Q4 2020 Wesco International Inc Earnings Call
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Please note that this event is being recorded I would now like to turn the conference over to Leslie Hunziker. Please go ahead.
Thank you and good morning, everyone before we get started I want to remind you that certain statements made on this call contain forward looking information.
Forward looking statements are not guarantees of performance and by their nature are subject to inherent uncertainties actual results may differ materially.
We see our webcast slides as well as the company's SEC filings for additional risk factors and disclosures.
Any forward looking information relayed on this call speaks only as of this date and the company undertakes no obligation to update the information to reflect changed circumstances.
Today, we'll use certain non-GAAP financial measures required information about these non-GAAP measures is available on our webcast slides and in our press release, both of which are posted on our website at <unk> Dot com.
On this call. This morning, we have John Engel, our CEO and Dave Schulz Wesco.
Chief Financial Officer, now I'll turn the call over to John.
Well, thank you Leslie and a warm welcome to Wesco, it's great to have you on the team Inc. Kim.
Good morning, everyone and I hope that all of your debt staying safe and healthy.
I'll start out with a summary of 2020 and some of our most notable accomplishments.
Dave will take you through at that point and update on our rapid progress that we're making on integrating anixter and it will take you through our fourth quarter and full year results.
And I can give you at overlook our overview of our outlook for 2021 after that ill offer a quick recap before we open the line for questions.
So starting out 'twenty 'twenty was an extraordinary year for wesco.
We completed the transformational acquisition of Anixter, doubling our size of the company and changing our trajectory for years to come.
We're off to an excellent start and I'm more bullish than ever on delivering against our substantial value creation potential.
In addition, I'm inspired by and we'd like to thank all of our associates for their dedication commitment resilience and extraordinary effort and serving customers during the global pandemic.
As most of you know we announced our agreement to acquire Anixter International last January and we were very pleased to close the transaction a little more than five months later.
The first six months of the integration have gone exceptionally well and our synergy capture of exceeded our expectations. Both in terms of the size of the opportunities as well as the rapid pace of our execution.
Youll recall last quarter, we increased our three year post merger cost synergy target from $200 million to $250 million. In addition, the highly complementary nature of Wesco and anixter and our substantially larger scale has enabled us to build a cross sell pipeline. They are starting to show up in our topline results and this is very encouraging.
At the same time that we're working towards closing the transaction and beginning integration we were managing through an incredibly challenging macro environment driven by the COVID-19 global pandemic in response to this we took quick and decisive actions that are really on three priority.
And we've talked about this in the past first protecting our employees.
Second ensuring that our customer experience service and support with seamless and exceptional and number three taking the necessary actions to reduce our cost and efficiently manage our operations.
Diversity of our end markets, our differentiated service offering our global footprint and the attractive secular trends, we support help temper the effects of COVID-19 on our business last year.
On the right hand side of this page you can clearly get attractive secular growth trends that are driving demands from electrical communications security and utility solutions, all of which will continue to drive demand in the years ahead.
All three of our strategic business units have the scale and capabilities to deliver growth associated with the increasing use of automation and machine to machine connections.
Electrification of our infrastructure and the demand for faster bandwidth and data center capacity.
Emerging growth trends, such as the relocation of supply chains back to North America and increased remote connectivity also drive additional growth opportunities.
And combining wesco and anixter, we have created the industry leader in electrical communications and utility distribution and supply chain services.
Just as these secular trends are poised to drive strong growth in all the markets we serve.
Now moving to page five during our second quarter earnings call in August we highlighted our priorities for the second half of 2020 they.
They were to take share deliver synergies and focus our free cash flow generation on debt reduction.
In the fourth quarter, we saw improving sales momentum coming out of the COVID-19 Trust and are successfully utilizing our increased scale and capabilities to take share sales.
Sales were up 4% sequentially in Q4 on a work day adjusted basis, when typically our sales declined sequentially in the fourth quarter.
We closed the year with a record year end backlog, which sets us up well to continue building on this positive momentum in 2021.
Even more importantly January sales reflected a return to year over year sales growth with.
With sales up low single digits other comparable work day basis.
We've made great progress across the board on our synergy capture efforts. Our team is laser focused on driving synergies as we have combined into one organization. We've made great progress in reorganizing our.
Recognizing the savings from duplicative corporate overhead and functional integration.
Adjusted gross margin was up versus the pro forma prior year for the second consecutive quarter. Our management team is now in place and we've been able to streamline roles across both him for greater efficiency.
We are on track to meet the higher synergy targets that we announced last quarter and have very high confidence in delivering upside to these targets.
Free cash flow was another major highlight for us in 2020, we generated $586 million of free cash flow last year.
Close to the $600 million target that we set for three years out.
And more than 250 per cent of our adjusted net income.
This enabled us to reduce net debt by almost $400 million and leveraged by 0.4 times in just the first six months since the anixter close.
And last month, we completed a debt refinancing of our 2021 notes it reduces our interest expense by $20 million per year, which will further enhance cash flow and support achieving our 2023 debt reduction and debt repayment target.
Overall, we are very pleased with the results we're delivering on all fronts. We're entering 2021 from a position of strength with an unwavering commitment to our strategies and growth plans and an extraordinary team of associates and outside partners.
