WESCO International, Inc.

Good day and welcome to the Westcote First Quarter 2021 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press the star then one. Please note that this event is being recorded. I would now like to turn the conference over to Leslie Hunziker, Senior Vice President, Investor Relations and Corporate Communications. Please go ahead.

Thank you, and good morning, everyone. Before we get started, I want to remind you that certain statements made on this call contain forward-looking information. Forward-looking statements are not guarantees of performance and, by their nature, are subject to inherent uncertainties. Actual results may differ materially. Please see our webcast slides as well as the company's SEC filings for additional risk factors and disclosures. Any forward-looking information relayed on this call speaks only as of this date, and the company undertakes no obligation to update the information to reflect the changed circumstances. Today, we'll use certain non-GAAP financial measures. Required information about these non-GAAP measures is available on our webcast slides and in our press release, both of which are posted on our website at wesco.com. On the call this morning, we have John Engel, our CEO, and Dave Schultz, LESCO's Chief Financial Officer. Now I'll turn the call over to John.

Thank you, Leslie, and good morning, everyone. We're off to a great start in 2021, outperforming our markets, accelerating execution of our integration plan and synergy capture, delivering significant margin expansion and generating very strong free cash flow. First quarter results were excellent across the board. I'm very proud of our team and want to thank them for the great work that they're doing. We're seeing positive sales momentum across each of our three global business units, and backlog has reached a new all-time record level. Workday adjusted sales were up more than 3% versus last year, and were also up 1% versus the first quarter of 2019 on a pro forma basis. Against a tough year-over-year comparison, we delivered sales at pre-COVID levels as the economic recovery is underway and demand is building in nearly every end market we serve. This ramp-up in activity, coupled with continued benefits from secular growth trends and our sales synergies, including cross-selling and value-based pricing initiatives, is setting the stage for a top-line performance that is better than our initial expectations for the year. We're making great progress on our margin improvement program as well, reflecting our ability to more than offset cost inflation. In the first quarter, gross margin was up 50 basis points versus last year and was up 40 basis points versus the first quarter of 2019. These are pro forma comparisons. Gross margin also expanded 50 basis points sequentially versus the fourth quarter of 2020. Strong execution of our margin improvement initiatives drove gross margin expansion across each of our three business units. We're also making great progress on our integration plan and are accelerating our execution and synergy capture. As sales grew and gross margin expanded, the torque on our operating leverage increased, reflecting the benefits of our structural cost reduction initiatives in our operating profit growth. As you saw in our press release earlier this morning, due to our strong first quarter results and accelerated synergy realization to start the year, we have raised our full year 2021 outlook for sales, synergies, and profitability. Finally, we generated strong cash and paid down debt in the first quarter, as we expect to do every quarter through the integration. The power of our business model is clearly being demonstrated. With over $500 million of net debt reduction over the last three quarters since closing the Anixter merger, that is, we have reduced our financial leverage almost a full term to 4.9 times net debt to adjusted EBITDA. In summary, the first quarter is another strong proof point of the substantial value creation potential of Westco plus Anixter. Now moving to page five. As I mentioned since the merger close in June of last year, combining two industry powerhouses provides a tremendous opportunity to create value for our company and for our industry. I'm very pleased with our team's execution of our integration plan. It is delivering the synergies and capturing the initial value of the transformational combination of Wesco and Anixter. Specifically, these results are being generated as we leverage our broad product services and solution portfolio. share best practices as one team focused on value-based selling, and capture cost synergies by eliminating redundancies, optimizing our supply chain network, and improving process efficiencies through other integration initiatives. In the first nine months since closing the deal, we continue to outperform market growth rates and have generated nearly $75 million in realized cost synergies, primarily from organizational redesign that delivers structural cost takeout. and also from increased efficiencies and reducing staffing redundancies. We expect this phase of the synergy capture to be completed in the next couple of months ahead of schedule. Additional integration initiatives are also well underway that will deliver further savings over the long term. For example, the design phase of our supply chain network optimization effort for the U.S. is now complete. Over the course of the integration, we expect to reduce roughly one-third of our U.S. locations through consolidation of overlapping Annex and West Coast facilities. We're also repositioning a mix of our national, regional, and local distribution centers to enhance service capabilities and capture the benefits of a centralized network with much greater scale. In 2021, we expect to complete about 20% of the U.S. network optimization effort, supporting the incremental cost synergies we're targeting this year. The strength of our franchise, the power of our industry-leading value proposition, and the benefits of our increased scale are now more evident than ever. As the economic recovery accelerates, we're exceptionally well positioned to capitalize on the secular growth trends of electrification, automation, communications, and security. With that, I'll turn it over to Dave to walk you through the details of our first quarter, as well as how we're thinking about the full year. Dave.

