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spk01: Hello and welcome to today's West Coast first quarter earnings call. I would like to remind you that all lines will be on listen only mode throughout this presentation. If you would like to ask a question, please press start followed by one on your telephone keypad. Please note that this event is being recorded. I would now hand the conference call over to Will Ruff Ruff, Director of Investor Relations to begin. Will, over to you.
spk10: 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. Additionally, today we will 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, WESCO's Chairman, President, and Chief Executive Officer, and Dave Schultz, Executive Vice President and Chief Financial Officer. Now I'll turn the call over to John.
spk07: Well, thank you, Will, and good morning, everyone. It's a pleasure to be with you. Our first quarter results speak volumes about Wesco's foundation for accelerating growth and profitability. After delivering exceptional performance in 2021, we're off to an even more impressive start in 2022. Once again, we outperformed the market, and we achieved new company records for sales, profitability, and backlog. Each of our three global business units delivered double-digit sales and profit growth, with results that are now well above 2019 pre-pandemic levels. We also continued our rapid deleveraging, which now stands at 3.6 times adjusted EBITDA, compared to 5.7 times when we closed the annex or acquisition just seven quarters ago. This is by far the strongest quarter since the new Wesco was formed by the transformational combination of Wesco and Anixter in June of 2020. With each quarter, the power of Wesco's increased scale, expanded portfolio, and industry-leading positions becomes more evident as we build momentum and deliver superior value to all of our customers. As a result of our standing start to the year and the accelerating momentum across our business, we are substantially raising our outlook for 2022, as well as increasing our cumulative sales synergy target through the end of 2023. Importantly, we are continuing to invest in our digital transformation effort, which will raise WestGear to an even higher level of performance, operating efficiency, and customer loyalty. Overall, our results continue to prove the extraordinary value of the West Atlantic combination and point to a future of sustained growth and market outperformance. Dave will review our financial results and address our substantially higher full-year outlook in more detail shortly. But before I hand it off to Dave, I want to address three additional items. First, it's the WESCO results versus pre-pandemic levels. Second, our uniquely strong position to capitalize on the attractive secular growth trends in our end markets. And third, our new company, our new co-brand identity that we launched earlier this year. Turning to page five. The strength of the new WESCO and our accelerating growth and profitability are best measured by comparing our results to pre-pandemic levels in 2019. This page spotlights those comparisons versus Wesco plus Anixter's 2019 pro forma results. Sales, sales are up 21% to over 4.9 billion in the first quarter. Adjusted EBITDA nearly doubled from 187 million to 364 million with a trailing 12-month rate of 1.32 billion. Adjusted EBITDA margin expanded 280 basis points to 7.4% in the first quarter. And this reflects outstanding execution of our integration program and delivery of our costs, sales, and margin synergies. And finally, we've deleveraged over two turns to 3.6 times since the Anister closing in June 2020, which is well ahead of our external target. These results clearly demonstrate the power of the transformational combination of Lesko plus Anister. Now moving to page six. Our focus on providing our global customers with the products, services, and supply chain solutions that they need is what drives us each and every day. We're executing at a very high level and we're exceptionally well positioned to capitalize on the strong secular growth trends and increasing investments in public sector infrastructure outlined on this page. These long-term growth drivers positively impact each of our three global business units. As I previously said, the new Wesco is becoming a growth company. We have a record backlog, an accelerating cross-sell program, a growing opportunity pipeline, and very positive momentum overall. And most importantly, we are only in the early stages of unlocking our total growth potential. Now turning to page seven. The transformational combination of Wesco and Attix during June 2020 created a new company with increased scale, a higher growth portfolio, and significantly expanded capabilities. We launched a new brand platform to better reflect our new company and amplify the key attributes that describe the new Wesco. Outlined on this page are four statements that are central to our new brand. First, our mission. Our mission is that we build, connect, power and protect the world. Second, our vision. Our vision is to be the best tech-enabled supply chain solutions provider in the world. Operative words being tech-enabled. Third, our purpose. Our purpose is for life to run smoothly. It should run smoothly so we can create a world you can depend on. And finally, our promise. And our promise is ingenuity delivered. I'm very proud of our team's continued commitment to realizing the vision and mission of the new Wesco. Our exceptional results are a testament to the ingenuity and solutions-driven mindset that are hallmarks of our culture. Our new logo in the center of this page is more than a change of design. It is a W with an embedded A, and it provides a visual representation of the coming together of Wesco and Anixter to drive growth and innovation. responsibly, and sustainably. We're utilizing our new brand to engage with our customers and suppliers, as well as in our new employee recruiting campaigns. I encourage you to visit our new website, which was launched a little over a week ago, to experience our exciting new Wesco brand. With that, I'll now turn the call over to Dave.