Coupled with our strong execution and accelerating progress on the integration, we have very high confidence in our ability to deliver sustainable long term value creation.
2021 will be another positive an important stepping stone in our transformational journey.
With that I'll turn the call over to Dave who will take you through our financial results Dave. Thank.
Thank you John before getting into the results for the fourth quarter I'd like to address where we are with cost synergies from the integration with anixter.
We announced the merger with Anixter back in January of 2020, we anticipated a mid 2020 close and providing investors with our view on synergies for the first three years post close on.
On slide seven you'll see that we've converted our synergy timeline to align with our fiscal year end.
The chart on the left side of this slide shows the cumulative realized cost synergies that we expect to generate my fiscal year.
Realized synergies are those that are reflected in our income statement.
In the first six months post close we have realized $39 million of cost synergies $15 million in Q3 and $24 million in Q4.
In 2021, we expect to realize an additional $90 million of synergies, bringing our total to $130 million by the end of the year.
Consistent with the expectations, we provided on our last earnings call, we still anticipate realizing $100 million of cost synergies in the first 12 months of the merger through June of 2021, with the cumulative cost synergies of $130 million by December.
In addition to the cumulative cost synergies we have shown the cumulative one time operating expenses to achieve the synergies below the bar chart.
As you can see we have spent $37 million in onetime operating costs in the first six months and expect to spend an incremental $78 million on onetime operating expenses to generate the incremental $90 million of synergies in 2021.
By June of 2023, we expect to generate $250 million of realized cost synergies on a trailing 12 month basis.
In total this $250 million target is comprised of initiatives that are approximately 20% related to cost of goods sold and approximately 80% related to reducing operating expenses.
This is consistent with the sources of synergies, we previously discussed and we expect the synergies related to corporate overhead G&A and field operations will drive the SG&A synergies with the majority of the supply chain synergies impacting cost of goods sold.
Turning to slide eight in Q4, we delivered another quarter of strong free cash flow that represented more than 160% of net income.
For the full year free cash flow was $586 million or more than 250% of adjusted net income.
This level of free cash flow generation highlights <unk> ability to generate strong cash flow throughout the economic cycle and especially during down cycles like the one related to COVID-19.
This resilient model, coupled with our execution on the integration with Anixter gives us very high confidence that we will successfully reduce leverage below three five times adjusted EBITDA over the next two and a half years consistent with our commitment when we announced the merger.
Our capital allocation priority remains unchanged, we will allocate capital to support the integration invest in our business and rapidly delever the balance sheet.
We made substantial progress on this goal in 2020, as we reduced net debt by $389 million and leveraged by 0.4 times trailing 12 months adjusted EBITDA since closing the anixter acquisition in June.
Net debt was reduced by $109 million in the fourth quarter. Following our first semiannual payment of $103 million of interest on our new 2025 and 2028 notes.
Liquidity, which is comprised of invested cash and borrowing availability on our bank credit facilities is exceptionally strong and totaled $1 1 billion at the end of the fourth quarter.
In early January we increased the size of two bank credit facilities by a combined $275 million.
We utilize this higher capacity and existing availability to retire our $500 million 2021 notes.
Turning to page nine this summary table compares our fourth quarter adjusted income statement results to the pro forma from the prior year period, and our adjusted results in the third quarter.
Because anixter and Wesco had different fiscal reporting periods. There was an extra week of anixter sales in the fourth quarter of 2019, making comparisons to that period less meaningful for that reason most of my comments today will be on a sequential comparison against the third quarter.
On a reported basis sales were flat versus the third quarter.
It is important to note that the fourth quarter had three fewer work days compared to the third quarter.
When adjusting results to a comparable workday basis sales were up more than 4%.
The momentum has continued into January with workday adjusted sales up low single digits versus the prior year.
Adjusted gross margin, which excludes the effect of merger related fair value adjustments to inventory in and out of period adjustment related to inventory absorption accounting was 19, 6% in line with the prior quarter and up 10 basis points versus the prior year.
We are seeing continued traction from our margin improvement initiatives, including early results from deploying anixter has proven gross margin improvement programs across the combined business.
Note that the out of period adjustment relates to the cumulative effect of the adjustment to inventory since Wesco was spun out of Westinghouse and no period was the adjustment material to our reported results.
Adjusted income from operations was $172 million in the quarter after adjusting to remove the effect of merger related costs of $40 million merger related fair value adjustments on inventory of $16 million and the out of period adjustment of $23 million related to inventory absorption accounting.
Adjusted income from operations was $28 million lower than the third quarter, which primarily reflects an increase in SG&A related to the discontinuance of temporary cost reduction measures. We have taken in response to COVID-19.
As we had highlighted in our Q3 earnings call and reiterated in the 8-K that we filed on December 15th.
We reinstated the full salaries of legacy Wesco employees.
Thank you to the 2020 merit adjustments and resume their retirement savings plan employer matching contributions effective October one 2020.
These measures along with certain other actions had generated more than $50 million of savings during the second and third quarters of 2020 relative to West Coast Q1, SG&A run rate before the merger.
In total adjusted income from operations was $13 million lower than prior year pro forma on sales that were $223 million lower.
Representing a decremental margin of approximately 6%.
