Vertiv Holdings Co

NYSE:VRT

Q3-2025 Earnings Call

[Operator]

Good morning. My name is Breka, and I will be your conference operator today. At this time, I would like to welcome everyone to Vertiv's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note that this call is being recorded. I would now like to turn the program over to your host today, to begin Lynne Maxeiner, Vice President of Investor Relations. Please go ahead.

[Lynne Maxeiner, executive]

Great. Thank you, Breka. Good morning, and welcome to Vertiv's Third Quarter 2025 Earnings Conference Call. Joining me today are Vertiv's Executive Chairman, Dave Cote; Chief Executive Officer, Gio Albertazzi and Chief Financial Officer, David Fallon. We have 1 hour for the call today.

[Operator Instructions].

Before we begin, I'd like to point out that during the course of the 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'll turn the call over to Executive Chairman, Dave Cote.

[David Cote, executive]

Good morning, all. Well, this is a very strong quarter by any measure. Although, I got to say, by looking at the stock price reaction right now, I wonder what would have happened if we hadn't blown the doors off of every single metric. We exceeded guidance across all metrics in a very convincing way, I continue to say I'm more excited now than ever and you're seeing why. We're in the early stages of the digital age and Vertivs' position today reflects the years of focus on customer relationships, disciplined investment, operational excellence and R&D expansion. Selecting a good strategy, sticking with it day by day and reinforcing it with monthly growth base, works.

Our technology leadership comes from consistently staying ahead of where the industry is going. This digital transformation is just beginning. The scale and speed of what we're seeing in AI and data centers today is just a preview of what's ahead. Data will continue to increase rapidly, and data centers are essential for storage and processing. We are very well positioned to continue to lead through it. I've seen many business transformations over the years and what's clear is that our strategy is working. As our technology focus, grows market share. The investments we've made in R&D and capacity are delivering results today and more importantly, we believe they're building a sustainable competitive advantage that will serve us well for years to come. I'm more confident than ever that we're in the early stages of what I believe will be a multiyear period of significant growth and value creation, and we couldn't have a better leadership team than Gio and his group to make it happen.

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

[Giordano Albertazzi, executive]

Thank you, Dave, and welcome, everyone. We go to Slide 3. Our Q3 performance demonstrates the strength of our strategy and execution. Our adjusted diluted EPS of $1.24 was up about 63% year-over-year driven by higher adjusted operating profit. [indiscernible] organic sales grew 28%, with a strong Americas up 43% and APAC up 21%, EMEA declined 4%, relatively in line with our expectations. Particularly encouraging is the 1.4x book-to-bill ratio in Q3. Our trailing 12-month organic orders growth of about 21% demonstrate strong momentum, with Q3 orders up 60% year-over-year and 20% sequentially. The market growth ranges from our November 24 Investor Day, remain valid, though tracking at the higher end with the colo-cloud share expanding as the fastest-growing segment, the overall market growth is accelerating. We continue to outgrow the market through superior technology and execution.

Q3 adjusted operating profit reached $596 million, up 43% year-on-year with a 22.3% margin and exceeding guidance. Adjusted free cash flow of $462 million was up 38%, reflecting our strong operating performance. Our 0.5x net leverage demonstrates our strong balance sheet. Now momentum heading into Q4, we are raising full year guidance for adjusted EPS, net sales, adjusted operating profit and adjusted free cash flow. And with that, we go to Slide 4.

Vertivs' order momentum and pipeline continue to outpace the strong market. While orders can be lumpy, our Q3, about 21% a trailing 12-month organic orders growth and the 1.4x book-to-bill ratio showcased our competitive advantages. As mentioned in July, starting next year, we'll move to providing full year orders projections with quarterly updates to better reflect our long-term strategic focus. Our sales grew 29% in the quarter while building an additional $1 billion in backlog from Q2. Our total backlog now stands at $9.5 billion, up about 30% year-on-year and 12% sequentially. This clearly gives us a strong visibility into 2026. The phasing of our backlog remains consistent with historical patterns, a healthy backlog in a healthy market. Our application expertise and proven track record have positioned us as a preferred partner for strategic projects.

Early involvement in project technology and in project planning further drives our above the market growth. Pricing remains favorable. Expected to exceed inflation. EMEA sales continue to be muted as a market, mainly to power availability and regulatory challenges. Here, we're implementing regional restructuring programs to have the right structure for future-strong growth, though acceleration may not come until second half, 2026.

