Q2 2020 Wesco International Inc Earnings Call
Good morning, and welcome to the West Coast second quarter 2020.
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I would now like to turn the conference over to Brian Treasurer. Please go ahead.
Thank you Kate good morning, ladies and gentlemen, thank you for joining US joining me on today's call or John Engel, Chairman, President and CEO, Dave Schulz Executive Vice President and Chief Financial Officer.
The conference call includes forward looking statements and therefore actual results may differ materially from expectations. Please see the webcast slides for additional risk factors and disclosures for additional information on whats going international please refer to the company's FCC filings.
Including risk factors described there right.
The following presentation included this discussion certain non-GAAP financial measures information required by regulation G or the exchange Act with respect to such non-GAAP financial measures can be obtained be a wescos website watsco dot com.
Meets the access this conference call via webcast was disclosed in the press release was posted on our website.
Replays of this conference call will be archived and available for the next seven days with that I'll turn the call over to John Engel.
Thank you, Brian well good morning, everyone. Thanks for joining us for today's call.
They have a wesco I hope that all of you have been staying healthy unsafe and these challenging times.
We prepared a party thorough update for you today I'll I'll lead off with a few introductory remarks, and then Dave will take it through our second quarter results.
And then we'll provide her ability excellent progress, we're making money anixter integration.
As well as the outstanding value creation that our transformational combination of let's go on anixter will create.
So first of for an update on our business in the second quarter results exceeded our expectations across the board.
That is for sale operating margin operating profit E P S and free cash flow.
This momentum improved through the quarter as we outperformed the market and built an all time record backlog for the legacy Wesco business.
Importantly, sales improved sequentially each month, and we saw continued growth in our utility business.
Our next are also delivered a strong performance to close out the second quarter.
Our positive momentum has continued in the third quarter, we're very encouraged by that with quarter did they sell through workday 28 that quarter to date down 8% versus prior year, but up 11% sequentially with a book to bill ratio above one point, though.
As we have done in prior economic cycles, we aggressively managed our business and took significant cost reduction in cash management actions, which enabled us to achieve a detrimental margin of only 10%.
And generate exceptionally strong free cash flow of $140 million or 250% of adjusted net income.
As you know we increased that to complete the anixter combination.
Back to our consistently strong countercyclical free cash flow generation to enable us to rapidly de lever and get back within our financial.
Target leverage so within [noise].
[noise] in closing out the first half a 2020 I would like to take this time, they recognize and thank all of our associates poor inspirational dedication commitment and hard work effectively managing through this code at 19 driven crisis.
Now turning to anixter, the second quarter will prove to be a watershed period in our Alesco history.
We successfully closed on our industry shaping merger of Wesco and anixter.
And combining through industry, leading fortune 500, accompanied with successful track record, we are creating the premier electrical communications and utility distribution and supply chain solutions company in the world.
In May we completed a well oversubscribed and highly successful capital raise of approximately $5 billion and bonds in Baghdad, all with very favorable parent.
We satisfied the remaining closing condition when we when the waiting periods, where the Canadian competition Bureau expired on beauty too and then successfully closed the out of your transaction on June 20 seconds.
[laughter] timing met our commitment to close the transaction and the second or third quarter.
I guess, the challengers imposed by the global pandemic the extraordinary determination of our what's going on Anixter associates.
Acute a flawless day, one closing just bars month.
Barack mugs after starting the merger agreement was very impressive.
I could not be more cloud or more appreciative of the entire team and their extraordinary effort in achieving this noteworthy milestones.
As I mentioned before we've been executing a detailed rigorous and process oriented integration planning effort over the last several months now all of our integration African organizational focus shift from planning to execution and synergy realization.
I'm happy to say, we're off doing excellent start integrating the two businesses and our first six weeks since closing and have already completed actions to deliver over 50% of our year one cost synergy target.
$68 million.
We've also begun to realize our for sale synergies through leveraging our expanded global footprint and cross selling what is now our broader product and services portfolio.
The strong cultural alignment between Wesco, one extra is proving to be a key driver of our initial success.
We're building on these early successes and we remain highly confident.
In capturing a significant upside potential and exceeding our three year cost savings sales gross margin expansion and cash generation synergy target.
With that I'll now turn the call over to babies are walking through our second quarter results.
Then discuss our integration execution.
And synergy capture plan in Washington.
Dave.
Thank you John and good morning, everyone I'll start with an overview of results beginning on page four.
Slide presents our second quarter walking you from our reported GAAP results to the legacy Wesco results. The column on the left shows our reported GAAP numbers it to the right on that call them are the various adjustments to our reported results to remove the transaction related impacts.
The third column some trucks the merger related adjustments from the reported results. The show the underlying results of the business adjusted for all deal related costs and activities.
To the right about all the anixter in Wesco components of these adjusted results respectively.
Reported sales in the quarter were down, 3% and down 12% organically.
Driven by lower demand due to the cobot 19 pandemic.
I'll walk you through our sales results in more detail in a moment.
The legacy Wesco business generated approximately operating profit of $17 million approximately $28 million lower than the prior year, although sales decline of approximately $285 million, representing a decremental margin of 10%.
Yes, you name it was down $33 million compared to the prior year quarter, reflecting carbon related cost action in lower volume.
Well I guess you watsco adjusted operating margin was 3.8% for the quarter and adjusted EPS was the dollar forced Josh.
The legacy adjusted Anixter results for the period following the merger I'd gross margin of 20.3% an operating margin of 8.3%.
This exceptional result was driven by the strong anixter sales during the nine day ownership period into second quarter continued gross margin expansion and cost reduction actions initiated by anixter in response to cope with 19.
On an adjusted basis, the combined whats going extra business generated operating margin of 4.2% and diluted EPS of $1.36. That's [noise].
A brief comment on the merger related adjustments.
The $73 million as you know primarily represents investment banking legal and integration management Beach. Additionally, we recognize the onetime expense associated with the change of control provisions of the transaction.