spk08: Thanks, John, and good morning. I'll start on slide nine with a summary of our first quarter results compared to the prior year. As John mentioned, first quarter sales were a record and exceeded our expectations. We had anticipated sales would decline sequentially versus the fourth quarter, consistent with our normal seasonal pattern. Sequentially organic sales were essentially flat from Q4 and up 21% from the prior year as we experienced an acceleration of sales in the second half of the quarter. The primary driver of this difference, relative to our expectations, was stronger demand, more cross-sell revenue recorded in the quarter, and an increased benefit from price. On a reported basis, sales were up 22%. Currency and last year's required Canadian divestitures were a combined 80 basis point headwinded growth, offset by the benefit of an extra workday, which added 160 basis points to sales. We estimate pricing added approximately eight points to sales growth in the quarter, which primarily benefited our EES and UBS businesses. Pricing in the CSS business was a low single-digit benefit versus the prior year. Supply chain challenges have continued to impact certain pockets of our business. We believe our sales growth could have been one to two percentage points higher if we were able to secure additional products from our suppliers to meet demand. We continue to strategically invest in our inventories in the quarter to address these challenges, as well as support our strong pipeline of sales growth opportunities. Backlog reached another record level this quarter and was up 25% sequentially from December and up more than 90% from the prior year. Each business unit posted sequential backlog increases of more than 20% from the fourth quarter and increases of at least 70% above the prior year. As we start the second quarter, demand continues to be strong. Eliminate results are very encouraging, with sales up approximately 22% year-over-year on a same workday basis. Gross margin matched our level at 21.3% in the quarter, up 120 basis points versus the prior year, and up 50 basis points sequentially. This strong performance was primarily driven by our gross margin improvement program including the effective pass-through of supplier price increases and the absence of an inventory write-down related to PPE equipment in the prior period. Recall the impact of the PPE write-down with 20 basis points in the prior year quarter. Adjusted EBITDA, which excludes merger-related and integration costs, stock-based compensation, and other net adjustments, was 68% higher than the prior year and represented 7.4% of sales, an all-time high watermark for the company, and 200 basis points higher than the prior year. I'll walk you through the main drivers of this improvement in a moment. Adjusted diluted EPS for the quarter was $3.63 and an all-time record, up more than 150% from the prior year. The primary driver of this increase was higher sales, as well as an 11-cent tailwind from lower interest expense due to refinancing activities last year. The combination of a higher tax rate, divestitures, foreign exchange, and a higher share count collectively represented a 29-cent headwind. The effective tax rate was lower than our fiscal year outlook, but higher than the prior year due to less benefit from certain discrete tax items. Turning to page 10, You can see that the higher sales, expanded gross margin, and integration cost synergies drove the $148 million increase in adjusted EBITDA. As you'd expect in a strong demand and inflationary environment, we continue to experience higher volume-related operating costs, including shipping and sales commissions, as well as higher expenses for employee benefits and incentive compensations. Finally, we incurred higher expenses related to our investment in IT systems and digital tools. Overall, we delivered strong operating leverage as we generated a 68 percent increase in adjusted EBITDA on organic sales growth of 21 percent, a greater than three times multiple. Moving to our strategic business unit, beginning on slide 11. Sales in our EES segment were up 21 percent year-over-year in the first quarter on an organic basis, with double-digit growth in all operating groups. This growth reflects construction sales that continue to increase with the recovery of the non-residential market. We also continue to see increasing momentum in our industrial and OEM businesses, supported by the broader industrial recovery. Elevated bidding activity drove a further increase in our EGS backlog from its record level in the prior quarter. We also made progress on our cross-sell initiatives and our capturing demand driven by the secular growth trends that John discussed earlier. Adjusted EBITDA was $192 million, a record level for EPS, and up more than 70% from the prior year. Adjusted EBITDA margin was 9.2%, 270 basis points higher year over year. This increase reflects effective price-cost pass-through, strong cost-energy realization, and operating cost leverage. Turning to slide 12, sales in our CSF segment were up 14% versus the prior year on an organic basis. We saw double-digit growth in both the network infrastructure and security solutions operating groups, driven by data center and hyperscale projects, continued investment in cloud-based applications and audio-visual installations, and increased return-to-workplace activities. While strong, CSF sales growth was not as robust as EES and UBS, primarily due to supply chain constraints and select product categories within the industry. We are helping our customers effectively navigate these challenges. Backlog increased 23% from year-end to another record level, reflecting continued strong demand driven by our cross-sell program and the secular growth trends in our end markets. Profitability was also strong with adjusted EBITDA of 8.6% in the quarter, 130 basis points higher than the prior year, driven by operating leverage, integration cost synergies, and the execution of our margin improvement initiatives. Turning to slide 13, organic sales in our UBF segment were up 30% versus the prior year. Utility demand has remained strong as all of our investor-owned utility and public power customers continue to invest in grid hardening and modernization. Demand in our broadband business was strong again in the quarter, driven by demand for data and high-speed connectivity, as well as expansion in connectivity requirements for home-based applications. Additionally, we are beginning to benefit from sales activity related to phase one of the federal government's Rural Digital Opportunity Fund project. Adjusted EBITDA in the quarter was up 63% for UBS, and adjusted EBITDA margin expanded 190 basis points to 9.7% of sales. This growth was driven by the scale benefit of sales and gross margin expansion. Now moving to page 14. The size of the cross-sell opportunity of combining WESCO and Annexer continues to