Q1 2023 WESCO International Inc Earnings Call
Hello, and welcome to West Coast.
First quarter 2023 earnings call I would like to remind you that all lines are on listen only mode.
Throughout the presentation. If you would like to ask a question. Please press Star then one followed on your telephone keypad.
Please note that this event is being recorded I will now hand, the call over to Scott Geffner S V P investor relations to begin.
Thank you and good morning, everyone before we get started I want to remind you that certain statements made on this call contain forward looking information.
Forward looking statements are not guarantees of performance and by their nature are subject to inherent uncertainties actual results may differ materially.
Please see our webcast slides as it is this 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.
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 Wesco dotcom.
On this call on the call. This morning, we have John Engel West Coast, Chairman, President and Chief Executive Officer, and Dave Schulz Executive Vice President and Chief Financial Officer.
And now I'll turn the call over to John .
Thank you Scott and good morning, everyone. It's a pleasure to be with you today.
We're off to a strong start this year and set a new first quarter company records for sales backlog margin and profitability.
Power of our increased scale, our industry, leading position and our expanded portfolio of products services and complete solution is.
As evidenced in our continued strong performance.
We delivered double digit organic sales growth driven by secular demand trends share gains and ongoing improvements in our supply chain.
All three of our business units set new records for first quarter sales as well as gross margin.
And we delivered another impressive quarter of cross sell results, which continued to continue to exceed our expectations.
We're confident that 2023 will be another transformational year for Wesco, we're making excellent progress on our digital transformation and expect our strong sales growth and margin expansion to continue.
You saw in our release earlier. This morning, we reaffirmed our full year outlook and we expect to generate significant free cash flow in 2023.
As Dave will discuss in more detail later in the call we are focusing our cash generation on debt reduction in the near term.
As a result, we expect to reduce our leverage below 275 times, which is the midpoint of our target range by year end.
And that creates increased capital allocation optionality for us in the second half.
And entering next year.
Now turning to page four.
The strength of our business model and the success of our integration efforts since closing the anixter acquisition in mid 2020 has established a track record of superior results for our company.
This page highlights our first quarter record results compared to the pro forma pre pandemic results of legacy Wesco plus legacy anixter in the first quarter of 2019.
As you can see we've clearly outperformed the market delivering impressive sales growth and margin expansion and we've achieved record profitability all while rapidly deleveraging our balance sheet. Most importantly, our dedicated team of Wesco associates continues to provide resilience and critical supply chain solutions.
For our customers around the world capturing the benefits of our deep exposure to sustainable secular growth trends that drive.
Our future sales and profitability.
So with that I'll now turn the call over to Dave.
Thanks, John and good morning, everyone I'll start on slide five with a summary of our first quarter results compared to the prior year.
As John mentioned, we delivered first quarter record sales gross margin adjusted EBITA margin and adjusted EPS.
Our cross sell program again exceeded our expectations and our ability to cross sell Wesco and anixter products and services contributed approximately $220 million of sales in the quarter.
On an organic basis sales were up 11% in the quarter driven by a combination of price and volume along with share gains.
We estimate pricing added approximately five points to sales growth with the benefit primarily in our UBS and EES segments.
On a reported basis sales were up 12% as additional sales from Rohit were partially offset by a headwind due to foreign exchange rates in the quarter.
Backlog continues to be at historically high levels and total backlog was up 21% year over year and flat sequentially from the end of December including backlog associated with the Rocky acquisition.
Supply chain is starting to heal and in some instances have returned to normal. However, we are still experiencing extended lead times in our E S and UBS segments for critical components, such as switch gear Breakers Transformers.
While an improving supply chain is a positive for wesco, our customers and suppliers.
It has created some near term timing issues around inventory.
Specifically, we are adjusting our order patterns to reflect shorter lead times versus last year.
Our current inventory levels support our record backlog and our expectation to deliver 6% to 9% revenue growth in 2023.
As we start the second quarter demand has continued to be resilient on top of a tough base period comparison.
In the month of April growth continues to be led by CSS, and UBS, which were both up low double digits.
Preliminary workday adjusted April sales were up approximately 6% year over year, including the impact of be stronger dollar and the rocky acquisition.
On a preliminary workday adjusted two year stack basis sales were up 28% in April recall that comparable in the first half of the year are particularly challenging.
Gross margin was a first quarter record of 21, 9% up 60 basis points versus the prior year and in line with the fourth quarter of 2022.
Result was again driven by our margin improvement program and the effective pass through of supplier price increases.
Adjusted EBITDA, which excludes merger related and integration costs stock based compensation and other net adjustments was a Q1 record 16% higher than the prior year.
Adjusted EBITDA margin was also a Q1 record at seven 6% of sales or 20 basis points above the prior year.
Adjusted diluted EPS for the quarter was $3.75. Another Q1 record 12 cents above the prior year.
The primary driver of this increase was core operations as we recognized higher below the line items related to interest and other expenses.
Turning to page six this slide bridges, the year over year increase in sales and adjusted EBITDA.