You'll also note several impacts below the operating profit line, including interest expense of $45 million. This includes interest paid on the bonds issued and non amortize financing fees.
We also recognize preferred dividends expense or just over $1 million into quarter related to the preferred stock consideration the anixter stockholders.
We will provide a detailed update on the anixter acquisition a bit later in the call as we've made substantial progress on the integration of the businesses and the generation of synergies.
Turning to slide five this summarizes the organic sales growth by end market and geography for the legacy Wesco business and does not include any contribution from anixter.
You can see on the right hand side that monthly organic sales in the quarter were down 16%, 10% and 13% in April may and June respectively versus the prior year.
As John mentioned sales improved sequentially through the quarter on a same workday basis with April down, 13%, followed by increases of 9% and 5% in May and June respectively.
[noise] differences in foreign exchange rates reduced growth by 90 basis points, primarily reflecting unfavorable Canadian dollar exchange rates.
Looking at the sales results by geography, you asked which is roughly 75% of legacy Wesco overall revenue was down 12%, Canada was down 17% organically.
The U.S. in Canada results were driven by declines in our industrial and construction end markets.
Many projects were delayed beginning in March.
Industrial sales were down 21% organically in the U.S. and 22% in Canada as we saw broad based weakness in market verticals, we serve due to cope with 19.
Putting in project activity remains strong however, and a number of industrial markets improve sequentially from Q1.
[noise] construction sales were down 16% in the U.S. and 21% in Canada, reflecting the project delays due to cope with 19.
Our legacy Wesco backlog reached a new company record and was up 17% versus the prior year and up 4% sequentially from Q1.
Consistent with what we saw through the end of April construction projects have been delayed rather than canceled.
Utility sales continued to be exceptionally strong in the quarter, U.S. up 6% organically and Canada up 36%.
Sequentially U.S. utility sales were up 8% and Canada utility sales were up 27% versus Q1.
This was our 12 consecutive quarter of organic growth in the U.S. utility business.
Commercial institutional and doubling or C.G. organic sales ended down approximately 5% for the quarter.
This end market exhibited positive momentum in the quarter as sales were up 13% and 11% sequentially from Q1, and you Western Canada, respectively.
Projects related to datacenter build security and cloud computing projects with large technology customers.
James It provides significant sales growth opportunities.
Moving to slide six let me take a moment to remind you of our liquidity and some features of our new borrowing facilities that we closed on in June as they position us to meet the challenges related to the economic impact of the Corona virus.
Our liquidity, which is comprised of invested cash and borrowing availability on our bank credit facilities is strong and $890 million.
We have maintained sufficient cash on the balance sheet of $265 million.
Collections throughout the quarter into August have performed at or above historical trends.
Bad debt reserves are also tracking consistent with historical levels.
In connection with our closing the anixter merger, we raise new senior unsecured notes of approximately $2.8 billion a portion of which was used to refinance anixter is 2021, 2023 and 2025 notes.
We also entered into a new 1.1 billion dollar ABL facility and increased the off facility commitment to $1.0 billion to $5 billion in June.
Our bank credit facilities, our low cost LIBOR based agreements and mature in June 2023, and 2025.
We expected our ratio of fixed rate debt to variable rate debt to be approximately 70% of closing and it ended up at 72% at the end of June.
Our credit facilities include limited operating covenants, and we easily past liquidity threshold by which compliance as measured by a very large margin.
I think completed the anixter merger, our capital allocation priority will be to support the integration organic sales growth opportunities and to rapidly retire debt.
We do not expect utilize any remaining amounts available under our board authorized share repurchase program that expires on December 31st of this year.
Turning to slide seven let me recap our second half priorities.
Our first priority is to build on the improving sales momentum we experienced this quarter.
Despite weakness in certain markets in Q2, we capitalized on improving momentum within our business and are well positioned to leverage our broad portfolio of products and services to drive sales ahead of the market.
We will maintain our cost discipline to meet or exceed the $50 million in cost savings generated by the actions that we took in April.
Response to cope with 19.
We are planning to reinstate pull compensation October 1st for legacy Wesco employees that was temp relever temporarily reduce between 12% and 25% effective may onest.
We will be deploying across the legacy Wesco business anixter. Its gross margin improvement programs that enabled annex start to deliver seven consecutive quarters of year over year improvement.
We will continue to rapidly execute our integration plan and delivered the year, one merger synergies with a high confidence of delivering substantial upside.
As we generate cash our priority bill will be to retire debt consistent with our objective return to our target leverage so to the three and a half times debt to adjusted EBITDA within 36 months post close of the transaction.
Finally, beginning in the third quarter, we will begin reporting results for the three strategic business units announced as part of our new organizational structure in early June.
With that let me turn the call back to John as we will provide an update on the anixter merger.
Thank you, Dave So I'd now like to reemphasize the outstanding value creation that our transformational combination of Wesco and anixter will create.
For a seven figure highlights regarding this industry shaping merger.
Number one the merger is a transformational combination that create as I said before the industry leader in electrical communication and utility distribution and supply chain services.
Number two the combined company benefit from a step change and skill and capability in what remains a highly fragmented electrical in communications distribution space.
On a combined basis, where the industry leader in North America with approximately 17 billion sales revenues and over 1 billion in adjusted EBITDA on a pro forma basis, including the identified cost.
Number three the two businesses are highly complimentary in terms of products industries and geographies.
Which enables us to sell more products to more customers and more locations around the world and more importantly, accelerate our sales growth by more than 100 basis points versus standalone projection.
I've said this before this is an extraordinary combination of two successful companies, where one plus wallet is equal to three.
Number four we're executing an integration plan to deliver well over $200 million worth of cost synergies as I mentioned previously we're off to an excellent start only six weeks since closing this acquisition in late June and Dave will take you through our notable progress and much more detail shortly.
Number five the financial benefits of this combination that will be generated will be exceptional.