When we talk about tariffs, we view them as another input cost to our business. The situation remains fluid, and we're addressing it with comprehensive mitigation actions and pricing programs. We expect to materially offset current tariff impacts as we exit Q1 2026, while optimizing our supply chain and manufacturing footprint. We are progressing well in addressing the operational and supply chain challenges we experienced in Q2. We are accelerating manufacturing and service capacity investments across all regions and particularly in the Americas, while maintaining disciplined fixed cost management. Our engineering and R&D spending continues to accelerate to further strengthen our industry leadership.

And spin of leadership, let's go to Slide 5. And let me elaborate on our Services capabilities. Services turn market complexity into opportunity from liquid cooling to higher voltages and services are fundamental to our competitive position. We support the complete customer journey from consultancy through implementation to life-cycle and optimization. Our Advanced Technology platform combines remote metering, predictive analytics and energy optimization. Our Advanced Diagnostics and predictive capability, including Thermal Mapping and Power Quality Analysis are helping customers maximize reliability and efficiency, with a seamless system integration. What truly sets us apart in combining this technology with our unmatched global scale.

The recent Waylay acquisition accelerate this advantage by analyzing real-time machine data, identifying operational trends and proposing predictive actions from maintenance to energy optimization. As rack densities increase and systems become more complex. This integration of AI-enabled capabilities with our established field service becomes even more advantageous. But technology alone is not enough presence and capacity in field are fundamental.

We are scaling our service capacity in-parallel with manufacturing, staying ahead of the demand cloud. Services, combined advanced technology, global reach and growing capability is truly one of Vertivs' superpowers. And with that, over to you, David.

[David Fallon, executive]

Thanks, Gio. Turning to Slide 6. Let me walk you through our strong third quarter financial results, starting with adjusted diluted EPS of $1.24 up approximately 63% from last year's third quarter, with the improvement driven by higher adjusted operating profit and a lower effective tax rate primarily from progress with tax planning and timing of some discrete items in the quarter. Organic net sales were up 28%, with continued momentum in the Americas, up 43%, while APAC was up 21% as we continue to drive top line expansion across that region. EMEA was down 4%, but as Gio mentioned, we continue to see encouraging signs of accelerated growth in that region likely looking to the back half of 2026.

Our adjusted operating profit of $596 million was up 43% from last year and $86 million higher than guidance. Adjusted operating margin of 22.3% exceeded prior year by more than 200 basis points, primarily driven by operational leverage on the higher sales, positive price/cost and productivity, but partially offset by the negative tariff impact and as we summarized last quarter, operational inefficiencies driven by supply chain actions to mitigate tariffs. This 22.3% adjusted operating margin was 230 basis points higher than guidance, aided by operational leverage on higher sales, but also, by strong operational execution, including addressing supply chain inefficiencies more quickly than expected just 3 months ago. Still work to do, but we are encouraged as we move into the fourth quarter and 2026.

Importantly, our year-over-year incremental margin in the third quarter was approximately 30%, a good indication that we continue the path towards full year adjusted operating margin target of 25% in 2029. And finally, on this page, we generated $462 million of adjusted free cash flow. That's up 38% from last year, and that translates into approximately 95% free cash flow conversion, and that is consistent with our long-term expectations. Net leverage was 0.5x at quarter end, and we expect to exit the year at 0.2x, providing significant flexibility with future capital deployment. Moving to slide 7.

This page illustrates our segment results. And as mentioned, Americas delivered strong organic top line growth of 43% and driven by accelerated AI demand across product lines and customer segments and margin expanded 400 basis points despite the tariff headwinds, as we continue to drive operating leverage, productivity and positive price cost. Moving to the right. Operating leverage was critical for margin expansion in APAC, which saw 21% organic growth as AI infrastructure continues to drive current and future expected growth across that region. In EMEA, organic sales were down 4% due to continued industry challenges. However, sales were higher than expectations heading into the quarter, reason for optimism as we expect EMEA to reaccelerate in the back half of 2026 driven by the latent although inevitable AI infrastructure demand there. Third quarter adjusted operating margin was significantly below prior year, and we think at a low point, driven by de-leverage on lower sales and higher fixed costs as we continue to invest in regional capacity to ensure readiness for the anticipated market recovery.

As Gio mentioned, we are implementing a restructuring program, primarily in EMEA, but also impacting other regions. And this global program, which commenced in the third quarter cost approximately $30 million, and we expect an annualized benefit of approximately $20 million commencing in 2026. Now let's move to guidance where we will address the midpoint of our guidance ranges for both 4Q and full year in Slides 8 and 9.

