Q1 2021 Wesco International Inc Earnings Call
And earnings Conference call, all participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After todays presentation, there will be and opportunity to ask questions to ask the question. The press Star then one place that the this event is being recorded I would now like to turn the conference over the Leslie Hunziker Senior Vice President Investor Relations and corporate Communications. Please go ahead.
Thank you and good morning, everyone before we get started and I want to remind you of 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 and.
Actual results may differ materially please see our webcast slides as well as the company's SEC filings for additional risk factors and disclosures.
Any forward looking information relayed on this call speaks only as of this day and the company undertakes no obligation to update the information to reflect the changed circumstances.
Today, we'll use certain non-GAAP financial measures required information.
Information about these non-GAAP measures is available on our webcast slides and in our press release, both of which are posted on our web site at Wesco Dot com.
And the power of this morning, we have John Engel, our CEO and Dave Schulz West Coast, Chief Financial Officer, now I will turn the call over to John.
Thank you Leslie and good morning, everyone.
We're off to a great start in 2021 outperforming our markets accelerating execution of our integration plan and synergy capture delivering significant margin expansion and generating very strong free cash flow.
First quarter results were excellent across the board.
I'm very proud of our team and one of the thank them for the great work that they're doing.
We're seeing positive sales momentum across each of our three global business units and backlog has reached a new all time record level.
Workday adjusted sales were up more than 3% versus last year and were also up 1% versus the first quarter of 2019 on a pro forma basis.
Against the tough year over year comparison, and we delivered sales of pre COVID-19 levels as the economic recovery is underway and demand is building and nearly every end market share.
And this ramp up and activity coupled with continued benefits from secular growth trends and our sales synergies, including cross selling and value based pricing initiatives and setting the stage for of topline performance is the better than our initial expectations for the year.
We're making great progress on our margin improvement program as well, reflecting our ability to more than offset cost inflation and the first quarter gross margin was up 50 basis points versus last year and was up 40 basis points versus the first quarter of 2019.
These are pro forma comparison.
Gross margin also expanded 50 basis points sequentially versus the fourth quarter of 2020.
Strong execution of our margin improvement initiatives drove gross margin expansion across each of our three business units.
We're also making great progress on our integration plan and are accelerating our execution and synergy capture.
As sales grew and gross margin expanded the torque on our operating leverage increased reflecting the benefits of our structural cost reduction initiatives and our operating profit growth.
As you saw on our press release earlier this morning due to our strong first quarter results and accelerated synergy realization. The start the year, we have raised our full year 2021 outlook for sales synergies and profitability.
Finally, we generated strong cash and paid down debt and the first quarter as we expect to do every quarter through the integration.
The power of our business model is clearly being demonstrated.
With over $500 million of net debt reduction over the last three quarters since closing the anixter merger that is we have reduced our financial leverage almost a full turn.
The four nine times net debt to adjusted EBITDA.
In summary, the first quarter of another strong proof point of the substantial value creation potential of Wesco plus that expense.
Now moving to page five.
As I mentioned since the merger closed in June of last year of combining two industry powerhouses provides a tremendous opportunity to create value for our company and for our industry.
And I am very pleased with our team's execution of our integration plan and delivering the synergies and capturing the initial value of the transformational combination of Wesco and anixter spin.
Specifically these results are being generated as we leverage our broad products services and solutions portfolio.
Share best practices as one team focused on value based selling and capture cost synergies by eliminating redundancies and optimizing our supply chain network and improving process efficiencies through other integration initiatives.
And the first nine months since closing the deal we continue to outperform market growth rates and of generated nearly $75 million and realized cost synergies primarily from organizational redesign the delivery structural cost takeout and also from increased efficiencies and reducing staffing redundancies.
We expect this phase of the synergy capture to be completed and the next couple of months ahead of schedule and.
Additional integration initiatives are also well underway that will deliver further savings over the long term.
For example, the design phase of our supply chain network optimization effort for the U S is now complete.