We expect our EPS growth rates to double.
Adjusted EBITDA margins to expand by more than 100 basis points through the cost synergies I just discussed.
Number six.
Both companies benefit from a highly resilient business model generates substantial free cash flow through all phases of the economic cycle.
The combined company is expected to generate free cash flow of more than $600 million annually by year, three which we expect will enable rapid deleveraging through within our target range within 36 months.
As well as provide future capital deployment options to drive value creation.
And finally number seven the collective let's go on Anixter management team and.
Our results oriented and laser focused on driving an efficient integration and on generating these synergies to drive the substantial value creation.
In summary, with Morningstar, the new Wesco will capitalize on the accelerating secular trends of electrification increased bandwidth demand driven by higher voice data video and mobile usage and the digitization of our b to b value chain.
We are more bullish than ever in the substantial value creation that this transformational combination will create for our customer our supplier partners are employing our investors and the communities in which we operate.
With that I'll now hand, it back to Dave to provide additional details on the excellent progress, we're making on the anixter integration.
Dave.
Moving to slide 10, the enhanced scale that this merger creates is clear it brings together two highly complimentary companies combining them benefits our customers and creates value through significant cross selling opportunities premier supply chain services acceleration of our digital initiatives and improved operational and supply chain.
Specialties.
On a trailing 12 month basis through June Thirtyth.
The business generated revenue of approximately $17 billion in adjusted EBITDA of over $1 billion on a pro forma basis, including the $200 million of cost synergies, we're confident that we will deliver.
Turning to slide 11, the North American electrical distribution industry is very large and highly fragmented with an estimated total size of $114 billion per year.
The merger the company has a share of approximately 13%.
Even with this merger the market remains highly fragmented and offer substantial opportunities for accelerated organic growth.
Both what's going to anixter have invested in supply chain services to differentiate our overall customer value proposition.
The combination of these two companies not only increases our overall scale, but also improves our ability to better serve our customers through an expanded product and services portfolio.
Moving to page 12, as we consider the future of the combined enterprise there are numerous ongoing an attractive secular trends and growth opportunities.
Demand for increased bandwidth driven by higher voice data video and mobile usage greater conductivity needs for remote work home in school applications and the increasing electrification of our infrastructure are just a few of the growing secular trends that are directly aligned with the core capabilities of our combined business.
The right hand side of this page outlines the financial benefits of this transformational combination.
We are highly confident and exceeding our three year cost savings sales growth in cash generation synergy targets communicated earlier this year.
With a challenging economic cycle, we're facing near term. This strategic combination remains compelling as we're doubling the size of our company and will transform the new enterprise through execution of the integration plan and delivery of these synergies.
Moving to slide 13, we're focused on meeting and exceeding the commitments, we made to our investors when we announced the merger in mid January.
We raised approximately $5 billion in banking bond debt with favorable terms in the bond offerings were substantially oversubscribed.
We closed the transaction near the end of Q2 inline with our initial commitment to close in Q2, where Q3.
We increased our liquidity to more than $820 as of the end of Q2.
We are rapidly executing our integration plan and have already completed actions to deliver over one half of our year, one cost savings target of $68 million.
We're already generating sales synergies from the merger that are in addition to the minimum $200 million of cost synergies that we expect to generate.
Turning to page 14.
Our top focus is executing a detailed rigorous and process oriented integration that delivers our committed synergies as well as the clear upside potential while combining the best elements of each company.
The three objectives that are planning has encompassed our first executing a flawless day, one and first 100 days post closing that ensures business continuity and an effective onboarding process.
Second delivering the value of the combination through both the cost and sales growth synergies and third implementing an operating model for the new enterprise, which deploys cutting edge digital tools and applications and as led by an organization that is staff with the best leaders of each company.
Value delivery teams comprised of approximately 150 employees from both legacy organizations have identified more than 500 initiatives and 2500 milestones to combine the best of our two companies.
The six valued delivery work streams that are we are working on in our integration planning and execution include commercial digital an ITC supply chain operations marketing and the corporate functions.
We are also mindful of the critical importance that culture plays in the value creation opportunities of this combination.
We conducted a wide scale and thorough survey of all employees to understand the key attributes of the cultures and are developing a plan to combine the best to bolt.
The high degree of collaboration among in across these teams has been inspiring and underscores the strong cultural alignment between the two companies.
We are taking advantage of the opportunity to leverage the best talent and ideas of two successful organizations as we create a new world class enterprise.
Turning to slide 15.
This slide highlights our progress against the three core integration objectives outlined on the prior page.
We achieved our first priority, which was the execute a flawless day one.
Our various value delivery teams have spent months preparing for day, one which I'm pleased to report was very successful.
We executed a detailed plan of communicating to our customers and suppliers, providing updates or 18900 colleagues, we held multiple town hall events for our employees to get to know our new management team.
Our second critical objective is to complete all of our master planning and value capture initiatives.
Having generated more than half of our year, one target of $68 million of run rate synergies, we're on track to exceed this target.
We have deployed commercial targets for sales growth margin improvement and cash flow and are already experiencing success with our first cross sell pilot programs.
Our final critical objective is to build a new world class company.
We've announced our three strategic business units and the first two levels of our senior management team.
Moving to page 16, you can see the detail of the composition than expected timing of our synergies.
Of the 45% that is corporate administrative approximately two thirds will come from the elimination of duplicative general administrative costs and one third will come from corporate overhead.
Of the 55% that will be generated from supply chain and field operations. The majority of will come from supply chain efficiencies. The field operations estimate includes the footprint rationalization of both companies branch networks.
Approximately two thirds of Wesco and anixter facilities in the U.S., our within 20 miles of each other.
Additionally, with a combined $14 billion in total cost of goods, we have identified over $70 million up supply chain related synergies.
Both the supply chain and field operation synergies are expected to begin in year, one, but the bulk of these opportunities will be realized in years, two and three.
