Q1 2024 WESCO International Inc Earnings Call

I would like to ask a question. Please press star followed by one on your telephone keypad. Please note. This event is being recorded.

The call over to Scott <unk>, our SVP Investor relations to begin.

Yeah.

Operator: Thank you and good morning to everyone joining us today. 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 uncertainties. The actual results may differ materially.

Thank you and good morning to everyone joining us today before we get started I want to remind you that certain statements made on this call contain forward looking information.

Scott Louis Gaffner: Please see our webcast slides and the company's SEC filings for additional risk factors and disclosures. Any forward-looking information speaks only as of this date, and the company undertakes no obligation to update the information to reflect changed circumstances. Additionally, today we used certain non-GAAP financial measures. Requirement information on these measures is available on our webcast slides and in our press release, both of which are posted on our website at wesco.com. On this call this morning, we have John Engel, Wesco's Chairman, President, and Chief Executive Officer, and Dave Schulz, Executive Vice President and Chief Financial Officer. And I'll turn the call over to John. Thank you, Scott. Good morning, everyone.

Scott Louis Gaffner: <unk> looking statements are not guarantees of performance and by their nature are subject to uncertainties.

Scott Louis Gaffner: Actual results may differ materially.

Scott Louis Gaffner: Please see our webcast slides in the company's SEC filings for additional risk factors and disclosures.

Scott Louis Gaffner: Any forward looking information and speaks only as of this date and the company undertakes no obligation to update the information to reflect changed circumstances.

Scott Louis Gaffner: Additionally, today, we will use certain non-GAAP financial measures.

Scott Louis Gaffner: Required information on these measures is available on our webcast slides and in our press release.

Scott Louis Gaffner: Of which are posted on our website at Wesco dotcom.

Scott Louis Gaffner: On this call. This morning, we have John Engel West Coast, Chairman, President and Chief Executive Officer.

Scott Louis Gaffner: And Dave Schulz, Executive Vice President and Chief Financial Officer.

John J. Engel: I'll turn the call over to John.

John J. Engel: And thank you for joining our call today. Our first quarter sales met our expectations, and our overall performance, compared against a very strong first quarter a year ago, was in line with our typical seasonal pattern and our full year outlook. Quoting bid activity levels and backlog all remain healthy and support our view for sequential growth as the year progresses. Our free cash flow generation, and it's something we're acutely focused on, was a record $731 million in the first quarter.

John J. Engel: Thank you Scott good morning, everyone and thank you for joining our call today.

John J. Engel: Our first quarter sales met our expectations and our overall performance compared against a very strong first quarter a year ago was in line with our typical seasonal pattern at our full year outlook.

John J. Engel: Quoting bid activity levels and backlog all remain healthy and support our view for sequential growth as the year progresses.

John J. Engel: Our free cash flow generation and it's something we're acutely focused on was a record $731 million in the first quarter. We utilized a portion of this free cash flow to repurchase $50 million worth of common stock in the first quarter and we've reduced our net debt, bringing our financial leverage down by two tenths.

John J. Engel: We utilized a portion of this free cash flow to repurchase $50 million worth of common stock in the first quarter, and we reduced our net debt, bringing our financial leverage down by two-tenths of a turn. Our financial leverage now stands at 2.6 times EBITDA, and that's getting very close to our recently reduced target range of 1.5 to 2.5 times. More importantly, and I want to highlight this, we generated more than $1.4 billion in free cash flow over the trailing 12-month period. Historically, Wesco has demonstrated the ability to consistently generate free cash flow of 100% of net income over time.

John J. Engel: Sure.

John J. Engel: Our financial leverage now stands at two six times EBITDA and that's getting very close to our recently reduced target range of one five to two five times.

John J. Engel: More importantly, and I want to highlight this we generated more than $1 4 billion in free cash flow over the trailing 12 month period. Historically wesco has demonstrated the ability to consistently generate free cash flow of 100% of net income over time.

John J. Engel: With double-digit growth and significant supply chain disruption in 2021 and 2022 coming out of the COVID pandemic, we invested in net working capital resulting in cash flow conversion that was well below our historical average. Our trailing 12-month cap generation results smooth out the inter-quarter effects that we experienced last year as supply chains normalized. I want to highlight that all three components of working capital, that is, accounts receivable, inventory, and accounts payable, contributed to this record $1.4 billion of free cash flow generation over the last four quarters, clearly highlighting the power of the distribution business. In addition, during the first quarter, we announced the divestiture of our integrated supply business, which closed on April 1st.

John J. Engel: With double digit growth and significant supply chain disruption in 2021 and 2022 coming out of the Covid pandemic, we invested in net working capital, resulting in cash flow conversion it was well below our historical average.

John J. Engel: On our trailing 12 months, our trailing 12 months cash generation results smoothed out the inter quarter effects that we experienced last year as supply chain has normalized.

John J. Engel: I want to highlight that all three components of working capital that is accounts receivable inventory and accounts payable contributed to this record $1 $4 billion of free cash flow generation over the last four quarters, clearly highlighting the power of our distribution business model.

John J. Engel: In addition, during the first quarter, we announced the divestiture of our integrated supply business, which closed on April 1st we expect to use all of the after tax proceeds of approximately $300 million to repurchase common stock starting in the second quarter.

John J. Engel: We expect to use all of the after-tax proceeds of approximately $300 million to repurchase common stock starting in the second quarter. As Dave will discuss in more detail later in the call, we are reaffirming our previous full-year outlook for organic sales growth, adjusted EBITDA margin, and adjusted earnings per share. We completed $20 million of annualized structural cost reductions late in the first quarter.

John J. Engel: As Dave will discuss in more detail later in the call. We are reaffirming our previous full year outlook for organic sales growth adjusted EBITDA margin and adjusted earnings per share.

John J. Engel: We completed $20 million of annualized structural cost reductions late in the first quarter and I think as you. All know this is in addition to the 45 million of cost reduction actions, we took in 2023.

John J. Engel: And I think, as you all know, this is in addition to the $45 million of cost reduction actions we took in 2023. Our outlook for the year has been updated to reflect the divestiture of our integrated supply business on April 1st and our expectation to fully deploy these proceeds to share repurchase. Given the record free cash flow generation in the first quarter, we are also increasing our full-year free cash flow outlook to $800 million to $1 billion, or more than 100% of adjusted net income at the midpoint, which provides increased optionality for share repurchases, debt reduction, and or M&A in the sector.

John J. Engel: Our outlook for the year has been updated to reflect the divestiture of our integrated supply business on April 1st and our expectation fully deploy these proceeds to share repurchases.

John J. Engel: Given our record free cash flow generation in the first quarter. We are also increasing.

John J. Engel: Our full year free cash flow outlook to $800 million to $1 billion or more than 100% of adjusted net income at the midpoint, which provides increased optionality for share repurchases debt reduction and our M&A in the second half.

John J. Engel: Finally, we expect to be within our target leverage range, that is, the recently reduced target leverage range, that is, of 1.5 to 2.5 times by year. We are laser-focused on continual improvement and making the internal investments to improve our performance and our capability.

John J. Engel: Finally, we expect to be within our target leverage range. That's there recently reduced target leverage range that is a one five to two five times by year end.

John J. Engel: We are laser focused on continual improvement and making the internal investments to improve our performance and our capabilities. The long term secular growth trends remain intact and they are opportunities that will sustain wesco has long term growth and allow us to increase our share because of our unique global capabilities, our broad portfolio.

David S. Schulz: The long-term secular growth trends remain intact, and there are opportunities that will sustain Wesco's long-term growth and allow us to increase our share because of our unique global capabilities, our broad portfolio, and our... I'll now hand it over to Dave to take you through our first quarter results in more detail, as well as our outlook for the rest of the year. Dave.

Dave: And our scale.

Dave: I'll now hand, it over to David to take you through our first quarter results in more detail as well as our outlook for the rest of the year.

David S. Schulz: Good.

David S. Schulz: Thank you, John. Good morning, everyone. Turning to page four of our deck, organic sales were down approximately 3% versus the prior year, reflecting about a 1% benefit from price offset by lower volume. However, differences in foreign exchange rates were minor in the quarter, as shown by the other category on the sales wall.

Dave: Thank you John Good morning, everyone turning to page four of our deck organic sales were down approximately 3% versus the prior year, reflecting about a 1% benefit from price offset by lower volumes differences.

David S. Schulz: Differences in foreign exchange rates were minor in the quarter as shown by the other category on the sales walk.

David S. Schulz: The volume decline was attributable to a very challenging comparison, sales up 12% in the prior year period, and continued choppiness in certain end markets. On the lower half of the page, you can see the adjusted EBITDA impacts of lower sales, gross margin headwinds, and higher SG&A in the first quarter. Gross margin was down about 60 basis points, with approximately half of the decline due to the impact of lower billing margin due to MEC.

David S. Schulz: Volume decline was attributable to a very challenging comparison sales up 12% in the prior year period and continued choppiness in certain end markets.

David S. Schulz: On the lower half of the page you can see the adjusted EBITDA impacts of lower sales gross margins headwinds and higher SG&A in the first quarter.

David S. Schulz: Gross margin was down about 60 basis points.

David S. Schulz: Approximately half of the decline the impact of lower billing margin due to mix.

David S. Schulz: We continue to see a higher proportion of direct ship sales, which have a lower gross margin than stock sales. Direct ship sales, however, have a much higher return on net assets as we recognize the sale and profit with the product never hitting our inventory. The rest of the decline in gross margin was attributable to billing-to-gross-margin adjustments, including a higher inventory adjustment versus the prior year. The year-over-year increase in SG&A was primarily due to higher salaries and higher costs to operate our facilities. These increases were partially offset by cost reduction actions taken last year.

David S. Schulz: We continue to see a higher proportion of direct ship sales, which has a lower gross margin than stock sales <unk>.

David S. Schulz: Direct ship sales, however have a much higher return on net assets as we recognize the sale and profit with the product never hitting our inventory.

David S. Schulz: The rest of the decline in gross margin was attributable to billing to gross margin adjustments, including a higher inventory adjustment versus the prior year.

David S. Schulz: The year over year increase in SG&A was primarily due to higher salaries and higher cost to operate our facilities.

David S. Schulz: These increases were partially offset by the cost reduction actions taken last year.

David S. Schulz: In total, adjusted SG&A represented 15.1% of sales, 60 basis points from the prior year, with about half the basis point increase driven by the impact of lower sales. Turning to page 5, on a sequential basis, sales were also in line with expectations and were down 4% organically, primarily due to lower volume. Differences in foreign exchange rates and the benefit of one extra workday contributed about 1.5 points to sales. However, adjusted EBITDA was lower than the prior quarter, primarily due to lower sales.

David S. Schulz: In total adjusted SG&A represented 15, 1% of sales up 60 basis points from the prior year with about half the basis point increase driven by the impact of lower sales.

David S. Schulz: Turning to page five on a sequential basis sales were also in line with expectations and were down 4% organically, primarily due to lower volumes.

David S. Schulz: Differences in foreign exchange rates and the benefit of one extra workday contributed about one five points to sales growth.

David S. Schulz: Adjusted EBITDA was lower than the prior quarter, primarily due to lower sales building.

David S. Schulz: Billing margin was up sequentially, and gross margin was down 10 basis points due to the billing to gross margin adjustment. Adjusted SG&A was up sequentially about 1%, reflecting the restoration of incentive compensation back to target. Turning to page 6, this slide shows how Wesco has outperformed both our supplier partners and our distributor peers. We believe this is clear evidence of our share gains over the past few years.

David S. Schulz: Billing margin was up sequentially in gross margin was down 10 basis points due to billing to gross margin adjustments.

