Q4 2024 WESCO International Inc Earnings Call
Speaker Change: Hello and welcome to West Coast 2024 fourth quarter and full year earnings call. I would like to remind you that all lines are in a listen only mode throughout the presentation.
Speaker Change: Additionally, today, we will use certain non-GAAP financial measures.
Information about these measures is available on our webcast slides and in our press release.
Speaker Change: Of which are posted on our website at <unk> Dot com.
John Engel: On the call. This morning, we have John Engel West Coast, Chairman, President and Chief Executive Officer Officer, and Dave Schulz.
Dave Schulz: I can give vice president and Chief Financial Officer, I will turn the call over to John.
Dave Schulz: Thank you Scott and good morning, everyone. Thank you for joining our call today.
John Engel: We're pleased with our return to sales growth in the fourth quarter. It was sparked by accelerated growth in our global data center business, which was up more than 70%.
John Engel: In addition, we had 20% growth in our broadband business and we had renewed positive sales momentum in our electrical and electronic solutions business.
John Engel: It's important to note that for Etfs. This marks our first quarter of growth since early 2023.
John Engel: Now there's sales growth momentum was partially offset by a slowdown with our industrial customers, especially in the last two weeks of December and what we expected. The continued weakness in our utility business with that said our positive momentum overall has carried into January in our preliminary sales per workday adjusted for M&A M&A is.
John Engel: Up 5% versus prior year.
John Engel: Our opportunity pipeline remains at a record level, our backlog remains healthy and our bid activity levels remain very strong.
John Engel: On a full year basis organic sales were roughly flat with the prior year and gross margin was stable, although we experienced some pressure in communications and security solutions as sales ramp to data center customers on project deployment.
John Engel: Consistent with our past practice and experience, we expect to improve margins as we move through the data Center lifecycle, Dave will address this in more detail shortly including the actions, we're taking to improve TSS margins in 2025.
John Engel: Now turning to free cash flow our continued focus on effective working capital management yielded strong benefits again in the fourth quarter, and we generated $268 million of free cash flow and drove net working capital intensity down significantly versus the prior year on a full year basis, we exceeded our.
John Engel: <unk> and delivered record free cash flow of more than $1 billion or 154%.
John Engel: Adjusted net income.
John Engel: Overall key developments in 2024 set us up very well for future margin expansion of outgrowth relative to our market and to our peers.
John Engel: First.
John Engel: We made excellent progress on our enterprise wide digitalization efforts and our overall business transformation last year, well more than halfway complete on our technology and capability built which once deployed is expected to accelerate our earnings growth through greater cross sell is expected to expand our margins through improved pricing and operating cost leverage analytics.
John Engel: Back to dramatically increase our speed the value on the integration of future acquisitions.
John Engel: Second we.
John Engel: We materially strengthened our west coast portfolio through both divestitures and acquisition early in 2024, we divested our integrated supply business, which drove a positive mix shift for UBS. We also acquired three service based businesses, including <unk>, which closed in December.
John Engel: I think you'll all recall that as soon as a premier provider of data Center facility management services and it enables us to provide additional value to try out and across the entire data center lifecycle.
John Engel: These strategic portfolio moves that is divesting a low margin business and adding higher margin services businesses are integral to achieving our 10 plus percent EBITDA margin goals.
John Engel: Third in addition to generating record free cash flow in 2024, we also reduced our net debt by $431 million repurchased $425 million of shares and increased our common dividend, 10% after initiating it in 2020.
John Engel: Now moving to 2025, and our outlook, we expect organic sales to grow 2.5 to six 5% and operating margin to expand in all three business units are expected to deliver profitable growth. This year, we expect to generate $600 million to $800 million of free cash flow and I am.
John Engel: Please go announced that we plan to increase our common stock dividend by 10% again this year to $1 82 per share while continuing our share buyback program.
John Engel: We also expect to strengthen our balance sheet by fully redeemed our outstanding preferred equity in June which will improve both our cash flow and our earnings per share.
John Engel: And that as we outlined at our recent Investor day, we are committed to substantial value creation from operational improvements, our digital transformation and our overall capital allocation strategy, including additional M&A.
John Engel: As we look into 2025, our pipeline of strategic acquisitions remains strong and it's aligned with our goal to increase our service offerings to our customers. We are well positioned to deliver outsized growth due to the secular trend of AI driven data centers increased power generation electrification automation.
John Engel: <unk> and reassuring.
