Q4 2021 Wesco International Inc Earnings Call
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Good morning, welcome to today's.
Speaker 1: Good morning, welcome to today's...
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<unk> fourth quarter 2021, and it's called.
Speaker 1: Co, fourth quarter 2021 earnings call. My name is Candice and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for question and answer at the end. If you would like to ask a question, please press start followed by one on your telephone keypad. As a reminder, it is one question only and one follow up. I would now like to hand the conference over to our host, Lesley Hunsinker, head of investor relations.
My name is Candice and I'll be your moderator for today's call all lines will be muted during the presentation portion of to cope with an opportunity for a question and answer the end. If you would like to ask a question. Please press star followed by one on your telephone keypad. As a reminder, it's just one question and one follow up I would now like to hand the conference.
All to all host Leslie Hunziker.
Head of Investor Relations Leslie 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.
Speaker 2: 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.
Speaker 2: 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 well as the company's SEC filings for additional risk factors and disclosures any forward looking information relayed on this call speaks only as of this date and the company undertakes no obligation to update the information to reflect the changed circumstances.
Speaker 2: 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 date, 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 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.
Speaker 2: Today we'll use certain non-GAAP financial measures. Required information about these non-GAAP measures is available on our webcast slides and in our press release, both of which are posted on our website at wesco.com.
Also please note that all references to prior year comparisons we flipped reflect pro forma results as if the company had completed the June 2020 merger with Anixter International on January one 2019.
Speaker 2: Also, please note that all references to prior year comparisons reflect proforma results as if the company had completed the June 2020 merger with Anaxter International on January 1, 2019.
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 .
Speaker 2: On the call this morning we have John Engle, our CEO , and Dave Schultz, West Coast Chief Financial Officer. Now I'll turn the call over to John .
Thank you Leslie and good morning, everyone. It's great to be with you. This morning.
Speaker 3: Thank you, Leslie, and good morning, everyone. It's great to be with you this morning.
Well that's good performance in 2021 was accepted and laid the foundation for the extraordinary value creation opportunity that lies before us.
Speaker 3: West Coast performance in 2021 was exceptional and laid the foundation for the extraordinary value creation opportunity that lies before us.
We finished last year with another very strong quarter of market outperformance and achieve new company records for build backlog and overall profitability.
Speaker 3: We finished last year with another very strong quarter of market out performance and achieved new company records for sales, backlog and overall profitability.
Importantly, we reduced our financial leverage to below four times EBITDA in just 18 months since closing the anixter acquisition.
Speaker 3: Importantly, we reduced our financial leverage to below four times EBITDA in just 18 months since closing the annex door acquisition.
It's important to note that all of this has been done under the cloud of the pandemic and global supply chain challenges I am truly proud of our team's commitment to our vision of the new wesco and for their focus on providing our global customers with the products services and supply chain solutions that they need.
Speaker 3: It's important to note that all of this has been done under the cloud of the pandemic and global supply chains.
Speaker 3: I am truly proud of our team's commitment to our vision of the new WESCO and for their focus on providing our global customers with the products, services and supply chain solutions that paint select all three options together.
The new Wesco emerge as our brand is evolving to align with our new vision mission and values that reflect the unity growth and ingenuity that now differentiate our company.
Speaker 3: As the new Wesco emerges, our brand is evolving to align with our new vision, mission, and values that reflect the unity, growth, and ingenuity that now differentiate our company.
We're carrying strong positive momentum into 2022 and the year is off to an excellent start we strategically invested in our inventories last year to address the global supply chain challenges as well as support our strong pipeline of sales growth opportunities, we're very well positioned to meet increasing customer demand is.
Speaker 3: We're carrying strong positive momentum into 2022 and the year is off to an excellent start. We strategically invested in our inventories last year to address the global supply chain challenges as well as support our strong pipeline of sales growth up.
Speaker 3: We're very well positioned to meet increasing customer demand as supply chains are rebuilt this year. As a result, we expect to again deliver market outperformance in 2022 with both expanded margins and double digit EPS growth.
Supply chains are rebuilt this year.
As a result, we expect to again deliver market outperformance in 2022, with both expanded margins and double digit EPS growth in.
In addition.
Based on the strength of our continuing execution, we are again, increasing the cost and sales synergy targets for a three year integration program.
Speaker 3: Based on the strength of our continuing execution, we are again increasing the cost and sales energy targets for a three-year integration program.
We are only at the mid point of our integration plan, but our progress is accelerating as wesco accelerates its market, leading positions expanded portfolio integration execution and digital transformation and badge, but to build a growth engine that is both resilient and sustainable.
Speaker 3: We are only at the midpoint of our integration plan, but our progress is accelerating as Westco accelerates its market leading positions, expanded portfolio, integration execution, and digital transformation investments to build a growth engine that is both resilient and sustainable.
Dave will walk you through our 2021 results in 2022 outlook in detail in a few moments, but before I turn the call over to him I want to provide a few comments on our secular growth trends, our recent new product and services launch and our progress on ESG.
Speaker 3: Dave will walk you through our 2021 results and 2022 outlook in detail in a few moments. But before I turn the call over to him, I want to provide a few comments on our secular growth trends, a recent new product and services launch, and our progress on ES.
Moving to page five.
Speaker 3: Moving to page five. As we've outlined over the last several quarters, we are clearly seeing the outside benefits of our cross-selling initiatives and new service capabilities on our results.
As we've outlined over the last several quarters, we are clearly seeing the outsized benefits of our cross selling initiatives and new service capabilities on our results.
We're building on this positive execution momentum in 2022, as we begin to capture additional growth from the large scale secular growth trends outlined on this page.
Speaker 3: We're building on this positive execution momentum in 2022 as we begin to capture additional growth from the large-scale secular growth trends outlined on this page.
Over the last few earnings calls I've talked about how we're capitalizing on the increasing public and private investments in grid modernization rural broadband and data Center development.
Speaker 3: Over the last few earnings calls, I've talked about how we're capitalizing on the increasing public and private investments in grid modernization, royal broadband and data center development.
Another trend, we're well positioned to benefit from is the rapidly expanding impact of digital and Iot applications on our customers' operations and supply chain as well.
Speaker 3: Another trend we're well positioned to benefit from is the rapidly expanding impact of digital and IoT applications on our customers operations and supply.
Automation and Iot represent one of the fastest growing set of applications and solutions across our customer base combined with other high growth technologies, such as <unk> and cloud computing automation and Iot improve operational efficiencies minimize cost improved decision, making and enhance the overall customer experience.
Speaker 3: Automation and IoT represent one of the fastest growing set of applications and solutions across our customer base. Combined with other high-growth technologies such as 5G and cloud computing, automation and IoT improve operational efficiencies, minimize cost, improve decision-making, and enhance the overall customer experience.
The Iot applications market is forecast to grow at a 20 plus percent CAGR compound annual growth rate through the end of this decade, and there is an ever increasing business need to connect the physical and digital ecosystems to provide a frictionless customer experience.
Speaker 3: The IoT applications market is forecast to grow to 20 plus percent kegger or compound annual growth rate through the end of this decade. And there's an ever increasing business need to connect this physical and digital ecosystems to provide a frictionless customer experience.
<unk> is very well positioned to capture these additional growth opportunities by combining our product and service capabilities in electrical utility data communications broadband communications and security and we combine those into complete solutions for our customers.
Speaker 3: LESCO is very well positioned to capture these additional growth opportunities by combining our product and service capabilities in electrical, utility, data communications, broadband communications, and security. And we combine those in the complete solutions for our customers.
Now moving to page six.
Wesco is developing Iot solutions that transform how our customers procure deploy and utilize digital products and technologies highlighted on this page is an example of a new product with embedded services and cloud based subscription model that we launched a few weeks ago in the latter part of January .
Speaker 3: LESCO is developing IoT solutions that transform how our customers procure, deploy, and utilize digital products and technologies. Highlighted on this page is an example of a new product with embedded services and cloud-based subscription model that we launched a few weeks ago in the latter part of January .
Our new AAV conference room, as a service addresses the growing need for our business customers to make changes to support our hybrid work environment employees returning to their workplace have become adept at running their homebase videoconference applications business conference rooms are commonly outfitted with displays connectivity devices and equipment.
Speaker 3: Our new AV Conference Room as a service addresses the growing need for our business customers to make changes to support a hybrid work environment. Employees returning to their workplace have become adept at running their home-based video conference applications.
Speaker 3: Business conference rooms are commonly outfitted with displays, connectivity devices, and equipment that are difficult to use or have no collaboration system at all. Our end-to-end AV as a service solution provides customers with a robust conference room infrastructure, new applications, predictive maintenance, and advanced automation and analytics all in one package.
That are difficult to use or have no collaboration system at all of our end to end a Z as a service solution provides customers with a robust conference room infrastructure, new applications predictive maintenance and advanced automation and analytics all in one package.
With our subscription based model customer labor cost associated with system maintenance, a reduced without the typical upfront capital expenditures and importantly customers are provided access to the latest technology and 24 seven support.
Speaker 3: With our subscription-based model, customer labor costs associated with system maintenance are reduced without the typical upfront capital expenditures. And importantly, customers are provided access to the latest technology and 24-7 support.
Wesco is committed to developing digital solutions that support data driven decisions improve operational efficiencies and provide flexibility for our customers while still only in the early innings of our digital transformation. It's already very clear that our opportunities will be significant we will make sure that we continue to share our progress.
Speaker 3: WESCO is committed to developing digital solutions that support data-driven decisions, improve operational efficiencies, and provide flexibility for our customers.
Speaker 3: While still only in the early innings of our digital transformation, it's already very clear that our opportunities will be significant.
Speaker 3: We'll make sure that we continue to share our progress with you along the way.
I guess with you along the way.
Now moving to page seven.
Speaker 3: Now moving to page seven. I'm confident that WESCO is investing in the right areas at the right.
I'm confident the western was investing in the right areas at the right time, we are deepening our competitive advantage and setting the foundation for long term profitable growth at the same time, we're committed to responsible ESG operating practices and a brief update as outlined on this page.
Speaker 3: We are deepening our competitive advantage and setting the foundation for long-term profitable growth. At the same time, we're committed to responsible ESG operating practices. And a brief update is outlined on the
As a beta be wholesale distribution and supply chain solutions company. We don't have the same environmental exposure as many of our supplier manufacturing partners. We do however, assist our customers in meeting their environmental and sustainability goals, particularly in the areas of energy usage and conversion to higher efficiency products and service.
Speaker 3: As a B2B wholesale distribution and supply chain solutions company, we don't have the same environmental exposure as many of our supplier manufacturing partners. We do, however, assist our customers in meeting their environmental and sustainability goals, particularly in the areas of energy usage and conversion to higher efficiency products and services.
Yes.
We previously set and achieved our company targets regarding <unk>.
Speaker 3: We previously set and achieved our company targets regarding...
Greenhouse gas emissions and waste reduction and we are very proud of our commitment to safety and achieving best in class results. After combining with anixter. We've now set new improvement goals for 2030, as we are fully committed to using our scale and our resources to drive a better more sustainable future.
