Q2 2021 Wesco International Inc Earnings Call
Good morning, and welcome to the West Coast second quarter 2021 earnings conference call. All participants will be on listen only mode should you need assistance. Please signal of the conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then 1 on your telephone keypad to withdraw your question. Please press Star then 2 please.
Please note. This event is being recorded I would now like to turn the conference over to Leslie Hunziker the.
The senior Vice President of Investor Relations. 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.
Please see our webcast slides as long as of 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 change of circumstances today, we'll use certain non-GAAP financial measures.
The acquired 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 Wesco dotcom.
On the call. This morning, we have John Engel, our CEO and Dave Schulz West Coast, Chief Financial Officer.
Now I'll turn the call over to John.
Thank you Leslie and good morning, everyone.
We had an exceptional quarter on delivered outstanding results across the board.
In just 1 year after closing of the transformational combination of Wesco and anixter, the substantial value creation of the new Wesco is clear and powerful.
We're capitalizing on our scale and industry, leading positions, we're generating significant integration synergies at a pace exceeding our initial expectations as a result, our margin performance and backlog of records for the company.
And we are delevering, our balance sheet at a rapid rate. Most importantly, we are only in the early stages of unlocking the power and performance of this new Wesco.
Moving to page 4.
We're seeing accelerating sales and margin momentum across our entire business and delivered second quarter sales that are 4% above 2019 pre pandemic levels.
<unk> also delivered second quarter EBITDA margin that is up 110 basis points versus 2019 pre pandemic levels as well.
Each of our 3 business units is making strong contributions to the growth of our company.
Our comprehensive product and value added service offering our broad and deep supplier relationships and our technical expertise are proving to be critical differentiator for our customers.
We're also ensuring continuity of supply to our customers, which is especially critical as the economic recovery accelerates.
Now shifting the margin and operating leverage we built a foundation for sustainable margin improvement through our increased global scale value based pricing program and the realization of cost synergies at a pace and scale that continues to exceed our expectations Inc.
The earnings power that we're generating has been of key catalyst of rapidly delevering, our balance sheet since our June 2020 acquisition of Anixter.
In just 1 year since closing the transaction, we've improved our leverage ratio by 1.2 turns which is well ahead of schedule and highlights the power of our business model as.
As the result, we now expect the reach our targeted leverage range of 2 point out of 3.5 times by the second half of 2022, which is significantly ahead of our original outlook.
Year to date, we've experienced upside to our forecast on all of our key operating metrics and as such we've raised our sales margin and profit guidance for the second time this year.
In addition, we've raised our 3 year sales and cost synergy targets on the continuing strength of the integration execution.
Our employees have done an absolutely outstanding job on delivering on our commitments in the first year of the transformational combination of let's go on anixter.
We'd like to recognize and thank each and every 1 of them for the drive dedication resilience and strong results.
Now moving to page 5 our dramatically increased scale and expanded portfolio positions us very well to capitalize on the secular growth trends that will sustain the current economic recovery.
And our foundational for the global economy in the years ahead.
Our future growth opportunities amplified by the 6 secular growth trends outlined on this page you'll recall that we previously had a wheel of 12 and we'd collapses into the 6 <unk>.
Major secular trend categories I'd like to take a few moments the highlight 2 specific examples today.
First grid hardening.
When it comes to the power generation transmission and distribution the the overall infrastructure and infrastructure of that power change so to speak today's utilities faced numerous challenges from new environmental regulations evolving technologies and aging infrastructure and increased storm activity.
60% of U S distribution lines of sort of surpass their 50 year life expectancy and it's estimated that 1.5. The 2 trillion the will need to be spent and modernize the grid just the maintain reliability.
Is ongoing and significant infrastructure upgrades of required we're supporting our customers with advanced products and more importantly, with integrated supply chain management services.
We're on site with many of our utility customers, helping with product selection will provide the application and technical support we're sourcing materials and we're handling materials staging and logistics through a single interface or platforms or digitally integrated with our customers' systems for efficient project management as the.
<unk> on utility distribution, we are well positioned to continue to partner with all of the major utilities as they implement the critical work for grid modernization.
Second highlight area I wanted to highlight was the world broadband rural.
All of broadband network development is the huge growth opportunity for Wesco today, there are more than 30 million people on the U S who don't have access to broadband of 30 million homes that as you're doing that don't have access the broadband the pandemic put a spotlight on the challenge is working from home and learning from home became necessary. The FCC has.
Committed $20 billion to support the broadband build out in the U S through the rural digital opportunity fund or better known as Argos. There's another 65 billion within the proposed infrastructure Bill we're partnering with electric utilities co ops in municipals as well as telecom providers to help bring broadband to these rural.
On markets.
Specifically.
We're supplying end to end fiber solutions for the build out of broadband networks and last mile Internet access projections are that the build out will take place over the next 10 plus years, we are in an absolutely outstanding position to leverage our broadband capabilities for customers as the leader in both utility and broadband supply chain management.
So in summary, our Michigan is the build connect power and protect the world.
1 year end of this journey, we are confident that the results. We're seeing are just the beginning of the value creation opportunity that the new wesco represents.
The value creation potential of Wesco, plus anixter has started to emerge, but we have only just begun.
With that I'll turn it over to Dave The walk you through the details of the second quarter as well as our updated an updated guidance.
Yes.
Thanks, John and good morning, everyone and thank you for joining our call starting on slide 7 the summary table compares our second quarter results to the pro forma results from the prior year.