Thanks, Sean, and good morning, everyone. Starting on slide seven, this summary table compares our first quarter to the prior year pro forma results. Sales were flat in the first quarter, noting there were two fewer workdays this quarter compared to the prior year period. On a workday adjusted basis, sales were up more than 3% on positive contributions from pricing and currency. Backlog reached another record level this quarter, up more than 20% since the end of December, with each business unit posting double-digit increases. Gross margin was 20.1% in the quarter, up 50 basis points compared to the prior year, and up 50 basis points sequentially. This is our highest gross margin since 2016 on a pro forma basis. These results were broad-based and reflect the impact of our gross margin improvement initiatives started in previous periods, including the deployment of Annexer's Margin Improvement Program across the combined business. As we have discussed previously, Our margin improvement program focuses on value-based pricing and emphasizes training and development of our sales force. In addition to a proactive approach to cost pass-through, our sales reps focus on managing freight costs, minimum ordered quantity, and ensuring we are incorporating our portfolio of supply chain services in customer discussions. We also aligned incentives across the sales force to reward margin improvement. Gross margin included a 20 basis point negative impact from a $9 million write-down to inventory of personal protective equipment. Both business unit mix and supplier volume rebates were neutral to gross margin versus the prior year. Adjusted income from operations was $171 million in the quarter, or 4.2% of sales, after adjusting out the effect of merger-related costs of $46 million and a $9 million gain on the divestitures of the legacy Wesco Datacom and utility businesses in Canada that we announced in February. Adjusted EBITDA, which also excludes the merger-related costs and gain on the divestitures, as well as stock-based compensation and other net adjustments, was $217 million, $35 million higher than the prior year, and 5.4% of sales, 90 basis points above the prior year pro forma. I'll walk you through the details of this strong result in a moment. Adjusted diluted EPS for the quarter was $1.43. A full reconciliation of adjusted EPS is included in our press release. Preliminary results for April are encouraging, with sales up approximately 20%, albeit versus the first full month of COVID impact in the base year, where sales were down approximately 16%. Of note, gross margins in April are in line with Q1 results. Turning to page 8, we made substantial progress on our integration with Anixter. We captured $34 million of cost synergies in the quarter, favorable to the $28 million we expected. The increase was driven by a pull forward of the timing of activities initially expected to occur later in 2021, primarily related to permanent headcount reductions enabled by the organizational redesign. We also recorded a higher benefit from indirect procurement savings. Due to this faster execution, we are increasing our 2021 and 2022 target synergy levels. We now expect to realize $170 million of cost synergies in 2021, $40 million higher than our prior estimate of $130 million. We are increasing our estimate of realized synergies in 2022 by $10 million to $210 million. The bulk of the synergies that have been realized to date were driven by SG&A reductions, including the elimination of duplicative overhead costs and other SG&A efficiencies. We remain on track to deliver the three-year cost synergies of $250 million by June 2023 and we continue to expect that approximately $200 million, or 80%, will benefit SG&A, and approximately $50 million, or 20%, will benefit cost of goods sold. We are continuing to evaluate our integration program, including expected synergies over the three-year period post the annex to merger, and we'll provide a full update in our next earnings release following the one-year anniversary of the transaction. Turning to page 9, you can see the drivers of the $35 million increase to adjusted EBITDA on flat sales versus the prior year. The primary drivers of this increase were the 50 basis