Speaker 3: greenhouse gas emissions, and waste reduction, and we are very proud of our commitment to safety and achieving best-in-class results. After combining with Annexter, we have now set new improvement goals for 2030, as we are fully committed to using our scale and our resources to drive a better, more sustainable future for all our stakeholders.
For all our stakeholders.
I'm very pleased to highlight that last year Forbes named Wesco is one of the world's best employers as well as one of America's best employers for women for the second year in a row. In addition, we were recently named to Fortune's list of most admired companies in which we were ranked number two in the wholesalers diversified cat.
Speaker 3: I'm very pleased to highlight that last year Forbes named WESCO as one of the world's best employers, as well as one of America's best employers for women for the second year in a row. In addition, we were recently named a fortunes list of the most admired companies in which we were ranked number two in the wholesalers diversified category. Lastly, I'd also like to highlight that WESCO has been included in Bloomberg's Gender Equality Index for the fourth consecutive year in 2020.
Lastly, I'd also like to highlight that Wesco has been included in Bloomberg's gender equality index for the fourth consecutive year in 2022.
In summary, West County, West Coast, newfound scale expanded portfolio and industry, leading positions when combined with the integration plan and digital transformation represent our catalyst for market outperformance and lasting value creation for all our stakeholders.
Speaker 3: In summary, WESCO's newfound scale, expanded portfolio, and industry leading positions, when combined with the integration plan and digital transformation, represent our catalyst for market outperformance and lasting value creation for all our stakeholders.
With that I'll now turn the call over to Dave who will take you through our financial results and outlook.
Speaker 3: With that, I'll now turn the call over to Dave who will take you through our financial results and outlook.
Dave.
Thanks, John and good morning.
Starting on slide nine this summary table compares our fourth quarter results to the prior year.
Speaker 3: Starting on slide nine, this summary table compares our fourth quarter results to the prior year.
As John mentioned fourth quarter sales exceeded our expectations.
Speaker 3: As John mentioned, fourth quarter sales exceeded our expectations.
When we updated our outlook in early November we anticipated sales would decline sequentially versus the third quarter consistent with historical trends and considering the impact of supply chain disruptions.
Speaker 3: When we updated our outlook in early November , we anticipated sales with decline sequentially versus a third quarter consistent with historical trends and considering the impact of supply chain disruption.
Sequential organic sales and backlog increased 6% and 14% respectively.
Speaker 3: sequential organic sales and backlog increase 6% and 14% respectively.
We knew that December would be a wildcard and we're pleased by the strength of volume that continued through each month of the quarter.
Speaker 3: We knew that December would be a wild card and we're pleased by the strength of volume that continue through each month of the quarter.
Overall sales were a record level and up 16% versus the prior year quarter on an organic basis.
Speaker 3: Overall, sales were a record level and up 16% versus the prior year quarter on an organic basis, which excludes the benefit of an extra workday, variable foreign exchange rates, and the impact of the Canadian divestitures we completed in the first quarter of 2021. On a reported basis,
Which excludes the benefit of an extra workday favorable foreign exchange rates and the impact of the Canadian divestitures, we completed in the first quarter of 2021.
On a reported basis sales were up 18%.
Currency added 70 basis points to growth, which was partially offset by the divestitures.
Speaker 3: Currency added 70 basis points to growth, which was partially offset by the divestitures, while the extra workday added up to the
While the extra workday added 160 basis points.
We estimate pricing added approximately six points to sales growth in the quarter.
Speaker 3: We estimate pricing added approximately six points to sales growth in the quarter. Notably, sales are up 11% versus 2019 pre-pandemic pro forma level.
Notably sales were up 11% versus 2019 pre pandemic pro forma levels.
Our backlog reached another record level this quarter up 14% from the prior record in September .
Speaker 3: Our backlog reached another record level this quarter, up 14% from the prior record in September .
Each business unit posted backlog increases of more than 60% over last year.
Speaker 3: Each business unit posted backlog increases of more than 60% over last year.
Heading into the first quarter demand continues to be strong preliminary January results are encouraging with sales up low teens year over year on a workday adjusted basis and up high teens compared to the pre pandemic 2019 level.
Speaker 3: Heading into the first quarter, demand continues to be strong. Preliminary January results are encouraging, with sales up low teens year over year on a workday-adjusted basis and up high teens compared to the pre-pandemic 2019 level.
Gross margin was 28% in the quarter up 120 basis points versus the prior year.
Speaker 3: Gross margin was 20.8% in the quarter, up 120 basis points versus the prior year.
The strong gross margin performance reflected effective pass through of supplier price increases driven by the markets supply demand imbalance and the benefits of our value based pricing program.
Speaker 3: Strong gross margin performance reflected effective pass-through of supplier price increases driven by the markets, supply, demand, and balance, and the benefits of our value-based pricing program.
Sequentially versus the third quarter gross margin was approximately 50 basis points lower.
Speaker 3: sequentially versus the third quarter gross margin was approximately 50 basis points lower.
Mix was a headwind sequentially of approximately 20 basis points, primarily driven by our UBS segments accelerated pace of growth and shipment type mix.
Speaker 3: Mix was a headwind sequentially of approximately 20 basis points, primarily driven by our UBS segments, accelerated pace of growth, and shipment type mix.
B S sales include a higher percentage of lower gross margin direct ship products than our other business units.
Speaker 3: UBS sales include a higher percentage of lower gross margin direct shipped products than our other business units.
The balance of the gross margin impact sequentially was due to a higher allowance for inventory adjustments, including additional write downs of safety equipment and rising average inventory costs that are catching up with inflationary pricing.
Speaker 3: The balance of the gross margin impact sequentially was due to a higher allowance for inventory adjustments, including additional write-downs of safety equipment and rising average inventory costs that are catching up with inflationary prices.
Adjusted EBITDA, which excludes the merger related costs stock based compensation and other net adjustments were.
Speaker 3: Adjusted EBITDA, which excludes the merger related costs, stock based compensation, and other net adjustments, was 48% higher than the prior year and represented 6.6% of sales, which was 140 basis points above the prior year and 130 basis points above the 2019 fourth quarter on a pro forma basis.
Was 48% higher than the prior year and represented six 6% of sales, which was 140 basis points above the prior year and 130 basis points above the 2019 fourth quarter on a pro forma basis.
Adjusted diluted EPS for the quarter was $3 17.
Speaker 3: Adjusted diluted EPS for the quarter was $3.17, a record quarter and up 160% from the prior year.
A record quarter and up 160% from the prior year.
As you may have seen in our press release in the fourth quarter, we recorded a $37 million curtailment gain related to pension obligations in the U S and Canada. This is a onetime nonoperating gain and therefore excluded from our adjusted results.
Speaker 3: As you may have seen in our press release, in the fourth quarter we recorded a $37 million court tailment gain related to pension obligations in the US and Canada. This is a one-time, non-operating gain and therefore excluded from our adjusted results.
Additionally, the effective tax rate for the quarter was 16% lower than our implied guidance provided in November .
Speaker 3: Additionally, the effective tax rate for the quarter was 16%, lower than our implied guidance provided in November .
The lower tax rate was driven primarily by the timing of tax benefits related to foreign derived intangible income and favorable adjustments to valuation allowance for foreign tax credits as we estimate we now have a higher probability of using these credits in the future.
Speaker 3: The lower tax rate was driven primarily by the timing of tax benefits related to foreign derived intangible income and favorable adjustments to valuation allowance to foreign tax credits as we estimate we now have a higher probability of using these credits in the future.
Turning to page 10, you can see that the higher sales expanded gross margin and integration cost synergies drove the $104 million increase in adjusted EBITDA.
Speaker 3: Turning to page 10, you can see that the higher sales, expanded gross margin, and integration cost synergies drove the $104 million increase in adjusted EBITDA.
As you would expect in a strong demand in an inflationary environment. We also experienced higher volume related operating costs, including shipping and sales commissions as well as higher expenses for employee benefits and incentive compensation.
Speaker 3: As you'd expect in a strong demand and inflationary environment, we also experienced higher volume-related operating costs, including shipping and sales commissions, as well as higher expenses for employee benefits and incentive compensation.
Finally, we incurred higher expenses related to our investment in systems and digital tools that offset a portion of the growth of adjusted EBITDA.
Speaker 3: Finally, we incurred higher expenses related to our investment in systems and digital tools that offset a portion of the growth of adjusted EBITDA.
Overall, we delivered strong operating leverage as we generated a 48% increase in adjusted EBITDA on 16% organic sales growth.
Speaker 3: Overall, we delivered strong operating leverage as we generated a 48% increase in adjusted EBITDA on 16% organic sales growth.
Turning to page 11. This table compares our full year 2021 results to the 2020 pro forma results.
Speaker 3: Turning to page 11, this table compares our full year 2021 results to the 2020 pro forma results.
You will recall that results prior to the merger completed in June where on a pro forma basis.
Speaker 3: You will recall that results prior to the merger completed in June were on a pro forma base.
For the full year sales reached a record level of $18 $2 billion and were up 14% compared to the 2020 pro forma level.
Speaker 3: For the full year, sales reached a record level of $18.2 billion, and we're up 14% compared to the 2020 pro forma level. The record backlog was up 88%.
The record backlog was up 88% over the prior year.
Adjusted EBITDA was 1.1 dollars 76 billion also a record level and 37% higher than 2020.
Speaker 3: Adjusted EBITDA was $1.176 billion, also a record level, and 37% higher than 2020.
As a percentage of sales adjusted EBITDA was six 5% 120 basis points higher than the prior year.
Speaker 3: As a percentage of sales, adjusted EBITDA was 6.5%, 120 basis points higher than the prior year.
Compared to pre pandemic 2019 pro forma results 2021 sales were 6% higher.
Speaker 3: Compared to pre-pandemic 2019 pro forma results, 2021 sales were 6% higher, adjusted EBITDA was 30% higher, and adjusted EBITDA margin improved by 120 bases.
Adjusted EBITDA was 30% higher.
And adjusted EBITA margin improved by 120 basis points.
Now let me walk you through the results by business unit beginning on slide 12 note that references to full year 2021 results compare the change versus 2020 full year pro forma results.
Speaker 3: Now let me walk you through the results by business unit beginning on slide 12. Note that references the full year 2021 results compare the change versus 2020 full year pro forma results.
The sales and EBITDA results in the press release reflect the combination with anixter as of the end of June in 2020.
Speaker 3: The sales and EBITDA results in the press release reflect the combination with Anixter as of the end of June in 2020.
Turning to slide 12 sale.
Sales in our EES segment were up 18% year over year in the fourth quarter on an organic basis with double digit growth in all operating groups.
Speaker 3: sales in our EES segment were up 18% year over year in the fourth quarter on an organic basis with double-digit growth in all operating groups.
This growth reflects construction sales that continued to increase with the recovery of the nonresidential market.
Speaker 3: This growth reflects construction sales that continue to increase with the recovery of the non-residential market.
We also continue to see increasing momentum in our industrial and OEM businesses in line with the broader industrial recovery.
Speaker 3: We also continue to see increasing momentum in our industrial and OEM businesses in line with the broader industrial recovery.
Elevated bidding activity drove a further increase in our E S backlog from its record level in the prior quarter.
