have said before, the digital revolution is happening, and it still has a long way to go. Data centers remain fundamental to all of it. AI adoption is spreading globally, data center demand remains robust and Vertiv is positioned extremely well to capitalize on these opportunities. Our portfolio, technology leadership and global scale are not easily replicated. Vertiv's management team has an intense focus on speed and strong execution, and that is amplifying our competitive advantages in this fast-growing market. Additionally, it's the only thing we do. So it gets a lot of attention. There's been a lot of turmoil lately about tariffs, which, of course, remains a fluid situation. The reality is, given our market position and operational flexibility we believe we're well positioned to handle the tariff situation.

We have a sound playbook developed over several years to manage through this situation. We have manufacturing capabilities across multiple regions and our supply chain team has proven to navigate these challenges. I'm confident in our ability to handle what comes our way. All that being said, we do have to wait and see what actually transpires. We're still early in our Vertiv transformation. There's so much more value to unlock here and we've got the right team and strategy to do it. We are much better than we were before, and there is still a lot of upside left yet. We're building a great track record of consistently outperforming, but there's still so much more potential ahead. That's good news for all of us as investors.

So with that, I'll turn it over to Gio.

Well, thank you, Dave. And let's go to Slide 3. Our Q1 performance demonstrates the strength of our business and the soundness of our strategy. It is a strong quarter, and it confirms everything we've been telling you about our market position and execution capabilities. Among other things, I am very pleased with the direction of pipelines and orders. And with the further backlog expansion we have driven in Q1.

We have heard a lot of opinions about the market. Let me be clear, our visibility into the data center market gives us every reason to be confident. Not just for '25 but for the years beyond. Our industry is continuing to grow, particularly around AI infrastructure. And it's moving along the market trajectory that we shared with you at our November 24 Investor Day. Vertiv is uniquely positioned to capitalize on this trajectory.

In Q1, EPS were up 49% to $0.64, driven by our increased AOP. Our organic net sales were up 25%, and we believe we are outperforming market growth. Book-to-bill was a convincing 1.4x in Q1. Our trailing 12-month organic orders growth is 20%. We're winning in a market that shows a strong demand signals. We believe the TTM trend is the right way to look at orders. Yes, I want to underline that Q1 orders were up 21% sequentially and a healthy 13% year-over-year against very challenging comps. The strength of these numbers reflects not just market growth but our ability to expand our market position. Our strong growth, combined with convincing execution resulted in an adjusted operating profit of $337 million up 35% from prior year. We delivered another strong quarter of adjusted free cash flow at $265 million, up 162% year-on-year. Our balance sheet continues to strengthen, which is especially important during times of uncertainty.

Now let's look at the full year ahead. We are very pleased to raise our sales growth guidance to 18%. As we know well, the tariff situation is quite dynamic and fluid. We wanted to have a credible reference point. So we have based our guidance on the tariff rates in place as of April 22. And we have assumed they will remain unchanged for the rest of the year. We will elaborate further in the next pages. In this scenario, we have held our EPS guidance midpoint unchanged at $3.55 and expanded the range. We have held our AOP guidance center point unchanged, also within the broader range. The broader guidance range reflects the uncertainty that the tariff situation creates. However, we believe in our business fundamentals and in our ability to execute. We have built resilience into our operations, precisely for situations like this. Certainly, there are things we don't know yet. And rather than speculate, we'll continue to focus on what we can control, and we will adapt as the situation becomes clearer.

We have started the year strong and based on the demand signals from customers and technology partners, we believe that 2025 will be another strong year.

With that, let's move to Slide 4. We continue to see a strong end market environment that expands well beyond 2025. This is clearly a secular trend. The trajectory of pipeline and orders indicates strength in demand. As I said, our TTM orders remain very convincing. Pipeline continuous -- pipelines continue to grow sequentially across all regions, demonstrating we are still in the early phases of this investment cycle. In the Americas, we are seeing strong performance with TTM organic orders up more than 30% and particularly strong pipelines. APAC in general, continues to show order strength and pipeline growth, EMEA still lags the other regions. The dynamics we discussed in February continue. EMEA pipelines, though are robust and growing. Our backlog expanded further and expands strong at $7.9 billion, up $1.6 billion year-over-year. This corroborates our growth story and the 5-year model that we shared at the November 24 Investor event.

