Q1 2022 Wesco International Inc Earnings Call
Hello, and welcome to today's call there was a short delay in the coast Dalton, we'll be back with you and in enough of initial taste. Please bear with us.
[music].
Hello, and welcome to todays West Coast first quarter earnings call I would like to remind you that all lines will be on listen only mode. Throughout this presentation.
If you would like to ask a question. Please press star followed by one on your telephone keypad.
Please night.
This event is being recorded I would now hand, the call conference call I bought two well Rockwell's director of Investor relations to begin well over T. A.
Thank you and good morning, everyone before we get started I want to remind you that certain statements made on this call will contain forward looking information.
Forward looking statements are not guarantees of performance and by their nature are subject to inherent uncertainties.
Actual results may differ materially.
Please see our webcast slides as 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 <unk>.
<unk> undertakes no obligation to update the information to reflect the changed circumstances.
Additionally, today, we will 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 was at Wesco Dot com on the call. This morning, we have John Engel.
Chairman, President and Chief Executive Officer, and Dave Schulz, Executive Vice President and Chief Financial Officer, now I'll turn the call over to John .
Well, thank you will and good morning, everyone. It's a pleasure to be with you.
Our first quarter results speak volumes about West Coast Foundation for accelerating growth and profitability.
After delivering an exceptional performance in 2021, we're off to an even more impressive start in 2022. Once again, we outperformed the market and we achieved a new company record for sales and profitability in backlog.
Each of our three global business units delivered double digit sales and profit growth with results that are now well above 2019 pre pandemic level.
We also continued our rapid deleveraging, which now stands at three six times adjusted EBITDA compared to five seven times when we closed the anixter acquisition, just seven quarters ago.
This is by far the strongest quarter since the new Wesco was formed by the transformational combination of Wesco and anixter in June of 2020.
With each quarter the power of less good with increased scale expanded portfolio and industry, leading position becomes more evident as we build momentum and deliver superior value to all of our customers.
As a result of our outstanding start to the year and the accelerating momentum across our business. We are substantially raising our outlook for 2022 as well as increasing our cumulative sales synergy target through the end of 2023.
Importantly, we are continuing to invest in our digital transformation effort, which will raise westgate joint even higher level of performance operating efficiency and customer loyalty.
Overall, our results continue to prove the extraordinary value of the west Atlantic or combination and point to a future of sustained growth and market outperformance.
Dave will review, our financial results and address our substantially higher full year outlook in more detail shortly but before I hand, it off to Dave I wanted to address three additional items.
First the <unk>.
Wesco results versus pre pandemic levels.
Second our uniquely strong position to capitalize on the attractive secular growth trends in our end markets and third our new company, our new co brand identity that we launched earlier this year.
Turning to page five.
Strength of the new Wesco, and our accelerating growth and profitability, our best measured by comparing our results to pre pandemic levels in 2019.
This page spotlights those comparisons versus let's go plus anixter 2019 pro forma results.
Sales sales are up 21% to over $4 9 billion in the first quarter adjusted EBITDA nearly doubled from 187 million to 364 million with a trailing 12 month rate of 1.32 billion.
Adjusted EBITDA margin expanded 280 basis points to seven 4% in the first quarter and this reflects outstanding execution of our integration program and delivery of our cost sales and margin synergy.
And finally, we have deleveraged over two turns to three six times since the anixter clothing in June 2020, which is well ahead of our external target.
These results clearly demonstrate the power of the transformational combination of Wesco anixter.
Now moving to page six our focus on providing our global customers with the products services and supply chain solutions that they need is what drives us each and every day, we're executing at a very high level and we're exceptionally well positioned to capitalize on the strong secular growth trends and increasing invest.
You mentioned public sector infrastructure outlined on this page.
These long term growth drivers positively impact each of our three global business units as I previously said, the new Wesco is becoming a growth company.
We have a record backlog and accelerating cross sell program, a growing opportunity pipeline and very positive momentum overall.
And most importantly, we are only in the early stages of unlocking our total growth potential.
Now turning to page seven the <unk>.
Transformational combination of Wesco and Anixter in June 2020, created a new company with increased scale, a higher growth portfolio and significantly expanded capabilities.
We launched a new brand platform to better reflect our new company and amplify the key attributes that describe the new wesco.
Outlined on this page are four statements that are central to our new brand.
First our mission our mission is that we build connect power and protect the world.
Second our vision, our vision is to be the best chapter enabled supply chain solutions provider in the World operative word being tech enabled.
Third our purpose.
Our purpose is for life to run smoothly. It should run smoothly. So we can create a world you can depend on and finally, our promise and our promises ingenuity delivered.
I'm very proud of our team's continued commitment to realizing the vision and mission of the new Wesco.
Our exceptional results are a testament to the ingenuity and solutions driven mindset that a hallmark of our culture.
Our new logo in the center of this page is more than a change in of design. It is a W with an embedded a.
And it provides a visual representation of the coming together of Wesco and anixter to drive growth and innovation.
Responsibly and sustainably.
Where are you utilizing our new brand to engage with our customers and suppliers as well as in our new employee recruiting campaigns I encourage you to visit our new website, which was launched a little over a week ago to experience our exciting new Wesco brand.
