Q3 2019 Earnings Call
Good morning, and welcome to the West Coast third quarter 2019 earnings Conference call.
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Now I'll turn the conference over to well Ruth Rob Director of IR. Please go ahead.
Thank you Jacob.
Good morning, ladies and gentlemen, thank you for joining us.
Joining me on today's call or John angle, Chairman, President and CEO , Dave Schulz, Senior Vice President and Chief Financial Officer.
This conference call includes forward looking statements and therefore actual results may differ materially from expectations.
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The following presentation includes the discussion certain non-GAAP financial measures.
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The Exchange Act with respect to such non-GAAP financial measures can be obtained via what's good for web site at Wesco Dot com.
Means to access this conference call via webcast what scores in the press release.
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Thank you well good morning, everyone.
Thanks for joining us for today's call.
I'll lead off with a few high level remarks, then Dave will take you through our third quarter results and provide an update to our 29 feet outlook.
It will also provide our initial view on our 2020 top line so.
We achieved record sales in the third quarter and sales in all of our end markets and geography grew on a year over year basis as expected.
Importantly, we achieved these results in a more challenging economic and end market environment.
We were encouraged with our improved results in the U.S. and strengthen industrial utility and Datacom.
Gross margin was under pressure and declined in the quarter driven by mix and the time like the passed through the record levels of supplier price increases the customers this year.
They will take you through the margin drivers in more detail in a few moments.
We continue to focus on what we can control and effectively manage operating cost to deliver operating margin within our expected range and he P.S. growth of 8% versus prior year.
Free cash flow was also very strong as we expected driven by inventory reduction and strong collections in the third quarter.
Have you saw in our release earlier. This morning based on our September year to date result, and our view at the end markets. We have narrowed the range for full year outlook for sales growth operating margin any P.S., while maintaining our outlook for free cash flow generation or at least 90% of net income.
Finally, as you know, we recently announced that Nelson Squires was appointed senior Vice President and Chief operating Officer. This organizational change as part of a broader streamlining of our operating structure that will discuss a little bit later in this call. We're also very pleased to welcome a new member to our Wesco Board of directors earlier this month long.
Thompson joined our board and she brings deep financial expertise and global operations experience to our board.
With that I'll now turn the call over to Dave to provide further details on our third quarter results.
And our updated outlook for 19 wells our initial look at sales for 2020, Dave.
Thank you John and good morning, everyone.
I'll start with an overview beginning on page four.
Reported sales in the quarter were up 3.9% within our outlook range up 3% to 5%.
Sales were up 4% with growth in all end markets construction increased 4% industrial up 3% utility sales grew at a strong 6% and C.G. sales increased 2% over the prior year.
Sales in Canada were up 1% with our industrial end markets up 7% and 6% respectively.
Construction sales in Canada were up 1% on top of 12% growth in the prior year period.
Utility sales were down due to the contract Nonrenewal mentioned in previous quarters.
International sales were up more than 5% on an organic basis.
I see a STS <unk> expenses were 2% higher than the prior year driven by the SLS acquisition.
Operating profit was $93.7 million were 4.4% themselves within our outlook range for the quarter.
The effective tax rate for the quarter was 19.8% lower than our expected rate of 22% and 260 basis points higher than the prior year.
Our effective tax rate is typically impacted by the tax effect of intercompany financing.
Foreign tax rate differences nondeductible expenses and state income taxes.
The effective tax rate was lower than our outlook for the quarter.
Merrily due to the full application of the international production of U.S. tax reform.
Partially offset by the discrete effect of accruing taxes attributable to undistributed earnings from operations in China that are expected to be remitted in the foreseeable future.
Interest costs were lower than the prior year, the non cash benefit of settling a Canadian transfer pricing issue.
Moving to slide spot.
As John mentioned gross margin was 18.6% in the quarter down 60 basis points versus the prior year and 40 basis points lower than the June quarter.
I'd like to provide some more detail on what drove this result.
Relative to prior year gross margin this quarter was impacted by two primary factors mix and price cost headwinds.
On the right side of this slide you may recall from our Investor day that we provided an overview of historical differences in gross margin rate like sales type.
The growth we experienced in construction and utility which are below the line average for wesco graded they miss Nextraq to gross margin.
The same is true when a geographic basis as sales in our high gross margin Canadian business grew less than in the U.S. and our international markets.
Lastly, our direct ship sales grew at a higher rate in our stock sales and direct chip sales have lower gross margins operating costs then stock shipments.
Regarding supplier price increases we are aggressively working to pass through increases to our customers.
Year to date, the number of supplier price increases can you do see dosing in 2018, when tariff cited as a significant driver for approximately half of all increases.