Let's look at the right side of the slide. Our supply chains continue to demonstrate strong momentum and resilience across multiple dimensions. Supply chain resilience has been central to our agenda for more than 2 years now. We have been driving geographical -- sorry, geographical and geopolitical diversity, multi-sourcing and standardization, all with a very rigorous and data-driven resilience drumbeat. As we said, we have built our supply chain and manufacturing resilience around geopolitical themes in the last couple of years. The current tariff map adds a new dimension to it. But our resilience and the muscle we have created are strong and position us well to manage the current situation. Of course, we'll stay agile and adapt as conditions evolve. We continue to focus on the Vertiv operating system. VOS is driving manufacturing productivity efficiency and is liberating capacity. We maintain a relentless focus on operational excellence across the organization.

Let's move to Slide 5. Over the years, we have strengthened our pricing muscle and capabilities. And as I said, we are continuously optimizing our global supply. Let me take a moment to provide some clarity around our tariff mitigation strategy. Let's look at how we supply our American business. In the U.S., we have strong local capacity and we continue expanding it. We have capacity in Mexico. Most of our Mexico capacity and production is already USMCA qualified, and we are driving towards 100% of qualification goal. Single digits portion of our demand is sourced from China, and we are deploying or have already deployed lower tariff or no tariff alternatives. A small portion of the U.S. demand comes from other regions, predominantly from EMEA and of course, that is being optimized.

The agility and efficacy we have developed over the last couple of years is helping, but we're not standing still. We have a comprehensive set of actions underway. We are working towards the USMCA qualification for the remaining portion of our Mexico-based supply chain, we are actively rebalancing our global supply chain towards low or no tariff regions, and we are strategically relocating production while leveraging our U.S. manufacturing footprint. The commercial aspects of tariff mitigation are important. We have already taken some price actions in the market and will take more as necessary. Discussions with our customers about existing orders pricing actions where needed are also part of the mitigation strategy. We believe the impact of these mitigating actions will compound as the year progresses.

Although the tariff environment remains fluid, our goal is to significantly mitigate the effect of tariffs as we enter 2026. But do not get me wrong. This is complicated, and there is a very large number of moving parts. We have established a detailed tariff playbook that allows us to monitor and respond to evolving trade dynamics.

And with that, over to David.

All right. Thanks, Gio. Turning to Slide 6. This page summarizes our first quarter financial results. All metrics are significantly improved from last year's first quarter, including adjusted diluted EPS at $0.64. As Gio mentioned, up 49% from last year and $0.04 better than our guidance. The increase in EPS was primarily driven by higher adjusted operating profit, but also positively influenced by lower interest expense, in part due to the term loan repricing last year.

Moving to the right. Organic net sales were up 25% from last year's first quarter, driven by strong growth in the Americas and APAC. We overdrove sales guidance by over $100 million, facilitated by available capacity and strong operational execution. Adjusted operating profit was up $88 million or 35% from last year, and that was primarily driven by the higher volume. And the 130 basis point expansion in adjusted operating margin was primarily due to operational leverage. Another strong quarter for adjusted free cash flow as we generated $265 million, $164 million higher than last year, and that drove a free cash flow conversion of over 100%. We experienced strong collections at the end of the quarter with a good portion of that accelerated a few weeks from Q2, which does create a potential headwind for next quarter. We expect free cash flow for the first half of 2025 to be [indiscernible] consistent with the first half of 2024.