exceed our expectations. In Q1, we added $160 million of cross-sell wins. Programmed to date, we have generated $525 million in cumulative cross-sell revenue. We have an expanded pipeline of sales opportunities, and our cross-sell momentum continues to build. We're capitalizing on the complementary portfolio of products and services, as well as the minimal overlap between legacy Wesco and legacy Anixter customers. The size of this opportunity has turned out to be one of the most significant value drivers of the combination of WESCO plus Anixter. Recall that last quarter we increased our cumulative cross-sell target to $600 million. Due to the continued strength of this program, we are increasing our target again to $850 million cumulatively by the end of 2023. Turning to page 15. On this slide, we have highlighted three recent cross-sell awards that collectively represent approximately $50 million of future sales across our three business units. In the first example, EES and CSS were able to jointly win an award for $40 million of table tray, power table, and network infrastructure products related to construction of a new semiconductor fabrication facility in the United States. In the second example, CSS was able to sell Anixter products to a legacy Wesco customer to support the build-out of the passive optical network of an entertainment theme park. And in the third example, UBS sold an additional $10 million of Anixter wire and cable product to a long-term Wesco utility customer. Our cross-sum momentum is building and clearly highlights the power of the combined portfolio. Turning to slide 16. On the left side of the slide, you can see in the gray boxes that we realized cumulative run rate cost energies of $188 million in 2021 and realized $63 million in Q1 of this year. We are on track to meet our expected target of $315 million by the end of 2023. Recall that these savings are relative to the 2019 pro forma base. On the right side of the slide, we've outlined the $315 million of cost savings targets by synergy type, and in the chart, you get a sense for the synergies that have been realized to date in each category. For example, the estimated $45 million in corporate overhead savings have now been fully realized. The largest remaining synergies are those that take longer to execute, including those related to supply chain and field operations. Turning to page 17, on the left side of this page, you will see a bridge from first quarter adjusted net income to free cash flow. The $6 million use of cash primarily reflects a combination of depreciation and amortization, interest and income taxes, which were add back to net income in the quarter, offset primarily by incentive compensation payments, accrued for 2021 performance and paid out in March. Working capital was a $339 million use of cash for the quarter, primarily driven by higher receivables of $325 million due to the strength of our sales and continued investment in inventory to support this level of growth, maintain customer service levels, and support projects in our backlog. Lastly, the CapEx and IT spend reflects our investment related to our ongoing digital transformation consistent with our plan. On the right side of this page, you can see that we are gaining efficiencies in working capital. On a trailing 12-month basis, using a five-quarter ending balance sheet average, net working capital improved by more than five days compared to the end of the prior year quarter, driven by lower inventory days outstanding and days payable. Moving to slide 18. Reducing our leverage has been a top priority since we announced the merger with Anderson. In the first quarter, we reduced leverage by 0.3 times trailing 12 months adjusted EBITDA and brought our leverage ratio down to 3.6 times. This represents a decrease of 2.1 leverage turns since closing the acquisition in June of 2020. This accelerated pace of de-levering reflects the strength of our B2B distribution model and our ability to rapidly return to our target leverage range. We now expect to return to our target leverage range in the second quarter, a full year earlier than we originally committed to at the time the acquisition closed. Moving to page 19, we are updating our full-year outlook. Based on this quarter's results, strong demand trends, the continued expansion of our backlog, and the significant growth of our cross-sell synergies, we are increasing our full-year sales outlook from the previous range of 5% to 8% to a range of 12% to 15%. Our assumption for market growth is 9% to 11%, including the benefit of price. We expect the demand environment for our products, services, and solutions to continue to be strong. However, we recognize that supply chain constraints and the pace of inflation presents some uncertainty. We are increasing our outlook for growth from share gains and cross-sell synergies to 3% to 4%, as we expect to continue to outperform the market and have increased our expectations for higher cross-sell revenue, as discussed earlier. Lastly, keep in mind that 2022 has one more workday than 2021 that occurred in the first quarter, which we estimate will add one-half point of growth in 2022. With regard to our business units, we expect that DES and UBS will be toward the upper end of our sales range for the full year. CSS is expected to be at or slightly below the low end of the range. This outlook reflects our expectation that foreign exchange will be neutral. Also included in our outlook is a contract with a utility customer that will shift from a full revenue model to a service fee model, which will negatively impact sales by approximately half a point, with no impact to EBITDA. For adjusted EBITDA margin, we are increasing our outlook to a range of 7.3 to 7.6%, primarily reflecting increased operating leverage on higher sales, as well as continued benefit from our gross margin improvement program. At the midpoint of this sales and EBITDA margin range, our full-year outlook for adjusted EBITDA is $1.54 billion and represents a substantial increase versus the midpoint of our prior outlook range of $1.33 billion. We are also reducing our effective tax rate to 24% for the year, primarily reflecting the lower effective tax rate in the first quarter. Our outlook does not assume any impact from discrete items that we experienced in the first quarter. We are increasing our adjusted EPS outlook by 26% at the midpoint to a range of $14 to $15, which represents growth versus the prior year of 40% to 50%. Lastly, we are adjusting our expectations for cash flow to approximately 80% of adjusted net income, which reflects the need for higher investment in working capital to support our increased sales outlook. I would like to point out that even though this reflects a lower percentage of net income, the increased outlook for net income implies that we expect WESCO to generate a similar amount of free cash flow dollars this year as