Organic sales increased 11% versus the prior year, including a 5% benefit from price in the quarter, along with volume growth in our markets.
As expected the contribution from price moderated in the quarter relative to 2022 as there had been fewer supplier price increases and the magnitude of these increases has moderated.
Adding to this growth was the impact of the $220 million, we generated in cross sell in the quarter as well as continued share gains.
Adjusted EBITDA increased 16% versus the prior year.
Higher sales and expanded gross margin drove the majority of the increase along with the realization of cost synergies in the quarter.
Consistent with 2022, we continue to experience higher volume related operating cost, including shipping and sales commissions.
We also recognized higher expenses for employee compensation and benefits due to inflation and higher head count as well as cost increases related to the operation of our facilities.
SG&A came in above expectations with the majority of the increase incurred in our EES business unit.
Finally in accordance with our plan, we continued our strategic investments in systems and digital tools. These cost increases were partially offset by the realization of integration cost synergies and lower incentive compensation expense.
Turning to slide seven organic sales in our EES business were up 4% year over year and a first quarter record.
Recall that beginning in Q1, we transferred certain businesses from EES to CSS and UBS to better align our sales management of certain customer accounts.
Excluding the impact of this transfer EES organic sales would have been 6% above prior year.
The year over year growth, primarily reflects continued double digit sales growth momentum in our industrial markets and solid construction sales up mid single digits.
<unk> sales were down low single digits, driven primarily by lower specialty vehicle and manufactured structures demand.
Backlog was flat with the record December level, and 14% higher than the prior year.
In the first quarter adjusted EBITDA was $183 million for E S down approximately 5% from the prior year adjust.
Adjusted EBITDA margin was eight 6% 60 basis points lower year over year.
Segment gross margins were up over prior year, however, higher SG&A costs in the quarter, specifically related to higher head count and transportation and logistics costs drove the decline in EBITDA.
We expect <unk> profitability to improve in the second and third quarters, driven by operating leverage on seasonally higher sales.
SG&A reductions initiated in the second quarter will take effect in the second half of the year.
Turning to slide eight sales in our CSS business, where a Q1 record and up 13% versus the prior year on an organic basis.
Excluding the impact of the intersegment business transfer I mentioned, a moment ago CSS organic growth would have been 11%.
Of critical importance was the strong sales growth in February and March the two toughest comparable of the quarter.
We saw solid growth in network infrastructure up mid single digits, driven by data center and cloud applications as well as very strong growth in security, which was up low double digits and professional audio visual installations, which was up more than 30% from prior year.
Backlog, including Rohit was up 10% over the prior year and decreased 2% sequentially. As we were able again to release more projects from backlog due to improved availability of product and a return to more normal lead times across most product categories.
Profitability was also strong with record Q1, adjusted EBITDA and adjusted EBITDA margin of 9% 40 basis points higher than the prior year driven by operating leverage integration cost synergies and the continued successful execution of our margin improvement initiatives.
Turning to slide not record sales in our UBS business were up 18% versus the prior year on an organic basis in the quarter.
Marking the sixth consecutive quarter of organic growth above 15%.
We experienced broad based growth in our utility and integrated supply business with sales up over 20% and up low double digits respectively.
Broadband sales were download double digits as certain customers worked through higher levels of inventory that were built last year.
Backlog was another record in the quarter up 46% over the prior year and up approximately 1% sequentially.
Profitability was exceptionally strong with an adjusted EBITDA margin of 11, 3% up 160 basis points versus the prior year, driven by operating leverage on higher sales or margin improvement initiatives and integration synergies.
This was the fourth consecutive quarter of adjusted EBITDA margins above 10%.
Now moving to page 10.
The size of the cross sell opportunity of combining wesco and anixter continues to exceed our expectations.
In Q1, we recognized $220 million of cross sell revenue, bringing the cumulative total to $145 billion since the beginning of the program.
Our pipeline of sales opportunities remains healthy and expanded again in the quarter.
We are capitalizing on the complementary portfolio of products and services as well as the minimal overlap between legacy Wesco and legacy anixter customers.
As we look at the remaining nine months of the program in 2023.
Our increasing our expected cumulative total to $1 8 billion, reflecting the strength of our value proposition against the backdrop of cellulose accelerating secular trends.
Turning to slide 11. This is a slide that we've shown throughout the integration with the realized cumulative run rate cost synergies of $188 million in 2021 and $270 million in 2022.
We remain on track to meet our expected target of $315 million by the end of 2023.
Our focus through the balance of the year is on our supply chain network design and field operations to drive cost synergies.
Turning to page 12.
On this page you can see a bridge of free cash flow in the first quarter, which was a draw of $266 million.
The primary driver was working capital, which more than offset netting.
Receivables increased sequentially in Q1, as some customers delayed payments from March into April However, accounts receivable reserves and bad debt write offs are at normal levels.
The increase in inventory in the quarter was due to a few factors as we continue to see supply chain normalized certain suppliers are accelerating their pace of shipments to us.