Compared with the prior year sales were up 24% currency added 3 points to growth and pricing was approximately a 4 point benefit.
During the quarter, we saw suppliers increased prices on average about 8% as we have indicated in the past pricing on our project based bids are generally honored by our suppliers and we don't see the full impact of supplier price increase notifications.
Backlog reached another record level this quarter up 36% from the prior year and up 17% from the prior record level in March notably each business unit posted backlog increases of more than 15%.
Gross margin was 21% in the quarter up 140 basis points compared to the prior year.
The strong gross margin performance included a 20 basis point negative impact from an $8 million right down to the inventory of personal protective equipment.
As we foreshadowed last quarter, we took additional inventory adjustments based on market prices and quantities and stock relative to expected demand.
Business unit mix was the 20 basis point benefit the gross margin versus the prior year.
Supplier volume rebates increased gross margin by 30 basis points, driven primarily by our year to date true up in the quarter given our strong performance.
The balance of the gross margin improvement approximately of 110 basis points was driven by the benefits of the ramp up of our combined company margin improvement program and inflationary pricing.
Sequentially versus the first quarter gross margin increased by 90 basis points.
Mix contributed 10 basis points in supplier volume rebates 30 basis points with the balance driven by the benefits of our margin improvement initiatives and positive price cost.
Adjusted EBITDA, which excludes the merger related costs stock based compensation and other net adjustments was $309 million $99 million higher than the prior year.
This represented 6.7% of sales 100 basis points above the prior year.
110 basis points above the 2019 second quarter on a pro forma basis.
Adjusted diluted EPS for the quarter was $2.64.
Preliminary results for July are encouraging with sales up mid teens versus the prior year.
Moving to slide 8 as I mentioned, a moment ago gross margin was 21% this quarter.
This result was broad based on a major driver was continued traction of the margin expansion program that we deployed across the entire organization.
The slide lays out some of the aspects of the program starting with capability building, which is the foundation of the program and includes the interactive training sessions that the entire sales organization undergoes the become familiar with the program.
Second of sales processes, and playbook, which captures the focus on value based pricing the emphasis on solution selling and the ongoing database coaching that our sales teams received.
Third performance management captures the accountability aspect of the program and the alignment of our sales incentives to our margin expansion goals.
Lastly, the systems and dashboards component of the program includes the access the dashboards that capture the most critical information of our team needs and ultimately enables us to unlock the power of our big data.
We are still on the early phases of the rollout and expansion of the program to the entire Wesco Anixter organization and are confident we will see continued margin expansion from this effort.
Turning to page 9 you can see the drivers of nearly $100 million increase of adjusted EBITDA driven by higher sales expanded gross margin and the benefit of synergies from the integration.
Partially offsetting the positive drivers were higher volume related operating costs, including variable compensation.
The higher variable compensation as the function of both sales commissions and an increase to incentive compensation as we expect payoffs for the year to exceed targets in the annual operating plan.
Other headwinds the EBITDA in the quarter were higher benefit costs and the reversal of certain cost reduction actions, we undertook in the prior year and response of the Covid pandemic.
In total adjusted EBITDA was up 47% from the prior year on sales growth of approximately 24%.
Now let me walk you through the results by business unit beginning on slide 10, all of the year over year comparisons shown in the next 3 slides are based on the pro forma results in the prior year.
Sales in our EES segment were up 34% with double digit growth in all operating groups.
This growth reflects the construction sales that are continuing to recover faster than we had anticipated momentum on our cross sell initiatives and demand driven by secular growth trends.
This quarter, we continue to see a higher level of projects being released from backlog and shipped relative to our expectations at the beginning of the year.
We continued to experience robust bidding activity levels that are driving an incremental increase to our backlog from its record level on the prior quarter and we made further progress on our cross sell initiatives that is capitalized on our ability to now offer a complete electrical package to our customers.
We also continue to see increasing momentum in our industrial and OEM businesses in line with the broader industrial recovery.
Adjusted EBITDA was up 85 million.
Representing 8.7% of sales 290 basis points higher than the prior year level.
This increase reflects the gross margin initiatives I discussed earlier.
The strong cost synergy realization and effective price cost pass through.
Turning to slide 11 sales in our CSS segment were up 22% versus the prior year pro forma and up 17% sequentially.
We saw strong growth in our security solutions Global accounts data center, and Hyperscale projects, partially offset by decline in safety related products.
In addition to our cross sell programs CSS benefited from several secular trends the need for increased bandwidth $24.7 connectivity IP based security solutions and the demands related to remote work and school applications.
Backlog increased almost 20% from March to a record level.
The ability was also strong with adjusted EBITDA at 9% of sales 30 basis points higher than the prior year, driven by operating leverage integration cost synergies and the execution of our margin improvement initiatives.
Note that the majority of the 8 million inventory write down was recorded in CSS negatively impacting adjusted EBITDA margin by 40 basis points.
Turning to slide 12 sales on our UBS segment were up 13% versus the prior year and up 13% compared to the prior quarter.
Utility demand was has remained consistently strong as our customers continued to invest in grid hardening and monetization and we won new business due to our leading value proposition.
Our broadband business was up double digits versus the prior year driven by strong demand for data and high speed connectivity that has never been greater due to the step change expansion and requirements for work from home and school from home applications.
Additionally, we are benefiting from sales activity due to the federal government's rural digital opportunity fund, which John mentioned earlier.
As 1 of that project began at the end of 2020.