We are confident in achieving the synergies and believe that they can be realized efficiently with minimal disruption to our day to day business.
To date, we've already executed more than 30 unique initiatives across the four synergy types, resulting in more than $35 million of run rate synergies.
We've eliminated duplicative public company related expenses of approximately $7 million as well as C suite. Another duplicative roles that provided an additional $20 million in savings.
Moving to page 17.
What's going to anixter have strong track records of generating free cash flow throughout the economic cycle.
Over the past five years, the businesses generated an average of $370 million in free cash flow on a combined basis with the combination of earnings growth in the realization of cost synergies. We expect the annual cash generation of the combined company will expand to over $600 million per year by year three.
This includes $75 million and free cash flow through the release of working capital as we mentioned earlier the strong free cash flow in earnings growth will enable us to rapidly deleverage the balance sheet.
Our ratio of debt to adjusted EBITDA was 5.7 times as of June Thirtyth 2020.
We are putting your one synergies of $68 million, our leverage ratio was 5.3 times.
We are expecting to return to leverage within our target range of two to three and a half times net debt to EBITDA within 36 months.
Moving to slide 18, well, let's go and anixter benefit from several dynamics that make our company hiring resilient to economic cycles.
First our cash flow is counter cyclical as we release working capital during a downturn.
Second our cost structure that allows for quick adjustments in response to changing demand levels and third well required capital expenditures given the nature of the business model.
Over the past 10 years, Wesco and anixter capital expenditures have averaged less than half a point of sales.
In the current environment. This resilience is enhanced by Whetstone answers high degree of diversification by customer supplier end market and geography.
Both wesco and anixter have proven abilities to de lever through the economic cycle as they bolted from 2007 into 2011 when their net leverage was reduced to below two turns as a combined $1.9 billion or free cash flow was generated.
Additionally, both companies have demonstrated the ability to use their cash flow to rapidly pay down debt following a sizable acquisition.
In the case of Wesco, we reduced leverage from four and a half turn to 2.7 turns following the acquisition of equal in 2012, and admixtures case it reduced leverage from 4.1 turns the 2.8 turns in the two years following its acquisition of HD power solutions in 2015.
This quarter was an excellent example of our strong counter cyclical free cash flow as the combined company generated $142 million in free cash flow or approximately 248% of adjusted net income.
Moving to slide 19, you may have seen the press release, we issued on August six announcing the consent agreement reached with the competition Bureau of Canada.
We had closed the merger on June 22nd 2020, as the waiting period for the compensation Bureau expired on June 18th 2020.
Under the terms of the agreement Wesco agreed to divest the legacy Wesco utility in Datacom businesses in Canada.
This includes the utility businesses, a Bruce tried door and lot Prairie.
Acquired some years ago combined the Wesco Canadian utility and Datacom businesses represent approximately a $150 million in sales or less than 1% of the revenue of the combined organization.
The divestitures will have no impact to the overall outstanding value creation opportunity of this merger.
I'd now like the hand, it back to John Perfect summary, before we open it up to QNX. Thank you Dave.
We've covered a lot of material. This morning, so before opening the call to your questions I'd like to just walk you through a quick summary.
We responded to a quick and decisive actions in response to the global Cobot 19 pandemic, we will continue to aggressively manage our business as we have done in prior economic cycle and respond to this crisis as needed.
Just five months after announcing the definitive anixter agreement in January we completed a very successful and oversubscribed capital raise in May and then we successfully closed the anixter merger on June 22nd most notably all of this was done against the covert 19 backdrop.
As I mentioned earlier integration is off to an excellent start and execution is accelerating.
We expect to exceed our cost savings sales growth margin expansion and cash generation synergy targets.
And deliver the substantial upside potential and value creation associated with this transformational combination.
And finally at the start of a new era for Wesco as an industry leader, we are now larger and more diversified with differentiated scaling capability in what remains a highly fragmented industry. As a result were exceptionally well position to leave not only a digital transformation of our business, but also of our industry.
Overall, we are doing what we said we would do and we will continue to transparently provide our progress versus our plan and our commitment.
With that I'd like to open the call your question.
We will now begin the question and answer session.
A question May Press Star then one on your question.
If you are getting speakerphone, please pick up your hands that before passing the key.
So withdraw from the question. Please press Star then too.
Limit yourself to one question and one follow up if you have additional questions. You may we enter the question Q.
First question comes comes from Deane Dray of RBC capital markets. Please go ahead.
Thank you good morning, everyone. Congratulations thank you Dan good morning.
Hey.
Really great to see how well you've hit the ground running on the.
The cost synergy side and already realizing half of the first year target.
And lots of good color on the merger rationale in a specific said and just really appreciate the color you provided today.
Question I wanted to ask is it because we've hit you with US a couple different times in the last five months and with regard to some more specifics on annex there's.
Business practices TNL.
And where and how are they able to generate such attractive margins and the idea. Here was you were never able you had not gotten full access to their books.
Well you have now so what have you learned that you Didnt know before maybe have higher degree of confidence.
That especially gives you the is.
Line of sight on margin expansion and maybe specifically gross margins start there. Please.
Yes, the in thanks, Thats a great question, you know to your point when we.
We had a clean room, a clean room process in place all the way up till closing.
So we couldn't get to the.
Really the specifics on pricing costing by customer by supplier.
What.
What though the construct of the margin was in the margin improvement program. So we've been working aggressively.
Since June 22nd when we close and that's when we cross the wall so to speak and could get all our commercial teams engaged.
And.
The bottom line is a more bullish than ever as I've gotten a much deeper understanding now prices and how the business as Ron.
It it reinforces and reaffirms my expectations around the following we have the global leader in communications and security.
Absolutely the global leader unmatched capabilities, and the operating and business model our outstanding.
And they generate very good margins from gross margins through the operating margins through to return on total capital or invested capital.
Number one number two.
Wire and cable business.