And finally, on this slide, in the bottom right-hand corner, our net leverage currently stands at 0.8x. As we mentioned previously, we believe our strong balance sheet, debt profile and cash generation qualify us for an investment-grade credit rating right now. And we are pleased to announce that Fitch agrees with us as they recently launched ratings on Vertiv debt at investment-grade BBB-. This provides additional flexibility with our capital structure, improves our borrowing capabilities. And frankly, it is a testament to how far we have come with our cash generation profile. We will always manage our capital structure in the best interest of shareholders, and this investment-grade rating amplifies our ability to do exactly that.

Next, turning to Page 7. This slide summarizes our quarterly segment performance. As mentioned, continued strong top line growth in both the Americas and APAC, including China, while EMEA's growth lagged the other 2 regions, primarily due to slower AI infrastructure build, as we discussed in the fourth quarter. Nonetheless, we remain optimistic about the future growth in EMEA as orders pipeline continues to expand at an encouraging pace. Adjusted operating margin increased from last year's first quarter across all 3 regions, with operational leverage, the primary driver and the 160 basis point expansion in the Americas was the incremental cost of tariffs.

Moving to Page 8. This slide summarizes our second quarter guidance. We expect continued top line momentum, including 15% sequential quarterly growth and 21% growth from last year's second quarter, with both the Americas and APAC, once against growing once again growing more than 20% year-over-year, and we continue to be prudent with growth expectations in EMEA. Tariff costs will certainly accelerate in the second quarter from the first quarter. And with limited time to mitigate with either supply chain or commercial countermeasures, our adjusted operating margin will be negatively influenced. If tariff rates in effect today remain in effect for the entire second quarter, we expect adjusted operating margin to be 18.5%, about 110 basis points lower than last year's second quarter. However, excluding the estimated net tariff impact, adjusted operating margin would show good expansion, which implies that tariffs more than explain the year-over-year reduction and underlying margin expansion drivers, including operational leverage, productivity and commercial execution remains strong, and we believe we continue to be on track for our long-term margin targets.

And finally, despite the negative impact from tariffs, our second quarter adjusted operating profit is still growing 14% and our adjusted diluted EPS is still growing an impressive 21% from last year, strong growth even in a world without tariffs.

Next, moving to Page 9. This slide updates our full year 2025 financial guidance. In summary, compared to prior guidance, we are increasing top line projections and including estimated net tariff costs. First, we are increasing full year sales guidance by $250 million, including approximately $150 million organically and approximately $100 million from favorable foreign exchange. The $150 million increase in organic sales is driven by both the first quarter and higher expectations in the second quarter versus what was implied in our prior guidance. Regionally, we are increasing full year expectations for both the Americas and APAC, while lowering projections for EMEA. Full year organic sales growth is now expected to be 18% at the midpoint, 2 percentage points higher than our prior guidance. We are maintaining our full year guidance for adjusted operating profit at $1.935 billion at the midpoint. This guidance assumes that tariff rates in effect yesterday remain in effect for the remainder of the year.

Of course, adjusted operating profit will be favorably influenced by the higher sales volume. In addition, we have higher expectations for productivity, but we also include provision for the potential negative net impact of tariffs for the remainder of the year, including the cost of tariffs themselves, offset by planned supply chain and commercial countermeasures. We are reducing our full year guidance for adjusted operating margin to 20.5% at the midpoint, approximately 50 basis points lower than prior guidance, of course, primarily driven by the estimated net impact of tariffs offset by favorable operating leverage on higher expected sales. This all translates into maintaining our adjusted diluted EPS at $3.55 at the midpoint, which is consistent with prior guidance and 25% higher than prior year despite the impact of tariffs. Once again, good growth for most years, but particularly impressive considering the uncertain and fluid environment.