The magnitude of supplier price increases also continues to exceed that seen in 28.
An average high single digits in the quarter and year to date.
We are experiencing the typical time lag of working increases through the value chain to customers, we expect to see positive effects of our efforts in the coming quarters.
Moving to the diluted EPS walk on page six.
We reported diluted earnings per share of $1.52 up 8% from the prior year.
Oh, that's reflected a combined 21 cents benefit from foreign exchange rates.
Lower tax impact net of interest.
In the lower share count following our repurchase activity in 2018 and 2019.
Mostly offset by a combined 10% to 10 cents decline due to core operations and the SLS acquisition.
We've also provided viewed a reconciliation of organic and reported sales growth.
Foreign exchange was a drag to reported sales, but more than offset by the benefit of the FLS acquisition.
Moving to our end market results beginning on page seven.
Industrial sales were up 5% overall and up 3% and 7% in the U.S. in Canada, respectively.
I think a stronger results in the first half.
Industrial sales were up 1% sequentially from the second quarter.
Among our global account market verticals petrochemical metals and mining and food processing were all up double digits from the prior year period.
While OEM was down versus the prior year.
Year to date industrial sales were up 2% and we continue to expect growth in this market.
Although moderating the macroeconomic indicators still support solid production levels and capacity utilization rates in the U.S. in Canada.
RFP quotations in bidding levels remained very strong with third quarter and year to date activity up mid single digits versus prior periods.
During the quarter, we were awarded a new three year contract to provide electrical and MRO and OEM products to support the U.S. and Canadian operations of a high voltage equipment manufacturer.
Turning to page eight.
Sales in the construction end market were up 3% in the quarter, reflecting sales are up 4% in the U.S. and up 1% in Canada in local currency.
Sales were up 2% sequentially from the second quarter in line with typical seasonality.
Project activity levels remain active however, we have seen some project delays with industrial contractors do the skilled labor constraints in overall uncertainty partially caused by tariff driven price increases.
The skilled labor shortages that our customers are facing represent opportunities for Wesco project management and construction services that help our customer customers meet these challenges by reducing supply chain complexity, and then increasing job site productivity.
Backlog in constant currency was down versus prior year and flat on a sequential basis, reflecting normal seasonality.
We ended the quarter with the second highest Q3 backlog in our history. We're pleased to note that margin our backlog was higher on both a sequential and year over year basis.
As an example of our recent success. This quarter, we were awarded a multimillion dollar contract to provide switch gear for the construction of a new hospital in Canada.
Moving to page nine our utility sales continued to be strong.
Sales were up 3% for the quarter after delivering 11, 11% growth in the prior year.
This result was despite a 28% decrease in our Canadian business due to the non renewal of a contract that was that an unacceptable margin that we have discussed in prior quarters.
This is the last quarter for which there will be a negative comparison in our Canadian utility sales from the absence of this contract.
You asked sales increased 6% and improved 4% sequentially.
Let's go is benefiting from secular trends and utility sector, including construction market growth increased industrial output grid hardening and reliability projects and higher demand for renewable energy.
In addition to these trends we continue to expand our scope of services with investor owned utility public power and utility contractor customers.
Our utility business has posted seven years of growth and we expect us to continue going forward.
Bidding activity levels are high and we have a robust opportunity pipeline.
This quarter, we were awarded a multiyear contract to provide broadband cable in fiber equipment to support a fiber to the ex project for municipal utility in the U.S.
We also began servicing a new utility alliance customer in October , which we had highlighted on the first quarter call.
Finally, turning to commercial institutional and government or C.G. on page 10.
Sales were up 1% with the us up 2% in Canada up 6% in local currency.
International was down double digits, reflecting strong project activity in the prior year.
Sequentially sales were down 3%.
The Datacom and security customers were up double digits on.
On a two year stack basis, C.G. sales were up 9% in the quarter.
This performance was again driven by our strong capabilities and value added services and led lighting renovation and retrofit applications as well as fiber to the ex deployments broadband buildouts in Canada and networking security solutions.
As an example of the continued strength we are seeing CDAI Gee. This quarter, we were awarded a multimillion dollar contract to provide data communications products for the construction of the us Federal government facility.
Turning to page 11, the company generated free cash flow of $117 million in the quarter, 481% of net income.
Year to date, Wesco is generated $86 million or 51% of net income we continue to expect to generate free cash flow of approximately 90% of net income for the full year.
Yes leveraged net of cash was three times trailing 12 months EBITDA down from the prior quarter driven by lower debt in a higher cash balance.
Leverage is within our target range of two to three and a half times trailing 12 month EBITDA.