Speaker 3: Elevated bidding activity drove a further increase in our EES backlog from its record level in the prior quarter.
We also made progress on our cross sell initiatives and are capturing demand driven by the secular growth trends that John talked about earlier.
Speaker 3: We also made progress on our cross-sell initiatives and are capturing demand driven by the secular growth trends that John talked about earlier.
In the fourth quarter, adjusted EBITDA was $151 million for EES up 59% from the prior year adjusted EBITDA margin was seven 5% 180 basis points higher year over year.
Speaker 3: In the fourth quarter, adjusted EBITDA was $151 million for EES, up 59% from the prior
Speaker 3: Adjusted EBITDA margin was 7.5%, 180 basis points higher year over year.
Speaker 3: This increase reflects effective price-cost pass-through, strong cost-synergy realization, and operating cost leverage.
This increase reflects effective price cost pass through strong cost synergy realization and operating cost leverage.
Full year sales were up 19% with adjusted EBITDA up 62%.
Speaker 3: Full year sales were up 19% with adjusted EBITDA up 62%.
As a percentage of sales adjusted EBITDA was seven 9% for the year, representing an increase of 210 basis points.
Speaker 3: as a percentage of sales adjusted EBITDA was 7.9% for the year, representing an increase of 210 basis points.
Turning to slide 13.
Sales in our CSS segment were up 9% versus the prior year on an organic basis.
Speaker 3: Sales in our CSS segment were up 9% versus the prior year on an organic basis.
Saw high single digit growth in network infrastructure, driven by data center and Hyperscale projects as well as continued investments in cloud based applications and professional audio visual installations.
Speaker 3: We saw high single digit growth in network infrastructure driven by data center and hyperscale projects.
Speaker 3: as well as continued investments in cloud-based applications and professional audio-visual installation.
Security operating group sales were also up high single digits in the quarter.
Speaker 3: Security operating group sales were also up high single digits in the quarter.
Backlog was 114% higher than the prior year and increased 11% since September to another record level due to continued strong demand along with the impact of supply chain challenges supply chain challenges on project timing.
Speaker 3: Backlog was 114% higher than the prior year and increased 11% since September to another record level due to continued strong demand, along with the impact of supply chain challenges on project timing.
Profitability was also strong with an adjusted EBITDA margin of eight 3% 10 basis points higher than the prior year, driven by operating leverage integration cost synergies and the execution of our margin improvement initiatives.
Speaker 3: Profitability was also strong, with an adjusted EBITDA margin of 8.3 percent, 10 basis points higher than the prior year, driven by operating leverage, integration, cost synergies, and the execution of our margin improvement initiative.
I would point out that most of the safety inventory write down was recorded and CSS, which negatively impacted adjusted EBITDA by approximately 28 basis points in the fourth quarter.
Speaker 3: I'd point out that most of the safety inventory write down was recorded in CSS, which negatively impacted its adjusted EBITDA by approximately 28 basis points in the fourth quarter.
For the full year CSS sales were up 9% and adjusted EBITDA was up 13% with adjusted EBITDA margin of eight 4%, a 30 basis point increase over the prior year.
Speaker 3: For the full year, CSS sales were up 9% and adjusted EBITDA was up 13%, with adjusted EBITDA margin of 8.4%, a 30 basis point increase over the prior year.
This result includes the impact of the inventory write down that reduced EBITDA margin by 37 basis points for the full year.
Speaker 3: This result includes the impact of the inventory write down that reduced EBITDA margin by 37 basis points for the full year.
In addition to our cross sell programs CSS is positioned to benefit from numerous secular trends the need for increased bandwidth 2047 connectivity IP based security solutions and the capacity demands related to remote work and school applications.
Speaker 3: In addition to our cross-cell programs, CSS is positioned to benefit from numerous secular trends. The need for increased bandwidth, 24-7 connectivity, IP-based security solutions, and the capacity demands related to remote work and school applications.
Turning to slide 14 organic sales in our UBS segment were up 22% versus the prior year.
Speaker 3: Turning to slide 14, organic sales in our UBS segment were up 22% versus the prior year.
Utility demand has remained strong as both our investor owned utility and public power customers continued to invest in grid hardening and modernization.
Speaker 3: utility demand has remained strong as both our investor-owned utility and public power customers continue to invest in grid hardening and modernization.
In the quarter, we benefited from storm recovery sales in both the Gulf Coast and in the northeast However year over year storm recovery sales were slightly below the prior year activity levels.
Speaker 3: In the quarter, we benefited from storm recovery sales in both the Gulf Coast and in the Northeast. However, year over year, storm recovery sales were slightly below the prior year activity.
Our broadband business was up double digits again this quarter driven by continued strong demand for data and high speed connectivity as well as expansion in connectivity requirements for home based applications.
Speaker 3: Our broadband business was up double digits again this quarter, driven by continued strong demand for data and high-speed connectivity, as well as expansion in connectivity requirements for home-based applications.
Speaker 3: Additionally, we are benefiting from the sales activity related to phase one of the federal government's Rural Digital Opportunity Fund project.
Additionally, we are benefiting from the sales activity related to phase one of the federal government's rural digital opportunity Fund project.
Adjusted EBITDA in the quarter was up 63% for UBS with margin 230 basis points higher at nine 6% of revenue versus the prior year.
Speaker 3: Adjusted EBITDA in the quarter was up 63% for UBS, with margin 230 basis points higher at 9.6% of revenue versus the prior year.
This growth was driven by the scale benefit of sales and gross margin expansion.
Speaker 3: This growth was driven by the scale benefit of sales and gross margin expansion.
For the full year sales were up 12% and adjusted EBITDA was up 34%.
Speaker 3: For the full year, sales were up 12% and adjusted EBITDA was up 34%, with adjusted EBITDA margin of 8.8%, a 140 basis point increase over the prior year.
With adjusted EBITDA margin of eight 8%, a 140 basis point increase over the prior year.
Now moving to page 15.
We have an expanding pipeline of sales opportunities and our cross sell momentum is building.
Speaker 3: We have an expanding pipeline of sales opportunities and our cross-sell momentum is building.
We're capitalizing on the strength of the complementary portfolio of products and services as well as the minimal overlap that exists between legacy Wesco and legacy anixter customers.
Speaker 3: capitalizing on the strength of the complimentary portfolio of products and services, as well as the minimal overlap that exists between Legacy West Co. and Legacy Annexed or Customized.
Customers are benefiting from our ability to be the one stop shop for their products services and supply chain solution needs.
Speaker 3: Customers are benefiting from our ability to be the one-stop shop for their products, services, and supply chain solution needs.
Opportunities exist across all three of our global business units.
Speaker 3: Opportunities exist across all three of our global business and we are looking forward to seeing you soon.
Recall that in June we increased our target level of cross sell synergies from 150 million to $500 million of cumulative sales by the end of 2023 due to a larger cross sell opportunity and faster generation than we had originally anticipated.
Speaker 3: Recall that in June we increased our target level of cross-cell synergies from $150 million to $500 million of cumulative sales by the end of 2023 due to a larger cross-cell opportunity and faster generation than we had originally anticipated.
Based on the strength of our execution and our expanding pipeline.
Speaker 3: Based on the strength of our execution and our expanding pipeline, today we are increasing that target again from $500 million to $600 million and to date have generated approximately $365 million of cross-cell center.
Today, we are increasing that target again from $500 million to $600 million and to date have generated approximately $365 million of cross sell synergies.
Recent cross sell wins in the fourth quarter include our EES business, where we were able to expand west coast relationship with a multinational integrated energy company.
Speaker 3: Recent cross-cell wins in the fourth quarter include our EES business, where we were able to expand West Coast's relationship with a multinational integrated energy company.
Another example, CSS was awarded business to refresh wireless access points for 'twenty 100 locations of a national DIY retailer.
Speaker 3: In another example, CSS was awarded business to refresh wireless access points for 2100 locations of a national DIY retailer.
And finally, our UBS business is also growing through cross selling where we recently won a two year project to provide materials and material management services for a broadband services provider.
Speaker 3: And finally, our UBS business is also growing through cross-selling, where we recently won a two-year project to provide materials and material management services for a broadband services provider.
Turning to slide 16.
On the left side of this slide you can see in the gray boxes that we realized cumulative run rate cost synergies of $188 million in 2021, beating our previous estimate of $182 million.
Speaker 3: On the left side of this slide, you can see in the gray boxes that we realize cumulative run rate cost synergies of $188 million in 2021, beating our previous estimate of 182 million.
Based on the strength of our execution as well as the accelerated pace of synergy realization, we are increasing our 2022 targeted cost synergies to $250 million.
Speaker 3: Based on the strength of our execution, as well as the accelerated pace of synergy realization, we are increasing our 2022 targeted cost synergies to $250 million, and 2023 estimate to our cumulative $315 million.
2023 estimate to our cumulative $315 million.
Recall that these savings are relative to the 2019 pro forma base.
Speaker 3: Recall that these savings are relative to the 2019 pro forma
On the right side of this slide we've outlined the $315 million of cost savings target by synergy type.
Speaker 3: On the right side of the slide, we've outlined the $315 million of cost savings target by synergy type. And in the chart, you get a sense for the synergies that have been realized to date in each category.
And then the chart you get a sense for the synergies that have been realized to date in each category. For example, the estimated $45 million in corporate overhead savings have now been fully realized.
Speaker 3: For example, the estimated $45 million in corporate overhead savings have now been fully realized.
The largest remaining synergies are those that take longer to execute including the supply chain and field operations buckets.
Speaker 3: The largest remaining synergies are those that take longer to execute, including the supply chain and field operations.
Turning to page 17 on the left side of the page you will see a bridge from full year 2021, adjusted net income to free cash flow.
Speaker 3: Turning to page 17, on the left side of the page, you'll see a bridge from full year 2021 adjusted net income to free cash.
Working capital was a $613 million use of cash for the year, which was substantially above normal levels.
Speaker 3: Working capital was a $613 million use of cash for the year, which was substantially above normal levels.
Offsetting this use of cash was a combination of depreciation and amortization and other items, including payroll and benefits interest and income taxes that were a net source of cash and capital expenditures and other related costs of approximately $85 million.
Speaker 3: Offsetting this use of cash was a combination of depreciation and amortization and other items, including payroll and benefits, interest, and income taxes that were a net source of cash, and capital expenditures and other IT-related costs of approximately $85 million.
Free cash flow was $94 million, representing 16% of adjusted net income below our outlook for the year.
Speaker 3: Free cash flow was $94 million, representing 16% of adjusted net income below our outlook for the year.
Recall, our implied outlook for the fourth quarter assumed a reduction in sales sequentially with net working capital as a source of cash in the quarter.
Speaker 3: Recall our implied outlook for the fourth quarter assumed a reduction in sales sequentially with networking capital as a source of cash in the quarter.
The higher than expected sales led to a higher receivables balance and continued strategic and inventory to ensure we maintain our customer service levels and support projects in our growing backlog.
Speaker 3: The higher than expected sales led to a higher receivables balance and continued strategic and inventory to ensure we maintain our customer service levels and support projects in our growing backlog.