As Gio mentioned, there's still plenty of uncertainty and a ton of work to do, but we believe we are very well positioned to respond to the challenges, which is a good segue to the next slide, Slide 10, which due to the dynamic nature of the tariff environment, this slide depicts our adjusted operating profit under various scenarios. Of course, we anchor to our base guidance from the prior page, which is highlighted in blue here on Page 10, with the high end and low end of the adjusted operating profit guidance primarily driven by the upper and lower ends of the sales guidance on the previous slide. Once again, this guide assumes that the tariffs in place yesterday remain in effect for the remainder of the year. We also illustrate a few other scenarios to our base guidance, including an upside scenario of $2.015 billion at the top of the slide, and this is primarily driven by sales opportunities above the high end of our sales guidance, which is consistent with our continued favorable view of the market and growing orders pipeline.

We also include 2 potential downside scenarios on this slide, one where we include provision for potential risk related to supply chain and commercial countermeasures and another below that where we estimate the potential negative impact of April 2 reciprocal tariff rates that were subject to a 90-day pause are indeed reinstated. Clearly, uncertainty remains, and there continues to be a lot of moving elements, but we believe these scenarios provide directional guardrails for possible outcomes.

So with that said, I turn it back over to Gio.

Well, thank you. Thank you, David. And just take for a moment still on Page 10. I just want to add that we believe the guidance, you will see in bold here is the place to anchor to. And I'm very, very encouraged by the speed of execution and the rigor of execution that team Vertiv is displaying in handling the changing conditions.

Let's go to Slide 11 now. [indiscernible] and then I'll add a couple of important comments. A few points really stand out from our first quarter. We exceeded our guidance for Q1, sales and profitability. The strong momentum we built throughout '23 and '24 continues. Our order performance was particularly encouraging, and so our book-to-bill ratio at 1.4x. Strong organic sales growth and margin expansion are expected to continue [ to '25 ] and throughout the year. We are raising our full year organic sales growth expectation to 18%. That is supported by the strong backlog and the pipelines we see across our business. Our profitability and on profitability, we continue to expand operating margin expansion despite the potential tariff headwinds. We have developed playbooks to address various scenarios. We remain focused on operational and commercial execution.

Very importantly, we expect our strong free cash flow generation to continue. This gives us flexibility to invest further. The market remains robust, particularly the data center space, and we are well positioned to capture this growth opportunity while delivering on our commitments to expand margin and generate strong cash flow.

Now let me share some exciting news about our projects with iGenius. Here, NVIDIA and Vertiv are delivering a fully prefabricated AI factory. This is a very important sovereign AI supercomputer and we provide everything infrastructure from liquid cooling to heat rejection, grid to chip power in a very rapidly deployable modular infrastructure. All leveraging our NVIDIA codeveloped AI reference designs. What makes this truly special is how it brings together all our core Vertiv strengths. Our ability to deliver complex solutions at scale, our deep technical expertise and our commitment to innovation. We're not just providing infrastructure, we are enabling iGenius to deploy advanced AI models in a highly regulated industry. I invite you to take a closer look at our iGenius project solution in the quite cool video linked from both yesterday's press release and indeed on the stack. This video really showcases the scope of our solution and the unique end-to-end capabilities of Vertiv.

When we talk about partnership and partnership is crucial. And working together and closely with NVIDIA, we are advancing AI factory design through digital twins and simulation, all connected directly to Vertiv solutions. We are delivering the technology that enables the future generations of AI. We are helping our customers to stay one or more GPU generations ahead. We enable customers to plan infrastructure before silicon lands with deployment-ready design ready for increased rack power density. We're not just participating in the market evolution, we are actively shaping it.

So we remain humble about the work ahead. We are laser-focused on delivering on our commitment. We remain confident in the long-term vision we shared with you last November. We have started the year strong, and we believe that 2025 is shaping to be another strong year.

With that, Nadia, let us begin Q&A session. Thank you.

[Operator Instructions] Our first question goes to Scott Davis of Melius Research.

Congrats on navigating through this mess on scads far. It's going to be a hard question to answer, perhaps. But when you think about -- I think your guide for incremental margins because of these tariffs is like, call it 13% or so for 2Q. How do you see the mitigation efforts from Slide 5? How do you see that phasing in through '25 assuming there's no change, obviously, there could be a change in DC tomorrow. But assuming steady state, how do you see that improving that mitigation and kind of your sequential improvements there? And is some of that mitigation perhaps some repricing of contracts or make there the new contracts that are sized or price or a higher price or have surcharges? Just trying to get a sense of that, and then I'll pass it on.