While the improved availability of product as a positive for our customers recall that we do not typically ship product to our customers until their entire order is available.
As we make progress shipping the backlog of projects, we expect to see a normalization of inventory levels, which will drive cash generation through the rest of the year.
Payables were an $87 million use of cash following the $70 million cash generation in the fourth quarter driven by the timing of purchases in Q1 and normal seasonal cash payments based on prior year accruals.
Capital expenditures was approximately $14 million in the quarter and other sources and uses of cash were collectively and $18 million use of cash in the quarter.
Moving to slide 13, reducing our leverage has been a top priority since we announced the acquisition of anixter.
While leverage decrease for eight consecutive quarters through the end of last year our leverage.
Increased eight tenths of a turn in Q1, driven by the use of cash in the quarter.
Leverage remains well within our targeted range of two to three and a half turns and we expect to generate full year free cash flow of $600 million to $8 million.
Given our current debt levels and the interest rate environment, our near term capital allocation priority will be to pay down debt until we reach the midpoint of our target leverage range, which we expect will occur in the second half of the year.
Now moving to page 14.
This slide shows the uniquely strong position of our company to drive growth and profitability in the years ahead.
The end to end solutions that we provide to our global customer base are directly aligned with the six secular growth trends shown on the left side of this page.
Our participation in these trends coupled with increasing public sector investments in infrastructure broadband and partnerships with the private sector like wesco positioned exceptionally well.
As we outlined at our Investor day last year, we expect to grow 2% to 4% above the market due to the combined benefit of secular trend growth and increasing share in short we view Westfield was the secular growth company.
Moving to page 15, we are reaffirming our 2023 outlook today based on the demand trends and record results in the first quarter.
In 2023 market growth is expected to contribute approximately 4% to 6% to the top line, which is a combination of volume and price.
We expect U S GDP to be flat in 2023 with our secular tailwind is providing one to two points of volume growth.
Price carryover in 2023 will be 3% to four points based primarily on pricing actions in 2022.
Recall that our guidance does not incorporate any impact of future pricing actions.
In addition to market growth, we believe our scale and continued cross selling efforts will contribute an additional 1% to two percentage points above the market driving total organic growth of 5% to 8%.
After factoring in the additional revenue from <unk> and the impact of working days and foreign exchange, we estimate our reported sales growth will be in the range of 6% to 9%.
For our strategic business units, we expect EES reported sales to increase by mid single digits versus 2022.
With both CSS and UBS up high single to low double digits.
Please note that in the appendix, we have highlighted the account transfers from EES to CSS and UBS, we discussed earlier and that began taking effect in Q1.
In 2022. These accounts represented approximately $200 million of sales with 85% moving to CSS and 15% moving to UBS.
Our adjusted EBITDA margin.
Our outlook is for a range of eight 1% to eight 4%, which represents approximately 20 basis points of expansion at the midpoint.
We expect adjusted earnings per share between $16 80.
To $18 30, <unk> and.
And free cash flow of between $600 million and $800 million.
This free cash flow outlook of $700 million at the midpoint would represent the highest free cash flow in our history.
Through the cycle, we still expect the company will deliver free cash flow equivalent to net income.
Consistent with the expectations, we outlined during our Investor day in September we expect to generate $3 5 billion to $4 $5 billion of operating cash flow during the period of 2022 through 2026.
To note, we expect positive free cash flow in Q2 to return to US net neutral cash generation for the first half and to deliver the rest of our targeted $600 million to $800 million of free cash flow in the second half of the year.
We increased our expectation for interest expense for the year from a range of $330 million to $370 million to a range of $350 million to $390 million, primarily driven by higher variable rates and the timing of debt Paydown in 2023.
We have detailed our expectation for other expense, which captures certain non operating expenses primarily related to the impact of pensions and foreign exchange.
In the first quarter. These expenses were approximately $10 million.
And we expect $30 million to $40 million for the full year.
This expense reflects the recent devaluation of certain foreign currencies, along with slightly higher pension expense.
This outlook reflects our revised effective tax rate of about 25% to 26% for the year lower than our prior expectation due to the benefit of certain discrete items in the first quarter we.
We still expect an effective tax rate of approximately 27% for the remaining three quarters of the year.
This is slightly above our ETR for the past few years, primarily due to the implementation of certain rules in our Canadian business related to hybrid debt instruments.
122 also benefited from certain one time discrete items, primarily related to a change in U S tax law regarding the valuation allowance on certain foreign tax credits and onetime discrete benefits in Canada.
In 2023, we continue to expect to spend approximately $100 million on capital an additional $40 million on capitalized cloud based computing arrangements related to our digital transformation.
On the statement of cash flows approximately $100 million will flow through capital expenditures and approximately $40 million will flow through changes in other assets.
For the year, the lower tax rate that we experienced in Q1 will be more than offset by higher interest and other expenses. While we continue to expect adjusted EPS will be within the outlook range.
Our outlook assumes an average diluted share count of 52 to 53 million shares for the year.