Over the course of the integration, we expect to reduce roughly one third of our U S locations through consolidation of overlapping anixter and wesco facilities were low.
Also repositioning of mix of our national regional and local distribution centers to enhanced service capabilities and capture the benefits of our centralized network with much greater scale.
And 2021, and we expect to complete about 20% of the U S network optimization effort supporting the incremental cost synergies we're targeting this year.
The strength of our franchise the power of our industry, leading value proposition and the benefits of our increased scale are now more evident than ever and the economic recovery accelerates, we're exceptionally well positioned to capitalize on the secular growth trends of electrification automation communications and secure.
And <unk>.
With that I'll turn it over to Dave to walk you through the details of our first quarter as well as how we're thinking about the full year.
Dave Thanks.
Thanks, John and good morning, everyone starting on slide seven the summary table compares our first quarter to the prior year pro forma results.
Sales were flat and the first quarter, noting there were two fewer workdays this quarter compared to the prior year period.
On a workday adjusted basis sales were up more than 3% on positive contributions from pricing and currency.
Backlog reached another record level this quarter up more than 20% since the end of December with each business unit posting double digit increases.
Gross margin was 21% and the quarter up 50 basis points compared to the prior year and up 50 basis points sequentially. The.
This is our highest gross margin since 2016 on a pro forma basis.
These results were broad based and reflects the impact of our gross margin improvement initiatives started in previous periods, including the deployment of Anixter is margin improvement program across the combined business.
As we have discussed previously our margin improvement program focuses on value based pricing and emphasizes training and development of our sales force and.
In addition to a proactive approach the cost pass through our sales reps focused on managing freight costs minimum order quantity and.
And ensuring we are incorporating our portfolio of supply chain services and customer discussions.
We also aligned incentives of cost of sales force to reward margin improvement.
Gross margin included a 20 basis point negative impact from of $9 million write downs of inventory of personal protective equipment.
Both business unit mix and supplier volume rebates were neutral to gross margin versus the prior year.
Adjusted income from operations was $171 million and the quarter or four two percentage of sales after adjusting out the effect of merger related costs of $46 million and of $9 million gain on the divestitures of the legacy Wesco Datacom and utility businesses in Canada that we announced in February.
Adjusted EBITDA, which also excludes the merger related costs and gain on the divestitures as well as stock based compensation and other net adjustments was $217 million $35 million higher than the prior year and five 4% of sales 90 basis points above the prior year pro forma.
And I'll walk you through the details of this strong result in the moment.
Adjusted diluted EPS for the quarter was $1 43.
A full reconciliation of adjusted EPS is included in our press release.
Preliminary results for April are encouraging with sales up approximately 20%, albeit versus the first full month of COVID-19 impacting the base year, where sales were down approximately 16%.
Of note gross margins and April are in line with Q1 results.
Turning to page eight we have made substantial progress on our integration with anixter.
We captured $34 million of cost synergies and the quarter favorable to the $28 million we expected.
The increase was driven by a pull forward of the timing of activities. Initially expected to occur later in 2021, primarily related to permanent head count reductions enabled by the organizational redesign.
We also recorded a higher benefit from indirect procurement savings.
Due to this faster execution, we are increasing our 2021 and 2022 target synergy levels.
We now expect to realize the $170 million of cost synergies in 2021.
And $40 million higher than our prior estimate of $130 million.
We are increasing our estimate of realized synergies in 2022 by $10 million to $210 million.
The bulk of the synergies that have been realized to date were driven by SG&A reductions, including the elimination of duplicative overhead costs and other SG&A efficiencies.
We remain on track to deliver the three year cost synergies of $250 million by June 2023.
And we continue to expect that approximately $200 million or <unk>, 80% will benefit SG&A and approximately 50 million of 20% will benefit cost of goods sold.
We are continuing to evaluate our integration program, including expected synergies over the three year period post the anixter merger and will provide a full update on our next earnings release following the one year anniversary of the transaction.