For UBS adjusted EBITDA on the quarter was $101 million or 8.3% of sales up 70 basis points, driven by synergy realization gross margin expansion and effective cost controls.
Turning to slide 13, let me walk you through the updates to our integration and revised expectations for synergies.
Starting with revenue. We originally estimated that we would generate sales synergies of approximately 1% of the pro forma sales of the combined company or accumulative of $170 million over 3 years based on 2019 pro forma sales of approximately $17 billion.
This assumed we would see some customer attrition as we merged Wesco and anixter.
To date, we have not seen any revenue dis synergies and have realized $77 million of cross sell benefit.
The success of the cross sell program to date has exceeded our expectations and our pipeline of opportunities continues to build.
Due to these factors, we are increasing our revenue synergies to the cumulative 500 million or roughly 3% of 2019 pro forma sales to be achieved by the end of 2023.
On this slide we have provided examples of recent cross sell wins for each business unit in each case, we have been able to expand a legacy customer relationship of either wesco or anixter to sell additional products or capabilities.
Each of these examples reflects a multiyear opportunity and combined represent future sales of more than $60 million in aggregate.
You can see that they also cover a wide array of products and capabilities, including the wire and cable capabilities at anixter is known for in the led lighting capabilities of wesco as well as reflecting the secular trends of electrification bandwidth driven fiber optic deployment and the growing need for supply chain services.
Turning to slide 14.
Last quarter, we mentioned, we would be reevaluating the synergy plan once we reach the 1 year anniversary of the merger in June.
Based on the results to date, the accelerated pace of integration and the size of cost synergy opportunities. We are increasing the cumulus target by 20% and the $300 million compared to the 2019 pro forma cost structure.
This represents a 50% increase from our original cost synergy target of $200 million when the merger closed in June of last year.
We expect onetime cost to generate these synergies will be approximately $225 million through the end of 2023.
In total we have generated approximately $117 million of cost synergies to date are roughly 40% of our target through 2023.
On the right side of the slide we had outlined the target by synergy type as well as an overlay of the synergies that had been realized to date you can see as an example that most of the corporate overhead synergies have been generated the little more than half of the G&A synergies have been captured primarily related to our organizational redesign which is now essentially.
The complete.
The largest remaining synergies are those that take longer to execute including the supply chain and field operations buckets.
Moving to slide 15.
We remain laser focused on reducing our leverage on this slide you can see that this quarter, we reduced leverage by 0.4 times trailing 12 month adjusted EBITDA for the second quarter in a row.
And have reduced leverage by 1.2 times since closing the anixter acquisition 12 months ago.
Net debt increased marginally in the quarter, primarily due to investment in working capital that we made the support the exceptionally strong sales growth we experienced across all of our strategic business units.
We're gaining efficiencies and reduce working capital by 3 days in the quarter.
1 of the hallmarks of our business model is our ability to generate strong cash flow throughout the economic cycle.
And we remain focused on reducing our leverage.
We expect to continue the rapid pace of deleveraging and are accelerating our plan to return to our target leverage range of 2 to 3.5 times trailing 12 months adjusted EBITDA in the second half of 2020 to at least 6 months earlier than our prior expectation of mid 2023.
Turning to.
<unk> 16, and our outlook for 2021.
We have increased our outlook for sales growth to a range of 10% to 13% primarily due to the strong demand we have experienced in the first half of the year execution of our cross sell program continued share gains and the strong macroeconomic outlook for the remainder of the year.
We now expect EES to be up at the high end of our range driven by the faster than expected macro recovery of our end markets.
Note that we do not participate in the residential construction market in the meaningful way.
We expect CSS to be at the middle of our sales range due to its exposure to critical secular growth trends and its global footprint.
Next we expect UBS to be at the low to mid point of our sales range. The.
The utility market has been very stable and we expect continue.
Continued demand increases in the broadband market to contribute to growth as well.
We have increased our outlook for adjusted EBITDA margin to a range of 6.1% to 6.4%, primarily primarily driven by the strong profitability of this quarter. The expectation for continued sales growth and operating leverage in the second half of the year.
Continuing down the income statement, we expect our effective tax rate to be approximately 23%.
Due to the higher sales and profitability expectations, we are increasing our adjusted diluted EPS outlook to a range of $8.48.
The $8.80.
We are adjusting our expectation for free cash flow as a percentage of adjusted net income to 90% to reflect the investment in working capital to support the higher sales growth outlook.
We still expect to deploy $100 million to $120 million of cash for capital expenditures and investments in it and digital.
Note that many of our investments from it will be cloud based cloud based subscription services will be recorded as other assets and amortized over the term of its associated arrangement.
Rather than classified as the capital expenditure and depreciated over its useful life.
Please note that we do not anticipate of change to the total depreciation and amortization related to this accounting.
Turning to page 17 before opening the call up to questions I'd like to walk you through a quick summary of the key takeaways that we've covered this morning.
<unk> had an exceptionally strong first half of the year on the outlook calls for sequential growth in the back half of these.
Results were again strong across the board this quarter with sales up double digits in each of our 3 businesses.
We are outperforming the market capitalizing on our leadership position and executing well on the tremendous cross selling opportunity of our combined business.
We are well positioned to continue benefiting from these trends in the years ahead.
These business reported higher adjusted EBITDA margin this quarter than the prior year pro forma in total EBITDA was up nearly 50% with 100 basis points of EBITDA margin expansion, we are driving increased operating leverage across the enterprise and realizing the benefits of our strong execution of cost synergies.