This outlook reflects our expectation that 2023 will be the third consecutive year of record results with record sales gross and EBITDA margins EPS and a record free cash flow and is consistent with our long term financial framework, we presented at our Investor day in September of last year.
We'll complete our integration with anixter at the end of the year, we expect the results in 2023 to substantially outperform the expectations, we set and raised since the time the transaction closed.
Moving to slide 16, and before opening the call for questions. Let me provide a brief summary of what we covered this morning.
The first quarter was a great start to the year.
We had record first quarter sales in all three of our business units along with record gross margin operating profit adjusted EBITDA and adjusted EBITDA margin.
We again took share through sales execution and our cross sell program. We are again, increasing our cross sell synergies outlook for 2023.
The ability was also strong in the quarter as gross margin EBITDA margin also expanded versus the prior year.
We continue to expect 2023 will be a transformational year with continued execution of our digital initiatives strong sales growth and continued margin expansion.
Lastly, we remain on track to deliver record free cash flow of $600 million to $800 million to support our capital allocation priorities with that we'll open the call to your questions.
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.
Our first question today comes from Deane Dray with RBC capital markets.
Please go ahead.
Thank you and good morning, everyone.
Good morning Deane.
We're hearing lots of consternation about channel inventory and customer inventories and whether there's destocking going on and I was hoping you could just take us through from your perspective.
Supply chain normalization is allowing companies and customers to be able to release buffer inventory, they're all talking about that but anytime you see or hear about destocking. It raises concerns is that the early sign of a slowdown so yeah.
You're right in the ground zero of all of this because youre getting inventory from the suppliers, taking that and you're seeing that pace with your customers as well so.
Please share with us what you are saying.
With regard to that question. Thanks.
Yet the very good question look I.
I think we had a very strong quarter, we we built our plan for the year, we essentially delivered our plan there.
Mix was a little different than what we thought UBS in CSI is a bit stronger than in EES, a little bit of headwinds there, but still grew in the quarter.
So overall.
We're seeing very strong demand levels still.
Backlog was held flat in the quarter, we do expect because our backlog is running at over two times, a normalized rate and that was built over the last couple of years and we're running with elevated inventories as well, we expect backlog to start to come down.
It's working our business back to a more normalized state, but we did not see that yet in Q1, even with the 12% reported 11% organic growth.
And that's a reflection of.
Very strong demand level bid activity levels remained at a record high our opportunity pipeline continues to grow the cross sell synergies, we took up meaningfully again that terrific cross sell results in the quarter. So I. Yeah. This is really a strong quarter in terms of the destocking.
Only area, where we're seeing material destocking at the customer level.
Is in broadband.
I think if you look at some companies that are heavily exposed to broadband value chain, you'll see that in their results. The other publicly traded companies.
There was very strong growth last year, and what customers did was run with higher levels of inventory.
Knowing that the secular growth trends are there, but also the concerns about the overall supply chain, which was very constrained through the pandemic, so theyre working through that a bit.
This is for broadband it's our anticipation it will take one to two quarters for customers to work down those inventory levels and we and we expect broadband are returned to growth in the second half.
I remain very bullish on broadband over the mid to long term driven by strong secular growth trends $24 seven connectivity automation Iot applications as well as government spending in both U S and Canada art off and indeed.
To name two drivers of that so that's really the only other area I think the other point I will make which is incredibly important I think many folks are missing <unk>.
Remember that our purchases are our suppliers sales.
Our purchases are supplier sales, we grew our inventories over 30% in Q1 2023 versus Q1, 2022, and that's because our suppliers.
Had been recovering quickly their production rates have been coming up the past dues have been coming down and their shipments to us accelerated but I think that's incredibly important to understand because their shipments to us.
Which reflects as reflected in our inventory growth is that are out the door sales and without our out the door sales.
We had strong double digit growth that we've got to get is like again, maintaining this record backlog. So very highly highly confident as we as we look to the second half through the second quarter through the second half of this year and that's why we reaffirmed the guide alright.
Hopefully that gives you the color it's really helpful. I appreciate you taking us through all of that.
And just if we could drill down a bit on E S and I liked hearing the expectations the second quarter and third quarter are projected to be better we don't often hear about specialty vehicle and manufactured housing.
As as verticals, but yet.
Take us through the extent that that's meaningful but more importantly on what youre seeing in the construction markets.
Yes.
Well, we've got three really parts of that business industrial construction at OEM comprise our EES business. So I'll start with industrial because up mid teens very strong we're seeing.
A large number of Mega Capex projects, we've got a record backlog that backlog includes construction, but it also includes big industrial projects, we think that we do with the end user customer the secular trends are very strong and intact, especially reassuring remember we sell the 90% of the fortune 500 companies directly I can tell you.
All of our customers are looking at it reassuring near near shoring.
Supply chains begin.
Begin shifting structurally back to North America.
I I believe fundamentally and we're seeing this we're in the early innings of a multiyear industrial up cycle or even super cycle. So industrial strong momentum Dean that's N E. S again double digit growth in the quarter moving to construction.
