Q2 2024 WESCO International Inc Earnings Call
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Unknown Executive: Hello, and welcome to Wesco's 2024 second quarter earnings call. I would like to remind you that all lines are in listen-only mode throughout the presentation. If you would like to ask a question, please press star followed by one on your telephone keypad. Please note that this event is being recorded.
Speaker Change: Hello, and welcome to <unk> 2024 second quarter earnings call.
Operator: I would like to remind you that all lines are in listen-only mode throughout the presentation. If you would like to ask a question, please press star followed by one on your telephone keypad.
Speaker Change: I would like to remind you that all lines are in listen only mode throughout the presentation.
Speaker Change: If you would like to ask a question. Please press star followed by one on your telephone keypad.
Speaker Change: Please note this event is being recorded.
Scott Gaffner: I will now hand the call over to Scott Gaffner, Senior Vice President and thus Relations to begin. Thank you, and good morning, everyone. Before we get started, I want to remind you that certain statements made on this call contain forward-looking information. Forward-looking statements are not guaranteed the performance, and by their nature, are subject to uncertainties. Actual results may differ materially. Please see a webcast line in the company's SEC filing for additional risk factors and disclosures. Any forward-looking information speaks only out of this date, and the company undertakes no obligation to update the information to reflect change circumstances.
Scott <unk>: I will now hand, the call over to Scott <unk> Senior Vice President of Investor Relations to begin.
Scott: Thank you and good morning, everyone before we get started I want to remind you that certain statements made on this call contain forward looking information.
John Engel: Thank you, and good morning, everyone. Before we get started, I want to remind you that certain statements made on this call contain forward-looking information. Forward-looking statements are not guarantees of performance and, by their nature, are subject to uncertainties. The actual results may differ materially.
Speaker Change: Forward looking statements are not guarantees of performance and by their nature are subject to uncertainties.
Speaker Change: Actual results may differ materially.
Speaker Change: Please see our webcast slides in the company's SEC filings for additional risk factors and disclosures.
John Engel: 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. Thank you, Scott. Good morning, everyone.
Speaker Change: Any forward looking information speaks only as of this date.
Speaker Change: Company undertakes no obligation to update the information to reflect changed circumstances.
Scott Gaffner: Additionally, today we will use certain non-GAAP financial measures. Required information about these measures is available on our webcast slides and in our press release, both of which are posted on our website, Wesco.com.
Speaker Change: Additionally, today, we will use certain non-GAAP financial measures.
Speaker Change: Information about these measures measures is available on our webcast slides.
Speaker Change: And in our press release, both of which are posted on our website Wesco dotcom.
Scott Gaffner: On the call this morning, we have Gemini Engel, Wesco's chairman, president, and chief executive officer, and Dave Schultz, executive vice president and chief financial officer. With that, I will turn the call over to John.
Speaker Change: On the call. This morning, we have John Engel West Coast, Chairman, President and Chief Executive Officer, and Dave Schulz Executive Vice President Chief Financial Officer.
Speaker Change: With that I'll turn the call over to John.
John: Thank you Scott good morning, everyone. Thank you for joining our call today.
John Engel: Thank you for joining our call today. With our record $500 million of free cash flow generation in the first half, we're on track to deliver our full-year free cash flow outlook of $800 million to $1 billion. As planned, we executed our capital allocation strategies and repurchased $300 million of our Wesco stock in the second quarter. We also closed on two small but important software-based acquisitions.
John Engel: Thank you, Scott.
John Engel: Good morning, everyone. Thank you for joining our call today. Our second quarter results were somewhat below our expectations for a low single digit decline in reported sales, and this was against them, continued mixed in multi-speed economic environment. Results improved; however, as we move through the quarter, with a return of organic sales growth in June, and that was accompanied by improvement in growth and operating margins on a sequential basis. With our record 500 million of free cash flow generation in the first half, we're on track to deliver our full year free cash flow outlook of 800 million to $1 billion.
Speaker Change: Our second quarter results were somewhat below our expectations for a low single digit decline in reported sales and this was against them continued Mexican multi speed economic environment.
John Engel: Results improved however, as we moved through the quarter with a return to organic sales growth in June and that was accompanied by a.
Speaker Change: Improvement in gross and operating margins on a sequential basis.
John Engel: With a record $500 million of free cash flow generation in the first half we're on track to deliver our full year free cash flow outlook of 800 million to $1 billion.
John Engel: As planned, we executed our capital allocation strategies and repurchased 300 million of our Wesco stock in the second quarter. We also closed on two small but important software-based acquisitions. Interest them, being the first one, a data center and building intelligence software company, and Store Room Logics, the second acquisition, an asset and inventory management software company. I think it's important to note that M&A remains a critical component of our enterprise growth strategy. As we continue to benefit from our global capabilities, our leading scale and our expanded portfolio, and continue our move towards our long-term even-done margin expansion goal.
Speaker Change: As planned we executed our capital allocation strategy and repurchased $300 million of our West coast stock in the second quarter. We also closed on two small but important software based acquisition.
Speaker Change: Interest them being the first one data center and building intelligence software company and store run logic, the second acquisition.
Speaker Change: In asset and inventory management software company.
Speaker Change: I think it's important to note that M&A remains a critical component covenant of our enterprise growth strategy as we continue to benefit from our global capabilities, our leading scale and our expanded portfolio and continue our move towards our long term EBITDA margin expansion goal.
John Engel: The digital transformation that we're currently executing will enable us to increase shareholder value through a combination of cost efficiencies, additional cross-cell opportunities, and rapid integration of future acquisitions.
Speaker Change: Digital transformation that we're currently executing will enable us to increase shareholder value through a combination of cost efficiencies additional cross sell opportunity and rapid integration of future acquisitions.
John Engel: We look forward to sharing more details on these critical aspects of our growth strategy at our Investor Day next month. Dave will walk you through the details of our three businesses momentarily, but I first want to touch on a few noteworthy aspects of the quarter. Clothes in our data center business was strong, and it was up high teams versus the prior year. We continue to capture share and benefit from the secular growth of global data centers and the increases driven by AI and Gen AI applications. This growth was more than offset by a significant slow down and purchases by our utility customers as a result of destocking and project delays in the second quarter.
John Engel: We look forward to sharing more details on these critical aspects of our growth strategy at our investor day next week. As John noted earlier, our second quarter results were below our low single-digit expected decline in reported sales against a continued mixed and multi-speed economic environment. The primary driver of the top line missed was market weakness in utility and broadband.
Speaker Change: We look forward to sharing more details on these critical aspects of our growth strategy at our Investor Day next month.
Speaker Change: Dave will walk you through the details of our three business businesses momentarily, but I first wanted to touch on a few noteworthy aspects of the quarter.
Speaker Change: Growth in our data center business was strong it was up high teens versus the prior year, we continue to capture share and benefit from the secular growth of global data centers and the increase is driven by AI and Jenny I applications.
Speaker Change: This growth was more than offset by a significant slowdown in purchases by our utility customers as a result of Destocking and project delays in the second quarter.
Jenny: While we remain confident in the long term growth of our utility broadband solutions business. We do expect the mixed economic environment and customer purchasing delays in in our UBS business to continue through the second half of 2024 as you saw from our materials, we've reduced our full year outlook to reflect this change.
John Engel: The utility and broadband solutions business we do expect the mixed economic environment and customer purchasing delays in our UBS business to continue through the second half of 2024, as you saw from our materials. We've reduced our full year outlook to reflect this change. With that said, overall quoting, the activity levels, and overall backlog remains healthy, and it supports our view for sales growth in the second half against an easier year-over-year comparable. But in a more modest rate than our previous outlook.
Speaker Change: With that said overall quoting.
Speaker Change: Activity levels in our overall backlog remains healthy and supports our view for sales growth in the second half against an easier year over year comparable but at a more modest rate than our previous outlook.
Speaker Change: So with that I'll now hand, it over to Dave to take you through our second quarter results in more detail as well as our updated outlook for the rest of the year.
Dave Schultz: So, with that, I'll now hand it over to Dave to take you through our second quarter results in more detail, as well as our updated outlook for the rest of the year.
Dave Schultz: Dave. Thank you, John.
Speaker Change: Yes.
Dave Schulz: Thank you John Good morning, everyone turning to page four.
Dave Schultz: Good morning, everyone. Turning to page four. As John noted earlier, our second quarter results were below our low single-digit expected decline and reported sales against a continued mixed and multi-speed economic environment. The primary driver of the top line, this was market weakness and utility and broadband, leading to an organic sales decline of less than 1% versus the prior year. This includes approximately a 2% benefit from price, offset by lower volumes. Pricing was a tailwind in both EES and UBS, including the benefit from higher commodity costs, while pricing in CSS was slightly negative. The vestiture of the integrated supply business was a year-over-year impact of 350 basis points, and differences in foreign exchange rates were a minor headwind.
Dave Schulz: As John noted earlier, our second quarter results were below our low single digit expected decline in reported sales.
Speaker Change: Against the continued mixed in multi speed economic environment.
Speaker Change: The primary driver of the topline Miss was market weakness in utility in broadband.
Speaker Change: From an organic sales decline of less than 1% versus the prior year.
Speaker Change: This includes approximately a 2% benefit from price offset by lower volumes.
John Engel: This includes approximately a 2% benefit from price, offset by lower volume. Pricing was a tailwind in both EES and UBS, including the benefit from higher commodity costs. The divestiture of the integrated supply business was a year-over-year impact of 350 basis points, and differences in foreign exchange rates were a minor headwind, with all three SBUs contributing. The integrated supply divestiture and differences in foreign exchange rates were a combined headwind of 390 basis points, offset by 160 basis points due to one additional workday in the second quarter.
Speaker Change: Are you seeing was a tailwind in both es and UBS, including the benefit from higher commodity costs, while pricing GSS was slightly negative.
Speaker Change: The divestiture of the integrated supply business was a year over year impact of 350 basis points and differences in foreign exchange rates were a minor headwind.
Dave Schultz: I'll provide more color on the sales drivers in the next few slides. On the lower half of the page, you can see the adjusted EBITDA impacts of lower sales, partially offset by gross margin. Gross margin was up 30 basis points over the prior year on a reported basis. As discussed in the prior quarter earnings call, the integrated supply business had a lower gross margin than the balance of the company. The year-over-year improvement in the gross rate was primarily due to the mixed benefit of the vestiture. Gross margin, excluding this benefit, was down slightly and entirely due to lower gross margin in our CSS business.
Speaker Change: I'll provide more color on the sales drivers in the next few slides.
Speaker Change: On the lower half of the page you can see the adjusted EBITDA impact of lower sales, partially offset by gross margin.
Speaker Change: Gross margin was up 30 basis points over the prior year on a reported basis.
Speaker Change: As discussed in the prior quarter earnings call. The integrated supply business had a lower gross margin than the balance of the company.
Speaker Change: The year over year improvement in the growth rate was primarily due to the mix benefit of the divestiture.
Speaker Change: Gross margin, excluding this benefit was down slightly and entirely due to lower gross margin in our CSS business.
Dave Schultz: Gross margins in EES and UBS, excluding the impact of the integrated supply the vestiture for up versus the prior year. Excluding the impact of the integrated supply, the vestiture adjusted SG&A increased slightly due to the annual merit increase, partially offset by cost actions taken in previous quarters.
Speaker Change: Gross margins in Etfs and UBS, excluding the impact of the integrated supply divestiture were up versus the prior year.
Speaker Change: Excluding the impact of the integrated supply divestiture adjusted SG&A increased slightly due to the annual Merit increase.
Speaker Change: Partially offset by cost actions taken in previous quarters.
Dave Schultz: Turning to page 5. On a sequential basis, organic sales were up approximately 5% with all three SPUs contributing. The integrated supply, the vestiture, and differences in foreign exchange rates were a combined headwind of 390 basis points, offset by 160 basis points due to one additional workday in the second quarter. As you can see on the chart on the bottom of the page, adjusted EBITDA margins were up 90 basis points from the first quarter. All three SPUs and sequential improvements of 50 to 130 basis points. Gross margin was up 60 basis points sequentially due to the integrated supply divestiture, as well as favorable cash discounts and inventory adjustments.