Our rapid pace of deleveraging continues.
We reduced our leverage by 0.4 turns for the second consecutive quarter and delivered a total leverage reduction of 1.2 turns since closing the transaction just 12 months ago.
These strong results of enabled us to make several significant adjustments to our outlook for the business we.
We increased the expectations for sales growth and profit profitability for the year.
We increased our cost synergy target by $50 million to $300 million and our sales synergy outlook by approximately 3 fold to be to be achieved by the end of 2023.
And finally, we accelerated our anticipated deleveraging by at least 6 months to the back half of 2022.
With that I'd like to open the call to your questions.
We will now begin the question and answer session.
I ask a question you May press Star then 1 on your telephone keypad. If you were using a speakerphone. Please pick up your handset before pressing the keys.
Trailing a question. Please press Star then 2.
And please also limit your questions to 1 question and 1 follow up.
At this time, we will pause momentarily to assemble a roster.
Yeah.
Our first question comes from Deane Dray with RBC capital markets. Please go ahead.
Thank you and good morning, everyone. Good morning day.
Hey, maybe we can start with price cost.
And as Dave was zipping through the prepared remarks, we heard 4 percentage point benefit the price, but then there was a reference to an 8% supplier input cost increase now we don't know the timing of the state and how they came through.
But we did hear a positive price cost several times can you pull it together what was price cost for the total company in the quarter.
And if you can give it by segment that would be great, but we'd be happy with the total company and start there. Please.
The short game.
I appreciate the question as we mentioned what we saw from our suppliers where of.
Supplier price increase notifications that on average were 8% in the quarter.
And of 1 of the things that we highlighted was that we don't see all of that impacting our business because of the bids and our suppliers will honor the bids.
1 of the things that's very difficult for us to do is to call out the exact basis point benefit that we get from price cost at this point.
That is 1 of the key elements of our margin improvement program is making sure that we're pushing through price to our customers to the best of our ability we do track that but it's very difficult for us to break out the inflationary benefit that we're seeing in our gross margin relative to what we're seeing from the balance of our margin improvement program.
I hope that provides some perspective in terms of the by the of strategic business unit, we're seeing more of the price increases coming through on the EES side.
And then I would say, it's UBS followed by CSS just based on the the different types of businesses and the impacts of that suppliers are pushing through on price increases.
That's great, but just to clarify the.
The wesco that I know historically it has always been quick to pass through.
Put costs I don't see where that changes and just your degree of confidence on being able to keep up. This is these are extraordinary times right now on cost inflation, but just your degree of confidence that youre going to stay ahead of this during the course of the second half day.
Yeah. Good morning again, yes. This is John.
<unk>.
Great confidence if you look at what's occurred.
I'll keep my comments with respect of Q2 and Q1. So the first half of this year, we're saying, we're clearly in an inflationary cycle.
So versus what the company has done historically I will tell you that we are passing through the price increases quicker than we have historically the.
A lag that we typically experience.
And other inflationary cycle is much shorter I'm very encouraged by that it's really a function of 2 things the comprehensive margin improvement program the value based selling and explicitly we're focused on moving that the pricing through our business.
And the customers the supplier price increases that is.
Through a whole array of techniques and Dave laid out of.
The key elements of that comprehensive program. In addition.
Vision.
We doubled the size of the company.
And that increased scale and global supply chain capability.
In a significantly better position to ensure continuity of supply. If you look at our end markets across the board demand is still outstripping overall this is a market question.
The supply chain rebuild the rebuilds underway, but we're seeing the fact that we've added to our inventory consciously.
Using our new found an increased scaling and very strong global supplier of supplier relationships, we're able to provide that continuity of supply as demand is ramping which is also supportive of not only pricing and gross margins, but our sales growth, which is accelerating so the.
What day broke out was the.
The 8% is a published hub.
Publish supplier price increases this is incredibly important and I think as you all know that's not what's realized in the value chain for the business that we provide it's direct shipped in this project based those those are competitively bid and we get special pricing authorizations in place from our suppliers.
That represented a more competitive price the support that project activity and that gets locked in between our suppliers and us. So again that that shows the difference that's the delta between the 8 <unk> and the 4.
Is that helpful.
Oh It is really helpful and just on reading the slides. This morning before the call. There was no no excuse no complaining about price cost.
Which kind of was signaling that you had it handled and I appreciate the the.
The specifics you provided just here so I feel good about that and just as my follow up on the cross selling target increase.
That's a big bump.
And I loved hearing that youre, not seeing dis synergies because that's kind of the 1 area. We were holding our breath on in terms of the the merger. So that's good news just talk about the rigor and how you're tracking these actual cross selling wins I mean, you gave good examples on the slide but just is this a bucket of debt.
Can I have a high degree of confidence that yes, that's the cross selling that would not have existed prior to the integration yeah. What we tried to do deem the spotlight 3 different types of examples.
To give a sense of the the categories..1 was where we had a day is focus on that 1 page 1 is where we had the.
On existing Wesco customer relationship and we were able to pull in anixter products and services. The newfound capabilities as a result of the merger. The second was where there was an existing anixter customer relationship and we did the we did the reciprocal we pulled in wesco products service capabilities and capabilities and the third 1.
On the existing Wesco customer, where we did 2 things where we pulled in anixter products, but we also expanded the scope of supply and use the anixter supply chain service capabilities to expand the business.
So we wanted to show there was 3 different types of examples to the heart of your question.