With that I'll now turn the call over to Dave.
Thanks, John and good morning, I'll start on slide nine with a summary of our first quarter results compared to the prior year.
As John mentioned first quarter sales were a record and exceeded our expectations we.
We had anticipated sales would decline sequentially versus the fourth quarter consistent with our normal seasonal pattern sequentially organic sales were essentially flat from Q4 and up 21% from the prior year as we experienced an acceleration of sales in the second half of the quarter.
The primary driver of this difference relative to our expectations with stronger demand more cross sell revenue reported in the quarter and an increased benefit from price.
On a reported basis sales were up 22% currency and last year's required Canadian divestitures were a combined 80 basis point headwind to growth.
Offset by the benefit of an extra workday, which added 160 basis points to sales.
We estimate pricing added approximately eight points of sales growth in the quarter, which primarily benefited our EES and UBS businesses.
Pricing in the CSS business was a low single digit benefit versus the prior year.
Supply chain challenges have continued to impact certain pockets of our business we.
We believe our sales growth could have been 1% to two percentage points higher if we were able to secure additional products from our suppliers to meet demand.
We continued to strategically invest in our inventories in the quarter to address these challenges as well as support our strong pipeline of sales growth opportunities.
Backlog reached another record level this quarter and was up 25% sequentially from December and up more than 90% from the prior year.
Each business unit posted sequential backlog increases of more than 20% from the fourth quarter and increases of at least 70% above the prior year.
As we start the second quarter demand continues to be strong.
Preliminary April results are very encouraging with sales up approximately 22% year over year on a same workday basis.
Gross margin master whichever level at 21, 3% in the quarter of 120 basis points versus the prior year and up 50 basis points sequentially.
This strong performance was primarily driven by our gross margin improvement program, including the effective pass through of supplier price increases and the absence of an inventory write down related to PPE equipment in the prior period.
Recall the impact of the PPE write down was 20 basis points in the prior year quarter.
Adjusted EBITDA, which excludes merger related and integration costs stock based compensation and other net adjustments was 68% higher than the prior year and represented seven 4% of sales an all time high watermark for the company and 200 basis points higher than the prior year I'll walk you through the main drivers there.
This improvement in a moment.
Adjusted diluted EPS for the quarter was $3 63.
And an all time record of more than 150% from the prior year.
The primary driver of this increase was higher sales as well as an 11 tailwind from lower interest expense due to refinancing activities last year.
The combination of a higher tax rate divestitures foreign exchange and a higher share count collectively represented 29% headwind.
The effective tax rate was lower than our fiscal year outlook, but higher than the prior year due to less benefit from certain discrete tax items.
Turning to page 10, you can see that the higher sales expanded gross margin and integration cost synergies drove the $148 million increase in adjusted EBITDA.
As you would expect in a strong demand in inflationary environment, we continued to experience 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 it systems and digital tools.
Overall, we delivered strong operating leverage as we generated a 68% increase in adjusted EBITDA on organic sales growth of 21% a greater than three times multiple.
Moving to our strategic business units beginning on slide 11 sale.
Sales in our EES segment were up 21% year over year in the first 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.
We also continue to see increasing momentum in our industrial and OEM businesses supported by the broader industrial recovery.
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 discussed earlier.
Adjusted EBITDA was $192 million, a record level for EES and up more than 70% from the prior year adjust.
Adjusted EBITDA margin was nine 2% 270 basis points higher year over year.
This increase reflects effective price cost pass through strong cost synergy realization and operating cost leverage.
Turning to slide 12 sales in our CSS segment were up 14% versus the prior year on an organic basis we.
We saw a double digit growth in both the network infrastructure and security solutions operating groups driven by data Center and Hyperscale projects continued investments in cloud based applications and audio visual installations and increase return to workplace activities.
While strong.
<unk> sales growth was not as robust as EES and UBS, primarily due to supply chain constraints and select product categories within the industry.
We are helping our customers effectively navigate these challenges.
Backlog increased 23% from year end to another record level, reflecting continued strong demand driven by our cross sell program and the secular growth trends in our end markets.
Profitability was also strong with adjusted EBITDA of eight 6% in the quarter of 130 basis points higher than the prior year, driven by operating leverage integration cost synergies and the execution of our margin improvement initiatives.
Turning to slide 13 organic sales in our UBS segment were up 30% versus the prior year.
Utility demand has remained strong in both our investor owned utility and public power customers continue to invest in grid hardening and modernization.
Demand in our broadband business was strong again in the quarter driven by demand for data and high speed connectivity as well as expansion in connectivity requirements for home based applications.
Additionally, we are beginning to benefit from 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 and adjusted EBITDA margin expanded 190 basis points to nine 7% of sales.
This growth was driven by the scale benefit of sales and gross margin expansion.
Now moving to page 14 the.
The size of the cross sell opportunity of combining wesco and anixter continues to exceed our expectations.
In Q1, we added $160 million of cross sell wins.
Program to date, we have generated $525 million in cumulative cross sell revenue.
We have an expanded pipeline of sales opportunities and our cross sell momentum continues to build.
We're capitalizing on the complementary portfolio of products and services as well as the minimal overlap between legacy Western Wesco and legacy anixter customers.