Speaker Change: Turning to page five.
Speaker Change: On a sequential basis organic sales were up approximately 5% with all three sbu's contributing.
Speaker Change: The integrated supply divestiture and differences in foreign exchange rates were a combined headwind of 390 basis points offset by 160 basis points due to one additional workday in the second quarter.
Speaker Change: As you can see on the chart on the bottom of the page adjusted EBITDA margins were up 90 basis points from the first quarter.
John Engel: All three SVUs posted sequential improvements of 50 to 130 basis points. Gross margin was up 60 basis points sequentially due to the integrated supply divestiture as well as favorable cash discounts and inventory adjustments. Turning to page 6.
Speaker Change: All three SBU posted sequential improvement of 50 to 130 basis points.
Speaker Change: Gross margin was up 60 basis points sequentially due to the integrated supply divestiture as well as favorable cash discounts and inventory adjustments.
Dave Schultz: As I mentioned earlier, gross margin expanded sequentially in both EES and UBS, offset by weaker gross margins within our CSS business. The SNA impact on the sequential improvement to adjusted EBITDA was neutral as the benefit of the integrated supply divestiture offset the annual merit increase effective on April 1st. SNA as a percentage of sales improves sequentially due to operating leverage on higher sales.
Speaker Change: As I mentioned earlier gross margin expanded sequentially in both Es and UBS.
Speaker Change: <unk> offset by weaker gross margins within our CSS business.
Speaker Change: The SG&A impact on the sequential improvement to adjusted EBITDA was neutral as the benefit of the integrated supply divestiture offset the annual merit increase effective on April 1st.
Speaker Change: SG&A as a percentage of sales improved sequentially due to operating leverage on higher sales.
Dave Schultz: Turning to page 6. This is a slide we first showed last quarter and supports that Wesco has outperformed both our supplier partners and our distributor peers over the past few years. The chart on the left compares Wesco's year-over-year organic growth to the average organic growth of our 10 largest publicly traded supplier partners. Wait until 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 fair distribution survey, which is published quarterly.
Speaker Change: Turning to page six this is a slide we first showed last quarter and supports that Wesco has outperformed both our supplier partners and our distributor peers over the past few years.
Speaker Change: The chart on the left compares let's go year over year organic growth to the average organic growth of our 10 largest publicly traded supplier partners waited to the proportion of our purchases that they represent.
Speaker Change: You can see that Wesco has outperformed the supplier average since the middle of 2021.
Speaker Change: The chart on the right compares west goes year over year organic growth to the electrical and data communications distributors in the Baird distribution survey, which was published quarterly.
John Engel: The chart on the right compares Wesco's year-over-year organic growth to the electrical and data communications distributors in the Baird Distribution Survey, which is published quarterly. Turning to slide 7, second quarter organic sales in our EES business were down about 1% on both an organic and reported basis. But more importantly, we have seen a stabilization in the top line, which has allowed the business to leverage the cost actions taken over the last year. We are encouraged by the growth acceleration in our data center business. CSS backlog continues to climb after normalizing last year due to lead time compression and increased product availability.
Dave Schultz: We think these two data sets clearly demonstrate that our growth has exceeded our peers and we have outperformed the market over the last three years.
Speaker Change: We think these two datasets clearly demonstrate that our growth has exceeded our peers, we have outperformed the market over the last three years.
Dave Schultz: Turning to slide 7. Second quarter organic sales in our EES business were down about 1% on both an organic and reported basis. But more importantly, we have seen a stabilization in the top line, which has allowed the business to leverage the cost actions taken over the last year. Organic sales improved each month as we move to the second quarter. Additionally, our EES sales in Canada were up low single digits due to some large project wins, and we continue to see significant growth in the EES international markets. Similar to the first quarter, construction sales were down low single digits due to continued weakness in solar, early offset by growth from large project shipments.
Speaker Change: Turning to slide seven second quarter organic sales in our EES business, we're down about 1%.
Speaker Change: On both an organic and reported basis, but more importantly, we have seen a stabilization in the top line, which has allowed the business to leverage the cost actions taken over the last year.
Speaker Change: Organic sales improved each month as we moved through the second quarter.
Speaker Change: Additionally, our EES sales in Canada were up low single digits due to some large project wins and we continue to see significant growth in EES International markets.
Speaker Change: Similar to the first quarter construction sales were down low single digits due to continued weakness in solar partly offset by growth from large project shipments.
Speaker Change: Industrial sales were up low single digits with strong project activity offset by some weakness in day to day MRO consistent with recent market data in the U S.
Dave Schultz: Industrial sales were up low single digits, with strong project activity offset by some weakness in day-to-day MRO, consistent with recent market data in the US. OEM sales were down low single digits. Backlog was down about 2% on a sequential basis and down about 9% from the prior year. This represents normal seasonality for backlog, as orders taken in Q4 and Q1 are converted into revenue in Q2 and Q3. Lastly, as anticipated, EES adjusted EBITDA margin continued to improve and was up approximately 40 basis points during, by higher gross margin, benefits of cost actions taken in 2023 and 2024, and continued cost control.
Speaker Change: OEM sales were down low single digits.
Speaker Change: Backlog was down about 2% on a sequential basis and down about 9% from the prior year.
Speaker Change: This represents normal seasonality for backlog as orders taken in Q4, and Q1 are converted into revenue in Q2 and Q3.
Speaker Change: Lastly, as anticipated EES adjusted EBITDA margin continued to improve and was up approximately 40 basis points driven by higher gross margin.
Speaker Change: If it's a cost actions taken in 2023 and 2024.
Speaker Change: And continued cost controls.
Dave Schultz: Charles. Turning to slide eight, while CSS sales in the quarter were generally in line with our expectations, adjusted evitam margin was impacted by the mix of sales, which I'll explain shortly. Second quarter sales in CSS were up approximately 1% from the prior year on both an organic and reported basis. We are encouraged by the growth acceleration in our data center business. Data center sales were up high teens in the second quarter versus the prior year, and acceleration from the first quarter were year over year sales were up low single digits. Growth was broad base with all end users, hyperscale, multi-tenant and enterprise data center customers.
Speaker Change: Turning to slide eight.
Speaker Change: While CSS sales in the quarter were generally in line with our expectations. Adjusted EBITDA margin was impacted by the mix of sales, which I'll explain shortly.
Speaker Change: Second quarter sales in CSS were up approximately 1% from the prior year.
Speaker Change: On both an organic and reported basis.
Speaker Change: We are encouraged by the growth acceleration in our datacenter business.
Speaker Change: Data center sales were up high teens in the second quarter versus the prior year, an acceleration from the first quarter, where year over year sales were up low single digits.
Speaker Change: Growth was broad based with all end users hyperscale multi tenant and enterprise data center customers.
Dave Schultz: The growth opportunity of this business continues to be exceptionally strong given the step change in data center capacity driven by artificial intelligence. Enterprise network infrastructure, which comprises structural cake structured cabling and Internet service providers, was down low single digits due to declining sales to service providers, as well as weakness in commercial office space. Security sales were down mid-single digits driven by a general slowdown in non-residential commercial construction and weaker office space activity. The security market has contracted over the past few quarters, but we expect it will grow in the second half of this year as comparisons e significantly, particularly in the fourth quarter.
Speaker Change: The growth opportunity of this business continues to be exceptionally strong given the step change in data center capacity driven by artificial intelligence.
Speaker Change: Enterprise network infrastructure, which comprises structural Cape structured cabling and Internet service providers was down low single digits due to declining sales to service providers as well as weakness in commercial office space.
Speaker Change: Security sales were down mid single digits, driven by a general slowdown in nonresidential commercial construction and weaker office space activity.
Speaker Change: The security market has contracted over the past few quarters, but we expect it will grow in the second half of this year as comparisons ease significantly, particularly in the fourth quarter.
Speaker Change: PSS backlog continues to decline after normalizing last year, just the lead time compression and increased product availability.
Dave Schultz: CSS backlog continues to climb after normalizing last year due to lead time compression and increased product availability. Back while I was down 4% versus the prior year, but a 13% from the end of 2023 and up 8% sequentially from the last quarter. Adjusted EBITDA margin for CSS was down 160 basis points. The primary driver of the decrease was gross margin in the enterprise network infrastructure business. Several factors drove the CSS EBITDA margin contraction versus the prior year. First customer mix. We had a higher mix of shipments in support of large programs that are below the average CSS gross margin, including a higher percentage of direct ship projects.
Speaker Change: Backlog was down 4% versus the prior year.
Speaker Change: 13% from the end of 2023 and up 8% sequentially from the last quarter.
Speaker Change: Adjusted EBITDA margin for CSS was down 160 basis points.
Speaker Change: The primary driver of the decrease was gross margin in the enterprise network infrastructure business.
Speaker Change: Several factors drove the CSS EBITDA margin contraction versus the prior year.
Speaker Change: First customer mix.
Speaker Change: We had a higher mix of shipments in support of large programs that are below the average CSS gross margin, including a higher percentage of direct ship projects.
Dave Schultz: As I mentioned previously, sales were generally in line with our expectations overall. The day-to-day business was slower than anticipated, which has a higher margin. While we were able to make up the sales with projects, the mix of sales impacted margins. Second additional sales through channel. In the second quarter, we worked with our suppliers to serve as several large projects that historically were sold direct to the end user by the supplier. This is the result of customers looking to consolidate their supplier base and take advantage of our global one-stop shop capabilities. In the future, we anticipate winning more of these types of projects and expanding margin by adding additional services to our offering.
Speaker Change: As I mentioned previously sales were generally in line with our expectations overall.
Speaker Change: The day to day business was slower than anticipated, which has a higher margin.
Speaker Change: While we were able to make up the sales with projects the mix of sales impacted margins.
Speaker Change: Second additional sales through channel.
Speaker Change: In the second quarter, we worked with our suppliers to serve as several large projects that historically were sold direct to the end user by the supplier.
Speaker Change: This is the result of customers looking to consolidate their supplier base.
Speaker Change: The advantage of our global one stop shop capabilities in the future, we anticipate winning more of these types of projects and expanding margin.
Speaker Change: Adding additional services to our offering.
Dave Schultz: Third, we built this business to deliver on the higher growth rates of secular trends. We have invested in people and capabilities to capture this growth, but with sales in the quarter of only 1%, we did not get the operating leverage we expect to get in the future. for the balance of the year, we expect stable gross margins and additional operating leverage in CSS. Turning to slide 9, organic sales and UBS were down 3% in the quarter, and reported sales were down 15% due to the integrated supply divestiture. Utility market is experiencing some short-term softness related to customer destocking and lower project activity, which is a function of the current interest rate and regulatory environment.
Speaker Change: Third we built this business to deliver on the higher growth rates of secular trends.
Speaker Change: We have invested in people and capabilities to capture this growth, but with sales in the quarter up only 1% we did not get the operating leverage we expect to get in the future.
Speaker Change: For the balance of the year, we expect stable gross margins and additional operating leverage in CSS.
Speaker Change: Turning to slide nine.
Speaker Change: Organic sales in UBS were down 3% in the quarter and reported sales were down 15% due to the integrated supply divestiture.
Speaker Change: The utility market is experiencing some short term softness related to customer Destocking and lower project activity, which is a function of the current interest rate and regulatory environment.
John Engel: Although the utility market is experiencing some short-term softness related to customer destocking and lower project activity, which is a function of the current interest rate and regulatory environment, adjusted EBITDA margins were healthy despite the near-term top-line headwind. Adjusted EBITDA margins were favorable, approximately 90 basis points versus the prior year, driven by the divestiture of integrated supply and improvements to gross margin in the core business. These examples reinforce the positive trend of our bidding and cross-electivity to win increasingly large, complex projects. Moving to slide 11.
Dave Schultz: We expect these impacts to last through the end of the year. We continue to benefit from the secular trends of electrification, green energy, and grid modernization, and believe that these trends will support growth acceleration as we move into 2025 and beyond. Broadband sales were down high single digits, reflecting continued demand weakness, as customers continued to work through inventory and delay purchases until government funding is released. At present, it is difficult to call the bottom in this market in the US, but we are driving growth in our Canadian operations. We expect this market to improve in 2025, with the timing of Broadband Equity Access and Deployment or B dollars getting spent.