And we've mentioned this before we stood up a dedicated and the integration management office, we pulled some of our top talent across both respective organizations and staffed at that full time and we use of the acronym I am out of that full time integration management office is still in place and will be in place for the 3 year integration period, we're still working with.
Our external consulting partner across that integration period, and the integration execution, which includes detailed program management processes in tracking mechanisms and scorecard is incredibly rigorous unlike anything either company had ever had in place.
Prior to the merger so.
Great confidence very high degree of confidence debt.
We're going to we're going to go from the 1% cumulative incremental growth via cross sells of 3 percentage points of growth.
It's really we're in the very early innings of this that's my final point the opportunity pipeline.
Debt, we're tracking and its rigorous again is growth.
<unk> substantially as we move through the second quarter and that coupled with the recent wins, we spotlight of 3.
And the we're beginning to see the cross selling results in our sales results.
Put that all together.
And we told you that we are going to take a very comprehensive look at our 3 year plus integration synergies at the 1 year of close it gives me great confidence Dean.
To take up the 1% the 3%.
That's all good to hear thank you and congrats.
Steve.
The next question is from Sam cash with rain.
James Please go ahead.
Good morning, John Good morning, Dave how are you good morning.
Terrific performance obviously.
2 questions.
1 of them I guess would be of piggyback on what Dean's Prior Inc.
Where it was as it relates to your implied second half guidance for this year.
What specifically are you baking in for sequential pricing actions and sequential billing margin expansion within the guidance and related to that at what point does the PPE.
Inventory write down space.
Yes I'm.
I'm sorry, Sam let me address first on the the pricing impact for the second half very very difficult to forecast the impact of pricing on our revenue.
So therefore, we don't include that we know what we experienced in the first half that's assumed in our full year forecast, but we don't assume any incremental pricing benefit as we enter the second half of the year.
Related to the PPE write downs as we mentioned back in our first quarter call that was a very fluid situation and we had indicated at that point.
Back in May that we would continue continue to look at our inventory write down requirements related to that safety equipment. We.
Still do have some inventory, we think that any potential write down would be immaterial, but again, that's something that we will continue to monitor and make sure we get the accounting.
Correct as we report our results and you are billing margin expectations in the second half versus the the first half of you're expecting continued improvement in billing margins.
We generally don't disclose any of the the drivers or the the forecast for our gross margin. So I don't want to get into too much detail on that obviously 1 of the things that we're focused on is making sure that we continue to address the inflation. We continue to make sure that we're getting the value based pricing.
Through to our customers, so again I'm not going to comment specifically on the the billing margin of the gross margin going forward, but as you can see from our implied second half we are assuming adjusted EBITDA margin expansion in the second half.
And then my last quick. Thank you my last question would be.
I didn't note that year 3 free cash flow guidance has changed from the at least 600 million of so prior despite the fact that you're obviously raising year 3 synergies no I know theres going to be some incremental working capital needs but.
Theoretically would it be more than $600 million at this point based on.
Current trends in the synergy expectations.
We're confident that we can deliver the $600 million of free cash flow by year 3.
We continue to recognize that 1 of the drivers to our ability to generate that free cash flow is continuing to become more effective on net working capital and as we expect more sales synergies that's going to require more networking capital.
The combination we're very confident that we can deliver the $600 million by year 3.
Thank you much.
Thanks, Jim.
The next question is from Nigel Coe from Wolfe Research. Please go ahead.
Thanks, Good morning, everyone.
So yeah the.
The rebates disclosure very helpful I'm, assuming the bulk of that hits in the EES segment, maybe just the.
Maybe just confirm that and then.
The more curious on the on the customer rebates that you're giving to your customers.
The 4% price would that be net of rebates and I'm just wondering how the dynamic on the rebates the yield given to your customers versus the prior rebates, how that's sort of net notes here.
Certainly Nigel So let me address first on the supplier volume rebates.
We did do a true up in the second quarter again, we generally were looking at our expectations for the full year and of that 30 basis point improvement that we saw at the gross margin related to supplier volume rebates. The majority of that was just the true up to get the front half, where we thought it needed to be.
Based on our performance and our expectations for the balance of the year. The supplier volume rebates are actually recognized in each of our businesses. So I don't it would not be fair to say that the majority of that would be in EES. It is split out between the 3 businesses based on the agreements that we have with our suppliers and the on your comment about.
The customer rebates and the pricing impact the customer rebates are netted so generally its the agreements that we have with customers on rebates is based on primarily what their spend pools are and how much they purchase from us so that would be of net against the inflationary impact on our revenue.
Okay, that's great.
And then on.
On the on the comp headwind the variable comp headwind.
You you mentioned that that stepped up in the bridge just curious you know where we sit on that on the dollar basis here and then as we think beyond this year in the sort of a more normalized.
On what.
What kind of tailwind can we expect into 'twenty 2 from that reset.
Yes. So at this point, we've accrued what we believe is the appropriate amount of incentive compensation for the front half of the year based on the performance of the company. We are above our targeted annual operating plan. So we will be expecting to pay out incentives at a higher level.
If you think about what we outlined earlier in the year relative to the headwinds that we had for bolt the incentive compensation plus COVID-19.
We recognize that and we've increased the accruals for the dollars that we expect to pay out for 2021.
Similar to what we had occurred for the current year, if we accrue at a higher level versus target.
We would reset of our plans for 2022 back to targets. So there would be of potential tailwind in 2022 related to the incentive compensation.