While the fourth quarter is typically a source of cash.
Speaker 3: While the fourth quarter is typically a source of cash, in 2021, net working capital was a use of cash of $210 million in the quarter, including $100 million for inventory.
In 2021, net working capital was a use of cash of $210 million in the quarter, including $100 million for inventory.
The timing of inventory purchases also led to a lower accounts payable balance, resulting in a cash draw of $100 million in the quarter.
Speaker 3: The timing of inventory purchases also led to a lower accounts payable balance, resulting in a cash draw of $100 million in the quarter.
On the right side of this page you can see that we are gaining efficiencies in working capital.
Speaker 3: On the right side of this page, you can see that we are gaining efficiencies and working capital.
Using a five quarter ending balance sheet average calculation net working capital improved approximately six days versus 12, 31, 2020, driven by lower inventory days outstanding and days payable.
Speaker 3: Using a five-quarter ending balance sheet average calculation, networking capital improved approximately six days versus 12-31-2020, driven by lower inventory days outstanding and days payable. Moving to slide 8.
Moving to slide 18.
<unk>, our leverages a top priority.
In the fourth quarter, we reduced leverage by 0.2 times trailing 12 month adjusted EBITDA.
Speaker 3: In the fourth quarter, we reduced leverage by 0.2 times trailing 12-month adjusted EBITDA and brought our leverage ratio to 3.5.
And brought our leverage ratio to three nine times.
This accelerated pace of Delevering reflects the strength of our <unk> distribution model and our ability to quickly return to our target leverage range.
Speaker 3: This accelerated pace of de-levering reflects the strength of our B2B distribution model and our ability to quickly return to our target leverage.
Total debt was reduced by $205 million in the fourth quarter with net debt down by $32 million.
Speaker 3: Total debt was reduced by $205 million in the fourth quarter, with net debt down by $32 million.
Since closing the Anixter acquisition 18 months ago, our Leverages, one eight turns lower.
Speaker 3: Since closing the annex, annex their acquisition 18 months ago, our leverage is 1.8 turns lower.
We remain on track to return to our target leverage range of two to three five times during the second half of 2022.
Speaker 3: We remain on track to return to our target leverage range of two to three and a half times during the second half of 2022.
Moving to page 19, you can see our 2022 outlook. This year, we estimate low to mid single digit market growth.
Speaker 3: Moving to page 19, you can see our 2022 outlook. This year, we estimate low to mid-single-digit market growth.
We are encouraged by the economic indicators and expected demand environment to continue to be strong. However, we recognize that supply chain constraints and the pace of inflation present, some uncertainties. This early in the year.
Speaker 3: We are encouraged by the economic indicators and expect the demand environment to continue to be strong. However, we recognize that supply chain constraints and the pace of inflation present some uncertainties this early in the year.
We continue to expect to outperform our markets as a result of our capabilities and cross sell programs, which we estimate will deliver incremental sales of 2% to 3% above the market.
Speaker 3: We continue to expect to outperform our markets as a result of our capabilities and cross-sell programs, which we estimate will deliver incremental sales of 2% to 3% above the market.
Lastly, keep in mind that 2022 has one more work day than 2021, which we estimate will add one five points of growth in 2022.
Speaker 3: Lastly, keep in mind that 2022 has one more workday than 2021, which we estimate will add one half point of growth in 2022....
We expect foreign exchange to be neutral.
Also embedded in our outlook is a contract with a utility customer that will shift from a full revenue model to a service fee model.
Speaker 3: Also embedded in our outlook is a contract with a utility customer that will shift from a full revenue model to a service fee model.
This will negatively impact sales by approximately half a point with no impact to EBITDA. So in total we expect sales to grow 5% to 8%.
Speaker 3: This will negatively impact sales by approximately half a point with no impact to EBITDA. So in total, we expect sales to grow 5% to 8%
For adjusted EBITDA margin, our outlook is for a range of six 7% to 7%.
Speaker 3: For adjusted EBITDA margin, our outlook is for a range of 6.7% to 7%.
We expect our effective tax rate to be approximately 25% for the year and adjusted earnings per share in the range of $11 to $12.
Speaker 3: We expect our effective tax rate to be approximately 25% for the year and adjusted earnings per share in the range of $11 to $12.
When it comes to free cash flow conversion, we expect to generate free cash flow of at least 100% of adjusted net income.
Speaker 3: When it comes to free cash flow conversion, we expect to generate free cash flow of at least 100% of adjusted netting.
This outlook reflects a handful of assumptions I'd like to walk you through.
Speaker 3: This outlook reflects a handful of assumptions I'd like to walk you through.
Our short term compensation structure is reflected in our margin outlook at a target payout.
Speaker 3: Our short-term compensation structure is reflected in our margin outlook at a target pay-up.
This is a tailwind of approximately 30 basis points compared to 2021, where we paid out short term compensation above target.
Speaker 3: This is a tailwind of approximately 30 basis points compared to 2021, where we paid out short-term compensation above target.
This accrual could change as we move through the year, depending on how our performance compares to target plan.
Speaker 3: This accrual could change as we move through the year, depending on how our performance compares to target plan.
We expect transportation and logistics costs will be an incremental headwind to margin in 2022 of approximately 20 basis points.
Speaker 3: We expect transportation and logistics costs will be an incremental headwind to margin in 2022 of approximately 20 basis.
Reported depreciation and amortization will be lower than 2021, primarily due to the accelerated trademark amortization of certain brands.
Speaker 3: Reported depreciation and amortization will be lower than 2021, primarily due to the accelerated trademark amortization of certain brands.
We recorded $32 million of accelerated amortization in 2021 and expect to record approximately $10 million in 2022.
Speaker 3: We recorded $32 million of accelerated amortization in 2021 and expect to record approximately $10 million in 2022.
On an adjusted basis depreciation will be about flat with 2021.
Speaker 3: On an adjusted basis, depreciation will be about flat with 2021.
On cash flow, we expect to spend approximately $120 million and combined capital expenditures and digital investments.
Speaker 3: On cash flow, we expect to spend approximately $120 million in combined capital expenditures and IT digital investment.
On the statement of cash flows approximately $45 million will flow through capital expenditures and approximately $75 million will flow through changes in other assets.
Speaker 3: On the statement of cash flows, approximately $45 million will flow through capital expenditures, and approximately $75 million will flow through changes in other assets.
We will realize the full $18 million of annual interest savings related to the redemption of our 2024 notes that we completed in June of last year.
Speaker 3: We will realize the full $18 million of annual interest savings related to the redemption of our 2024 notes that we completed in June of last year.
Call that in 2021, we realized approximately $2 million of the full $18 million benefit.
Speaker 3: Recall that in 2021, we realized approximately $2 million of the full $18 million benefit.
Our outlook does not incorporate the potential benefit of any further refinancing activity this year.
Speaker 3: our outlook does not incorporate the potential benefit of any further refinancing activity this year.
Our outlook assumes an average diluted share count of just below $53 million or 53 million shares for the year.
Speaker 3: Our outlook assumes an average diluted share count of just below $53 million, or 53 million shares for the year. And lastly, this outlook does not reflect any potential changes to tax law in any locations that we serve.
And lastly, this outlook does not reflect any potential changes to tax law in any locations that we serve.
Moving to slide 20 before opening the call for questions. Let me provide a brief summary of what we covered this morning.
Speaker 3: Moving to slide 20. Before opening the call for questions, let me provide a brief summary of what we covered this morning. 2021
2021 was an exceptional year for wesco.
We delivered very strong financial results as we finished the first 18 months of integration following the combination with anixter.
Speaker 3: We delivered very strong financial results as we finished the first 18 months of integration, following the combination with annex.
Sales were up in every segment, both year over year and compared to 2019 pre pandemic levels.
Speaker 3: Sales were up in every segment both year over year and compared to 2019 pre-pandemic levels.
EBITDA margins expanded substantially driven by our gross margin improvement program as well as value based pricing execution and an accelerated pace of synergy capture.
Speaker 3: EBITDA margins expanded substantially, driven by our gross margin improvement program, as well as value-based pricing execution and an accelerated pace of synergy capital.
We increased our market share through sales execution and cross selling program, we increased our targets for both cost synergies and cross sell synergies twice in 2021, representing.
Speaker 3: We increased our market share through sales execution and cross-selling program. We increased our targets for both cost synergies and cross-sell synergies twice in 2021, representing both the larger opportunity and faster execution than we originally anticipated. We reduced our leverage by 1.8 turns since closing the acquisition 18 months ago, and are on track to return to our target range in the second half of this year.
Representing both the larger opportunity and faster execution than we originally anticipated.
We reduced our leverage by one eight turns since closing the acquisition 18 months ago and are on track to return to our target range in the second half of this year.
Lastly, we're making excellent progress on our it and digital roadmap and are exceptionally well positioned to benefit from the secular growth trends that John discussed earlier.
Speaker 3: Lastly, we're making excellent progress on our IT and digital roadmap and are exceptionally well positioned to benefit from the secular growth trends that John discussed earlier. With that, let's
With that let's open the call to your questions.
Yes.
Speaker 1: Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you'd like to remove your question, it is star followed by two. Again, to ask a question, it is star followed by one. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking a question. There is one question and one follow up only.
If you would like to ask a question. Please press one.
Followed by one on your telephone keypad, if for any reason you'd like to remove your question. It is star followed by <unk>.
To ask a question it just stopped <unk> five one as a reminder, if you like using a speaker phone. Please remember to pick up your handset before asking the question.
There is one question and one follow up I'm name.
We will now pause briefly while the questions are counted.
Our first question comes from Deane Dray from RBC capital. Your line is now open you May go ahead.
Speaker 1: Our first question comes from Dean Dre from RBC Capital. Your line is now open. You may go ahead.
Thank you good morning, everyone and congrats on the strong finish to the year.
Speaker 3: Thank you, good morning everyone, and congrats on the strong finish to the year.
Thanks, a lot Dean good morning.
Good morning so.
Speaker 3: Good morning. Maybe you start with the demand outlook for 2022.
I'll start with the demand outlook for 'twenty two.
Dave commented on the strength in January can you rank order your end markets by expected strength.
Speaker 3: Can you rank order your end markets by expected?
And and really.
Speaker 3: And really, you know, talk about pricing power, the six percentage points you realized in the four...
Talk about pricing power the six percentage points you realized in the fourth quarter, how much of that carry into 'twenty. Two and then if I can also have you address backlog how much do you expect to be able to work that down.
And what timeframe. Thanks.
Yeah, I'll start Deane by saying the the the execution momentum and just call. It the positive results.
Speaker 4: Yeah. I'll start, Dean, by saying the execution momentum and just call it the positive result.
The build across Q4 was in retrospect was exceptional we obviously finished much stronger than we thought.
Speaker 4: The build across Q4 was, in retrospect, was exceptional. We obviously finished much stronger than we thought.
In December .
Speaker 4: uh... in December uh... and you know
And.
What was what was even more I'll say very encouraging.
Speaker 4: What was even more, I'll say, very encouraging and even a bit surprising is with that strong December close, we got out of the gate.
And even a bit surprising us with that strong December close.
We got out of the gate.