Speaker Change: We expect these impacts to last through the end of the year.
Speaker Change: We continue to benefit from the secular trends of electrification green energy and grid modernization and believe that these trends will support growth acceleration as we move into 2025 and beyond.
Speaker Change: Broadband sales were down high single digits, reflecting continued demand weakness as customers continue to work through inventory and delay purchases until government funding is released.
Speaker Change: At present, it is difficult to call the bottom in this market in the U S. But we are driving growth in our Canadian operations.
Speaker Change: We expect this market to improve in 2025 with the timing of broadband equity access and deployment or be dollars getting spent.
Dave Schultz: Backlog was down 15% in the prior year, and down 10% on a sequential basis, as there has been a delay on projects being converted from the opportunity pipeline into backlog. Adjusted EBITDA margins were healthy despite the near-term top-line headwinds. EBITDA margins were favorable approximately 90 basis points versus the prior year, driven by the divestiture of integrated supply and improvements to gross margin in the core business. On this slide, we have highlighted a recent win by each of our business units that, in aggregate, represent more than $100 million of future project sales. These examples reinforce the positive trend of our bidding and cross-ele activity to win increasingly large, complex projects.
Speaker Change: Backlog was down 15% from the prior year and down 10% on a sequential basis as there has been a delay in projects being converted from the opportunity pipeline into backlog.
Speaker Change: Adjusted EBITDA margins were healthy despite the near term top line headwinds.
Speaker Change: EBITDA margins were favorable approximately 90 basis points versus the prior year driven by the divestiture of integrated supply and improvements to gross margin in the core business.
Speaker Change: Turning to page 10.
Speaker Change: On this slide we have highlighted a recent win by each of our business units that in aggregate represent.
Speaker Change: Represent more than $100 million of future project sales.
Speaker Change: These examples reinforce the positive trend of our bidding and cross sell activity to win increasingly large complex projects.
Dave Schultz: Also worth noting are the end-market set these projects serve: a major power plant retrofit, a cloud data center project, and a large renewable energy project.
Speaker Change: Also worth noting are the end markets that these projects serve a major power plant retrofits.
Speaker Change: <unk> Cloud data Center project and a large renewable energy project.
Dave Schultz: Moving to slide 11, on this slide, we have outlined our return to capital to shareholders over the past three years, along with our capital allocation priorities for 2024 and the long term. We said we intended to use the full $300 million of after-tax proceeds from the integrated supply divestiture for share purchases in the second quarter, and we hit that target. In addition, our 2024 free-cashable outlook of $900 million at the midpoint provides us with options to opportunistically repurchase additional shares, reduce debt, and/or pursue M&A in the second half of the year. We call that we provided a five-year outlook for operating cash flow generation of $3.5 to $4.5 billion at our Investor Day in 2022.
Speaker Change: Moving to slide 11 on this slide we have outlined our return to capital to shareholders over the past three years, along with our capital allocation priorities for 2024 and the long term.
John Engel: On this slide, we have outlined our return on capital to shareholders over the past three years, along with our capital allocation priorities for 2024 and the long term. In 2022 and 2023, we generated double-digit growth in utility. Lastly, our enterprise network infrastructure is expected to be up low single digits. Moving to slide 14 for our 2024 outlook. Adjusting for the Impact of Integrated Supply Divestiture and Foreign Exchange due to the lower sales outlook, along with our results here today.
Speaker Change: We said, we intended to use the full $300 million of after tax proceeds from the integrated supply divestiture for share repurchases in the second quarter and we hit that target.
Speaker Change: In addition, our 2020 for free cash flow outlook of $900 million at the midpoint provides us with options to opportunistically repurchase additional shares reduced debt.
Speaker Change: Or pursue M&A in the second half of the year.
Speaker Change: Recall that we provided a five year outlook for operating cash flow generation of three five to $4 $5 billion at our Investor day in 2022.
Dave Schultz: We remain on track to achieve this target and expect to return approximately 40% of our operating cash flow to shareholders through dividends, including our common dividend, which we increase 10% in 2024, and executing our $1 billion share repurchase authorizations. Foundation. The Upsides Task Generation also allows us to continue to invest for organic growth and operational efficiency through our digital transformation. Turning to page 12. Historically, strong free cash flow has been a hallmark of Let's Go in our distribution business model. With the significant sales growth we delivered in 2021 and 2022. We invested heavily in networking capital and were well below our expected free cash flow conversion.
Speaker Change: We remain on track to achieve this target and expect to return approximately 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.
Speaker Change: The upsides cash generation also allows us to continue to invest for organic growth and operational efficiency to our digital transformation.
Speaker Change: Turning to page 12.
Speaker Change: Historically strong free cash flow has been a hallmark of wesco and our distribution business model.
Speaker Change: With the significant sales growth, we delivered in 2021 and 2022, we invested heavily in networking capital and were well below our expected free cash flow conversion.
Dave Schultz: We delivered strong free cash flow beginning in the back half of 2023, in which the company generated approximately $400 million. This has been followed by free cash flow generation of $500 million in the first half of 2024, a record for Let's go. On a trailing 12-month basis, which has charged bridges to adjusted net income, free cash flow was more than $900 million with more than $80 million of cash generation from networking capital. Now moving to page 13 for the key drivers of our strategic business units. We are reducing our top line organic growth forecast, primarily driven by market conditions in our utility and broadband markets.
Speaker Change: We delivered strong free cash flow beginning in the back half of 2023 in which the company generated approximately $400 million.
Speaker Change: This has been followed by free cash flow generation of $500 million in the first half of 2024 a record for Wesco.
Speaker Change: On a trailing 12 month basis, which discharge bridges to adjusted net income.
Speaker Change: Free cash flow was more than $900 million with more than $80 million of cash generation from networking capital.
Speaker Change: Now moving to page 13 for the key drivers of our strategic business units.
Speaker Change: We are reducing our topline organic growth forecast, primarily driven by market conditions, and our utility and broadband markets.
Dave Schultz: Looking specifically at UBS, in 2022 and 2023, we generated double-digit growth in utility. The recent softness is coming off a historically high base. We now expect the utility business to be down low to mid-single digits versus a high single-digit increase previously. This is driven by a change in market conditions due to continued customer destocking and lower project activity. However, if you look at long-term capital expenditure budgets for the utility market to address the rising power demand curve, there is strong momentum for this business to significantly surpass the historical growth rates over the long term. For broadband, we had assumed that we would see the market recover by the end of 2024, with growth in our Canadian business offsetting continued weakness in the U.S.
Speaker Change: Looking specifically at UBS in 2022, and 2023, we generated double digit growth in utility.
Speaker Change: The recent softness is coming off of historically high base.
Speaker Change: We now expect the utility business to be down low to mid single digits versus a high single digit increase previously.
Speaker Change: This is driven by a change in market conditions due to continued customer destocking and lower project activity.
Speaker Change: However, if you look at long term capital expenditure budgets for the utility market to address the rising power demand curve. There is strong momentum for this business to significantly surpass the historical growth rates over the long term.
Speaker Change: For broadband we had assumed that we would see the market recover by the end of 2024 with growth in our Canadian business offsetting continued weakness in the U S.
Speaker Change: However, the spending of <unk> continues to be delayed.
Dave Schultz: However, the spending of B dollars continues to be delayed due to customer destocking and delays of purchases until government dollars are released. We now expect our broadband sales to be down high single digits versus our previous outlook of down low single digits. Within EES, our overall forecast remains largely unchanged. In 2024, we expect EES reported sales growth to be flat to upload single digits as construction and markets remain pressured, despite an increase in large project activity. The industrial business is expected to benefit from continued growth in many of the end-market verticals we support, but the recent softness in our day-to-day business has moderated some of the expected upside.
Speaker Change: Due to customer Destocking and delays the purchases until government dollars are released we now expect our broadband sales to be down high single digits versus our previous outlook of down low single digits.
Speaker Change: Within EES, our overall forecast remains largely unchanged.
Speaker Change: In 2024, we expect EES reported sales growth to be flat to up low single digits.
Speaker Change: Construction end markets remain pressured despite an increase in large project activity.
Speaker Change: The industrial business is expected to benefit from continued growth in many of the end market verticals, we support but the recent softness in our day to day business has moderated some of the expected upside.
Dave Schultz: OEM is expected to be roughly flat. Looking at our CSS segment, we generated accelerating growth in our data center business in the second quarter, which was up high teens versus a low single-digit increase in the first quarter. We now expect our data center business to be up midteens for the full year, and based on share gains and security, we expect to outgrow the market and for the business to be relatively flat based on strong comparisons in the second half of 2020.
Speaker Change: OEM is expected to be roughly flat.
Speaker Change: Looking at our CSS segment, we generated accelerating growth in our data center business in the second quarter, which was up high teens versus a low single digit increase in the first quarter.
Speaker Change: We now expect our data center business to be up mid teens for the full year and based on share gains in security, we expect to outgrow the market and for the business to be relatively flat based on strong comparisons in the second half of 2023.
Dave Schultz: Dray. Lastly, our Enterprise Network Infrastructure is expected to be up low single digits.
Speaker Change: Lastly, our enterprise network infrastructure is expected to be up low single digits.
Dave Schultz: Moving to slide 14 for our 2024 outlook. As we noted earlier, while we still see a long-term secular growth opportunity in utility, the market has downshifted. Based primarily on the reduction to the utility market forecast, along with continued delays in the broadband market recovery, we are reducing the range and adjusting our reported top line outlook to down 1.5% to down 3.5% versus the prior year. As we noted on the previous slide, the change to the top line outlook is entirely driven by a shift in market conditions. Adjusting for the impact of integrated supply to investor and foreign exchange, we expect organic sales to be down 1.5% to up 0.5%.
Speaker Change: Moving to slide 14 for our 2020 for outlook.
Speaker Change: As we noted earlier, while we still see a long term secular growth opportunity in utility the market has downshifted.
Speaker Change: Based primarily on the reduction to the utility market forecast along with continued delays in the broadband market recovery.
Speaker Change: Reducing the range and adjusting our reported topline outlook to down one 5% to down three 5% versus the prior year.
Speaker Change: As we noted on the previous slide the change to the top line outlook is entirely driven by a shift in market conditions.
Speaker Change: Adjusting for the impact of integrated supply divestiture and foreign exchange, we expect organic sales to be down one 5% to up 0.5%.
Dave Schultz: This translates into total revenue for 2024 of 21.6 to 22 billion dollars. At the midpoint of the range, prices expected to contribute about one point to the top line, with volume slightly negative.
Speaker Change: This translates into total revenue for 2024 of 21 $6 billion to $22 billion.
Speaker Change: At the midpoint of the range price is expected to contribute about one point to the topline with volume slightly negative.
Dave Schultz: Due to the lower sales outlook, along with our results here today, we are reducing our full year EBITDA outlook to 1.55 billion versus 1.7 billion and an adjusted EBITDA margin range of 7 to 7.3%. We are also adjusting our outlook for adjusted EPS to a range of $12 to $13. We feel that this updated outlook is appropriate given the mixed economic environment and our current business results. Additionally, we are reaffirming our previously increased outlook for free cash flow to be in 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.
Speaker Change: Due to the lower sales outlook, along with our results year to date.
John Engel: We are reducing our full-year EBITDA outlook to $1.55 billion versus $1.7 billion. On leverage, we finished the second quarter at 2.9 times, the trailing 12-month need to die, and our expectations for the third quarter. Preliminary July sales per workday were down low single digits versus the prior year. If you would like to ask a question, please press star followed by one on your telephone keypad. Thank you. Good morning, everyone.
Speaker Change: We are reducing our full year EBITDA outlook to 155 billion versus $1 7 billion.
Speaker Change: And an adjusted EBITDA margin range of seven to seven 3%.
Speaker Change: We are also adjusting our outlook for adjusted EPS to a range of 12 to $13.
Speaker Change: We feel that this updated outlook is appropriate given the mixed economic environment and our current business results.
Speaker Change: Additionally, we are reaffirming our previously increased outlook for free cash flow to be in the range of $800 million to $1 billion.