reflected in our previous outlook. This outlook reflects a handful of assumptions that I would like to remind you of. Based on our first quarter results and outlook for the year, our short-term compensation structure is reflected in our margin outlook at an above-target payout, but lower than 2021 on the dollars basis. We expect this resulting tailwind will be approximately offset by an increase in transportation and logistics costs that we mentioned last quarter. On cash flow, we still expect to spend approximately $120 million in combined capital expenditures and IT and digital investments. On the saving of cash flows, approximately $45 million will flow through capital expenditures, and approximately $75 million will flow through changes in other assets. We expect to realize the full $18 million of annual interest savings related to the redemption of our 2024 notes that we completed in June of last year. Recall that in 2021, we realized approximately $2 million of the full $18 million annual benefit. Our outlook does not incorporate the potential effects of any further refinancing activity this year. Our outlook assumes an average diluted share count of approximately 53 million shares for the year, and lastly, the outlook does not reflect any potential changes to applicable tax laws. As we think about our sales profile by quarter, Q2 is off to a strong start. The base period comparisons on a sales per workday basis get tougher, and we would expect the monthly growth rates to moderate in May and June. We expect our sales profile by quarter will follow the historical seasonality pattern. Recall that in the fourth quarter of 2021, sales per workday increased sequentially versus the third quarter. We do not expect this pattern to repeat in 2022, consistent with typical seasonality. Moving to slide 20, before opening the call for questions, let me provide a brief summary of what we covered this morning. This was an exceptional start to the year, and we have accelerating momentum across our business. We delivered very strong financial results across the board, including record-level sales, operating profits, adjusted EBITDA and adjusted EPS, and the strongest quarter since the annex or transaction closed in June 2020. Every segment of our business grew versus the prior year and compared to 2019 levels. We delivered adjusted EBITDA margin expansion of 200 basis points over the prior year, driven by the benefit of sales growth, our value-based pricing execution, accelerated cross-sell, and continued cost synergy generation. Our pace of deleveraging has exceeded our expectations, and we are very close to being back within our target leverage range, just 21 months or seven quarters after closing the acquisition of Annex Service. Lastly, we're making excellent progress on our IT and digital roadmap and are exceptionally well positioned to benefit from the secular growth trends and increasing public sector investments that John discussed earlier. With that, let's open the call for questions.
spk01: Thank you. We will now begin the question and answer session. If you would like to ask a question, please press Start followed by 1 on your telephone keypad. Please limit your questions to one question and one follow up. Our first question comes from Dean Dre of RBC Capital Markets.
spk09: Thank you.
spk01: Your line is now open. Please go ahead.
spk09: Thank you. Good morning, everyone, and congrats on an exceptionally strong quarter.
spk08: Morning, Dean.
spk09: Hey, I got a couple, a near-term and a medium-term question, if I could. Near term, given the supply chain challenges that your manufacturing suppliers are feeling, and Dave commented about those uncertainties, and you could have shipped another one or two percentage points higher if it weren't for some of those disruptions. Can you comment on product availability and fill rates in the quarter and how you're set up for a second quarter?
spk07: Yeah, Dean, I couldn't be more pleased with our partnership with our suppliers. Just very strong partnerships. You know, there are clearly supply chain challenges, but, you know, it's our view that it's our job, that being Wesco, the leading B2B distributor that managed them for, managed the supply chain challenges on behalf of and to the benefit of our customers. So, With respect to our operating KPIs, we're maintaining very high fill rates and high availability, consistent with what's called normal business operation. So that's the good news. Our stock and flow business is performing very well. We've strategically added to our inventories to support stock and flow as well as the project business a large portion of which sits in backlog in many cases you know we're kidding staging storing different components modules and products and subsystems for full solutions as you know as suppliers shift yes ship various pieces to us and then we put them together as a full solution for our customers um so you know i would i would tell you Despite the challenges throughout the global supply chain, our operational KPIs are tracking very well, consistent with our historically high levels. And I think clearly we're seeing the benefits of how we've been managing the supply chain with our selective investment in inventory, as well as we're seeing the benefits fundamentally of a much stronger, broader set of relationships with our supplier partners And that's a direct result of the combination of, of, of Anexo and Resco.
spk09: That's really helpful. And so more of a medium term or just looking out for the balance of the year, you've got another record backlog. How does it convert? And can you give us a sense of the implied margins in that backlog?
spk07: So look, we're, we're, you know, we're not throttling the backlog in terms of, you know, if you think about the equation, You know, we have a record opportunity pipeline. Our bid activity levels are record levels, and we're securing orders at a higher rate than our out-the-door sales rate. So our backlog is growing at a higher rate. That I would characterize as the highest class challenge we can have as a business. It's an exceptionally good thing. You know, eventually that, you know, we'll reach the point where as supply chain challenges continue to improve that will start executing at a higher shipping rate against what that backlog is. But it's not our intent and it's not our plan to have the input side of that equation slow down. We're aggressively trying to continue to win new orders and drive execution of our bids. And we couldn't be more pleased with our cross-sell execution and the wins we're putting on the board. Relative to margins, We do track margin rate of the backlog, and those margin rates are increased. So they are up. I won't say by how much, but the good news is the trend of the margins in the backlog has been increasing consistent with how we've been expanding and increasing our gross margins for our reported results.