John Engel: And importantly, we remain laser focused on our enterprise wide margin improvement program, which has been a historical strength for wesco.
John Engel: I'm confident the Wesco will outperform our markets again, this year and we're well positioned to deliver improved sales growth and continued toward our long term EBITDA margin expansion goal.
John Engel: Finally.
John Engel: I continue to be very proud of our talented and dedicated wesco team, who remained steadfast in executing our strategic plan to capture the significant value creation opportunity in front of us and we're doing this as we realize our vision of becoming the best check enabled supply chain solutions provider in the world.
Speaker Change: With that I will now hand, it over to David to take you through our fourth quarter and full year 2024 results as well as provide a much more detailed look at our 2025 outlook Dave.
Speaker Change: Dave Thank.
Dave Schulz: Thank you John and good morning, everyone.
Turning to page four I'll walk you through our fourth quarter results.
Dave Schulz: Sales were below our expectations with a considerable drop off in the latter half of December organic.
Organic sales in the quarter were up mid single digits through the end of November.
Dave Schulz: Sales per workday were trending positive in December before dropping high single digits versus the prior year.
Dave Schulz: Last two weeks of the month, just understand low single digits.
Dave Schulz: In the fourth quarter market weakness continued in utility industrial and enterprise network infrastructure.
Dave Schulz: We saw strong growth in Canadian broadband and again delivered exceptional growth in our West Coast data Center solutions business.
Dave Schulz: Reported sales in the fourth quarter were flat year over year organic sales were up 2%.
Dave Schulz: Price contributed approximately one 5% versus the prior year with volume growth just under 1%.
Dave Schulz: In addition reported sales were negatively impacted by approximately 300 basis points from the divestiture of integrated supply.
Dave Schulz: Exchange rates. These headwinds were partially offset by the benefit of an additional work day.
Dave Schulz: On the lower half of the page you can see the adjusted EBITDA impact of higher sales offset by lower gross margin and slightly higher SG&A.
Dave Schulz: Gross margin was down one basis points in the prior year.
Dave Schulz: Approximately 30 basis points from Walmart arent volume.
Dave Schulz: Adjusted earnings per share of $3.
Dave Schulz: 19% from prior year.
Dave Schulz: Turning to page five.
Dave Schulz: On a full year basis sales were down two 5% on a reported basis.
Dave Schulz: 105% organically.
Dave Schulz: I used the bridge at about one 5%.
Dave Schulz: By lower volume.
Dave Schulz: 90 days, when cumulative impact from acquisitions and divestitures.
Steve: Morning, Steve.
Dave Schulz: Rates benefited.
Dave Schulz: To ease the burden.
Dave Schulz: Got it.
On the lower half of the page you can see that adjusted EBITDA was down from the prior year each loan sales.
Dave Schulz: Gross margin was flat with prior year level.
Dave Schulz: It raised why divestiture was offset by lower supplier volume rebates.
Dave Schulz: SG&A was up slightly.
Dave Schulz: <unk>, an employee related cost and warehouse leases.
Dave Schulz: Turning to page six.
Dave Schulz: On the left side of this page you can see that gross margin in 2024.
Dave Schulz: It was flat with the prior year.
Speaker Change: One 6%.
Speaker Change: This reflects a decrease of more than 200 basis points over the past five years and we believe there is opportunity for further margin expansion.
Speaker Change: The right side of the page shows the gross margin in 2024 varies by business unit.
Speaker Change: Well, yes, UBS margin increase from the prior year and were up.
Speaker Change: 80 basis points, respectively.
Speaker Change: Thank you.
Speaker Change: E.
Speaker Change: He believes that UBS is the direct result of our strategic portfolio again with.
Speaker Change: We've resolved the divestiture.
Speaker Change: Why.
Speaker Change: In addition, the increases at EES and UBS.
Speaker Change: The positive impact of our enterprise wide marketing program.
Speaker Change: As John mentioned in his opening remarks, the exceptional group of experienced within our data Center business has included participation numerous large scale is in branches.
Speaker Change: Some of these projects are direct ship, which has a lower gross margin.
Speaker Change: We believe that over the course of the data center lifecycle.
Speaker Change: Margins in the east customers.
Speaker Change: Provide additional products and services consistent with past experience.
Speaker Change: Nobody wants to do our business unit results beginning with <unk> on slide seven.
Speaker Change: Note that we have provided additional disclosure on gross profit and SG&A for each of our sites.