Speaker Change: This free cash flow outlook represents the highest free cash flow in our history and more than 100% of adjusted net income.
Dave Schultz: We have assumed in our free cash flow outlook that networking capital days improve and continue to target a 3-day improvement in inventory days outstanding. On leverage, we finish the second quarter at 2.9 times trailing 12-month EBITDA. We now expect leverage to improve slightly through the bounce of the year, but to end above the high end of our 1.5 to 2.5 times range.
Speaker Change: We have assumed in our free cash flow outlook that net working capital days improved and continue to target a three day improvement inventory days outstanding.
Speaker Change: On leverage we.
Speaker Change: Finished the second quarter at two nine times trailing 12 months EBITDA.
Speaker Change: We now expect leverage to improve slightly through the balance of the year, but to end above the high end of our one five to two five times range.
Dave Schultz: Turning to page 15. This slide shows the year-over-year monthly and quarterly sales growth comparisons for the past 18 months and our expectations for the third quarter. Sequentially, we expect reported sales to be flat to down, single digits. EBITDA margins should also be stable sequentially with the second quarter as we continue to manage costs effectively in a mixed economic environment. Preliminary July sales per workday were down low single digits versus the prior year, excluding the impact of the integrated supply divestiture in the base period. The sales outlook at the midpoint to the third quarter and the balance of the year assumes the current run rate of sales continues, while the high end of the guidance range assumes more normal season hours.
Speaker Change: Turning to page 15.
Speaker Change: This slide shows the year over year monthly and quarterly sales growth comparisons for the past 18 months and our expectations for the third quarter.
Speaker Change: Sequentially, we expect reported sales to be flat to down low single digits.
Speaker Change: EBITDA margins should also be stable sequentially with the second quarter as we continued to manage cost effectively in a mixed economic environment.
Speaker Change: Preliminary July sales per workday were down low single digits versus the prior year, excluding the impact of the integrated supply divestiture in the base period.
Speaker Change: The sales outlook at the midpoint for the third quarter and the balance of the year assumes that current run rate of sales continues while the high end of the guidance range assumes more normal seasonality.
Unknown Executive: Committee. Turning to slide 16.
Speaker Change: Turning to slide 16, before we open it up to you for your questions today.
Unknown Executive: Before we open it up to your questions today, I wanted to highlight our upcoming Investor Day on Thursday, September 26th, from 9 to 11:30 AM Central Time. We will be giving an update on our digital transformation with more details on what we are executing and the benefits to our customers, suppliers, employees, and our investors. We will also discuss the path to our long-term goal of a 10% EBITDA margin. And finally, we will talk in more detail around our up-sized cash generation and how we intend to use this cash flow to increase investment returns.
Speaker Change: I wanted to highlight our upcoming Investor day on Thursday September 26 from nine to 11 30, a M central time.
Speaker Change: We'll be giving an update on our digital transformation with more details on what we are executing and the benefits to our customers suppliers employees and our investors.
Speaker Change: He will also discuss the path to our long term goal of a 10% EBITDA margin and finally, we will talk in more detail around our upsized cash generation and how we intend to use this cash flow to increase investment returns.
Unknown Executive: With that operator, we can now open the call to questions.
Speaker Change: With that operator, we can now open the call to questions.
Unknown Executive: Thank you.
Speaker Change: Thank you we will now begin the question and answer session.
Unknown Executive: We will now begin the question and intercession. If you'd like to ask a question, please first start following by one on your telephone keypad. Please limit your questions to one question and one follow-up.
Speaker Change: If you'd like to ask a question. Please press star followed by one on your telephone keypad.
Speaker Change: Please limit your questions to one question and one follow up.
Deane Dray: Today's first question comes from Dean Dre with RBC Capital Markets.
Speaker Change: Today's first question comes from Deane Dray with RBC capital markets. Please go ahead.
Unknown Executive: Please go ahead. Thank you.
Deane Dray: Thank you good morning, everyone.
Unknown Executive: Good morning, everyone.
Deane: Good morning Deane.
John Engel: Morning, Dean. Hey, maybe we can start with the pockets of weakness and in your release the slides in the commentary. Everything you talked about we've heard before in terms of being weak spots: construction, solar, utility, and the telecom broadband. So there's nothing relatively new here from a vertical getting weaker, but just talk about within the context of your expectations. Is it the duration of the slowing in these pockets? Lasting longer is the magnitude getting worse. When you talk about project delays, are they cancellations? Is there a demand sentiment here where you're seeing this ripple through, where you're getting delays in decision making?
John Engel: Maybe we can start with the pockets of weakness and, you know, in your release, the slides and the commentary, everything you talked about, and our view of broadband recovery, but principally utility. I have had a bit of a slowdown in purchases in utility that started in the fourth quarter and continued into the first quarter. We thought that it would start to kick back into a more normal purchase run rate in the second quarter, but it has not happened yet.
Speaker Change: Maybe we could start with the pockets of weakness and yet in your release the slides and the commentary everything you talked about we've.
Speaker Change: Heard before in terms of being weak spots construction solar utility and the telecom broadband so theres nothing relatively new here from a.
Speaker Change: Our vertical getting weaker but just talk about within the context of your expectations is it the duration of the slowing in these pockets are lasting longer or is that magnitude getting worse.
Speaker Change: When you talk about project delays, they're not cancellations is there.
Speaker Change: Demand sentiment here, where there just youre seeing this ripple through where youre getting delays in decision, making just kind of bigger.
John Engel: Just that bigger context of how we look at all these pockets and is there a bigger trend here?
Speaker Change: Bigger context of how we look.
Speaker Change: Look at all these pockets and is there a bigger trend here.
John Engel: Thanks for that question. No cancellations. Let me just hit that up front. We've seen no cancellations in our backlog or our business. The only meaningful change is utility and our view of broadband recovery, but principally utility. We had expected we had that a bit of kind of slowed down in purchases in utility that started in the fourth quarter, continued into the first quarter. We felt that would start to kick back into a more normal purchase run rate in the second quarter. It is not a curve. I think an important point is on our UBS pages in our Outlook deck.
Speaker Change: Thanks for that question no cancellations. So let me just hit that upfront we've seen no cancellations in our backlog in our business.
Speaker Change: The only meaningful change.
Speaker Change: Is utility.
Speaker Change: And our view of broadband recovery.
Speaker Change: Principally utility we had expected.
Speaker Change: We haven't I haven't had a bit of a kind of slowdown in purchases and enjoy that started in the fourth quarter continued into the first quarter, we thought that would start to kick back into a more normal purchase run rate in the second quarter. It has not occurred.
John Engel: And, you know, I think an important point is on our UBS page, it's in our Outlook deck, we have sales down in the quarter. So that's a very good indication of the overall utility market. And so we just see that extending through the second half, and that's based on discussions with our utility customers. I think, again, given our size, scale, and leading value proposition in utilities, I think we have very good insight into kind of exactly what customer purchasing patterns are.
Speaker Change: Yeah.
Speaker Change: I think an important point is on all of our U B S pages in our outlook.
John Engel: Two-thirds of our customers in the US; we have sales down in the quarter. So that's a very good indication of the overall utility market. So we just see that being extending through the second half. And that's based on discussions with our utility customers. I think again, given our size scale and leading value proposition and utility, I think we have very good insight into exactly what customer purchasing patterns are. But back to the balance of the business, you can think of the momentum vector as consistent with Q1. EES is stable. that slight improvement versus Q1, construction, stable, industrial, great opportunity, pipeline, just a little bit of moderation in the day-to-day MRO, but I think that's in phase or we're in alignment with the overall market dynamics, OEM improving momentum-wise as we move out of Q1, Q2.
Speaker Change: Two thirds of our customers in the U S. We have.
Speaker Change: Sales down in the quarter. So that's a very good indication of the overall utility market.
Speaker Change: And so we just see that extending through the second half and that's based on discussions with our utility customers I think again, given our size scale and leading value proposition and utility I think well very good insight into kind of exactly where our customers' purchasing patterns are.
John Engel: But back to the balance of the business, you can think of the kind of the momentum vector as consistent with Q1. EES is stable. And so, again, I think we have very good insight into kind of exactly what customer purchasing patterns are.
Speaker Change: Back to the balance of the business you guys think about the kind of the momentum vector is consistent with Q1, yes, it's stable.
Speaker Change: A slight improvement versus Q1.
Speaker Change: Construction stable industrial great opportunity pipeline.
Speaker Change: Just a little bit of moderation in the day to day MRO, but I think that's an enphase are or are in alignment with the overall market dynamics, our OEM improving momentum lives as we move out of Q1 and Q2 so.
John Engel: So, if you look at EES too, I think very, very good margin and cost management, so we're well positioned for continued margin expansion as future growth kicks in. And on CSS, we saw an acceleration, so data center, AI driven data centers started really picking up momentum; it's ticked into the double-digit growth range from single-digit growth in Q1. I know that was a lot of questions; we had around why wasn't data centers growing at double digits, and it's great to see. And you'll recall from last quarter's call, we kind of took everyone through the value chain, the timing of gray space, white space, and when we see the benefit. And so we said there would be a bit of a lag there, so that's clearly kicking in. Great to see that, and we expect that momentum vector to continue, and so that's the other two businesses.
Speaker Change: If you look at it he has to I think very very good.
Speaker Change: Margin and cost management, so we're well positioned for continued margin expansion as well as future growth kicks in and I don't see us as we saw an acceleration so data centers AI driven data centers started really picking up momentum kicked into the double digit growth range from single digit growth in Q1, I know that.
Speaker Change: A lot of questions, we had around well I wasn't datacenters growing at double digits, and it's great to see and you'll recall from last quarter's call. We.
Dean: Got it took everyone through the value chain, the timing of the grain space White space and when we see the benefit and so we said there'd be a bit of a lag there. So that's clearly kicking in great to see great to see that and that we expect that momentum vector to continue and so that's the other two businesses. So that's there's a little more color Dean hopefully.
John Engel: So, there's a little more color, Dean. Hopefully, that's hopeful that the big delta is utility not coming back in the second half. And then just to clarify on the utility, how much of that is project delays and pushouts versus the kind of extended destocking that's been going on for multiple quarters? So, the destocking continues. I wouldn't say it's project delays; the dynamic that's occurring is, you know, with all the inflation that's occurred across our economy and value chain over the last couple of years, the capital spending that was approved is still getting executed by the utilities, but those dollars are not going as far.
Dean: Thats helpful. And then the big Delta is utility not coming back.
Speaker Change: In the second half.
Speaker Change: And then just to clarify on the utility how much of that is project delays and push outs versus that kind of extended destocking, that's been going on for multiple quarters.
John Engel: Project delays and pushouts versus the kind of extended destock, interest rates that have increased, tightened lending standards, even a strong dollar. You're just, you're kind of seeing that kind of ripple through. And I think that's what's impacting utilities. Seeing a little bit of residential construction weakening, you're seeing that in the industrial kind of trending sideways, you know. That ISM number is a pretty notable number. You know, 19 in the last 20 months; it's been in contraction territory.
Speaker Change: So the Destocking continues.
Speaker Change: You say, it's project delays the dynamic thats occurring is.
Speaker Change: With all the inflation that's occurred.
Speaker Change: Across our economy value chain over the last couple of years.
Speaker Change: The capital spending that was approved is still getting executed by the by the utilities, but those dollars are not going that far.
John Engel: So, it's not that the current projects underway are getting stretched out or slipped or go kind of extending. If they're not, the new projects are not kicking in, and I think, you know, I think what we're seeing is kind of the overall economy and impact on our serve markets adjusting to, you know, the elevated interest rates that increase tight and blending standards, even a strong dollar. Either you're just, you're kind of seeing that kind of ripple through, and I think that's what's impacting utilities, you know, a little bit of residential construction weakening. You're seeing that in the industrial kind of trending sideways; you know, that ISM number is a pretty notable number. You know, 19 of the last 20 months it's been in contraction territory.
Speaker Change: So it's not that the current projects underway are getting stretched out or slipped again kind of extending if theyre not the new projects are not kicking in.
Speaker Change: You know I think what we're seeing is kind of the overall economy and impact on our served markets adjusting to.