Turning to Slide 8, our fourth quarter guidance. We expect adjusted diluted EPS of $1.26, up approximately 27% from prior year, and primarily driven by higher adjusted operating profit. We project net sales of $2.85 billion with organic growth of approximately 20%. Looking at regional growth rates, we expect momentum to continue in the Americas, up high-30s with APAC up mid-single digits and EMEA down high-single-digits, but up mid-teens sequentially from the third quarter. Adjusted operating profit is expected to be $639 million, up approximately 27% year-over-year, with adjusted operating margin of 22.4%, 10 basis points higher than the third quarter despite higher sales due to headwinds from new tariffs announced since our last earnings release, including those implemented under Section 232 and also a sequential quarterly increase in growth investment, as we ready for future-strong customer demand.

Next, turning to Slide 9, our full year guidance. We are raising our projection for adjusted diluted EPS to $4.10, 4% higher than 2024. This improvement is primarily driven by higher adjusted operating profit with benefit from lower interest expense and a lower effective tax rate. We are raising our expectations for net sales to $10.2 billion, translating into 27% organic growth for the full year, and we expect adjusted operating profit of $2.06 billion, up 33% from last year and full year adjusted operating margin of 20.2%, approximately 80 basis points higher than 2024, demonstrating strong expansion despite the negative impact from tariffs. We are raising our adjusted free cash flow guidance to $1.5 billion with free cash flow conversion at approximately 95%.

And before turning it back to Gio, I do note that this guidance assumes tariff rates active on October 20 are maintained for the remainder of the year. So now with that said, back to, Gio.

[Giordano Albertazzi, executive]

Well, thank you very much, Dave. And we go to Slide 10 to share some thoughts on 2026. So the data center market continues to show remarkable strength driven by accelerating AI adoption globally. Our order pipeline and market indicators give us confidence in this trajectory, though EMEA remains softer and we expect it to rebound in the second half of 2026.

Based on our substantial backlog and clear visibility of pipeline, we anticipate continued significant organic sales growth in 2026. To anticipate and stay ahead of our customers' evolving needs and timelines, we expect to accelerate our investments in supply chain and services capabilities and capacity. Tariffs remain dynamic but we have clear action plan and strong execution. Our mitigation strategies are progressing well and under current conditions, we expect to materially offset their impact as we exit Q1.

On profitability, multiple drivers support continued margin expansion, strong operating leverage, certainly at these growth levels. Ongoing productivity initiatives and effective price cost management. We remain fully committed to our November 2024 Investor Day margin target. Our robust free cash flow provides significant strategic flexibility. And let me elaborate on this a little bit more on Page 11, so let's go to Slide 11.

And we are accelerating our investments for growth along three dimensions: Capacity. We are investing globally with a significant focus on Americas across multiple technologies. Some examples. Our Infrastructure Solutions capabilities are growing with Prefabricated Solutions for both gray and white space and in [indiscernible]. Vertical Infrastructure Solutions enables faster deployment, shorter time to revenue and alleviate skilled labor constraints on site.

SmartRun, our innovative prefabricated white space system shared with you in July, exemplifies this acceleration capability. The Great Lakes acquisition strengthens our IT systems offering and deepens our white space presence. We are scaling these capabilities as we have done with previous acquisitions, a playbook that we know quite well. In general, our capacity expansion strategy keeps us 6, 12 months ahead of demand curves, maintaining technology leadership while driving operational efficiency. The other access, of course, is technology, and our engineering and R&D spending will grow 20% plus in 2026 with flexibility to accelerate further. Through aggressive R&D investment, we are committed to staying multiple GPU generations ahead. We are accelerating our funding for the system layer, connecting all critical infrastructure elements and this is a crucial advantage, as data centers are becoming increasingly complex.

When it comes to M&A, our strong balance sheet enables us both opportunistic bolt-ons, and the largest strategic acquisitions, all according and in line with our value creation framework. We maintain a vibrant pipeline across technologies, regions and deal sizes. As the industry accelerates, we need to stay ahead whether through smaller technology acquisitions or larger scale opportunities. This strategy strengthens our complete system solution offering, expands our TAM and enhances our global reach. And we will continue investing to extend our technology leadership and deepen our capabilities to serve customers in ways no one else can.

So let's now go to Slide 12, our last slide. We're certainly pleased with our performance this quarter. Confidence with what we see leads us to raise our full year guidance. Our 2025 execution demonstrates the strength of our strategy, and it positions us well for 2026. Strategic acquisitions and increased investment in CapEx and engineering and R&D reflect a sense of urgency in capturing opportunities ahead. While the global landscape presents complexities from tariffs to geopolitical ships, that approach remains unwavering, develop robust mitigating strategies assign clear accountability and execute with precision. We are pleased with our progress, but there is more work to do. And as you know, we're never satisfied.

