WESCO International, Inc.

Hello and welcome to Westco's 2025 third quarter earnings call. I would like to remind you that all lines are in a listen-only mode throughout the presentation. If you would like to ask a question, please press star followed by one on your telephone keypad. Please note that this event is being recorded. I will now hand the call over to Scott Gaffner, SVP, Investor Relations, to begin.

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 uncertainties. Actual results may differ materially. Please see our webcast slides and the company's SEC filings for additional risk factors and disclosures. Any forward-looking information speaks only as of this date and the company undertakes no obligation to update the information to reflect changed circumstances. Additionally, today, we will use certain non-GAAP financial measures. Required information about these measures is available on our webcast slide and in our press release, both of which you can find at our website at wesco.com. On the call this morning, we have Johnny, 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 Johnny.

Thank you, Scott, and good morning, everyone. Thank you for joining our call today. We delivered very strong results in the third quarter, and we again outperformed the market with our leading portfolio of product services and solutions. Sales growth has accelerated throughout the year, with organic sales up 6% in the first quarter, 7% in the second quarter, and now 12% in the third quarter. And that marks four consecutive quarters of accelerating growth. momentum. Our positive business momentum has continued into October. We're happy to say with month-to-date preliminary sales per workday up approximately 9% year-over-year, and that's with three days left in the month. Our record quarterly sales, and it was an all-time record for any quarter sales, of $6.2 billion were led by 18% organic growth in communications and security solutions, 12% organic growth in our electrical and electronic solutions business, and a return to growth in utility and broadband solutions. And that was driven by strong high single-digit growth of investor-owned utilities and strengthened broadband. Also of note, all three SBUs delivered sales growth in this quarter, and that's the first time that's occurred since Q1 of 2023. Total data center sales were again very strong at $1.2 billion. They set another quarterly record. They were up 60% year over year and now represent 19% of our total Q3 company sales. On a trailing 12-month basis, our data center sales are now close to $4 billion. Adjusted EPS earnings per share grew 9.5% versus prior year and 16% versus Q2 sequentially, with both gross margin and EBITDA margin improving sequentially. We're building on our positive business momentum as we enter the fourth quarter and as we prepare for continued market leading growth in 2026. Now turning to our full year 2025 outlook. We are raising our full year outlook for organic sales growth, adjusted EBITDA, and adjusted EPS based on our increasing business momentum in the third quarter. At the same time, we're reducing our full year free cash flow outlook to reflect and increase in working capital dollars, and that's associated with our rising demand curve and the increased sales growth rates we've been experiencing. We're executing very well, and we remain firmly focused on accelerating our cross-selling initiatives, continuing to drive our enterprise-wide margin improvement program, and delivering operational improvements enabled by our technology-driven business transformation. As the market leader, it's really the strength of our portfolio and the enduring secular growth trends of digitalization, that includes AI-driven data centers and automation, electrification, that includes increased power generation and reliability, and supply chain resiliency, which includes reshoring. All of these secular trends fuel my confidence that Wesco will continue to outperform our markets and deliver exceptional customer and shareholder value in 2026 and beyond. Looking ahead specifically to 2026, our midterm targets for annual sales growth and margin expansion that we provided at our investor day are the appropriate starting point for the outlook that we will provide in conjunction with our earnings release in February. So with that, I'll turn it over to Dave to walk you through our Q3 results and our outlook for the remainder of the year. Dave.