points of gross margin improvement and the benefit of realized cost synergies, which collectively contributed approximately $50 million of higher adjusted EBITDA. Partially offsetting these positive drivers was the higher incentive compensation and benefits we discussed on our previous earnings call that reflect normal merit increases in annual incentive compensation accruals, as well as inflation on benefits. As we discussed, on a year-over-year basis, the increase reflects last year's unusually low compensation expenses resulting from the impact of COVID on operating performance. Lastly, you can see from the last green bar to the right that we benefited from a handful of other items, including lower travel and entertainment expenses due to COVID-19. In total, adjusted EBITDA was up 90 basis points over the prior year, driven by the strong gross margin performance as well as increased operating leverage from synergy realization within SG&A. Now let me walk you through the results by business unit beginning on slide 10. All of the year-over-year comparisons shown in the next three slides are based on the pro forma results in the prior year. Turning to slide 10, sales in our EES segment were up 4% year-over-year and up 7% on a workday-adjusted basis. This growth reflects construction sales that are recovering faster than we had anticipated, progress on our cross-sell initiatives, and demand driven by secular growth trends. In Q1, we saw an increase in projects being released from backlog and shipped relative to our going-in expectations. We are experiencing robust bidding activity levels that drove an incremental increase in our backlog from the record year-end level. We've made further progress in our cross-sell initiatives that have capitalized on our ability to now offer a complete electrical package to our customers. We also continue to see increasing momentum in our industrial and OEM businesses. OEM was up versus the prior year, and industrial MRO activity levels have been improving in line with the broader industrial recovery. Adjusted EBITDA was up $25 million, representing 6.5% of sales, 130 basis points higher than the prior year level. This increase reflects the gross margin initiatives I discussed earlier, cost synergy realization, and effective cost controls driving increased operating leverage on sales growth. Turning to slide 11, sales in our CSS segment were down 4% versus the prior year and 1% on a workday-adjusted basis. While sales were impacted by project timing, a decline in safety-related products year over year, and the impact of COVID-19 in certain regions, we saw strong growth in our security solutions, global accounts, and high-growth data center and hyperscale projects. Backlog increased double digits to a record level. Profitability was also strong. Adjusted EBITDA was 7.3% of sales, 40 basis points higher than the prior year. This strong result includes the majority of the $9 million inventory write-down. This impact was more than offset by strong integration cost synergies and the execution of our margin improvement initiatives. Turning to slide 12. Sales in our UBS segment were down slightly versus the prior year, but up 2% on a workday adjusted basis. Utility demand has remained consistently strong as our customers continue to invest in grid hardening and modernization, as well as LED lighting and automation projects. Our broadband business was up double digits versus the prior year, driven by strong demand for data and high-speed connectivity, that has never been greater due to the step change expansion in remote connectivity for work from home and school from home applications. Additionally, we are seeing early benefits from our participation in the federal government's Rural Digital Opportunity Fund project, a $20 billion investment to bring high-speed broadband service to rural homes and businesses. Phase one of that project began at the end of last year. For UBS, Adjusted EBITDA in the quarter was $84 million, up 100 basis points as a percentage of sales driven by synergy realization, gross margin expansion, and effective cost controls. Moving to free cash flow and liquidity on slide 13. In Q1, we delivered another quarter of strong free cash flow