Looking ahead, our 800-volt DC portfolio, planned for release in the second half of 2026 aligns directly with NVIDIA's 2027 rollout of their Rubin Ultra platforms. We're collaborating closely with NVIDIA to advance these platform designs. This is about staying ahead of where the industry is going, not just where it is today. What sets Vertiv apart is our system-level expertise across AC and DC power, combined with our Thermal Management and Service capabilities, delivering solutions that address the complete power and cooling infrastructure. Our team understands that leadership means constantly raising the bar for tomorrow. And that's exactly what we will continue to do.

So with that, I'll turn it over to Breka, for our questions.

[Operator]

[Operator Instructions] Your first question comes from Amit Darani with Evercore.

[Unknown Analyst]

Impressive set of results here despite the stock reaction today. Gio, hoping you could just maybe help us understand the order uptick you're seeing that you're talking about today, up 60%. What is sort of driving this? And really, the part I would love to understand is when we see Oracle reported $300 billion-plus RPO number or OpenAI announced a 10-gigawatt deal with NVIDIA. What's the cadence for these big announcements to flow into orders and revenues for Vertiv? I suspect none of these multiple recent announcements have really made it to order of the ecosystem yet. But I'd love to understand just a little bit on what's driving this order growth in September and the timeframe from when these big headlines we're seeing start to become orders for the company?

[Giordano Albertazzi, executive]

So first of all, Amit, thank you for your question. So certainly, the drivers are a combination of things, very good market. Certainly, technology evolution in the market that goes in our direction. Certainly, an industry that trust the ability to scale that Vertiv is displaying. And what we have multiple times being vocal about our competitive advantages, our service, our technology, et cetera. So all things that certainly drive that demand, combined with a reliable execution.

On the Oracle side, as an example, I don't want to go too specific. But in general, we see -- we see some of the players, many of the players, the large players in this space that talk about a backlog expansion that really has to do with their service agreements. So I don't want to go into details of what these customers and how they look and measure their backlog. But typically, those are a different type of backlog, the different type of agreements. And on the back of this, the back of these plans and facts and commercial situations, we have an infrastructure that is being built. And that build-out is rapid, but gradual numbers. So the dynamics of the orders to Vertiv or to the likes of us relative to the dynamics of the order intake and the backlog of our customers can be very different. But there are two sides of the same, very positive coin, if you will, but they beat to a slightly different drum, if you see.

[Operator]

We now have the next question from Scott Davis with Melius Research.

[Scott Davis, analyst]

You emphasized it on Slide 5 kind of the Services opportunity here, could you give us a little bit more color on perhaps the margin structure of Service versus Equipment. The growth rate is at outgrowing equipment or since we're in such a hypergrowth period for equipment, perhaps it's not, but it comes in later? Just a little bit more color about how that service opportunity kind of flows through the P&L over the next few years.

[Giordano Albertazzi, executive]

Yes, thanks for the question, Scott. So the -- clearly, we love our service business, a lot. We believe it's a unique competitive advantage, uniquely strong competitive advantage. Certainly accretive. Now if you go to Page 5, you see there are various components to our Services portfolio. That, of course, have different -- slightly different dynamics in the various components but certainly, overall accretive to our business and certainly generating a lot of recurring revenue in everything that is linked to everything life cycle, services, optimization, it's a very robust business.

But in times where the product system side of the business is growing at this space, particularly, and it's very normal that the service business lags. But again, it's a very strong flywheel that is catching up speed. So it's almost bound to have and is going to happen with [indiscernible] celebrating. We like the direction in which it is going. And quite frankly, I'm really let's say, excited about the technology that we're bringing out. So it's really the combination of technology and capacity and presence and customer as -- customer experience. So expand that to continue to accelerate that fly will continue to accelerate.

I think an important element is that the type of equipment that is being deployed. The density of technology that is being deployed nowadays in new and newer data centers, certainly conducive to more business service penetration.

[Operator]

Your next question comes from Steve Tusa with JPMorgan.

[C. Stephen Tusa, analyst]

Just you guys had said, I think in the release or maybe in the presentation that you're on track for, I think it was the margins that are embedded in kind of the long-term outlook I would assume that, that means that's kind of more of an absolute margin comment. So if revenues are looking better that we should assume that those margins are good, but that would obviously imply a bit lower decremental margin?

I guess I'm just curious as to kind of the outlook for -- or sorry, incremental margin. The outlook for incrementals and want to get through these tariffs can we kind of get back on the horse of 35%? Or are we now at a point where with the types of projects you're doing and although modular work and things like that, that you may be a little bit less than more revenue, same margins, which is still very good, but not quite the incremental -- same incremental?