Absolutely a leader undisputed leader and as we've gotten deeper insight into that business the power and structure of the margins again from gross margins through operating margin return on total capital very strong.
I had a view that they were both leading businesses, but now I've got a much better sense understanding the term profit and cash generation characteristics and Furthermore, I think this is something there were wesco has had some deficiency historically and I've been here for some time as you know, we didnt have anywhere near the wiring.
Cable strength.
Of anixter.
Hey, we're far.
Well beyond us in terms of capability. So we're now in the for the first time and my Wesco tenure in a unique position to sell the Trump tire electrical package with with with very strong.
Capabilities in core wire and cable that whole category.
So that's just the highest level being and maybe the only other thing I would say is we had to quote unquote industry leaders coming together and agility and.
That that speaks for itself and I think you see the results that we posted in Q2 not only in the U.S., but in Canada. So feel very good about that I would say that's also a reaffirmation probably the biggest surprise.
Overall is just.
Had a sense there was good cultural matching and that occurred but again post June 22nd we got all the field teams engaged in the business leader, we announced our SMB business leadership structure. The cultural alignment is exceptional and I think thats would speaking to our ability to execute and deliver results. So quickly out at the gate.
Post close.
That's all helpful and just given how much of the integration Road map you provided this morning and the progress you've made so far I, just I don't feel like I need to start nitpicking on any of those assumptions. So the my follow up question might surprise, you a bit and having covered wesco for so long.
With multiple storm events.
We have seen where and how wesco benefits and provides.
Medical support during power restoration.
My House in Connecticut was without power for seven days, so adult this real time.
We did have a generator, but still.
Just give us good here Im glad you that.
Well, we do copper electrical equipment so.
True true, but I'd love to hear some real time.
Color as to how you coordinated.
As the merged company in response to all of these utilities did you have any supply chain issues at where does that stand and am I correct to assume maybe thats about a percent of topline in a benefit if I compare that to what you did with sandy. So that's my follow up thanks, So I'll make I'll make a comment we.
In turn it over the company, we have a pretty robust process every week, we're communicating our successes.
Out of the integration of the dedicated fully staffed integration of external consulting firm or what we need consulting firm, but as we mentioned before and communicating with all the Wesco Anixter associates and.
This was one of our top 10.
And that is what how we coordinated effort.
How are we operationalize supporting customers with either through.
Up to east coast, particularly through the northeast this was more a win driven storm beam.
Both Wesco and anixter, both had utility customers that were in the swath of the storm, particularly in the northeast.
And we've traveled that already as I said in the early days post close is one of our troops success stories in terms of leveraging the integrated teams, we looked across both supply chain supplier relationship inventory positions and we mobilized resources as if they were one company I mean I'm absolutely thrilled.
With that rapid reaction in response to it was executed but now with a combined company.
In terms of meaningful sales impact this was more wind driven.
It's a.
It's not meaningful if not meaningful yet now we'll see what happens down the road in terms of permanent damage and rebuild but that's all kind of swept up in the where the whole nonresi construction in resi construction market is I think but so far I can tell you we've looked at that.
August but Q3.
Slash August quarter to date not material at all we're talking.
Under $10 million of specific integrate incremental sales associated with.
So I think Thats just puts the Q3 to date numbers and even better light I think in terms of an improved momentum.
That's exactly what I wanted to hear best of luck. Thank you, yes. Thank you.
The next question from Sam Darkatsh.
Raymond James Please go ahead.
Good morning, John Good morning, Dave I Hope you both are well good morning, Sam Hope Likewise I hope you have family are safe and healthy. Thank you couple of questions. If I could the first the backlog growth, obviously encouraging the up 17% year on year.
And this is a little bit more challenging for us to see especially with the new segment reporting.
Can you remind us right now within your Nonresi construction, including your backlog.
What your end market vertical mix is specifically, where we might see some some long standing hot spots like office and retail and hospitality and what have you and then remind us what the total nonresi construction is pro forma I've got a follow up.
So.
First of all I'll start on a wesco basis for the Wesco backlog is.
Yes legitimate booked orders.
And I say that to make a distinction of where we hardly multiyear global accounts contract in closing alone contract or a large global capital construction project that we grow.
Numerous releases package really packages released over time that are not yet bolt.
The global Caf utility alliances those large complex capital project, that's not in our backlog. So this is true booked orders.
And.
In the and what's our current our old Wesco segment reporting end market segment, which we're pivoting to a new structure as you mentioned that which I'll get too.
The majority of that backlog is construction related projects, but also if we have a direct end user customer.
And any orders that are booked that are already booked that are in booking whether its MRL.
Material or projects direct with end users it would show up in our backlog stands so.
So.
It's a very good indicator I think over all of Directionally of our project portion of our business as opposed to the MRO supplies piece or a leader.
I'm really pleased with how strong falling off.
You know again I'd like sales to be stronger for some of that is sitting in backlog with that said the opportunity pipeline is exceptionally strong.
If you look at anixter.
Had very strong backlog that they they operate with running through the first half and coming out of.
The second quarter.
Yes, I'm really pleased in particular around what will be our new communications and security solutions business.
Which I'll talk to an event that backlog is up double digits as well year over year. So a little more color to help with that we will we won't be as part of Q3 earnings during a much more detailed presentation of our new segment reporting I'll just take a moment on that now we have we've announced it internally.
Operating under that structure now inside the company.
The first is elect electrical and electronic solutions, we called he asked or call me strategic business units, that's our largest business its global the second would be communication and security solutions.
Acronym CSS.
Thats also global the second largest and the third will be utility in broadband solutions also a global business.
With that state and the acronym GBS, so that'll be our segment reporting going forward.
We'll do that effective with our Q3 results.
And obviously, we'll have full segment reporting at that point. So I think we'll we'll we'll have a very much more expands the presentation at that time for walks you through here's what's in each of the three businesses.
Here's the end market space or the business model, the operating characteristics et cetera, if thats helpful.