The size of this opportunity has turned out to be one of the most significant value drivers of the combination of Wesco plus anixter <unk>.
Recall that last quarter, we increased our cumulative cross sell target to $600 million.
Due to the continued strength of this program, we are increasing our target again to $850 million cumulatively by the end of 2023.
Turning to page 15.
On this slide we have highlighted three recent cross sell awards that collectively represent approximately $50 million of future sales across our three business units.
And the first example, EES and CSS were able to jointly win an award for $40 million of cable tray power cable and network infrastructure projects products related to construction of a new semiconductor fabrication facility in the United States.
In the second example, DSS was able to sell anixter products to a legacy western customer to support the build out of the passive optical network Covenant Entertainment theme Park.
And then the third example, UBS sold an additional $10 million of anixter wire and cable products to a long term western utility customer.
Our cross sell momentum is building and clearly highlights the power of the combined portfolio.
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 realized $63 million in Q1 of this year.
We're on track to meet our expected target of $350 million by the end of 2023.
Recall that these savings are relative to the 2019 pro forma base.
On the right side of the slide we have outlined to $315 million of cost savings targets by synergy type and in the chart you get a sense for the synergies that have been realized to date in each category. For example, the estimated $45 million and corporate overhead savings have now been fully realized the largest remaining.
Synergies are those that take longer to execute.
Putting those related to supply chain and field operations.
Turning to page 17 on the left side of this page you will see a bridge from first quarter adjusted net income to free cash flow.
The $6 million use of cash primarily reflects a combination of depreciation and amortization interest and income taxes, which were add backs to net income in the quarter.
<unk>, primarily by incentive compensation payments accrued for 2021 performance and paid out in March.
Working capital was a $339 million use of cash for the quarter, primarily driven by higher receivables of $325 million due to the strength of our sales and continued investment in inventory to support this level of growth maintain customer service levels and support projects in our backlog.
Lastly, the Capex and it spend reflects our investment related to our ongoing digital transformation consistent with our plan.
On the right side of this page you can see that we are gaining efficiencies in working capital.
On a trailing 12 months basis, using a five quarter ending balance sheet average net working capital improved by more than five days compared to the end of the prior year quarter, driven by lower inventory days outstanding and days payable.
Moving to slide 18.
Reducing our leverage has been a top priority since we announced the merger with anixter.
In the first quarter, we reduced leverage by <unk> three times trailing 12 months adjusted EBITDA.
And brought our leverage ratio down to three six times.
This represents a decrease of two one leverage turned since closing the acquisition in June of 2020.
This accelerated pace of Delevering reflects the strength of our <unk> distribution model and our ability to rapidly return to our target leverage range.
We now expect to return to our target leverage range in the second quarter or full year earlier than we originally committed to at the time the acquisition close.
Moving to page 19, we are updating our full year outlook.
Based on this quarter's results strong demand trends and the continued expansion of our backlog and the significant growth of our cross sell synergies we are increasing our full year SaaS sales outlook from the previous range of 5% to 8% to a range of 12% to 15%.
Our assumption for market growth is 9% to 11%, including the benefit of price.
We expect the demand environment for our products services and solutions to continue to be strong. However, we recognize that supply chain constraints and the pace of inflation present some uncertainties.
We are increasing our outlook for growth from share gains and cross sell synergy to 3% to 4% as we expect to continue to outperform the market and have increased our expectations for higher cross sell revenue as discussed earlier.
Lastly, keep in mind that 2022 has one more work day than 2021 that occurred in the first quarter, which we estimate will add one five points of growth in 2022.
With regard to our business units, we expect that Ges and UBS will be towards the upper end of our sales range for the full year.
<unk> is expected to be at or slightly below the low end of the range.
This outlook reflects our expectation that foreign exchange will be neutral also included in our outlook is a contract with a utility customer that will shift from a full revenue model to a service fee model, which will negatively impact sales by approximately half a point with no impact to EBITDA.
For adjusted EBITDA margin, we are increasing our outlook to a range of seven 3% to seven 6%, primarily reflecting increased operating leverage on higher sales as well as continued benefit from our gross margin improvement program.
At the midpoint of the sales and EBITDA margin range, our full year outlook for adjusted EBITDA is 154 billion and represents a substantial increase versus the midpoint of our prior outlook range of $1 three 3 billion.
We are also reducing our effective tax rate to 24% for the year, primarily reflecting the lower effective tax rate in the first quarter.
Our outlook does not assume any impact from discrete items that we experienced in the first quarter.
We are increasing our adjusted EPS outlook by 26% at the midpoint to a range of 14% to $15, which represents growth versus the prior year of $40 to 50%.
Lastly, we are adjusting our expectations for cash flow towards approximately 80% of adjusted net income, which reflects the need for higher investment in working capital to support our increased sales outlook I would like to point out that even though this reflects a lower percentage of net income the increased outlook for net income implies that we expect west.
Go to generate a similar amount of free cash flow dollars. This year as reflected in our previous outlook.
This outlook reflects a handful of assumptions that I would like to remind you off base.
Based on our first quarter results and outlook for the year. Our short term compensation structure is reflected in our margin outlook at an above target payout.