spk09: That's great. And if I could just sneak one more question in. I really like page six and all the multiple long-term drivers. And on the right-hand side, this is something you would not have seen in Wesco previously, but it's there now. Can you expand on the point on unlocking the value of Wesco's big data? I'm sure this is part of the digital transformation, but what color can you provide?
spk07: Yeah. And I talked a little bit about this only briefly in our last two earnings calls. And it's something that, to do it justice, we need to really spend a lot more quality time on it with all of you, our investors, and those that cover the company. That is our plan, Dean, in our investor day that we are going to conduct later this year. It'll be our first investor day since 2019. It'll be our first investor day since actually us getting together. But just to address your question directly, We're in the midst of a very aggressive and comprehensive digital transformation effort. And it is our digital applications that are going to unlock the power of our big data. Our big data really is, if you think about it, we have significantly more data on our customers, their operations, their demand profiles, what products go with what in what sequence, the current state of their operations and what needs to be upgraded, what needs to be maintained and at what cadence. We have significantly more data than our supplier partners have because the majority of our supplier partner sales go through distributions. It is one of our top assets of the corporation. It doesn't show up as an asset on the balance sheet explicitly. So one of the things that was incredibly important to us, and we have been working on this for years, pre-Annexter, and Annexter was working on this, was putting in place a new, refined, and expansive master data management construct. Both companies have been working on that. When we put the two companies together, one of our top priorities was was getting both respective companies big data and putting it into one world-class data lake. And we've done that. So we're at the point now where we're increasingly starting to unlock the power of that big data through a series of digital applications, and we use the term digital products, that we're developing using agile methodology in conjunction with our lean culture. So I'll give you a few examples. I alluded to these before. One of these is an AI-enabled product search function, a smart search function that we make available to our inside sales desk so that they can do a more effective job of finding the best product for that customer's application as demand rolls in. Another one is intelligent pricing application. A third is something we call our unified sales desk, and think about that as the umbrella for all the front-end digital applications that we're going to bring to bear and enable our front-end sales force to do a much more effective job with customers. And an example of a product we've taken outside our four walls is what we announced last quarter, that conference room A-B as a service. So that's the first quote-unquote digital product that we've taken outside our four walls, and are selling as a service to customers. So we're in the very early stages of this, but I think you can sense my excitement. The power of this is going to be exceptional in terms of value creation and the ability, you know, greater ability to serve customers. And it's something we've got to, you know, kind of take you through much more expansively. As I said, we've got those plans later this year.
spk09: All sounds good. Thank you.
spk07: Thanks, Dean.
spk01: Thank you. Our next question comes from Sam Darkash of Raymond James. Your line is now open. Please go ahead.
spk04: Good morning, John. Good morning, Dave. How are you?
spk07: Morning.
spk04: Thanks. Fantastic start to the year, obviously. Dave, two questions for you, if I could. Within the 80% free cash flow conversion assumption, Are you assuming that you finally reach where you'd like to be for inventories by year end? I mean, in other words, at what point do you imagine that you're going to be returning to a normal 100% conversion rate?
spk08: We have assumed that we get back to a typical inventory level to support the demand. And obviously, we are facing supply chain challenges. We talked about that. Every company is dealing with it. We're aggressively going after inventory where and when we can. But right now, our assumption is that as we see that typical seasonal quarterly pattern for sales, We would expect that our fourth quarter sales and requirement for inventory would also come down to those typical levels and return back to a typical inventory level to support our customer requirements.
spk04: Gotcha. And then my second question, I'm looking at the incremental guidance, both the guidance raise, the increase. It looks like you're raising guidance by roughly – billion three in sales and about two hundred and ten million dollars in EBITDA and that that change is about a sixteen seventeen percent incremental margin and you're not changing your synergies so what I guess I'm getting at is is that what we should be looking at for the organization's incremental margin on a go-forward basis organically assuming that high single, low double-digit type growth rates, is that the new normal for Wesco? Because I'm guessing that's quite a bit higher than many people have baked into their models.
spk08: And that's what we've talked about in some of our previous earnings calls is, you know, just the simplest way to think about our incremental margin, particularly within a year, is, you know, take the gross margin, less the additional variable cost, that is required to support those incremental sales. So now that's roughly four to five points. So again, within this current year, we believe that we can handle that incremental volume within our current fixed cost base. So that's one of the other key drivers of that, the benefit that we're seeing with the increased guide, seeing that incremental margin in 2022. As we continue to grow the company, we are focused on driving additional synergies from supply chain and our field operations. Those are built into our out-year expectations. Again, we've not changed our cost synergies for the year. So net-net, our incremental margin from the guidance is the right way to think about it going forward.
spk04: Yeah, the reason why I'm bringing that up is there was already kind of a high teens incremental assumed for the year inclusive of the synergies. That was the rationale for the question. So you're saying that even exclusive of the synergies going forward, we're still looking at a mid to high teens incremental?
spk08: That's correct, in the near term.
spk07: And, Sam, you're also seeing, you know, you're also seeing the effect of the the increased operating leverage, particularly with cross-sell. When you think about, if you think about the dynamics of cross-sell, the dynamics, because there was, you know, much less overlap between the two respective customer bases, Basie, the Bannister, and Wesco, and the portfolios were more complementary than we thought. When you think about the ability to execute well against cross-sell, You know, it's not like we have to add anywhere near the normal rate of incremental resources to get that incremental sale growth. So that's providing an additional accelerant for the margin pull through.