The new leased accounting standard did not have a material impact on the income statement or the statement of cash flows.
We maintain strong liquidity defined is available cash plus committed borrowing capacity of $723 million at the end of the quarter.
Our weighted average borrowing rate was 4.4% for the quarter.
Our fixed rate debt is approximately 62% of total debt consistent with historical averages.
As referenced on slide three of the presentation during the quarter, we extended the maturity dates for our two credit facilities and increased overall borrowing capacity by $50 million.
Capital expenditures were $9 million into quarter, reflecting investments to digitize, our business, including information technology tools and digital applications.
We completed the previously mentioned accelerated share repurchase transaction that we entered into in may for $150 million.
And received an incremental 700000 shares in the quarter.
We've now completed 275 million of the 400 million dollar share buyback authorization that will expire at the end of 2020.
Let's go has a history of generating strong free cash flow throughout the entire business cycle, and we expect us to continue.
Our capital allocation priorities remain consistent.
The first priority is to invest inorganic growth initiatives and accretive acquisitions, including large core electrical distributors that consolidate the market or transactions that provide a new strategic capability.
Second we seek to maintain a targeted financial leverage ratio of between two and three and a half times EBITDA.
Third we returned cash to shareholders through share repurchase under our three year 400 million dollar share buyback authorization.
Now, let's turn to our outlook for the remainder of 2019 on slide 12.
For the full year, we are lowering the midpoint of our outlook to reflect our results in the first nine months of the year as well as economic data that now points to slower growth.
We expect our industrial construction and C.G. end markets to be up low single digits for the full year in our utility and mark the up low to mid single digits.
We expect to use to be up low single digits and sales in Canada to be up low to mid single digits for the year.
On a consolidated basis, our outlook is for sales growth of 1% to 3% operating margin of approximately 4.2%.
The effective tax rate of approximately 21%.
And diluted EPS of $5 to $5.40.
At the midpoint this outlook would represent the highest earning per share and wesco history.
We still expect or to generate free cash flow of approximately 90% of net income as the increase in accounts receivable that impacted the first half will continue to be converted to cash in the fourth quarter.
This full year guidance imply sales growth of approximately 3.5% at the midpoint operating margin of approximately 4.2% an effective tax rate of approximately 21% for the fourth quarter.
Moving to slide 13, we are providing our first end market outlook for 2020 today.
We expect our end markets to provide profitable growth opportunities for wesco in 2020, while macro macroeconomic uncertainties could affect the industrial and construction end markets.
Overall, we expect that the current soft demand environment will continue next year similar to the second half of 2019.
With the utility in C.G. end markets offering relatively stronger growth potential driven by long term electrification and digitization secular trends.
Our 2020 plan includes outperformed the end markets by leveraging our full range of Wesco services and solutions investing in our people and digital capabilities and maintaining our costs and cash management discipline.
As a result, we expect sales growth in the range of flat to plus 4% for next year and will provide the balance of our 2020 outlook. During the first fourth quarter earnings call in January .
As the economy slows and then end markets become more challenging the strong free cash flow generation capability of our business and supports execution of our strategy and capital allocation priorities.
Customers are seeking continuous improvement and supply chain stability in an increasingly complex and rapidly changing world.
Our talented talented team of associates in our robust portfolio of products and value added services continue to differentiate wesco and providing our customers with complete solutions, where the MRO OEM and capital project needs.
With that let me turn the call back to John .
Thanks, Dave before we open the call the questions I want to comment on the press release that we issued earlier this month promoting Nelson Squires to our senior VP and CFO as you know Nelson has had responsibility for Canadian operation since 2015, and would given additional responsibility for integrated supply and international operation.
Ratios in early 2018.
Nelson has proven to be a highly capable and effective business leader, who has delivered results since joining wesco four years ago.
All of our business leaders now report directly to Nelson.
The overall us business leader position has been eliminated.
These organization changes further streamline our operations and will help wesco grow is a leaner leaner more agile company.
With that we'll now open it up for questions.
We will now be can the question and answer session to ask a question you May Press Star then one and your Touchtone sound.
You are using a speakerphone please pick up your handset therefore pressing the keys to withdraw your question. Please press Star then to at this time, we'll pause momentarily to assemble our roster.
The first question comes from.
David Manthey with Baird. Please go ahead.
Thank you good morning, guys.
Good morning, Dave.
Since the analyst day, Youve been talking about transformational M&A and I'm. Just wondering if you can help us in your thinking of how you define transformational are you thinking about just on large deal or is it something outside your core business.
What do you consider transformational and for something big and meaningful would you consider using wesco stock are not yet.