Lower than 2021 on the dollar basis, we expect this resulting tailwind will be approximately offset by an increase in transportation and logistics costs that we mentioned last quarter.
On cash flow, we still expect to spend approximately $120 million and combined capital expenditures in it and digital investments on the statement of cash flows of approximately $45 million will flow through capital expenditures and approximately $75 million will flow through changes in other assets.
We expect to 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.
Recall that in 2021, we realized approximately $2 million of the full $80 million annual benefit.
Our outlook does not incorporate the potential effects of any further refinancing activity this year.
Our outlook assumes an average diluted share count of approximately $53 million 53 million shares for the year and lastly, the outlook does not reflect any potential changes to applicable tax laws.
As we think about our sales profile by quarter Q2 is off to a strong start.
The base period comparisons on a sales per workday basis get tougher and we would expect the monthly growth rates to moderate in May and June .
We expect our sales profile by quarter will follow the historical seasonality pattern.
Recall that in the fourth quarter of 2021 sales per workday increased sequentially versus the third quarter.
We do not expect this pattern to repeat in 2022 consistent with typical seasonality.
Moving to slide 20, and before opening the call for questions. Let me provide a brief summary of what we covered this morning.
This was an exceptional start to the year and we have accelerating momentum across our business we.
We delivered very strong financial results across the board, including record level sales operating profit adjusted EBITDA and adjusted EPS and the strongest quarter since the anixter transaction closed in June 2020.
Every segment of our business grew versus the prior year and compared to 2019 levels.
We delivered adjusted EBITDA margin expansion of 200 basis points over the prior year driven by the benefit of sales growth our value based pricing execution accelerated cross sell and continued cost synergy generation.
Our pace of deleveraging has exceeded our expectations and we are very close to being back within our target leverage range, just 21 months or seven quarters. After closing the acquisition of anixter.
Lastly, we're making excellent progress on our digital roadmap and are exceptionally well positioned to benefit from the secular growth trends and increasing public sector investments that John discussed earlier.
With that let's open the call to questions.
Thank you we will now begin the question and answer session. If you would like to ask a question. Please press star followed by one on your telephone keypad. Please limit your questions to one question and one follow up.
Last question.
Comes from.
Deane dray of RBC capital market.
Thank you.
Please go ahead.
Thank you good morning, everyone and congrats on an exceptionally strong quarter.
Good morning Deane.
Hey, I got a couple are near term and a medium term question. If I could so near term given the supply chain challenges that you're manufacturing suppliers are feeling and Dave comment about those uncertainties.
And you could have shipped another one or two percentage points higher if it weren't for some of.
Those disruptions can you comment on product availability and fill rates in the quarter and how you're set up for a second quarter.
Yeah Deane I.
Couldn't be more pleased with our partnership with our suppliers.
Just very strong partnerships.
There are clearly supply chain challenges, but.
It's our view that it's our job that being wesco as a leading <unk> distributor to manage them for manage the supply chain challenges on behalf of the benefit of our customers. So.
With respect to our operation our operating Kpis are well.
Maintaining very high fill rates and high availability consistent.
Consistent with with.
Call normal business operation.
That's the good news.
Our stock and flow business is performing very well.
We have strategically added to our inventories to support stock and flow as well as the project business, a large portion of which sits in backlog.
Many cases, where kit kitting staging storing.
Components modules and products and subsystems for full solutions.
As you know as suppliers shifts, yes ship various pieces to us and then we put them together as a full solution for our customers.
So.
I would tell you despite the challenges throughout the global supply chain, our operational Kpis are tracking very well consistent with our with our historically high levels and in it and I think clearly we're seeing the benefits of how we've been managing the supply chain with our selective investment in.
And inventory as well as we're seeing the benefit fundamentally of a much stronger broader set of relationships with our supplier partners and that's a direct result of the combination.
Add extra wesco.
That's really helpful and so more of a medium term or just looking out for the balance of the year, you've got another record backlog.
How does it convert and can you give us a sense of the implied margins in that backlog.
So look we're.
We're not throttling tobacco, okay in terms of.
If you think about the equation.
We have a record opportunity pipeline our bid activity levels are at record levels, and we are securing orders at a higher rate than our out the door sales rate.
Our backlog is growing at a higher rate.
That I would characterize as.
The highest class challenge, we could have as a business. It's a exceptionally good thing.
Eventually that will reach the point where.
Supply chain.
<unk> continued to improve that we will start executing at a higher shipping rates against what that what that backlog is but it's not our intent that it is not our plan.
To have the input side of that equation slow down we're aggressively trying to continue to win new orders.
And drive execution of our bids in.
We couldnt be more pleased with our cross sell execution and the wins were putting on the board relative to margins. The March we do track margin rate of the backlog and those margin rates are increased so they are up I won't I won't say by how much but the good news is that trend is the trend of the margins in the backlog.
It's been increasing consistent with how we've been expanding and increasing our gross margins for the overall for our reported results.
That's great and if I could just sneak one more question and I really like page six and all of the multiple long term drivers and on the right hand side. This is something you would not have seen in west called previously, but its there now can you expand on the point on unlocking the value of West Coast Big data I'm sure.