Okay, we will follow up offline on the actual quantification of that thanks, David.
The next question is from Spain, Germany of Keybanc capital markets. Please go ahead.
Hey, good morning.
That's where a lot of companies of this quarter, we've seen really solid increases to revenue and EPS like you just put up.
Through the cycle of recovering inflation I think some investors are just thinking about how the demand cycle plays out here. So I'm curious to the extent you can talk about it what is your view on cycle duration and is there any reason to think that you can drive further solid earnings upside as long as youre seeing revenue growth.
I think we're in the early innings. The answer your question directly on the cycle early innings, you know when you look at look at the.
Look at each of the 3 big business units.
And I'll talk of job dress cycle, but then also of the secular growth trends, Steve because I think those 2 you got to look at in combination clearly the economic cycle and the overall economic cycle recovery is underway.
For EES.
Remember exposed to industrial end markets that the building. It includes the OEM that's building sort of both of those are in recovery and we're seeing real nice sequential growth. We're also outperforming that because we believe we're outperforming that and taking share, but so its the kind of a double boost.
Remember, we're not we're not.
We're not positioned to benefit directly from the resi cycle, but we benefit.
On the second derivative basis, when it drive subsequent non resi cycle.
The non res the cycle.
Recovery has begun but we're in the very early innings, there's a bunch of puts and takes depending on the end Mark the end market type of the type of projects, but if you look at non Radnet, Inc.
Are viewed as we kick into 2022, and 2023 of that cycle recovery well underway, we're not really seeing the tailwind from the cycle, yet, but as evidenced by our improving sales growth momentum sequentially, particularly as noted in Es plus the record backlog ending the degree to which backlog grew.
True I'm going to put a very fine point on this.
Normally based on historical seasonality, we would eat into the backlog sequentially in the second quarter.
We grew our backlog sequentially sequentially by a large margin. This is counter of normal.
Any normal historical seasonality or cyclicality so.
More on the early innings of the recovery I think we're significantly outperforming.
In construction, so thats whats driving E S.
<unk> UBS.
We're benefiting just from a leading leadership position in the industry, leading value prop and there are strong secular growth trends in that are driving across the utility power chain and that's why I cited that example in my opening comments about grid modernization as well as broadband and then she us.
Cash is really benefiting from our global leadership position its tech driven selling technical driven selling and very strong secular growth trends I think we're in the very early innings. Because you had the cycle question. We're in the very early innings.
Of a large capital deployment cycle.
Across 5 G P.
Plus S T T X fiber to the X, including fiber to the home.
And Hyperscale data centers.
On the backlog for CSS is also at a record level by 8.
Extraordinarily large margin when.
When you look at how much backlog grew in PSS in Q1 and Q2, it's it's unlike anything we've ever seen it may stay the anixter team has ever seen in that business.
And UBS is author sitting at a record backlog.
So.
The cycle question is of Great question I'm glad you asked me I think we're getting some benefits, but we're effectively in the early inning I'll come back to the secular growth trends you look at what we laid out there I've touched upon the benefit directly UBS in CSS, yes, we're in the very early innings of the electrification secular trend.
Okay.
And that that has legs of the next decade of Leon and Green energy. We're in the very early stages that has legs of the next decade and be on and obviously digitalization.
And supply chain reassuring, the North America cut across our entire enterprise so.
I feel really good about where we are and I feel really good about our outperformance versus the current market.
You couple that with where we are in the cycle. That's what gave us the great confidence to increase our 3 year targets on the topline and cost and bottom line effectively effectively.
That is really great color.
And now that we're a year or so into this and you're getting a better sense of the cost structure, obviously, you're increasing those targets.
For sales and cost synergies and and you think about those secular trends and opportunities on what the mix impact of that is how are you thinking about sustainable incremental operating contribution margin in an up cycle for however, long that lasts.
So.
I think the way I'd ask you to think about it and Steve you know us well so.
With our with our 3 year integration programs.
Executing that in the targets that we've laid out for the 3 year plus period through the end of 2023 post close.
We've given we've giving a good insights in terms of how we think of the next 2 years, because we're 1 year into the.
I will tell you that this transformational combination is exceeding our expectations I told you that the 2 businesses were more complementary than we thought when you looked at end market customers and categories products and services.
Also the cultural integration is exceeding our expectations.
So those 2 elements together bear on the.
The higher confidence, we have relative to the sustainable value creation.
I do want to make the point, we're above the 2019 pre pandemic levels on sales gross margin EBITDA dollars on EBITDA margin, so and that's without all of the tailwind of the cycle. So I'm not going to give you the the longer term construct right now, but we we believe we're exceptionally.
Well positioned to outperform the market on the topline.
Obviously, leveraging the combined increased scale and the cross selling.
The cost synergies.
We've only delivered 117 million to date is in our P&L of the $300 million.
Right that we've outlined through 'twenty 2023.
Gross margins at a record level and we're in the early innings of our margin expansion program on the Wesco side Anixter 3 years of note and still seeing margin expansion and we're delevering at a very rapid rate and I would tell you that's probably the most the <unk>.
As part of the story is deleveraging story, it's a major deleveraging story is well underway you put that all together I think we've got you know.
Just an outstanding value creation opportunity in terms of topline growth above market.
<unk> EBITDA margin expansion deleveraging and outstanding cash flow generation it can't redeployed to invest in the platform.
Great detail I appreciate it.
The next question is from Christopher Glynn with Oppenheimer. Please go ahead.