Turning to page nine you can see the drivers of the $35 million increase to adjusted EBITDA on flat sales versus the prior year.
The primary drivers of this increase were the 50 basis points of gross margin improvement and the benefit of realized cost synergies, which collectively contributed approximately $50 million of higher adjusted EBITDA.
Partially offsetting these positive drivers was the higher incentive compensation and benefits we discussed on our previous earnings call that reflect normal merit increases and annual incentive compensation accruals as well as inflation on benefits.
As we discussed on a year over year basis. The increase reflects last year's unusually low compensation expenses, resulting from the impact of COVID-19 on operating performance.
Lastly, you can see from the last Green bar to the right that we benefited from a handful of other items, including lower travel and entertainment and expenses due to COVID-19.
And total adjusted EBITDA was up 90 basis points over the prior year driven by the strong gross margin performance as well as increased operating leverage from synergy realization within SG&A.
Now let me walk you through the results by business unit beginning on slide 10, all of the year over year comparisons shown on the next three slides are based on the pro forma results and the prior year.
Turning to slide 10 sales and our EES segment were up 4% year over year and up 7% on a work day adjusted basis.
This growth reflects construction sales that are recovering faster than we had anticipated progress on our cross sell initiatives and demand driven by secular growth trends and.
And Q1, we saw an increase and projects being released from backlog and shipped relative to our going and expectations.
We are experiencing robust bidding activity levels that drove an incremental increase and our backlog from the record year and level.
We've made further progress on our cross sell initiatives that of capitalized on our ability to now offer a complete electrical package to our customers.
We also continue to see increasing momentum and our industrial and OEM businesses.
OEM was up versus the prior year and industrial MRO activity levels have been improving in line with the broader industrial recovery.
Adjusted EBITDA was up $25 million, representing six five percentage of sales 130 basis points higher than the prior year level.
This increase reflects the gross margin initiatives I discussed earlier cost synergy realization.
And effective cost controls driving increased operating leverage on sales growth.
Turning to slide 11.
Sales and our CSS segment were down 4% versus the prior year and 1% on a work day adjusted basis.
While sales were impacted by project timing of decline and safety related products year over year and the impact of COVID-19, and certain regions. We saw strong growth and our security solutions global accounts and high growth data center and Hyperscale projects.
Backlog increased double digits to a record level.
Profitability was also strong adjusted EBITDA was seven 3% of sales 40 basis points higher than the prior year.
The strong result includes the majority of the $9 million inventory write down.
This impact was more than offset by strong integration cost synergies and the execution of our margin improvement initiatives.
Turning to slide 12.
Sales and our UBS segment were down slightly versus the prior year, but up 2% on of Workday adjusted basis.
The utility demand has remained consistently strong as our customers continue invest and grid hardening and modernization as well as led lighting and automation projects.
Our broadband business was up double digits versus the prior year, driven by strong demand for data and high speed connectivity and.
It has never been greater due to the step change expansion and remote connectivity for work from home and school from home applications.
Additionally, we are seeing early benefits from our participation and the federal government's rural digital opportunity Fund project, a $20 billion investment to bring high speed broadband service to rural homes and businesses.
One of that project began at the end of last year.
For UBS adjusted EBITDA, and the quarter was $84 million up 100 basis points as a percentage of sales driven by synergy realization and gross margin expansion and effective cost controls.
Moving to free cash flow and liquidity on slide 13 and.
And Q1, we delivered another quarter of strong free cash flow debt represented more than the 140% of net income.
Over the trailing 12 months, we've generated almost $700 million of free cash flow.
We remain laser focused on reducing our leverage since completing the merger we have reduced net debt by more than $500 million and reduce leverage by nearly a full turn.
One of the hallmarks of our business model is our ability to generate strong cash flow throughout the economic cycle.
This resilient model, coupled with our execution on the integration with anixter and accelerated expectations per synergy realization and give us high confidence that we will successfully reduce leverage below three five times trailing 12 month adjusted EBITDA by our target date of June 2023.