Thank you, John. Good morning, everyone. Turning to slide four, organic sales in Q3 were up 12% year over year. This growth was driven by volume gains across all three SBUs, supported by an estimated price benefit of less than 3%. Reported sales increased 13%, with sequential growth of 5%, which was better than historical seasonality. The strong performance was broad-based, with continued momentum in our data center business and solid contributions from all three business units. As John mentioned, CSS delivered 18% organic growth EES grew 12%, and UBS organic sales increased by 3%. Adjusted EBITDA margin was 6.8%, down 50 basis points versus the prior year, but was up 10 basis points sequentially. Gross margin contracted 80 basis points to 21.3%, reflecting consistent project and product mix dynamics experienced over the last four quarters. Importantly, gross margin increased sequentially by 20 basis points, driven by mix, higher supplier volume rebates, and execution of our enterprise-wide margin improvement program. Adjusted SG&A increased approximately 11% year-over-year, driven by the higher levels of sales growth, along with higher employee and facility costs. Specifically, over a third of the increase in SG&A dollars year-over-year was related to higher volume, with the balance coming from increased incentive compensation, merit increases, employee benefits, and facilities costs. SG&A as a percentage of sales improved due to operating leverage on our sales growth. Finally, adjusted EPS was up 9.5% year over year, driven by the improved operating performance and the absence of the preferred stock dividend following the redemption in Q2. I'll walk you through our business unit results, beginning with EES on slide five. In the third quarter, EES delivered very strong results with organic sales up 12% year over year, driven by growth across all three operating groups, construction, industrial, and OEM. Construction grew mid-teens, driven by robust wire and cable demand and ongoing infrastructure projects, including sales data centers. Industrial was up mid-single digits, supported by improved day-to-day demand in the U.S. and increased project activity in Canada. And OEM sales grew mid-teens, reflecting strong momentum in both the U.S. and Canada. Notably, data center sales were up 60% year-over-year, now representing approximately 6% of EES sales. Backlog remained flat year-over-year with healthy quoting activity and a strong pipeline of opportunities. Profitability improved with adjusted EBITDA margin of 8.4 percent, up 30 basis points sequentially, driven by improved gross margin and stable operating cost leverage. Gross margin was 23.3 percent, down 100 basis points year-over-year, but up 30 basis points sequentially. Lower gross margin year-over-year was primarily due to project and product mix. STMA remained stable at 14.9% of sales, and adjusted EBITDA increased to $198 million, up 9% year-over-year. Looking ahead, EES remains well-positioned to capitalize on secular trends in electrification, data center expansion, and infrastructure modernization. Turning to slide six. In the third quarter, CSS again delivered very strong results, with organic sales up 18% and reported sales up 21% year-over-year. This growth was driven by continued strength in Westco data center solutions, which was up over 50% from large project activity with hyperscale and multi-tenant data center customers. Enterprise network infrastructure also contributed to growth with sales up mid-single digits year-over-year. E&I growth was due partially to the timing of project activity during the quarter and a favorable year-over-year comparison. Security sales were up low single digits, including data center-related sales. Security growth was up mid-single digits. CSS backlog increased 17% year-over-year, reflecting continued strength in data center project activity. Profitability improved, with adjusted EBITDA margin at 9.1%, up 30 basis points sequentially, driven by improved gross margin and stable operating cost leverage. Gross margin was 21.2%, down 80 basis points year-over-year, but up 30 basis points sequentially. Lower gross margin year-over-year was primarily due to business and project mix, included elevating volume from large hyperscale projects. Significant operating leverage year over year drove 90 basis points of EBITDA margin improvement, and adjusted EBITDA increased to $221 million, up 22% year over year. Overall, CSS continues to demonstrate strong growth and profitability, supported by sustained demand and AI-driven data center projects and security markets, along with disciplined cost management. We remain focused on improving margins, with our large customers by expanding the scope of services we provide to them throughout the entire data center lifecycle. Turning to slide seven, I want to take a moment to discuss the continued momentum we're seeing in the broader data center space and Wesco's role in that growth. Customers continue to rely on Wesco and our supplier partners to meet their evolving needs, including our expanding portfolio of services we provide across the data center lifecycle. From a total company perspective, data center sales were about $1.2 billion in the quarter. Data center represented approximately 19% of West Coast sales in the third quarter and 17% on a trailing 12-month basis. This growth was driven by strong performance in both the white space and the gray space, with CSS representing the majority of the sales contribution. The top of this slide outlines the two key stages of the data center construction cycle. time to power, and the construction period. The key takeaway, projects announced and funded today typically take four to seven years to become operational. Our solutions now span the full spectrum of the data center lifecycle, from power and electrical distribution systems and advanced AI and IT infrastructure, to onsite services and solutions that support ongoing operations. This ensures we can deliver value throughout every phase of the data center lifecycle. On the lower left of this slide, you can see the substantial and accelerating growth in our total data center business over the past seven quarters. Total data center sales on a trailing 12-month basis were approximately $4 billion. This growth has been driven by organic initiatives, along with tuck-in acquisitions that have expanded our services capabilities. We remain committed to partnering with our suppliers to service our customers from cradle to cradle, supporting everything from initial builds, onsite services and solutions, ongoing upgrades, retrofits, lifecycle upgrades, and modernization. Turning to slide eight, this provides additional information of our data center product, services, and solutions offerings. Our offerings span both gray space and white space, delivering a comprehensive