[David Fallon, executive]

No, I understand your question, Steve, this is David. I would say our path to the 25% long-term margin target in 2029 stays intact. I think we certainly had some noise this year, specifically as it relates to tariffs, not only with the tariffs themselves, but also some of the supply chain countermeasures to address those. Our long-term model assumes incrementals in that 30% to 35% range. I think low 30s gets us to that 25% in '29. If we're at the upper end of that range, we could do it sooner.

But I would say everything that we see, certainly, based on Q3 and what we see shaping up for Q4 certainly keeps us on that path. The one variable, and we were very clear with this in both Investor Days is going to be the timing of growth investments and they're investments. So you invest upfront, you get the return over time. But even with that, we would believe going into any given year. Our expectation is to be in that 30% to 35% range. Maybe the one dynamic for next year is we certainly wouldn't anticipate a headwind from tariffs. They continue to remain volatile and uncertain, but that was probably the most significant headwind that got us below that 30%, 35% range in 2025.

[Operator]

We now have Chis Snyder with Morgan Stanley on the line.

[Christopher Snyder, analyst]

I wanted to follow up on the prior margin commentary. The one thing that really stood out to me, Q2 to Q3 was the sequential margins, operating profit up more than revenue sequentially. So I know margins are swinging around a lot with tariffs and how that's being phased in. I guess kind of the question is, if we step back, do you think the price conversations or negotiations versus the customers have changed versus a year ago? Specifically, do you think they've gotten any harder? Or is this kind of still the same environment where they're paying for speed of supply and innovation of the technology?

[Giordano Albertazzi, executive]

Thank you, for the question, Chris. So I'd say that, first and foremost, we continue to be focused on and deliver on a price cost positive type of performance. When it comes to the conversation with the customer, I think we have to be all very, very, very careful in the sense that I don't think we should think about as price conversations have been easy. I mean we have a very, very professional, knowledgeable savvy customers and they correctly behave as such. So the price that one can achieve is really on the back of the value that is being delivered to our customers, and very commercially savvy, technically savvy customers. I don't see a dramatic change in that respect.

What is absolutely critical is really the innovation, but the innovation not in and of itself, but innovation that enables additional value creation for them, for our customers. It is a service level. It is the quality you bring to the party. We think we're doing a very good job in that respect across all axis. But our customers more or less price sensitive. They're very business-sensitive. They've always been very business-sensitive. So it's up to us to deliver value to them that enables price to be achieved for us.

[Operator]

Your next question comes from Jeff Sprague with Vertical Research.

[Jeffrey Sprague, analyst]

I have two questions on my mind. I guess I'll ask one actually. Just curious on Europe, actually, your apparent confidence that it does, in fact, get better second half of 2026 sounds like a long way away. I mean, watch in France, I think, is on the fourth government here in 12 months. So just your confidence that they get their act together? Do you actually see a product pipeline coming together there? And maybe just address a little bit, I guess, the restructuring you're doing to prepare for that eventual growth that you're expecting?

[Giordano Albertazzi, executive]

Sure. Well, Jeff, thanks a lot. So I probably have been more sanguine about the Europe re-acceleration in the past that I've been now. So saying it is going to be 1 year from now. I mean 1 year from now, when we sit around the same table and phone summarizing our '26 -- Q3 2026 performance. That means that we are building some wiggle room there for things to really come back. And I truly believe that they will come back because the market is in a bad need for capacity AI capacity. And there are very stringent data sovereignty reasons, why that capacity for inference needs to be in country, in region, in the EU or in the U.K., et cetera. So vacancy rates are extremely, extremely low. And by the way, new technology data center design needs to be built.

Pipelines are encouraging in terms of the total size of the pipeline. But what I see different is there is a certain vibrancy in the conversation with customers that was not there to the same extent. So one of the things I said in the past to say, "Hey, the people, our customers have many open fronts and the American front is so demanding that it's absorbing them a lot". While that continues to be the case. I think that they are making headroom, if you will, or let's say, they dedicated a few more brain cycles to the rest of the world, and Europe is certainly one of those.

We are positive also about the Middle East landscape from a market standpoint. We will not go into the details of the restructuring for obvious reasons. But rest assured that it means making sure that as the market accelerates in the direction of AI infrastructure build-out, we want to have an organization that [indiscernible] delivery and execution and also a go-to-market standpoint is exactly tailored to that. So I want to make sure that we do not miss any opportunity and certainly are agile enough for re-acceleration. But I will not go too much into detail.

[Operator]

We now have Andrew Obin with Bank of America.