Our capital allocation priorities remain unchanged, we will pay the preferred dividend invest capital to support the integration and rapidly delever the balance sheet.
Turning to slide 14, and I'll walk you through our revised outlook for 2021.
We have increased our outlook for sales growth to a range of four 5% to seven 5% primarily due to the macroeconomic outlook, which has substantially improved since January.
We expect the market for our CSS SBU to be up mid single digits and sales growth at the higher end of our range due two weeks of exposure to critical secular growth trends and its global footprint.
Next we expect the market for UBS to be up low to mid single digits with sales growth for 2021 at the mid to high end of our sales outlook.
The utility market has been very stable and its exposure to continued demand increases and the broadband market will contribute the growth as well.
Lastly, we expect the market for EES business to be up low single digits and aggregate.
Overall, the nonresidential construction market is expected to be down this year.
While forecast for the electrical market are strong. They include residential construction, which has been up double digits. However, we do not participate in that market and a meaningful way for that reason, we expect EES to be at the lower to mid and of our sales outlook range.
We have increased our outlook for adjusted EBITDA margin to a range of five 8% to six 1% primarily driven by the strong profitability of this quarter and our and Greece targets the synergy realization for the rest of the year.
When it comes to the integration, we now expect to complete our organizational redesign and by mid year pulling forward. The originally planned second half actions.
The outlook includes a $130 million of synergies incremental to 2021 and increase of $40 million compared to our previous outlook.
The cadence of the $130 million of incremental realized synergies is estimated to be approximately 60% weighted to the front half of the year.
And the second half, we'll continue working on the supply chain network optimization plan that John talked about which is a longer project timeline and therefore those savings will be realized over the next two years.
We also are reevaluating our cumulative three year synergy plan to validate our current assumptions, we will provide an update next quarter on total synergies and cost to achieve over the three year period post merger period.
In addition to the synergies we expect the benefit from increased operating leverage on our higher expectation for sales growth.
Continuing down the income statement, we expect our effective tax rate to be approximately 22% slightly lower than previously anticipated due to the beneficial impact of certain discrete tax items recorded in the first quarter.
Due to the higher sales and profitability expectations, we are increasing our adjusted diluted EPS outlook to a range of $6 80 to $7 30.
Our expectation for free cash flow as a percentage of adjusted net income and capital expenditure remained unchanged.
As a reminder, much of our capital expenditures this year will be invested and the early stages of aligning our systems and investing in digital tools and applications.
With this outlook, we are providing our best estimate based on our visibility to the current environment and acknowledging that there are still underlying risk, including the continued impact on the demand from COVID-19 pandemic across the globe and the pace of supply chain recovery.
With that I'll turn the call back to John for closing remarks.
Thanks, Dave.
Well, we've covered a lot of material of this morning.
Before opening the call to your questions I'd like to walk you through a quick summary of the key takeaways.
The positive momentum for our transformational year in 2020 is clearly continued into 2021 and we're off to a great start results were strong across the board this quarter with sales up and.
And each of our three global businesses reporting higher adjusted EBITDA margin.
We are clearly capitalizing on our market, leading position and driving increased operating leverage across the enterprise.
We are also benefiting from secular growth trends that provide upside for all of our businesses.
And we are well positioned to continue benefiting from these trends and the years ahead.
The strong cash generation capabilities enable us to delever the balance sheet rapidly and the first nine months post close we have already reduced leverage by nearly a full turn.
And the execution of our integration with and Anixter has progressed, even faster than we anticipated we've increased our cost synergy expectations by $40 million for 2021.
And lastly, we are pleased to have substantially increased our outlook for sales and profitability for the balance of 2021, our performance and the improving macro environment support of our stronger 2021 outlook.
That I would like to open the call to your questions.
And we will now begin the question and answer session to ask a question you May Press Star then one on you touched on phone if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two we kindly ask that you. Please limit yourself to one question and one follow up and at this time, we were part of inventory to us.