portfolio that positions Wesco as a trusted partner for hyperscale, multi-tenant, co-location, and enterprise data center customers. In the gray space, which accounts for approximately 20% of our overall data center sales, serviced by our EES business, we deliver extensive power, electrical, automation, and MRO solutions that support the build-out of high-performance, reliable, and scalable data centers. Some of our product offerings include electrical infrastructure, such as medium voltage cables and cable trays, alongside mechanical and cooling products like automated switches and sensors. Additionally, we supply MRO and safety products to help ensure safe, efficient, and reliable data center operations. In the white space, which accounts for approximately 80% of our total data center sales through our CSS business, We deliver next-generation infrastructure and services for always-on connectivity. Our white space products include communications equipment, advanced IT infrastructure such as racks and enclosures, wireless technologies, access controls, and video surveillance equipment. Beyond products, we offer extensive services and holistic solutions spanning the entire data center lifecycle, from planning and design through installation and commissioning, to ongoing operations through onsite services and decommissioning. We are there every step of the way, moving with speed to help our customers quickly adapt and thrive in a rapidly evolving environment. With a global ecosystem of suppliers and partners, Wesco offers a leading portfolio and complete solutions, providing customers with a single source for their evolving data center needs. WESCO enables seamless global execution, moving products and solutions across borders to support our customers. We believe our combination of products, services, solutions, and expertise uniquely positions WESCO to capture the accelerating demand for data center capacity driven by cloud, AI, and edge computing trends. Turning to slide nine. In the third quarter, organic and reported sales in UBS increased 3% year-over-year, marking a return to growth after seven quarters of declines. This improvement was led by high single-digit growth in our investor-owned utility customer base, partially offset by continued softness in public power. We expect the utility market to continue to improve as greater clarity is obtained on tariff impacts and as interest rates are reduced. Additionally, we expect public power customers to return to growth in 2026. Broadband performance accelerated in the third quarter with sales up over 20% year-over-year, driven by increased demand in the U.S. This marks a significant improvement from Q2, where broadband growth was up mid-single digits. Backlog increased 11% year-over-year, reflecting stronger customer order rates. Adjusted EBITDA margin for UBS was 10.4 percent, flat sequentially, reflecting disciplined cost management and sustained profitability. Adjusted EBITDA margin was down 90 basis points year over year, primarily driven by lower gross margins due to competitive pressures within public power markets, partially offset by improved operating cost leverage. We remain confident in the long-term growth potential of our utility business. supported by secular trends in electrification, green energy, and grid modernization. These drivers are expected to accelerate demand for our utility services and solutions, and we anticipate further margin improvement in Q4 as MIX improves and utility growth continues. Turning to slide 10. In the third quarter, free cash flow was a use of $89 million. Recall that our distribution model requires investment in working capital, especially in times of significant growth, which we have experienced year to date. The third quarter was the highest growth quarter of the year, with organic sales up 12%. In addition, you will see later in the presentation that September organic sales were up mid-teens, which is the highest growth month of the year. It represents an all-time record for monthly sales per workday. Given a top line strength in the quarter and in September, we generated significant increases to accounts receivable, resulting in a use of cash of $270 million. I'll provide you with an update on our free cash flow outlook shortly. Turning to accounts payable, we've had strong performance over the trailing 12 months in a third quarter period with cash generation of $526 million on a trailing 12-month basis and $100 million in the third quarter. Inventory has increased in 2025 to support customer projects and to ensure supply chain disruptions are minimized as we work to meet our customers' needs and the rising demand curve. On the right side of this slide, you can see that networking capital intensity has steadily improved over the past three years. This quarter, we saw a 60 basis point year-over-year improvement on a trailing 12-month basis with networking capital intensity declining from 20.4% to 19.8%. That follows a 50-base improvement in 2024 over 2023. We remain confident in our ability to drive stronger cash generation through the cycle. Turning to slide 11, we redeemed our $540 million Series A preferred stock in June, the first opportunity to do so at face value. This high-cost instrument carried a 10 and five-eighths dividend rate, and its redemption marked a significant milestone in our capital structure optimization. To fund the redemption, we utilized proceeds from our $800 million issuance of six and three-eighths senior notes due to 2033, which we completed earlier in the year. This refinancing action reduced our total financing costs and created a substantial benefit to our net income, EPS, and cash flow rates. The estimated annualized benefit from this transaction is approximately $32 million, or 65 cents per diluted share. In addition, with the financing completed in the first quarter, we extend the maturities of our accounts receivable facility and revolver to 2028 and 2030, respectively. As a result, we now have no significant debt maturities until 2028, providing enhanced financial flexibility and stability. Turning to slide 12. On this slide, we provided an overview of the actions we've taken to manage the impacts on our business from tariff announcements. The chart lists the potential impacts in our response to protect our margins. An update on the tariff environment. In the third quarter, supplier price increase notifications were up over 100% in count, but the impact on results was limited due to the timing of notifications and effective dates. We estimate a price benefit of less than 3% for the quarter, and this includes about a point from commodity price increases. Through October, supplier price increase notifications are up over 60% in count versus all of Q4 2024, with an average increase in the mid-single-digit range. This remains an evolving and dynamic