This is part of the digital transformation, but what color can you provide.
Yeah, and I talked a little bit about this only briefly.
And our last two earnings calls.
And it's something that could do adjust as we need to really spend a lot more quality time on it with with all of you.
Our investors to know that cover the company that is our plan gain in our Investor day that.
We are going to conduct later this year it will be our first investor day since 2019, it'll be our first investor day, since anixter and Wesco team together, but just to address your question directly.
We're in the midst of.
Very aggressive and comprehensive digital transformation effort.
<unk>.
It is our digital applications that are going to unlock the power of our big data or big data really is if you think about it we have significantly more data.
On our customers their operations their demand profiles, what products go with what in what sequence.
The current state of their operations and what needs to be upgraded.
What needs to be maintained and at what cadence we have significantly more data than our supplier partner partners have because the majority of our supplier partner sales go through distribution.
It is it is our it is one of our top assets of the corporation. It doesn't show up as an asset on the balance sheet explicitly.
So one of the things that was incredibly important to us and we have been working on this for years pre anixter and anixter with working on that.
We're putting in place.
A new refined and expansive master data management construct both companies have been working on that when we put the two companies together in one of our top priorities with getting both respective companies big data and putting it into one world class data Lake.
And we've done that so we're at the point now where we're where we're increasingly starting to unlock the power of that big data through a series of digital applications and we use the term digital products that we're developing using agile methodology.
In conjunction with our with our lean culture.
I'll give you a few examples I alluded to these before one of these is a is an AI enabled product search function of smart search function that we make available to our inside sales desk. So that they can do a more effective job of finding the best product for that customer or application as demand roll.
Then.
Another one is intelligent pricing application.
And third is something we call our unified sales desk and think about that is the umbrella for all the front end digital applications.
We're going to bring to bear on our and enable our front end sales force to do a much more effective job with customers.
And an example of a product we've taken outside our four walls of what we announced last quarter that conference room as a service. So that's that's the first quote unquote digital product we've taken outside our four walls and are selling as a service to customers. So we're in the very early stages of this but.
I think you can sense my excitement the power of this is going to be exceptional in terms of value creation and the ability.
Greater ability to serve customers in and it's something we've got to kind of take you through much more expansively. They said we got those plans later this year.
All sounds good thank you.
Thanks, Steve.
Thanks Keith.
Our next question comes from Sam <unk> of Raymond James Your line is now open. Please go ahead.
Good morning, John Good morning, Dave how are you.
Good morning. Thanks.
Fantastic start to the year, obviously, Dave two questions for you if.
If I could.
Within the 80% free cash flow conversion assumption.
Are you assuming that you finally reach where you'd like to be for inventories by year end.
In other words at what point do you imagine that youre going to be return returning to our normal 100% conversion rate.
We have assumed that we get back to a typical inventory levels to support the demand and obviously, we are facing supply chain challenges we've talked about that.
Company is dealing with it we're aggressively going after inventory where and when we can.
But right now our assumption is that as we see that typical seasonal quarterly pattern for sales, we would expect that our fourth quarter sales and requirement for inventory would also come down to those typical levels and return back to a typical inventory level to support our customer requirements.
Gotcha and then my second question I'm looking at the incremental guidance both in terms of the guidance raise the increase it looks like you're raising guidance by roughly.
A $1 three in sales and about $210 million in EBITDA.
And then that.
Change is about a 16, 17% incremental margin.
And you're not changing your synergies so what what I guess I'm getting at is.
Is that what we should be looking at for the organizations incremental.
Margin.
On a go forward basis organically.
Assuming high single low double digit type growth rates is that the new normal for wesco, because I'm guessing that's quite a bit higher than many people have baked into their models.
And that's what we've talked about in some of our previous earnings calls is just the simplest way to think about our our incremental margin, particularly within a year is take the gross margin less the additional variable cost that is required to support those incremental sales. So that's roughly <unk> <unk>.
Four to five points.
So again within this current year, we believe that we can handle that incremental volume.
Within our current fixed cost base.
So that's one of the other key drivers of that the benefit that we're seeing with the increased guide you have seen.
That incremental margin in 2022 now as we continue to grow the company. We are focused on driving additional synergies from supply chain and our field operations those are built into our out year expectations.
We've not changed our cost synergies for the year, So net net our.
Incremental margin from the guidance is the right way to think about it going forward.
Yes. The reason why I bring that up is there was already kind of.
High teens incremental assumed for the year inclusive of the synergies.
What was the rationale for the question, so you're saying that even exclusive of the synergies going forward, we're still looking at a mid to high teens incremental.
That's correct in the near term and Sam Youre also seeing you know Youre also seeing the effect of the increased operating leverage, particularly with cross sell when you think about if you think about the dynamics of cross sell.
The dynamics because there was much less overlap between the two respective customer bases bases of anixter and wesco.
And the portfolios were more complementary than we thought.
Again, when you think about the ability to execute well against cross sell.
It's not like we have to add anywhere near the normal rate of incremental resources to get that incremental sales growth.
So thats, providing an additional accelerant to the margin pull through.