David S. Schulz: Adjusted SG&A was up sequentially about 1%, reflecting the restoration of incentive compensation back to target.

David S. Schulz: The chart on the left compares Wesco's 10-year organic growth to the average organic growth of our 10 largest publicly traded supplier partners, weighted to the proportion of our purchases that they represent. You can see that Wesco has outperformed the supplier average since the middle of 2021. The chart on the right compares Wesco's year-over-year organic growth to the electrical and data communications distributors in the Bayer Distribution Survey, which is published quarterly. Wesco has outperformed its distribution peers in nine of the 13 periods presented.

David S. Schulz: Turning to page six this slide shows how wesco has outperformed both our supplier partners and our distributor peers.

David S. Schulz: We believe this is a clear evidence of our share gains over the past few years.

David S. Schulz: The chart on the left compares West Coast 10 year organic growth to the average organic growth of our 10 largest publicly traded supplier partners.

David S. Schulz: Weighted to the proportion of our purchases that they represent.

David S. Schulz: You can see that Wesco has outperformed the supplier average since the middle of 2021.

David S. Schulz: The chart on the right compares west goes year over year organic growth to the electrical and data communications distributors in the bear distribution survey, which is published quarterly.

David S. Schulz: Wesco has outperformed its distribution peers in nine of the 13 periods presented.

David S. Schulz: We think these two data sets clearly demonstrate that our growth has exceeded our peers, indicating our market outperformance over the last three years. Turning to slide 7, first quarter organic sales in our EES business, we're down approximately 2% on both an organic and reported basis. Construction sales were flat, reflecting large project shipments and strength in Canada offset by continued weakness in solar due to a challenging comparable in the prior year.

David S. Schulz: We think these two data sets clearly demonstrate that our growth has exceeded our peers, indicating our market outperformance over the last three years.

David S. Schulz: Turning to slide seven first quarter organic sales in our EES business were down approximately 2% on both an organic and reported basis.

David S. Schulz: Construction sales were flat, reflecting large project shipments and strength in Canada offset by continued weakness in solar due to a challenging comparable in the prior year.

David S. Schulz: Industrial sales continue to be strong and were up low single digits over the prior year, driven by automation and a continued resurgence in oil and gas. OEM sales were down by a single digit. Backlog was approximately flat on a sequential basis and down about 5% from the prior year, reflecting the continued reduction of supplier lead time. EES backlog remains at an historically high level.

David S. Schulz: Industrial sales continued to be strong and were up low single digits over the prior year driven by automation and a continued resurgence in oil and gas OEM sales were down high single digits.

David S. Schulz: Backlog was approximately flat on a sequential basis and down about 5% from the prior year, reflecting the continued reduction of supplier lead times.

David S. Schulz: <unk> backlog remains at historically high level.

David S. Schulz: Adjusted margin was down from the prior year, with EBITDA margin down 70 basis points. The decrease in EBITDA margin reflects gross margin headwinds, primarily from lower supplier volume rebates. SG&A was down slightly versus the prior year from the benefit of cost actions taken in 2023. Importantly, adjusted EBITDA margin was flat on a sequential basis. Turning to slide 8.

David S. Schulz: Adjusted margin was down from the prior year.

David S. Schulz: With EBITDA margin down 70 basis points. The decrease in EBITDA margin reflects gross margins headwinds primarily from lower supplier volume rebates.

David S. Schulz: SG&A was down slightly versus the prior year from the benefit of cost actions taken in 2023.

David S. Schulz: Importantly, adjusted EBITDA margin was flat on a sequential basis.

David S. Schulz: Turning to slide eight <unk>.

David S. Schulz: First quarter sales in our CSS business were down approximately four percent from the prior year on both an organic and reported basis. Enterprise Network Infrastructure, which comprises structured tabling along with sales to internet service providers, was down low single digits in the quarter. Sales to service providers in support of 5G, fiber, and satellite connectivity projects were down double digits in the quarter, although this was partially offset by growth in structured cabling sales versus the prior year. Security sales were down in the high single digits.

David S. Schulz: First quarter sales in our CSS business were down approximately 4% from the prior year on both an organic and reported basis.

David S. Schulz: Enterprise network infrastructure, which comprises structured cabling, along with sales to Internet service providers was down low single digits in the quarter.

David S. Schulz: Sales to service providers in support of five G fiber and satellite connectivity projects were down double digits in the quarter. This was partially offset by growth in structured cabling sales versus the prior year.

David S. Schulz: Security sales were down high single digits recall, the prior year quarter was up low teens.

David S. Schulz: Recall the prior year quarter was up low teens. Q1 sales were negatively impacted by lower spending on small and mid-sized contracts. The security market has contracted over the past few quarters, but we expect it will grow in the second half of this year, with strong secular growth in the out... Data center sales were again primarily driven by growth with hyperscale customers, and we're up low single digits in the quarter. The growth opportunity for this business is exceptionally strong given the step change in data center capacity needs driven by artificial intelligence.

David S. Schulz: Q1 sales were negatively impacted by lower spending with small and midsized contractors.

David S. Schulz: The security market has contracted over the past few quarters, but we expect it will grow in the second half of this year with strong secular growth in the out years.

David S. Schulz: Data Center sales were again, primarily driven by growth with Hyperscale customers and we're up low single digits in the quarter.

David S. Schulz: The growth opportunity of this business is exceptionally strong given the step change in data center capacity needs driven by artificial intelligence.

David S. Schulz: As we discussed last quarter, CSS backlog is back to normal levels and was down 20% versus the prior year and up 9% sequentially. Adjusted EBITDA margin for CSS was down 140 basis points, and the primary driver of the decrease was gross margin, including the impact of an inventory adjustment. While SG&A was relatively flat with the prior year, the decline in sales also unfavorably impacted adjusted EBITDA. Turning to slide 9. UBS sales were down 5% in the quarter on an organic and reported basis.

David S. Schulz: As we discussed last quarter CSS backlog is back to normal levels and was down 20% versus the prior year and up 9% sequentially.

David S. Schulz: Adjusted EBITDA margin for CSS was down 140 basis points. The primary drivers of the decrease was gross margin, including the impact of an inventory adjustment.

David S. Schulz: While SG&A was relatively flat with the prior year the decline in sales also unfavorably impacted adjusted EBITDA margin.

David S. Schulz: Turning to slide nine.

David S. Schulz: UBS sales were down 5% in the quarter on an organic and reported basis.

David S. Schulz: Sales and utility were down low single digits versus growth of more than 20% in the prior year. However, we continue to benefit from the secular trends of electrification, green energy, and grid modernization. We saw a decline versus the prior year in our stock and flow sales, with customers more tightly managing inventory. Although we divested the integrated supply business on April 1, sales from the business are included in our first quarter results, and we're up low single digits versus the prior year, consistent with the strength we experienced with other industrial customers within our portfolio. Broadband sales were down over 20%, which reflected continued demand weakness as customers continue to work through inventory and delay purchases until government funding is released.

David S. Schulz: <unk> and utility were down low single digits versus growth of more than 20% in the prior year.

David S. Schulz: We continued to benefit from the secular trends of electrification green energy and grid monitors modernization.

David S. Schulz: We saw a decline versus the prior year, and our stock and flow sales with customers more tightly managing inventory.

David S. Schulz: Although we divested the integrated supply business on April 1st sales from the business are included in our first quarter results and were up low single digits versus the prior year consistent with the strength, we experienced with other industrial customers within our portfolio.

David S. Schulz: Broadband sales were down over 20%, which reflected continued demand weakness as customers continue to work through inventory and delay purchases until government funding is released.

David S. Schulz: Backlog was down 7% from the prior year and down 1% on a sequential basis. However, backlog remains near historically high levels. Adjusted EBITDA was down approximately 60 basis points versus the prior year, driven by lower supplier volume rebates, a mixed impact, and slightly higher SG&A as a percentage of sales. Turning to page 10, on this slide, we have highlighted a recent win by each of our business units that, in aggregate, represent more than $200 million of future project sales.

David S. Schulz: Backlog was down 7% from the prior year and down 1% on a sequential basis backlog remains near historically high levels.

David S. Schulz: Adjusted EBITDA was down approximately 60 basis points versus the prior year driven by lower supplier volume rebates are mixed impact and slightly higher SG&A as a percentage of sales.

David S. Schulz: Turning to page 10 on this slide we have highlighted a recent win by each of our business units that in aggregate represent more than $200 million of future project sales.

David S. Schulz: These wins are consistent with the trend of our bidding and winning increasingly large, complex projects. Also worth noting are the end markets that these projects serve, a project that is expected to be the world's first zero-carbon emission ethylene cracker, the Enterprise Data Center Project, and a large renewable energy project. Turning to page 11.

David S. Schulz: These wins are consistent with the trend of our bidding and winning increasingly large complex projects.

David S. Schulz: Also worth noting are the end markets that these projects serve.

David S. Schulz: A project that is expected to be the world's first zero carbon emission ethylene cracker.

David S. Schulz: Enterprise data Center project, and a large renewable energy project.

David S. Schulz: Turning to page 11.

David S. Schulz: Historically, strong free cash flow has been a hallmark of Wesco and our distribution model. We are pleased to see a return to strong free cash flow as most global supply chains have reached equilibrium over the past few quarters. Pre-cash flow in the quarter was $731 million, driven by working capital, which improved on a day's basis, both sequentially and versus the prior year, on a trailing 12-month basis, which this chart bridges to adjusted net income. Free cash flow is more than $1.4 billion, with cash generation improvements in all three components of working capital. Note that free cash flow in the first quarter partially benefited from a temporary increase in accounts payable.

David S. Schulz: Historically strong free cash flow has been a hallmark of wesco and our distribution model.

David S. Schulz: We are pleased to see a return to strong free cash flow as most global supply chains have reached equilibrium over the past few quarters.

David S. Schulz: Free cash flow in the quarter was $731 million driven by working capital, which improved on a days basis, both sequentially and versus the prior year.

David S. Schulz: On a trailing 12 month basis, which this chart bridges to adjusted net income.

David S. Schulz: Free cash flow was more than $1 4 billion.

David S. Schulz: With cash generation improvements in all three components of working capital.

David S. Schulz: Note that free cash flow in the first quarter, partially benefited from a temporary increase in accounts payable.

David S. Schulz: We migrated a portion of our business to a new accounts payable system that resulted in delays in processing payments. This temporary benefit should reverse in the second quarter. Additionally, we did not take early pay discounts at our historical rate, which also resulted in a higher accounts payable.

David S. Schulz: We migrated a portion of our business to a new accounts payable system that resulted in delays in processing payments.

David S. Schulz: This temporary benefit should reverse in the second quarter.

David S. Schulz: Additionally, we did not take early pay discounts at our historical rate, which also resulted in a higher accounts payable balance.

David S. Schulz: Note that in the second, third, and fourth quarters of last year, receivables and inventory were a combined source of approximately $340 million, harshly offset by payables, which was a use of $233 million. It is important. It is because of this significant increase in quarter-to-quarter variability that we believe free cash flow is best considered on a trailing 12-month basis. We were pleased to see a return to cash flow generation beginning in the back half of 2023.

David S. Schulz: Note that in the second third and fourth quarters of last year.

David S. Schulz: <unk> and inventory were combined source of approximately $340 million, partially offset by payables, which was a use of $233 million.

David S. Schulz: It is important.

David S. Schulz: It is because of the significant increased quarter to quarter variability that we believe free cash flow is best considered on a trailing 12 month basis.

David S. Schulz: We were pleased to see a return to cash flow generation beginning in the back half of 2023.