situation, with modifications to effective dates based on finalized tariff agreements and timing. Wesco has a long operating history and has successfully navigated similar global supply chain challenges. We're continuing to execute our playbook to effectively manage our business in the current volatile environment. Turning to slide 13. This slide shows our updated 2025 outlook by strategic business unit and the individual operating groups. As John mentioned, we are revising our 2025 outlook and increasing organic sales growth to up 8% to 9%. This is significantly higher than our prior guidance of up 5% to 7%. Sales into data centers continue to exceed our initial expectations, as do broader electrical sales trends. For EES, we are benefiting from data center growth along with broader positive trends in electrical end markets. We continue to expect growth in the fourth quarter across all three markets we serve, construction, industrial, and OEM, supporting our revised EES outlook of mid-single-digit-plus growth. For CSS, due to the continuation of exceptionally high growth in our data center business, we are increasing our full-year outlook for reported sales growth of Westco data center solutions from up about 40% to up approximately 50%. This supports our revised CSS outlook of mid-teens growth from our prior growth expectation of low double-digit growth. And lastly, within UBS, we expect further utility growth in Q4 driven by our investor-owned utility customers. We anticipate public power customers won't return to growth until 2026, which leaves our total full-year outlook for the utility market unchanged. Broadband is now expected to be up for the full year versus our prior expectations for approximately flat sales versus 2024. Moving to slide 14. We are raising and narrowing our ranges for organic and reported sales growth, increasing adjusted EBITDA, and increasing and narrowing the range for adjusted EPS. Our expectation for free cash flow has been lowered due to the significant top line growth in 2025 which requires networking capital investments, principally accounts receivable. We are revising our 2025 sales outlook based on the accelerated growth we are experiencing. Organic sales are expected to be up 8 percent to 9 percent versus our prior forecast of 5 percent to 7 percent. I want to emphasize that our outlook does not include the impact of future pricing actions, including tariffs. This is consistent with our past practice, given a lag between when a supplier announces a price increase and when it begins to impact our revenue. While we have seen a significant uptick in price increase notifications as we move through the year, our outlook does not include any additional benefit to sales beyond what we realized in the third quarter and the rollover impact of those price increases. Turning to EPS, we are raising our outlook by 10 cents at the midpoint, a range of $13.10 to $13.60. Improved operating results are the primary driver of the increased EPS outlook, which is partially offset by higher estimates for interest expense. In terms of free cash flow, we now expect to deliver between $400 million to $500 million in 2025. As a percentage Percentage of adjusted net income, this implies a range of approximately 60% to 75%. Our strategy for how we deploy cash flow remains unchanged. The use of available cash will be allocated to the highest return opportunity, and we will continue to make decisions in the best interest of the shareholders over the long term. Our top priority is to invest organically in the business to drive growth and operational efficiency including the completion of our digital business transformation. In the near term, given the current economic environment, we expect to prioritize de-levering the balance sheet. However, we will continue to be opportunistic regarding share repurchases and acquisition opportunities. We continue to seek acquisitions that expand our capabilities and better serve our customers, particularly those engaged in our high growth and markets. We've also included updated modeling assumptions on the right-hand side of the slide. Most notably, interest expense is now forecast to be about $10 million higher. This is largely driven by the reduction in free cash flow for the full year, along with increased borrowings, inch or quarter, to support the current level of growth. Turning to slide 15. This slide shows the year-over-year monthly and quarterly sales growth comparisons over the past year and our expectations for the fourth quarter. You can see the return to growth in the last quarter of 2024 and the acceleration throughout 2025. As mentioned, preliminary month-to-date October sales per workday are up approximately 9% with three days to go in the month. We expect fourth quarter reported sales will be up high single digits plus with growth across all three business units. We expect organic sales will be up a similar amount, as there is no difference in workdays year over year, and FX impacts have moderated. We expect adjusted EBITDA margins will be up approximately 30 basis points versus the prior year, with improved gross margin driven by higher supplier volume rebates and SG&A headwinds due to higher incentive compensation. Moving to slide 16, let me briefly recap the key points before we open the call to your questions. We delivered another very strong quarter, with sales up 12% year over year, marking four consecutive quarters of accelerating sales momentum. CSS led the way, up 18%, EES grew 12%, and UBS was up 3%. Utility return to growth, driven by investor-owned utilities, And total data center sales were approximately $1.2 billion, up about 60% year over year. Adjusted EBITDA margins expanded 10 basis points sequentially, supported by improved gross margin and strong operating leverage. Adjusted EPS was up 9.5% year over year. We've raised our full-year organic growth outlook, adjusted EBITDA, and adjusted EPS to reflect this strength. We remain very well positioned to benefit from secular growth trends, including AI-driven data centers, power generation, electrification, automation, and reshoring. As John noted earlier, when looking ahead to 2026, our midterm targets for annual growth and margin expansion that we provided at our investor day are still appropriate and would be the starting point for any outlook that we will provide in February. Based on the strength of the secular trends, we would expect mid-single-digit organic sales growth in 2026, with continued strength in our electrical markets, a return to full-year growth in utility with a recovery in public power, and mid-teens growth in data center. We are also targeting annual adjusted EBITDA margin improvement of 20 to 30 basis points, with the majority of the improvement being generated by operating leverage. With that, operator, we can now open the call to questions.

Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star followed by 1 on your telephone keypad. Please limit your questions to one question and one follow-up. And our first question today will come from David Manthe with Barrett. Please go ahead.

Hi. Good morning. Thank you. Just a quick question here on I think you mentioned it right at the end there dave you said that you expect to see some ebitda margin improvement into 2026 so so i'll put that one on the side um could you tell us approximately how much price contributed to growth by segment or at least ballpark to give us an idea certainly so overall our pricing benefit in the third quarter

was just under 3%. And that was primarily driven by our EES segment, which was about 4%. And that's where we saw the largest benefit from commodity pricing on our pure commodity products. Our CSS business saw a price benefit of about 2% and UBS about 1%.

Okay, thank you. Then maybe on EES, outside of data center, could you just talk about whether it's industries or applications where you're seeing some strength there? It's great to see a return to growth, nice growth in EES, and maybe you could just help with a little bit of color there.

Thanks for that question, Dave. Morning. This is John. Yeah, we're really pleased. I think it's a highlight of the quarter, actually. I mean, CSS, the beat goes on. That's clear. There's strong performance there. due to AI-driven data centers. But for EES, this is the fourth consecutive quarter of improving sales growth. I'll just remind everyone, we returned to growth in fourth quarter of last year, grew 3% in Q1, 6% in Q2. Now this is a significant step up to 12% growth in Q3. All three operating groups in the business, Dave, that's construction, industrial, and OEM, all three grew. particularly for construction. I'll double-click. I mean, that was up mid-teens. And it's not just growth in data center projects. There's also growth in other big projects, infrastructure-related. We saw growth in wastewater, hospitals, public transit. So just a really nice step up in construction. Very pleased with that. In terms of industrial projects, Also pleased with that performance, up mid-single digits. We had improved day-to-day demand in the U.S. We had increased project activity in Canada. And our stock sales increased each month of the quarter. That's our stock and flow business, which is a good indication of what kind of the daily demand the market is. So we feel good about that. And then OEM up mid-teens, really strong growth again across the U.S. and Canada. That's being driven by semiconductor. and other infrastructure markets. So that's the business in EES that has our most semiconductor exposure. And that would be, again, you're seeing the, you know, that's driven, you know, kind of the semiconductor expansion, big mega projects and such. We have some terrific semi-con relationships there. So all in all, I think, feel good about EES's top line momentum. Also EBITDA margins are above 8% for the second quarter in a row. And I do want to mention, because I didn't mention it in my prepared remarks, we do have a new leader on board, Danny Castillo, terrific leader, returns to the electrical industry, has a long history, and was part of Cooper when Eaton bought Cooper, worked for some other companies since post that combination. And he's off to a great, great start. Thanks for that question, Dave.

It's great to hear, John. Thank you, and see you in a couple weeks.

Yep, we'll see you in a couple weeks. Your next question today will come from Sam Darkash with Raymond James. Please go ahead. Good morning, John. Good morning, Dave. How are you?

Morning, Sam.

I wanted to follow up on Dave Manthe's last question. I mean, you're right. I mean, the 10% EES growth excluding data center just really notable. We're hearing a lot of reports about just general AI and tech spending by customers crowding out other sorts of CapEx, and it doesn't look like you're seeing that in your results. Are you not seeing that crowd out effect, or is the EES growth excluding data center, more so via share gains, John?

Good morning again, Sam. We're not seeing a crowd out based on our activity levels, but I do think it's pretty clear that this quarter's results, there was overall market outperformance across our three businesses, and if we stay on EES in particular, there's enough other data points out there in terms of market surveys and competitors who have reported that this is a very strong outperformance versus market. So, you know, I'll tell you, this did surpass our expectations. We did expect EES to pick up pace in Q3 and Q4, and we outlined that. And we did have an improving momentum vector, but this was a more meaningful step up, Sam, to your point. getting north of, you know, getting 12% growth and double-digit growth X data centers than we expected.

Yeah, my last question, looking at data center itself, I know the margins are a little bit lower than fleet average because of all the large projects, but I'm also, I imagine that since it's a lot of direct ship special order that the asset velocity is also better than fleet average. Can you talk to that Put a little bit of clarification in terms of what your ROA is for that data center business.