that represented more than 140% of net income. Over the trailing 12 months, we've generated almost $700 million of free cash flow. We remain laser-focused on reducing our leverage. Since completing the merger, we have reduced net debt by more than $500 million and reduced leverage by nearly a full turn. One of the hallmarks of our business model is our ability to generate strong cash flow throughout the economic cycle. This resilient model, coupled with our execution on the integration with Anixter, and accelerated expectations for synergy realization give us high confidence that we will successfully reduce leverage below 3.5 times trailing 12-month adjusted EBITDA by our target date of June 2023. Our capital allocation priorities remain unchanged. We will pay the preferred dividend, invest capital to support the integration, and rapidly de-lever the balance sheet. Turning to slide 14, I'll walk you through our revised outlook for 2021. We have increased our outlook for sales growth to a range of 4.5% to 7.5%, primarily due to the macroeconomic outlook, which has substantially improved since January. We expect the market for our CSS SBU to be up mid-single digits and sales growth at the higher end of our range due to exposure to critical secular growth trends and its global footprint. Next. We expect the market for UBS to be up low to mid single digits with sales growth for 2021 at the mid to high end of our sales outlook. The utility market has been very stable and its exposure to continued demand increases in the broadband market will contribute to growth as well. Lastly, we expect the market for EES business to be up low single digits in aggregate. Overall, The non-residential construction market is expected to be down this year. While forecasts for the electrical market are strong, they include residential construction, which has been up double digits. However, we do not participate in that market in a meaningful way. For that reason, we expect EES to be at the lower to mid-end of our sales outlook range. We have increased our outlook for adjusted EBITDA margin to a range of 5.8% to 6.1%. primarily driven by the strong profitability this quarter and our increased target for synergy realization for the rest of the year. When it comes to the integration, we now expect to complete our organizational redesign by mid-year, pulling forward the originally planned second half actions. The outlook includes $130 million of synergies incremental to 2021, an increase of $40 million compared to our previous outlook. The cadence of the $130 million of incremental realized synergies is estimated to be approximately 60% weighted to the front half of the year. In the second half, we'll continue working on the supply chain network optimization plan that John talked about, which has a longer project timeline. Therefore, those savings will be realized over the next two years. We also are reevaluating our cumulative three-year synergy plan to validate our current assumptions. We'll provide an update next quarter on total synergies and cost to achieve over the three-year period post-merger period. In addition to the synergies, we expect to benefit from increased operating leverage on our higher expectation for sales growth. Continuing down the income statement, we expect our effective tax rate to be approximately 22%, slightly lower than previously anticipated due to the beneficial impact of certain discrete tax items recorded in the first quarter. Due to the higher sales and profitability expectations, we are increasing our adjusted diluted EPS outlook to a range of $6.80 to $7.30. Our expectation for free cash flow as a percentage of adjusted net income and capital expenditure remained unchanged. As a reminder, much of our capital expenditures this year will be invested in the early stages of aligning our systems and investing in digital tools and applications. With this outlook, we are providing our best estimate based on our visibility to the current environment and acknowledging that there are still underlying risks, including the continued impact on the demand from COVID-19 pandemic across the globe and the pace of supply chain recovery. With that, I'll turn the call back to John for closing remarks.