Got you and if I can sneak one more in it looks like most of your synergies that you recognized in the quarter were in field ops G&A, a little bit of supply chain, but looks like most of them were field ops G&A.
At what point for the incremental synergies for the rest of the year at what point do we start to see them filter through cost of sales as opposed to SG&A.
We should begin seeing some of those supply chain benefit of our cost synergies in 2022 and again some of that is negotiating.
Into stock costs with our suppliers. It also includes our supplier volume rebates. So we would anticipate that as we continue to grow.
But there would be incremental benefit we would recognize some of those cost synergies here in the current year.
Terrific stuff.
Others. Thanks again.
Thanks, Tim.
Thank you.
Our next question comes from David Manthey from Baird. Your line is now open. Please go ahead.
Thank you and good morning, everyone.
Furthermore, payment on.
Pacing in seasonality high jet.
Hum.
Seasonality and pacing here of the EBITDA, usually your EBITDA margin percentage is lowest in the first quarter, then goes higher in the second and third and based on the guidance. It seems like there's a little bit less seasonality there and Im wondering if you could just talk about the.
Normal uptick from first to second quarter, and and what's different this year that it is a little bit less than normal.
Still obviously good that based on your guidance it looks like it's not coming up a full percentage point or something thats coming up.
Less than that could you just talk about the factors.
Certainly so as we think about our sales profile by quarter, and we would anticipate that our Q2 and Q3 sales would be up sequentially versus Q1, and one of the things from a an EBITDA margin profile.
We anticipate that our SG&A on a dollar basis would also increase primarily because April one is when we pay our merit increases so our salaries wages and benefits. We'll go up effective the beginning of the second quarter, so but based on the expected.
Topline growth sequentially.
I would anticipate that we would get adjusted EBITDA margin expansion sequentially Q1 to Q2, and then given the seasonality when sales come down in the fourth quarter, we would give back some of that that adjusted EBITDA margin just given that we still have the same SG&A cost to support the sales.
Okay, Yeah that makes a lot of sense.
Second if.
If I heard you right, Dave you mentioned that price in the CSS is low single digits does that imply that es and <unk>.
Our low double digits or high single could you put a finer point on that and then just the last part of this gross margin question.
Could you talk about the magnitude by which inventory gain sort of temporary timing of price increases over lower cost inventory is.
Helping gross margin to whatever extent you can measure that.
Certainly so on the pricing question at the enterprise level. We noted that we had approximately eight points of benefit to our sales growth. As you said that would imply that both EES and UBS are double digits low double digits offsetting what we saw within our CSS business low single digits.
No youre absolutely right in the way that youre thinking about that.
It is very clear that we are getting the benefit of inflation, but again very very difficult to call that out what I would point to is we are continuing to get the benefit of our gross margin improvement program.
And that has continued to get traction across our combined company and when you take a look back at some of the legacy Anixter results pre merger.
In a relatively low pricing environment, they were able to get significant gross margin expansion.
As we've talked about in the past week deploy that now across our entire company and we're still in the early stages of getting the benefit for that across the legacy Wesco businesses and again one of the key components of that is ensuring that we are effectively passing through price increases to our customers and getting paid for the value and.
So we do expect that we will continue to see the benefits.
The gross margin improvement program very very difficult for us to call out the differential between price to customer versus our average with inventory cost very difficult to calculate that and provide you any any quantitative answer there.
Yeah very good.
Alright, Thank you very much good luck.
Thanks.
Thank you.
Our next question comes from the line of Nigel Coe of Wolfe Research. Your line is now open. Please go ahead.
Thanks, Good morning.
Good morning, I really like the.
One John I really like the new logo I didn't see the a in <unk>. So I'm glad you pointed out to me.
[laughter], so alberts come back to just very quickly you know the the margin seasonality point, because you know just going back in time, you know <unk>.
Margins are normally the weakest.
The year on Nuomi below the full year. So we just pointing to weaker seasonality than normal and you know how much of this is conservatism, we're one quarter into a pretty uncertain.
Understood in time. This is you know there's some known headwinds coming up you know, maybe that's supplier price increases et cetera, and any any more color there that'd be helpful.
Yes.
And we're not going to we're not going to guide the guide Nigel you know, we won't do that but with that said.
If you look at supplier price increases, let me touch upon that point for us. It's important when you look at number quantity and in magnitude advertising.
We're not seeing them continue to increase.
Sequentially. So I think we've reached a stage where they.
They are still high.
A number of our high reflecting the overall higher inflation environment, but theyre not theyre not spiking up.
And.
The reality of this is that we've now posted.
You know three quarters in a row.
Resolved that are well well above standard seasonality.
We've also posted now seven quarters since we closed this transformational combination is transaction. So we think we clearly are building a very strong track record of delivering exceptional results rapidly delevering.
Against a backdrop that's challenging.
A supply constrained value chain.
So I think what you see there is that we.
We're thrilled literally thrilled with the strong results in Q1. It comes on the heels of our Q4 and Q3 in the second half of last year that was well better than normal seasonality and capped off an exceptional year.
And and you know we've raised the guide much more than our beat.
And so I think it does represent very clear confidence in not only the demand environment that we can access and deliver again, but more importantly, and this is really important board point.
Our confidence in our execution.