Speaker Change: This information will be provided.
Speaker Change: Finally, starting in 2025.
Yeah, So again, 1% in the fourth quarter.
Speaker Change: Reported sales were up 2%, which reflects the benefit of an extra work day compared with the prior year.
Speaker Change: We're pleased with the return to growth in our EES business.
Speaker Change: Construction sales were up one.
Speaker Change: One of the single digits.
Speaker Change: Driven by a higher level of project activity that drove growth in Canada and EMEA.
Speaker Change: Weakness in solar in the United States.
Speaker Change: Industrial sales were down low single digits and delivered growth in Canada, offset by a weaker U S market, reflecting the broad based industrial slowdown experienced across the market in the fourth quarter.
Speaker Change: OEM sales were up low single digits for the second consecutive quarter.
Speaker Change: Reflecting improved momentum in the second half in 2020.
Speaker Change: Backlog was down 1% from the prior year and down 2% sequentially in line with normal seasonality.
Speaker Change: When you change one of the bright side of this page you can see that adjusted EBITDA margin was up 10 basis points from the prior year, reflecting improved operational efficiency and cost controls.
Speaker Change: G&A as a presenter.
Speaker Change: Favorable by 30 basis points.
Speaker Change: For the full year organic and reported sales were down 1% due to low single digit growth in construction <unk> industrial sales and a low single digit decline in OEM.
Speaker Change: Gross margin was up 10 basis points in four years not to use the margin was not binary.
Speaker Change: Turning to slide eight.
Speaker Change: Yes, that's all.
Speaker Change: Celebrating momentum in the fourth quarter with sales up 11% year over year on an organic basis and up 14% as rewarding.
Speaker Change: The growth was driven by Westwood datacenter solutions solutions, which was up.
Speaker Change: 70%.
Speaker Change: With double digit growth across all three customer types hyperscale multi tenant data center.
Speaker Change: Yes.
Speaker Change: This growth has significantly increased the mix of data center with Ingalls <unk> Ian was neutral.
Speaker Change: Within CSS datacenter represented.
Speaker Change: Sales up from about 25% of sale in the prior year.
Speaker Change: From a total company perspective data center, which includes sales across all three business units was approximately 16% a bunch of those sales in the quarter.
Speaker Change: 13% on a full year basis.
Speaker Change: This is an increase from the comparable 10% plus of our sales that we shared at Investor Day, which was based on trailing 12 months sales through June.
Speaker Change: Security sales were approximately flat quarter in enterprise network infrastructure was down in the quarter.
Speaker Change: But the continued softness in the wireless and structured cabling, partially offset by spurring north service provider business.
Speaker Change: <unk> was up 16% from the prior year, reflecting the substantial growth of our data center business and down about 5% sequentially given the timing of large project shipments in Q2.
Speaker Change: Yeah.
Speaker Change: Adjusted EBITDA margin for <unk> was down 150 basis points versus the prior year.
Speaker Change: Primarily reflecting the mix of large customer data center projects in the quarter with a lower gross margin that I mentioned a moment ago.
For the full year.
Speaker Change: Sales were up 5% on a reported basis and a 4% organic.
Speaker Change: This growth was due to the exceptionally strong growth in data center build outs in 2020.
Speaker Change: Turning to slide nine I wanted to take a moment to discuss the growth.
Speaker Change: The broader data center space that we've seen recently and how we participate.
Speaker Change: We first provided the information in the left side of this page in our Investor Day last September.
It highlights the two stages of the data center construction cycle time to power and new construction.
Speaker Change: The key takeaway is that projects that are announced today and have obtained funding will likely take about four to seven years before things will be happening one.
Speaker Change: The pipeline data center projects continues to rapidly expand especially within the Mega project space.
Speaker Change: Based on data that we track.
Speaker Change: Last two years Datacenters are accounted for Boston will be 35% of the total megaproject investments the highest by far among the 16 categories we track.
Speaker Change: Our solutions now encompass everything from the license and distribution systems to advance ICT infrastructure to services that support center operations.
Speaker Change: And our customers comprehensive solutions in our all things data Center site.
Speaker Change: On the right side of the slide you can see the substantial and it's selling really grown that our data center business delivered in 2020.
Speaker Change: This growth has been driven by organic initiatives, along with substantial acquisition investments you've made these our exposure certain capabilities within the space.
We continue to invest in capabilities and in 2024 and in person and Incent to expand capabilities to service data center customers from cradle to grave.