And will the roster.
And my first question today will come from Deane Dray with RBC capital markets. Please go ahead.
Thank you and good morning, everyone nice execution.
Thank you Dan good morning.
It is such a hot topic across the industrial was hoping you could walk through some of the <unk>.
Price cost dynamics that you've seen including freight and <unk>.
Dave and his wrap up comments sided supply chain recovery and so just if you could give us some color on supply chain disruptions as you're seeing them today and whats embedded in your guidance.
So in terms of of pricing clearly, we saw inflation stepping up across the number of commodity categories and and other parts of and this is.
And kind of in line with the overall economic recovery cycle.
And we typically will share of this each quarter. If you look of the number of supplier price increases versus what we would typically see and the first quarter and the average price increase.
Both are up materially and the first quarter of 2021.
<unk>.
First quarter of 2020, and even prior years. So clearly there's been a step up there I think that.
As we shared and and as you can see and of itself and we feel very good.
Our execution of our gross margin improvement programs and we're clearly think that we're.
We're doing a good job of <unk>.
Pricing the value.
And.
So and so Thats fair.
The overall price cost question Deane in terms of supply chain disruptions, we have not seen any material disruptions in the first quarter.
I think we are.
And we've done a very nice job of working with our top supplier partners and.
And the ensuring integrity and the <unk>.
Supply chain as we can manage it for our customers remember we doubled the size of the company. So we.
We've strengthened our supplier partnerships, we have broad and deep inventories I think if you see through our results we added to our inventory position and the first quarter. It is critically important to us.
We have the proper inventory and we can support both the availability of what our customer demand.
The economy recovers as well as support strong fill rates with all of that said I think this is something that clearly represents the challenge for certain product categories and <unk>.
Number of product category and enhance the overall global supply chain.
On the supply chains are working to get fully rebuilt and the disruption that was caused by COVID-19 was substantial.
Across all facets of all of the economies around the world. So clearly clearly theres challenges there. The way we were trying to work work that is again with our expanded inventory position and our relationships with our supplier base.
That's really helpful and if I could just clarify because I know you guys track. This closely when you talk about the number of supply Inc.
Supplier price increases and the average price increases is that still within a manageable level because historically this inflationary environment is actually very attractive for wesco as the distributor. So are we still and that sweet spot or has the volume of either of those kind of pushed.
Two where youre actually getting.
Yes, some pressures.
Right.
Currently favorable gain.
And I think what we're doing a better job of versus what we've ever done historically and again all credit.
The combination of anixter, and Wesco coming together and the team had been working on this revised margin improvement program across the combined enterprise.
You have to give the full credit to our combined team on that anixter had a good very good momentum. If you look at their gross margin results, which were public prior to the merger closed in June of last year. They had upwards of two years every quarter of gross margin expansion against the market that was not supporting that and when you look at the other publicly traded.
And so but the short answer to your question is yes, I think we're doing a better job on when we ever have of pricing the value and look and inflation is not done.
And you look at where we are and the economic recovery cycle and.
Inflation is going to continue as the economy recovers and I feel very good about where we are so far through the first quarter. That's great to hear and then my second question would be for Dave and just the.
Really strong free cash flow conversion this quarter. The deleveraging is happening actually faster than what we were modeling and it's not lost on us that youre already into the fore handle on net leverage so it really does beg a couple of questions. One is there anything.
One timer related and the free cash flow this quarter and within your guide because you're still at 100% IC and is it is it too much the Ashford a little more color in terms of the path of deleveraging is there a goal for 2021.
And you kind of milestones.
Would be helpful here.
Yes, Deane good morning, thanks for the questions the.
I would tell you that there's not anything substantial and our free cash flow results for the first quarter relative to the prior year of the only thing that you could call out that is up as you do see significant change and that other net which is including some of the compensation accruals that of course, we have not paid out.
So that's the only area that I would say is of minor benefit that we're seeing within the first quarter free cash flow results.