Thanks, Good morning, and congrats so congratulations on all of the success to date.
Im curious if youre seeing your volumes right now kind of augmented by the overall supply chain disruptions globally and you know the.
The influence of that might have on customer buying.
Buying patterns.
So that's a contributor Chris.
No.
We doubled the company in 1 move so.
It's the inherent benefits of putting 2 strong leading companies together that increased scale and I just mentioned the complementary nature of the combination.
And the overnight the much stronger broader deeper relationship we have with our global supply chain partners.
That's having benefits across the entire operation of the entire company.
And part of that is as the demand is pulling on the supply chain that is rebuilding.
We are able we're in a position to.
<unk> high integrity supply chain management and continuity of supply.
Look we consciously increased our inventories because we are seeing very strong sales growth and we're focused on inventory availability and fill rates for what we're seeing demand and what our customers are giving us insight into and we're able to in conjunction with our supplier partners provide of continuity of supply that we think is different.
<unk> I don't think that is temporal.
I think this is the.
The result of this transformational combination.
It's the benefits of scale of putting 2 leading companies together in what's still a fragmented value chain. So I see the I honestly see these benefits carrying on into the future in the perpetuity.
Okay and then.
The third and fourth quarter.
Similar earnings results as the second quarter puts of nicely above the range. So I'm just curious within the outlook what part of the second quarter.
The composition of the P&L might not repeat.
Yeah, Hey, Chris It's Dave Schulz. So a couple of things to look at that May not repeat in the second half of obviously the gross margin true up the SVR true up that we got benefit from where we're at the right level.
Our forecast for supplier volume rebates, and but we did get that extra benefit in Q2 that really should of been spread out between Q1 and Q2, knowing what we know now so we did get an outsized benefit here.
<unk>.
In the second quarter.
Also the incentive compensation true up.
Again going back to the discussion on we had earlier around based on the progress that we've made relative to our annual operating plan. We do expect to pay higher incentives. There was a portion of of a true up that was included in Q2.
So again net that would be a little bit more level in the second half of the year.
Okay. Thanks, Dave.
The next question is from David David Manthey with Baird. Please go ahead.
Okay.
Hey, Thank you good morning.
Good day.
Yes, Hi, John so.
Inflation clearly had some positive effect on revenues and operating margin this quarter, but it sounds like you're telling us its more like tens of basis points and a smaller impact than what you were able to achieve through organizational change is that the way to think about it.
I would say day I would say Dave This is really an important point.
Which is why we included a page we had not done of previously of the structure and.
I'll use the term of our recipe of our margin improvement program.
Yeah, it within days of prepared remarks.
Focused on value based selling and getting those price pass throughs.
He is an explicit.
Element among other elements in that comprehensive program and as I mentioned earlier, the Dean Dean's question.
She is passing through those more quickly than we have historically.
As the result of this enterprise wide margin execution program.
Parsing out just that inflation benefit versus all of the other initiatives. That's embodied in that program that are positively impacting both billing and gross margin is.
The.
Impossible to do.
Other than the <unk>.
Explanation that.
The cause of the mix of our business.
Those are list prices that are published.
Back of that and in our project part of our business, we're quoting competitively ever debt every day and we're securing S. P. A special pricing authorizations in conjunction with our suppliers to secure those project bid.
And that represents pricing that is not new.
<unk> the list pricing that Youre seeing that are published and because we have.
The sizable portion of our business is direct ship.
That dynamic the pricing dynamic is different there, we're getting special pricing authorizations that support winning those jobs in conjunction with other suppliers and then consequently, we are of different SG&A structure to to execute that direction of business.
That's understandable, if if you're if the suppliers though.
Are experiencing price increases across the board.
It's not a net zero of game, there, they're not going to sell it to you at lower than their cost their sort of the passing through something I I guess I'm confused on what youre, saying about the special pricing hold on.
Sure sure and obviously, they they pass that to us and we work they try to and I'm just I'm just talking about the dynamic of the value chain and what pricing.
Price is real.
Because of what's in our margin as the price we're realizing.
Net debt with my main point and.
And.
We're obviously working in conjunction with our supplier partners the push that through and I think what I'm, what I'm most encouraged about.
It is again anixter had this 2 years running pre merger closed they had.
On a rigorous set of training materials around.
A whole series of margin improvement levers.
Put price pass through of doing it quickly, but value based selling and it just terrific set of materials and if those materials, we refined and expanded and now are driving enterprise wide effect of really with the start of this year across the legacy Wesco of portion of the the combination that we are seeing the benefits on so.
Super encouraged with.
No.
What were driving the set of initiatives initiatives, we're driving as part of a comprehensive margin improvement program and the benefit that's having on our both of our billing and gross margin.
Okay. Thank you for that John.
<unk>.
As it relates to the the sequential and the seasonal pattern here at new Wesco, I mean, theres always a glide path on pricing. So I would imagine you'd get a little more benefit net in the third quarter than second quarter.
Talked about the backlog build.
The question is should we just assume that the quarter to quarter growth from <unk> should be at least as good as normal maybe a little bit better than that.
Yeah, Dave I, obviously, you can do the math on our total back half versus where we are year to date with our outlook.
As we think about the sequential we do anticipate that we will see.
Continued back half I mean at the midpoint of our of our guide we're 7% growth on sales front half of the back half.
And obviously as we see increases in supplier price increase notifications, we're going to work really hard to get those pass through to our customers through our value based pricing initiatives and our other margin improvement plans.