[Andrew Obin, analyst]

Just a question on Services. It seems services as part of your mode being the industry leader. As you're gaining the strong equipment orders, could you just comment on your investment in services and specifically any KPIs you can give us on how are you scaling up your support function to keep up with the top line?

[Giordano Albertazzi, executive]

Yes. Well, certainly, those big orders and any orders in general, infrastructure requires a service for in times installation, not always certainly all the time, very often in project management and commissioning and startup. So very, very important. I agree with you, that is mode or as we like to call it, super power. When it comes to the headcount, we were talking about north of 4,000 engineers globally. I think we were we were on north of 4,400. So there we go, we are certainly accelerating and continue to invest. The way we approach that is really when we do our [indiscernible] for product demand.

On the back of that, there is a tie-up for services, and sample services has also geographic dimension by which we have to understand where our backlog will land and where we will need to increase capacity. So it's, of course, much more dispersed than a manufacturing capacity for obvious reasons, but there are all dimensions that will -- that we are taking into consideration. So if you think about that, call it about 4,400, 4,500 field engineers expect that to continue to expand. By the way, just like we talked about productivity in the manufacturing of the environment, there is productivity in the Service environment. So we really look at Services from the way we run it, in terms of distributed supply chain, distributed factories. So we are very rigorous in terms of how we measure the performance in terms of the service level, in terms of time it takes to be on site relative to our contractual commitments, et cetera, very, very, very experienced, mature and paranoid about our service level.

[Operator]

We now have Andy Kaplowitz with Citigroup.

[Andrew Kaplowitz, analyst]

Gio, can you give us a little more color into your capacity investments that you talked about that you're making, particularly in North America, -- you mentioned you're increasing R&D about 20% plus, but how do we think about CapEx growth in '26? And Will you have enough capacity to keep up with your current backlog growth of 30% with the assumption that your revenue growth may not slow much, if at all, from I think, high 20s this year.

[Giordano Albertazzi, executive]

So we will not be explicit when it comes to CapEx in 2026. And -- but clearly, as usual, there are two things at play. One is more footprint and CapEx. The other is productivity and vertical [indiscernible] system. So let's not forget the second part because to us, it's very, very, very important.

But you're right. I mean, the -- clearly, with the backlog extending, with the comments that I made, encouraging comments on the pipeline, we clearly are expanding our capacity. And that's particularly true in North America. The expansion as we have said in other occasions, is predominantly expansion of existing sites. That's something that we like a lot in terms of the speed that it enables from the decision to having that capacity available and the ability to scale very experienced teams that are already running Vertiv plants. So that will continue. That is our philosophy. Don't rule out, of course, brand new locations. But in general, what we do and what we do well is grow the footprint 6 to 12 months ahead of when the footprint is needed. Now I think we do a very, very good job. Never perfect. It's never perfect. There's always multiple product lines, multiple regions, but we're pretty satisfied with the direction of travel. And we believe it will well sustain our future trajectory. That's what I can have add.

[Operator]

We now have Nigel Coe with Wolfe Research on the line.

[Nigel Coe, analyst]

I want to go back to margins. Obviously, a very impressive outcome in 3Q. Maybe, David, give us an update on sort of where we are on this plant reconfiguration, which I think was meant to be completed by the end of the year. And just on the 4Q margins, specifically, you did, I think, take it down by maybe 1 point versus the original -- what was embedded in the 4Q plan. Just wondering if that's half inflation, some of these secondary tariffs or whether there's an EMA mix there? And I know I'm rounding a bit here. Can I just clarify the points about 2026 incrementals? Because tariff mitigation maybe -- so do we think '26 can be above -- do we think 2026 is going to be above the bar in terms of that incremental margin guidance?

[David Fallon, executive]

I would say you weren't rambling until the last 5 to 10 seconds, but I think all your questions are very much linked together. But looking at Q4 margins, we did bring those down versus prior guidance about 100 basis points, as you mentioned. I would say half of that on the contribution margin side and certainly driven by the incremental tariffs that we saw post earnings last time. In addition, and we're very proud of our operating leverage, but we're not afraid to invest in fixed cost. And we are planning to accelerate fixed cost investment into Q4, that were previously planned in the first half of next year.

So if you put those two together, it's probably half related to contribute margin with tariffs and the other half related to operating leverage. And if you look at margins sequentially, relatively flat Q3 to Q4. Once again, we see benefit as it relates to addressing the operational challenges, but we do have the additional tariff headwinds. Your question related to incrementals for 2026, probably premature to provide any specific numbers.