And total Nonresi construction pro forma.
As a as a percent of your mix.
So total non resi.
So for US that's a really great question with summer exceptionally important point, because we have dramatically reduced our exposure to the more cyclical portion of Nonresi construction. It's now roughly 24% 24, 25% of total company approximately mix.
And if you go back to the original I served as a new era for less color I'd go back the original Wesco spin out there that was 90 plus percent.
So here, we sit here today and the company with a 1 billion five in sales. So here, we sit here today the $17 billion.
Revenue base and 24, 25% process.
So my final question that after the the Canadian divestiture the small.
Operation there.
And following the close of the Anixter deal Im guessing there may be other businesses that you're looking at that may be deemed I don't know noncore or potentially distracting or potential sources of cash what are your thoughts in terms of other planned contemplated divestitures at this point.
So we are we're going through a.
Hey.
Unconstrained clean sheet of paper evaluation of.
The strengths and capabilities of all the businesses across the entire enterprise and particularly how they are lining up with our three global strategic business unit.
And.
And that's again this is a.
Sense of work, we're doing that really ramped up in earnest.
Once we closed Sam good now we were able to cross the wall fully and get the business leaders and gain so that's something we're looking at.
And you're right now I feel terrific about the portfolio in terms of fundamentally we mix shifted up to a much more attractive higher growth set of end markets that were lined up with leading value propositions. The served so I'm thrilled with overall mix.
With that said there may be some some areas of the business that that are not as strategic or core that makes sense too.
The disposition. So that's a process we're going through now nothing to report on that yet, but we're taking an unconstrained look across the whole portfolio and then.
So the two to three and a half times of leverage prospectively in year, three does not really contemplate any material divestitures and door equity raises or anything like that it would be entirely organic free cash flow and EBITDA growth story.
100% correct and we are highly confident that I think you can see from the the cash generation in Q2 alone.
I think.
I think we've set the bar on our free cash flow target three years out with.
Substantial upside potential against that and so yes. The answer to your question is yes. So to the extent, we you know there's any parts of the business, albeit whether they're small or whatever that don't fit that we disposition that would that I would just incrementally help us de lever quicker.
Very helpful stay well.
Yes. Thanks.
The next question is from David Manthey of Baird. Please go ahead.
Hi, good morning, everyone.
On a day morning.
Yes first off.
Thanks for the insight into how you're going to segment report this going forward.
But as as you roll into these new segments will it be like he asks will be anixter as plus wesco construction and industrial and DSS is anixter, NSS, plus wesco, CIA GE or something or you just could have put everything in the blender and.
Shuffle and give us restated historicals.
Sure I will use the blend.
Okay, but let me just kind of I'm trying to kind of give you. How we're thinking about again, we need to give you a very detailed presentation of this which we will do as part of our Q3 earnings, but but the way I would ask you to think about it is.
The core.
Strong deep roots that wesco had in electrical.
That formed.
The basis of yes, that's the big anchor call. It in a positive sense the big deep roots of E. S. What gets added to that from the anixter side is their legacy which they are the absolutely undisputed leader wiring cable business.
That moves that will get coupled and data that was my earlier comments that that now gives us the complete.
From entire electrical package to sell because that wasn't efficiency on the west is that in addition.
The electrical portion of HD supply power solutions Anixter bought will go part become part of the yes business, which from a broad based electrical standpoint with predominantly in the east coast southeast or portion of the U.S. So that he asked it will be a global business.
And we'll be the largest of the three the second we'll be communication the security solutions.
So that will include yes, it's the classic NSS business with Anixter build Gary is leading that so he is leading that previously.
He's off doing absolutely outstanding sorry started as a result, a combination and weve, taking the legacy Wesco Datacom.
Business.
That was.
I see and what we've invested over the years back since 2006 and Thats rolling into that.
Anixter.
Just a bit so we'll have all communications and security together Wesco had some legacy Datacom and IP security nowhere near the size or scale of anixter or the undisputed leader. We also had a nice avi business.
As well as Anixter Hasnt Navy business when you look at those two more on this in the future for highly complimentary.
And but that'll that'll be part of build Gary's business and then a third businesses.
As utility in broadband solution that includes the prior number one number two liters and utility both ourselves and what anixter bought from HD supply.
Their utility business.
We have improved productivity, all who supply, which I think you all know well so in utility, but it's also broadband communications. So there's this outside plant focus.
And that's the prior Wesco TVC, but it also includes broad band.
The broadband business that was.
NSS segment, and Thats highly complementary more on that in the future.
When we got to go through the businesses in more detail, but absolutely thrilled with the complementary nature of that.
Combination.
Particularly given the tremendous grilling secular trends around fiveg acceleration demand for bandwidth increasing increased security.
So there's a quick little run through.
Well, obviously give you a sense of end markets for each of the three businesses. The product category probably lineup will go through that vary in great detail I would say this question I got earlier somebody I, probably the most surprising thing to me is not reflected upon it is.
Hi, I knew I knew that far into their business, well and we knew their business, while they knew us pretty well as competitors prior competitors, but it's more complimentary thenines falling asleep.
If I want to put a finer point on it that the biggest take away.
Yes, electrical complementary nature I, absolutely thought if that was part of the key rationale the dealer wire and cable so strong core wesco electrical so strong put it together, we've got the whole electrical package, but the communication and security is actually highly complimentary when you look at exactly what Wesco had helped was done versus an extra toxin.
I think there obviously the undisputed leader. The these pieces are complementary broadband is exceptionally complementary and utility is just a a significant.
You know well at the one into coming together, so that kind of speaks for itself. So does that help there.
Yes, yes, sorry, I was I was going to ask just what anixter segments did in the quarter, but I guess, we can talk about that offline maybe I did want to talk about the core SGN a reduction which is clearly a highlighted this quarter.
How much of the 33 million in legacy Wesco Opex reduction was so good related that we should expect will come back in the third quarter versus cost that will only further back in with volume and second did the any of the synergy benefits hit the second quarter at all in and third I guess, we should assume.