Adjusted EBITDA, which excludes the effect of the adjustments I, just mentioned as well as stock based compensation and other net adjustments was $216 million or five 2% of sales lower than the third quarter due to the higher SG&A I just discussed and approximately in line with the prior year.
Adjusted diluted EPS for the quarter was $1 22.
A full reconciliation of adjusted EPS is included in our press release.
Before getting to the SBU results I'd like to remind you of our new three segment structure on slide 10, which we introduced in the third quarter.
First electrical and electronic systems, or EES, which is approximately 40% of our company's total business.
Communications and security solutions, or CSS, which is roughly one third of the Companys revenue and then third utility and broadband solutions, our UBS, which represents represents the remaining 27% of the overall sales across the enterprise.
As we have said previously one of the most meaningful and positive discoveries post close is how complementary the wesco and anixter portfolios are.
The pie charts on this page depicts the legacy Wesco and legacy Anixter composition for each of the three businesses. It is this very highly complementary suite of products and solutions that enables us to offer even more end to end solutions for our customers and supports the cross sell program as John mentioned.
Additionally, we found that customer overlap between the legacy companies was more favorable than expected.
Turning to slide 11.
Reported sales in our EES segment were up 1% versus the third quarter on a reported basis and up 6% on a comparable workday basis.
This growth reflects improving construction demand in North America in the second half of the year as well as the first sales from our cross sell initiatives and our ability to offer a complete electrical package to our customers.
We have continued to see some project delays, primarily driven by COVID-19, but still no cancellations.
EES backlog was a fourth quarter record.
With the trend we have observed since last March as some projects are delayed and we continue to be awarded new projects.
We also continue to see increasing momentum in our industrial and OEM business in the fourth quarter MRO and project activity levels improved in all of the verticals we serve.
Adjusted EBITDA of $94 million represented five 6% of sales about $14 million lower than the third quarter.
The decrease primarily reflects higher SG&A due to the reinstatement of the temporary COVID-19 cost reductions discussed earlier.
Turning to slide 12, our CSS segment closed out a strong year in part driven by increased focus on bandwidth need stemming from COVID-19, as well as our global scale, which offers greater value to our customers.
On a reported basis sales were 1% lower than the prior quarter, but were up 3% on a comparable workday basis.
We're taking share in all geographic regions and especially in areas outside the United States as with EES. We saw continued positive momentum throughout the quarter.
Specifically, we experienced growth in our network infrastructure markets that was driven by increase in global accounts and continued strong demand in data centers in building wireless and professional audio visual applications.
Sequentially security sales were up low single digits on a comparable work day basis, driven by expanding demand for secure network and IP security applications.
CSS is uniquely well positioned to benefit from several other secular growth trends that we have highlighted as the pace of technological innovation demand for data and reliance on security are all driving an accelerated pace of both new installations and upgrades to existing systems.
Profitability was strong.
Adjusted EBITDA was $112 million or eight 2% of sales. This was 50 basis points higher than the prior year, but down sequentially from the third quarter, primarily reflecting the reinstatement of temporary cost reductions.
Turning to slide 13 sales in our UBS segment were down slightly versus the third quarter on a reported basis, but up 4% on a comparable workday basis.
Strong utility demand continued this quarter as our utility customers continued to invest in grid hardening and modernization projects as well as led lighting and automation projects.
The broadband business was also resilient to COVID-19, driven by <unk> deployments last mile fiber installations, and increasing broadband projects the.
The global demand for data and high speed connectivity has never been greater due to the step change in requirements driven by remote work and school environments.
Adjusted EBITDA of $79 million was in line with the prior year and up 10 basis points as a percentage of sales adjusted EBITDA margin was down sequentially on slightly lower sales and the restoration of COVID-19 related cost actions.
Turning to slide 14, I'll walk you through our outlook for 2021.
On a pro forma basis sales were $16 billion in 2020.
In 2021, we estimate market growth of roughly 3% to 5%.
We recognize that COVID-19 and the timing of broad scale vaccinations.
Create volatility and influenced the overall demand pattern of our business.
We are encouraged by the economic indicators and expect the demand environment to continue to improve as we progress through 2021.
On top of that we expect that the combination of the continued outperformance in our cross sell programs will grow sales, 1% to 2% above the market.
Lastly, keep in mind that 2021 has one fewer workday than 2020, and we will have the impact of the U S branch sale completed in Q3 of 2020 as.
As well as the expected completion of the Canadian divestitures in the first quarter.
Aggregate sales relating to the divested businesses are approximately $125 million.
The impact of these will be a headwind of approximately 1%. So in total we expect sales to grow 3% to 6%.
We expect differences in foreign exchange rates to be neutral to slightly favorable for the full year.
On the right hand side of the page we have provided a bridge for our 2020 pro forma adjusted EBITDA margin.
A five 3% to our outlook for adjusted EBITDA margin of five 4% to five 7%.
We expect to benefit from improving mix market outperformance and operating leverage, which we will expect to collectively drive about 50 to 80 basis points of margin expansion.
In addition, as you saw on the prior page, we expect to generate an incremental $90 million of realized cost synergies in 2021, which will contribute approximately 55 basis points of additional EBITDA margin.