Speaker Change: Onsite services and data center technology upgrades.
Speaker Change: Moving to page 10.
John Engel: John mentioned the top of the call in December we closed the acquisition of <unk>.
John Engel: Provider and data center facility management services.
John Engel: Headquartered in St. Louis San provides data center operators with highly specialized facility management services.
John Engel: Our sense strengthens our leading global datacenter solutions portfolio for our customers by allowing us to further extend our end to end service offerings, including advanced blade design and implementation solutions.
John Engel: Turning to slide alone.
John Engel: Again sales and EPS were down 6%. This quarter reported sales were down 78%, which includes the divested integrated supply business in the base period.
John Engel: As we've discussed previously utility market continues to experience short term softness related to customer Destocking and lower project activity levels.
John Engel: It's partly a function of the current interest rate and regulatory environment.
John Engel: We expect these impacts to continue into the first half of 2025.
John Engel: They returned to growth in the second half of the year.
John Engel: We remain highly confident in future.
John Engel: From the secular trends in electrification.
John Engel: Energy.
John Engel: Our interface and believe these trends will support substantial broken celebration in our utility business over the long term.
John Engel: We are pleased with our return to growth in broadband and <unk> more.
John Engel: Broadband zones within 20%, albeit against the prior year that was down more than 30% by the exceptionally strong growth in Canada.
The Canada broadband business began to re signs of improving momentum in Q3.
John Engel: GBS backlog was down 25% from the prior year and down 10% sequentially.
John Engel: Adjusted EBITA margin was up 40 basis points over the prior year.
John Engel: On a full year basis organic sales were down 5% from prior year and reported sales were down 13%, reflecting the divestiture.
John Engel: Gross margin was up 80 basis points as we discussed a moment ago.
John Engel: Yeah.
John Engel: Turning to page 12.
John Engel: In the fourth quarter, we delivered $268 million of free cash flow or 156% of adjusted net income.
John Engel: Turning to our full year free cash flow of more than $1 billion a record for the company.
John Engel: And representing 154% of adjusted net income which is a.
John Engel: And certainly more than our through cycle target of 100%.
John Engel: This is largely been driven by a reduction in working cap.
John Engel: I'd like to point out that cash flow in the fourth quarter benefited from the timing of payments for tax credit purchasers that effectively means a $45 million as even on the fourth quarter of 2024 to the first quarter.
John Engel: Got it.
John Engel: You see on the right funds fees and we reduced net working capital intensity by 160 basis points in 2020.
John Engel: We are pleased with this result.
On making further progress, including reducing inventory as a percentage.
John Engel: In 2025, we expect working capital to grow and have an REO sale.
John Engel: This will further drive down net working capital as a percentage of sales.
John Engel: Turning to slide 13.
John Engel: This slide shows our 2020 outlook by strategic business unit and you envision operating groups.
Speaker Change: As John mentioned, we expect organic sales to be up so you wouldn't have a 65%.
Speaker Change: Quarterly sales in the range of flat to up 4% with.
Speaker Change: With the difference driven by M&A activity, along with headwinds from foreign exchange and workplace.
Speaker Change: Starting with Etfs.
Speaker Change: We expect 2025 reported sales to be flat to up low single digits.
Speaker Change: You can see that sales from all three operating groups were relatively flat.
Speaker Change: Sure.
Speaker Change: As we move into 2025 expectation does that construction will be in Boston, one industrial will be up.
Speaker Change: OEM will grow as the positive momentum we experienced in the second half of 2024 and used this year.
Speaker Change: Looking at our CSS I mean.
Speaker Change: We expect 2025 reported sales will be up mid single digits.
Speaker Change: We've already discussed the significant growth in data centers in 2024, which we believe will continue into 2020 bond with that where he grew up mid teens.
Speaker Change: We also expect security will be driven by a recovery in U S markets.
Speaker Change: Enterprise network infrastructure, which primarily sells into contractors service providers and communications end markets I'd say softness throughout 2024 due to slower by he build outs and construction specific markets.
Speaker Change: Particularly in structured data.
We expect overall enterprise network infrastructure will be flat in 2021.
Speaker Change: Lastly, looking at UBS, our utility business was down throughout 2024, due to customer Destocking and lower project activity.
Speaker Change: While we expect that softness to continue through the first half of 2025, our expectation is that growth will return in the second half of the year.