Speaker Change: But the elevated.
Speaker Change: Interest rates increased tightened lending standards, even a strong dollar either you're just you're kind of seeing that kind of ripple through.
Speaker Change: And I think that's what's impacting utilities seemed a little bit and rising construction weakening youre seeing that in the industrial kind of trending sideways.
Speaker Change: That <unk> number is a pretty notable number you have 19 of the last 20 months its been in contraction territory. So I think that that speaks to the overall economic environment being next to a multi speed alright.
John Engel: So, I think that that speaks to the overall economic environment being next in multi speed.
Unknown Executive: All right, that's all really helpful. And just one last question related to the data center growth: that is right now in that kind of mid to high teens, that's the sector, that vertical growth that we would expect. DeCenter business for you versus the segment average. I would have thought there'd be more of an offset to the other areas, but it looks like you're not getting that. So, where does the data come from? Well, yeah. So, so in, in the quarter, you know, when you think about the operating groups that are part of CSS, it's Enterprise Network, Infrastructure, it's our WDCS, the Data Center Solutions, or Data Center business and Insecurity Solutions.
Speaker Change: Alright, that's all really helpful and just one last question related to the data center growth that is.
Speaker Change: Right now in that kind of mid to high teens, that's a sector that vertical growth that we would expect just talk about the margins for that data center business for you versus the segment average I would've thought there'd be more of an offset to.
Speaker Change: The other areas, but it looks like you're not getting that so where does that yes.
Speaker Change: So in in the quarter in the quarter.
Speaker Change: Yeah. When you think about the operating groups that are part of CSS. It's enterprise network infrastructure. It's R. W. D C S and data Center solutions, our data center business and our security solutions.
John Engel: The gross margin of our data center business and our security business actually improved in the quarter year over year. It was the enterprise network infrastructure that we had the contraction, and Dave kind of went through the details on that and is in his opening comments. So, I think is that increasingly grossed in, you know, again, and as Dave mentioned, which I'll reiterate, you know, our view on CSS margins are going forward. We expect you know stability. We're working to improve those. And with the accelerating growth, we'll get increased operating leverage, you know, down the EBITL line for CSS.
Speaker Change: The gross margins of our data center business and our security business actually improved.
Speaker Change: In the quarter year over year. It was the enterprise network infrastructure that we had the contraction and David kind of went through the details on that and as you know.
Speaker Change: Any comments, so I think as that increasingly grows dean.
Speaker Change: Again, as Dave mentioned, which I'll reiterate our view on CSS margins are going forward, we expect stability, we're working to improve those and with the accelerating growth, we'll get increased operating leverage no doubt.
Speaker Change: That EBITDA line for CSS.
Unknown Executive: Thank you.
Speaker Change: Thank you.
Sam <unk>: Thank you and our next question comes from Sam <unk> with Raymond James. Please go ahead.
Samuel Darkatsh: Emma, next question comes from Sam Darkhops with Raymond James.
Unknown Executive: Please go ahead. Good morning, John. Good morning, Dave.
John Engel: So I think that speaks to the overall economic environment being mixed at multi-speeds. Just talk about the margins for that data, the segment average, and I would have thought there'd be more of an offset. Good morning, John. Good morning, Dave. How are you?
Sam: Good morning, John Good morning, Dave how are you.
Unknown Executive: How are you?
Samuel Darkatsh: Good morning, Sam. First question, you've taken a 300 million, 300 to 400 million dollar cut in your sales guidance. You're cutting EBITL by 150. That's obviously way more than your normal decriminal margin. Just trying to get a sense as to why that might be so high. And then also with keeping free cash flow guidance intact, what's the incremental benefit to free cash flows with 150 million dollar take down EBITL to get to your intact free cash flow guide?
John Engel: Morning, Sam. As we called out, the majority of that is really driven by utility and broadband tools. We also did not perform to our expectations in the first half of the year. Clearly, we missed the consensus in the second quarter by just under $100 million.
Speaker Change: One of them.
Speaker Change: First question.
Speaker Change: Taken a 300 million 300 or $400 million cut in your sales guidance, you're cutting EBITDA by 150.
Speaker Change: That's obviously way more than your normal.
Speaker Change: Decremental margin.
Speaker Change: I'm, just trying to get a sense as to why.
Speaker Change: That might be so high and then also with keeping free cash flow guidance intact, what's the incremental benefit to free cash flows with $150 million take down an EBITA would take to get to your intact free cash free cash flow guide.
Dave Schultz: Yeah, Sam, let me first address the changes to the guidance. And at the midpoint, you know, we're coming down about 450 million dollars of sales at the midpoint. You know, as we called out, the majority of that is really driven by utility and draw advantage. We also did not perform to our expectations in the first half of the year, you know, clearly we missed the consensus in the second quarter by just under 100 million dollars. So, you know, those are the real drivers of the sales coming down. When you take a look at the incremental margin for that decline, it is heavier than we would historically count off.
Speaker Change: Yes, So let me first address the changes to the guidance and at the midpoint.
Speaker Change: We're coming down about $450 million of sales at the midpoint.
Speaker Change: As we called out the majority of that is really driven by utility and broadband solution. We also did did not perform to our expectations in the first half of the year you know clearly we missed the consensus in the second quarter by just under $100 million. So those are the real drivers of the sales.
John Engel: So those are the real drivers of sales when you take a look at the decremental margin. So the lower SVRs implies lower purchases, which implies lower inventories, which is why the free cash flow doesn't change.
Speaker Change: Is coming down.
Speaker Change: When you take a look at the decremental margin.
Speaker Change: For that decline it is heavier than we would historically count off.
Dave Schultz: One of the things that I'll highlight here is the utility and broadband solutions business is our high adjusted EBITL margin business. So, as we're taking out the majority of the sales for that, that is having a disproportionate effect on the decremental margins. On top of that, we're recognizing that our results were soft in the first half of the year relative to our initial outlook. And we're also recognizing that, given that our sales are coming down, there will be some pressure on our supplier volume rebates. So we are reflecting, you know, a reduction to the outlook to emphasize that given the slower than expected growth rate with this outlook, there will be pressure on growth margins because of the supplier volume rebates.
Speaker Change: One of the things that I'll highlight here is the utility and broadband solutions business is our highest adjusted EBITDA margin business. So as we're taking out the majority of the sales for that that is having a disproportionate effect on the decremental margins on top of that we're recognizing that our results were soft in the first half of the year.
Speaker Change: Relative to our initial outlook and we're also recognizing that given that our sales are coming down there will be some pressure on our supplier volume rebates. So we are reflecting.
Speaker Change: A reduction to the outlook.
Speaker Change: To emphasize that given the slower than expected growth rate with this outlook there will be pressure on gross margins because of the supplier volume rebates on the margin side of this.
Dave Schultz: On the margin side of this, we also need to take into account the leveraging of our operating platform. So, you know, as sales have come down, we've already taken cost reductions over the past 12 months. It's difficult for us to manage a significant reduction to cost in the back after the year, keeping in mind that we want to make sure that we keep the capability to take advantage of the secular growth trends in the out years. But that operating leverage is also putting pressure on the EBITDA.
Speaker Change: I need to take into account.
Speaker Change: The deleveraging of our operating platform. So as sales have come down we've already taken cost reductions over the past 12 months.
Speaker Change: It's difficult for us to manage.
Speaker Change: Significant reduction to cost in the back half of the year keeping in mind that we wanted to make sure that we keep the capability to take advantage of the secular growth trends in the out years, but that operating Leverages is also putting pressure on the EBITDA margin.
Dave Schultz: Sergeant. So the lower SVR is implies lower purchases, which implies lower inventories, which is why the free cash flow doesn't change? Correct. And so we wouldn't anticipate that, given the shape of the curve on sales, as we guided to reported sales being sequentially down low single digit, the flat. You know, we think we've given you the appropriate guide. So, from a networking capital perspective, that's what gives us the confidence that we can hold the free cash flow outlook that we provide. We've provided to previously.
Speaker Change: So the lower SVR is implies lower purchases, which implies lower inventories, which is why the free cash flow it doesn't change.
Speaker Change: Correct and so we wouldn't anticipate that given the shape of the curve on sales as we've guided to reported sales being sequentially down low single digits to flat.
John Engel: So we would anticipate that given the shape of the curve on sales as we've guided to reported sales being sequentially down, low single-digit to flat, we think we've given you the appropriate guidance. So from a networking capital perspective, that's what gives us the confidence that we can hold the free cash flow outlook that we provided to you previously.
Speaker Change: We think we've given you the appropriate guide so from a net working capital perspective, that's what gives us the confidence that we can hold the free cash flow outlook that we provided to you previously got it and then my last question.
Unknown Executive: Got it.
John Engel: My last question. There's been some chatter in the channel about, you know, improper coordination and pricing between manufacturers of PVC conduit would be, of course, a much smaller portion of that. And we're not aware of anything from our suppliers. We've not been contacted by anyone about this concern in the marketplace. So, you know, this is relatively new news to us. Morning, Tommy.
Samuel Darkatsh: My last question, there's been some chatter in the channel about, you know, improper coordination and pricing between manufacturers of PVC pipe for electrical conduit. I'm almost positive. This is a really small part of your business. But can you remind us what your sales and EBITDA mix is specific to electrical conduit? You know, Sam, if you're talking specifically about PVC-related conduit, I don't have that number in front of me. I mean, when you think about the pure commodity products across all product categories, it's mid single-digit percentage of our revenue. PVC conduit would be, of course, a much smaller portion of that.
Speaker Change: There's been some chatter in the channel about <unk>.
Speaker Change: Proper coordination in pricing between manufacturers of PVC.
Speaker Change: PVC pipe for electrical conduit.
Speaker Change: I'm I'm almost positive. This is a really small part of your business, but can you remind us what your sales and EBITDA mix is specific to electrical conduit.
Sam <unk>: Yeah Sam.
Sam <unk>: Youre talking specifically about PVC related condo. It I don't have that number in front of me I mean, when you think about the pure commodity products across all product categories. It's mid single digit percentage of our revenue PV.
Speaker Change: PVC conduit would be of course, a much smaller portion of that.
Dave Schultz: And we're not aware of anything, you know, from our suppliers. We've not been contacted by anyone about, you know, this concern in the marketplace. So, you know, this is relatively new news to us.
Speaker Change: And we're not aware of anything from our suppliers, we have not been contacted by any one about this concern in the marketplace. So this is relatively new news to us.
Unknown Executive: Thank you. Appreciate it.
Speaker Change: Thank you appreciate it.
Unknown Executive: Thank you. Any other questions?
Speaker Change: Thank you and our next question today comes from Tommy Moll with Stephens Inc. Please go ahead.
Thomas Moll: Today comes from Tommy Moell with Steve in the sink. Please go ahead. Good morning, and thank you for taking my questions. Morning, Tommy.
Tommy Moll: Good morning, and thank you for taking my questions.
Speaker Change: Good morning, Tommy.
John Engel: I'll have two on utility: one near term and one bigger picture. But in the near term, John, you've referenced this customer destocking for some time. Do you have any idea how far above. Typical, the inventory there at your customer base sits today, and how much farther we may have to go. Yeah, you know, there's a great question. There's actually some variation by customer. Now, look, those customers typically run with inventory that is in a meaningful position to support. You know, running their business and supporting getting back up online quickly in response to a storm. So, there's always meaningful inventory and the customer portion of that value chain.
Tommy: I'll have to on utility one near term and one bigger picture, but on the near term John you've referenced this customer destocking for some time do you have any idea how far above.
Speaker Change: A typical the inventory there at your customer base sits today and how much farther we may have to go.
John Engel: Yeah, you know, it's a great question. There's actually some, you know, variation by customer. And they're just.
Speaker Change: Yeah.
Speaker Change: There's a it's a great question.
Speaker Change: Actually some variation by customer.
Speaker Change: No look that those customers typically run with with inventory that is in a meaningful position to support.
Speaker Change: You know running their business and supporting getting back up online quickly in response to the storm.
Speaker Change: There's always meaningful inventory and the customer portion of that value chain.