Partially offsetting these two margin drivers will be the restoration of the employee compensation and benefit costs discussed previously and the restoration of a full accrual for incentive compensation the aggregate amount of which is approximately 90 basis points.
Continuing down the income statement, we expect our effective tax rate to be approximately 23% and adjusted diluted EPS in the range of $5 50 to $6.
We assume a diluted share count of approximately 51 5 million shares.
We expect to spend between $100 million to $120 million on capital expenditures in 2021, much of which will be invested in the early stages of aligning our systems and investing in digital tools.
We expect to continue generating substantial free cash flow, which we're forecasting to be at least 100% of adjusted net income.
As we look at the drivers of the first quarter of 2021, we expect to benefit from $28 million of realized cost synergies in the quarter. Please keep in mind that the first quarter has two fewer work days from the first quarter of 2020 as shown in the table.
With that I'll return the call back to John for his summary.
Thanks, Dave.
We covered a lot of material. This morning before opening the call to questions I'd like to walk you through a quick summary.
Again, 2020 was a transformational year for Wesco and highlighted many of the companies strike.
First we respond with quick and decisive actions as I mentioned earlier in response to the global Covid.
COVID-19, pandemic and deliver excellent performance through the downturn.
Number two our integration with anixter is off to an excellent start and it is accelerating we made substantial progress on the integration in just the first six months and we're very pleased that being able to increase our synergy target. Our new leadership team is the strongest management team in our history and is driving our high performance culture.
We have launched our cross sell programs in all three of our business units.
We're already seeing positive results and.
And three and most importantly, the business is uniquely well positioned to capitalize on our highlighted secular growth trends that will drive demand for our full spectrum of end to end solutions for years to come.
2020 marked a watershed year and the beginning of a new era for Wesco.
As the industry leader.
We are now a larger and more diversified with differentiated scale and capabilities in what remains a highly fragmented industry, we're exceptionally well positioned and intend to lead not only a digital transformation of our business, but also of our industry.
So with that I'd like to open the call for questions.
We will now begin the question and answer session.
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Yes.
The first question comes from Sam Dark Hutch with Raymond James. Please go ahead.
Good morning, John Good morning, Dave how are you.
Good morning, Sam.
Two questions if I might.
The first.
You're calling out I guess, if my math holds about $150 million of resumed costs in fiscal 'twenty one.
From Covid restoration of incentive comp benefits.
And so on.
We knew about the $50 million.
And specific to Covid the <unk>.
$100 million of.
Incentive comp and benefits at least to me was a surprise and at scale.
To the extent that it doesn't look like you're going to be levering, the $500 to $1 billion in incremental sales on an organic basis.
First off.
By mass mass halls, but why why not lever that type of thing.
Incremental sales, especially knowing that price and price cost and presumably billing margins are going to be favorable for you. This year.
Yeah, Sam Good morning. Thank you for the question, we were very clear that we had $50 million on the legacy Wesco business that was COVID-19 related actions that we took in 2020.
Obviously, that's being restored as we enter 2021, we also mentioned on several of our earnings calls that our results were well below our expectations coming into 2020, and as such we have not paid out or accrued for full incentive compensation and sales commissions here in 2000.
'twenty, how you see that in our results. So similar to what we've done in previous years. Our intent is to include 100% target payouts and not only on the incentive compensation, but also our sales commissions. We also do have a couple of other volume related increases to SG&A, including some higher.
Benefits cost that we've included in that outlook of a 90 basis point drag for 2021.
Okay and my second question, if I might pardon me you had $24 million from synergies that you realized in the fourth quarter and it looks like youre guiding to $28 million in the first quarter I would've thought that the.
Synergy recognition would've been a step function higher meaningful step function higher in the first quarter over the fourth quarter because of the timing of vendor supply agreements.
Rolling over and therefore your benefits to purchasing.
Is there an offset to that or what am I missing in terms of thinking about sequential synergies Q1 over Q4.
Yes, Sam a lot of the benefit that we're expecting to see in the first quarter, particularly well really be more on the SG&A side. You are correct that we are continuing to focus on some of our supplier agreements and getting.
The alignment between the two legacy programs.
Obviously, we've included some of that in our expectations for the adjusted EBITDA margin, but right now at this point, we don't expect there to be considerable cost of goods synergies at least in the front half of the year for 2021.
Sam Let me, let me just make a comment because I think both your two questions get it which is.
I want to be.
Very clear that we have high confidence on our upside in.
And the upside is sales sales growth cost synergies Mara.
Margin expansion.
Free cash flow generation.
Our confidence is the highest its ever been as we've gone through the first.
Six months plus post close our confidence has increased quite frankly.
But we did not and appropriately we believe did not build that into our 2021 guide.
Very helpful. Thank you gentlemen.
The next question comes from Deane Dray with RBC capital markets. Please go ahead.
Thank you good morning, everyone.
Good morning, I'd like to pick off where where Sam left off there in terms of this are the rollback of the temporary costs. It looks like it hit the electrical segment disproportionately it just in terms of like the margin hit.
And I know you've given the for 'twenty 'twenty. One are you sized it at 90 basis points.
That was it for electrical and maybe for the three segments in the fourth quarter, because it just feels like it.