David S. Schulz: With the significant sales growth we delivered in 2021 and 2022, we invested heavily in net working capital, and we're well below our normal free cash flow conversion expectations. With this first quarter result, we are increasing the midpoint of our free cash flow outlook for 2024 from $700 million to $900 million, which is more than 100% of our implied outlook for adjusted net income at the midpoint, to a range of $800 million to $1 billion. Moving to slide 12.

David S. Schulz: With the significant sales growth, we delivered in 2021 and 2022, we invested heavily in networking capital and were well below our normal free cash flow conversion expectation.

David S. Schulz: With this first quarter result, we are increasing the midpoint of our free cash flow outlook for 2024 from $700 million to $900 million, which is more than 100% of our implied outlook for adjusted net income at the midpoint to a range of $800 million to $1 billion.

David S. Schulz: Moving to slide 12.

David S. Schulz: On this slide, we have outlined our return of capital to shareholders over the past three years, along with our capital allocation priorities for 2024. You can see that we intend to fully utilize the net proceeds of the integrated supply divestiture for share repurchases in the second quarter. In addition, the significant increase in our 2024 free cash flow outlook to $900 million at the midpoint provides optionality for us to opportunistically repurchase additional shares, further reduce debt, or pursue M&A in the second half of the year.

David S. Schulz: On this slide we have outlined our return of capital to shareholders over the past three years, along with our capital allocation priorities for 2024.

David S. Schulz: You can see that we intend to fully utilize the net proceeds of the integrated supply divestiture for share repurchases in the second quarter.

David S. Schulz: In addition, the significant increase in our 2020 for free cash flow outlook to $900 million at the midpoint provides optionality for us to opportunistically repurchase additional shares.

David S. Schulz: Either reduce debt and or pursue M&A in the second half of the year.

David S. Schulz: Recall that we provided a long-term outlook for operating cash flow generation of $3.5 to $4.5 billion at our investor day in 2022. We remain on track to achieve this target and expect to return about 40% of our operating cash flow to shareholders through dividends, including our common dividend, which we increased 10% in 2024, and executing our $1 billion share repurchase authorization. On the upside, cash generation also allows us to continue to invest in organic growth and operational efficiency through our digital transformation.

David S. Schulz: Recall that we provided a long term outlook for operating cash flow generation of three five to $4 $5 billion out of our Investor day in 2022.

David S. Schulz: We remain on track to achieve this target and expect to return about 40% of our operating cash flow to shareholders through dividends, including our common dividend, which we increased 10% in 2024.

David S. Schulz: And executing our $1 billion share repurchase authorization.

David S. Schulz: The upside cash generation also allows us to continue to invest for organic growth and operational efficiency by our digital transformation.

David S. Schulz: Now moving to page 13 for the key sales drivers of our strategic business. We first provided this outlook by SBU last quarter with our initial 2024 outlook, excluding the impact of the WIST divestiture. Our outlook for sales at the SBU level is unchanged from our prior view.

David S. Schulz: Now moving to page 13 for the key sales drivers of our strategic business units.

David S. Schulz: We first provided this outlook by SBU last quarter with our initial 2020 for outlook.

David S. Schulz: Excluding the impact of the west divestiture.

David S. Schulz: Our outlook for sales at the SBU level is unchanged from our prior view.

David S. Schulz: Within EES, we faced headwinds in both construction and OEM in 2023 that more than offset significant growth in the industry. In 2024, we expect EES reported sales growth to be flat to up low single digits as construction and markets remain pressured despite an increase in large project activity. The industrial business is expected to again benefit from continued growth from customers in many of the end market verticals we support. However, OEM is expected to be roughly flat.

David S. Schulz: Within EES, we faced headwinds in both construction and OEM in 2023 that more than offset significant growth in industrial.

David S. Schulz: In 2024, we expect EES reported sales growth to be flat to up low single digits as construction end markets remained pressured despite an increase in large project activity.

David S. Schulz: The industrial business is expected to again benefit from continued growth from customers in many of the end market verticals, we support.

David S. Schulz: OEM is expected to be roughly flat.

David S. Schulz: Looking at our CSS segment, we generated strong double-digit growth in Wesco data center solutions last year and significant share gains in security that allowed us to outgrow the market. However, Enterprise Network Infrastructure, which is focused on service providers and data communication applications, including structured cabling products, experienced softness due to the slowing of 5G buildouts and the non-residential construction market, including renovations. Enterprise network infrastructure is the largest business for CSS and makes up approximately 40% of segment revenue.

David S. Schulz: Looking at our CSS segment, we generated strong double digit growth in Wesco datacenter solutions last year and significant share gains in security that allowed us to outgrow the market.

David S. Schulz: However, enterprise network infrastructure, which is focused on service providers and data communication applications, including structured cabling products experienced softness due to the slowing of <unk> build outs in the nonresidential construction market, including renovations.

David S. Schulz: Enterprise network infrastructure is the largest business for CSS and makes up approximately 40% of segment revenues.

David S. Schulz: For CSS in 2024, we again expect double-digit growth in data center and share gains in security. But some of the weakness that we saw in enterprise network infrastructure is expected to continue. That said, we expect volume growth to drive CSS sales up low to mid-single digits. Lastly, looking at UBM. In 2023, we generated double-digit growth in utility revenue, but this was partially offset by an approximately 20% decline in broadband due to customer destocking and delays of purchases until government dollars were released.

David S. Schulz: For CSS in 2024, we again expect double digit growth in data center and share gains in security, but some of the weakness that we saw in enterprise network infrastructure is expected to continue.

David S. Schulz: That said, we expect volume growth driving CSS sales up low to mid single digits.

David S. Schulz: Lastly, looking at UBS.

David S. Schulz: In 2023, we generated double digit growth in utility.

David S. Schulz: This was partially offset by an approximately 20% decline in broadband due to customer destocking and delays of purchases until government dollars are released.

David S. Schulz: In 2024, we expect growth in utility services, but at a more moderate pace as we lap strong comparisons, significant 2023 price increases, and as utility customers, more tightly managed inventory. In addition, based on customer and supplier input, we don't expect to see a recovery in broadband until late 2024 before turning to growth in 2025. Despite these factors, we expect growth for UBS in 2024, with sales up mid-single digits. Please note these growth rates exclude the integrated supply business that we divested last year.

David S. Schulz: In 2024, we expect growth in utility, but at a more moderate pace as we lapped strong comparisons significant 2023 price increases and as utility customers to more tightly manage inventory.

David S. Schulz: In addition, based on customer and supplier input, we don't expect to see a recovery in broadband until late 2024 before turning to growth in 2025.

David S. Schulz: Despite these factors we expect growth for UBS in 2024 with sales up mid single digits. Please note. These growth rates exclude the integrated supply business that we divested last month.

David S. Schulz: Moving to slide 14 for our 2024 outline, we are reaffirming our outlook for organic sales growth, adjusted EBITDA margin, and adjusted EBITDA margin. The divestiture of our integrated supply business will represent a 3% headwind to sales, which reduces our reported sales outlook to a range of down 2% to up 1%, or approximately $21.9 to $22.6 billion. At the midpoint of the range, price is expected to contribute about one point to the top line with volumes relatively flat.

David S. Schulz: Moving to slide 14 for our 2020 for outlook.

David S. Schulz: We are reaffirming our outlook for organic sales growth adjusted.

David S. Schulz: Adjusted EBITDA margin and adjusted EPS.

David S. Schulz: The divestiture of our integrated supply business will represent a 3% headwind to sales, which reduces our reported sales outlook to a range of down 2% to up 1% or approximately $21 nine to $22 6 billion.

David S. Schulz: At the midpoint of the range prices are expected to contribute about one point to the topline with volumes relatively flat.

David S. Schulz: From a quarterly sales perspective, we expect to see normal sequential patterns as we move throughout 2024. At the midpoint of our revenue outlook, reported sales would be roughly flat, including the Q2 through Q4 divestiture impact of approximately $700 million. On adjusted EBITDA margin, while we do not provide an outlook for gross margin, we expect to see improvement in 2024. The integrated supply divestiture will be accreted to gross margin. Our billing margin was stable in 2023 and up slightly sequentially in the first quarter.

David S. Schulz: From a quarterly sales perspective, we expect to see normal sequential patterns as we move throughout 2024.

David S. Schulz: At the midpoint of our revenue outlook reported sales would be roughly flat, including the Q2 through Q4 divestiture impact of approximately $700 million.

David S. Schulz: An adjusted EBITDA margin, while we do not provide an outlook for gross margin, we expect to see improvement in 2024.

David S. Schulz: The integrated supply divestiture will be accretive to gross margin.

David S. Schulz: Our billing margin was stable in 2023 and up slightly sequentially in the first quarter.

David S. Schulz: We expect improved mix and flat supplier volume rebates as a percentage of sales, along with the benefit of our margin improvement program, to drive higher results in 2024. On SG&A, there are headwinds related to our annual merit increase, along with a return to target payouts for incentive compensation. Combined, these items represent an approximately $100 million cost headwind in 2024 and are expected to be only partially offset by the cost actions we took in 2023 and the $20 million of annualized cost actions we took at the end of the first quarter. From a P&L perspective, we continue to expect adjusted EBITDA margin to be in the range of 7.5% to 7.9%, or approximately $1.7 billion of EBITDA at the mid-term.

David S. Schulz: We expect improved mix and flat supplier volume rebates as a percentage of sales along with the benefit of our margin improvement program to drive higher results in 2024.

David S. Schulz: On SG&A there are headwinds related to our annual merit increase along with a return to target payouts for incentive compensation.

David S. Schulz: Combined these items represent an approximately $100 million cost headwind in 2024.

David S. Schulz: And are expected to be only partially offset by the cost actions. We took in 2023 and a $20 million of annualized cost actions. We took at the end of the first quarter.

David S. Schulz: Yes.

David S. Schulz: From a P&L perspective, we continue to expect adjusted EBITDA margin to be in the range of seven 5% to seven 9% or approximately $1 7 billion of EBITDA at the midpoint.

David S. Schulz: The revision to adjusted EBITDA at the midpoint reflects the impact of the integrated supply divestiture of approximately $45 million relative to our initial outlook. You can see that we are maintaining our outlook range for adjusted EPS of $13.75 to $15.75. The dilutive impact of the integrated supply divestiture will be partially offset by the $300 million of share repurchases we expect to initiate during the second quarter. Additionally, as I discussed a moment ago, we are increasing our outlook for free cash flow from a range of $600 to $800 million to a range of $800 million to $1 billion. This free cash flow outlook represents the highest free cash flow in our history and more than 100% of adjusted net income.

David S. Schulz: The revision to adjusted EBITDA at the midpoint reflects the impact of the integrated supply divestiture of approximately $45 million relative to our initial outlook.

David S. Schulz: You can see that we are maintaining our outlook range for adjusted EPS of $13 75.

David S. Schulz: The $15 75.

David S. Schulz: The dilutive impact of the integrated supply divestiture will be partially offset by the $300 million of share repurchases, we expect to initiate during the second quarter.

David S. Schulz: As I discussed a moment ago, we are increasing our outlook for free cash flow from a range of $600 million to $800 million.

David S. Schulz: To a range of $800 million to $1 billion.

David S. Schulz: This free cash flow outlook represents the highest free cash flow in our history and more than 100% of adjusted net income.

David S. Schulz: We have assumed in our free cash flow outlook that net working capital days improve, including a three-day improvement in inventory days outstanding. Before turning to slide 15, I want to draw your attention to some updates we have made to our underlying assumptions for 2024. We have increased our outlook for other expenses to the upper end of our range for approximately $25 million based on first quarter results. This expense is a combination of our pension costs and the impact of changes in foreign exchange rates on the balance sheet.