Up mid single digits in the quarter, both in U S and Canada record backlog as I mentioned, the secular trends give us great confidence remember word nonresident essentially very little residential construction exposure, but the secular trends of electrification Iot and automation again, the reassuring very positive.
Drivers of our business and it's important to understand to the big infrastructure spending and investments that had been approved through various bills in Congress, that's not in our numbers yet that's not driving the market yet so that's 2020 for 2025 and beyond.
So.
Good really solid start I think on construction.
Also important to remember that construction overall.
So the company is only 17% of our total sales now.
So the cyclicality of construction.
Only 17% when you look at the balance of our business just incredibly strong secular growth driving most aspects of the business and then for OEM. That's our value added assemblies business. That's traditionally been a lumpy business no structural issues.
It's just it's it has been lumpy over time, if you were to look at that historically.
We remain bullish on OEM, though ultimately at our value added assembly capabilities, because when you look at the fundamental drivers for industrial they also apply to Oems. When you think about OEM being value added assemblies that that feed a variety of end markets, including industrial so.
So that takes it takes you through the pieces.
Thank you.
Our next question is from Sam Dark dark catch and he's with Raymond James. Please go ahead.
Good morning, John Good morning, Dave how are you.
Good morning, Sam.
A couple of two three questions I suppose first.
I'm trying to reconcile your flat sequential backlogs with the commentary from some of your primary suppliers. Some of Eaton is a.
An example was talking about their backlog sequentially being up high single digit.
Sequentially.
Or are there certain mega projects that your vendors are seeing that are not going through distribution per se that theyre more vendor direct or what what else might might explain that that that delta.
I mean, the short answer is yes.
No Sam.
And so I think what I'd suggest is take a look at the <unk>.
Look across the entire electrical.
I'll call channel value chain space.
Number of suppliers they have different performance levels.
And there's a number of distributors you look at us versus our competitive peers and we think we had a very strong quarter outperformed a large it you look at the suppliers. There's a range of there is a range of performance again I think what's most important is remembering that.
Our suppliers are purchases our supplier sales.
I'm not going to speak to a specific supplier with respect to how they measure order.
Front end pipeline, our order book I can tell you what our pipeline looks like it's at record levels and continues to expand our bid activity levels are very strong and again, we remain bullish on the secular growth trends as they impact.
The construction end market vertical.
Mix, which is neither as he predominantly.
And then my second question is I guess more high level and piggy backs on on I think what they might've been getting at.
As it stands right now are you expecting organic sales growth and 24, we're seeing obviously EES softening a bit and that's your most economically sensitive segment, but your backlogs are obviously very large and stable. So what would have to realistically happen in 'twenty four not to show organic sales growth.
Well, we'd have to go into a into a severe economic down cycle.
We're not out there with a 24 guide except I will tell you that or outlook, but I will tell you. These strong secular growth trends that we're facing into.
Our deep.
And they are enduring.
These are not short term mid term. We believe these are long term. We believe there are structural we also believe fundamentally the mix shifted this company to a higher growth.
Set of end markets and we are a growth company.
When you look at the portfolio evolution and what's the mix of our businesses are today and end market exposure today.
Versus pre Anixter, and then go back longer term look at 10 15 20 years ago. This has been this has been a fundamental portfolio shift into higher growth markets. So I remain very bullish on the secular growth trends and our market outperformance.
We've done an exceptional job of cross sell we raised it again this quarter.
And.
That's the hardest thing to get when you put two companies together. So I think that speaks to the power of the combination which is unique to us that's a special cause driver plus the rigor of the process. We put in place in our operating model that we're figuring out there really leverage our sales force.
The poll in other aspects and capabilities are a company in each and every customer opportunity to sell a much more complete solution and a more complete basket.
Yes, I think and I've made this statement I think that's the largest value creation lever as a result of putting these two companies together and that has tremendous legs to it. It's the hardest thing to get and we're still building momentum there with.
With tremendous opportunity for upside execution.
David if I can sneak a real quick one in here the April up six by my math or at least my notes I think may and June are considerably easier comparisons, maybe like five or 10 points or so is that does that hold.
Yes.
Yes, just to ground everyone on the call when you take a look at our second quarter of 2022.
We had organic sales growth that was up 21%. So again as we've talked about.
If you go back to what we set out for April of 2022 on this call a year ago.
We were we were up.
22% in the month of April so why the math, yes, the comparisons get slightly easier as we progress through May and June .
Thank you both I appreciate it.
The next question is from Nigel Coe with Wolfe Research. Please go ahead.
Oh, hi, Thanks, Joe and thanks, Tony Thanks, Scott good.
Good morning, good morning, so yeah, so just going back to your questions Dave on the second quarter free cash flow. So it looks like went back to neutral which is sort of I think what we were initially.
Initially.
Roughly $3 million of free cash flow in the second quarter.
Maybe just I mean, obviously, you know I'm, assuming a will unwind through the second quarter, but what is your ambition on the inventory do you expect to be cut in inventory through the quarter what is that.