So we haven't been public on that yet, Sam. I think at some point in the future we may do that. So I appreciate the question. I will, maybe I'll focus on it this way, which is another dimension of your question. You know, DS, direct ship margins inherently have lower gross margin, but we have significant lower operating costs to execute those transactions. We've always said that it represents, you know, very good operating profit pull through. I'm really pleased that CSS has a third quarter in a row of sequential EBITDA margin expansion. And we're getting it with gross margin and operating costs leveraged. This quarter, CSS's gross margins were up 30 basis points sequentially. And I'll remind everyone that we did have a big shift in our kind of margin mix in Q4 last year when CSS really started to drive outsized growth. Data centers grew 70% in Q4 last year. And I mentioned that we're going to work margins up over time. If you look at that, CSS has their margins are gross margins. are 40 basis points higher than they were in Q4. So we're walking those margins up, and we're getting operating cost leverage on the growth. So I at least wanted to hit that point, Sam, on your question. In terms of ROIA, yes, it is much better asset velocity, to your point. We just haven't put a number out there by SPU.

Thank you much. And your next question today will come from Guy Hardwick with Barclays. Please go ahead.

Hi, good morning.

Good morning, Guy.

Good morning. With volume so strong, I was wondering whether as a company as a whole is hitting levels in terms of where volume rebates, which have been kind of declining as a percentage of EBITDA, but may start to recover, or whether this sets you up for them becoming a positive tailwind to margins next year?

Yeah, Guy, good morning. Thank you for the question. So year over year in the third quarter, some of the increase in our gross margin was driven by better supplier volume rebates. That does include the benefit we're getting this year from reaching some of those higher volume tiers, which is translating to a better rate with certain suppliers. We also expect that we will continue to see that in the fourth quarter. So year over year, we do expect to see supplier volume rebates contributing to gross margin expansion. I do believe it is a good setup as we go into 2026. We'll provide you more details on that in February when we do our next earnings call.

And just as a follow-up, I didn't hear you mention much about the digitalization investment. Are you beginning to see benefits in terms of cross-selling yet, or is that more of a story for out years?

Guy, it's a great question. Thanks for asking. Look, I think that first on cross-selling, I don't want to link that to our to our enterprise-wide digital transformation because that will help accelerate it and improve our execution across the global enterprise. But I'll take all the investors back to, this has been really one of the most significant value creation levers that we've been executing exceptionally well against since we put Anixter and Wesco together. And we had significantly over-delivered the sales synergies that we committed to. We had committed to 1% of performer sales, which would be $170 million a year. We ended up delivering over $2.3 billion cumulative of cross-sell sales. So that process we put in place and the incentive structure supporting it that's deployed across our sales force and the way we're executing, we're gaining value. better traction every day on our cross-selling, and we're seeing that in our results. The digital transformation, when it's done, will result in, I think, even further acceleration of improved execution there. With respect to the overall digital transformation, since you touched on it, at least I'll make a comment. We're making very good progress. All three SBUs are running the initial build of our new digital platform in at least one location. That's called that baseline set of capabilities. In the second half of 2025, we've been focused on continuing to build out additional capabilities while beginning deployment. And in 2026, deployment will really start to scale up, as we outlined at our last investor day. Our tech-enabled business transformation is on track, and with the timelines we outlined at our last investor day in 2024. More on that as we move into next year. We'll be providing more robust updates. Thank you.

And your next question today will come from Dean Dre with RBC Capital. Please go ahead.

Thank you. Good morning, everyone.

Morning, Dean.

Hey, I appreciate all the clarity on the revised outlook, especially the change in free cash flow guidance, which we consider to be a high-quality problem given all the growth.

Thank you, Dean. Yeah, we don't like the printed number of free cash flow, but Our sales per workday in September were the highest monthly sales per workday we've ever had in our history in the 15 plus percent range. And all that AR, resolving growth of AR. AR grew $271 million. So, you know, this is, you said it well, very high quality problem because that AR will get collected.

Yeah, and your working capital intensity continues to improve, so you know you're not losing anything on the receivables, payables, et cetera.

Yeah, that's an important point, which is why we include that page, Dean, that the net working capital is a percentage of sales, which is obviously AR plus inventory minus payables. We're showing improved efficiency, and so this is just a high-quality problem on the AR growth. And, you know, so we're doing that now still with all the various, quote-unquote, ERP instances we're running in the company. We do expect, as we outlined in Investor Day, when our digital transformation is done, to get, you know, really substantial benefits in overall network and capital.

Exactly. All right. Just a couple quick ones from me here. First, I'll echo all the previous comments about EES and ERP. I was a little surprised not to see some backlog build there. So, you know, was it all really short, quick-turn business that was done? That would probably be the explanation, but would love to hear your color.

Yeah, I think the backlog is still very healthy. We just didn't grow it, and it was just the exceptional step up in sales growth, as I talked earlier. But versus normal historical seasonality, it's intact. It's strong. It's high quality. The opportunity pipeline continues to increase. So we're seeing more opportunities. We're putting more shots on goal, to use that analogy. And so that's what's encouraging. And again, we're not giving a full guide for 26 yet. But we did make some commentary, Dave did, just around stronger electrical markets in 26. So I think that gives some indication of the confidence level we have given backlog plus sales execution.