Yes.
So if you recall at our Investor Day, we did we did outline our.
Priorities.
Relative to our overall acquisition strategy as part of our overall strategy and they were first to consolidate large core electrical distributor second to expand into adjacent product and service category and third you'll recall that we said we want to invest in digital technologies that advance the enterprise strategy. So there are core element.
Most of our acquisition strategy.
And transformational acquisition means.
It basically fit within those three priorities that could a large acquisition provide that potential because of the synergies that.
We would we will be able to extract and then.
Thoughtfully reinvest a portion of it also investing in digital technology that advance our enterprise strategy and helping lead the digital transformation for for our type a company in the B to b distribution value chain relative to financing, Dave I think that.
We've always run with leverage we have excellent free cash flow generation. In fact, if you go back and look at what our cash generation has been since were public.
20 years ago.
It's been very strong cash generation through all phases of the economic cycle.
Our free cash flow yield is very high so we're comfortable running with financial leverage very strong free cash generation very strong balance sheet and.
If we are talking a very large transformational acquisition, we would use the most optimal mix of financing.
That would get the deal done combination of of tapping the debt markets as well as considering equity when appropriate.
Makes sense, Okay, and then maybe one for Dave gross margin has been flat to higher year over year for the past five quarters. When we took a little step back here.
Could you give us a bit of a walk from the 19 to last year to 18, six this quarter and then what changes between here and the fourth quarter to get you back on track.
Certainly so as we highlighted there are two primary factors and we've talked about this in some of the previous quarters as well, but the first was mix and as we highlighted during the Investor day.
We saw mix as a headwind across all three of the vectors of our gross margin composition. So our end market mix was primarily driven by the growth in utility business and also with construction.
Additionally, within our industrial end market the mix of the growth by end market created a mix headwind and so thats something that we havent talked about quite a bit publicly but for example, we highlighted that our OEM business was was down versus the prior year that has a higher gross margin in the balance of the industrial end markets. So that.
At a headwind even within our industrial end market and then clearly the geographic mix was also a key driver it's relatively straightforward we highlighted at our Canadian business has a significantly higher gross margin in the balance of the company.
Panic sales were only up 1% in the quarter versus the U.S. and international being up in a low single digit range.
So finally, we also had that higher percentage of sales that were direct ship. So these are direct ship sales. They don't touch our inventory and we have a lower gross margin on these sales compared to stock sales, which resulted in the margin headwind and then on price cost again, we've seen as cumulative effect.
Significant number of price increases and we're averaging locally or mid single digit price increases with our suppliers and we just are continuing to see that lag between being able to pass through those price increases and get the margin rate recovery with our customers. So thats clearly been providing a.
Drag versus the prior year going forward as we highlighted we are continuing to work through driving through and getting gross margin rate with our customers and as we look at it going forward. We've got a series of initiatives in place that we anticipate will drive that expansion of our gross margin rate.
Very good thank you.
The next question comes from Deane Dray with RBC capital markets.
Please go ahead.
Thanks, Good morning, everyone and wanted to add my congrats to Nelson. He's a great addition to the C suite.
[noise] Love that and then also that.
Margin slide mix.
That's really helpful and that was was very informative so I appreciate that color.
Hi, Thanks, a lot the interested cruciate the real time feedback on that.
Right. So if what surprised me most first is that we're all seeing across the industrial sectors signs of short cycle industrial weakness and if I look at your results in the industrial side and on the construction side it doesn't come.
Through this quarter I mean, you just you seem to be breezing through it up 5% organic and industrial and up 3% and construction. So when you talk about slowing in the fourth quarter. It sounds like you're pointing to the economic data suggests saying, they're slowing but are you actually seeing it in your day to day business, maybe it's on your EM.
Borrow business, so maybe we start there.
So your question.
Is.
You are right when we say, we're seeing increased headwind and challenges that is the end markets.
So that is more around commentary from customers. There's a continued uncertainty with the economic outlook.
And so again that all those comments around more challenging economic and end market environment. It is the end markets like I have to say I'm actually very pleased with what we've done.
In terms of driving a topline results in Q3, I know the comparable they're easier year over year, but it's a it's against the backdrop, it's much tougher and you cited to the end market.
End markets industrial construction remember we grew at all of them and we grew in all geography, but I I think of particular note of industrial because when you look at our industrial end market as you alluded to we had growth.
In Canada Us and international.
On the overall growth with mid single digit and that's with.
Oil and gas sales being.
Flattish in the third quarter as they were in Q2.
So overall overall oil and gas across the company so.
Right.
I think Thats, a testament to a number of the sales related initiative that we have underway.