Very strong in January .
Speaker 4: And you know and the strength is really reflected in the backlog build sequentially the sales growth sequentially in Q4 and then you look at January with with where we are out You know in terms of prior year preliminary results just just overall very strong in terms of your end market question
And in the strength is really reflected in the backlog build sequentially. The sales growth sequentially. In Q4, and then you look at January with with where we are in terms of prior year preliminary results. Just just overall very strong in terms of your end market question.
We're seeing very good balance across all the end markets.
Speaker 4: You know, we're seeing very good balance across, you know, all the end markets. You know, we're in a demand recovery part of the cycle. It's still a bit supply-constrained, which is why we consciously and strategically invested in our inventories. We think we're exceptionally well-positioned with a strong structural setup for 2022. But we're seeing demand across all the end markets.
We're in a demand recovery part of the cycle, it's still a bit supply constrained, which is why we consciously and strategically invested in our inventories. We think we're exceptionally well positioned with a strong structural setup for 2022.
But we're seeing demand across all the end markets.
Remember, we don't really play in residential so any any perturbations there don't affect us.
Speaker 4: Remember, we don't really play in residential, so any perturbations there don't affect us. Industrials under recovery, you see continued strength. That shows up in the EES results.
Industrials under recovery you know, you'll see continued strength that shows up in the EES results.
Speaker 4: You know, there's a little bit of supply chain challenges in certain categories for CSS, but
No.
There's a little bit of supply chain challenges in some certain categories for CSS, but.
That would've been we probably would've had another point or two in sales growth in Q4 had had those supply chain constraints not impacted CSS with that said the backlog growth there is exceptional and outpacing the other two businesses.
Speaker 4: that would have been, we probably would have had another point or two of sales growth in Q4 had those supply chain constraints not impacted CSS. With that said, the backlog growth there is exceptional and outpacing the other two businesses and the secular growth trend.
And the secular growth trends are going to drive it.
Speaker 4: You know, going to drive, you know, outstanding growth as we look forward. And then UP, UBS was an absolute standout call blowout performance in the fourth quarter and that's the momentum across all three is continuing in the start. I just, I, Dave and I feel good about.
Standing growth as we look forward and then <unk> at UBS with an absolute standout call blow out performance in the fourth quarter.
The momentum across all three is continuing in the start dates.
Just David I feel.
Pretty good about it.
Team's execution very proud of them and also the setup for this year in terms of price price cost.
Speaker 4: team's execution, very proud of them, and also the setup for this year. In terms of price, price cost, you know, we're still in the relative early phases of executing our enterprise-wide margin improvement and expansion program.
We're still.
We're still in the relative early phases of executing on our enterprise wide margin experience improvement and expansion program and.
Speaker 4: And, you know, ASTR had a good couple of years of results under them. When we came together, we refined that program. We've taken it enterprise-wide. I could not be more pleased with how.
Anixter had a good couple of years of results under than when we came together, we we refine that program. We've taken an enterprise wide I could not be more pleased with how we've managed.
<unk> cost and converted that to Mark gross margin expansion in 2021.
Speaker 4: price cost and converted that to gross margin expansion in 2021. And that momentum is also building. And we're clearly in an inflationary part of the cycle. We talked about that in the last earnings call. That's clearly continuing to build. But the important thing to note is it's still supply constrained.
And that momentum is also building and we're clearly in an inflationary part of the cycle, we talked about that in the last earnings call that clearly continuing to build but but the important thing to notice it's still supply constrained.
And theres still acute supply chain challenges in certain categories, which is why we constantly invest consciously invested in inventory so yes.
Speaker 4: And there's still acute supply chain challenges in certain categories, which is why we constantly invest, you know, consciously invested in inventory. So, you know, it's our intent to continue to execute this, this enterprise-wide gross margin expansion program. And our one-two punches.
It's our intent to continue to execute this this enterprise wide gross margin expansion program and our one two punch is with outsized topline growth we get the margin expansion, we're getting excellent operating cost leverage I'll end on that note. We've taken our three year synergy targets up again both.
Speaker 4: without sized top line growth, we get the margin expansion, we're getting excellent operating cost leverage. I'll end on that note. We've taken our three years synergy targets up again, both for cost and meaningfully again for cross-sell, which on that note, I'll end with by saying, I think that's turning out to be.
Cost and meaningfully again for cross sell which.
On that note I'll end with by saying I think thats turning out to be.
The most exceptional synergy.
When companies come together to equal sized companies in particular, there's always the cost synergies.
Speaker 4: When companies come together, two equal sized companies in particular, there's always the cost synergies. It's not easy, but we're executing there, but we're getting core margin expansion.
It's not easy, but we're executing there, but we're getting core margin expansion.
It's the cross sell synergies that proved to be the most elusive in most acquisitions and combinations.
Speaker 4: it's the cross-cell synergies that proved to be the most elusive in most acquisitions and combinations and you know that is that is really the Fundamental driver, I think and turning out to be one of the biggest growth engines for us Finally in terms of backlog, you know, look we would not have expected backlog to grow sequentially every month
And that is that is really.
Fundamental driver I think in turning out to be one of the biggest growth engines for us finally in terms of backlog.
No.
We would not have expected backlog to grow sequentially every month.
In 2021.
Speaker 4: in 2021. In my tenure, that has never occurred.
My tenure that has never occurred.
And that's why it gives us the confidence with the inventory build that we put in place with that said, we would expect that as supply chains are rebuilt and we continue to convert on the on the demand side of our value chain with sales out the door.
Speaker 4: And that's why it gives us the confidence with the inventory build that we put in place. With that said, we would expect that as supply chains are rebuilt and we continue to convert on the demand side of our value chain with sales out the door, that we'll begin to work some of that backlog.
We will begin to work work some of that backlog now.
Thank you that's all really helpful and I realize I asked him a multipart first questions or just to clarify on that backlog you said you would be converting but any sense.
Speaker 3: a thank you that's all really helpful and i realize i asked them a multi part first question
Speaker 3: clarify on that backlog you said you would be converting but any sense you know it was up 88
It's up 88% year over year.
How much earnings visibility do you have from that backlog is it linear or is it front end loaded.
Just to give us a sense of how that converts.
So maybe so maybe I'll give I'll give this this measure.
Speaker 4: So maybe I'll give this measure. SHAFIA
So.
It is.
All three businesses all three SBU grew grew above 50% or backlogs I think north of 60%. So it's very balanced first 0.2nd point is.
Speaker 4: All three businesses, all three SBUs grew, you know, grew above 50 percent. They're back, obviously, north of 60 percent. So it's very balanced, first point. Second point is...
It is comprised of a balanced mix of short cycle mid cycle and longer cycle orders longer cycle being bigger projects.
Speaker 4: It is comprised of a balanced mix of short-cycle, mid-cycle, and longer-cycle orders, longer-cycle being bigger projects, but not different than what our normal composition will be. I will say this. We don't talk about
Not different than what our normal composition will be I will say this we don't talk about this often.
The margins in our backlog also are have been are at a higher level than that but that had been the case as we were building the backlog in 2021. So that's another very encouraging sign in terms of.
Speaker 4: The margins in our backlog also are at a higher level, but that had been the case as we were building the backlog in 2021, so that's another very encouraging sign in terms of our ability to manage in this supply-constrained value chain.
Our ability to manage in this supply constrained value chain.
And it supports as those backlogs convert the sales and out the door sales and shipments out the door sales, we will get we will continue to see the margin contribution.
Speaker 4: And it supports, you know, as those backlogs convert to sales and out-the-door sales and shipments and out-the-door sales, you know, we'll get, we'll continue to see the margin content.
Speaker 4: Because the margins are at an elevated rate versus what they were a year ago in the backlog.
Because the margins are at an elevated rate versus what they were a year ago in the backlog.
Yes.
Thank you that's all very helpful and congrats.
Thanks, Steve.
Thank Keith.
Our next question comes from David Manthey of Baird.
Speaker 1: Our next question comes from David Manfi of Baird. Your line is now open. Please go ahead. OK, thank you. Good morning, everyone.
Your line is now open. Please go ahead.
Okay. Thank you and good morning, everyone.
Good morning, Dave.
Yeah, I would just say I like the clean and green new logo. It looks good so that looks really nice on the slide deck anyway.
Speaker 5: Yeah, I'll just say I like the clean and green new logo. It looks good. So that looks really nice on the slide.
Speaker 5: I'm sorry to always be the corporate expense guy here, but it was lower than we estimated this quarter. And I was wondering, Dave, if you could talk about why that down ticked from the prior two quarters, despite the really strong sales and earnings performance you saw here this quarter.
And I'm, sorry to always be the corporate expense Guy here, but it was lower than we estimated this quarter and I was wondering Dave if you could talk about.
Why that down tick from the prior two quarters. Despite the really strong sales and earnings performance you saw here this quarter and then.
Speaker 5: And then, as you look to 2022 based on, you mentioned the 100% target incentive comp you're accruing for, but I assume now you know technology and other costs, what should we expect for corporate expense in 2022?
As you look to 2022 based on you mentioned, the 100% target incentive comp you're accruing for but.
But I assume that you know technology and other costs, what should we expect for corporate expense in 'twenty two.
Yes, so primarily the change in our corporate expenses related to the incentive compensation accruals and some of the true up that we did in the fourth quarter relative to what you saw in previous quarters. As we think about one of the other things that we've discussed quite a bit as we are on this digital transformation.
Speaker 3: Yeah, so primarily the the change in the corporate expense is related to the incentive compensation accruals and some of the true up that we did in the fourth quarter relative to what you saw in previous quarters, as we think about one of the other.
Speaker 3: things that we've discussed quite a bit is, you know, we are on this digital and IT transformation. More of those costs will reside in the corporate segment, particularly some of the enterprise level resourcing that we are hiring and we have working on some of our projects. So you will see a tick-up in the corporate segment expenses on a like-for-like basis excluding the
More of those costs will reside in the corporate segment, particularly some of the enterprise level of Resourcing that we are we are hiring and we have working on some of our projects. So you will see a tick up in the corporate segment expenses.
On a like for like basis, excluding the incentive accrual.
Okay.
Speaker 5: Okay, could you scale that for us or just higher is what we're going to do? It'll be higher and it's incorporated in our adjusted EBITDA outlook that we've provided you.
Would you scale that for us or just higher is what we're going to do.
It'll it'll be higher than it is incorporated in our adjusted EBITDA outlook that we provided you.
Yeah, Okay fair enough.
Speaker 5: And then on gross margin and inventory, it sounds like
And then on the gross margin and inventory it sounds like.
The supply is still tight.
Speaker 5: is still tight and prices are still going up but your inventory position is really strong so you
Prices are still going up but your inventory position is really strong so you.
You should continue to enjoy benefits of inventory gains in 2022, but at the point, where those things do catch up could you just give us an idea of.
Speaker 5: You should continue to enjoy benefits of inventory gains in 2022, but at the point where those things do catch up, could you just give us an idea of.
Those are the short term inventory gains that all distributors are seeing right now is they use their balance sheets can you can you talk about what that will look like as that normalizes out as it is it 50 basis points is it 100 basis points, what kind of magnitude are we thinking there.