Isn't a feathering back of these costs, but it was more just a full.
Reversion there so just take us through the size and maybe that will help us calibrate the impact yes.
Certainly you saw it you know going back to what we talked about in the third quarter.
On our Covid related cost actions again this was really on just the legacy.
Wesco business and obviously, we've done quite a bit of work to begin the integration but.
We highlighted that COVID-19 related cost reduction of $50 million as part of our Q1 earnings call.
As you see that we had $28 million of benefit from that program in the third quarter that basically came back in the fourth quarter as we restore those activities. If you take a look at the composition of our strategic business units.
There are more sales from the legacy Wesco business within the E. S. SBU and therefore, they took a higher portion of that recovery of Covid related actions within the fourth quarter relative to the other two SB use so that's really what's driving that that margin degradation in EES relative to.
The sequential numbers from Q3.
That is actually very helpful.
We're just looking at the context of having higher Wesco legacy sales in the electrical segment.
That's.
That's good input there.
And John on that again, it was temporary salary reductions, which then the benefits came with that 401, K matching but it wasn't a very as you know and we've articulated very aggressive set of actions.
And you know and so that mix effect of your stake is what Youre, saying is you have you.
As Dave highlighted alright, so that that color is helpful. And then second question on page seven the whole cost synergies.
The timeline.
Just as a reminder, these are net synergies are and are you seeing any sort of lost sales and branch consolidations.
Sales force reductions or any of the revenue is walking out the door.
So I'll answer the second part and Dave May want to tag on on the balance.
The the very encouraging answer to this is we have not been.
We you know we feel very good about momentum in the marketplace.
And we're not seeing you know first of all we have from.
Actually addressed.
The combination of two companies with structural cost take out and we highlighted that we had over 650 fulltime equivalent instead of less of the business. So we've been working that we've not we've not seen unplanned or unwanted attrition.
One point to we are not seeing any share leakage.
So very encouraged by our results thus far.
That's helpful. Thank you.
And Jim Let me address your question on slide seven of our deck. What we're showing here are essentially the gross cost synergies that we expect to achieve which would be a structural takeout versus our 2019 pro forma and we were showing you separately the cost to achieve which would be onetime in nature.
Got it thank you.
The next question comes from David Manthey with Baird. Please go ahead.
Thank you and good morning, everyone. Good morning, Dave.
First question, you don't mention price and the sales outlook, but with copper and other industrial commodities being up as much as they are how are you thinking about price increases and in 2021 and related to that.
When you're talking about the 50 to 80 basis points of EBITDA improvement from mix share and leverage how much of that is mix alone are you assuming gross margin is higher in 2021.
So day for our outlook, we have not specifically called out the inflationary benefit that we would expect to see as commodity prices increase it's always extremely difficult for us to project what that would look like for the full year. So clearly we have seen what's going on within the car.
Current market, we know it's volatile.
Our expectation is that as we see those cost increases we will continue to pass them through to our customers, but inherently we have not built that into our outlook for 2021.
And Dave I will comment on gross margin, we're not guiding gross margin, but I'll give you. Some some indication of how we're thinking about it because.
Nearly where we're now seeing I would say for first quarter of this year. If you look at the supplier price increases that we are aware of that.
Informed of and we also have obviously have knowledge of what suppliers are intending on doing to some degree before everything fully rolled through we work with them in conjunction.
The number and an overall average increase average increases other price increases has had.
Increased so clearly above a year ago, we're seeing that momentum build net net that'll be a good thing.
And it will be a positive support for our margin expansion.
Absolutely intend and are very focused on getting core gross margin expansion. This year, we're just not guiding to that level as you know.
And what we've done and we've talked about in our last two quarterly earnings calls Anixter did a I think an outstanding job.
With their with their multi year margin improvement program, we've taken that program and there were some other refinements. They wanted to make so we incorporated those improvements and that is being deployed enterprise wide. So the refined version for anixter has been deployed.
Enterprise.
It's deployed and then across Wesco, we do fully intend and expect to see core growth margin expansion I mean panics there's delivered.
Two and a half plus years of gross margin expansion looking back every quarter.
Which is which is absolutely terrific and in the environment that they've that we collectively face that environment right is going to get a bit better here with inflation, increasing and then finally, we've got we've got unmatched supply chain capability of interest that you look at the two together and then this is more of a strategic benefit.
Was addressing earlier more of that kind of the initiatives and tactical benefit but strategically.
We've doubled the size of the company.
And we've got unmatched supply chain capabilities and we are we are in the process now of going through our category reviews.
Going category by category by category and looking at complete supplier lineup.
And it's a part of that process underneath the guys of the integration management office fully dedicated and staff driving execution is too.
Drive business.
True to our preferred supplier partners and that inherently will result in a larger more strategic relationship with them net net together, we'll be able to provide even better value and I think that will be margin accretive as well.
That helps.
It does thank you very much John.
Okay.
Yeah.
The next question comes from Christopher Glynn with Oppenheimer. Please go ahead.
Yeah. Thanks, Good morning, John.
Good morning.
You guided our EBIT adjusted EBITDA margins for the debt.
<unk>.
For the the DNA in order to kind of bridge to the adjusted earnings on the P&L is the for Q represent a good annualized.