Speaker Change: As we have discussed previously there is significant underlying demand for modernization investment in the brain.
Speaker Change: Well as investments in new generation transmission and distribution to support roaming power and watch the needs.
Speaker Change: Page 14.
Speaker Change: The details of our outlook for 2025.
Speaker Change: Starting at the top of the page, we expect organic sales to grow between two and half and 65% for the year.
Speaker Change: Reported sales.
Speaker Change: To be flat to up 4%.
Speaker Change: Including a foreign exchange headwind of approximately one 5% due to rate differences primarily to Canada.
Speaker Change: Reported sales also includes an approximately 1% impact from net divestitures and one fewer workday in 2021.
All the best and embraced by last April which was partially offset by acquisitions completed in the second half of 'twenty.
Speaker Change: We expect adjusted EBITDA margins to be in the range of six 7% to seven.
Speaker Change: 2%.
Speaker Change: Recall that we are facing a 20 to 30 basis point SG&A headwind from the restoration of incentive compensation.
Given our results in 2020 for incentive compensation is below target and we haven't seen a target payout in 2025.
Speaker Change: Without this headwind we are on track within 20 to 30 basis points of annual margin improvement that we highlighted at our Investor day.
Speaker Change: The upper end of this EBITDA margin range with Blackstone gross margin expansion and operating leverage on higher sales.
Speaker Change: Now the lowering the range reflects the impact of flat volume and operating leverage.
Speaker Change: Regarding gross margin, we expected to deliver some level of gross margin expansion in 2025 due in part to a slightly higher level of supplier volume rebates and improvement of CSS gross margin.
Speaker Change: Our outlook range for adjusted diluted earnings per share of $12 to $14 50.
Speaker Change: Reflects year over year growth of 8%.
Speaker Change: Note that we have also provided key modeling assumptions and I want to comment on a few specifics.
Speaker Change: Our outlook assumes.
Speaker Change: <unk> expense will be approximately $40 million in 2025 up from $14 million in 2024.
Speaker Change: Consistent with historical results.
Speaker Change: The amortization is recognized as SG&A and not included in adjusted EBITDA. It is however included in adjusted operating income and adjusted earnings per share.
Speaker Change: Interest expense is expected to decrease in 2025 due to lower debt balances and dividends on preferred equity will be reduced by half as we anticipate redeeming the preferred in June of this year.
Speaker Change: We expect to generate substantial expense savings by redeeming the preferred stock.
Speaker Change: The difference between our expected borrowing rates and a tenant and five eighths preferred dividend rate.
Speaker Change: Lastly, turning to free cash flow, meaning.
Speaker Change: We would expect to deliver free cash flow of between $600 million to $800 million in 2025.
Speaker Change: As a percentage of adjusted net income this implies a range of approximately 95% to 105%.
Speaker Change: Regarding capital allocation our strategy is unchanged.
Speaker Change: Our priority is to invest organically in the business to drive growth and operational efficiency, including the completion of our business and digital transformation.
Speaker Change: After funding organic investments free cash will be allocated to the highest return option.
Speaker Change: We will prioritize acquisitions to continue to expand our capabilities and better serve our customers, particularly those engaged in high growth end markets.
Speaker Change: We'll continue to repurchase shares under our current authorization.
Speaker Change: Given our expectation to redeem the preferred stock we would anticipate share repurchases will be opportunistic and well below the 2021 level of $425 million.
Lastly in 2025, we expect to increase our common stock dividend by 10% or approximately an incremental $2 million per quarter versus 2024.
Speaker Change: Turning to page 15, this slide shows the year over year monthly and quarterly sales growth comparisons for the past few years and our expectations for the first quarter.
Speaker Change: Versus the prior year, we expect first quarter organic sales, excluding a net headwind of M&A, one fewer work days in the prior year.
Speaker Change: Low to mid single digits.
Speaker Change: On a reported basis, we expect sales to be approximately flat versus the prior year.
Speaker Change: Preliminary January sales per one adjusted for M&A are up about 5% from the prior year.
Speaker Change: At January of 'twenty 'twenty four is the easiest comparable of the year.
Speaker Change: We expect adjusted EBITDA margins will be slightly lower than the prior year level of six 4% as we continue to manage cost effectively in a mixed economic environment.
Speaker Change: Moving to slide 16, we've covered a lot of material. This morning. So let me briefly recap the key points before we open the call to your questions.