Speaker 5: those the short-term inventory gains that all distributors are seeing right now as they use their balance sheets. Can you talk about what that'll look like if that normalizes out?
Speaker 5: 50 basis points, is it 100 basis points? What kind of magnitude are we thinking there?
Yes, David its extremely hard for us to calculate that but we are very clearly seeing the benefit of price running ahead of cost as it hits. Our income statement. That's primarily because we are an average with inventory company. So as you think about our balance sheet as we are replenishing inventory that average call.
Speaker 3: Yeah, Dave, it's extremely hard for us to calculate that, but we are very clearly seeing the benefit of price running ahead of cost as it hits our
Speaker 3: That's primarily because we are an average with inventory company. So as you think about our balance sheet, you know, as we are replenishing inventory, that average cost given inflation is going up. So it is, has still been a net positive for us, uh, that over the course of time, all other things being equal, including no more inflationary pricing from suppliers, you know, that, that, uh, favorable balance, uh, will continue to deteriorate.
Just given the inflation is going up.
So it is it has still been a net positive for us that over the course of time, all other things being equal, including no more inflationary pricing from suppliers that that favorable balance will continue to deteriorate, but again, we're in an inflationary environment. So we believe that we've got a long runway on that cost of goods improvement.
Speaker 3: But again, we're in an inflationary environment, so we believe that we've got a long runway on that cost of goods improvement. And Dave, the other thing I would mention is,
And Dave the other thing I would mention is.
Anixter pre acquisition close.
Speaker 4: you know, annexed or pre-acquisition closed.
We had put in place an enterprise wide margin improvement program I know, we've talked about that in the past.
Speaker 4: They had put in place an enterprise-wide margin improvement program. I know we've talked about that in the past. The, you know, cost price environment was different back then, you know, taking you back into 2018 and 2019. But they had enjoyed 10 quarters in a row of core gross margin expansion prior to acquisition close.
<unk> cost price environment was different back then taking it back into 2018 in 2019, but they had enjoyed 10 quarters in a row of core gross margin expansion prior to acquisition close.
And that's the program that we refreshed they wanted to refine it as well we took an enterprise wide. It's very focused on value based selling so I think the other thing I see thats very different with the new Wesco is that it's not just cost plus a markup.
Speaker 4: And that's the program that we refreshed. They wanted to refine it as well, and we took it enterprise-wide. It's very focused on value-based selling. So I think the other thing I see that's very different with the new WESCO is that it's not just cost plus a mark.
Standard distribution. It is it's really focusing on the value, we're delivering on customer and pricing for that value.
Speaker 4: you know, standard distribution, it is it's really focusing on the value we're delivering on customer and pricing for that value.
And we're still we still have a lot of legs left a lot of runway left let's say in this enterprise wide margin expansion program.
Speaker 4: And we're still, you know, we still have a lot of legs left, a lot of runway left, let's say, in this enterprise-wide margin expansion program. So I think as the price costs...
I think as the as the price cost.
Effect occurs like Dave said, we're fundamentally looking at expanding the core margins and seeing terrific results on that front and final point is increasingly the digital applications that we're investing is no unlock the power of our big data and there's just there's a plethora of <unk>.
Speaker 4: effect occurs, like Dave said, we're fundamentally looking at expanding the core margins and seeing terrific results on that front. And final point is increasingly the digital application
Speaker 4: that we're investing in, you know, they'll unlock the power of our big data. And there's just, there's a plethora of opportunities to continue to drive margins up. And I alluded to a few of the digital products that we launched inside our four walls in the last call.
Opportunities to continue to drive margins up.
Alluded to a few of the digital products that we have.
Launched inside our four walls in the last call.
One is focused on intelligent pricing another is focused on AR and AI enabled product search function those are two of them.
Speaker 4: One is focused on intelligent pricing. Another is focused on an AI-enabled product search function. Those are two that are underway now and we're deploying across our enterprise. So again, I think that we see this as having a lot of runway in front of us in terms of core margin expansion.
<unk> are underway now we're deploying across our enterprise. So again I think that were we see this as having a lot of a lot of runway in front of us in terms of core margin expansion.
Sounds good John Thank you very much.
Thanks, Dave.
Thank you. Our next question comes from Sam Zell cash from Raymond James Your line is now open. Please go ahead.
Speaker 1: Thank you. Our next question comes from Sam Darkash from Raymond James. Your line is now open, please go ahead.
Good morning, John Good morning, Dave how are you.
Speaker 6: Good morning, John . Good morning, Dave. How are you? Morning, Sam.
Good morning Ann.
Speaker 6: A couple questions, I suppose these are for you Dave. And my first one, I apologize, I'm going to be throwing a bunch of numbers at you. But I'm trying to…
Couple of questions.
Both of these are for you, Dave and my first one I apologize I'm going to be throwing a bunch of numbers at you.
I'm trying to.
Reconcile the EBITDA guidance for 'twenty, two it's effectively a $100 million to $200 million up on a year on year basis, but when I try to look at some of the line item guidance is that you've been providing I'm getting something much higher than that so for example, you have.
Speaker 6: reconcile the EBITDA guidance for 22, it's effectively 100 to 200 million dollars up on a year-on-year basis. But when I try to look at some of the line item guidances that you've been providing, I'm getting something much higher than that. So for example, you have...
$50 million and the variable comp reset.
Speaker 6: $50,000,000 in the Variable Comp Reset, you've got $60,000,000 or so in Synergies.
Got $60 million or so in synergies you've got call. It I don't know $25 million to $30 million in PPE write downs in fiscal 'twenty one.
Speaker 6: You've got, call it, I don't know, $25, $30 million in PPE write-downs in fiscal 21. I know you have the $30 million logistics cost as a headwind, but I'm still getting north of $100 million in good guys for 22, and then you have whatever you're going to get, EBITDA, from the 5% to 8% organic.
You have the $30 million.
Logistics cost as a headwind, but I'm still getting north of $100 million in good guys for 'twenty. Two and then you have whatever youre going to get EBITDA from the 5% to 8% organic.
So I'm trying to figure out why you're only guiding $100 million to $200 million up water on a year on year basis. So I know, there's digital but that can't be that dramatic it doesn't sound like you're assuming any major retreat in price cost. So I'm just trying to understand what the offset is that I might be forgetting Dave.
Speaker 6: So I'm trying to figure out why you're only guiding $100 to $200 million up on a year-on-year basis. I know there's digital, but that can't be that dramatic. It doesn't sound like you're assuming any major retreat in price costs. So I'm just trying to understand what the offset is that I might be forgetting, Dave.
Yeah, I think the one thing that we've not provided any.
Speaker 3: Yeah, I think the one thing that, you know, we've not provided any of the details behind it, we did hint to this in our fourth quarter discussion for 2021, but as we've talked about, we are investing in our transformation and in digital. That means expanding the capabilities and expanding the headcount that we have.
The details behind it we did hint to this in our fourth quarter discussion for 2021, but as we've talked about we are investing in.
In our transformation and in digital that means expanding the capabilities and expanding the head count that we have applied to our big data and our enterprise solutions.
Speaker 3: applied to our big data and our enterprise solutions. So right now, that is one of the drivers that we've not called out the specifics, but that would be a headwind as we think about the 2022 outlook that you've just discussed. And I wouldn't call it a headwind, Sam. I mean, I'll take you back to when you think about the top strategic rationale for why we put these two companies together.
So right now that is one of the drivers that we have not called out the specifics, but that would be a headwind as we think about the 2022 outlook that you've just discussed and I wouldn't call. It a headwind Sam I mean, I'll take you back to when you think about the top strategic rationale for why we put these two companies together.
That was within the top III.
Speaker 4: I'll take everyone back to because it's out there in the record books on what we said in our investor day in 2019.
And I will take everyone back to because it's out there in the record books on what we said.
At our Investor day in 2019.
<unk>.
Consolidation that's occurring in our part of the value chain.
Speaker 4: consolidation that's occurring in our part of the value chain, you know, the impact of digital, we're at the beginning part of the S curve. So, look, I think, you know, we couldn't be more pleased with the power of this combination.
Impact of digital where at the beginning part of the S curve. So look I think.
We couldnt be more pleased with the with the power of this combination.
We're getting core margin expansion, we're getting outstanding operating cost leverage and as I mentioned earlier.
Speaker 4: We're getting core margin expansion. We're getting outstanding operating cost leverage. And as I mentioned earlier, the breakout move is the top-line growth and outperforming the market. But it gives us the ability also to invest in our digital transformation while still delivering outstanding year-over-year incrementals. And it's a-
The breakout move as the topline growth and outperforming the market, but it gives us the ability also to invest in our digital transformation, while still delivering.
Outstanding year over year Incrementals and.
<unk>.
You know it's.
Speaker 4: You know, it's a beautiful thing when a plan comes together. Yeah, two other things I'll highlight for you, Sam. The first is that we are seeing substantial pressure
It's a beautiful thing when a plan comes together.
Two other things I'll highlight for you Sam the first is that we are seeing substantial pressure.
On our leases so as you think about the demand for well suited warehouse space.
Speaker 3: So as you think about the demand for well-suited warehouse space.
As we are going to renew leases as we're looking for new opportunities to expand our footprint to consolidate our footprint we are seeing considerable pressure.
Speaker 3: You know, as we're going to renew leases, as we're looking for new opportunities to expand our footprint, to consolidate our footprint, we are seeing considerable pressure from our occupancy costs. The other thing is, we've been hiring people throughout 2021. As I'm sure you're all seeing in the press, I mean, there is substantial pressure on wage inflation. And so that is another headwind that we've got built into our outlook.
Our occupancy cost the other thing is we've been hiring people throughout 2021 as Im sure Youre all seeing in the press there is substantial pressure.
On wage inflation and so that is another headwind that we've got built into our outlook I mean again. The good news is you put that all together Dave and.
Speaker 4: I mean, again, the good news is you put that all together, Dave, and, you know, with how we've outlined 2022, 2022's position to be another very strong year in the journey of incremental value creation.
No.
How we've how we've outlined 2022 2022 is positioned to be another very strong year of.
The journey of <unk>.
Incremental value creation.
Agreed.
Speaker 6: Agreed. Second question, the synergies for 22, the 60 some odd million dollars incrementally, I'm guessing a big chunk of that is going to be supply chain related.
Second question.
Synergies for 'twenty two.
60, some odd million dollars incrementally.
I'm guessing a big chunk of that is going to be supply chain related.
As such because youre vendor negotiations typically occur in the first quarter might we then.
Speaker 6: As such, because your vendor negotiations typically occur in the first quarter, might we then imagine that those synergies would be more front-end weighted this year as it works through your cost of sales?
Imagine that those synergies would be more front end weighted this year as it works through your cost of sales.
So so Sam it's not just supply chain so.
Speaker 4: So Sam, it's not just supply chain. So I'd like to make sure it's clear to everyone, it's operations plus supply chain.
I'd like to like to make sure it's clear to everyone its operations plus supply chain.
And I.
Speaker 4: And I mentioned this in the last earnings call that we're in the early phases of implementing a new WMS TMS package. And so that's also a key enabler in terms of in conjunction with our supply chain network optimization.