Run rate from the segments in total what are you expecting for DNA.
It is a good it's a good proxy for what we're expecting for DNA in 2021, I mean with the fourth quarter you can see how our DNA came down slightly versus Q3.
That's a good starting point as Youre thinking about 2021.
Okay and back to slide seven their day.
Cumulative one time opex.
We can tell the incremental amount I believe that gets adjusted out within the merger cost buckets each quarter just want to verify that.
That is correct.
Okay.
And then in terms of the restoration of costs that $150 million.
Per our Sams accurate map there how much of that run rate would you say was.
Realized or restored in the fourth quarter, maybe on a percentage basis.
Yeah, the only thing that really hit us in the fourth quarter, Chris was that restoration of the Covid actions and so we relative to Q3, we restored little over $28 million of Covid related cost actions here in the fourth quarter. The balance is really what we're at.
<unk> in terms of primarily target payouts and the impact of inflation on some of our benefits programs for 2021 that have not impacted 2020 in our numbers.
Okay.
Thank you.
The next question comes from Nigel Coe with Wolfe Research. Please go ahead.
Thanks, Good morning.
Morning, Nigel good morning.
Defense too just thinking a little bit deeper into slide 14.
Now in your adjusted EBITDA margin targets that excludes stock based comp but surface pits.
Yes, so just wanted to size that I think I'd say $5 million.
In 2020, I'm, just wondering what that what that is and then interest costs.
Line, what should we got into that.
Certainly so the the stock based compensation you should assume approximately.
Yeah.
$35 million.
For a 2021 impact and again as you mentioned, we do exclude that when we talk about our adjusted EBITDA, but that impact is included in the adjusted EPS numbers.
And then interest.
Yeah.
For interest expense, you're probably looking at somewhere in the range of $67 million to $70 million per quarter.
In 2021, that's taking into account what you saw here in Q4, but then we also do have the.
The benefit of the 2021 notes being called and.
We will also be obviously, managing our facilities down aggressively.
Okay, so $67 million to $71 million per quarter.
So Mike My broader question is.
Total these inputs since my model.
Okay.
Guidance range, so I'm wondering if debt.
If there's some conservatism or hedge baked into that range over and above all the inputs are given us thanks very much.
Yeah again, we've given you a fairly clear view of our expectations throughout the income statement. We've also provided you with our view of what.
You should expect in terms of the free cash flow generation.
Again, we know that there is some volatility in the end markets. We're laser focused on not only meeting the expectations, we set on delivering the synergies, but exceeding them and so I'll, let you draw your own conclusion in terms of how we put together the guide I mean, obviously you you've done the math.
Again, we believe that we are just starting to see the true benefit of those strategic combination of Wesco and anixter coming together in 2021 in terms of top line and our ability to drive cost synergies.
And Nigel as I mentioned earlier again, we very high confidence we have substantial upside.
Completely down the P&L and with cash generation again look at our cash generation in 2020.
Look at it a little under $600 million, which is the three year target that we have set and again, we did not build that into the guide and we think appropriately. So I mean, let's keep in mind that.
There is there is a lot of positive indicators around overall market recovery, we feel very good about our trajectory because we think we're accelerating and doing better than market.
But we're not we're not fully recovered yet and there are still there's still many many customers have not returned to work quote unquote and so.
That's what also informs what we think is an appropriate guide alright.
Great. Thanks, guys I appreciate that.
Yeah.
The next question comes from Tommy Moll with Stephens. Please go ahead.
Good morning, and thanks for taking my questions.
Good morning.
I wanted to start on your outlook for revenue this year, if I'm interpreting correctly I think we're looking at up 3% to 6% year on year across all three segments, but.
Could you give us any insight, maybe a rank ordering of segments, which might skewed toward the higher end of that range or the lower.
Or related Leigh any kind of specific end market color.
If you could give would be helpful. Thanks.
Sure.
If the three businesses I'll start with the one that has the most global it's the second largest in CSS.
Communications and security solutions. So when you take a look at our materials, Tommy and look at the secular growth trends we've called out.
Almost all of those directly impact that business, it's the most global business.
It's been enjoying a multiyear run run of very strong growth that the legacy anixter NSS business at the legacy Wesco Datacom business, but it's.
The mix was substantially driven by the legacy Wesco Anixter NSS business.
And so the secular growth trends really weigh in heavily there of the three businesses. That's the one that has the.
In terms of end markets.
And performance against the end markets are the highest.
Growth opportunity. So you put that at the higher end of the range on a relative basis.
UBS is next utility in broadband system utility market very stable, we've got a tremendous franchise business with.
Pulling together the legacy what used to be HD supply at anixter button, the legacy Wesco utility business.
Really strong broad service oriented business, we feel very good about utility.
With pent up demand for investment talked about this at length in prior calls that we clearly see that in the future and broadband is also part of that business unit that faces an exceptional set of growth opportunities driven by a five <unk> build out and so feel very very good about that I'd put that one you know kind of mid to high.
Higher end of the range in a comparative sense for you know in terms of where that rank growth wise.
Both market and performance and income E since our largest business.
And that's predominantly the legacy Wesco electrical business, plus anixter wire and cable business just to remind everyone. We're.