Speaker Change: <unk> fourth quarter were at the high end of our outlook growth momentum data center continues to be exceptionally strong and we were pleased to mark a return to growth in both broadband and our EES business unit.
Speaker Change: Full year free cash flow was one of $1 million and a record level for the company.
Speaker Change: In 2024, we repurchased $425 million in common shares and reduced net debt by 431 million homes in 2025, we expect to deliver above market growth and improve profitability.
Speaker Change: With that operator, we'll be following questions.
Speaker Change: I will now begin the question and answer session. If you would like to ask a question. Please press star followed by one on your telephone keypad. Please limit your questions to one question and one follow up.
Speaker Change: And our first question today will come from Sam Darkish with Raymond James. Please go ahead.
Speaker Change: Good morning, John Good morning, Dave how are you.
Speaker Change: Good morning, Sam.
Speaker Change: Two quick questions if I could.
Speaker Change: Help help us with what gives you confidence.
Speaker Change: With respect to your visibility into the second half recovery.
Speaker Change: The utility.
Speaker Change: Vertical I know that the first quarter is the seasonal low point.
Speaker Change: But you also took your primary K P. I as I recall was mostly fill rates as opposed to.
Speaker Change: Perhaps forecasting.
Speaker Change: Demand levels. So what gives you confidence that the second half as to is the right time to assume a snapback in that business.
Speaker Change: Oh Good question, Sam first we do have a.
Speaker Change: A couple of new customer wins.
Speaker Change: Yeah.
Speaker Change: We'll get that start their ramp up here in the first quarter build through the second quarter and are reaching a.
Speaker Change: A much higher run rate of sales in the second half.
Speaker Change: So irrespective of the market those wins occurring.
Speaker Change: Second half of 'twenty four.
Speaker Change: So we enter the year with the level. They are both very meaningful so we're very much encouraged by that.
Speaker Change: Secondly.
Speaker Change: Jim Cameron and his team have had deep discussions with all our utility customers and.
Speaker Change: I think that given given the secular growth trends, we're seeing the change in the administration in the U S and <unk>.
Fact that they've been customers.
Speaker Change: On behalf of and with us have been working down their inventory levels.
Speaker Change: Being a customer by customer fab.
Speaker Change: So our teams do that as we as we get through the first quarter to the second quarter moving into the second later part of the second quarter into the second half.
Speaker Change: Materially.
Charles: Charles will turn back.
Speaker Change: Purchasing and get back on.
Speaker Change: I think overall our view.
Speaker Change: Hum.
Speaker Change: Overwhelmingly strong secular growth trends.
Speaker Change: Utility power chain remain intact.
Speaker Change: I've mentioned quite a few times.
Speaker Change: All of these other secular growth trends, we're talking about require one thing power. So we're going to have a kind of an overall increase in the power demand curve as far as we can see and as you get a pull on capacity, it's got a mandate.
Speaker Change: Utilities invest in increasing our capacity for generation to transmission substation and then obviously through the distribution portion of the power chain.
Dave Schulz: Thank you My second question, Dave You mentioned that you expect gross margins to be up slightly for the year.
Speaker Change: I'm guessing, especially because of the easy comparison in the first quarter that you are anticipating gross margins to be up all year long is that a is that a fair representation.
Speaker Change: Yeah, It's a fair representation.
Speaker Change: I point, you to we could have a peak in the third quarter.
Speaker Change: Again, a lot of that will be predicated on what is the mix of the business and the impact on gross margin as we think about the full year one of the benefits. We are expecting our gross margin is the higher supplier volume rebates, our supplier volume rebates in 2024 was that one of the lowest historical levels that we've had so we do expect that to increase particularly as we go.
Speaker Change: We look at growth at the higher end of our range at the midpoint, we would still expect SBR benefits against gross margin in 2025.
Speaker Change: Thank you.
Speaker Change: Your next question today will come from Tommy Moll with Stephens. Please go ahead.
Tommy Moll: Good morning, and thank you for taking my questions.
Speaker Change: Good morning, Tommy.
John Engel: John Thanks, so much for the gross margin insight at the segment level, maybe next quarter, we will get it at the business unit as well, but for the moment.
Could you just give us some of the backstory here on what was the decision making process on going ahead, and providing that disclosure and what you want to make sure we take away.
Dave Schulz: Yeah, Hey, Tom It's Dave Schulz. So there is a new requirement from the SEC.
Dave Schulz: That company's filing after December 15, 2024 are required to provide.