And then of your question about leverage as we mentioned this has been our key priority and getting back to our target leverage range. Three years post close is what we're focused on we've not provided any specific glide path on how we anticipate getting there or by when.
And I appreciate it thanks.
And our next question will come from Sam Dark day.
Our cash with Raymond James Please go ahead.
Good morning, John and good morning, Dave how are you good.
Good morning, Sam.
Sam.
Three three questions if.
If I could be forgiven, hopefully pretty quick the FERC.
First one day.
Should we still.
The view gross margins as rising sequentially each quarter. This year I know I'm guessing rebates are going to be exceeding original expectations are getting increased traction from your internal initiatives you talked about favorable price cost you have the roll off of the PPE inventory.
Is that a fair characterization the gross margins would rise as the year progresses.
Yes, and we've not provided any specific guidance for our gross margin I think you've hit upon a couple of things that we are really focused on the first is we're very pleased with the progress we made on the gross margin improvement plan and.
And we do anticipate the continue to Incent, our sales force and worked very hard to continue to get good execution on gross margin.
The one thing I will highlight is we did take the write down on the personal protective equipment as highlighted in our prepared remarks, we still are carrying some inventory. So we will continue to monitor what the market conditions are like and whether or not we have to take another write down and the future quarter.
Second question, the $40 million increase and synergies from your prior views.
Is any of that and cost of sales or how much of that is and cost of sales and where are you.
And the vendor negotiation process, because I know that you were hesitant on reticent to include a lot of purchasing synergies and so those were completed.
Yes, Sam.
On the benefit that we're seeing and the increase year over year and our outlook for the synergies of the plus $40 million.
And it's primarily SG&A still and Thats part of the execution of some of the organization redesign.
We're underway with we've got a good portion of that done here and the first quarter, we will complete that and the second quarter. There are some gross margin benefits that we do anticipate.
Will be realized and the second half.
Of 2021, but again the majority of the savings and 2021 will still be on the SG&A line, you specifically mentioned supplier volume rebates, that's something that we are continuing to work remember that a lot of that of the benefit that we'll see there is as our sales and purchases growth and.
And were flat year over year versus the prior.
Pro forma period, so from that perspective, there is an opportunity there we're continuing to work and hard.
And my last question is just a follow up on <unk> point around pricing based can you specifically quantify what pricing was in the first quarter year on year, and then how much within your guidance.
And is inclusive of price versus volumes.
Certainly so we estimate one to two points of positive pricing and the first quarter of 2021.
As we've mentioned before it is extremely difficult for us to predict the benefit of pricing for the balance of the year. So we've not included any specific pricing benefit for the following three quarters of 2021.
Very helpful terrific job this quarter.
Thank you Tim.
Okay.
And our next question will come from Nigel Coe with Wolfe Research. Please go ahead.
Thanks, Good morning, everyone.
And the.
On the pick up on the price question I think what are your competitors called out and North American pricing from non cable.
Of the $3 6%.
And so I'd say, that's well ahead of book just call out that you think there's potential to maybe push up to those kinds of out of the price given the inflationary pressures.
Nigel it's Dave Schulz, So theres always the potential and we saw some of the market estimates of pricing by category again.
We've always talked about there being a lag between when we get those supplier price increase notifications to when we start to see it and our results.
So is there the potential for that it would be more pricing and the balance of 2021, there is but again that will really be dependent upon the macro environment. How quickly supply chain covers and really what that underlying demand and again a lot of that's being driven by the residential side and within the electrical space, which we don't participate to a meaningful level.
Great. Thanks, Dave and then it's great to see you are getting some benefits already from the rural broadband.
The fundings that <unk> been the.
$20 billion, how much of about 20 billion and do you think speaks to wesco products and what do you think youll fair share of that of that.
Tim might be over the next several years.
It's a great. It's a great question.
And we've not gone public on what I'll say the conversion rate is on the publicized number.
And I will just maybe share a little bit of this is 100% and our.