We are now positioned to sell the complete electrical package. So that's the breakout move for US that's the strategic power of that combination from an end market perspective. It is a global business, okay, but end markets its really big industrial exposure big construction exposure. So the industrial exposure we're seeing.
As we're all I know many of you have seen this but we're clearly hearing from our customers improving demand positive momentum vector in terms of industrial spending.
Turnaround projects that had been delayed theres other spend levels that were getting good indications should increase as we move through 2021 and the economy recovers for construction, where we're predominantly non resin very little direct residential construction exposure.
The good news there is the residential ended 2021 2020 that is on a very strong note that portends well for non RASM, but non resi. This year I would say it will be a mixed bag there'll be some verticals that are going to grow and could have some nice very nice growth health care education infrastructure. There are some other verticals that are going on.
It remains remain pressured and that's oil and gas. So net net debt hopefully gives you a sense. We've got three businesses. There we all expect that all three to grow.
The largest kind of grower and probably at the high end would be CSS UBS right behind it and then EES, the electrical and electronic solutions I will say this about construction, though.
Despite kind of a mixed bag outlook on the non resi market in 2021, and I think most folks have that for us in particular and consider this a special cause driver.
We ended last year with an all time record year and record backlog and that speaks to our project business and we haven't seen any material cancellations. Its just been some spotty delays here or there. So it sets up very well for us I think.
In.
In 2021, and our bid activity levels for projects, both non res and industrial and even into the commercial institutional and governmental markets. Both those customers or project activity levels of quoting activity levels. Let me say very very robust to start the year. Our opportunity pipeline is also at a record level.
That's all very helpful.
Very much appreciate it I'll shift to one follow up question here to drill down a bit more.
On the first quarter.
So we don't have official guidance in terms of the outlook here, but I would ask for any kind of color you could give us on margin expectations. It sounds like there's some crosscurrents with some incremental synergy capture.
And then with with the offset of some of the incremental costs and I think specifically you called out.
Of the you know we broke up the 150.
For the full year into you know 50 Covid related that's already hit in Q4, but 100.
On an annualized that has yet to hit and so presumably some of that will offset in Q1.
So anything you could frame for us there in terms of the incremental.
Possibilities or maybe even just the margin bridge.
First quarter year on year, or maybe first quarter sequentially anything to just calibrate our expectations would be helpful. Thanks.
Yes, Tom It's Dave Charles I. Appreciate the question. The one thing that I would call out is if you look historically.
At the Wesco business.
The.
Q1 is primarily.
Our lowest adjusted EBITDA margin quarter of the year.
Also in Q1 of 2020, we did not have the COVID-19 related cost actions, so that will create a little bit of a different comparison versus Q3, and Q4 going forward in Q2 and.
Q2 over Q2 right.
Thank you I'll turn it back.
Yeah.
The next question comes from Steve Barger with Keybanc capital markets. Please go ahead.
Hey, good morning, guys.
Yeah.
John You said this is the strongest management team in West Coast History, and you also said you have high confidence in upside to sales margin and free cash flow, but you decided not to build that into the 2021 guide.
I just wanted to make sure I understand the message if your confidence is that high why not push the organization to accomplish that via stated goals.
Yeah.
Internally, we've got targets well above our external partners I've already said that right we've been very clear.
No.
I think let's think back on how the last.
You know last 13 months have unfolded I mean, it was literally just a year ago January that we struck the deal too and got an extra board approval. They approved the wesco bid for anixter.
It was only a few months later well before close that we put out three year targets.
Our three year targets on.
Cost synergies on margin expansion EPS growth as well as free cash flow generation.
We closed the acquisition on June 22nd we.
We report our second quarter results that included a nine day stub period.
We're well into the integration because we had started in.
Resolutely integrating.
Integration planning pre close and then we will shut out of the gate with integration and we had a flawless we use this term flawless day one close.
Look at our third quarter results very very strong right versus what expectations were we beat our own expectations remember, we're driving a higher targets internally and what we did was real life. We were realizing the capture two on track with higher target levels.
One quarter first full quarter under our belt, we raised our guide around the synergies and we raised them substantially we went from $68 million in year $1 million to $100 million, we went from $200 million in year $3 million to $250 million substantial race right here. We go through Q4, we absolutely did.
<unk>, what we said.
If you look at Q4 actually came in a bit stronger than what we signaled that we didn't have a guide out there, but everything we signaled was even stronger than we thought.
We never thought we would have backlog build that strongly we have the sales came in stronger margins are solid we have a record backlog and we had exceptional free cash flow, you've got close to $600 million of free cash flow a little under it in our first full year that didn't even include four quarters of Anixter go right included two quarters of anixter, so that gear.
US the confidence as we're coming into 2021, what we don't control is the macro so it's a long winded lineup to say what is out there that is out of Arkansas, we don't control the background.
So there's still enough uncertainty around that we reinstated our guide we put a guide out there and we think this is an appropriate guide okay.
But we and we continue to drive the internal targets that are above our external commitment with substantial margin and that's what gives me the core the fundamental confidence.
So the key takeaway from that being that if the macro comes in the way you May expect internally then you would expect too.
Significantly outperform the guidance that you've put out today to start the year is that fair.