spk04: Got you. And if I can sneak one more in, it looks like most of your synergies that you recognized in the quarter were in field ops and G&A, a little bit of supply chain, but it looks like most of them were field ops and G&A. At what point for the incremental synergies for the rest of the year, at what point do we start to see them filter through cost of sales as opposed to SG&A?
spk08: We should begin seeing some of those supply chain benefit of our cost synergies in 2022. And again, some of that is negotiating into stock costs with our suppliers. It also includes our supplier buying rebates. So we would anticipate that as we continue to grow, that there would be incremental benefit and we would recognize some of those cost synergies here in the current year.
spk04: Terrific stuff. I'll defer to others. Thanks again.
spk01: Thanks, Sam. Thank you. Our next question comes from David Manphy from Baird. Your line is now open. Please go ahead.
spk06: Thank you. Good morning, everyone. First question on pacing and seasonality. Hi, John. Seasonality and pacing here of EBITDA, usually your EBITDA margin percentage is lowest in the first quarter and then goes higher in the second and third. And based on the guidance, it seems like there's a little bit less seasonality there. And I'm wondering if you could just talk about that normal uptick from first to second quarter and what's different this year that it's a little bit less than normal. I mean, it's still obviously good, but based on your guidance, it looks like it's not coming up a full percentage point or something. It's coming up less than that. Could you just talk about the factors?
spk08: Certainly. So as we think about our sales profile by quarter, we would anticipate that our Q2 and Q3 sales would be up sequentially versus Q1. And one of the things from an EBITDA margin profile, we anticipate that our SG&A on a dollar basis would also increase primarily because April 1 is when we pay out merit increases, so our salaries, wages, benefits will go up effective at the beginning of the second quarter. But based on the expected top-line growth sequentially, we would anticipate that we would get adjusted EBITDA margin expansion sequentially Q1 to Q2. and then given the seasonality when sales come down in the fourth quarter uh we would give back some of that uh that adjusted ebitda margin just given that we still have the same sgna cost to support uh the sales okay that yeah that makes a lot of sense um second if um
spk06: If I heard you right, Dave, you mentioned that price in CSS is low single digits. Does that imply that EES and UPS are low double digits or high single? Could you put a finer point on that? And then just the last part of this gross margin question. Could you talk about the magnitude by which inventory gains or temporary timing of price increases over lower cost inventory is helping gross margin to whatever extent you can measure that?
spk08: Certainly. So on the pricing question, at the enterprise level, we noted that we had approximately eight points of benefit to our sales growth. As you said, that would imply that both EES and UBS are double digits, low double digits, offsetting what we saw within our CSS business, low single digits. So you're absolutely right in the way that you're thinking about that. It is very clear that we are getting the benefit of inflation. But, again, very, very difficult to call that out. What I would point to is, you know, we are continuing to get the benefit of our gross margin improvement program. And that has continued to get traction across our combined company. And when you take a look back at some of the legacy Anixter results pre-merger, In a relatively low pricing environment, they were able to get significant gross margin expansion. As we've talked about in the past, we've deployed that now across our entire company, and we're still in the early stages of getting the benefit for that across the legacy Wesco businesses. And, again, one of the key components of that is ensuring that we are effectively passing through price increases to our customers and getting paid for the value. And, you know, so we do expect that we will continue to see the benefits of of the gross margin improvement program. Very, very difficult for us to call out the differential between price to customer versus our average with inventory cost. Very difficult to calculate that and provide you any quantitative answer there. Yeah, very good.
spk06: All right. Thank you very much. Good luck. Thanks.
spk01: Thank you. Our next question comes from the line of Nigel Cole of Wharf Research. Your line is now open. Please go ahead.
spk03: Thanks. Good morning. Good morning, Nigel. Morning, John. I really like the new logo. I didn't see the A in W, so I'm glad you pointed that out to me. So I wanted to come back to, just very quickly, the margin seasonality point, because just going back in time, 1Q margins are normally the weakest of the year and normally below the full year. So Are we just pointing to, you know, weaker seasonality than normal and, you know, how much of this is conservatism? You know, we're one quarter into a pretty, you know, uncertain time versus, you know, there's some known headwinds coming up. You know, maybe that's supply of price increases, et cetera. Any more color there would be helpful.
spk07: Yeah, look, we're not going to guide the guide, Nigel. You know, we won't do that. But with that said... If you look at supplier price increases, let me touch upon that point first, it's important. When you look at number, quantity, and then magnitude, average price, we're not seeing them continue to increase sequentially. So I think we've reached the state where they're still high, they're large in number, and they're high, reflecting the overall higher inflation environment, but they're not spiking up. And, you know, The reality of this is that we've now posted, you know, three quarters in a row of results that are well above standard seasonality. We've also posted now seven quarters since we closed this transformational combination, this transaction. And we think, you know, we clearly are building a very strong track record of delivering exceptional results, rapidly delivering. It's still against a backdrop that's challenging. It's a supply-constrained value chain. So I think what you see there is we're thrilled, literally thrilled with the strong results in Q1. It comes on the heels of a Q4 and a Q3 and a second half of last year that was well better than normal seasonality and capped off an exceptional year. And, you know, we've raised the guide much more than our beach. And so I think it does represent very clear confidence in not only the demand environment that we can access and deliver against, but more importantly, and this is a really important point, it's the confidence in our execution. So that's the message that you should take away. I mean, if I were to use one word to describe our execution and results, it's they're accelerating.