So that's the message that you should take away.
I mean, if I were to use one word to describe our execution and results.
If they are accelerating.
No doubt about it.
Amen.
Yes, and then my quick follow up is Canada can you talk about Canada quickly.
That's again, reaching high margin region, we're seeing some some seo point acceleration in Canada, maybe.
Maybe just talk about where we are in the recovery there.
That'd be helpful. Yeah.
Question Nigel.
We have.
Well, let's go had a very strong maybe I'll start here to level set because I think it's important to remind everyone because not everyone may fully appreciate it yeah.
Very strong.
Electrical based business in Canada with some with some utility position that we had built via a few selected acquisitions.
I would say just deep strong broad routes as the undisputed leader in electrical distribution in Canada pre acquisition. When you look at what anixter brought to the table. They brought a exceptionally strong wire and cable.
Clearly, we're the category leader in North America, and that's their deep bridge, but they also brought a very strong utility business are there Budd.
When they acquired power solutions from HD supply.
I think as you all know when we went through the regulatory approvals, we had to do some divestitures and we divested the wesco piece.
Related to utility as well as Datacom.
And obviously anixter brought tremendous datacom and IP security capability being the global leader in the.
Global leader and clearly the leader in North America, as part of being a global leader.
That was the foundation.
And if you look at what's happening with our Canadian results. There. They are exceptional so we have outstanding broad based momentum across our Canadian business.
And I would say is the complementary nature or the combination of the result of the two portfolios.
Cross sell is is contributing to a very large degree and the secular trends in particular.
Or a positive driver to our results.
All across the board all of the secular trends, we've we've identified and in particular.
Broadband and <unk> build out.
So I mean, we're just we're benefiting greatly from everything we've talked about that's affecting us in the U S and globally and I will also say this is with our business has been diversified significantly.
Yeah.
The oil and gas.
Since the last oil and gas cycle, and as oil and gas cycles, that's only incremental and you're not we're not seeing that as a meaningful contributor yet. So we're not we're not oil and gas driven whatsoever in terms of that being the driver to our results. So any anything thats done anything that happens in the oil and gas in terms of increased capital spend.
<unk> and alike will only be positive incremental.
Accelerant to our growth so great question, Nigel hopefully that helps to provide a context, but the short answer is I wanted to go through the contract. It's important the short answer is strong and broad based results.
That are above market.
Great. Thanks, Joe.
Thank you.
Our next question comes from the line of Tommy Moll of Stephens. Your line is now open. Please go ahead.
Good morning, and thanks for taking my questions.
Good morning.
I believe it was John a minute ago, who who mentioned on the gross margin improvement program Youre still in the fairly early innings for realizing the full benefit across the legacy Wesco side of your business, which makes good sense.
But I wonder if you could could go deeper there what what does what is the work. That's still ahead to realize that full benefit what does that timeline.
Looked like and what does it involve in terms of any training or initiatives across the sales force to deploy.
So the program is developed.
The various let's call it levers and techniques are well defined and honed and we have extensive training materials that have been deployed through the sale of Florida.
And again that was building off of what Anixter had put in place as Dave mentioned, a few minutes ago.
And not all of those training materials developed internally or got a terrific training team that does that work.
And one of the major I think.
Drivers of the results too as the refined incentive compensation, we put in place for the sales force, but we did that effective.
Two quarters into the merger close we didn't do that the first or second quarter, but we did it two quarters into the merger close to an hour basically five quarters into that.
Here's the way I would I would address your point in time, because that kind of nowhere youre going there and if it's important how much legs are left on this we think that we have a lot of runway left.
I'll put a fine point on this if you look at Anixter as reported results before the acquisition closed in June of 2020 one.
They had they had delivered.
Volume plus quarters in a row of gross margin expansion.
They will look at it.
And against the distribution.
<unk> base, where all the other distributors had flat to declining gross margins.
Since we've come together as two companies in and I said, we weren't going to talk about this much anymore because were combined but I will we still measure legacy anixter legacy Wesco on margin every quarter since we've been together they still delivered gross margin expansion. So as those seven quarters to the prior nine and now let's go as well.
It was delivered at every quarter. So that just gives you a little sense Anixter is four plus years running now and.
And West Coast, essentially you know less than half of that running.
I will tell you we have a long a lot of runway in front of us and the sales force is just getting better and better and better at doing two things simultaneously selling the value.
The complete solution offering is our suppliers' products with our services wrapped around that.
In conjunction with the cross sell because the cross sell to provide more of a one stop shop and in today's world, where supply chain integrity supply chain resilience, it's become a C suite issue.
I can tell you now.
Ceos of our customers are worried about supply chain. It never was a C suite issue. So we provide that supply chain integrity and resilience and that's valuable.
That's incredibly valuable in terms of what it provides to our customers and thats part of our value.
Value priced.
Gross margin improvement program and the incentive compensation absolutely helps because again our sales forces is getting paid for when they deliver the incremental margin expansion.
That's very helpful. Thank you I wanted to follow up on that cross sell initiatives.
Big raising the target today from 600 to 850, and reflecting back it kind of feels like the.
The cost synergy raises that we saw.