But once again, we'll reiterate, we expect to be in that 30% to 35% range in any even year over the next 3 to 5 years that the 25% target is pertinent. We're still evaluating the impact of tariffs, but we do anticipate to materially offset the tariffs that we have line of sight to today with countermeasures we're enacting with both pricing and also transitioning the supply chain we expect to be materially offset exiting Q1, which would imply, certainly, tariffs not being a headwind year-over-year. And despite uncertainty, we would expect that actually to be somewhat of a tailwind. So again, too soon to give any specific numbers as it relates to incrementals, but if you backtrack, there's nothing in particular that we're looking at 2026 that would be different than any other year as it pertains to incrementals.

[Operator]

We now have a question from Nicole DeBlase with Deutsche Bank.

[Nicole DeBlase, analyst]

Yes. So I just wanted to ask on EMEA margins. I think David, in the opening remarks, you kind of shared confidence that 3Q was kind of below [indiscernible] for EMEA margins. So what is the path back to mid-20s? Can we get there without volume growth driven by what you're doing on restructuring? Or we really need volumes to come back to kind of get back to where margins were within EMEA?

[David Fallon, executive]

I would say a combination of both. And we did mention that we do anticipate, number one, a sales acceleration in EMEA in Q4. I think I mentioned in my comments, up mid-teens. That certainly facilitates improved operating leverage versus Q3. And I would say, overall, that we do anticipate margins in Q4 in EMEA to be significantly higher than what we saw in Q3, including addressing operational inefficiencies. So when we talk about the operational inefficiencies as we put in place to address some of the tariffs. We have a global supply chain. And a lot of those actions have been put in place to address those inefficiencies in EMEA, and we would start to certainly see some definitive impact in Q4.

[Operator]

We now have a question from Mark Delaney with Goldman Sachs.

[Mark Delaney, analyst]

Yes. I was hoping to circle back to the order and pipeline topic. Gio, I think in your remarks that the backlog phasing is within typical levels for Vertiv at this point. And I think that implies backlog that is project weighted would typically be for shipments that are up to 12 to 18 months forward. Take that comment on the phase and of your backlog, it would seem to imply that most of these bigger data center announcements that have come out in recent months and are often for projects that are over the next many years have not yet been fully booked by Vertiv. So one, is that right? And two, is that what's underpinning some of your comments about the pipeline [indiscernible]?

[Giordano Albertazzi, executive]

Let me elaborate a little bit on this, Mark. Thank you for the question. So -- when we talk about the phasing of the backlog is, if you take a snapshot now of the $9.5 billion backlog and you look at this in the 12 months, 18 months 24 months, whatever, and you look at the same picture for the backlog of a year ago, you will see pretty much a similar shape, clearly bigger 30% bigger, but similar shape. That means that our backlog has not grown by virtue of, let's say, elongation or overstretching. So that's good for us.

We believe that, that is good because that represents the way the industry works. Now clearly, we have seen a lot of very strong, big, credible announcement and [ disclosures ] and one would expect Vertiv to be involved in many of those, that would probably be a very reasonable expectation, let's put it this way.

But those projects are then deployed in phases. And if we go back to our pretty [indiscernible], let's say, sticking to -- [indiscernible] sticking to the rule of only a PO is a legally binding PO constitute backlog, then you'll see that, that backlog pretty much mimics the way and the speed at which deployments occur. So in that respect, there's certainly all a lot of the more that will be done to fulfill those announcements in our pipe. And as those projects mature, as those projects mature in terms they are ready for deployment, maybe the next 250-megawatts in a 1 gigawatt deployed, that's the time when orders start to flow in for the likes of us and hopefully, for us. Hopefully, that addresses your question, Mark.

[Operator]

We now have Michael Elias with TD Securities.

[Michael Elias, analyst]

So Gio, on the ground, I'm seeing a massive acceleration in data center demand. I think in the third quarter, run rate data center demand is up close to 4x. So it's great to see you guys investing in production capacity. My question for you is that as you think about adding production capacity, can you help us understand from when you make the decision to expand capacity. How long does it take to have the first unit come off the live in that new production capacity. And as part of that, what's the earliest that you could book into that new production capacity? I only ask because I think you're going to move the equipment in a hurry.

[Giordano Albertazzi, executive]

Well, Mike, first of all, thank you for the question. We like the reinforcement about the market trajectory. We wholeheartedly agree on a very, very strong market to the point of capacity. I wouldn't say I would that there is one answer to that. A lot of our capacity expansion is used more, use that 25%, 30% of capacity that we have latent in the way we build things. If you think about our capacity build out, do not please think of it in aggregate as one discrete step happening sometime. That's been going on forever. We continue to expand what we're saying expansion rate will accelerate, but expansion has always been going on. It depends again the time to first unit, let's say, the time to revenue for new capacity is -- can vary from a few months for a line reconfiguration like 3, 4, 5 months, to maybe 12 months for larger expansion that require building from scratch.