Thanks, Dave. Well, we've covered a lot of material this morning. Before opening the call to your questions, I'd like to walk you through a quick summary of the key takeaways. The positive momentum for our transformational year in 2020 has clearly continued into 2021, and we're off to a great start. Results were strong across the board this quarter with sales up, and each of our three global businesses reporting higher adjusted EBITDA margins. We are clearly capitalizing on our market-leading position and driving increased operating leverage across the enterprise. We are also benefiting from secular growth trends that provide upside for all of our businesses, and we are well-positioned to continue benefiting from these trends in the years ahead. Blanco's strong cash generation capabilities enable us to deliver the balance sheet rapidly. In the first nine months post-close, we have already reduced leverage by nearly a full turn. The execution of our integration with Anister has progressed even faster than we anticipated. We've increased our cost synergy expectations by $40 million for 2021. And lastly, we are pleased to have substantially increased our outlook for sales and profitability for the balance of 2021. Our performance and the improving macro environment support our stronger 2021 outlook. With that, I'd like to open the call to your questions.

And we will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. We kindly ask that you please limit yourself to one question and one follow-up. And at this time, we will pause momentarily to assemble the roster. And our first question today will come from Dean Dre with RBC Capital Markets. Please go ahead.

Thank you. Good morning, everyone. Nice execution.

Thank you, Dean. Good morning.

It is such a hot topic across the industrials. I was hoping you could walk through some of the price-cost dynamics that you've seen, you know, including freight. And Dave, in his wrap-up comments, cited, you know, supply chain recovery. And so just if you could give us some color on that. supply chain disruptions as you're seeing them today and what's embedded in your guidance. Thanks.

So in terms of pricing, clearly we saw inflation stepping up across a number of commodity categories and other parts. And this is kind of in line with the overall economic recovery cycle. If you, you know, and we typically share this each quarter. If you look at the number of supplier price increases, versus what we would typically see in the first quarter and the average price increase. Both are up materially in the first quarter of 2021 versus first quarter of 2020 and even prior years. So clearly there's been a step up there. I think that as we shared and as you can see in the results, we feel very good about our execution of our gross margin improvement programs, and we clearly think that we're doing a good job of pricing the value in. So that's our overall price-cost question, Dean. In terms of supply chain disruptions, we have not seen any material disruptions in the first quarter. I think we've done a very nice job of working with our top supplier partners in ensuring integrity in the supply chain as we can manage it for our customers. Remember, we doubled the size of the company. So, you know, we've strengthened our supplier partnerships. We have broad and deep inventories. I think if you see through our results, we added to our inventory position in the first quarter. It's critically important to us. that we have the proper inventory and we can support both availability of what our customers' demands are as the economy recovers, as well as support strong fill rates. With all that said, I think this is something that clearly represents a challenge for certain product categories, a number of product categories, and it's the overall global supply chain. You know, the supply chains are working to get fully rebuilt the disruption that was caused by COVID was substantial across all facets of all the economies around the world. So clearly there's challenges there. The way we're trying to work that is, again, with our expanded inventory position and our relationships with our supplier base.

That's really helpful. And if I could just clarify, because I know you guys track this closely when you talk about the number of supplier price increases and the average price increases. Is that still within a manageable level? Because historically, this inflationary environment is actually very attractive for Wesco as a distributor. So are we still in that sweet spot? Or has the volume of either of those kind of pushed it to where you're actually getting some pressures.

No, definitely favorable, Dean. I think what we're doing a better job of versus what we've ever done historically, and again, I'll credit the combination of Anixter and Westco coming together and the teams have been working on this revised margin improvement program across the combined enterprise. I have to give the full credit to our combined team on that. Anixter had a good very good momentum if you look at their gross margin results which were public prior to the merger closed in june of last year they had you know upwards of two years every quarter of gross margin expansion against a market that was not supporting that right when you look at the other publicly traded distributors so But the short answer to your question is yes. I think we're doing a better job when we ever have a pricing of value. And look, inflation is not done. I mean, you look at where we are in the economic recovery cycle, inflation is going to continue as the economy recovers. And I feel very good, Dean, about where we are so far through the first quarter.

That's great to hear. And my second question is, would be for Dave and just the really strong free cash flow conversion this quarter. The deleveraging is happening actually faster than what we were modeling. And, you know, it's not lost on us that you're already into the four handle on net leverage. So it really does beg a couple of questions. One, is there anything one timer related in the free cash flow this quarter and within your guide? Because you're still at 100 percent, I see. And is it too much to ask for a little more color in terms of the path of deleveraging? You know, is there a goal for 2021? Any kind of milestone, you know, would be helpful here. Thanks.

Yeah, Dean, good morning. Thanks for the questions. I would tell you that there's not anything substantial in our free cash flow results for the first quarter. Relative to the prior year, the only thing that you could call out that is up is you do see a significant change in that other net, which is including some of the compensation accruals that, of course, we have not paid out. So that's the only area that I would say is a minor benefit that we're seeing within the first quarter free cash flow results. And your question about leverage, as we mentioned, this has been our key priority, and getting back to our target leverage range three years post-close is what we're focused on. We've not provided any specific glide path on how we anticipate getting there or by when.