Five.
When you and I'll take a moment Nigel just to provide a little color because I think it's important.
Both wesco and legacy Wesco and legacy Anixter had.
Pad.
Participated and the broadband business.
When you actually look at what each company was strong.
Collective strength of the respective strength and with a much more complementary combination and then we had realized or anticipate I did make a comment on that several earnings calls ago, and Thats last form but the prior one.
And so im really pleased with how they of teams have come together, we have one overall broadband leader.
For the combined business and.
Part of our UBS.
<unk> business unit.
Per segment and that.
At broadband leader of the legacy Anixter leader.
And we've got a terrific set of capabilities because of.
The court.
That the broadband build out and and drive specification driven solutions in conjunction with our with our supplier partner base. So.
I think what's really important to understand here and we cited that this example, and David and his comments because and.
And something you can all see but I will make this comment that the broadband build out and the acceleration of five JV properties on a secular growth trend, that's very strong and both across the U S and Canada and this is just one of the I'll call. It catalysts that are helping drive that secular growth trend.
Absolutely Thanks, John and then.
I hear your comments on on labor constraints, because we talk a lot about supply chain, but labor and hiring the right skill labor seems to be a real challenge right now so I'm, just curious what youll see and out there and the labor market and how much of your full year 'twenty, one time and is contingent on the on hiring the right kind of personnel here.
So on.
I'll give you an answer maybe you don't expect the first part of this answer will.
Very much focused on it with respect to our customers.
Because one of part of our core value proposition.
Is providing more efficient more effective solutions.
The construction project build whether it's MRO supplies.
And we can pick up additional outsourcing.
The output, which not quarter, where they're constrained on and OEM build and ramp up and in conjunction with the industrial recovery and we'll provide more effective solutions there.
In the value chain, where myopically focused on the on customer operations and value chain and this that constraint and it's manifesting itself, we have very specific services and solutions that target that the.
This is really important now with respect to the ourselves I can call it wesco and anixter coming together remember we.
And we've gone through and aggressive integration program, where we're three quarters in the three year plus program and we've taken structural cost out we've been selecting the best of the best talent of growth both of the organization to staff the new combined company and we've got the management team completely in place and as Dave said, we're a quarter.
<unk> plus away from the essentially being done with the.
The organization redesign and structural cost take out relative to our labor force and head count and having that be completed.
We are right now and not seeing any constraints and our labor force that are material that are impacting our ability again, whether that impacted the Q1 results one area, where we are I will call out we are aggressively adding additional talent is in the digital.
And on it so.
And remember we are we are looking at driving the digital transformation of our business and in doing that we expect the lead the digital transformation of our industry and that is an area of where we are ingesting talent.
From the outside and I'm very pleased with the results we've had thus far and.
The new additions to our to our talent base, particularly debt of accelerated.
Upon the higher and since the higher of our CIO and Chief Digital officer of cash Corrado.
And he has been onboard.
And better.
In 2021 and.
And the momentum of our it and digital teams is accelerating very pleased with that so, but we will continue to add talent and that part of the business.
Great. Thanks, John.
And our next question will come from David Manthey with Baird. Please go ahead.
Alright, Thank you and good morning, guys and good morning, Dave.
Yes, so from what.
Dave just said it sounds like none of the revenue or EBITDA guidance increase contemplates upside to inflation and that sort of is TBD.
So I guess it looks like most of the EBITDA guidance increases because of the synergies, but I mean, given the strong selling margin you saw on the first quarter I would've thought the gross margin would have been a bigger contributor to your.
Outlook upside so I'm just wondering was the gross margin and the first quarter was it consistent with your expectations or was it actually a little bit better than what you've contemplated in original guidance.
Yes, Dave So good morning, I would point you to we've taken our adjusted EBITDA guidance of 40 basis points improvement versus our previous outlook. So of that 40 basis points roughly half of that is the increase and the synergies we expect to achieve the other half is based on the performance that we've been seeing.