That's really good to hear. And since you opened the door on the 2026 kind of data points that Dave shared, the one on data center, the mid-teens growth, That would be what we consider to be industry growth, the kind of footprint rollout given the multi-year of backlog. You've been outgrowing that significantly for the past year plus, and increasing your share of wallet. Do you see where that ramps down, and just what's your visibility on this outgrowth in data center heading into 26th?

All indications are the data center market remains incredibly strong. Again, we have a unique and very strong set of end-user customers. We're in dialogue with them. We get good insights into their multi-year investment and deployment plans for data centers. We're helping them execute globally. So the market's strong and robust. I will say it this way, I wouldn't get, again, we're not giving the guide for 26 yet. We are focused and committed to and confident that we will continue to outperform the market in data centers. And it's driven by the strength of, we have this tremendous strength in the white space. It's extensive. We've added services. We have increasing strength in the gray space, and we talked about that the last several calls. We wanted to provide some more details on our mix. You see that in today's webcast materials. And increasingly, too, our UBS business is getting pulled in and engaged on the front end because really the number one driver of what's going to support data center growth is power. And so it's why I'm so bullish on utility turning into a secular growth industry because fundamentally, it's increased power generation that's going to be driven or required to support the data center build-out, and that bodes very well for us. So, final point, our white space capabilities, our gray space capabilities, our power and utility capabilities, coupled with the global footprint and increasing services, we think puts us in a very unique position to continue to outperform the market for data centers.

Thank you.

Your next question today will come from Nigel Coe with Wolf Research. Please go ahead.

Oh, thanks. Good morning. Thanks for the question, guys. We've got a lot of ground already, but I'm just wondering, I'm sorry if I missed this, 30 base points of margin expansion for 4Q. How should we think about that between gross margin and SG&A?

Nigel, good morning. One thing I'll emphasize is that given the increase in our top line, part of that 30 basis points of expansion will be improvement to our supplier volume rebates. And so when you think about the 30 basis points, you should assume a modest increase in the supplier volume rebates. And we're confident we'll be able to get to the 30 basis points through a combination of that supplier volume rebate, other gross margin actions, but then also operating leverage.

Okay, great. And then on the price increases, I think we understand how you're layering those in now for 4Q. Would that be gross margin accretive as well? Because normally when you raise prices, you normally have maybe a temporary benefit on inventory. So just wondering if that's having an impact as well.

It will have a slight impact because we are average with inventory. So as market prices increase, You know, our inventory has not caught up to that market increase. What I would tell you what we experienced in Q3 was it was a very modest impact. We're not seeing that pricing translate from our suppliers into the market and into our sales yet. So, you know, we had, you know, rough round, you know, just under 3% pricing benefit. That's after seeing these high single-digit price increase notifications in Q1 and into Q2. So all of that pricing is not translating to the market yet. As we do get pricing traction, we should see a modest benefit to our gross margin.

Okay. And then a quick one on cash flow. If we do get into that mid-single-digit zone on growth in 2026, would you expect conversion to be, if not 100%, pretty darn close?

Yes.

Nice short answer. I like that. Thanks, Dave.

You bet. And your next question today will come from Ken Newman with KeyBank Capital Markets. Please go ahead. Good morning, guys.

Thanks for squeezing me in. Morning, Ken. Morning. First, Dave, could you just talk about, you know, obviously the implied acceleration in UBS organic sales growth in fourth quarter. Just talk a little bit about the color and the confidence there. If there's any comment you have on how much that revenue is already secured in backlog just versus, an easier comparison, Matt, there?

Well, I'll start with the easier comparison. So if you take a look at our overall utility and broadband solutions business in the fourth quarter of 2024, you know, we do have an easier comp, particularly within the utility space. So utility was down high single digits in Q4 2024. And given the acceleration that we've seen, particularly with the investor-owned utilities, we're confident that we will have significant growth here in the fourth quarter of 2025. Again, some of that's just the trends that we're seeing, not only the backlog, but the day-to-day activity, primarily, again, in those investor-owned utilities, some of the project work that we're doing, but we also are getting some benefit from an easier comp.

Got it. Okay. And then... Sorry if I missed it, but did you disclose how much gray space revenue was up this quarter versus white space? It was nice to see the stronger margins in both the EES and CSS this quarter. I'm just trying to see if there's a way to think about the longer-term margin trend as we balance the mixed impacts from growth in those two channels.

Yes. The data center sales in our EES business, those gray space sales, were up approximately 60% in the third quarter.

And the white space was up over 50%. Correct. So we did mention that, Ken. So both 50%. Think of it as both 50 plus.

And then any comments on that, how you think about mix kind of normalizing into 26%?