Appreciate it. Thanks.

And our next question will come from Sam Darkhashed with Raymond James.

Please go ahead. Good morning, John. Good morning, Dave. How are you? Good morning, Sam. Hi, Sam. Three questions, if I could be forgiven. They're hopefully pretty quick. The first one, Dave, should we still – view gross margins as rising sequentially each quarter this year? I'm guessing rebates are going to be exceeding original expectations. You're getting increased traction from your internal initiatives. You talked about favorable price costs. You have the roll-off of the PPE inventory. Is that a fair characterization that gross margins would rise as the year progresses?

Yes, Sam, we've not provided any specific guidance for our gross margin. I think you've hit upon a couple of things that we are really focused on. The first is we're very pleased with the progress we made on the gross margin improvement plan, and we do anticipate to continue to incent our sales force and work very hard to continue to get good execution on gross margin. The one thing I will highlight is we did take the write-down on the personal protective equipment, as highlighted in our prepared remarks. We still are carrying some inventory, so we'll continue to monitor, you know, what the market conditions are like and whether or not we have to take another write-down in a future quarter.

Second question, the $40 million... increase in synergies from your prior views. Is any of that in cost of sales or how much of that is in cost of sales? And where are you in the vendor negotiation process? Because I know that you were hesitant or reticent to include a lot of purchasing synergies until those were completed.

Yes, Sam. The benefit that we're seeing in the increase year over year in our outlook for the synergies, the plus $40 million, it's primarily SG&A still, and that's part of the execution of some of the organization redesign that we're underway with. We've got a good portion of that done here in the first quarter. We'll complete that in the second quarter. There are some gross margin benefits that we do anticipate will be realized in the second half. of 2021 but again the majority of the savings in 2021 will still be on the sg a line you specifically mentioned supplier volume rebates that's something that we are continuing to work remember that a lot of that of the benefit that we'll see there is as our sales and purchases grow and we're flat year over year versus the prior uh pro forma period so from that perspective you know there is an opportunity there we're continuing to work it hard

And my last question is just a follow-up on Dean's point around pricing. Dave, can you specifically quantify what pricing was in the first quarter, year-on-year, and then how much within your guidance is inclusive of price versus volumes?

Certainly. So we estimate one to two points of positive pricing in the first quarter of 2021. As we've mentioned before, it's extremely difficult for us to predict the benefit of pricing for the balance of the year. So we've not included any specific pricing benefit for the following three quarters of 2021.

Very helpful. Terrific job this quarter, John.

Thank you, Sam.

And our next question will come from Nigel Coe with Wolf Research. Please go ahead.

Thanks. Good morning, everyone. I want to pick up on the price question there. I think one of your competitors called out North American pricing for non-cable of 3.6%. And obviously, that's well ahead of what you just called out there. Do you think there's potential to maybe push up to those kinds of levels of price given the inflationary pressures?

Nigel, it's Dave Schultz. So there's always the potential, and we saw some of the market estimates of pricing by category. Again, we've always talked about there being a lag between when we get those supplier price increase notifications to when we start to see it in our results. So is there the potential for there to be more pricing in the balance of 2021? There is. But, again, that will really be dependent upon the macro environment, how quickly supply chain covers, and really what's that underlying demand. And, again, a lot of that's being driven by the residential side within the electrical space, which we don't participate to a meaningful level.

Great. Thanks, Dave. And then, you know, it's great to see you're getting some benefits already from the rural broadband sector. funding, that $20 billion, how much of that $20 billion do you think speaks to Wesco products? And what do you think your fair share of that, Tam, might be over the next several years?