David S. Schulz: We have assumed in our free cash flow outlook that net working capital days improve including a three day improvement in inventory days outstanding.

David S. Schulz: Before turning to slide 15, I want to draw your attention to some updates we have made to our underlying assumptions for 2024.

David S. Schulz: We have increased our outlook for other expense. So the upper end of our range for approximately $25 million based on first quarter results.

David S. Schulz: This expense is a combination of our pension costs and the impact of changes in foreign exchange rates on the balance sheet.

David S. Schulz: On shares, we reduced our expected average share count to 50.5 million shares based on the buyback activity of $50 million completed in the first quarter and our expectation to buy back $300 million of shares in the second quarter. And lastly, while we continue to expect an effective tax rate of approximately 27% for the remaining three quarters, the lower rate in Q1 reduces our outlook for the full year to approximately 26%. Turn to page 15.

David S. Schulz: On shares we reduced our expected average share count to 55 million shares based on the buyback activity of $50 million completed in the first quarter and our expectation to buy back $300 million of shares in the second quarter.

David S. Schulz: And lastly, while we continue to expect an effective tax rate of approximately 27% for the remaining three quarters the lower rate in Q1 reduces our outlook for the full year to approximately 26%.

David S. Schulz: Turning to page 15.

David S. Schulz: This slide shows the 2023 year-over-year monthly sales growth comparisons, the monthly growth rate for the first quarter, and our expectations for the second quarter. Like the rest of 2024, we expect to see normal seasonality in the second quarter, including a sequential increase in sales. On a year-over-year basis, we expect organic sales to be flat to up low single digits, and down low single digits on a reported basis. We expect our gross margin rate to improve sequentially, primarily reflecting the benefit from the integrated supply divestiture, and for SG&A to increase sequentially due to the annual merit. Preliminary April sales per workday were down 2%, in line with the typical sequential pattern.

David S. Schulz: This slide shows the 2023 year over year monthly sales growth comparisons with monthly growth rate for the first quarter and our expectations for the second quarter.

David S. Schulz: Like the rest of 2024, we expect to see normal seasonality in the second quarter, including a sequential increase in sales.

David S. Schulz: On a year over year basis, we expect organic sales to be flat to up low single digits and down low single digits on a reported basis.

David S. Schulz: We expect our gross margin rate to improve sequentially, primarily reflecting the benefit from the integrated supply divestiture and for SG&A to increase sequentially due to the annual Merit increase.

David S. Schulz: Preliminary April sales per workday were down 2% in line with typical sequential patterns.

David S. Schulz: Now moving to page 16. Our long-term secular trends are intact. 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 slide. Our participation in these trends, coupled with increasing public sector investments in infrastructure, broadband, and partnerships with the private sector, positions Wesco exceptionally well.

David S. Schulz: Now moving to page 16.

David S. Schulz: Our long term secular trends are intact.

David S. Schulz: This slide shows the uniquely strong position of our company to drive growth and profitability in the years ahead.

David S. Schulz: 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.

David S. Schulz: Our participation in these trends coupled with increasing public sector investments in infrastructure.

David S. Schulz: <unk> band and partnerships with the private sector.

David S. Schulz: <unk> and wesco exceptionally well.

John J. Engel: Our long-term financial framework is for Wesco to grow 2% to 4% above the market due to the combined benefit of secular growth trends and increasing share. Turning to page 17, we've covered a lot of material this morning, so let me briefly recap the key points before we open the call to your questions. Sales in the first quarter were in line with typical seasonality and our full year outlook, although backlog remains at very high levels in each of our businesses. Free cash flow was more than $700 million in the quarter and more than $1.4 billion over the past 12 months, including an accounts payable balance that will normalize going forward.

David S. Schulz: Our long term financial framework is for wesco to grow 2% to 4% above the market due to the combined benefit of secular growth trends and increasing share.

John J. Engel: Turning to page 17, we've covered a lot of material. This morning. So let me briefly recap the key points before we open the call to your questions.

John J. Engel: Sales in the first quarter were in line with typical seasonality and our full year outlook.

John J. Engel: Backlog remains at very high levels in each of our business units.

John J. Engel: Free cash flow was more than $700 million in the quarter and more than $1 $4 billion over the past 12 months.

John J. Engel: Putting in an accounts payable balance that will normalize going forward.

John J. Engel: We utilized our cash flow to opportunistically repurchase $50 million of shares in the first quarter. We are reaffirming our 2024 outlook for organic growth, adjusted EBITDA margin, and adjusted EPS and increasing the midpoint of our free cash flow outlook by $200 million. We intend to use the proceeds from the integrated supply divestiture to repurchase $300 million of our shares, in addition to the $50 million bought back in the first quarter. With the remaining free cash flow generated this year, we will balance additional share purchases with reducing leverage while continuing to pursue creative M&A. With that, Operator, we can now open the call to your questions. Yes, thank you.

John J. Engel: We utilized our cash flow to opportunistically repurchase $50 million of shares in the first quarter.

John J. Engel: We are reaffirming our 2020 for outlook for organic growth adjusted EBITDA margin and adjusted EPS and increasing the midpoint of our free cash flow outlook by $200 million.

John J. Engel: We intend to use the proceeds from the integrated supply divestiture to repurchase $300 million of our shares in addition to the $50 million bought back in the first quarter.

John J. Engel: With the remaining free cash flow generated this year, we will balance additional share repurchases with reducing leverage while continuing to pursue accretive M&A.

John J. Engel: With that operator, we'll now open the call to your questions.

Operator: We will now begin the question and answer session. If you would like to ask a question, please press star followed by 1 on your telephone. Or, send me your questions to 1-877-4333. Thank you.

Speaker Change: Yes. Thank you we will now begin the question and answer session.

Operator: She would like to ask a question. Please press star followed by one on your telephone keypad. Please limit your questions to one and one follow up.

Operator: Our first question today comes from Nigel Coe. Oh, thanks. Good morning.

Operator: Our first question today comes from Nigel Coe with Wolfe Research.

Nigel Edward Coe: Thanks for the question. I appreciate all the details, especially slide six, which is, I think, you know, quite limiting. Although you better be careful with those bad guys; the data there is pretty suspect. Just kidding. I thought we might get a comment like that.

Nigel Edward Coe: Oh, Thanks, good morning.

Nigel Edward Coe: For the question.

Nigel Edward Coe:

Nigel Edward Coe: Appreciate all the detail, especially slide fixed which.

Nigel Edward Coe: I think quite quietly and although you bet the chemical those bad Guy as you know the data that is pretty suspect.

Nigel Edward Coe: Okay.

Speaker Change: [laughter] comment like that.

Unnamed Speaker: No, I'm kidding. That's knowledge. Yeah. On SG&A, you mentioned the pickup sequentially on comp, but are we still in kind of the framework where SG&A growth for the full year will be sort of below revenue growth, so we still get a little bit of SG&A productivity? And maybe just talk about some of the kind of measures to address that inflation need as well. Yeah, Nigel, good morning.

Nigel Edward Coe: [laughter] kind of event that's not it.

Nigel: Oh, yes on the SG&A.

Unnamed Speaker: You mentioned the pick up sequentially on the <unk>.

Unnamed Speaker: But we still.

Unnamed Speaker: And the kind of the framework, where SG&A growth for the full year will build will be sort of below revenue growth, we still got a little bit of SG&A productivity and maybe just talk about some of the kind of measures to that inflation you talked about.

David S. Schulz: Let me start with the expectations for our SG&A. As we mentioned, we do have a $100 million headwind related to not only the merit increase, which is effective in the second quarter, and that will be a low single-digit increase to our people costs, but we also do have the restoration of incentive compensation. And we called out that combined, that's about a $100 million head. So, when you think about how we're looking at the cost actions, we do have some carryover benefit from the cost actions that we took in 2023. We did $20 million of additional structural cost takeout as part of the first quarter actions.

Unnamed Speaker: Yeah, Nigel good morning, let me start with the expectations for our SG&A as we mentioned, we do have a $100 million headwind.

David S. Schulz: Related to not only the merit increase which is effective in the second quarter that will be a low single digit increase to our people costs, but we also do have the restoration of the incentive compensation that we called out that combined that's about $100 million headwind.

David S. Schulz: So when you think about how we're looking at the cost actions. We do have some carryover benefit of the cost actions that we had taken in 2023 were doing we did $20 million of additional structural cost take out as part of the.

David S. Schulz: The first quarter actions. So from our perspective is if you take a look at those bread crumbs part of our issue that we have as we mentioned with the integrated supply divestiture.

David S. Schulz: So, from our perspective, if you take a look at those breadcrumbs, part of our issue is that we will see the gross margin benefit. But there's not a lot of SG&A benefit with that business coming out. So from that perspective, you know, we are expecting to have efficiency on SG&A, but given the sales growth, it will be more. Okay. Okay, great.

David S. Schulz: We will see the gross margin benefit there's not a lot of SG&A benefit with that business coming out so from that perspective.

David S. Schulz: We.

David S. Schulz: We're expecting to have efficiency on SG&A, but given the sales growth there will be more difficult.

David S. Schulz: Okay, Okay great.

David S. Schulz: And then on the free cash flow, obviously, strong performance on accounts payable. I'm assuming that's more of a timing issue, that we might have some headwinds from accounts payable, you know, over the remainder of the year. So we should think about offsets from accounts receivable and inventory to offset maybe some of that, sort of the balance of the year. Any help there, David?

David S. Schulz: And then on the free cash flow the strong performance on it.

David: Accounts payable I'm, assuming that's more of a timing issue than you might have some headwinds from accounts payable.

David: Over the remainder of the year so.

David: So we should think about offsets from.

David S. Schulz: Stable and inventory to offset maybe some of that some of the balance of the year and he helped that David and then obviously the the the five year framework is putting to operating cash flow of $1 billion.

David S. Schulz: And then, obviously, the five-year framework is putting an operating cash flow of a billion dollars next or a billion dollars plus for the next couple of years, 2025, 2026. Just want to confirm that's the case. That is the case. So, just going back to the cash flow expectations for 2024, we did have that temporary benefit of accounts payable. That will normalize over the course of the next couple of quarters, but we do still expect that the accounts payable balance will be a source of cash in 2024.

David S. Schulz: The next $1 billion plus for the next couple of years trying to make that the types of things I just want to confirm that's the case.

David S. Schulz: That is the case, so just going back to the cash flow expectations.

David S. Schulz: For 2024, we did have that temporary benefit of accounts payable that will normalize over the course of the next couple of quarters, but we do still expect that the accounts payable balance will be a source of cash for 2024. We are laser focused also on reducing our inventory days.

David S. Schulz: So again, we would expect our accounts receivable will grow sequentially with our sales.

David S. Schulz: And then we will continue to stay focused on reducing our inventory levels.

Speaker Change: Very helpful. Thanks.

David S. Schulz: Yeah.

David S. Schulz: We are also laser focused on reducing our inventory. So, again, we would expect our accounts receivable to grow sequentially with our sales, and then we will continue to stay focused on reducing our inventory level. Very helpful, thanks. Thank you, and the next question comes from Sam Darkatsh with Lamin Drain. Good morning, John. Good morning, Dave. How are you?

David S. Schulz: Thank you and the next question comes from Sam Dark harsh with Raymond James.

Samuel John Darkatsh: Hey, good morning, John Good morning, Dave how are you.