We do anticipate making progress on inventory, primarily as a supply chain continued to heal and our order lead times returned back to normal and so our expectation is that we're going to be begin seeing our inventory reduce month over month, we actually did see the inventory in the month of March did come down.
Sequentially versus February March March March versus February came down sequentially right.
Okay. That's helpful. Thanks, and then on SG&A you talked obviously you were you you you mentioned the pick up in an SG&A investments, particularly within E. S. S and it looks like we're making some or rather you are making some adjustments in the second quarter, that's going to have second half benefits just maybe just talk about some of the investment spending you made there.
You know it sounds like maybe sales I mean, maybe maybe you overstuffed overinvest there maybe just talk about some of the adjustments, you're making and it won't be a good run rate for SG&A in the back half of the year. Thanks.
A significant SG&A increase in EES, we did have across the entire company. We did have both year over year and sequential increases I think the the issue that we saw across the entire company was a little bit more severe in E. S. Primarily as we do.
We've also been investing in some new capabilities as well, which has come through and of course across the entire company. We've continued to invest in our it and digital transformation, so not necessarily at the EES level, but youre seeing that at the enterprise level. The only thing I'll highlight is in the first quarter we did.
<unk> some unexpectedly high costs, we would consider onetime in nature, particularly related to benefits. So we're not expecting that to continue as we enter the second quarter.
Great. Thanks, Dave.
The next question is from Tommy Moll with Stephens. Please go ahead.
Good morning, and thanks for taking my questions.
Good morning, Tommy.
Don't want to make a mountain out of a molehill here on E. S. But just just do want to clarify one point to meet your full year outlook.
Outlook on revenue was unchanged in the mid singles.
And then there was some commentary just around the margin compression and adjustments to the cost structure there.
Oh and one other 0.1 other point in time, and just to amplify it and I know, it's clear, but I want to.
So.
The costs are.
The increase was a little bit got ahead, a little bit of where the sales ended up coming in as I said their sales came in a bit lower but gross margins record level.
<unk> had a record level for all three of US we use including E. S. In Q1 very important point fundamentally the.
The margin expansion improvement program et cetera, Apprise, why and I know that's been a question many of you know.
The proverbial overwriting question, we're thrilled with our gross margins.
Trajectory as we can.
You need to do a great job executing that enterprise wide program and.
And John that's where I was headed for my next question just on price cost. It sounds like there is little or maybe even no incremental price assumed in your guide.
Guide for the year, how would you characterize the environment their own price and then also on any inflationary pressures or lack thereof. What can you give us for an update on that side of the equation. Thank you.
Yeah, Tom It's Dave Schulz. So we did see the number of supplier price increase notifications came down in the first quarter and the average percentage increase also came down substantially what was published in the first quarter. So as we took a look at.
How pricing impacted each of our business units, we mentioned both UBS in E. S experienced most of the benefit much less so within our CSS business, but I also want to highlight that the pricing benefit that we saw in the first quarter for EES moderated versus what we saw in 2022.
And so you know we were reporting eight.
<unk> and <unk>.
As a price benefit throughout the quarters in 2022 that came down to five and you know.
That came down even more so within our EES business, which of course is impacting the sales growth.
But overall, we continue to work closely with our suppliers to understand what is their expectation for price increases there had been some of our large suppliers that have announced that they expect to take additional price increases, but again, we've not included that until we actually see it impacting our revenue and we just didn't see a lot of incremental.
Pricing in our first quarter results.
Thank you, Dave I'll turn it back.
Yeah.
The next question is from Christopher Glynn with Oppenheimer. Please go ahead.
Thank you and good morning.
So what is that.
A demand question just wanted to talk about some of the kind of nonoperating cost items on the 30 to 40 million other expense range sounds like foreign exchange is a big part of that but.
My experience nonoperating FX adjustments are often very unpredictable period specific and even end of quarter Mark So.
Curious, what's going on there with that $30 million to $40 million and the non interest you know with a quarter in the books and better view on the cash flow linearity, what I'm curious why that's still a $40 million range interest line item.
Chris Let me address the other.
Other nonoperating so in the first quarter, we recorded $10 million, which was primarily related to.
The Egyptian pound, where we saw a significant devaluation occur in the beginning of January and then another devaluation 10 days later, so that is the balance sheet revaluation of the assets and liabilities that we have within that market.
To put that into context, all of 2022, we had a $10 million other expense nonoperating. So we've matched the full year 2022, and just the first quarter.
You know it it is an estimate at this point that we are going to continue to see additional devaluation, particularly upon that Egyptian pound currency again, it's our estimate at this point that will be impacting but as you mentioned, Chris It is extremely volatile and very difficult to predict but we at least wanted to call that out of this.
Continues we have at least $10 million already in the first quarter there could be additional risk. We've included that in our assumptions for the outlook on the interest expense. When you take a look at where we are relative to the guidance we provided in February .
We have borrowed more money here in the first quarter. We've also seen interest rates increase.