spk03: No doubt about it. Thanks, John. Yeah, and then my quick follow-up is Canada. Can we talk about Canada quickly? That's a good region, high-margin region. We're seeing some fuel point acceleration in Canada. Maybe just talk about where we are in the recovery there. That would be helpful.
spk07: Yeah. Great question, Nigel. Let's go ahead a very strong – maybe I'll start here to level set because I think it's important to remind everyone because not everyone may fully appreciate. Let's go ahead a very strong electrical-based business in Canada with some utility position that we had built via a few selected acquisitions. But I would say just deep, strong, broad roots. as the undisputed leader in electrical distribution in Canada pre-acquisition. You look at what Anixter brought to the table, they brought an exceptionally strong wiring cable, where they clearly were the category leader in North America, and that's their deep roots. But they also brought a very strong utility business that they had bought when they acquired power solutions from HD Supply. I think if you all know, We went through the regulatory approvals. We had to do some divestitures, and we divested the WESCO piece related to utility as well as Datacom. And obviously, Anastasia brought tremendous Datacom and IP security capability being the global leader. The global leader included leader in North America as part of being a global leader. So that was the foundation. And if you look at what's happening with our Canadian results, they're exceptional. So we have outstanding broad-based momentum across our Canadian business. And I would say it's the complementary nature or the combination of the result of the two portfolios, cross-sell is contributing to a very large degree. And the secular trends in particular are a positive driver to our results. all across the board all the secular trends we've we've identified and in particular uh broadband and 5g build out so i mean we're just we're benefiting greatly from everything we've talked about that's affecting us in the u.s and globally and i will also say this is with a business that's been diversified significantly beyond oil and gas since the last oil and gas cycle. And as oil and gas cycles, that's only incremental. And we're not seeing that as a meaningful contributor yet. So we're not oil and gas driven whatsoever in terms of that being the driver to our results. So anything that happens in oil and gas in terms of increased capital spending and the like will only be positive incremental accelerant to our growth. So great question, Nigel. Hopefully that helps provide the context But the short answer is, I wanted to go through the context. It's important. The short answer is strong and broad-based results that are above market.
spk03: Great detail. Thanks, John.
spk01: Thank you. Our next question comes from the line of Tommy Mull of Stevens. Your line is now open. Please go ahead.
spk02: Good morning, and thanks for taking my questions.
spk07: Good morning, Tom. Good morning.
spk02: I believe it was John a minute ago who mentioned on the gross margin improvement program, you're still in the fairly early innings for realizing the full benefit across the legacy WESCO side of your business, which makes good sense. But I wonder if you could go deeper there. What is the work that's still ahead to realize that full benefit? What does that timeline look like? And what does it involve in terms of any training or initiatives across the Salesforce that you need to deploy?
spk07: So the program is developed. The various what I call levers and techniques are well-defined and honed, and we have extensive training materials that have been deployed to the Salesforce. And, again, that was building off of what Anistar put in place, as Dave mentioned, a few minutes ago. And all those training materials were developed internally. We've got a terrific training team that does that work. And one of the major, I think, drivers of the results, too, is the refined incentive compensation we put in place for the sales force. But we did that effective, you know, two quarters into the merger close. We didn't do that the first or second quarter, but we did it two quarters into the merger close. So now we're basically five quarters into that. Here's the way I would address your point, Tom, because I kind of know where you're going there, and it's important. How much legs are left on this? We think we have a lot of runway left. So I'll put a fine point on this. If you look at Anixter's reported results before the acquisition closed in June of 2020, they had delivered – nine plus quarters in a row of gross margin expansion. Go look at it. And against the distribution peer base where all the other distributors had flat to declining gross margins. Since we've come together as two companies, and I said we weren't going to talk about this much anymore because we're combined, but I will, we still measure legacy and legacy Westco on margin. Every quarter since we've been together, they still deliver gross margin expansion. So add those seven quarters to the prior nine, and now Westco as well has delivered it every quarter. So, I mean, that just gives you a little sense. Amex is four-plus years running now, and Westco is essentially, you know, less than half of that running. I will tell you, we have a lot of runway in front of us, and the sales force is just getting better and better and better at doing two things simultaneously. Selling the value of the complete solution offering, it's our supplier's products with our services wrapped around that, okay, in conjunction with the cross-sell. Because the cross-sell, too, provides more of a one-stop shop. And in today's world... where supply chain integrity, supply chain resilience, it's become a C-suite issue. I can tell you now, the CEOs of our customers are worried about supply chain. It never was a C-suite issue. So we provide that supply chain integrity and resilience, and that's valuable. That's incredibly valuable in terms of what it provides to our customers, and that's part of our value-priced strategy. growth margin improvement program. And the incentive compensation absolutely helps because, again, our sales force is getting paid for when they deliver the incremental margin expansion.