You get you're trying to get me to guide the guide I'm, just going to tell you that which I'm not going to do because we just put a guide out there, but I think I will tell you that we're again, we're driving internal targets well above our external commitments I said well above the organizations lined up for that we're super excited about this transformational combination and feel great about it and it's our intent to delay.
Upside with that said, we think we said we think we set the appropriate guy given all the considerations most importantly macro.
Okay, So and it's the street's job to make best guesses on macro conditions and whatever company info was out there, but and we will never get it right exactly of course, but at this time there was obviously a sizable disconnect between your expectations and how wesco is looking at earnings power any thoughts on how we can improve the messaging. So we don't have this kind of one day volatility.
Going forward.
Look.
You asked me directly.
If we were we didn't have a guide out there in 2020 like most companies. We didn't guide Q4, but we're very clear on on the temporary cost actions coming back in.
And so I think that alone plus we were also very clear about all the other aggressive actions we were taking on the cost structure and so you know I guess.
I think that my.
My message is debt.
Versus what we expected and what we said we absolutely exceeded our expectations in Q4, we didn't have a guide for 'twenty and 'twenty. One we didn't have any signaling whatsoever and I think you know.
Just that kind of SG&A if it if it wasn't set rate for Q4 and the absence of a guide it gets extrapolated into 2021 I understand that I think this is important.
We are working aggressively to be as transparent as possible, we've got multi year targets out there around the transformation and we're going to continue to be reported our progress against that very clearly.
We think we're improving at <unk>.
Moving in that regard gave us that feedback we'd love to hear it if you've got some other suggestions on how we could how we could even be more clear about how we're performing against expectations, we'd love to get their inputs, we've got Lesley onboard.
Leading IR for US now she's an outstanding addition.
And I look forward to just continuing to improve in that area.
All focused on continuous improvement lean as part of our culture as you all know.
Thanks for the time.
Okay.
The next question comes from Chris Dankert with Longbow Research. Please go ahead.
Hey, good morning, guys. Thanks for taking my question.
I guess come up there's a bit of another way.
Thinking about the first quarter SG&A I mean looking at that step up from the fourth quarter. I mean, if we were to kind of baseline the first quarter SG&A in the $630 million range is that in the right ballpark just trying to size, how that $100 million rolls on and obviously, it's got to be first half weighted correct.
Yes, Chris I mean, if you the way to think about it is the <unk>.
We called out very specifically that $50 million.
That's primarily a Q2 and Q3 comparable.
But obviously, we were not given the results of the company and after we integrated with Anixter.
One of the other issues is that we do have this issue about the.
The restoration of bonuses and sales commissions and the like including some benefits and other inflation now that is going to be consistent throughout 2021, and so I think as youre thinking about how to frame that within the quarter.
Yeah, again, I think that youre going to see outside of that $50 million in Q2, and Q3 relatively consistently spread across the quarters.
Okay, well, then I guess.
The 100 million beyond the Covid related $50 million I mean is that actually a make whole for incentive comp last year am I understanding that correctly.
That is correct and so when you take a look at.
We did not meet our board approved plan.
And because of that we did not accrue nor are we planning to pay out at target compensation levels.
For.
For 2020.
Now that's been rolled into our numbers, we did speak to that.
Some of our earnings calls.
And again this is consistent with what we've done historically, particularly coming through the industrial recession, where we're not hitting our targets, we're not paying the incentive compensation. Our sales force is not getting their bonus payments consistent with previous years, we built that all in back debt target, 100% payout for 2021.
Okay. Okay. Thank you for the clarification I guess on a more optimistic note in the slides you guys highlighted re shoring as a positive driver is there anything tangible to offer on that dynamic I mean are we seeing actual projects coming through at this point. Thanks for the color there.
I will say this that we're.
We're having a lot of discussions obviously, it's virtual a lot of discussions.
Discussions with customers, they're evaluating their operations they are evaluating their supply chains in particular.
And I've spoken about this at length really over the last couple of years, but.
This is reported on a real catalyst.
This global pandemic, we're looking to obviously streamline get efficiency get supply chain cost out of the supply chain, let's say, but theyre also looking at inherently supply chain risk.
And that's what's driving them to look at re shoring I don't I don't want to call out any specific examples.
We are having those discussions with customers, they're sharing their plans and views with us there.
Been a few examples but again I'd have to get specific which I cant do on this call but.
Do I think that there is a potential for a broader trend there and kind of.
Something that could be a meaningful driver.
Incremental growth opportunities in North America I do.
I do.
Net net I do I think.
If one thing the global pandemic did it put a spotlight they actually got microscope on the global extended supply chain and the fragility that was inherent in some of those.
I'm talking the whole supply chain and so.
Just thinking about supply chain risk and integrity, it's a big driver and if those supply chains can be shortened.
And which really is the <unk>.
Impetus behind potentially reassuring it changes the risk profile of the supply chain.
Understood. Thanks for the time guys.
Yeah.
This concludes our question and answer session.
I'd now like to turn the conference back over to John Engel for any closing remarks.
Well. Thank you all for your time today and your support we have numerous follow up calls that have already been scheduled day, even know Leslie and will are available for your follow up discussions.
Have a good day and please stay safe and healthy thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
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