But again, one thing that we like a lot, and that's why we like a lot is that if we just expand existing facilities, that is really the -- just a technical time to have the new equipment available but you have the systems, the people, the leadership, all ready to go and really expanding their volume of business, a lot of scale and a lot of speed. So think about something that can go from a few months to maybe 9 to 15 months window. So we, of course, build on our backlog but also on the visibility that we have in the pipeline. Hopefully, that addresses your question. Mike.

[Operator]

We now have Amit Mehrotra with UBS on the line.

[Amit Mehrotra, analyst]

Thanks, operator. Hi, everybody. Gio, I wanted to maybe ask you to address the competitive environment across all your products? And the only thing I ask that, it seems like every 3 or 4 months, there was some announcement or some innovation that gets everybody to question the entire thesis around Vertivs' position in the market. There was obviously AWS in [indiscernible] exchangers a few months ago. Recently Microsoft, Microfluidics people are talking about 800-volt DC eliminating the need for PSUs. Maybe address all of those, if you don't mind, obviously, AWS, Microfluidics and the 800-volt DC dynamic and kind of how you're content is evolving against that $3 million per megawatt. And maybe what your message is to folks when they are on receiving end of these innovations every 3 or 4 months that causes them to question the entire thesis?

[Giordano Albertazzi, executive]

Well, we will use the next 2 hours, Amit, for this. This is a great question. But I'll try to be super concise here.

We love the innovation intensity in the industry. We love it because we are at the center of it. If anything, we drive it. And that's exactly -- we go back to one of the questions we had. I do make sure that the price equation, I think it was Chris, the price equation stays favorable. That's exactly what innovation does. And being a head in the innovation curve enables us to continue down that path. So very important, that's why we relentlessly invest more and more in innovation. That's why we nurture our relationships so intensely as you know, we do. When it comes to specific examples, take Macrofluidics take a 800-volt DC ,different stories.

For example, take [indiscernible] and you say, "Oh, if anything, this is exactly direct-to-ship direct-to chip liquid cooling just done with other means than coal plate, it preserve everything thermal chain, Vertivs' a thermal chain, absolutely intact, if anything, you would have probably smaller micro channels and more pressure drop and more [indiscernible] needs in the system. So let's not be afraid of innovation. Innovation is absolutely our friend. Our friend certainly is the 800-volt DC leveraging our decades long DC power and AC power experience and DC power specifically. So being at the forefront as our Page 12, I think it was explains at the forefront of it is a competitive advantage. When we think about our TAM per megawatt, we start to see really a range that goes from 3 to 3.5 megawatt -- sorry, million per megawatt. So if you will, narrowing a little bit on the upper end of the spectrum that we have given you in the past, and that's a good thing.

Again, it's because of the technology. Clearly, the industry is becoming more interesting. To many players, but also we think a better -- we see a better delineation of the competitive landscape. If we compare, for example, everything thermal and liquid cooling now compared to what it was 1 year and 1.5 years ago. So that is in the direction of more consolidated, more rational players, not bad. And again, we continue to hold true to our competitive advantages and reinforcing that service, innovation, ability to scale all the things that you heard from us. So absolutely intact. If anything, we love this environment. Innovation-intense environment. Thank you.

[Operator]

This concludes our question-and-answer session. I would like to turn it back over to Gio Albertazzi for any closing remarks.

[Giordano Albertazzi, executive]

Breka, thanks a lot, and thanks, everyone, for your questions and time today. But before I wrap up, I want to take a moment to express my sincere gratitude to David Fallon, our CFO, who will be retiring. So what there's been kind of a 12 earning calls together, probably 12 plus 1. I was kind of a semi in the role. So big thank you.

David has been instrumental in our success, bringing great financial leadership and strategic insight during a period of significant well -- transformation, acceleration and growth. So David, thank you whole heartly for your partnership and for your dedication.

I am absolutely excited to welcome Craig Chamberlin as our incoming CFO. Craig brings a strong experience and capabilities that will help drive Vertivs' next phase of growth. I couldn't be more excited about our future. We continue to demonstrate our ability to execute and adapt in an ever-evolving market. While our progress has been strong, we stay focused on doing more. Opportunities ahead are extraordinary. With our technology leadership, global scale and deep customer partnership Vertiv is uniquely positioned for the future. A big thank you to Team Vertivs' constantly focused on delivering value for our customers and investors. And with that, thank you, and have a great rest of your day.

[Operator]

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