I don't know that that mix normalizes. Again, the dynamic there is we've talked about it at prior earnings calls and also the investor conferences. We have deep and longstanding strength in white space, these end user relationships. We're adding services. And we're helping manage the global deployments for hyperscalers and global MTDC customers. So think of the market, and because of our unique value proposition and execution ability globally, we're outperforming the market with that white space strength. The gray space, a good portion of that historically has been served direct. But we're now picking up pieces that are moving into distribution because we become the one overall supply chain management manager on behalf of our end user customers. So that's what's driving some of that growth there. So I would expect we will continue to see very strong growth in both white and gray space. Again, outperforming the market is our expectation.

Perfect. Thanks, guys. And your next question today will come from Patrick Bauman with JP Morgan. Please go ahead.

Oh, hi. Good morning, guys. Thanks for taking my questions. Morning. Morning. I wanted to start off on utility, if we could, and to focus a little bit on the public power side. I think that's, I guess, a third of your utility sales. Correct me if I'm wrong. I'm wondering... how much it was down in the quarter, and then what gives you confidence it returns to growth next year. And along those lines, you mentioned something about, I guess, competitive price in that side of the world, and maybe that led to some of the gross margin compression quarter on quarter. Maybe if you could flesh that out a little bit.

Yeah, so maybe just a level set again. If you think of our utility business, the U of UBS, 90% of that is U.S., 10% is Canada. So when you take the U.S. now, that 90%, you know, 60-plus percent is investor-owned utilities, 10% or so is direct to specialty utility contractors. That leaves about 30% in public power. Our sales or IOU customers or investor-owned utility customers are up high single digits in the third quarter, and we're We're very pleased with that momentum. Our strength in IOUs is really carrying the day for the utility return to growth. Public power softness continued. And I mentioned this last quarter, and I'll just go back and double-click on it because it's the same situation. When you look at what occurred across the pandemic, it really was the IOU customers that were prioritized and they were delivering material as the supply chain started coming back online. And the public power customers started building inventory much later than the IOU customers. Those inventory builds for public power continued through 2024. And that's as the manufacturers switched from serving the IOUs to building up for the public power customers. So that's really what we're seeing. We're seeing that kind of customer stocking issue. And it's not across the board. Categorically, it's distribution transformers and wiring cable for public power customers. but not for line construction materials. So we're seeing it getting healthier. We've got overall improving customer order rates. That's a positive leading indicator. And, you know, public power, we do expect, will absolutely return to growth in 2026. I think the thing I'd focus investors on are the breadth and strength and diversity of the rest of our utility business. And obviously the IOUs and those multi-year agreements we have in place where we are essentially the supply chain management partner, solutions partner for them is exceptionally strong and good to see them with high single-digit growth. But we're also seeing very strong opportunities in growth not just in the D of transmission and distribution, but transmission and substation portions of the market. And that we're seeing kicking in this year. We've got a strong set of capabilities there, and we expect that to be a very strong growth driver in 2026. So there's the public power story. It is more competitive because, again, of the current stocking situation, that's more locally market-driven. Uh, some of our competitors are also not for profits. The so-called cooperative distributors. So, but that's been the nature of the beast for decades, quite frankly.

Got it. Helpful. Um, thanks for the color, uh, on, uh, on the 2026 margin outlook, the 20 to 30 basis points of expansion on, uh, I guess, mid single digit organic top line growth. Can you walk through us like the confidence you have in getting leverage and I ask just in respect to 2025 when you're growing high single-digit organically and not getting leverage, maybe remind us of the moving parts on why you're not getting leverage in 2025 and why that turns in 2026.

Yeah, Patrick, one of the things I'll highlight is relative to incentive compensation, we still have about a 20 basis point headwind to adjusted EBITDA margin with the expected payouts for incentive compensation, so in 2025. So that's a headwind in 2025. Obviously, we've been able to drive significant sales growth, but that's also come with some product mix and project mix impact on the gross margin line. You know, the other thing I'll highlight is, like many companies, we're also continuing to invest in our IT capabilities. And so we've made significant investments in that area. We do believe that that is part of our continued investment into our digital transformation and new capabilities to service our customers. And one of the other things that we'll highlight is we've made sequential improvement as we progress through the year. That leads us to a good setup for 2026. We'll provide you the full outlook for 2026 when we do our call in February.

Understood. So it's a better jumping off point at the end of the year combined with less incentive comp ed when maybe less project mix year over year. Those are some of the factors. I'd imagine you're going to keep investing.

Correct.

Makes sense. Thanks a lot. Best of luck. Thank you, Patrick.

That concludes our question and answer session. I'll now turn the conference back over to John Engel for any closing remarks.

Well, thank you for your questions and support today. I think we've addressed all the questions that were in the queue. I'll bring the call to a close. Again, thanks for your support. It's much appreciated. We look forward to speaking with many of you over the