John Engel: But, you know, I think it's just given the overall environment. We're seeing the pause on purchasing extending further than we thought. It varies pretty significantly, Tommy, across the customer base. But I would say, in general, overall, they still, they're just, they're just tight on their purchasing, and they're running those inventory levels down a bit.
Speaker Change: But.
Speaker Change: I think it's just given the overall environment, we're seeing the pause on purchasing extending further than we thought.
Speaker Change: It varies pretty significantly Tommy across the customer base, but I would say in general overall, they still there just there is tight on their purchasing I think they're running those inventory levels down a bit.
Unknown Executive: Okay.
Speaker Change: Okay.
John Engel: Bigger picture on utility. This is a market that we've discussed benefiting from secular tailwinds for some time now. And there just seems to be a growing list of. of interruptions, maybe you could call it. You mentioned John, what I'll call digesting some of this inflation, where maybe it's not the CapEx dollars impacted, but those dollars just don't go as far. You mentioned regulatory concerns; rates is potentially tying into some of the more muted spending patterns. So what gives you the confidence that we'll see this and market resume what has not that long ago been a pretty brisk secular growth clip.
Speaker Change: Bigger picture on utility. This is a market that we've discussed benefiting from secular tailwind for some time now.
Speaker Change: And they're just.
Speaker Change: It seems to be a growing list of.
Speaker Change:
Speaker Change: Of interruptions, maybe you could call it.
Speaker Change: You mentioned, John what all called digesting some of this inflation, where maybe its not the capex dollars impacted but.
John Engel: Those dollars just don't go as far.
John Engel: You mentioned regulatory concerns rates potentially tying into some of the more muted spending patterns.
Speaker Change: So what gives you the confidence that we'll see this in market resume was not that long ago been a pretty brisk secular growth clip.
John Engel: Yeah, there's a great question, Tommy. I have great confidence that I will call this a temporary pause. You know, if you think about the short meeting long term and all the different secular trends that everyone's talking about, whether it's electrification, we're green energy, grid modernization. Even even recently the buzz around AI driven data centers, when you look at all those secular trends and a couple with me, you're showing back to the US and North America, the governing factor to enable all of that is power. So I'm very confident over the mid to long term that we have a significant step up in the power demand curve, I'll call it.
John Engel: Yeah, that's a great question Tommy.
Speaker Change: Great confidence that we'll call this a temporary pause.
Tommy Moll: Where do you think about the short mid and long term.
John Engel: And all the different secular trends that everyone's talking about, whether it's electrification or green energy, grid modernization. Thank you, John. I'll turn it back. Thank you. And our next question today comes from David Manthey with Baird. Please go ahead.
John Engel: All of the different secular trends that everyone's talking about whether it's electrification or green energy grid modernization.
John Engel: Even even recently the buzz around AI driven data centers. When you look at all of those secular trends and coupled with me Nearshoring reassuring back to the U S and North America.
John Engel: The governing factor to enable all of that is.
John Engel: Is power.
John Engel: So I'm very confident over the mid to long term.
John Engel: We have a significant step up in the <unk>.
John Engel: Power demand curve I'll call it.
John Engel: And so I think, you know, all the ambitions around AI and Jenny I driven data centers, the ambitions are on green energy, the ambitions are on electrification. That's going to put that those that step up results significantly increase in demand; it's going to pull on the whole value chain. And the governing item, the critically enabling item, is it way up the value chain is power generation and distribution of that power. So the utilities play a critical role in enabling the secular growth. And I think, you know, we're going to see them, you know, in varying ways. Managing through that is not a one quarter or one year, you know, kind of lamp up; this is going to occur over a multi-year period and support these secular trends are the next decade and beyond.
John Engel: And so I think all of the ambitions around AI and Jenny I, driven data centers ambitions around green energy ambitions around electrification.
Speaker Change: That's going to put that does.
John Engel: That step up results significant a significant increase in demand that's going to pull on the whole value chain and the governing the critically enabling item.
John Engel: Is it way up the value chain is power generation.
John Engel: And the distribution of that power so.
John Engel: The utilities play a critical role in enabling the secular growth.
Speaker Change: Thank you know, where we're going to see them.
Speaker Change: Anyways managing through that this is not a one quarter or one year.
Speaker Change: Caught up ramp up this is going to occur over a multiyear period and support these secular trends over the next decade and beyond so I'm I'm again, I'm very confident that we.
John Engel: So I'm again, I'm very confident that it will get addressed; it has to get addressed. Again, if you look at the current state and fidelity of the power distribution transmission and distribution network, you know, it is not position the meat the rising power demand curve and clearly not position the meat with the reliability and sustainability requirements that are going to be required. So all that translation to a big step up in capex time over time.
Speaker Change: It will get addressed it has to get addressed again, if you look at the current state and fidelity of the power distribution transmission and distribution network.
Speaker Change: It is it is not position to meet the rising power demand curves and clearly not position that made it with the with the reliability and sustainability requirements that are going to be required.
Speaker Change: So all of that translates into a big step up in Capex Tommy.
Speaker Change: Overtime.
Unknown Executive: Thank you.
Tommy Moll: Thank you John I'll turn it back.
Unknown Executive: Thank you, John. I'll turn it back.
Speaker Change: Yeah.
David Manthey: Thank you. Any questions today comes from David man to eat with there.
Speaker Change: Thank you and our next question today comes from David Manthey with Baird. Please go ahead.
Unknown Executive: Please go ahead. Thank you and John. To your point earlier, I SM July came up today, 46.8. So it's just not pretty out there in industrial America today.
David Manthey: Okay. Thank you and John to your point earlier I S. M July came out today 46, eight so it's not pretty out there in industrial America today.
David Manthey: Yeah, thank you. And John, to your point earlier, ISM July came out today at 46.8. So it's just not pretty out there in industrial America today.
David Manthey: But the question, prior to the WIS divestiture, you said you expected full year 2024 gross margin to be higher than 2023. And if my math is right, I think the divestiture adds about 30 basis points to full year gross margin, which would put you up even higher, all else being equal. Taking into account the divestiture and the new guidance, do you generally still believe that 2024 gross margin can be higher than 2023?
Unknown Executive: But the question prior to the WIS, divestiture, you said you expected full year 2024 gross margin to be higher than 2023. And if my math is right, I think the divestiture adds about 30 basis points to full year gross margin, which would put you up even higher, all else being equal. But I'm taking into account the divestiture and the new guidance. Do you generally still believe that 2024 gross margin can be higher than 2023?
Speaker Change: But the question prior to the W. I S. Divestiture, you said you expected full year 2020 for gross margin to be higher than 2023.
Speaker Change: And if my math is right I think.
Speaker Change: The divestiture adds about 30 basis points to full year gross.
Speaker Change: Gross margin, which would put you up even higher all else being equal but.
Speaker Change: Taken into account.
Speaker Change: Divestiture of the new guidance do you generally still believe the 'twenty 'twenty four gross margin can be higher than 2023.
Dave Schultz: Okay, good morning, Dave Schulz. We're not going to guide specifically to gross margin. The one thing I will reiterate that you're math on the impact of the integrated supply divestiture on gross margin for the year. That's right; it's about 30 basis points of improvement. I also mentioned in one of my previous responses that, as we have downshifted the expectation for total sales of the company, primarily driven by utility and broadband solutions, that will put pressure on our ability to achieve supplier volume rebates, which will put some pressure on our gross margins, of course. So yes, we are getting the benefit of the 30 basis points from the integrated supply divestiture.
Speaker Change: Hey, Dave Good morning, its Dave Schulz.
Speaker Change: We're not going to guide specifically to gross margin. The one thing I will reiterate that your math on the impact of the integrated supply divestiture on gross margin for the year that that's right. It's about 30 basis points of improvement.
Speaker Change: I also mentioned in one of my previous responses that as we have downshifted the expectation for total sales of the company, primarily driven by utility and broadband solutions that will put pressure on our ability to achieve supplier volume rebates, which will put some pressure on our gross margins.
Speaker Change: Of course, so yes, we are getting the benefit of the 30 basis points from the integrated supply divestiture.
Dave Schultz: That will be partially offset or fully offset depending on how you model the balance of this year relative to gross margin. So again, we're not going to guide you specifically when you take a look at how we've provided you with the framework of a 7 to 7.3% adjusted EBITDA margin. You know, I think depending on your point of view on the gross margin, I mean, we think that we have the appropriate outlook for adjusted EBITDA. And, you know, there could be some swings between gross margin and estimate, of course, as we progress through the year.
Speaker Change: That will be partially offset or fully offset depending on how you model the balance of this year.
Speaker Change: Relative to gross margin so.
Speaker Change: Again, we're not going to guide you specifically when you take a look at how we've provided you with the framework of our 7% to seven 3% adjusted EBITDA margin.
Speaker Change: I think depending on your point of view on the gross margin I mean, we think that we have the appropriate outlook for adjusted EBITDA and <unk>.
Speaker Change: There could be some swings between gross margin and SG&A of course, as we progress through the year.
Unknown Executive: Yep, okay, that's fair.
Speaker Change: Yeah, Okay, that's fair.
Dave Schultz: The second question on CSS EBITDA, which came in a little bit later than we thought for the second consecutive quarter. I think last quarter, you attributed to slowing momentum in your core data column. I assume that means the enterprise network infrastructure business. But we're the margins there that gross margins as expected and the downfall in CSS margins were related to lack of X. It sounds like you're investing there quite a bit.
Speaker Change: Second question on the CSS, EBITDA, which came in a little bit lighter than we thought for the second consecutive quarter.
Speaker Change: Think last quarter you attributed to.
Speaker Change: Boeing momentum in your core Datacom I assume that means the enterprise network infrastructure business, but.
Speaker Change: We're the we're the margins there the gross margins as expected in the downfall in CFS margins were related to lack of opex leverage it sounds like youre investing there quite a bit. So I'm just wondering if we see a reacceleration in sales where that solve itself and then related.
David Manthey: Were the margins there, the gross margins, as expected, and the downfall in CSS margins related to a lack of OpEx leverage? It sounds like you're investing there quite a bit. So I'm just wondering if we see a re-acceleration in sales, will that solve itself? And then, related, if you could just give us a rough breakdown of CSS between data center, network infrastructure, and...
Dave Schultz: So I'm just wondering if we see a re-acceleration in sales or that solve itself and then related, if you could just give us a rough breakdown of CSS between data center network infrastructure and security. Yes, certainly. So let me start first with the margin expectations. CSS did not meet our margin expectations in the second quarter. So, you know, we did not expect that we would have the drag from the project mix and the higher mix of direct shipments in the quarter. So, you know, we did not meet our expectations when we look specifically at CSS suggested EBITDA margin driven primarily by that gross margin.
Speaker Change: If you could just give us a.
Speaker Change: Rough breakdown of CSS between data Center network infrastructure and security.
Speaker Change: Yeah, certainly so let me start first with the margin expectations.
David Manthey: <unk>.
Speaker Change: CSS did not meet our margin expectations in the second quarter.
John Engel: So, you know, we did not expect that we would have the drag from the project mix, the higher mix of direct shipments in the quarter. So, you know, we did not meet our expectations when we looked specifically at the CSS adjusted EBITDA margin, driven primarily by that gross margin. You know, when I take a look at the composition of the profit quality, it really is a gross margin issue. We did not get the leverage on the top line, but the top line was only up 1%. Thank you. And our next question comes from Ken Newman at KeyBank Capital Markets. Please go ahead.
Speaker Change: We did not expect that we would have the drag from the project mix and the higher mix of direct shipments in the quarter.
Speaker Change: No we did not meet our expectations when it when we look specifically at CSS adjusted EBITA margin driven primarily by that gross margin you know when I take a look at the composition of the profit quality. It really is a gross margin issue. We did not get the leverage on the top line with the top line only up 1%.
Dave Schultz: You know, when I take a look at the composition of the profit quality, it really is a gross margin issue. We did not get the leverage on the top line with the top line only up one person. As we think about the balance of this year, we do anticipate that the margins will be stable, plus get the benefit of operating leverage on the top line. And then if I take a look at, you know, what is the mix within CSS, so enterprise network infrastructure is just under 40% of that strategic business unit; security is also about 40%, the balance being in the data center side.
Speaker Change: As we think about the.