spk02: That's very helpful. Thank you. I wanted to follow up on that cross-sell initiative. So big raise in the target today from $600 to $850. And reflecting back, it kind of feels like the cost synergy raises that we saw soon after you closed the merger, where every quarter you dug a little deeper and you found more savings opportunities. So a similar question on the cross sell. How far into that process are you into discerning what the art of the possible is?
spk07: Yeah, it's a really insightful question, because when you think about it, the Cox Synergy's And I'm not saying that they're not difficult, but there's certain categories that we got right out of the gate starting day one, week one, month one, post-acquisition close. And it's still tough to do, but whereas cross-sell always proves to be the most elusive and most challenging synergy to get in any acquisition. You can go look at all deals that are done across all industry value chains. It is the hardest thing to get. So we spent substantial time and energy including leveraging our integration and consulting partner and putting together the recipe and playbook for that. And it took a couple quarters to really get that well-developed and honed, to be clear. And I know we shared that progress along the way. It really didn't get launched in earnest until, you know, early parts of 2020. And, look, we had a sales synergy we put out in our three-year financial targets when Dave and I went public back in March 2020, well before the deal closed. And, you know, the fact that we even had a sales synergy target we committed to we thought was a somewhat strong and aggressive step because these things proved to be the most elusive. And we were banking on those sales synergies of which we've had none. So that's the good news. But look at what we've done. We've raised it twice now. I will make this strong statement. First of all, there's tons of runway in front of us because in the continuum of learning how to really leverage cross-sell, this is a multi-year effort and we're in the early stages. With that said, I will make a very strong point. It's proving to be probably the most single strongest value creation driver of the combination. Yes, we deliver the cost synergies and they're there. We basically fundamentally re-engineered our cost structure to a lower cost structure. And for this combined, two Fortune 500 companies coming together, we have margin expansion. Yes, we're getting corporate margin. It's terrific. But I will tell you, this is proving to be the biggest driver. And these are very substantial numbers. and we're very disciplined with how we track it and count that. So I couldn't feel – actually, of all the things we've done, I feel the best about that, and we've got tremendous runway in front of us. This is what gives us the great confidence on – and a big part of our beaten raises over the last five quarters, quite frankly, that are substantial, around us shifting into a growth company.
spk02: Thanks, Sean. I appreciate it, and we'll turn it back.
spk01: Thank you. Our next question comes from Ken Newman of KeyBank. Your line is now open. Please go ahead.
spk05: Hey, good morning, and thanks for squeezing me in here.
spk07: Yes, good morning, Ken.
spk05: John, you said Wesco is transitioning to a growth company, and I know you're more confident in some of the more secular demand trends that you're seeing today, but Should we take that to suggest that you think the combined company can drive growth through cycles in ways that neither of the standalone companies could historically?
spk07: Absolutely, yes. I want to take that and amplify three points. If you think about it, the combination of these two Fortune 500 companies, both leaders in their own right and B2B distribution, so combined absolutely undisputed leadership, which gives us scale benefits, Number one. Number two, the portfolio, the combined portfolio was highly complementary, and the amount of customer overlap was minimal. So you put those two together, irrespective of the addressable markets, which I'll come to as the third point, and what we have is a much stronger enterprise that is able to drive fundamentally higher organic sales growth rates. And I've made this statement. And look, it only gets proven out when we continue to post the points on the scoreboard. But this is seven quarters in a row, OK? And I've made the statement that we have mix shifted the company up to a higher growth profile. We are more secular, not cyclical. I would argue those two factors together are driving an inherently higher organic growth structure and entitlement of the enterprise. And we're seeing that. And the cross-sell is a big contributor, as I mentioned. Lay on top of that the addressable markets and the secular trends that we don't control. But the combined portfolio and how it's positioned against those, I mean, we could not have put together a stronger portfolio that's lined up with these secular growth trends. I mean, and these are long-term, secular, not cyclical. And I think that represents a major accelerant on top of the growth that I just talked about. So, you know, we had the confidence, but we had to show we could do it. But you look at the momentum it's doing. That's why I said the one operative word to describe this quarter is accelerant.
spk05: Right. No, that makes sense. From my follow-up here, you know, obviously I think there's some broader concerns about rising interest rates here. I know you have one of your larger bonds becoming callable at a more attractive price here starting in June, but just any commentary about how you're thinking or looking at the capital structure here over the near term and just the potential upside from that lower interest expense could drive here for the guidance in 2022?
spk08: Right now, we've not contemplated any refinancing in our current outlook. We are obviously looking at the availability of how we can continue to make our capital structure more efficient. Again, we're monitoring the market, but at this point, we do have very large prepayment penalties if we were to call those notes early, and we're balancing any of the arbitrage on the interest rate against you know, those prepayment penalties. So we're continuing to watch it. But, again, at this point, not contemplated in our outlook.
spk05: Understood. Thanks for the time.
spk07: Ken, thanks. I'm going to bring the call to a close. We're a few minutes past the hour. I know we have a few more folks in the queue, and we will absolutely follow up with you. I know we have a very robust schedule called today and through tomorrow as well. Thank you all for your support. It's very much appreciated, and we look forward to speaking with many of you in the coming days. as well as at our upcoming investor events. The next one that we'll be participating in is the Key Bank Investors and Basic Materials Conference next month. Thank you and have a great day.
spk01: Thank you. That now concludes today's conference call. You may now disconnect your lines.
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