Thanks, Scott. Yes. Clearly, the -- as I mentioned, as we were going through the slides, the impact of the counter measures really counts as we go through the year and the quarters. Clearly, there are 2 fundamental dimensions to the countermeasures. One is, I'll start from where you started price. And there is, of course, price actions on new contracts, new opportunities, price actions in the market, some we have already implemented, more we likely will continue to implement it to implant. And there is certainly an element of existing backlog repricing where needed, not always needed. And conversations are ongoing in that respect.

There is a very important element to the tariff mitigation aspect that has to do with the supply chain. And as soon as this was evident and we started to understand which direction tariffs were going, as I said, not always easy and certainly not always stable. But we pulled the rig configure as needed the supply chain level. And -- but of course, there is a lag between the very rigorous approach we have taken and we continue to take to shape our supply chain to match at best the tariff situation and the benefits that come from that. So clearly, this lag such that the impact will be greater as we progress through the year. So I don't know, David, if there's anything you want to add here or...

No. And just big picture, we do anticipate the dollar impact of tariffs to sequentially the net impact of tariffs to sequentially decline as we go through the year. And then the margin impact even more so as we'll gain the leverage on the higher sales in the back half of the year versus the first half.

If I could just -- yes, Gio, if I could just add, pursuing your comment in the transcript though, you're intent by year-end in terms of tariff neutrality?

Yes, confirmed. Absolutely.

The next question go to Amit Daryanani of Evercore.

Congrats on a nice print. I guess my question is really around, you folks have had really impressive performance on orders, both sequentially and year-over-year basis, given some very difficult compares you had. Can you just -- Gio, talk about what's driving this trend and really the durability of growth you're seeing over here because it does stand out in contrast to all the noise that was out there in terms of hyperscalers potentially canceling leases and stuff. So I'd love to understand what's driving this trend if you saw any pull in? And how do you think about the durability here?

Look, the -- let's start with the durability. As I mentioned, our pipelines are growing, and it is sequentially growing quarter-on-quarter. So another aspect of the pipeline that is interested, not only pipelines are growing in what we call the next 12 months orders, so that are scheduled to land in the next 12 months, but also beyond. So there is also an elongation that gives us more visibility in the future. So that is a positive and is a positive that's talked to durability.

At the same time, there is a certain -- we said that the reason why we talk in terms of trailing 12 months is because we talked about lumpiness in orders. So we've been talking about that for now a good year. And that's still the case. So it could be in order to flip one side or a large order flips on one side or the other side of over quarter, and that changes your short-term profile. One thing that is interesting, when we look at our pipeline velocity, that's pretty stable. So that means that nothing very significant in terms of staff being pulled in. Let's look at it as sometimes the lumpiness works in the direction, sometimes it works in another direction. What matters is the long-term trajectory. And again, as I said, long-term trajectory for me confirms our 5-year model that we shared with you in November and then again in February and the factor today.

The next question goes to Steve Tusa of JPMorgan.

Just 1 detailed one and then a bit bigger picture, but the detailed one, can you just maybe give us a little more granular color around kind of the absolute China import exposure? You said kind of a single-digit percentage of I guess, what you're sourcing to come through U.S. factories. Would that be like a couple of hundred million bucks. And then are you like how much is price and how much is moving the supply chain around as far as mitigation? And then point number two, I think going back to the last question, which was a bit more macro, what do you think you're bringing to bear to gain market share? And do you believe you are gaining market share because that's kind of what it seems like with -- even just the trailing 12-month type number. It seems like you guys are gaining market share. What part of the portfolio do you think is resonating most with our customers?

I had to take note of all the kind of, how can I say, angle of your question here, Steve. We will not be specific about the exact number of what is us from where. But I think what we shared on Page 5 explains the fact that the exposure is certainly something that we are managing and addressing.