It's a great question. And we've not gone public on what I'll say the conversion rate is on the publicized number. I will just maybe share a little bit of, you know, this is 100% in our sweet spot. And I'll take a moment, Nigel, just to provide a little color because I think it's important. Both Legacy Wesco and Legacy Annexter had participated in the broadband business. When you actually look at what each company was strong, the collective strengths or respective strengths, It was a much more complimentary combination than we had realized or anticipated. I did make a comment on that several earnings calls ago, not the last one, but the prior one. So I am really pleased with how those teams have come together. We have one overall broadband leader for the combined business. It's part of our UBS strategic business segment. And that broadband leader is a legacy annexer leader. And we've got a terrific set of capabilities to support that broadband build-out and drive specification-driven solutions in conjunction with our supplier partner base. So I think what's really important to understand here, and we cited this example, and Dave did in his comments, because It's something you can all see, but I will make this comment that the broadband build-out and the acceleration of 5G represents a secular growth trend that's very strong across the U.S. and Canada. And this is just one of the, I'll call it, catalysts that are helping drive that secular growth trend.

Absolutely. Thanks, John. And then I'd really love to hear your comments on labor constraints, because We talk a lot about supply chain, but labor and hiring the right skilled labor seems to be a real challenge right now. So I'm just curious what you're seeing out there in the labor market and how much of your full year 21 plan is contingent on hiring the right kind of personnel here.

So I'll give you an answer. Maybe you don't expect the first part of this answer. We're first very much focused on it with respect to our customers. because part of our core value proposition is providing more efficient, more effective solutions, you know, whether it's a construction project build, whether it's MRO supplies, you know, where we can pick up additional outsourcing and they outsource what's not core, whether constrained on an OEM build and ramp up in conjunction with the industrial recovery, we'll provide more effective solutions there. So we're in the value chain. We're myopically focused. on our customers' operations and value chain, and that constraint, as it's manifesting itself, we have very specific services and solutions that target that. This is really important. Now, with respect to ourselves, I call it Wesco and Anister coming together, remember, we've gone through an aggressive integration program. We're three-quarters into a three-year-plus program, and we've taken structural costs out. We've been selecting the best of the best talent across both organizations to staff the new combined company. And we've got the management team completely in place. And as Dave said, we're a quarter plus away from essentially being done with the organization redesign and structural cost takeout relative to our labor force and headcount, having that be completed. We are right now not seeing any constraints in our labor force that are material, that are impacting our ability, again, or that impact the T1 results. One area where we are, I will call out, where we are aggressively adding additional talent is in the digital and IT arena. So, you know, remember, we are looking at driving a digital transformation of our business. And in doing that, we expect to lead a digital transformation of our industry, and that is an area where we are injecting talent from the outside. And I'm very pleased with the results we've had thus far in the new additions to our talent base, particularly that have accelerated upon the hire and since the hire of our CIO and Chief Digital Officer, Akash Karada. And, you know, he's been on board. you know, better in 2021. And the momentum of our IT and digital teams is accelerating. I'm very pleased with that. But we'll continue to add talent in that part of the business.

Great. Thanks, Joe.

And our next question will come from David Manthe with Baird. Please go ahead.

All right. Thank you. Good morning, guys.

Morning, Dave.

Morning. Yeah. So from what Dave just said, it sounds like none of the revenue or EBITDA guidance increase contemplates upside to inflation. That sort of is TBD. So I guess it looks like most of the EBITDA guidance increases because of the synergies, but given the strong selling margin you saw in the first quarter, I would have thought that gross margin would have been a bigger contributor to your outlook upside. So I'm just wondering, was the gross margin in the first quarter, was it consistent with your expectations, or was it actually a little bit better than what you contemplated in original guidance?

Yeah, Dave, so good morning. I would point you to we've taken our adjusted EBITDA guidance, the 40 basis points improvement versus our previous outlook. So of that 40 basis points, roughly half of that is the increase in the synergies we expect to achieve. The other half is based on the performance that we've been seeing through the first half of the year and how we believe we're set up. for the balance of the year. Again, we're very much focused on improving our EBITDA margins. We know that gross margin has been a key focus area for the company. We've not specifically guided that, but going back to your question of the 40 basis points is a combination of synergies, continued margin improvement programs, and the benefit of scale on the additional top line.