I don't know roughly half of the 68.
Goes into the third quarter four for synergy capture.
Hi, David say, Charles I'll start with the coated related savings that we posted in the second quarter just to remind everyone that we had talked about during our April call.
Expected to deliver $50 million of run rate savings versus Q1, and this is only on the legacy Wesco business and that $50 million would you realized in Q2 Q4.
We delivered greater than $20 million of that $50 million in the second quarter, it's primarily temporary in nature. So these were cost actions to to meet the cost structure requirements due to lower demand with the exception of the volume related decline you would anticipate that those costs would.
Come back as we progress through the balance of Q4 and into next year, one of the things to keep in mind is that our.
Our salary reduction plan.
Was only in effect until the end of the third quarter and.
And so we'll see a full benefit in the quarter of the monthly salary reductions, but that would be restored beginning in Q4.
And just to emphasize we did not get any synergy savings.
The legacy Wesco, a legacy anixter numbers during the second quarter, we would anticipate seeing some of those savings beginning here in the third quarter, we'll call those out to you as we present our results.
Okay. Thanks, a lot for the time guys.
Thanks, Dave.
The next question is from Nigel Coe of Wolfe Research. Please go ahead.
Thanks, Good morning, everyone.
So I think I was wondering I'd go back about hey, guys.
Correct that question how does the analyst.
Axioms pro forma numbers look.
Q.
I'm just curious because obviously the completion.
Steve Attendee condition was.
Except a strong, especially at the margin line. So I'm just curious how it.
Pro forma numbers look.
Okay.
So the the legacy Anixter businesses performed relatively in line with the legacy Wesco numbers and when you take a look at that by their their segments that they previously reported their NSS sales were down roughly 13%.
He asked was down 22%.
And their utility business was down just under 4% and again that was be on a on a like for like quarter basis that they would have reported historically.
So again relatively in line with the overall results that wesco posted in the second quarter.
And the Vasco scraping question, 10%.
We should margin within that rich was that is that just the seasonality that we normally see strength at the end of.
Q.
Or was there something else explain that that's a 10%.
Sure.
That's exactly right. So when you take a look at the nine days of ownership post the transaction closing you saw a relatively higher level of sales from the legacy anixter business on our on a roughly level loaded SGN today, and so thats what drove the higher margin in that stub period for anixter.
And then a quick follow one is obviously.
You are very confident on the free cash flow.
Rich the Delevering story.
Equity off the table here or is there a level of wholesale price, where you would complete come back in with a treasury issue.
Well we.
Presently you'll recall kind of where we originally had equity as part of this scenario as part of financing the anixter merger and we made the decision to go to all debt.
When the stock price with higher.
And we made that decision.
Because of the strength and conviction around what the opportunity was here we sit here today a month later, we used all debt to finance it and I look at where our stock price is trading honestly currently.
Factor into it you know you take our three year financial targets, which we have great confidence and not just delivering but heating and we think we and.
Clearly.
Signal that we see substantial upside to the cost synergies piece alone.
Coupled with we've got attractive sales synergies that have started out of the gave me typically proved to be the most dilution. So if you just take our three year financial targets without even the upside put a normal multiple on our stock prices should be multiples higher than it has today multiple fire. So.
Presently, where we're trading well below intrinsic value from our.
Great. Thanks, Joel Thanks, David.
The next question is from Michael Mcginn of Wells Fargo. Please go ahead.
Good morning, everybody.
Lord and good morning.
Feels good to be back or bring watsco again.
Great to have you back covering us thank you.
Yeah, So as we switch gears im talking about decrementals to hopefully incrementals by year end.
I know you mentioned this 75 million released in relation to the long term free cash flow target can you frame, what a near term recovery looks like specifically in terms of working capital because you've outlined facility in fixed cost synergies and also have some supply overlap with anixter. So does that mean working capital loading is different versus.
Maybe what it looks like as a standalone entity.
It's a market state shoals, typically and you've seen this through other cycles. We are has the ability to rapidly reduce our net working capital during a downturn. We then tend to see networking capital return as sales return and it's primarily driven by the accounts risk.
Waivable. So we've not provided any specific guidance on our outlook for 2020, So I don't want to get too far into the leads on our networking capital plans for the year only to remind our investors that we are laser focused on the working capital. We do believe that there are.
Significant.
Working capital synergies that can be gain through the combination we provided a number that we've included $75 million of a net working capital release as we bring the two companies together, we've not framed up the timing on that.
Okay.
And then more I guess another short cycle question I.
I believe July was your toughest comp both overall and in the US last year. So can you just frame how much of that played into the 8% figure.
What you're seeing out there right now in terms of a broadening of the recovery.
By end markets, new segments any anyway I'll take it.
Yes.
So I think you maybe I'll just start Michael if you look at Q2 so.
[music].
We didn't guide, but I think versus expectations, we did better than we thought clearly I said across the board starting with sales.
You look at you look at what it looked at what we did in construction and looked at what we did and industrial.
Little better than I thought we might end up in Q2 in both for both end markets.
Non remember construction were not renting driven very very low percentage single digit percent of our construction mixes as Randy So we're not ready so some of them ready.
Hiccup and benefit that some other distributors are getting we won't see that out a first derivative basis, we'll see it has the benefit ultimately down the road for Nonresi cycle, which follows ready and for utility if new leaders are going in the ground. So so actually when you put when you analyze our second quarter.
Results through that lens, and if you were to mix adjust absolutely even better than the print utility we already talked about exceptionally strong.
Gee came in much better than we thought that we didn't think that will perform disproportionately better I'd not down as much versus industrial and construction.
Because of the nature of the end the kind of the drivers the secular growth trends that are impacting those customer that we serve that are crj.
With that said, it's looking better.