When it comes to the supply reconfiguration and price element of our countermeasure, I would say it's a good combination. It's a good combination of the two. And again, both contribute to the impact. Are we gaining market share? We believe so. Again, we refer back to our November market growth figures that we shared with all of you. And those continue to be very relevant and proven fairly current and absolutely still represent our best view of the market. And relative to our growth rates relative to that are certainly higher. What brings to bear this growth? I think it's really the combination of things that we talked about several times. We know the space very well. That drives, of course, technology that is suited for the needs of the market in terms of -- again, I go back to my example of the cooperation with NVIDIA, but also the iGenius case that we represent here is understanding what the future technology looks like and being able to provide technology that addresses that.

Being ready for future silicon is an important element. We are a recognized leader. So we are at the tables. We have a strong -- we have a very strong service offering and very, let's say, very high stakes, infrastructure and compute requires very, very reliable partner, and they find it -- our customers find it in inverted and we scale. I think these are the element, Steve.

The next question goes to Jeff Sprague of Vertical Research.

Just a quick follow-up on some of that last point, and then I've got a different question. Gio, I know you don't want to get into the individual kind of pieces of where you're sourcing from where, but perhaps you or David, could you just tell us what is the total gross tariff-related pressure that's in -- that you're facing in 2025 here? Obviously, you've kind of told us what you think the net effect is, but what is the total gross number you're trying to counteract against?

Yes, Jeff, this is David. We're not going to disclose to that level of specificity. I can reiterate what Gio mentioned is that we're very focused on reducing the gross impact through 2 buckets of countermeasures. One being pricing, the other with the supply chain countermeasures. Both take some time, but we're absolutely focused on both of those levers. And just to repeat what Gio said, the reducing impact is pretty equally split between both of those.

Got it. So my question is really on the balance sheet. Your operating results and everything stand out. But the other thing that jumps off the page, right, is the shape of the balance sheet and a 0 in the share repurchase column and the cash flow statement. I guess we could kind of take a couple of things away from that, a, perhaps you're singularly focused on achieving investment grade before you do anything else or perhaps you see some significant M&A on the horizon. Otherwise, it's kind of hard to understand why you wouldn't have bought back any stock with the sort of really significant dislocation in your shares.

Yes. Let me take it real quick. Clearly, these are -- there is a lot of fluidity in the market in general. These are uncertain times, and certainly, having a strong balance sheet and cash is very important. We have a very active, as I mentioned a few times already, M&A pipeline. But specifically on the repurchase, considering the, of course, the importance in cash and times of uncertainty, there are moments in which the price would have suggested that, but those moments may have consulted with blackout periods.

So again, in this, as we stated a couple of times already probably 10x a radar, bear with us, is about being opportunistic when it comes to repurchase.

The next question goes to Andrew Obin of Bank of America.

Yes, so there were pretty public headlines about delays and cancellations from a prominent hyperscaler. And just can we get just some details? What are you seeing on your end? And how are you dealing with capacity that becomes available? Does it get pushed out or -- to a multi-tenant and color guys step up? Does it go to other hyperscalers? Can you just explain to us how do you manage your production less given the dynamic in the market that I think has been pretty well covered in the press.

Thank you, Andrew. So yes, we do not talk specifically about any individual customers or players. What we see, again, being generic, given the fact I would want to be specific to individual customer is, as you saw from the orders, as you saw from the backlog, we have demand and demand that is suggesting we increase in our year-on-year growth as you saw. So that means that our capacity has been increased and made available, as you saw in Q1 sales growth, there is more capacity, and we are delivering more to the market.