I've mentioned this in the last earnings call that.
We're in the early phases of implementing a new WNS Tms.
<unk>.
Package and so that's also a key enabler in terms of in conjunction with our supply chain network optimization.
We've done the easy a lot of the easy stuff that didn't but while as we rollout the new <unk> Tms across our network.
Speaker 4: We've done a lot of the easy stuff, but as we roll out the new WMS TMS across our network.
That enables even further streamlining and consolidation of our operations and how we manage are not are part of the supply chain and down to our supplier base. So.
Speaker 4: that enables even further streamlining and consolidation of our operations and how we manage our part of the supply chain and down to our supplier.
So it's really important.
Speaker 4: So it's really important to understand that we're in those phases of the integration plan now. We're midway through. This was always the way we laid it out. This is the second part of our three-year-plus plan, and that's what is in our priority list as we go.
To understand that we're in those phases of the integration plan that we're midway through this was always the way we laid it out. This is the second part of our three year plus plan.
That's that's what is in our priority list as we go through this year.
So the synergies will be ratable as the year progresses, then is that the takeaway is Joan.
Speaker 6: So the synergies would be ratable as the year progresses then? Is that the takeaway, John ?
I think that's right assumption, yes, they're not front end loaded.
Speaker 3: I think, Sam, that's the right assumption. Yes, they're not front-end loaded.
That was the short answer Sam and.
Speaker 4: That was the short answer, Sam, and I think as we work the supply chain network optimization.
I think as we work the supply chain network optimization.
We've done a lot of rationalization in the first 18 months.
Speaker 4: You know, we've done a lot of rationalization in the first 18 months.
Literally taking out dozens of facilities.
Speaker 4: You're literally taking out dozens of facilities. But this optimization is the second half of this integration program. And look, I'm really looking forward to seeing the benefits of that when that's all in place.
Optimization is the second half of the of this integration program in RA.
Really looking forward to seeing the benefits of that when that's all in place.
Thank you both.
Yep.
Okay.
Our next question comes from Nigel Coe.
Speaker 1: Our next question comes from Nigel Coe of Wolf Research. Your line is now open. Please go ahead. Thanks. Good morning, everyone. Obviously, British.
<unk> you.
Your line is my wife had please go ahead.
Thanks, Good morning, everyone.
Obviously, a pretty strong finished the year congratulations.
I wanted to go back to the EBITDA margin.
Yeah.
Speaker 7: Yeah, good evening. I want to go back to the EBITDA margin bridge, just dotting the i's and crossing the z's on the price-cost, because one of your competitors talks about a slight step back with the inflationary pressure. So just wondering, we're still expecting price-cost to be a tail in 2022. But really, my question is, how do you see the 2050 base point?
I want to go back to the EBITDA margin bridge.
You just don't need anything on the price cost.
Because one of your competitors talks about a slight step back.
With the inflationary pressure.
Pressures so just wondering.
We're still expecting price cost to be a tail.
In 2002.
But my question.
Is how do you see the 20 to 50 basis points shaken out amongst the segments and the spirit of the question really is that CSS was flattish and in 'twenty. One obviously inventory was the effect of that I'm just wondering if.
Speaker 7: you know, shaken out amongst the segments. And the spirit of the question really is that CSS was flattish in 21. Obviously, inventory was a factor there. Just wondering if any of the three segments, pushing or pulling, that range more or less.
Any of the three segments that is pushing them, putting that range more or less.
Yes, Nigel it's Dave Schulz, so outside of the adjustment that you just discussed related to the inventory write downs, we would expect all of our business units to be within the range of the adjusted EBITDA that we've outlined here there arent any specific or unique items that are impacting one.
Speaker 3: Yeah, Nigel, it's Dave Schulte. So outside of the adjustment that you just discussed related to the inventory write down.
Speaker 3: We would expect all of our business units to be within the range of the adjusted EBITDA that we've outlined here. There aren't any specific or unique items that are impacting one business unit versus the other. We see the market opportunity relatively consistent across the three SBUs, great opportunities.
<unk> business unit versus the other we see the market opportunity relatively consistent across the three sbu's great opportunities against all three all three have margin improvement programs that they are continuing to execute we're keeping a sharp watch on our cost structure, so nothing that would be unique or.
Speaker 3: against all three. All three have margin improvement programs.
Speaker 3: that they're continuing to execute. We're keeping a sharp watch on our cost structure. So, you know, nothing that would be unique or one SPU would have a less opportunity or greater opportunity than the other to expand from an EBITDA margin perspective.
Sure.
One one SBU would have a less opportunity or a greater opportunity than the other to expand from a EBITDA margin percentage.
That's great very very clear and then on the inventory.
Speaker 7: That's great, very, very clear. And then on the inventory, good job on sort of stocking up there. Would you expect to still build inventories to the first half of the year as per normal? So we're sort of more back on a normal seasonality basis here. And then just any color on sort of how you're faring on stock outs and availability of product versus some of your competitors.
Good job on sort of like stocking up there would you expect to still build inventories through the through the first half of the year as per normal.
With a more back on a normal seasonality basis here and then just any any color on sort of how you're faring on stock outs and an availability of product versus some of your competitors.
So on the first part I would say and this ties into Dean's question Nigel at the beginning.
Speaker 4: So on the first part, I would say, and this ties in the Dean's question, Nigel, at the beginning, you know, to the
To the extent as supply chains are being rebuilt and ive talked demand picks up and we're able to support even higher out the door sales and backlog starts to come down that that then then what we've done strategically with inventories will support.
Speaker 4: As supply chains are being rebuilt and as our demand picks up and we're able to support even higher out-the-door sales and backlog starts to come down, then what we've done strategically with inventories will support.
It will support that so we would expect that the inventory build approach that we took in 2021, we're ratcheting that back I only say that is based on that assumption because to the extent that.
Speaker 4: You know, we'll support that. So we would expect that, you know, the inventory bill.
Speaker 4: that we took in 2021, we're ratcheting that back. I only say that is based on that assumption because to the extent that we continue to significantly outperform the market, demand picks up, but our backlog continues to grow.
We continue to significantly outperform the market demand picks up but our backlog continues to grow.
Speaker 4: I just, you know, we're going to make sure that we position working capital to support that. So, but I think we do expect as we move through the year and supply chains are rebuilt, more of a return to normalcy. Relative to your stock out question.
Yeah.
We're going to make sure that we position working capital to support that so but I think we do expect.
As we move through the year and supply chains are rebuilt more of a return to normalcy relative to your stock out question.
We are laser focused and have our electron microscope on our availability.
Speaker 4: We're laser focused and have a electron microscope on our availability and our fill rate.
And our fill rates.
And I will tell you.
Speaker 4: And I will tell you, that was a driver behind how we managed our working capital and particularly inventory. We've been able to maintain very strong availability and fill rates, even in this supply chain constrained global environment that we're operating.
Yep.
That was a driver behind how we manage our working capital, particularly inventory, we've been able to maintain very strong availability and fill rates even in this supply chain constrained.
The global environment that we're operating in.
So.
Speaker 4: So, I know we pride ourselves on being kind of the oasis in the desert or the lighthouse in the storms, quote unquote. And really it is our job. It is our job as a leading B2B distributor to manage the supply chains challenges that our customers have. And I think what you're really seeing is it's the power of our scale and our supplier relationship.
We pride ourselves on being kind of the the oasis in the desert of lighthouse and the storms quote unquote and really it is our job. It is our job as a leading BW distributor to manage the supply chain challenges that our customers have and I think what you're really seeing is it's.
It's the power of our scale.
At our supplier relationships and using those together to ensure continuity of supply for our customers. So you know.
Speaker 4: and using those together to ensure continuity of supply for our customers. So, you know, I couldn't be more pleased with how the team's performing on that. And, you know, we're really well positioned again, as I said, structurally set up well for 2022. I'll end on this point, and this is more of a strategic point.
I couldnt be more pleased with how the team is performing on that and.
We're really well positioned again as I said structurally set up well for 2022.
I'll end on this point and this is more of a strategic point.
Supply chain integrity supply chain resilience.
Speaker 4: supply chain integrity, supply chain resilience, supply chain sustainability.
Supply chain sustainability.
That is core to our value proposition.
Working with our supplier partners, but but on behalf of and in support of our customers.
Speaker 4: working with our supplier partners, but on behalf of and in support of our customers.
Great. Thanks, Sean.
Thank you.
Our next question comes from comes small all Steven.
Speaker 1: Our next question comes from Tom Small of Stephens. Your line is now open. Please go ahead. Good morning, and thanks for taking my questions. Morning.
Line is now open. Please go ahead.
Good morning, and thanks for taking my questions.
Good morning Dominic.
Wanted to circle back to the outlook you provided on the adjusted EBITDA margin for the coming year.
If I look at the mid point of the 20 to 50 basis points improvement that you called out and I try to sum up everything we've heard thus far.
I think.
Youre communicating that in both in terms of gross margin rate.
And on the operating expense leverage both of those should.
It should improve on a full year basis, but if you could just confirm or pushback. There and then anything you would want to call out on the sequential progression on the SG&A line, even qualitatively just to help us think about the quarters would be helpful as well.
Yes, So let me just again, we're not going to guide specifically the gross margin versus the operating expense. We've provided you with the adjusted EBITDA margin. We've made some comments about our margin improvement program, which is primarily focused on gross margin, we're going to execute hard against that but we're focused on providing you with that <unk>.
Speaker 6: So let me just, again, we're not gonna guide specifically the gross margin versus the operating expense. We provided you with the adjusted EBITDA margin. We've made some comments about our margin improvement program, which is primarily focused on gross margin. You know, we're gonna execute hard against that, but you know, we're focused on providing you with that adjusted EBITDA outlook. In terms of how we think about the quarters.
<unk> EBITDA outlook in terms of how we think about the quarters four.
Speaker 3: for 2022 from an SG&A perspective. Obviously, there is going to be a ramp up from Q1.
For 2022 from an SG&A perspective.
Obviously.
There is going to be a ramp up from.
From Q1 to Q2.
And SG&A expenses, that's primarily related to the timing of our merit increases for the organization all streamlined effective April one so we see that typical step up in SG&A from Q1 to Q2, the balance of the year will primarily be based on the volume and sales profile and we have assumed.
Speaker 6: in SG&A expenses. That's primarily related to the timing of our merit increases for the organization, all streamlined effective April 1. So we see that typical step up in SG&A from Q1 to Q2. The balance of the year will primarily be based on the volume and sales profile. And we have assumed a typical
<unk> a typical.
Seasonal trend by quarter.
Speaker 6: seasonal trend by quarter on our sales. We typically see a sequential decline from Q4 to Q1.
On our sales, we typically see a sequential decline from Q4 to Q1.
We anticipate that that will occur again here in 2022, particularly given the strength of our fourth quarter, we've assumed that given the project backlog and the exposure of our business to seasonality. We will see sales grow Q3, Q2, Q3, and then we will have a sequential decline from Q3 two.
Speaker 3: We anticipate that that will occur again here in 2022, particularly given the strength of our fourth quarter.