And we talked about those as part of our commercial excellence strategic client at Investor day in terms of construction too.
I think what's really notable and this is particularly important.
To put this in the historical context, because we've had periods of a bit here 15 years been have had periods over that time, where.
Residential construction was materially stronger than Nonresi end market end markets. That's what we're seeing now I would say that most of the end market indicators and what we're hearing from contractor customers again around the uncertainty is there like increased headwinds across.
Option residential and nonresidential construction residential construction holding up.
And.
And again I would say that.
I'm pleased with our results.
Particularly in the U.S. stepping up to a 4% growth in construction.
In the third quarter.
The majority of our region geographic regions grew in the U.S.
And in Canada, as well the regions that we experienced some increased pressure was the western provinces.
Which which I think we've all seen with a commentary is on the paper, particularly.
Out of Alberta, and the other portions of the western provinces coming back to industrial one other comment as well I had a regional level in both us and Canada.
We had a majority of those regions also grow organically in sales so I.
Hi, I'm actually very pleased with how weve.
Our sales execution positive sales momentum.
And I and I say, there's a few others that have reported results thus far.
And both I.
I would call them investor appeared some competitors as well suppliers.
I think when you put it in that context. The fact that we grew all end markets all geographies and the numbers were we posted its something we feel pretty good about we want to obviously built on that momentum and the backlog held up.
Consistent with normal seasonality.
And as Dave mentioned the margin rate in the backlog is higher so that that give us.
And that's unique to US right. So I think that gives us.
Confidence as we start.
Through Q4.
Got it that's very helpful. And then if we look at your 2020 comments and we're actually pleasantly surprised that you wanted to take a stab at this cause a bunch of that companies are holding off on giving their sneak peek sitting here you are getting a pretty detailed bottom up and when I looked at flow.
Got to 4% total it just struck me as a bit optimistic, but then I look at the underlying assumptions about your outgrowth that seems in line. So maybe it looks that the industrial and construction low end of the ranges of low single digit how did you arrive at those is this is again your extrapolating what you're seeing.
On the economic data and some of the around the end markets, but what's the sensitivity there from a bottom up on the low into those ranges and could they actually be lower.
Yes. So so to answer your question is yes in terms of the end market range is that and our view of the end market and it's a combination of all the different indicators that we look at.
Some of which are in the public domain, a number of which are not so let me come back to our momentum because I think thats really important point.
Let me start with I said backlog is very healthy.
As we move Q3, the Q4 Thats number one number two the pipeline and we manage and a phased gain and pipeline of opportunities our pipeline.
Has actually increased substantially this is our opportunity pipeline increased substantially over the last several quarters as we've moved from 29 chain.
To be fair part of that.
Correct alcohol.
Some of the additional digital tools and analytics that we built for the front end sales and marketing teams as part of our commercial axle strategic Paul but our our pipeline that we're managing again of opportunities as the largest it's ever been bye bye.
Turning full measure and then what's our momentum thus far in Q4.
He said on on the slide that we reported.
We said sales were up low single digits with one day that go our sales growth is between 3% to 4% so.
Little bit stronger than when we lock down the chart.
I would want to be comfortable at the low single digit which for US is zero to three but I did want to give that point that one day to go and then today.
We're running roughly a three to three to four 3% to 4%.
Correct.
That's helpful. Thank you.
The next question comes from Nigel Coe with Wolfe Research. Please go ahead.
Thanks, Good morning, guys morning.
I Echo a dean's comments, great transformations, just wanted to pick up on that so the gross margin differentials I think we were sort of aware of the differences case remind us how does the operating margin compares so yesterday structures.
Amongst the different verticals and geographies.
Big difference in operating margin as well.
Nigel It's Dave show so overall at the company level, it's relatively agnostic at the operating margin line. The one thing that we did highlight.
It is that's particularly true when you take a look at our end markets and when you take a look at our shipment tight and remember that the shipment tied the margin differential is because of our cost to serve.
And so for example, something that goes direct ship Doesnt touch our inventories on the gross margins are lower but the operating costs are lower as well therefore, it's relatively agnostic at the.
Shipment type level, where we have the significant difference from an operating margin perspective is by geography. So if you take a look at the the average for Wesco, Canada is higher so again, we've invested heavily in Canada, primarily because we're attracted by the margin composition operating margin composition.
It does tend to be significantly higher than the balance of the business.
Conversely, based on the the mix of our international markets International tends to be slightly lower than the overall line average from a geographic perspective.
Okay, that's great and.
Then the middle of 2020, you called out a utility as a separate tailwind to growth next year and.
Let us what cubist.