And I don't know if we really look at the market is the demand is quite spread is spread now that it may have been a year, a year ago, 1.5 years ago. There are certainly hypers in self-build. There is colo for hyperscalers, but increasingly not only. Let's not forget that all the new cloud, let's say, space that is promising. Sovereign, as in our [indiscernible] example is started to happen and enterprise, it doesn't show interest in AI and infrastructure in general. So it's pretty normal that sometimes someone rephases something, pretty much have demand to cover any gaps. But again, I'm not talking specifically for one customer. And then in general, we should go on a product line by product line basis to see exactly how that answer questions should be answered, but much details at that stage to disclose.

The next question goes to Nicole DeBlase of Deutsche Bank.

Can we just talk a little bit about the ability to go back and reprice the backlog what's baked in from a contractual perspective with respect to tariffs. If you started to have those conversations have customers been somewhat understanding of what's happening? And I guess, how much of a risk that part of the equation is since the backlog is pretty robust?

Yes. The conversations are ongoing. Some of the conversations are ongoing, where that need exists. Clearly, contracts are supporting, sometimes more, sometimes less. Every single contract is a different situation. But what we see is that, in general, there is an understanding that this is a particularly challenging or unique moment. That is also true in the customer, it's true in the customer base. So we believe that we have fairly assessed the risk on the, let's say, price counter measure in our guidance and the range we were given. And again, we're going down that path in a very collaborative but also in a very focused fashion. So we stay very positive that what we have modeled, and that results into the guide that we've shared with you is -- will happen and the early signs that go in that direction.

The next question goes to Andy Kaplowitz of Citigroup.

You obviously had a strong book-to-bill in Q1 of 1.4x, but you mentioned that Europe in terms of better bookings lagging behind. I think at a recent conference, you talked about European environment getting a little more friendly. And today, you mentioned that your European order pipeline is a little better. Would you expect larger bookings going forward still mostly coming from the U.S.? Or do you see Europe starting to contribute at some point this year? And ultimately, does the overall landscape you're seeing still support a book-to-bill over 1x moving forward?

The second part of your question, again, sorry, Andy, I'm not sure I captured, something glicth in the line or something.

Just about overall will you get bookings more still from the U.S.? Or do you think that Europe starts to contribute this year? And can you still support a book-to-bill over 1x moving forward?

Well, thank you. So when it comes to Europe, specifically, I remember that probably that comment that you're referring to is the kind of a regulatory environment, hopefully becoming a little bit more friendly. We were probably right after the Paris meeting convention that [indiscernible] had just called. So it's almost like people are waking up to a challenging situation and certainly an unfavorable situation. So those things are probably slower to move than anyone here would wish.

But again, I am encouraged by the pipelines. Which speed that will accelerate, we remain cautious. And that caution you have seen in the comments about Europe's growth that David made. Is it going to -- is growth coming from the U.S.? Well, the Americas certainly is an engine and continues to be an engine for growth, and pipelines are very encouraging. But Asia is definitely not to be sniffed out and we're glad to see China reaccelerating. We are certainly very impressed by what we see in Asia in general. And I would add also India. India, quite strong.

The second part of your question about the book-to-bill greater that than one, yes, we believe that we will have a book-to-bill greater than 1 in the year. And again, this is very consistent with our long-term trajectory. That is certainly [ faced ] by backlog -- building backlog year-on-year. And we believe this is what will happen also in 2025.

The next question goes to Nigel Coe of Wolfe Research.

I think this might be for David, but Gio, [indiscernible] financial question, please weigh in as well. So just based on the guidance, based on the 2Q guidance and sort of we can sort of back into what you're inferring for the net tariff impact. It seems like the bulk of the impact is landing in 2Q, I'm guessing because the mitigation factors aren't really kicking in. I then assume that there's a pull-through in the 3Q, but it feels like 4Q, you're more or less mitigating the impact. Just conceptually, is that the right framework? And then if I could just clarify Jeff's comments on the credit rating. Is the desire to get that rating higher? Are there other circumstances where you've been for large contracts with some of these large DC customers where the credit rating are reporting?

Yes, I'll start with the tariff impact. I appreciate the question, Nigel. Unquestionably, the highest net tariff impact from a dollar perspective will be in Q2, and that will mitigate as we go through the year. So -- and that's primarily related to the timing of implementing the countermeasures, both pricing on book and ship and backlog and then also as it relates to changes with the supply chain.