Through the first half of the year and how we believe we're set up for.
For the balance of the year again.
We're very much focused on improving our EBITDA margins, we know that gross margin has been a key focus area for the company, we have not specifically guided that Bud and going back to your question of the the 40 basis points as a combination of synergies continued margin improvement programs and and the benefit of scale on the of the additional top.
John.
Okay.
And then as it really relates to the utility area. If you look at Doe funding and infrastructure and investment in general of the grid hardening et cetera.
Plus what you just said about the broadband space. So if you look at electrical plus broadband I mean, it sounds like the UBS segment is extremely well positioned once we sort of get out of this early cycle environment is that the right way to think about it that the the secular trends in the utility space.
Probably the most favorable of of any of your segments right now.
The first part of your estate absolutely, yes, I think that is.
And you characterize that Dave.
And the secular growth trends.
Our strong and and Andrew Busters I've seen.
And as I noted a strong statement and my tenure at Wesco.
And again.
To set the secular growth trends everything around utility that you outlined which is the U of UBS and everything around broadband build out five years of acceleration.
UBS so to speak.
In terms of it being the strongest I wouldn't say that.
And what CSS faces in terms of and it can take advantage of in terms of the global secular growth trends and you're also right up there.
In terms of data center growth the demand for bandwidth.
If anything is the.
And we've seen one result from this from the COVID-19 driven environment, it's going to be and acceleration of all things digital right and.
And.
Remote connectivity.
And ensuring that voice data video and all of that convergence on all applications and the I.
And I think we're at the very beginning part of the S curve of Iot based applications very beginning and it's got multiple decades of growth in front of us. So I mean, just on the second comment you made I would say that the secular growth trends of CSI per facing are very attractive to us and also on a robust and finally and this one will take a bit.
Longer and be more I'll call it.
More consistent over the next few decades, I think we're at the beginning part of and accelerating electrification trend.
And EES will benefit greatly but that affects on our other business units as well and.
I mean, it's hard for me to say UBS has got the strongest growth trends, we spend some time outlining all of the various growth trends and we think.
We're well positioned and take advantage of but I would say.
And that's how I would bucket by the utility and yes, yes on your utility comment yet on your broadband comment that I will put the.
Data comm and IP security right up there with it and electrification as well.
Great Alright, John and thanks for the comments I appreciate it good luck thanks, Dave.
And once again, if you'd like to ask the question. Please press Star then one.
Our next question will come from Chris Dankert with Longbow Research. Please go ahead.
Hey, good morning, guys, Congrats again on the quarter here.
I just want to make sure I got my numbers straight based on on Dave What you were saying synergy savings and step up pretty materially into the second quarter. The number of them coming out of $268 million is that correct is that what you're.
And you are intending to guide tahira on the <unk>.
That would be high and so if you think about we called out 34 and Q1.
And we called out the the for.
For the full amount. So we have said that 60%, 40% split on synergy realization front half back half. So we've not provided a specific number for Q2, but your numbers too hot.
Got it got it thank you there.
And then just housekeeping and sorry, if I missed it but any comment on April growth to date or is kind of how growth trended through the first quarter and into <unk> here.
Yes.
And we've been very pleased with the momentum as we.
Again preliminary basis, our April sales up roughly 20% versus the prior year pro forma and.
And obviously April and the prior year was the first full month that we had a true COVID-19 impact and we saw the decline and our sales rates and the middle of March April we were down on a pro forma basis of 16%. So we've come off the trough from the prior year.
And we also commented that the gross margins are in line with Q1.
Perfect perfect. Thanks, so much guys I appreciate it.
Thank you.
And this does conclude our question and answer session I would like to turn the conference back over to John Engel for any closing remarks.
Well, thank you all very much.
As we said we're off to a great start and we do appreciate your support and we look forward to the following up with you and I know we've already got a long list of calls Leslie and well and Dave and we'll be connecting with you and thank you. Please stay safe and healthy and have a great day.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.
Okay.
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