What is thinking about this business in terms of through a sequential lens, because we're still down year over here. So I can just tell you. How we're focused on it I would think focused on sequential growth sequential growth sequential as we do that will eventually get to the point, where we've we've gotten flat to prior year and we start growing again, and so all our effort and intensity focused on.
Through our through our our operations our sales teams.
And.
So in terms of color as we moved into third quarter, we're seeing that improving momentum back for continue as I outlined and it and it's been occurring through July and August thus far we're not quite halfway through the quarter.
We're not quite halfway through the quarter, but we're close to half way through the quarter. So.
And that Weve with respect to that this is really a nice it's nice to see the momentum continuing to continue to.
Well I told you we had record backlog backlog or home holding up exceptionally well could book to bills above one out and so.
Just it's.
We were really focused on what we can control there is something we did in prior downturns and with customers, particularly end user customers little more difficult for doing a contractor where the construction project does that scope gets behind pretty tightly, but we're going to end user customer we're engaging with them.
And extra heads up blue chip set of end user customer relationships as that lesko. So combined I think thats a distinctive differentiator in advantage versus our competitors with that said, what we did in the last downturn.
We doubled down on those customers and tried to sell them a complete portfolio and do other things for them, which ended up paying huge dividends when the cycle turn and we took a we took a disproportionate amount of market share as we came off the bottom and that's how we're focused now.
Let's go I always believe had a disproportionately higher number of end user customers that are standard industry competitors anixter has that as well.
Through the form it was through the prior NSS business and our utility business and so together. This is one of the most distinct differences.
Many most distributors in core electrical and communication sell two in through contractors and they're very important customers to us, but we have a disproportionately higher percentage of end user customers you can figure it out being kind of higher up the that enable go higher up the value chain with a more complete solution and that central to our strategy going forward.
So hopefully that gives you a little bit of color.
Yes, definitely makes sense thanks for the time.
Yes.
In the last question today comes from Chris Dankert of Longbow Research. Please go ahead.
Hey, good morning, guys.
Morning, while detail. Thanks, so much for for all the color thus far.
Thinking about the recently that segments I guess, how are the legacy wesco businesses and kind of a new extra pieces talking to each other within the new segments. I know, we were talking about an essay changeover within anixter before where do we stand technology and kind of communication wide internally.
Great well I think look they were in our new structure now and we've got our top level. The management defined we're now building down the organization.
And.
Building out the rest of the organizational layer the net that will be completed here in the third quarter. So as we exit the third quarter, we'll have become please organizational structure top to bottom laid out in concert with and in alignment with our new top level.
Three global us the structure the.
The discussion.
The collaboration or teamwork is absolutely outstanding.
And in terms of.
The was talking together.
Both by teaching they've done some terrific work in terms of connecting the two systems. We both are essentially big data ordering Ed distributors and so we've we've already written a series of I'll call Bye.
For the better to our internal apps, then have allowed us to look across the disparate systems and get a better sense of how we leverage the combined inventory how we start to look at customers on a combined basis the products that we're selling from et cetera. So we're doing that.
With some you know with some quick.
Custom apps that we've stood up already inside the company and we are using that as a key driver on how we're measuring our cost to cross sell synergies. So.
[music].
Great question, because that's that's kinda into the details, but that's how we're we're working it so far and I'm very pleased with how that's going.
Got it. Thank you so much for the color there.
And I guess really just.
Any further detail as far as.
The Canada business overall beyond the divestiture is that still a higher margin business overall for wesco, you're kind of following everything that shaken out.
Yes, absolutely.
And I mean, I just we've gone through this before the fundamental reason for both a terrific terrific team great capabilities, but it had inherently higher market share.
And then.
You know that do you asked that was true on a legacy wesco basis now lets a whole different equation in the USA globally now that now that Wesco and anixter combined you remarked take a look at our again, our deck and you'll see the.
You'll see the market shares of the.
In core electric on so we've just we're essentially doubled the company overnight.
What are tremendous opportunity.
In any market, but particularly the market. We're in right now that appears to be challenged because we we think it just gives us springboards us to be even.
More aggressive in creating more value for customers and I've said for a long time I thought the big will get bigger faster and and we're hearing this more than ever from our customers.
Consolidating their supply base was speaks very well for us overall macro secular trend thats growing but also we're hearing and I didn't get I can try that and get this question, we're having more and more reinsuring discussions.
And that's I think going to be is exceptionally.
Were exceptionally well positioned to take advantage of that with our undisputed leadership across all of North America.
Canada, but USA and Canada.
And that was I think were where I really wanted to take the question. My apologies is just as far as the cross selling opportunities and there seem to be quite a few here I guess is it really the international portion or is it kind of cross segment.
Oh, yes.
That's really a bigger opportunity no no no there will be there will be some globally and we've got we've got some interesting opportunities in our CRE I'll use the term cross selling pipeline that are leveraging the new anixter global footprint, but no. This is this is cross segment. This is we've got a more complete portfolio and we're going to both respective cost.
Summer bases, and saying now let's sell the whole portfolio I mean, that's at Anixter did not have safety anixter did not have lighting, we've got a turnkey retrofit renovation upgrade lighting capability right.
Both broadband business, we are very different already talked about high complementary. So we could take every add extra customer and bring safety and lighting to them right now they get and that's what we're prioritizing and on the Wesco side, we're taking ministers wire and cable capability and communications and security so.
There's a lot more underneath that but that is a very highest level.
Is it speaks to the opportunity.
Got it thanks, so much the color John and best of luck going forward here. Thank you.
This concludes the question answer session I would like to turn the conference back over to John angle for closing remarks.
I was a very busy quarter. Thank you.
You have got a sense of that.
We feel really good about how we closed out.
And we're looking forward to.
No executing strongly here as we go through the next two quarters and close out this year challenging here with all that said. Thank you for your time. This morning brine and we'll are available to take your questions and we look forward to being able to meet with new in person as our investor events. Eventually resumed in the meantime, please stay safe and healthy have a great day.
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