Obviously seen very nice trends right now in TNT, what kind of what kind of visibility do you have into next year. At this point and then I know that generation isn't that big driver for for Wesco, but so maybe just touch on what you've seen in generation as well that be helpful.
Yes so.
Our our utility business, we've got to.
On an interesting portal.
In the utility industry in terms of we serve the investor owned utilities.
And that grew in the third quarter, we serve public power municipal and co ops.
And that grew and the third quarter and then we also serve specialty utility contractors I would say if those contractors that we're uniquely geared for our business mix and capability standpoint to serve utility and that grew in the third quarter. So this would we feel really good about foundationally.
The strength of the growth in the third quarter and the us growing at 6% with a really good number we think Canada again is that.
Contract that we walked away from well have a little bit of sales, but we still have in Q4 of 2018 last year, but it's much smaller than the rate of sales. We had Q1 two three and then when we move move through Q4 into in the 2020, we expect again strong results in utility.
Cost our Canadian business. So I just wanted to set the stage without a bit and its through those relationships that we have insight into.
Our capital spending plan.
And and what's driving our growth isn't just I wouldn't call fundamentally the market we've been consistently outperforming the market and now when we finish this year will have eight years of sales growth in a row in utility organically.
Fight exiting.
These large contract that we walked away from so we're getting the sales growth from increasing our scope of supply with current customers CAD expanding our product categories with additional spend on grade hardening project when sales growth et cetera.
But as you think about the driver going forward.
It's great automation renewables storm hardening initiative as well as continued growth in revenue could contribute growth in resi add meters to the ground.
Which is a direct in first derivative growth driver for utility and then not nonresi typically follows so and finally I would say that.
The contractor business remains strong because structurally utilities continue to outsource their capital project work.
So when you integrate all these all these I'll call those dynamic.
We just we just see with our value proposition.
End market, but the ability to outperform the end market with our capabilities, we've got great confidence in that and we've got a long and strong.
I will track record.
Okay, John Thanks fell into that.
The next question comes from Steve Tests with JP Morgan. Please go ahead.
Hi, guys good morning.
Morning.
Keep just talk about what you're seeing in the machine builder a vertical there's you know it's kind of a.
Small vertical.
And the Grand scheme of things, but there's just been a little more chatter around.
You know weakness there given cross border.
Concerns, yes, yeah, it's a really good question, yeah, we're seeing challenges so.
You know we've got part of.
We'll call them OEM type customers that Dave alluded to in his earlier comment that would include that and then we we have some specialized business is around industrial automation and control and and we're seeing some headwinds with the customer that we would categorize it the machine builders, it's about how how much.
Good how or what is the is it down like mid singles or what would you say for us it for US it's in the single digit range yes.
Double digit.
Yes.
Mid mid to high single digit knocked off.
Okay, and then I know a guy trying to ask question almost like every quarter just got to reinforce the dynamics, but you know there's there's kind of have you out there that there is a you know like an inventory correction that that's going on here I mean, you guys. In particular are very good about managing their inventories and you never really get to bloated or.
You know to lean gay the correct. So if like somebody selling into you you're you're managing that pretty tightly to have a lot of visibility into that right. So there wouldn't be like a correction. It at your point in the channel.
Correct and then for US. This typically you know we didn't end up having our in we increased our inventories in the first half and we spoke about that and the Q2 conference call that was one of the drivers of our first half cash flow as well as.
A significant growth in a our balance given the shape of the sales in the first half and the and the increasing sales growth in may into June . So when we gave our our Q2 earnings call. We were very clear to make some comments around Q3 and said we do expect very.
Very strong free cash flow generation in Q3, and we did specifically talk about two contributors.
You are strong collections, which we have have executed non of senior that benefited us in the quarter as well as inventory reduction and we do and we reduced inventories over for approximately 400 million 40 million dollarss million dollars sequentially in the quarter.
Yep, Yeah. That's that's a that's a good good performance and then just just lastly on on a price.
On that kind of pricing side.
Are you seeing any of your major suppliers get.
Get I wouldn't say aggressive but in targeted areas try and.
Bring in some business either kind of late in the quarter or as we go forward here and kind of a weaker environment as anybody.
I wouldn't you start breaking ranks, it's probably too strong, but anybody kind of backing off there. They are aggressive pricing and you know pulling back on on price increases to book deals you've seen that at any or.
Sure I'll answer it with two with two different I'll break it into two a two part answer the short answer is no.
And for I'll call. It the pricing that that they said that kind of works its way through the channel and impacts our stock and flow business.
That that's the area, where they try to move the price increases through.