Samuel John Darkatsh: Learning Channel. So, first, a couple of clarifications, quick questions, and then most of my... The thrust of my questions have to do with your inventory management. So the $200 million bump in free cash flow guidance, Dave, is that entirely coming from payables? Since I think you originally were thinking about taking three days out of inventory, and sales organically don't change much. Is that the way to read that? It is a combination of the net working capital, so it benefits from inventory and the accounts payable source of cash offset by the accounts receivable.

Samuel John Darkatsh: Morning, Sam.

David S. Schulz: So.

Samuel John Darkatsh: First a couple of clarification quick questions and then on.

Samuel John Darkatsh: Most of my.

Samuel John Darkatsh: The.

Samuel John Darkatsh: Thrust of my questions have to do with your inventory management, so the $200 million bump in free cash flow guidance, Dave is that entirely coming from payables. Since I think you originally were thinking about taking three days out of inventory and sales organically. It doesn't change much or is that the way to read that.

Samuel John Darkatsh: It is a combination of the net working capital. So it has benefits on inventory in the accounts payable source of cash offset by the accounts receivable.

David S. Schulz: Gotcha. And then can you remind us the seasonality of EBITDA for the second quarter as a percent of the year and whether you expect to be in that general range? Generally, we see about a 45-55 split between our EBITDA based on the front half and the back half of the year. We are still anticipating to see that level of seasonality in the business. So again, as we see sequential sales growth, we've got moderation to our SG&A based on the cost actions.

Samuel John Darkatsh: Got you and then can you remind us.

David S. Schulz: Seasonality of EBITDA for the second quarter as a percent of the year and whether you expect to be in that general range.

David S. Schulz: Yeah generally we see about a 45 55 split between our EBITDA based on the front half back half of the year, we are still anticipating to see that level of seasonality in the business. So again as we see sequential sales growth.

David S. Schulz: Got moderation to our SG&A based on the cost actions.

David S. Schulz: So from that perspective, we do have a back-loaded EBITDA plan supported by sequential sales. Gotcha. And then my real question, though, has to do with inventory management. Obviously, you've got really high carrying costs.

David S. Schulz: So from that perspective, we do have a back half loaded EBITDA plan supported by the sequential sales growth.

Speaker Change: Got you and then my real question, though is it has to do with inventory management.

David S. Schulz: Obviously, you've got.

David S. Schulz: Your cost of debt is similar to your EBITDA margin. I think a couple of things. First off, I think you've had some issues with branches needing better visibility into other branch inventory. What's the timing of when you might see improvements there, and how much might that help?

Speaker Change: Really high carrying costs.

Speaker Change: Cost of debt is similar to your to your EBITDA margin.

David S. Schulz: I think a couple of things first off I think you have you've had some issues with branches needing better visibility into other branch inventory.

David S. Schulz: What's the timing of when you might see improvements there and how much might that help and then secondly with with.

David S. Schulz: And then, secondly, with inventory tied up with projects, are you able? [inaudible] certainly, let me address inventory management at the location level. Now, we are still in the middle of our digital transformation, so we are operating a number of different platforms on which we manage our inventory. We have provided our team with some digital applications that help them see the total level of inventory at the business unit level at the location.

David S. Schulz: With inventory tied up.

David S. Schulz: With projects are you able to.

David S. Schulz: To like D kit I don't know what the technical term is but break break apart kits and maybe bleed that into stock and flow.

David S. Schulz: Or are you reticent to do that maybe because it risks future price cost just just tactically how do you handle the inventory as long as certain lead times remain extended.

David S. Schulz: Certainly let me address the inventory management at the location level, we are still in the middle of our digital transformation. So we are operating a number of different platforms in which we manage our inventory we have provided our team with some digital applications, which help them see the total.

David S. Schulz: Level of inventory at the business unit level at the location level. We also have a specific tool that helps us monitor the amount of inventory that is allocated to a project. So in that case, we win a big job.

David S. Schulz: We also have a specific tool that helps us monitor the amount of inventory that is allocated to a project. So, in that case, we win a big job. We negotiate with the suppliers on what the cost of goods will be to support that project.

David S. Schulz: We negotiate back with the suppliers on what the cost of goods will be to support that project, we will work to lead times and bring that inventory into our location to service to job site or the project site.

David S. Schulz: We work the lead times and bring that inventory into our location to service the job site of the project. So, we do have better visibility into that. In the environment that we're operating in, there are some projects that are delayed. That means we're holding on to inventory longer than we had initially expected. We experienced that throughout the pandemic and the recovery coming out of the pandemic, but we do have the tools that our team has so they can monitor that inventory for a project. In some cases, we're able to divert that inventory and move it to a different project, all depending on the lead times and when that project is expected to ship.

David S. Schulz: So as we do have better visibility to that in the environment that we're operating in there are some projects that are delayed that means that we're holding onto inventory longer than we had initially expected we experienced that throughout the pandemic and the recovery coming out of the pandemic, but we do have the tools that our team has they can monitor that inventory for a.

David S. Schulz: Jack in some cases, we're able to deallocate that inventory and move it to a different project all depending on the lead times and.

David S. Schulz: When that project is expected to ship. So we do have that visibility, it's something that we initiated in the latter part of 2023, we are beginning to see some benefit of that so one of the early indicators of our inventory management is the amount of an order that we are reducing so go back two years when lead times.

David S. Schulz: So, we do have that visibility. It's something that we initiated in the latter part of 2023. We are beginning to see some benefit from that. So, one of the early indicators of our inventory management is the amount of on-order that we are reducing. So, go back two years when lead times were extended; we had to order material much earlier. As lead times have come down, we're better managing that allocated project inventory, and we're also providing better visibility to order timing so that we've reduced the on-order. We're seeing that primarily in our CSS business first. Their supply chain healed first. They also had the majority of their projects on one platform.

David S. Schulz: Were extended we had to order material much earlier in order to ensure that we could deliver it to the customer as lead times have come down we're better managing that allocated project inventory and we're also providing better visibility to order timing. So that we reduce the on order, we're seeing that primarily in our CSS business first.

David S. Schulz: Their supply chain heel first they also have the majority of their projects on one platform. We're now starting to see the benefits of that in the other two strategic business units, we're confident we're going to be able to reduce the inventory days.

David S. Schulz: We're now starting to see the benefits of that in the other two strategic business units. We're confident we're going to be able to reduce the inventory. Dan, it's Scott.

Scott Louis Gaffner: Just one clarifying point. You mentioned DIO. We had not given a three-day reduction in DIO on the fourth quarter earnings call, so that's a new item this quarter. Thanks. Thank you. And the next question comes from Deane Dray with RBCQ. Thank you. Good morning, everyone. Good morning, Deane.

David S. Schulz: And Scott just one clarifying point you mentioned the Dio, we have not given a three day reduction and vio on fourth quarter earnings call. So that's a new item.

Deane Michael Dray: This quarter.

Scott Louis Gaffner: Thanks.

Scott Louis Gaffner: Thank you and the next question comes from Deane Dray with RBC capital.

Deane Michael Dray: Thank you and good morning, everyone.

Deane Michael Dray: Good morning, James.

Deane Michael Dray: Hey, maybe we could start with some color, John, on the kind of tone of business. You mentioned bidding activity, but anything specifically around stock and flow, quote activity, any kind of context there for starters.

Deane Michael Dray: Hey, maybe we could start with some.

Deane Michael Dray: Some color John on the.

Deane Michael Dray: Kind of tone of business, you mentioned bidding activity, but anything.

Deane Michael Dray: Specifically around stock and flow quote activity any kind of.

Deane Michael Dray: Context, there for starters. Thanks, yeah.

John J. Engel: Yeah. The overall bid activity levels, and the quoting. Thank you.

Deane Michael Dray:

Deane Michael Dray: Overall better activity levels the quoting.

John J. Engel: The types of quotes we're getting, and seeing..., many cases either for larger or more complex solutions and sometimes mega-projects, it's very strong. So our backlogs are holding at historically high levels overall. And, you know, when you think about that and compare that against where supplier lead times are now, versus six months ago, 12 months ago, 18 months ago, that shows even greater strength in the backlog because most Most of the SKUs across our supplier partner base were back to pre-pandemic levels in terms of lead times. Now, we still have extended lead times on switchgear, transformers, some breakers, some molded products, but they're starting, there's some early indications that they're going to start to be brought in a bit.

Deane Michael Dray: The types of clients, we're getting theme.

John J. Engel: Many cases, either for larger more complex solutions, sometimes banking projects, it's very strong.

John J. Engel: Our backlogs are holding at historically high levels overall.

Speaker Change: And what do you think about that.

John J. Engel: And compare that against where supplier lead times are now.

John J. Engel: Versus six months ago, 12 months ago 18 months ago.

John J. Engel: That shows even greater strength in the backlog because most.

John J. Engel: Most of the skus across our supplier partner base.

John J. Engel: Back to pre pandemic levels in terms of lead times that we still have extended lead times on switch gear Transformers. Some breakers some older products.

John J. Engel: But there theyre starting in.

John J. Engel: And early indications that theyre going to start to.

John J. Engel: To be brought in a bit so I think.

John J. Engel: So I think there is some positive news on the horizon as we look out in terms of those lead times. So I think that's a way to think about our backlog in conjunction with the bid activity levels. I feel very good about that.

Speaker Change: There is some.

John J. Engel: Positive news on the horizon as we look out in terms of those lead times. So I think that's the way to think about our backlog in conjunction with the bid activity levels I feel very good about about that we're getting.

John J. Engel: We're getting, And we continue to drive the cross-sell. We're not reporting on that every quarter anymore because that was such a key value creation lever of the combination. And we reported on that through the end of last year. I think, as you know, we far exceeded our target. We beat and raised that numerous times.

John J. Engel: We continue to drive the cross sell we're not reporting on that every quarter anymore, because that was such a key value creation lever of the combination and we reported on that through the end of last year I think as you know we far exceeded our target we'd beat and raise that numerous times I will tell you that.

John J. Engel: I will tell you that the momentum around cross-selling continues to build in our company, and it's reflected in the RFPs we're getting, but also in our approach to the opportunity. So, you know, we are, as a matter of practice now, no matter what the bid is, we're trying to offer up additional, you know, portions of our portfolio and open the door and try to, you know, get a wider range for ourselves, irrespective of what the RFP requires.

John J. Engel: That momentum around the cross sell continues to build in our company and its reflected in Rfps, we're getting but also our approach to the opportunities David.

John J. Engel: So we are as a matter of practice now no matter what it is we're trying to offer up additional.

John J. Engel: Portions of our portfolio would open the door to try to get the broader cross sell irrespective of what the RFP required so.

John J. Engel: So I would kind of cap it by saying that the front end of the business, which is the leading indicator, is very, very healthy, very strong, and it speaks to, I think, the future, you know, future demand profile. That's all very helpful. And the follow-up question is, see if there have been any changes structurally within electrical distribution. And the term disintermediation comes up sometimes with questions.

John J. Engel: We kind of cap it by saying that front end of the business.

John J. Engel: Which is the leading indicator very very healthy.

John J. Engel: Very strong and it speaks to I think the future future demand profile.

John J. Engel: That's all very helpful.

John J. Engel: And the follow up question is.

John J. Engel: If theres been any changes structurally within electrical distribution and the term disintermediation comes up sometimes with questions. So.

Deane Michael Dray: So, two specifics. One, is there any kind of structural change with the role electrical distribution will play in these big megaprojects? There's been this question of whether, oh, the suppliers will be doing mostly direct. They won't use traditional distribution.

John J. Engel: Two specifics one is there any kind of structural change with the roll.

Deane Michael Dray: Electrical distribution will play in these big Mega projects. There's been this question of whether all the suppliers will be doing mostly to rack. They won't use traditional distribution. So can you address that topic and then related and this came up on one of your big suppliers.