Speaker Change: The balance of this year.
Speaker Change: We do anticipate that the margins will be stable plus get the benefit of operating leverage on the top line.
Speaker Change: And then if I take a look at you.
Speaker Change: What is the mix within CSS. So enterprise network infrastructure is just under 40% of that strategic business unit.
Speaker Change: Security is also about 40% the balance being in the data center side.
Unknown Executive: Very helpful. Thank you, Dave.
Ken Newman: Very helpful. Thank you David.
Unknown Executive: Thank you.
Speaker Change: Thank you and our next question comes from Ken Newman at Keybanc Capital markets. Please go ahead.
Ken Newman: So I just wanted to touch on, you know, some of the industrial end markets. Obviously, the PMI number was not that great, but Just, you know, as you think about the de-stocking that you've already seen in the industrial OE business from a few quarters ago, how do you think about that maintained EES guide in the context of, you know, what we're seeing in the macro today? I mean, we saw those results so far, Ken, in Q1 and Q2, so I would say that the industrial market's not downshifting, although a little bit of softness showed up in some other players that have reported this quarter.
Ken Newman: And our next question comes from Ken Newman, a key bank couple of markets.
John Engel: Please go ahead. As far as I'm new there, can you hear me? Yes, morning, Ken. Morning. So I just wanted to touch on, you know, some of the industrial and markets. Obviously, the PMI number was not that great, but just, you know, as you think about the destocking, you've already seen in the industrial, Louis business from a few quarters ago. So how do you think about that maintained ES guy in the context of, you know, what we're seeing in the macro today? I mean, we saw, we saw those results so far, Ken. If you want to keep to, so I would say the industrial, the industrial markets, not down shifting, the industrial is kind of trending sideways.
Speaker Change: As far as on mute there can you hear me.
Ken Newman: Yes, good morning, Ken.
Ken Newman: Good morning.
Ken Newman: So I just wanted to touch on.
Ken Newman: Some of the industrial end markets, obviously, the PMI number was not that great, but just as you think about the destocking that you've already seen in the industrial OE business from a few quarters ago.
Speaker Change: How do you think about that maintained EES guide in the context of what we're seeing in the macro today.
Ken Newman: I mean, we saw we saw those results so far kind of in Q1 and Q2, So I would say that the industrial the industrial market is not down shifting.
Speaker Change: The industrial is kind of trending sideways market comment.
John Engel: That is a market comment. You know, a little bit of softness showed up in some other players that have reported this quarter. Depending on their mix of business, they may be seeing that differently than others. But, you know, fundamentally for industrial, we have an outstanding portion of the ES; we have an outstanding opportunity pipeline. Our bidding and quoting and activity levels are strong. We've just seen some moderation in the day-to-day MRO, but that didn't just kick in in Q2, to your point. I mean, we've seen that over the last several quarters. So I just think that extends, you know, through the, through the second half.
Ken Newman:
Speaker Change: You know a little bit of softness showed up in some other players that have reported this quarter, depending on their mix of business. They may be seeing that differently than others, but you know.
Ken Newman: Depending on their mix of business, they may be seeing that differently than others. But, you know, fundamentally for industrial, we have an outstanding opportunity pipeline. Our bidding, quoting, and activity levels are strong. We've just seen some moderation in the day-to-day MRO, but that didn't just kick in in Q2, to your point. I mean, we've seen that over the last several quarters.
Speaker Change: Fundamentally for industrial we have an outstanding that portion of it yes, we have an outstanding opportunity pipeline, our bidding and quoting activity levels are strong.
Ken Newman: We've just seen some moderation in the day to day MRO, but that didn't just kick in in Q2 to your point I mean, we've seen that over the last several quarters. So I just think that extent.
John Engel: So, I just think that extends, you know, through the second half. With all that said, you know, given construction plus industrial plus OEM, our EES business showed good stability, and it showed some slight improvements in Q2 versus Q1. And I think, again, I want to emphasize this point. It's pretty important.
John Engel: Through the through the second half.
John Engel: With all that said, you know, given construction plus industrial plus OEM, our ES business showed good stability, and it showed some slight improvements in Q2 versus Q1. And I think again, I want to emphasize this point is pretty important when you look at both EES and UBS, even with sales that were down year over year. You know, we expanded operating margins in both of those two businesses. So I think for EES and industrial in particular, we've got, you know, well positioned. The SBA structure that's in place is what we need to take advantage of. And that market is a continuous growth, which turns the growth in the future in a more meaningful way.
John Engel: With all that said.
John Engel: Given construction plus industrial bus OEM, our EES business show good stability and it showed some slight improvements in Q2 versus Q1, and I think again I want to emphasize this point it is pretty important when you look at both EES and UBS, even with sales that were that were.
John Engel: When you look at both EES and UBS, even with sales that were down year over year, Yeah, that's helpful, Culler. No, no, no, I think it says that was part of the question. The other part was the EES gross margin. Was there a benefit from commodity pricing? Because your day-to-day industrial MRO business sounded like it was weaker, and I would have thought that would have been a headwind to margin there. But it sounds like, you know, the gross margin was more resilient. Now, the commodity impact was really not material to the EES gross margin. Again, we have a very modest one.
John Engel: Were down year over year.
John Engel: We expanded operating margins in both of those two businesses. So I think for EES in industrial in particular, we've got you know, we're well positioned to SG&A structure Thats in place is what we need to take advantage of that market as it continues to grow with the growth in the future in a more meaningful way.
Unknown Executive: And good cost management, good margin management. So I don't, you know, I'm not seeing a step down. I'm just seeing a kind of trending sideways.
John Engel: And good cost management, good margin management so.
Speaker Change: I don't I don't know that I'm.
Speaker Change: I'm not seeing a step down I'm, just seeing it kind of trending sideways hopefully that helps.
Unknown Executive: Hopefully, that helps. Yeah, that's that's helpful color.
Speaker Change: Yeah, that's a that's helpful color.
Dave Schultz: From my follow-up, you know, Dave, I think last quarter, you gave us a little bit of help on thinking about op-x on a sequential basis. I'm curious that there's anything in particular that we should kind of be paying attention to from an op-x perspective to Q3G or even from help on 3G to 4G. Thank you. Yes, Arley, the big thing to think about sequentially, Q2 to Q3, is in the second quarter. We recognize less expense than typical on our stock-based compensation and other incentives. And so I would anticipate that there is a mod of step up in that expense in the third quarter.
Speaker Change: For my follow up Dave I think last quarter, you gave us a little bit of help on thinking about opex on a sequential basis I'm curious if there's anything in particular that we should kind of be paying attention to from an opex perspective, Jupiter three G or even from a help on <unk>.
Speaker Change: Certainly the the.
Speaker Change: Big thing to think about sequentially Q2 to Q3 as in the second quarter.
Speaker Change: We recognized less expense than typical on our stock based compensation and other incentives and so I would anticipate that there is a modest step up.
John Engel: In that expense in the third quarter.
Dave Schultz: And then, of course, any adjustment for how you're modeling on the volumes. I mean, we've given you our point of view. But again, we have been aggressively managing structural costs takeout over the last 12 months. We will continue to be aggressive managing discretionary spend for the balance of the year.
Speaker Change: And then of course, the any adjustment for your how you're modeling on the volumes I mean, we've given you our point of view.
John Engel: But again, we have been aggressively managing structural cost take out over the last 12 months, we will continue to be aggressive managing discretionary spend for the balance of the year.
Unknown Executive: Very helpful. Thanks.
Speaker Change: Very helpful. Thanks.
Speaker Change: Thank you and our next question comes from Patrick Baumann with Jpmorgan. Please go ahead.
Patrick Baumann: Thank you. And the next question comes from Patrick Baumann with JP Morgan.
Unknown Executive: Please go ahead.
Dave Schultz: Hi, good morning. Quick one, a couple, a couple here. I guess the price that you talked about being up 2% for the company in the quarter. Was there any big difference across the segments, or was it up kind of 2% in all the segments? And you know, then on the ES gross margin line. Was there any benefit from commodity pricing in the quarter that could reverse in the second half because pricing, as you mentioned, was better. And I would have thought a slow down in the day-to-day industrial MRO business there would have been a headwind to margin.
Speaker Change: Hi, good morning.
Speaker Change: Quick one a couple of quick couple here I guess the price that you you talked about being up 2% for the company in the quarter.
Speaker Change: Was there any big difference across the segments or was it up kind of 2% in all the segments.
John Engel: And.
John Engel: Then on the EES gross margin line.
Speaker Change: Was there any benefit from commodity pricing in the quarter that could reverse in the second half because pricing as you mentioned was better.
Speaker Change: And I would've thought a slowdown in the day to day industrial MRO business, there would've been a headwind to margin. So maybe any color on that would be helpful.
Dave Schultz: So maybe any car, and that would be helpful. Yep, certainly. So on the overall company level pricing, we disclose the 1% benefit in the first quarter, a 2% benefit approximately here in the second quarter. The key difference between the quarters was the benefit of pure commodity pricing. And so when you think about us having that mid single digit exposure pure commodities, we did get extra benefits sequentially from commodity that would primarily be within our EES business. So, you know, both EES and UBS saw continued benefit from price in the second quarter. The CSS pricing was slightly negative.
Speaker Change: Yeah, certainly so on.
John Engel: On the overall company level pricing.
Speaker Change: We disclosed a 1% benefit in the first quarter, a 2% benefit approximately here in the second quarter. The key difference between the quarters was the benefit of pure commodity pricing and so when you think about us having that mid single digit exposure to pure commodities, we did get extra benefits.
John Engel: Sequentially from commodity that would primarily be within our EES business.
John Engel: So both Es and UBS saw continued benefit from price in the second quarter, the CSS pricing was slightly negative.
John Engel: Hello.
Dave Schultz: So, go ahead. No, no, no, I think it says that was part of the question. The other part was the ES gross margin. Was there a benefit there from commodity pricing because your day-to-day industrial MRO business sounded like it was weaker. And I would have thought that would have been a headwind to margin there, but it sounds like the gross margin was more resilient. The commodity impact was really not material to the EES gross margin. Again, we have the very modest percentage of our mix in EES is commodity related. And again, we're an average with inventory company.
John Engel: Yes.
Speaker Change: Go ahead.
Speaker Change: Oh, sorry, yes, that's my question.
John Engel: No no no I think it says that was part of the question. The other part was the EES gross margin was there a benefit there from commodity pricing because.
John Engel: Your day to day industrial MRO business. It sounded like it was weaker than I would've thought that would've been a headwind to margin there, but it sounds like the.
John Engel: The gross margin was not was more resilient.
John Engel: You know the commodity impact was really not material to the EES gross margin again, we have a very modest.
John Engel: Percentage of our mix in EES is commodity related and again were an average with inventory company those commodity costs have been going up and down over the last six months, so really no substantial benefit.
John Engel: The percentage of our mix in EES is commodity related. And again, we're an average with inventory company. Those commodity costs have been going up and down over the last six months. So, you know, really no substantial benefit because of commodities on the EES gross.
Dave Schultz: Those commodity costs have been going up and down over the last six months. So, you know, really no substantial benefit because of commodities on the EES gross margin. And Patrick, remember too, on the industrial portion of the business that we go to market, you know, not for all of industrial, but a good portion of that is national counter global count programs, you know, which are multi-year in nature, which, you know, there's a services component. And so when you just think about the margin mix of industrial, you know, that's, that doesn't move lockstep with commodities on a weekly day.
John Engel: Because of commodities on the EES gross margin.
John Engel: And Patrick, remember, too, on the industrial portion of the business, that we go to market, not for all of industrial, but a good portion of that is national account or global account programs, you know, which are multi-year in nature, which have a services component. And so when you just think about the margin mix of industrial, you know, that doesn't move lockstep with commodities on a weekly basis.
John Engel: Remember Joe on the industrial portion of the business that we go to market.
John Engel: Not for all of industrial but a good portion of that is is national account, our global account programs.
John Engel: Which are multiyear in nature, which you know there's a services.
John Engel: <unk> component and so when you just think about the margin mix of industrial.
John Engel: That doesn't move lock step with commodities on a weekly basis.