Speaker 3: We've assumed that, you know, given the project backlog and the exposure of our business to seasonality, we'll see sales grow Q3, Q2, Q3, and then we'll have a, sequential decline from Q3 to Q4.
Q4.
So the SG&A pattern will follow a similar.
Speaker 3: So the SG&A pattern will follow a similar rate with the exception of that large merit increase that will occur and impact SG&A in the second quarter. Thank you, that's helpful. And as a follow-up, I wanted to talk strategically on your M&A.
Right with the exception of that large merit increase that will occur and impact to SG&A in the second quarter.
Thank you that's helpful and as a follow up I wanted to talk strategically on your M&A.
Pipeline here with the visibility too.
Hitting your target.
<unk> by mid year, I think you said.
And with several quarters now where both on the cost synergy side in the field synergy said youre performing above expectations on anixter. So there there is an argument to make that better that integration goes.
The more appetite in the more urgency there would be for continued consolidation on the other hand, you've got your hands full with with a transaction of that size, even if it has gone well, thus far but could you.
Update us there on the M&A appetite.
Well look I think that.
Yeah.
That's a key value creation lever for us going forward.
Speaker 4: that's a key value creation lever for us going forward. If you look at Wesco's history since we became a publicly traded
If you look at West Coast history. Since we became a publicly traded company, we clearly have used M&A.
Speaker 4: We clearly have used M&A as a value creation lever.
As a value creation lever.
And.
Speaker 4: And the value chain that we're in, and particularly our portion of the value chain, which is really the most relevant point.
The value chain that we're in and particularly our portion of the value chain, which is really the most relevant point still remains fragmented highly fragmented and so as we look forward Tommy.
Speaker 4: still remains fragmented, highly fragmented.
Speaker 4: And so, you know, as we look forward, Tommy, you know, M&A is going to clearly be one of the levers that we use to support our overall value creation.
Tommy you know M&A is going to clearly be one of the levers that we use to support our overall value creation.
With that said our focus in the short term is still.
Speaker 4: With that said, our focus in the short-term is to still continue to
We continue to.
To use.
We used our strong free cash flow generation to Delever.
Speaker 4: use our strong free cash flow generation to de-lever. And that's what we're doing. And just to make sure it is clear, we had our original target was to get back within our target leverage range by mid 2023. We had accelerated that to the second half of this year.
And and that's what we're doing and just to make sure. It is clear we had our original target was to get back within our target leverage range.
By mid 2023, we have accelerated that to the second half of this year.
And clearly we have very positive momentum.
Speaker 4: And clearly, we have very positive momentum against that, you know, ending up below the four handle that closed out last year. But I mean, the short answer is key value creation lever. We see ourselves as being a strong leader. And now showing the ability to not just do smaller strategic acquisitions, but large transformational ones, you know, the ability to put two equal sized companies together.
Against that.
Ending up or below.
Below the four handle the closeout last year, but.
The short answer is key value creation lever, we see ourselves as.
As being a strong leader.
And now it's showing the ability to not just do smaller strategic acquisitions, but large transformational ones the ability to put two equal sized companies together.
Is incredibly challenging in any environment or any market.
Speaker 4: is incredibly challenging in any environment or any market. And to do it against the backdrop of the pandemic makes it exceptionally challenging, and we couldn't be more pleased with the initial results.
And to do it against the backdrop of the pandemic makes it exceptionally challenging and we couldnt be more pleased with the initial results.
Still a lot of runway there to your point still a lot of runway to deliver on the integration benefits that we've committed to as well as the digital transformation.
Speaker 4: Still a lot of runway though, to your point. Still a lot of runway to deliver on the integration benefits that we've committed to, as well as the digital transformation.
I appreciate the insight John I'll turn it back.
Yep.
Yes.
Thanks Kim.
Our next question is from Steve Barker of Keybanc.
Speaker 1: Our next question is from Steve Barger of Key Banks. Your line is now open, please go ahead.
Your line is now open. Please go ahead.
Thanks for for.
You put me in at the end here just since you used the slide for it in the front of the presentation I will ask her about conference room as a service just how big is that market. What do you expect the capex has to stand that up.
Speaker 8: mean at the end here. Just since you used a slide for it in the front of the presentation, I'll ask her about conference room.
Speaker 8: how big is that market, what do you expect the capex is to stand that up, what's the return profile.
Once the return profile and really what's the objective here.
I'll address the last part first.
Speaker 4: I'll address the last part first. Steve, we've been, and good morning, by the way. The last few calls, we've talked about the initial applications that we're focused on and are part of our overall digital transformation agenda. And the examples that we gave over the last couple quarters were focused on applications, I'll use the term, inside our four walls.
Steve we've been in good morning by the way we've been the last few calls we've talked about.
The initial applications that we're focused on and part of our overall digital transformation agenda.
And the examples that we gave over the last couple of quarters, we're focused on applications I'll use the term inside our four walls.
No.
Speaker 4: So, you know, applications that would leverage the power of our big data. And we spent a substantial amount of work, was focused in these first 18 months of taking Wesco's big data, quote, unquote, Annexer's big data, putting it together into one brand-new world-class data lake, and beginning to operationalize that data to run our business better. So, that's.
Applications that would leverage the power of our big data and we spent a substantial amount of work.
It was focused on these first 18 months of taking West coast Big data quote Unquote Anixter is big data putting it together.
Into one brand new World class data Lake and beginning to operationalize that data to run our business better.
So that's foundational but in parallel with that we're beginning to look at taking these new digital products and applications external and so this conference room as a service is a good example.
Speaker 4: But in parallel with that, we're beginning to look at taking these new digital products and applications ex ter.
Speaker 4: And so this conference room as a service is a good example. And that's why we cited it this quarter, just to show you that these digital products and applications won't just be inside our four walls, but there will be some customer-facing opportunities in terms of new products and services that we take to customers.
And that's why we cited it this quarter just to show you that.
These digital products and applications won't just be inside our four walls, but were going to there will be some customer facing opportunities in terms of new products and services that we take to customers. It's exciting because we have a capability of core capability in <unk> audio visual Wesco had one as well as anixter.
Speaker 4: It's exciting because we have a capability, a core capability in AV, audio-visual. Westco had one, as well as Annexter, and together, it's actually a very attractive market. It was attractive pre-pandemic, but the pandemic and
And together, it's actually a very attractive market it was attractive pre pandemic, but the pandemic and the impact on.
Return to the workplace and hybrid work environments.
Speaker 4: you know, return to the workplace and hybrid work environments.
I've created an even a greater opportunity. So this is this is just one product slash service application, it's very interesting because again, it's a subscription based model, we don't own the customer doesn't own the product we take care of that for him. It's all turnkey.
Speaker 4: has created even a greater opportunity. So this is just one product slash service application. It's very interesting because, again, it's a subscription-based model.
Speaker 4: You know, we don't own, you know, the customer doesn't own the product. We take care of that for him. It's all turnkey. I'd encourage you to go on our website and punch into it.
I'd encourage you to go onto the website and punch into it.
And get a sense for how we're presenting ourselves as a customer and how we could stand up that service capability is very new and different for wesco anixter for that matter.
Speaker 4: and get a sense for how we're presenting ourselves to the customer and how we can stand up that service capability, it's very new and different for WESCO, or Annexter for that matter.
Speaker 4: And those of you that know us, if you go punch into the website, you'll see that.
And those of you that know us to be go punch into the website youll see that so again, just an example of one of the what will be a long list of these.
Speaker 4: Again, just an example of what will be a long list of these.
Speaker 4: New launches that that will be working, you know in the coming
New launches that that will be working in the coming years.
Thanks for that detail to the first part of the question. How are you defining the addressable market there and how much are you spending on capex in terms of staffing that and standing it up yeah, Steve It's Dave.
Speaker 8: Thanks for that detail, and to the first part of the question, how are you defining the addressable market there, and how much are you spending on CapEx in terms of staffing
Speaker 4: Steve, the incremental investment is de minimis. We did not have to add resources. It was repurposing the resources we have working the AV part of our business already, as well as new resources that we had been adding anyway as part of our IT and digital group.
The incremental investment is de Minimis.
We did not we did not have to add resources. It was repurposing. The resources, we have work in the <unk> part of our business already as well as.
New resources that we had been adding anyway as part of our it and digital group and in support of our transformation. So.
Speaker 4: in support of our transformation. So no, you think of the incremental investment as being de minimis and we've not sized that individual. It's an individual product. It's not a market. So I'm not going to release, we're not going to size that information. The reason we included it today was just indicative of
You think of the incremental investment is being de Minimis and we've not size that individually, it's an individual product it's not a market.
I'm not going to release, but we're not going to size that information, but the reason we included it today was just.
Indicative of the digital investments, we're making are just going to be focused on applications inside our four walls leveraging our big data, but also include new products and services that are that are customer facing.
Speaker 4: The digital investments we're making aren't just going to be focused on applications inside or for walls leveraging our big data, but it will also include new products and services that are cutting ancestors back.
Understood and then I'll just ask one more on that as you've gone through this process of integrating the data and thinking about how to go external with that any other updates or thoughts on follow on offerings, and just where you want to take this one how big could this service model will be over time.
Speaker 8: Understood. And I'll just ask one more on that. As you've gone through this process of integrating the data and thinking about how to go external with that, any other updates or thoughts on follow-on offerings and just where you want to take this? How big could this service model be?
So so that is the really the big the biggest question.
Speaker 4: So that is really the biggest question and it's a phenomenal opportunity.
Nominal opportunity.
That's what we're that's what our digital transformation will enable so.
Speaker 4: That's what our digital transformation will enable. So, cannot be well developed in an earnings call, so stay tuned for our investor day, which will begin to kind of, let's say, put the meat on the bones in terms of that.
Not cannot be well developed in an earnings call. So stay tuned for our Investor day, which will begin to.
Kind of let's say took the meat on the bones in terms of that.
Very good thanks.
Thanks.
Okay, I think that.
Speaker 4: Okay, I think that we're a little bit over time, but these are terrific questions. So, you know, I know if we have anything else, anybody else lined up in the queue, we'll follow up with you posthaste. With that, though, I'd like to bring our call to a close, and thank you all for your support. It really is much appreciated. We look forward to speaking with many of you in the coming days, as well as our upcoming investor event.
I think we were a little bit over time.
But these are terrific question so.
If we have anything else anybody else lined up in the queue, we'll follow up with you and post haste with that though I'd like to bring our call to a close and thank you all for your support and it really is much appreciated we look forward to speaking with many of you in the coming days as well as our upcoming investor events.
And they include the next too eventually will be participating in are the Raymond James Institutional investors conference and the Jpmorgan Industrials conference.
Speaker 4: And they include the next two events we will be participating in are the Raymond James Institutional Investors Conference and the JPMorgan Industrials Conference shortly within the coming weeks. So with that, have a great day.
Shortly within the coming weeks, so with that have a great day.
This concludes today's conference call. Thank you for your participation you may now disconnect your line.
Speaker 1: This concludes today's conference call. Thank you for your participation. You may now disconnect your line.
Yeah.
Speaker 9: ? ? ? ? ?
Okay.
Yeah.