Deane Michael Dray: Can you address that topic? And then related, and this came up on one of your big supplier's questions about data centers: is it, do they go direct? Do they use distribution?

Deane Michael Dray: Question about data centers is it do they go direct do they use distribution and the supplier said.

Deane Michael Dray: And the supplier said that some of the data centers want the direct route and are less inclined to use distributors. So just those two topics, mega projects and data centers. So, in terms of the macro question, is there any fundamental shift from distribution to direct? Overall, I'll say, and then with respect to megaprojects, we are not seeing it. And I would think, you know, if you...

Deane Michael Dray: Some of the data centers.

Deane Michael Dray: On the direct and our lesson quiet to use distributors. So just those two topics mega Mega projects in the data center.

Deane Michael Dray: So in terms of the macro question is there any fundamental shift from from distribution to direct overall I'll say and then with respect to Mega project, we are not seeing that.

Deane Michael Dray: And I would think.

John J. Engel: If you were to look at the other bigs that have capabilities, our core big competitors are not seeing that as well. So, let me double-click on the data centers. I think it's really important to kind of talk about that value chain, how it's worked historically, how it's working now, and where it will go in the future. First, I must say that AI and Gen AI are going to significantly increase power consumption on behalf of the new data centers that are getting built. So these projects are going to be much larger and more complex. When you think of a data center project, it requires three things. A Powerful Solution

Deane Michael Dray: If you were to look at the other big that have capabilities, our core big competitors, we're not seeing that as well. So let me double click on the data centers I think it's really important to kind of talk about that value chain and how it's worked historically, how it's working now where it goes in the future first I must say that the AI engine AI is going to be.

John J. Engel: And then all the equipment that goes into gray space, I'll call that kind of build out of the structure. It's what's, you know, the infrastructure portion of that building in that, you know, what's required to run the data center. And then it requires white space, what I call the white space solution.

John J. Engel: So all new data centers require that. How does that match up with Wesco? Our UBS business, utility, and power solutions. Our EES business, gray space. Our CSS business is white space, so we're working to cross-sell with our customers. I'll come back on that in a minute, but the one key point I want to bring up, which gets to the heart of your question, is from a data center build schedule standpoint, the gray space, which is again the infrastructure portion of the project, including switchgear, that occurs well ahead of the white space in terms of the project schedule, the construction project schedule. The white space is the air-conditioned, quote-unquote, cleanroom space of That houses the electronics and all the datacom solutions.

John J. Engel: So this is really important, Matt, to understand. The larger, more complex the data center, the longer cycle time of that project, and what you'll see in the value chain is that orders and sales for the gray space are well in advance of the white space. Final point, I will tell you, in that market vertical, historically, switchgear and the gray space solutions went direct. If you actually look at our electrical sales and our major competitors, there's been, you know, I would say proportionally not a lot of quote-unquote gear sales for data centers in our sales. And that's how the electrical portion of the chain works because, by the way, it's specced, it runs differently, it's procured by different people than the white space.

John J. Engel: Significantly increased power consumption.

John J. Engel: On behalf of the new data centers are getting built so these projects are going to be much larger and more complex. When you think of a data center project. It requires three things.

John J. Engel: One of the strategic advantages of putting Annexer and Wesco together is that we've got all three parts of the solution, not just for data center projects, but for all projects. The power, the gray space, the white space, and we are working with our cross-cell to knit that together. I will tell you, we have specific opportunities that we are having with customers now, direct data center end user customers, and we have bid on specific opportunities.

John J. Engel: In the last six to 12 months, that provides a more complete solution. Not only white space, but we're pulling some gray space in. And Rahi, in fact, had a few of those successes in their early days after we acquired them as part of the acquisition that we did a short while ago. So it's a great question, Deane. It's a really important question.

John J. Engel: Power solution.

John J. Engel: And I know it probably went a little bit longer than some would like, but I thought it was really important to get that out there because you must understand how the data center kind of value chain works historically, the current construct, and then what's going forward. Where we're positioned, and this is the legacy Anister portion of our business, we have a direct end-user relationship with all the hyperscalers, as well as serving multi-tenant data centers and spend-to-co-load data centers.

John J. Engel: And then all the equipment that goes in the gray space I'll call that kind of build out of the structure. It's what's you know it's it's.

John J. Engel: With a leading position globally, we are exceptionally well positioned to drive disproportionate sales growth with data centers. So I remain more bullish than ever. I'll put a fine point on it. On that market, those sets of market opportunities, mainly because of our CSS business as the tip of the spear, and all this AI, Gen AI-driven incremental demand, it's not just incremental; it's substantially higher demand that will drive in the future, which is a further accelerant to our future sales. Thank you for all that color.

Operator: Thank you. And the next question comes from Tommy Moll with Stephen. Morning, and thank you for taking my questions. Morning. I want to make sure I heard correctly about the sales trajectory and then unpack some of the assumptions there. But I think I heard you say, Dave.

Thomas Allen Moll: From a sequential standpoint, sales improved from 1Q to 4Q. So maybe you could just clarify if I heard that correctly. And if so, are you assuming the typical sequential improvements there just through the months? Or is there some haircut you're applying at some point along the way?

John J. Engel: The infrastructure portion of that building and that whats required to run the data center and then it requires a whites the what I call. The white space solutions, So all new datacenters require that.

David S. Schulz: So we do have the expectation of sequential increases in our sales. So when you take a look at the typical seasonality by quarter, on a sequential basis, we typically see our first quarter down, that low to mid-single digits, which we just delivered. For the second quarter, we anticipate a mid-single digit increase sequentially. That ties out with about the last five years of history.

David S. Schulz: How does that match up with wesco or UBS business utility power solutions, our EES business Gray space, our CSS business White space. So we're working cross sell with our customers I'll come back on that in a minute, but the one key point I want to bring up which gets to the heart of your question is from a data center.

David S. Schulz: <unk> build schedule standpoint.

David S. Schulz: The gray space, which again is the infrastructure portion of the project would include switch gear that occurs well ahead of the white space in terms of the project's schedule. The construction projects schedule. The white space is the air condition.

David S. Schulz: Clean room space.

David S. Schulz: The data center that houses the electronics and all the Datacom solutions. So this is really important to understand the larger more complex. The data center the longer cycle time of that project and what Youll see in the value chain is the orders and the sales for the Gray space is well in advance of the.

David S. Schulz: The white space final point.

David S. Schulz: I will tell you in that market vertical historically.

David S. Schulz: Which gear and the gray space solutions.

David S. Schulz: Correct.

David S. Schulz: If you actually look at our electrical sales than our major competitors there has been.

David S. Schulz: Let's say proportionally not a lot of quote unquote your sales for data centers.

David S. Schulz: R R.

David S. Schulz: Sales and that's how the electrical portion of it a shame because by the way inspect it runs differently procured by different people in the white space one of the strategic advantages of putting anixter and Wesco together is we've got all three parts of the solution not just for data center projects, but all projects.

David S. Schulz: Power the great space, the white space and we are working with our cross sell the knit that together I will tell you we have specific opportunities that we're having with the customers now direct data center end user customers and we have bid specific opportunities in the last six to 12 months that.

David S. Schulz: Ill provide a more complete solution not only white space, but we're pulling some great space in <unk> and RA. He in fact had a few of those successes in their early days. After after we acquired them as part of <unk>.

David S. Schulz: As part of the acquisition.

Speaker Change: In a short while ago. So it's a great question Deane, it's really important question and I know it probably went a little bit longer than some would like but I thought it was really important to get that out there because must understand how the data center.

David S. Schulz: Value chain worked historically occurring.

David S. Schulz: Current construct and then whats going forward, where we're positioned and it's the legacy anixter portion of our business direct end user relationship with with all the hyperscale or as well as serving multi well multi tenant data centers.

David S. Schulz: And.

David S. Schulz: And then the Colo data centers.

David S. Schulz: With our leading position globally, we are exceptionally well positioned.

David S. Schulz: To drive disproportionate sales growth with data center, so I remain more bullish than ever.

David S. Schulz: A fine point on it on that market and those set of market opportunities, mainly because of our CSS business as the tip of the sphere and all this AI journey I driven incremental demand, it's not just incremental at substantially higher demand. It will drive in the future, which was a further accelerant to our future sales growth.

Speaker Change: Thank you for all that color John.

Speaker Change: Thank you and the next question comes from Tommy Moll Stephens.

Speaker Change: Good morning, and thank you for taking my questions.

Speaker Change: Good morning.

David S. Schulz: In Q3, we see a low single-digit increase versus the second quarter. The fourth quarter is where it's generally flat to up low single digits versus the third. One of the other things to keep in mind is we have two extra work days in the second half of 2024 versus the front half of 2024. So that will also provide a benefit on reported sales. That's very clear and helpful, Dave. Thank you.

Speaker Change: I want to make sure I heard correctly on the sales trajectory and then unpack some of the assumptions there, but I think I heard you say, Dave from a sequential standpoint sales improve from <unk> to <unk>. So maybe you could just clarify if I heard that correctly and if so are you.

Speaker Change: Are you assuming the typical sequential improvements there or just through the months or is there some haircut you're applying at some point along the way. Thank you.

Dave: Yeah, Tom and good morning, So we do have the expectation or sequential increases in our sales. So when you take a look at the typical seasonality by quarter.

David S. Schulz: On a sequential basis.

David S. Schulz: We typically see our first quarter down that low to mid single digits, which we just deliver for the second quarter, we anticipate and are a mid single digit increase sequentially.

David S. Schulz: That ties out was about the last five years of the history Q3, we see a low single digit increase versus the second quarter. The fourth quarter is where it is generally flat to up low single digits versus the third.

David S. Schulz: One of the other things to keep in mind is we have two extra workdays in the second half of 2024.

David S. Schulz: Versus the front half of 2024, so that will also provide a benefit on a reported sales basis.

David S. Schulz: That's very clear and helpful. Dave Thank you.

Thomas Allen Moll: Associated with that revenue trajectory, it's clear that you should start to see some volume leverage on the OPEX line as the year progresses. And so if you look at what's implied by your guidance for the EBITDA margin, I think it's up a couple hundred basis points in the second half versus the first half. Is all of that, substantially all of it, volume, or are there other dynamics you would call out? There's a combination of things. First and foremost, it is volume.

Speaker Change: So shaded with that revenue trajectory.

Thomas Allen Moll: It's it's clear that you should start to see some volume leverage on the on the Opex line.

Thomas Allen Moll: As the year progresses.

Thomas Allen Moll: And so if you look at what's implied by your guidance for the EBITDA margin I think it's up a couple of hundred basis points second half versus first half.

Thomas Allen Moll: Is all of that substantially all of it volume or are there other dynamics you would call out thanks.

Thomas Allen Moll: There is a combination of things first and foremost it is volume so we're getting the operating leverage in the back half of the year. The other thing to keep in mind is that we will be seeing a sequential benefit from Q1 to Q2 on the gross margin line relative to the integrated supply divestiture.

David S. Schulz: So we're getting operating leverage in the back half of the year. The other thing to keep in mind is that we will be seeing a sequential benefit from Q1 to Q2 on the gross margin line relative to the integrated supply divestiture. But that doesn't have a huge impact on total SG&A dollars because of, you know, what was sold as part of that divestiture.

David S. Schulz: Now that doesn't have a huge impact on total SG&A dollars because of what was sold as part of that.

David S. Schulz: Best picture, but again, we do have the restoration of incentive compensation and merit increase effective from Q2, and we are laser focused on continuing to drive those cost reduction actions that we took in the first quarter.