Our target is to be tariff neutral as we exit the year, but there should still be some net tariff impact in the full 4Q with the expectation of -- or the hope to be tariff neutral as we exit 2025. As it relates to the credit rating, I would say we do have ambitions to be investment grade, getting that rating from Fitch was a good start. I think we're one step below investment grade at S&P, a couple notches at Moody's. There are definitive benefits in being investment grade, and that's related to the availability of the debt. And you mentioned another benefit, Nigel, and that's related to credit in the eyes of customers. Although I don't lay awake at night based on our balance sheet and where we are today, that that's a significant issue with customers but it never hurts.

So we'll take it one step at a time. And at the end of the day, we'll always do, what's in us, the interest for investors as it relates to our balance sheet and use of capital.

Yes. And Nigel, let me comment specifically on our rating and the impact or influence on contracting with the large customers. I would say that especially in the last couple of years, the financial strength of Vertiv is well recognized, and that has already been recognized also by the rating agencies. So I would say that, of course, everything helps but that's really not a problem today. Investment grade makes us stronger. So we lack it for the reasons that David explained. But it's not a necessary condition today and we're recognized as a very strong player in the industry, also from a financial stability standpoint.

The next question goes to Chris Snyder of Morgan Stanley.

Maybe just a high-level one here. What do you guys think is the best way for all of us to track liquid cooling demand in the market? Is it Blackwell shipments? And if that is what we should be looking at? My understanding is you guys do would lead the chip shipments by some period of time. But just any color on that relationship?

Well, certainly Blackwell is a good -- Blackwell shipments is a good proxy. But as you were saying, we proceed that deployment or anyway, the demand for liquid cooling proceeds the deployment, especially when it's liquid cooling that is not in rack with the cool and distribution units that are not in back, in which case pretty much the CDU demand and the Blackwell demand coincide.

But it's not just Blackwell shipments. There are other chips, some prior chip ASIC silicon that is more and more requiring liquid colleague or able to work with liquid cooling. So it's a little bit multiface of it. But certainly, Blackwell is a good place. Blackwell shipments are a good place to start and think in terms of probably 6 to 3 months before that happens is when we see our demand turn into deliveries. Yes, I think we are pretty happy about the trajectory of this technology and this product line. I'm actually very happy the way it's unfolding right now.

So let's take one more and let's see [indiscernible].

The next question goes to Noah Kaye of Oppenheimer & Co Inc.

And hopefully, we can put a wrap on this topic. But Gio, you've been quite clear from your opening comments that you see overall pipeline and demand trend is consistent with your Investor Day trajectory. In the past, the company has talked about the market environment by segment and maybe that addresses some of the questions people are raising here about hyperscalers behavior. Are you seeing any signs of overall cloud and colo man scaling back or slowing down? If so, is there any replacement strength coming from other segments to speak of to keep the overall trajectory on track?

I would say that colo cloud, and we always talk about the 2 combined continues to be pretty strong. And again, we were talking about team 15%, 17% expected growth rate over the 5-year period with the colo cloud and that's pretty much what we see as of now. We put it to, again, reiterate the message that there are other dimensions to the demand that are maybe not strictly colo cloud that are starting to move. So again, I don't want to -- it's very much aligned with what we shared with you in November and things are unfolding.

That's all the questions that we have time for today. This concludes our question-and-answer session. I would like to turn the conference back over to Gio Albertazzi for any closing remarks.

Well, thank you, and thank you, everyone, for listening and for the questions. I just like to add a couple of things. And first and foremost, our commitment to customer success to operational excellence and, of course, shareholder value creation has never been stronger. And it's also for me an opportunity to thank the more than 30,000 hard-working, committed focused Vertivians, I am absolutely proud of what we all are doing and achieving. So with that, thank you to everyone for your continued trust in Vertiv and have a great day.

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