Unknown Executive: Alexis. Okay, and then my follow-up is on the July decline of low single digits. If you could help us understand how the different segments performed relative to that, and then also if there was anything unusual that you saw or any unusual performance in, you know, different markets that you saw that impacted that growth rate. Yeah, so, you know, those are preliminary numbers, so I don't want to provide a breakdown by units because there's a lot of things that could change, you know, in the last couple of days of a quarter and when we actually closed the books officially. But, you know, the one thing that I'll highlight is, you know, when you take a look sequentially in the second quarter where we saw the big step up in that sequential sales process.
John Engel: Okay.
Speaker Change: And then my follow up is on the July decline of low single digits. If you could help us understand how the different segments performed relative to that and then also.
Speaker Change: If there was anything unusual that you saw.
Speaker Change: Or any unusual performance in different markets that you saw that impacted that growth rate.
Speaker Change: Yes. So those are preliminary numbers. So I don't want to provide a breakdown by units because theres a lot of things that could change you know in the last couple of days of the quarter and when we actually close the books officially but the one thing that I'll highlight is when.
John Engel: Yeah, those are preliminary numbers. So I don't wanna provide a breakdown by units because there are a lot of things that could change in the last couple of days of a quarter and when we actually close the books officially. But the one thing that I'll highlight is when you take a look sequentially at the second quarter, where we saw the big step up. Thanks. Good morning, everyone.
John Engel: You take a look sequentially.
John Engel: In the second quarter, where we saw the big step up in that sequential sales growth. You know we were up about 5% organically sequentially in the second quarter that was with double digit sequential growth on a sales per workday basis within CSS.
Dave Schultz: You know, we were up about 5% organically, sequentially, in the second quarter. That was with double-digit sequential growth on a sales per workday basis within CSS. And, you know, given, you know, how we're viewing the market opportunity, if you compare the front half versus the back half and what we've guided for the full year reported sales. Now, you know, that would provide you with a little bit of how things are shaping, I would say, to live was in line with the full year outlook that we've provided you. Nothing significantly different from the trend from the second quarter or any impact to our full year outlook.
Speaker Change: And you know given.
Speaker Change: How were viewing the market opportunity if you compare the front half versus the back half and what we've guided for the full year reported sales now that would provide you with a little bit of how things are shaping up I would say July was in line with the full year outlook that we provided you nothing significantly different from.
John Engel: The trend from the second quarter or any impact to our full year outlook.
Unknown Executive: Okay, thank you.
Speaker Change: Okay. Thank you.
Nigel Coe: Thank you. The next question comes from Nigel Coe at Wolf Research.
Speaker Change: Thank you and our next question comes from Nigel Coe of Wolfe Research. Please go ahead.
Unknown Executive: Please go ahead. Thanks.
Speaker Change: Thanks, Good morning, everyone. Thanks for the questions.
Dave Schultz: Good morning, everyone. Thanks for the question. So I mean, give me a little bit short term here, but, you know, the thing about the third quarter guide, you know, plaster down, low singles, which wouldn't be out of step with history. But we do have that extra day in the third quarter. So just wondering if that's the message here that you're bacon in essentially week of seasonality. You know, effective macro is that the message and then you know, you sort of guidance for flatish EBITDA margins. It sales out down to Crenshaw expected, you know, margins to be down a little bit as well.
John Engel: So, I mean, keeping it a little bit short term here, but, you know, let's think about the third quarter guide, flat to down, low singles, which wouldn't be out of step with, you know, history, but we do have that extra day in the third quarter. So just wondering if that's the message here, that you're baking in essentially weaker seasonality, you know, reflective of the macro, is that And then, you know, your sort of guidance of flattish EBITDA margins, if sales are down to crunch here, I would have expected, you know, margins to be down a little bit as well.
John Engel: So.
Speaker Change: I mean, it came in a little bit short term here, but you know.
John Engel: The thing about the third quarter guide, you know flat to down low singles, which wouldn't be out of step with.
John Engel: History, but we do have the extra day in the third quarter. So just wondering if that's the message here that you're baking in essentially a weaker seasonality.
Speaker Change: You know were effective at the macro is that the message and then yeah.
Speaker Change: So the guidance of flattish EBITDA margins.
John Engel: Sales out down sequentially I would have expected margins to be downloaded as well so.
Dave Schultz: So I guess what will be the offset if voting is upcoming in the week.
Cuba Kim: I guess, what would be the offsets if volumes are coming into the weekend Cuba Kim.
Dave Schultz: Yes, certainly so, Nigel. Let me first address, you know, based on the outlook for reported sales in the third quarter. Yes, we are coming off the typical seasonality. I think the trends that we saw through the first half of the year are market outlook for primarily the utility and broadband solutions business. We believe that that's the appropriate way of viewing this. So yes, it is coming off of that typical seasonality. As we mentioned earlier, the high end of the guide takes into account more of the typical seasonality. But, you know, we believe that we've got the right framing for the third quarter based on input from our business units and how we see the months shaping up within the quarter.
John Engel: Yes, certainly so Nigel let me first address.
John Engel: Based on the outlook for recorded sales. As we mentioned earlier, you know, the high end of the guide takes into account more of the typical seasonality, but we believe that we've got the right framing for the third quarter based on input from our business units and how we see the month shaping up within the quarter. From a margin perspective, we did mention that we would expect the margins to be relatively stable from Q2 to Q3. Again, I think that's where I would leave this one, because the margins are relatively stable. Thanks, David. And then I want to go back to the utility outlook.
Speaker Change: Based on the outlook for reported sales.
John Engel: In the third quarter, Yes, we are coming off the typical seasonality I think the trends that we saw through the first half of the year our market outlook for primarily the utility and broadband solutions business. We believe that that's the appropriate way of dealing this so yes. It is coming off of that typical.
John Engel: Seasonality.
John Engel: As we mentioned earlier you know the high end of the guide takes into account more of the typical seasonality.
John Engel: But we believe that we've got the right framing for the third quarter based on input from our business units and how we see.
John Engel: The the months shaping up within the quarter.
Dave Schultz: From a margin perspective, we did mention that we would expect the margin to be relatively stable Q2 to Q3. Again, I think that that's where I would leave this one: the margins are relatively stable. And some of that will be impacted, of course, by the mix of the businesses. But, you know, we think that that's the appropriate framework for the third quarter.
John Engel: From a margin perspective, we did mentioned that we would expect the margins to be relatively stable Q2 to Q3.
John Engel: Again, I think that that's where I would leave this one is the margins are relatively stable and some of that will be impacted of course by the mix of the businesses, but.
Speaker Change: We think that thats the appropriate framework for the third quarter.
John Engel: Thanks, David and then I want to go back to the utility.
Unknown Executive: Thanks, David.
John Engel: And then I want to go back to the utility outlook. I mean, you know, it's definitely coming in weaker than we would expect. Maybe just maybe just try and pass out a bit more detail, you know, how much of this is destalking activity by the customs themselves versus genuine, you know, weakness and spending, just trying to figure out what change in the backup of the year. Yeah, I just, again, I'd reinforced that question; I'll reinforce the comment I made earlier. You know, it kind of varies by customer, but it clearly is just, you know, kind of putting it free on purchasing, running down their current inventory levels.
Speaker Change: Look I mean.
John Engel: You know, it's definitely coming in weaker than we would have expected. Maybe just, maybe just try and parse out in a bit more detail how much of this is destocking activity by the customers themselves versus genuine, you know, weakness in spending? Trying to figure out what changes in the back half of the year.
Speaker Change: Its definitely come in weaker than we would've expected.
John Engel: Maybe just if you could just maybe just try and parse out a bit more detail how much of this is destocking activities by the customers themselves. This is genuine weakness in spending just.
John Engel: Trying to think about what changed in the back half of the year.
Speaker Change: Yeah, I guess again reinforced.
John Engel: Yeah, I just, again, I've reinforced, thanks for that question, Nigel, I'll reinforce the comment I made earlier. You know, it kind of varies by customer, but it clearly is just, you know, kind of putting a freeze on purchasing, running down their current inventory levels. It is destocking, and they can do that at any given point in time because they always run with meaningful inventories. And then the dynamic is on, you know, not that they're delaying projects. It's just that, you know, given inflation, they're executing the current projects that are under way, but there seems to be a bit of a pause on the new projects coming in.
John Engel: Thanks for that question Nigel I'll reinforce the comment I made earlier, you know it kind of varies by customer, but it clearly is just kind of putting a freeze on purchasing we're running down their current inventory levels. It is destocking and they can do that at any given point in time, because we always run with meaningful inventories and.
John Engel: It is destalking, and they can do that at any given point of time because they always run with meaningful inventories. And then the dynamic is on, you know, not that they're delaying projects, it's just that, you know, given inflation or executing the current projects that are under lay, but there seems to be a bit of pause on the new projects kicking in. Again, I will say this is absolutely a temporary pause in our view; it's temporal, and I already talked about, you know, or my view, our team's view of the mid to long-term outlook. It is the critical enabler; I'll say it again, utility power generation and the utilities are critical enabler to realize all these secular trends, the growth of those.
John Engel: Then the dynamic is.
John Engel: On you know not that they're delaying projects.
John Engel: Given inflation or executing the current projects that are underway, but there seems to be a bit of a pause on the new projects kicking in again I will say this is absolutely a temporary pause in our view, it's temporal and I already talked about.
John Engel: Again, I will say, this is absolutely a temporary pause, in our view. It's temporal, and I already talked about my view and our team's view of the mid- to long-term outlook. It is the critical enabler, I'll say it again. Power generation, and the utilities are critical enablers.
John Engel: Our my view.
John Engel: Teams.
John Engel: The long term outlook.
John Engel: It is a it is the critical enabler I'll say it again utility power generation and the utilities are a critical enabler.
John Engel: To realize all of these secular trends the growth of this.
John Engel: Without that okay. Thanks, Sean.
John Engel: Without that, you're not going to see it, so it pays for them.
Speaker Change: I was going to say it so it pay off.
Unknown Executive: Wait, thanks. I'm Keith.
Jeff: Great. Thanks, Jeff.
John Engel: Great. Thanks, Tom. Cheers. Thank you. This concludes our question and answer session. I'd like to turn the conference back over to John Engel for any closing remarks.
Unknown Executive: Thank you. This includes a question and an intercession.
John Engel: 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 remarks.
Unknown Executive: I'd like to turn the conference back over to John Angle, funny closing remarks. Thank you all. I think we've addressed; we were able to get through all your questions today, so I'll bring the call to a close. Thank you for all your support. It's very much appreciated. A very full schedule followed calls today and tomorrow, and we do look forward to speaking with many of you over the next couple of months. We'll be attending the Key Bag Technology Leadership Forum next week on August 6th, as well as the Raymond James Industrial and Energy Showcase on August 8th, and the Jeffries Industrial Conference on September 4th.
John Engel: Thank you all of I think we've addressed we were able to get through all your questions. Today. So I'll bring the Colbert are close. Thank you for all your support is very much appreciate it have a very full schedule follow up calls today and tomorrow and we do look forward to speaking with many of you over the next couple of months, we'll be attending the Keybanc technology leader.
Speaker Change: Chip for them next week on August 6th as well as the Raymond James Industrial and energy showcase on August eight and the Jefferies Industrial Conference on September 4th in addition.
John Engel: In addition, we look forward to providing an in-depth update on our long-term strategy at our investor day. Last investor day we held was in 2022, so we'll hold our investor day on September 6th, as Dave mentioned earlier, and then finally, we expect an answer to the third, third, the October 31st.
John Engel: We look forward to providing an in depth update on our long term strategy at our Investor day.
Speaker Change: Yesterday, we held within 2022, so we will hold our Investor day on September six that Dave mentioned earlier and then finally, we expect to announce our third quarter. So on Thursday October 31, so with that thank you good day.
Unknown Executive: So, with that, thank you, and good day. Thank you, sir.
Speaker Change: Thank you Sir This concludes today's conference call. Thank you all for attending today's presentation you may now.
Unknown Executive: This includes today's conference call. We thank you all for attending today's presentation.
Unknown Executive: You may not have spent your lines now for a wonderful day.
Speaker Change: Now disconnect your lines and have a wonderful day.