Increased about 35 basis points. So from that perspective, we've assumed that we will be carrying higher debt levels and our initial assumption. But then also the interest rate environment continues to be volatile and it has been increasing so we've reflected that appropriately in our assumptions.
Thanks for that Dave and just to stick with the other expense.
Are you hedging against additional Egyptian pound devaluation during the year essentially.
At this point, we are not because it's extremely expensive in order to provide that and in some cases. The instruments are not even available is our current view of the market sorry, sorry, I meant the guidance hedge against that risk it wasn't talking about a financial hedge instrument.
Yeah. We've provided you with what we believe is the appropriate range.
Given that risk obviously the additional.
Non operating other expense is a headwind to our EPS guide at the midpoint, but we believe we've got the right outlook for EPS for the full year.
Not changing at this early in the year.
Thank you.
The next question is from David.
Manthey with Baird. Please go ahead.
Good morning, Thank you.
First I was wondering if you could quantify the puts and takes good morning could you outline the puts and takes relative to the 60 basis points year to year gross margin increase and specifically can you address do you think there's any inflationary inventory benefit in the first quarter gross margin and then secondary.
Could you discuss the contribution there from rebates and.
What's the typical high low range I know, that's a lot, but hopefully you can touch on those.
Certainly so the 60 basis point improvement in gross margin year over year was.
I only had a benefit of about 10 basis points from supplier volume rebates.
Versus the prior year remember when we when we booked our supplier volume rebates in the first quarter of 2022, we had a much different forecast for the full year and that contribution of supplier volume rebates as a percentage of sales was increasing throughout the back half of the year. So as we think about <unk>.
<unk> that we've built in to 2023, particularly as it relates to supply chain and we've built in the expectation on our supplier volume rebates, we got about a 10 point benefit versus Q1 of 2022, the real driver.
The gross margin enhancement has been the gross margin improvement program and we have continued to pushed out across the organization make adjustments and improvements to how our field is able to better understand how to price for value for the products and services that we're providing so it was really much more of that.
Transactional margin improvement going back to your question on are we seeing any of the profit and inventory being one of the drivers.
We're not you know I think one of the reasons that our pricing came down as we did see some commodity costs come down in the back half of 2022 and in the beginning of 2023, so actually we had a headwind on some of our pure commodity categories again, very small percentage of our business may be mid single digits, but that was that was.
A headwind on those commodity based products given the global market environment. So we don't believe that this is a profit and inventory issue its really the benefit we're getting from our margin improvement program.
Okay. Thank you for that and then second.
To hit on the cash conversion cycle here by my calculation was something like 84 days it looks like historically its been in the 60 to 70 range.
How many days do you think you can take out by year end is there a target you're supposed to get back to that previous range and maybe you could just discuss where that might come from where the days will come from whether it's your DSO depot inventory days.
Yeah, let me address specifically on inventory.
And.
Depending on.
The calculation that Youre looking at.
We essentially saw our inventory days increased by 11 days in 2022.
We don't believe it's prudent to assume that we can get all of that back in 2023, given some of the challenges with the supply chain.
What we are expecting no is that we will get about half of that improvement back in.
We will continue to grow networking capital at less than half the rate of sales. So our primary focus when it comes to networking capital is really on the inventory when I take a look at our receivables and our payables days they've been relatively stable.
Know that there were some some higher accounts receivable balances through the end of March you know just looking at our collections. The last two weeks of March versus the first two weeks of April .
We saw a nice pickup in our collections in April so our primary focus when it comes to net working capital as inventory.
Yeah.
I appreciate it Dave Thank you.
The next question is from Chris Dankert with loop capital. Please go ahead.
Hey morning, guys. Thanks for taking the question.
I guess looking at the comments you guys have had on UBS, specifically, I mean still expecting high single digit organic growth for the year I mean pretty hot start in the first quarter.
You're implying a pretty sharp deceleration.
No mid singles for the rest of the year kind of a thing.
Is it the broadband piece of it can you kind of walk us through what you're expecting shape of the year and then UBS I'm, just a little bit because the deceleration is so dramatic.
Yeah, I think what we said specifically Chris was high.
High single to low double.
So clearly we're at.
A nice double digit start.
It would have been much stronger.
It had been had we not had a low double digit decline in broadband now that's not a large piece of the portfolio, but that's very attractive secular growth trends. It is we're very bullish on that mid to long term. So.
I don't want to guide our guide and tell you, where we are in those ranges, but but but but just to put a fine point on it we have outstanding momentum in our UBS business overall, driven by the new part of UBS right now.
Credibly bullish on utility.
It's a secular growth end market now never used to be it could go a decade ago, but clearly as going forward and so as broadband. We also have our integrated supply business inside UBS, which technically serves in the industrial end market.
And we've taken you through this before why is it there because it's that business model, we took as a starting point and evolved it on how we serve these utility.
New customers and public power customers directly with our customized integrated supply model for utility that we're attempting to bring that into their broadband value chain to which we think has tremendous upside that integrated supply business grew double digits in the quarter and that's that's industrial so.