Okay.

And then as it relates to the utility area, if you look at DOE funding and infrastructure investment in general, the grid hardening, et cetera, plus what you just said about the broadband space, so if you look at electrical plus broadband, I mean, it sounds like the UBS segment is extremely well positioned once we sort of get out of this early cycle environment. Is that the right way to think about it, that the the secular trends in the utility space are probably the most favorable of any of your segments right now?

The first part of your statement, absolutely yes, I think, as you characterized it, Dave. The secular growth trends are strong and as robust as I've seen – I know this is a strong statement in my tenure at Wesco. Again, it's two sets of secular growth trends, everything around utilities, as you outlined, which is the U of UBS, and everything around broadband, build-out, 5G acceleration, which is the B of UBS, so to speak. In terms of it being the strongest, I would say that what CSS faces in terms of, and it can take advantage of in terms of global secular growth trends is also right up there, you know, in terms of data center growth, the demand for bandwidth. I mean, I, you know, if anything is that we've seen one result from this, from this COVID driven environment, it's going to be an acceleration of all things digital, right. And remote connectivity is, and ensuring that voice, data, video, all that convergence on all applications. And I think we're at the very beginning part of the S-curve of IoT-based applications, very beginning. That's got multiple decades of growth in front of us. So, I mean, just on the second comment you made, I'd say that, The secular growth trends that CSS are facing are very attractive to us and also are robust. And finally, and this one will take a bit longer and be more, I'll call it more consistent over the next few decades. I think we're at the beginning part of an accelerating electrification trend. And EES will benefit greatly, but that affects our other business units as well. So, I mean, it's hard for me to say UBS has got the strongest growth trends. We've spent some time outlining all the various growth trends we think we're well-positioned to take advantage of, but I would say, you know, that's how I would bucketize it. Utility, yes on your utility comment, yes on your broadband comment, but I would put, you know, data comm and IP security right up there with it and electrification as well.

Great. All right, John, thanks for the comments. Appreciate it. Good luck. Thanks, Dave.

And once again, if you'd like to ask a question, please press star then 1. Our next question will come from Chris Dankert with Longbow Research. Please go ahead.

Hey, morning, guys. Grats again on the quarter here. I just want to make sure I got my numbers straight based on, Dave, what you were saying, you know, synergy savings step up pretty materially into the second quarter. The number I'm coming at to is 68 million. Is that correct? Is that what you're intending to guide to here on 2Q?

That would be high. And so if you think about, you know, we called out 34 in Q1, and we called out for the full amount. So we have said that 60-40% split on synergy realization, front half, back half. So we've not provided a specific number for Q2, but your number is too high.

Got it. Got it. Thank you there. And then just housekeeping, and sorry if I missed it, but any comment on April growth to date or just kind of how growth trended through the first quarter into 2Q here?

Yeah, and we've been very pleased with the momentum as we, again, preliminary basis, our April sales up roughly 20% versus the prior year pro forma. And, you know, obviously April in the prior year was the first full month that we had a true COVID impact. We saw the decline in our sales rates in the middle of March. April, we were down on a pro forma basis 16%. So, you know, we've come off the trough from the prior year. And we also commented that, you know, the gross margins are in line with Q1.

Perfect. Perfect. Thanks so much, guys. Appreciate it.

Thank you. And this does conclude our question and answer session. I'd like to turn the conference back over to John Engel for any closing remarks.

Well, thank you all very much. As we said, we're off to a great start, and we do appreciate your support, and we look forward to following up with you. And I know we've already got a long list of calls, Leslie and Will and Dave, and we'll all be connecting with you. So thank you. Please stay safe and healthy, and have a great day.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.