But we are expecting EBITDA margin improvement front half the back half.
As you can see from our outlook, we're not going to break out the specifics between the gross margin line.
Got it thank you both thanks.
Thanks, Dave.
The next question is from Chris Thank God the cat.
Please go ahead.
Hey, good morning, guys. Thanks for sneaking me in here.
I guess, Dave you walked through some of the key drivers of that margin improvement program and John you highlighted pricing for value, specifically, but I guess more on on the systems and data side.
Meaning are we into when it comes to know first the.
Availability of that data to decision makers, and secondly, what kind of utilization and adoption of those actual tools I assume some of that rolled out new year, but it's kind of where are we in terms of actually getting that to the people on the ground.
Great question Chris.
So 1 of the major activities that we've been working on literally started post merger close.
Was getting both companies' respective dataset complete big datasets I'll call it and figuring out how the knit those together. So we have been working with 1 day, we have 1 new data Lake that we've established as part of our foundational element of our digital transformation program and we've been we've been.
High grading and porting that data both legacy anixter data and legacy Wesco data into that new enterprise wide data Lake as we've been doing that we've also been through our digital initiatives under the leadership of our of our new CIO and CTO, Chief Information Officer, Chief Digital officer of cost Corrado.
Those who we hired.
6 plus months ago under his leadership and with that team we've been developing our own digital applications.
The leverage that big data and unlock debt the power of that big data.
There are several applications that we've stood up Chris specifically that are supporting that margin improvement program.
With all of that said. This is this is the new Wesco I mean, we're in the in a multiyear digital transformation journey and increasingly we will be standing up building using an agile development process building our own digital apps the leverage our big data Super excited about the long term.
Impact of this I'm not going to go through the specific apps, we built but I will tell you a few of been built already that are part of this comprehensive margin program and we're also using the <unk>.
Also built the maps that are helping other parts of the front end sales management and order management and execution process. So we are in the very early innings.
Of applying digital.
And unlocking the power of our big data, but thanks for that question.
No no and thank you for the response really really helpful. There, but glad to hear you're moving fast.
I guess the the last follow up from me.
On the cross selling appreciate the examples out of curiosity of we've seen any cross selling on an international space kind of bringing legacy wesco into other markets any color there would be great.
Yes, we have we've.
We've seen opportunities.
A few opportunity both in E S.
And she is debt.
Now she has says.
Brought to us.
Very strong extensive global footprint.
The global leadership capability and data communications and IP security. So we've been able to in a few opportunities already leverage the existing.
Extra of slash CSS customers and pull on some of the Wesco portfolio, but in addition, anixter over the years.
On the oil.
On the foundation of the leading position in wire and cable in North America. They also had been expanding globally that capabilities. So we've been able to sell more of the complete electrical package quote unquote globally as well so.
The.
Examples and both of those business units.
Got it. Thank you so much of the color much appreciated.
The next question is from Patrick Baumann with Jpmorgan. Please go ahead.
Hi, good morning, Thanks for taking my question.
Just going back to the of pricing I think you saw 2 years to 3% impact year over year in the first half of the year, but then you said something in response to a question about nothing incremental expected for the second half. The does that mean you of zero for price year over year in the second half of it does it mean that you have nothing incremental versus the first half, but but still up year over year.
And then.
And then also and then also what is the assumption for foreign exchange and the guide if there is any.
Yeah, So Patrick I'd stay of shelves, so pricing very very difficult for us to pull out what that pricing potential benefit or.
The decrement would be from our overall revenue and so we don't include that as we think about the back half guide.
Same thing with foreign exchange, but right now I mean, we do look obviously at expected foreign exchange rate forwards, but.
We don't include any significant incremental delta for foreign exchange in the back half of the year.
Okay understood and then on on free cash flow you mentioned your capital spend target is unchanged, but so far this year, you've only spent about $20 million.
And then you also mentioned something about cloud investments. So I'm just wondering if you could flesh this out a bit why why the significant back half weighted on capital spend and then maybe some examples of things you'll be investing the capex in from a digital perspective, certainly so if you include some of the other expenditures from a cash flow perspective related to our it and digital we spent on.
Approximately $40 million year to date, a combination of capital expenditure of plus other cash spend on digital.
We are as John mentioned, we're still ramping up some of our digital initiatives and some of our.
Platforms as we move forward and so we do expect to see an incremental spend in the second half of the year related to those it and digital expenditures.
And then the other 20 is that in operating cash flow that we don't see.
Correct.
Understood.
And then last 1 from me why was mix of benefits margin like what drove that I, just would've thought with es growing faster than the rest of the company that makes would've been.
Headwind.
Yeah. So when you think about the we made the comment specifically around the gross margin.
It did get a mix benefit versus the prior year.
And that was primarily driven by the strong gross margin in the EES business. So if you take a look at some of the historical pro forma numbers.
Our EES business tends to have an above average gross margin relative to the company and when you take a look at that growth rate relative to where like our utility business grew and our utility business does have a substantial portion of its business is direct ship. So therefore, the you get do get a mixed impact just based on the the relative growth rates of.
Of the Sps.
Yeah.
Okay. Thanks, a lot I appreciate the time good luck.
So I think we're at the top of the hour.
I'll bring the call to a wrap thank you all for your support much appreciated and we look forward to speaking with many of you in the.
The coming days and throughout the quarter as well as our upcoming investor events, including the RBC Global Industrial Conference next.
Have a great day everyone.
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