David S. Schulz: But again, we do have the restoration of incentive compensation and the merit increase affected from Q2, and we are laser focused on continuing to drive those cost reduction actions that we took in the first quarter. Great. Thank you, Dave. I'll turn it back.

Speaker Change: Great. Thank you, Dave I'll turn it back.

Thomas Allen Moll: Thank you, and the next question comes in from Christopher Glynn with, Thanks, good morning. Just picking up on Tommy's question, within the... second quarter, relative to the down to April brisk, flattish 2Q guide, what's the visibility, confidence, any particular nuances with May and June that we should be aware of? There are no particular nuances with May and June off of what we saw in the month of April.

David S. Schulz: Thank you and the next question from Christopher Glynn with Oppenheimer.

Christopher D. Glynn: Thanks, Good morning, just picking up on Tommy's question within the.

Thomas Allen Moll: Second quarter.

Thomas Allen Moll: Live to the down to April flattish.

Thomas Allen Moll: <unk> guide, what's the visibility confidence any particular nuances with May and June that we should be aware of.

Thomas Allen Moll: There's no particular nuances with May and June off of what were what we saw in the month of April.

Christopher D. Glynn: The one thing that I'll just remind you is that, you know, that divestiture occurred on April 1. So, you know, you've got to pull out the $700 million in sales on a reported basis in queues two through queue four. But we are essentially anticipating that the second quarter shapes up, in line with typical seasonality versus Q1, and the months within the second quarter. We typically see April down versus March.

Thomas Allen Moll: The one thing that I'll, just remind you is that that divestiture occurred on April one so.

Christopher D. Glynn: You've got to pull out the $700 million of sales on a reported basis in Q2 through Q4, but we are essentially anticipating that the second quarter shapes up in.

Christopher D. Glynn: In line with typical seasonality versus Q1 and the months within the second quarter, we're expecting that typical seasonality as well, we typically see April down versus March.

David S. Schulz: That is what we just delivered in line with typical seasonality with the decline in March, and then we see a rebound in May and June, particularly as you're tying that back to the outlook that we provided for each of our business units. We're still very busy with project activity. We do have some expectations for some of the end markets, like broadband, which will see some recovery in the latter part of 2020. The other thing I'll just highlight is that the comps get easier, as well, versus the prior ones, right?

Christopher D. Glynn: That is what we just delivered in line with typical seasonality with the decline in March than we see in a rebound in may and June, particularly as you're tying that back to the outlook that we provided for each of our business units. We're still very busy with project activity, we do have some extra.

David S. Schulz: <unk> for some of the end markets like broadband, which will see some recovery in the latter part of 2024.

Speaker Change: Okay. Okay.

David S. Schulz: The comps get easier as well versus the prior year.

David S. Schulz: Right.

Christopher D. Glynn: And I'm curious about OEM down high single digits in the first quarter, flattish for the year. I understand that that's probably a significant destocking impact. Do you see that resolving in the near term and well within the first half? Or is it going to take kind of the full first half and second quarter to kind of get back to matching and demanding consumption? And the EES focus question, I guess. Yeah, so specifically on that, EES OEM. It's stabilizing. That's a current state comment. It's been stabilizing, and we're seeing signs of that through the first quarter.

David S. Schulz: Great.

David S. Schulz: Im curious about OEM down high single digit in the first quarter flattish for the year I understand that's probably significant destocking impact do you see that resolving in the near term and well within.

Christopher D. Glynn: The first half or is that kind of the full.

Christopher D. Glynn: First half and second quarter to kind of get back to.

Christopher D. Glynn: Matching end demand and consumption.

Christopher D. Glynn: Right.

Christopher D. Glynn: So first question I guess, yeah, yeah, so specifically on that E. S. OEM. It's stabilizing that's a current state comment it's been stabilizing we're seeing signs of that through the first quarter continued in the second quarter.

John J. Engel: It continues in the second quarter. And I think we're positioned for some improvement as we get into the second half. So that remains to be seen, but we're well-positioned for that, and that could be an upside driver. We'll see.

John J. Engel: And I think we're positioned for some some improvement as we get into the second half so that.

John J. Engel: That remains to be seen but we are well positioned for that and that could it could be an upside driver we'll see.

Christopher D. Glynn: Okay, and last one for me, the size of the inventory adjustment, maybe both absolute and the incremental or outsized portion. The inventory adjustment versus the prior year in the first quarter was 15 to 20 basis points. Great, thank you. Thank you. And the next question comes from David Manthey with Bayer. All right, good morning, everyone. Thank you. We're starting. Dave. Good morning.

John J. Engel: Okay.

Speaker Change: Last one from me.

David John Manthey: Size of the inventory adjustment, maybe both absolute and.

David John Manthey: The incremental or outsized portion.

David John Manthey: Yeah, the inventory adjustment versus the prior year in the first quarter was 15 to 20 basis points.

Christopher D. Glynn: Yeah.

David John Manthey: Great. Thank you.

Christopher D. Glynn: Thank you and the next question comes from David Manthey with Baird.

David John Manthey: Hey, good morning, everyone and thank you for.

Christopher D. Glynn: Dave.

David John Manthey: First question is, could you just tell us what approximately the first quarter revenues were related to Bruckner so we can conceptualize what normal pro forma sequentials might look like? There was approximately $200 million of revenue from the integrated supply business that we recorded in the first quarter. Got it. Okay. And Dave, that had very nice growth, too.

David John Manthey: Good morning first question is could you just tell us what approximately the first quarter revenues were related to Brooklyn. There. So we can conceptualize what normal pro forma sequential might look like.

David John Manthey: There was approximately $200 million of revenue from the integrated supply business that we recorded in the first quarter.

David John Manthey: Got it Okay, and then I guess.

David John Manthey: That day that had better.

Dave: Very nice growth too it's important to understand because if you take the 200 plus that we've outlined is the bridge for the full year the 700.

John J. Engel: It's important to understand, because if you take the 200 plus what we've outlined as the bridge for the full year, the 700, we had several quarters in a row of nice growth, and then that supported an operating plan that had meaningful growth in it in 2024. Second, as we look ahead here on SG&A, there are a lot of moving parts, and I want to be sure I'm seeing them clearly. Could you tell us which factors were baked into the first quarter and which ones are incremental as we move from first to second?

John J. Engel: Ben.

John J. Engel: We had a we had several quarters in a row of nice growth.

John J. Engel: And then that supported it.

John J. Engel: Operating plan that had meaningful growth in 2024.

Speaker Change: I see okay.

John J. Engel: Second as we look ahead here on SG&A. There is a lot of moving parts I don't want to be sure.

John J. Engel: Seeing them clearly.

John J. Engel: Could you tell us, which factors were baked into the first quarter and which ones are incremental as we move from first to second in the items I'm looking at our.

John J. Engel: And the items I'm looking at that I think are in the first quarter, reinstated incentive comp, annual merit increases, and carryover from the 2023 cost-saving benefits, and then new in the second quarter that were not in the first quarter would include the $20 million annualized cost actions you took at the end of the quarter, variable expenses on whatever the quarter-to-quarter sales delta is, and then the integrated supply costs, which you said had a small SG But can you shed any light on that for us, Dave, so we can make that bridge?

John J. Engel: That I think are in the first quarter reinstated incentive comp annual merit increases and carryover from the 2023 cost saving benefits and then new in this second quarter that were not in the first quarter would include the $20 million annualized cost actions you took at the end of the quarter.

John J. Engel: Variable expenses on whatever the quarter to quarter sales Delta is and then the integrated supply costs, which you said had a small SG&A impact, but can you any light you can shed on that first Dave. So we can make that bridge.

David John Manthey: Certainly, so I'll start with the fourth quarter. So rough numbers, $800 million of adjusted SG&A, just reported about 810. So that $10 million sequential increase versus the fourth quarter was essentially the restoration of incentive compensation, the bridge to go from Q1 to Q2.

Dave: Certainly so the I'll start with the fourth quarter, so rough numbers $800 million of adjusted SG&A.

Dave: We just reported about 810, so that $10 million sequential increase versus the fourth quarter.

Dave: Does essentially the restoration of incentive compensation.

Dave: The bridge to go from Q1 to Q2.

David S. Schulz: We will still have the restoration of incentive compensation for the balance of the year, but we also have the merit increase, so think about that in terms of a low single-digit increase in our people costs, effective April 1. So that is the step up, which would be partially offset by the cost actions that were initiated with carryover from the prior year, but then also the benefit of the $20 million of cost reduction actions, which were primarily people reduction, that were affected just at the end of the first quarter. Okay, thank you very much.

Dave: We will still have the restoration of incentive compensation and the balance of the year, but we also have the merit increase so think about that in terms of a low single digit increase to our people cost effective April one so that is the step up which would be partially offset by the cost actions that we're initiating.

David S. Schulz: <unk> with carryover in the prior year.

David S. Schulz: But then also the benefit of the $20 million of cost reduction actions, which were primarily people reductions.

David S. Schulz: That were effective just at the end of the first quarter.

David S. Schulz: Okay.

Speaker Change: Thank you very much.

David S. Schulz: Thank you and the next question comes from Chris Dankert with loop capital.

David John Manthey: Thank you. And the next question comes from Chris Dankert with... Morning. Thank you for taking the questions. Forgive me if I missed it, but just focusing on that down 2% in April, are we already seeing a rebound in the CSS business, just kind of given what the outlook is for the year here, or is it more of a back half kind of dynamic when we're thinking about the volume rebound in CSS specifically?

Christopher M. Dankert: Hey, good morning, Thank you for taking the questions.

David John Manthey: Forgive me if I missed it but just focusing on that that down 2% in April are we already seeing a rebound in the CSS business just kind of given what the outlook is for the year here or is it more of a back half kind of dynamic when we're thinking about the volume rebounded and see if that specifically.

Christopher M. Dankert: So year over year, CSS and EDS for a preliminary sales result are down low single digits, but UBS, which is now without LISP, so it's just utility and broadband, was flattened. So if you compare to Q1, we're seeing that UBS is getting a little better year over year. I understand. Thank you for that. And then just when we're thinking about the technology spending, the digital transformation there, can you just maybe flag what some of the next modules are that go live in the near term or kind of key focuses on spending for that digital transformation in the back half here? Yeah, certainly.

David John Manthey: So year over year, DSS and Etfs for April and these are preliminary sales results.

Christopher M. Dankert: Are down low single digits, but UBS, which is now without list. So its utility in broadband with flattish.

Christopher M. Dankert: So.

Christopher M. Dankert: Perfect or compare to Q1, we're seeing up there.

Christopher M. Dankert: <unk> got a.

Christopher M. Dankert: Little better year over year.

Christopher M. Dankert: Understood. Thank you for that and then just when we're thinking about the technology spending in the digital transformation. There can you just maybe flag what's on the next modules all of that go live in the near term or kind of key focuses on spending for that digital transformation into the back half here.

David S. Schulz: So on digital transformation, I also want to clarify that we had expenses that were in our reported results in the prior year for mergers and integration, including the digital transformation. For 2024, we no longer have the pure integration cost, but we are continuing with our digital transformation. So we did record some expenses that were one-time in nature that we pulled out of our adjusted results.

Christopher M. Dankert: Yeah, certainly so on digital transformation, but I also want to clarify that.

David S. Schulz: We had expenses that were in our reported results in the prior year mergers integration, including the digital transformation.

David S. Schulz: For 2024, we no longer had the pure integration costs, but we are continuing with our digital transformation. So we did record some expenses that were onetime in nature that we pulled out of our adjusted results. So on a go forward basis.

David S. Schulz: So on a go-forward basis, we would continue to spend dollars associated with that digital transformation. Keep in mind that this is things like the financial package that we had initiated back in 2022 and into 2023. There are some digital applications associated with our global business services, so think about accounts payable and accounts receivable.