We've got to try to obviously get that moves through the customer than in some cases, we've got multiyear contract on a global account customers thats the timeline, so but the short answer your questions, though on that I have not seen any change in behavior and daves comment earlier commentary speaks to the record level in terms of number of price increases the magnitude of business.
On the direction.
Yes, which in many cases will get special pricing and supplier costing to support that business.
You know that that always works very I'll call it.
It worked in a real time way so as projects are being bid.
Worth simultaneously with customer can contract customers were working with supplier partners on what the appropriate level of cost of what cost they're willing to go forward with that project on the we worked at as a team.
That that dynamic Hasnt change, that's always a very I'll call it.
Aggressive real time process.
I would say that because contractors have record backlogs.
And there's a labor shortage for the skilled trades.
You know as they continue to work to act that number one product for them is execute the backlog number two as they try to take on new business to increase their record backlog you haven't had confidence in the skilled trades and the uncertainty around pricing is just another dynamic there so that kind of sorts itself out real time the way we look at that in a good man.
Accurate, what's our backlog Dod and we said it was flat sequentially, but the margin rate in our backlogs up a little debt.
Which really speaks to the wesco value proposition with contractors and we're very focused on supply chain services, including three fab and material management.
Capabilities with our contractor customers, we're focused on job site productivity and improving that for a contractor customers does that does that help yeah. Okay. That's that's helpful. I appreciate it thanks.
Yes.
The next question comes from Michael again with Wells Fargo.
Please go ahead.
Thank you I could just follow up on the acquisition like crushing discussed earlier is this something transformational on the digital side, where you would entertain a dual.
Brand strategy kind of like a high touch low touch model or is that something or is it something more that you would integrated under the Wesco Brad.
So that's an excellent question.
As I recall I, probably haven't gotten that question for terrific.
I will I'll say that in terms of branding strategy, we already run a dual brand in Canada with customers. So I'll just take it back and summarize history a little bit.
We had a very strong Canadian business, we had the opportunity we start which was a unique opportunity in our careers 100. Your old pub private company, we were able to after working that deal for over five years, we're able to make that happen that with acquire new coal and that we've done seven years ago and so we went the market with a.
Dual brand.
After post acquisition closed.
In Canada and that was expressed leave the strategy one the Wesco brand has is lined up with a very large glee global leading electrical supplier for core electrical and ecowas lined up with us at different large leading global.
Leader electrical supplier there. So so we've already have that model working within wesco at a very low on a large scale basis and also other acquisitions that we've done over the years. We you know we've done over 45 cents leckow spun out of Westinghouse 25 years ago.
And.
There's still a handful of brands that we use where they add value.
You know in them and the value chain, then with customers. So.
I think that that would be you know.
We would do the right thing from a branding perspective, and we would also it would be a function of what we're acquiring what the business model is and what we think we'll make no sense in serving customers.
And since we're on the topic of deals and branding theres been some meaningful shifts in your supply chain lighting Cooper with the and then as well as on the data center side.
Can you just comment on those big changes and what you're seeing structurally pharma just customer win standpoint going forward.
Yeah, So if I'm sorry support supply supplier.
When standpoint, no no no idea.
Yes, I interpreted your question.
It's a it's early days on the latest lighting combination that being.
The announcement of signify acquiring Eaton's Cooper lighting business, we've got very strong relationship obviously with with all the Cooper divisions that are part of Eaton and eating overall Eaton is our largest supplier partnerships that we have very strong and long standing relationships with signify that is the way the prior.
Full up.
Both cases, those relationships go back well into the Westinghouse days, when we're a captive distribution arm. So.
From my perspective.
I've been very clear about this with respect to lighting and I know, we had a number of questions and comments around that at our recent investor day earlier this year.
And then.
Oh really there's a lot of changes occurring fast and I think the manufacturer supplier partners.
Our our.
Ill have particular challenges given.
Additional entrance and new entrants in terms of manufacturers of lighting project products globally.
As a as a supply chain solutions provider, we're able to provide good better best solutions for for lighting applications and we can work with our supplier partners bring the best brands together when it turns out to be the differentiator is the control solution and our ability to wrap services around that.
And we've got a turnkey retrofit renovation and upgrade set of capabilities that we acquired a number of years ago, where they like little budget that we've been investing in and our SLS acquisition earlier. This year is supportive of strengthening that.
Alright, Thank you very much I'll pass it along.
Yep.
The next question comes from Robert Barry with Buckingham Research. Please go ahead.
Hey, guys good morning.
Morning, Robyn I want to ask you about us DNA, but since it keeps coming up on the M&A question. Just curious your thoughts about doing a transformational acquisition at this.
Something gets out late stage in the cycle.