Soon after you close the merger where every quarter you dug a little deeper and you found more savings opportunities. So similar question on the on the cross sell.
How far into that process are you into discerning, what's the art of the possible is.
Yeah, that's a really insightful question because when you think about the cost synergy and I'm, not saying that they're not difficult, but there is certain categories that we got right out of the gate starting day, one week one month, one post acquisition close.
And it's still tough to do but whereas cross sell always proved to be the most elusive and most challenging synergy to get in any acquisition. You can go look at any and all deals that are done across all industry value chain is the hardest thing to get.
So we spent substantial time and energy.
Including leveraging our integration and consulting partner and putting together the recipe and playbook for that and it took a couple of quarters to really get that well developed and honed to be to be clear and I know, we share that progress along the way and really didn't get launched in earnest until early parts of 2020.
And look we had a sales synergy we put out in our three year financial targets, when Dave and I went public back in March 2020, well before the deal closed.
The fact that we even had a sales synergy target we committed to what we thought was was.
It was somewhat.
Drawing an aggressive step because these things proved to be the most elusive and we were banking on sales dis synergies of which we've had none.
That's the good news.
But look at what we've done we've raised it twice now I will make this strong statement first of all there's tons of runway in front of us because and they continue on the continuum of learning how to really leverage cross sell. This is this is a multi year effort and we are in the early stages with that said I will make a very strong.
Point.
It's proving to be.
Probably the most single strongest value creation driver of the combination, yes that we deliver the cost synergies in there there we basically fundamentally reengineering our cost structure to a lower cost structure and for this combined.
Two fortune 500 companies coming together, we've got margin expansion yes.
We're getting core gross margin is terrific.
But I will tell you. This is proving to be the biggest driver and these are very substantial numbers and we're very disciplined with how we track it in count that.
I Couldnt feel actually of all the things we've done I feel the best about that and we've got tremendous runway in front of US. This is what gives us.
The great confidence on.
It's a big part of our beat and raises over the last five quarters quite frankly that are substantial around us shifting into a growth company.
Thanks, John I appreciate it and we'll turn it back.
Thank you.
Our next question comes from Ken Newman of Keybanc. Your line is now open. Please go ahead.
Hey, good morning, and thanks for squeezing me in here.
Yes, good morning, Ken.
John You said Wesco is transitioning to a growth company and I know you are more confident in some of the more secular demand trends that youre seeing today, but.
Should we take that to suggest that you think the combined company can drive growth through cycles in ways that neither of the standalone companies could historically.
Absolutely yes.
Got it.
I want to take that and amplify three points. If you think about it the combination of these two fortune 500 companies both leaders in their own right and <unk> distribution.
So combined absolutely undisputed leadership, which gives us scale benefits number one number two the portfolio of the combined portfolio with highly complementary and the amount of customer overlap was minimal.
Okay.
Put those two together irrespective of the addressable markets, which I'll come to is the third point and what we have is a is a much stronger enterprise that is able to drive fundamentally higher organic sales growth rates.
And I've made this statement and look it only gets proven out when we continue to post.
Points on the scoreboard, but this is seven quarters in a row.
Okay and.
Made the statement that we are we are we have mix shifted the company up to a higher growth profile. We are more secular not sick cyclical I would argue those two those two factors together are driving an inherently higher organic growth structure and entitlement of the enterprise and we're seeing that and the cross sell them.
Big contributor as I've mentioned.
Way on top of that the addressable markets.
And the secular trends that we don't control, but the combined portfolio and how it's positioned against those.
We could not have put together a stronger portfolio that's lined up with these secular growth trends I mean, and these are long term secular not cyclical.
And I think that represents a major accelerant on top of the growth that I just talked about so I you know.
Yeah.
We had the confidence, but we had to show we could do it but you look at the momentum is still and that's why I said, the one operative word to describe this quarter as a seller but accelerating.
Right no that makes sense.
For my follow up here, obviously I think there is some broader concerns about rising interest rates here I know you have one of your larger bonds, becoming callable at a more attractive price youre starting in June but just any commentary about how you are thinking or looking at the capital structure here over the near term and just the potential up.
Side from that lower interest expense could could drive here for the guidance in 'twenty two.
Yeah.
Yes, right now we have not contemplated any refinancing in our current outlook. We are obviously looking at the availability of how we can continue to make our capital structure more efficient.
Again, we are monitoring the market, but at this point, we do have very large.
Prepayment penalties, if we were to call those notes early and we're balancing any of the arbitrage on the interest rate against those prepayment penalty. So we're continuing to watch it but again at this point not contemplated in our outlook.
Understood. Thanks for the time.
Ken Thanks.
I'm going to bring the call to a close there are a few minutes past the hour I know we have a few more.
More folks in the queue and we will absolutely follow up with you I know we have a very robust scheduled calls today and through tomorrow as well. Thank you all for your support it's very much appreciated and.
We look forward to speaking with many of you in the coming days as well as our at our upcoming Investor events. The next one is that we'll be participating in as the Keybanc industrials and basic materials conference next month, Thank you and have a great day.
Thank Keith that now concludes today's conference call you May now disconnect your line.
Yeah.
Okay.
Yes.
Okay.
Okay.
Sure.
Okay.
Okay.