I kind of guided that even though I'm not gonna technically officially goodbye.
There you go.
No I really appreciate the color there. Thanks, so much for that.
And then just secondly on the on the digital investment costs. It looks like yields were up.
Thirtyish million year over year give or take just kind of talk us through some of the key priorities on the digital investments side, and kind of where youre really focusing BP investment there.
Yes, Chris it's Dave Schulz. So we have some enterprise programs that we're implementing we've talked about some of those already you know that includes some of the you know our financial systems.
With some of our HR systems. We also have a series of of digital applications that we have been working on so you think about this as you know.
Not only improvements to our our margin improvement program, which is heavily digitalized.
But there are some other.
Applications that were providing to our field reps.
To allow them to better sell our value proposition. So there are a series of investments that we have continued to make in that area. I know, we gave you a little bit of an overview of that during the Investor day, and you know as we learn more and we're able to provide you more details as they begin to launch we intend to do so.
Alright, thanks, so much.
The next question is from Ken Newman with Keybanc capital markets. Please go ahead.
Hey, good morning, guys. Thanks for squeezing me in.
Good morning, Ken.
Good morning.
Curious if you can just talk a little bit about you know in the past.
<unk> call you talked about the margin profile of some of the new orders that were taken into backlog.
I'm curious any color on whether the orders taken in the first quarter right are at or.
Or above <unk> corporate margin average.
Hey, Ken I would say that the.
Margins in our backlog are consistent.
With.
With how we just reported our results. So again there is some volatility there depending on the end unit and the type of project, but.
But for the most part I mean, where were not seeing any significant change of the margin in the backlog.
Got it.
And just to clarify on some of the inventory challenges you mentioned earlier.
I'm curious if you can just dig into.
What youre seeing specifically relative to the backlog portion of your business versus the stock and flow portion.
Any change in momentum across those.
Whether it would be in the quarter or even in April to date.
We haven't seen any significant change in the composition of our inventory between stock and flow versus project I would tell you that our our expectation is that you know as the supplier lead times normalized.
We will be able to be holding less inventory for fewer months in order to ship a complete one.
And so a lot of the spike that we've been seeing in our inventory you know going back to late 2021 has really been as we have built our backlog, which room Mountain a reminder, our backlog as a firm customer work.
So as we built that backlog and we've got a stage getting store for some of those larger projects. We've had a hold inventory for a longer period of time just to ensure that we can meet the customer service metrics. So as those supply chains normalize our expectation is that we'll be holding inventory for fewer weeks and therefore, our net inventory will.
Coming down we are always looking at what is the right mix between stock and flow inventory by location by business.
We are tweaking that all of the time, but right now I would tell you that our inventory issue as you know.
A large number because we have a large backlog those are customer orders that we expect to ship. So you know that is a key driver of our inventory days reduction plan going through 2023.
Alright, that's very helpful. Maybe.
Maybe if I can just squeeze one more and more higher level.
You know John looking at Slide 14 of the deck I think these are helping.
Helpful to kind of see.
Just that the driver is from secular trends.
I'm curious if you guys have done any work on just.
Quantifying the actual exposure or benefit you expect.
From these secular drivers either in 'twenty, two 'twenty three or 'twenty 'twenty four you kind of mentioned you know none of the benefit from infrastructure hitting quite yet.
How do you guys think about that opportunity going forward.
Yeah, Ken it's a great question thanks for that.
I'd point, you back to our Investor day, because what we didn't we didn't show you the detail by secular trends, but we did so in aggregate what our outlook was in terms of market growth.
And market outgrowth I E market outperformance, driven and that was a result of the secular growth trends as well as our cross sell execution.
And we gave a framework where we increased.
Our expectation of Margaret out before events.
How much we outperformed the market by so we've done substantial work and continue to do substantial work internally.
But we haven't detailed and taken that externally yet, but you can I will tell you that was behind and supporting what we outlined at our Investor Day last year. Good question. Thanks.
Okay.
These are these are long term in nature and I think just to give you a sense.
They are secular.
And so I think just as we continue to move forward into 'twenty four 'twenty five 'twenty six.
The secular trends.
Our enduring are strong or expanding.
And then we have the increased infrastructure investments that are not.
In our value chain, you look at where we play in the value chain and I'll put a fine point on it.
When ground has broken our packages go in typically 612 18 months later, depending on the size and complexity of the project.
That's helpful. Thank you.
This concludes our question and answer session I'll now turn the conference back over to John Engel for any closing remarks.
So I think we're at the top of the hour I'll bring the call to a close. Thank you all for your support it is it's greatly appreciated.
We do have a robust calendar this quarter and engagement, we look forward to speaking to many of you we will be participating in the Oppenheimer industrial growth conference.
The Wolfe research Global Transportation, and industrial conference as well as the Keybanc industrials.
Basic materials conference during the second quarter, so with that I know, we've got a lot of follow up call scheduled we look forward to engaging with you. Thanks have a great day.
Yeah.
Okay.