So again I think we were we were very clear about what our.
Plans.
And strategies were at Investor day, and I'll reinforced and remember what we did at Investor Day, We took a we try I tried to provide a very forward looking view of.
The state of evolution in the state of disruption.
Transformation being required in the B to B value chain I think the opportunities are a significant for particularly for the largest and those companies that are well capitalized so which we are clearly in the class.
And we were very clear about overall enterprise strategy and our acquisition strategy as part of that which again with the consolidate large quarter electrical distributors expanded into adjacent product and service categories and invest in digital to help lead to digital transformation.
So that is that's our ambition.
I think that you know we will be very thoughtful you can't always control the timing of deals and so we'll be very thoughtful and take advantage of opportunities when they arise appropriately and and we've got a very strong balance sheet as I commented on earlier and has shown strong and consistent free cash flow.
Across all phases of the economic cycles. So you know the thing with acquisitions is you can't always.
They're just you can find them right I mean I'd be glad to say, we can strategically timing, but you can't you got to be prepared the.
When it makes sense to take action and not Great example, again the call we worked that for many many years, though.
We had a chance to get out of a century old company that was a very strong operator, and we did it right. So so I think you know again, we we look at the opportunities obviously the numbers have to work but.
This is our strategic view is overall upsell opportunity to lead the consolidation and digital transformation of B to B distribution for our so.
Okay, and the value change that we operate.
Got it okay. Thank you Didnt wanted just to touch on the yesterday.
Formans there continues to be a very good very low as GDP growth I'm, assuming there's maybe about 5 million from SLS and that number.
But.
Give or take.
How long do you think you could sustain growing yesterday yet.
It looks like.
Less than 1% I'm kind of adjusted for the M&A.
Rob its day shell, so again, what we see right now in our third quarter asking is the the increase year over year is primarily driven by the SLS acquisition.
As a company we had a long track record of carefully managing our costs one of the other things that is impacted our SGN a in the current quarter third quarter is obviously, we're not performing to our internal expectations across the entire business and therefore, some of our incentive compensation accruals are lower than they were.
In the prior year. So that's also having an impact on the seeing the third quarter going forward. Obviously, that's something that we want to make sure that we're able to restore so.
Well, we'll provide more details about our 2020 on our January earnings call.
Got it.
And just maybe a quick housekeeping item looks like the share count keeps coming down I know you've been doing a fair amount of repos what.
Share count assumed.
Something.
Yes, so again the the driver of the share count reduction in the third quarter was really just the carryover of what we saw from the $150 million share repurchase that was initiated in the second quarter in terms of the share count for the full year I think if you took a way.
Weighted average job the four quarters you'd get somewhere in the range of.
43.3 to 43.5, I think that would be the right expectation to think about as you're looking at your model.
Thank you.
The next question comes from Christopher Glynn with Oppenheimer. Please.
Please go ahead.
Thanks, Good morning.
Wanted to follow up on me a transformational.
Deal comments, so it takes to the Tangoe just wondering if there's any signs here.
On a parallel players and the large electrical distributor space are thinking similarly about the industry structure is you are.
[noise] you'd have to ask them Chris.
Uh huh.
I would be speculating.
Okay and then another housekeeping just said there's interest expense server to kind of the first half run rates after the adjustment in the third quarter.
That's correct, Chris So again, the we did have the benefit a noncash benefit in the third quarter now that was reversed unit accrual that was made years ago related to this Canadian transfer pricing issue you should expect that that's going to revert back to the trend in the first two quarters of year.
Okay, and then if you get one on gross margin.
[laughter] noted mix differences, but the rates weren't you know worlds apart, so maybe that the supplier price increases or the bigger piece there.
Curious if you're seeing good visibility to a reclaiming that are if kind of mid eightys is good place to reside for now.
So the so the price cost issue from the supplier increases is the larger of the two drivers that we called out. So that's fair again, we're we're continuing to monitor what comes through from the supplier price increases and we're focused on catching up and driving through not only to.
Dollar for dollar price increases, but also the gross margin rate benefit that we would get typically in an inflationary environment quite frankly, the rate and pace of the supplier price increases is considerably hampered our ability to get that done we normally have a lag, but obviously in the third quarter. We saw more of an impact than we have historically seen.
Great Thanks for that [noise].
This concludes our question and answer session I would like to turn the conference back over to China angle for any closing remarks.
Thank you all for your time this morning, Brian's bag and we'll are going to our available as always good to take your questions and we look forward to say many of you at one of our Investor marketing events, we will be participating in during the fourth quarter, including the bare 2019 Global Industrial Conference next week. Thanks, again have a great day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.