David S. Schulz: We would continue to spend dollars is associated with that digital transformation.

David S. Schulz: Keep in mind that this is things like the financial package that we had initiated back in 2022 and into 2023. There are some digital applications of soda associated with our global business services. So think about accounts payable accounts receivable.

David S. Schulz: We will be providing more details about that digital transformation when we do our investor day in the second half of the year, but these are consistent with the initiatives that we had outlined back in late 2022. That's part of that, you know; how do we continue to transform the company? How do we continue to make better use of our data? And then also become much more efficient from an SG&A perspective going forward.

David S. Schulz: We'll be providing more details about that digital transformation when we do our investor day in the second half of the year, but these are consistent with the initiatives that we had outlined back in late 2022.

David S. Schulz: That are part of that how do we continue to transform the company how do we continue to get better use of our data and then also get much more efficient from an SG&A perspective going forward.

Speaker Change: Understood. Thanks, a lot for the color there.

Christopher M. Dankert: Understood. Thanks so much for the call. Out of there. Thank you, and the next question comes from Ken Newman with KeyBank Capital. Hey, good morning, guys. Thanks for squeezing me in. Morning. Good morning. Good morning. So obviously, it's very nice to see the improvement in the pre-cash flow guide. You know, you obviously talked about being more active.

David S. Schulz: Thank you and our next question comes from Ken Newman with Keybanc capital markets.

Ken Newman: Hey, good morning, guys. Thanks for squeezing me in.

Ken Newman: Good morning.

Ken Newman: So obviously very nice to see the improvement in the free cash flow guide.

Ken Newman: You, obviously talked about being more active on the share repurchases. This quarter, but you know I am curious if you could talk about how you look to prioritize capital allocation between debt pay down versus M&A in the near term I think your preferred stock becomes callable in the middle of next year and then I'm wondering if you. If we should think that you plan to make moves in the balance sheet ahead of that.

Ken Newman: I am curious if you could talk about how you look to prioritize capital gains. I think your preferred stock becomes callable in the middle of next year, and I'm wondering if we should think that you plan to make moves on the balance sheet ahead of that call down. Well, let me make a few comments, Dave. You can add, as we said, we've been very clear about the prep we're going to take out when that's available, and it's June of next year. That's a very high priority for us.

Speaker Change: Call date.

Ken Newman: And we said we wanted to be balanced with our cash flow, debt reduction, you know, buyback, and then M&A is episodic, right? So we need to be positioned when the deals can be done and come to fruition. So we continue to work our M&A pipeline. And I would tell you it's a very robust pipeline.

Ken Newman: Well, let me make a few comments Dave you can add as we've said we've been very clear the prep, we're gonna take out when that's available. It's June of next year, that's very high priority for us.

Ken Newman: And we said we wanted to be balanced with our cash flow debt reduction.

Ken Newman: Buyback.

Ken Newman: Then M&A is episodic right. So we needed the position when the deals.

Ken Newman: It can be done and come to fruition.

Ken Newman: So we continue to work our M&A pipeline and I would tell you, it's a very robust pipeline.

John J. Engel: And I think I mentioned this in a previous call. We've got a new senior VP of corporate business development who's done an absolutely phenomenal job since he joined our team in 2023. And so we've got a tremendous pipeline of opportunities that we're sorting through. Our bar is high, so it takes a lot to get over our bar in terms of what meets our criteria. In terms of, I want to make a specific comment with respect to using the full amount of the $300 million of approximately after-tax proceeds from the WIS divestiture on a buyback. I mean, the way to think about that is this

Ken Newman: And I think I did mention this in a previous call. We've got a new senior VP of corporate business development Who's done an absolutely phenomenal job since you've joined our team.

John J. Engel: In 2023, and so just we got a tremendous pipeline of opportunities that were sorting through our bar is high. So it takes a lot to get over our bar in terms of what.

John J. Engel: So our criteria.

John J. Engel: In terms of I want to make a specific comment with respect to using the full amount of the 300 million of after tax proceeds.

John J. Engel: With divestiture on a buyback I mean, the way to think about that is.

John J. Engel: It's a combination of our confidence in our business plan, our execution of those business plans, and our outlook, coupled with the fact that we believe... strongly believe we're trading far below our intrinsic value. So we think taking the full 300 million and applying it to a buyback is the best return on investment by far, given where we are trading. So with that, Dave, I think I covered most of his comments, but you may wanna- Yeah, certainly.

John J. Engel: It's a combination of our confidence in our business plan, our execution of those business plans and our outlook coupled with the fact that we believe.

John J. Engel: <unk> believe we're trading far below our intrinsic value. So we think taking the full $300 million and applying it to a buyback is the best return on investment by far given where we are trading so with that Dave I think I hit most of his comments that you've made a lot of them yes.

Dave: Certainly so the in terms of how we think about capital allocation between.

John J. Engel: So in terms of how we think about capital allocation between buyback shares, which John mentioned, is usually around intrinsic value versus continuing to delever, particularly given the interest rate environment, versus M&A. We have a very high bar for M&A. And if we believe that we can make the right deal, we want to stay very actively engaged in both the process and also be able to close out acquisitions that will allow us to continue to drive competitive advantage and provide more products and services to our customers. So it's really coming back down to the economics behind each of those choices.

John J. Engel: Buying back shares, which John mentioned is usually around intrinsic value versus continuing to delever, particularly given the interest rate environment versus M&A, we have a very high bar on M&A and if we believe that we can make the right deal we want to stay very actively engaged in both the process.

John J. Engel: But then also being able to close out acquisitions that will allow us to continue to drive competitive advantage provide more products and services to our customers.

John J. Engel: It's really coming back down to the economics behind each of those choices are clearly we feel that the stock is undervalued. So we're gonna take the proceeds from the integrated supply divestiture apply that to buying back shares that also helps us partially offset the dilution of the profit that's coming out from an EPS perspective, we.

David S. Schulz: Clearly, we feel that the stock is undervalued, so we're going to take the proceeds from the integrated supply divestiture and apply that to buying back shares. That also helps us partially offset the dilution of the profit that's coming out from an EPS perspective. Now, we have been very active with our capital structure. So, in the first quarter, we made some additional moves to basically go ahead and issue the bonds to retire the $1.5 billion of notes that we have coming due in 2025. We avoided the breakage cost on that by warehousing those funds against our current facility.

David S. Schulz: Have been very active with our capital structure. So in the first quarter. We made some additional moves to basically go ahead and issue the bonds to retire the $1 $5 billion of notes that we have coming due in 2025, we avoided the breakage cost on that by warehousing those.

David S. Schulz: Funds against our current facility. So those are the types of ways that we've been thinking about this we want to make sure that we stay balanced between additional share repurchases delevering, but then making sure that we have enough dry powder for M&A.

David S. Schulz: So those are the types of ways that we've been thinking about this. We want to make sure that we stay balanced between additional share repurchases, delevering, but then making sure that we have enough dry powder for M&A. That's a really helpful color.

Ken Newman: I appreciate that. Maybe just for my last one here, John, it was really great color on the data center commentary earlier. But I just wanted to see if you could help us size that opportunity, or how you think about sizing that opportunity going forward. You know, I think in the CSS business data centers, maybe around 8 to 10% of sales on a total sales perspective, but any help on sizing that opportunity on the power and white space stuff that you mentioned earlier.

David S. Schulz: That's really helpful color I appreciate that maybe just for my last one here John It was really great color on the data center commentary earlier.

Ken Newman: But I just wanted to see if you could help us size that opportunity or how you think about that opportunity going forward I think in.

Ken Newman: Yes that business data centers, maybe around 8% to 10% of our sales on a total sales perspective, but just any help on that.

Ken Newman: I think that opportunity on the power and white space buckets, you mentioned earlier.

John J. Engel: Yeah, it's we've not been public on that yet, Ken. So let me just say, and it's also a moving target. Because what happens is, you know, now I think there's not any new data centers that are being designed that are not designed to expressly take advantage, [inaudible] I don't know if you'll see this in writing much, but markedly changed over the last six to 12 months, which actually, the power consumption goes up dramatically, and that drives the need for more complex power solutions, that's a UBS business, more challenging electrical solutions, that's our EES business, and obviously, there's more throughput in addition to the power, which is better for a CSS business.

John: Yeah, it's it's.

John: We've not been public on that you can so let me just say and it's also a moving target because what happens is.

John J. Engel: Now I think theres not any new data centers that are being design that are not designed to expressly take advantage of or being able to operationalize jet AI applications. So the fundamental design requirements of data centers have markedly changed I don't know if you'll see this in writing.

John J. Engel: But markedly changed over the last six to 12 months.

John J. Engel: It's actually the power consumption goes up dramatically and that drives the need for more complex power solutions like UBS business, where comps are more challenging electrical solutions as our EES business.

John J. Engel: And obviously.

John J. Engel: More and more there's more throughput.

John J. Engel: In addition to the power, which is better for our CSS business. So.

John J. Engel: So, I don't wanna size it on this call, we do have plans in our investor day this year, for all our end market verticals, and where we see these exceptional secular growth trends, to begin to put some more parameters around that, and I think you can look forward in anticipation too, about a drill down in the data centers, the whole value chain, and the incredible market leading role that we play, because of our unique portfolio globally, to help support our end user customers, so stay tuned for that, that will address your question directly.

Speaker Change: I don't want to size. It on this call. We do have plans in our Investor day. This year for all of our end market verticals and whereas we see these exceptional secular growth trends to begin.

John J. Engel: But some more parameters around that and I think you can look for in an anticipation to about a drill down in a data center is the whole value chain and the incredible market leading role that we play because of our unique portfolio globally to help support our end user customers. So stay tuned for that that will address your.

John J. Engel: <unk> directly.

Ken Newman: Got it. Thanks for all the color. Thank you, and this concludes our question and answer session. I would like to turn the conference back over to John Engel for any questions. I think we've addressed all your questions.

Speaker Change: Got it thanks for all the color.

John J. Engel: Yes.

Ken Newman: Thank you and this concludes our question and answer session I would like to turn the conference back over to John Engel for any closing comments.

John J. Engel: So I think I think we've addressed all your questions I'd like to thank you again for supporting US today, it's very much much appreciated and we look forward to speaking with many of you over the next two months, they're going to be busy next few months as the year has been so far we've been heavily out on the road and engaging investors.

John J. Engel: I'd like to thank you again for supporting us today. It's very much appreciated. We look forward to speaking with Manhey Gu over the next two months. They're going to be busy, as the year has been so far. We've been heavily out on the road and engaging investors, but we've got four conferences we're going to participate in in the coming months. The Oppenheimer Industrial Growth Conference on May 7th, the Wolf Research Global Transportation and Industrial Conference on May 21st, the Barclays Leverage Finance Conference on May 21st as well, and the Key Bank Industrials and Basic Materials Conference on May 29th. So with that, I should say finally that we expect to announce the second quarter earnings on Thursday, August 1st.

John J. Engel: But we've got four conferences, we're going to participate in the coming months. The Oppenheimer Industrial growth conference on May 7th the Wolfe Research Global Transportation Industrial conference on May 21.

John J. Engel: Barclays Leveraged finance conference on May 21st as well and the Keybanc Industrials and basic materials conference on May 29, so with that.

John J. Engel: Oh I shouldn't say finally, we expect to announce the second quarter earnings on Thursday August 1st.

Operator: Thank you very much, and have a good day. Thank you. The conference is now concluded. Thank you for attending today's presentation.

Speaker Change: Thank you very much and have a good day.

Speaker Change: Thank you. The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

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