Speaker Change: Key segment expenses and when you take a look at the composition and the profit structure of our business.
Dave Schulz: One of the key drivers of our profitability is obviously gross margin.
Dave Schulz: So we are disclosing that youll see that in our 10-K that will be released here probably the end of the week early next week.
Dave Schulz: You'll see three years of detail within the segment footnote.
Dave Schulz: Disclosing the gross profit and then the adjusted SG&A as well.
Dave Schulz: So we do intend to continue to disclose the gross margin at the SBU level.
Dave Schulz: From our perspective, it is complying with the SEC regulation.
Dave Schulz: Thank you and Dave a follow up on your comments regarding redeeming the preferreds.
Speaker Change: It's really a two part question as you laid out your EPS guidance range for the year.
Speaker Change: How many quarters or are you, assuming we'll have that roughly $14 million headwind there.
Speaker Change: And then as you redeem these in the June timeframe is the expectation you'll be able to fully redeem with cash on hand, or there would potentially need to be partial debt financing just given timing of cash flows.
Speaker Change: Yes, Johnny we fully intend to redeem the preferred that means that we'll pay.
Speaker Change: Two quarters worth of the dividend on that preferred stock.
Speaker Change: We will evaluate how we fund that redemption, whether it's with a combination of cash on hand borrowing against existing facilities or depending on the market, whether we would go out and issue an additional note.
One thing to keep in mind as we provided you with those key modeling assumptions for 2025.
Speaker Change: We have assumed a range on interest expense, which based on the current rate environment.
It's almost agnostic, whether we use our existing facilities or we finance that with a with a new note.
Speaker Change: Thank you I'll turn it back.
Speaker Change: And your next question today will come from David Manthey with Baird. Please go ahead.
David Manthey: Yes, Thank you and good morning.
Dave just a question on <unk>.
David Manthey: SG&A you've mentioned.
David Manthey: The reset of the incentive comp, but you also I believe have a 3% annual merit increase and remind me does that hit April 1st and then in light of those two items could you provide any color on how SG&A step through <unk> and then from the first quarter then into the.
David Manthey: Second quarter progressively.
David Manthey: Certainly the.
David Manthey: You're right that we've assumed the 20 to 30 basis point headwind on the incentives.
David Manthey: And that our typical merit increases effective on April one.
So as we think about.
David Manthey: The sequential impact to SG&A.
David Manthey: Moving from Q4 of 2004 to Q1, we would expect an uptick in that uptick in the.
David Manthey: The sequential increase is primarily going to be driven by that incentive compensation. When we then moved from Q1 to Q2.
David Manthey: There will be the step up related to a low single digit increase in our people costs.
David Manthey: Okay and then.
David Manthey: Second if we adjust for the <unk> divestiture.
David Manthey: I believe UBS segment EBITDA was one of the lowest rates that we've seen in <unk>.
David Manthey: Many quarters.
David Manthey: Has there been any structural change in UBS profitability as we go forward or with growth as we accelerate into 2025 do you expect to return to more of that.
David Manthey: Sort of 11% plus EBITDA margins, we saw in 'twenty three in early 'twenty four.
David Manthey: Yeah, well, let me provide a little bit of background on the integrated supply divestiture. So.
David Manthey: We have spoken about that had a lower gross margin.
David Manthey: And when we strip out the impact of integrated supply on gross margin.
David Manthey: Favorability to the total company, but that was primarily offset by an increase in SG&A due to lack of the operating leverage.
David Manthey: So overall the integrated supply divestiture at the company level was a slight favorable on adjusted EBITDA margin low single digit basis points, So really no meaningful impact within utility and broadband solutions, yes, there was a benefit from what's coming.
David Manthey: From a gross margin perspective.
The business actually performed extremely well and managed gross margin effectively well in 2020 for the margin pressure was really coming from SG&A on the lower sales. So this is a very efficiently run business, but as those sales continued to decline you can see from the slide that we just didn't get the leverage from.
David Manthey: The business within GBS, I, Wouldnt say that thats less from.
David Manthey: Integrated supply coming out more funding.
David Manthey: And down throughout 2024.
David Manthey: Hey, Todd let go forward, though with a return to growth I think Dave had a comment or question around operating leverage going forward. Yeah, absolutely. So this business runs very efficiently. So as we've seen a return to growth on the topline we would fully anticipate that we will get the margin benefit on adjusted EBITDA.
David Manthey: Great. Thank you and good luck.
Speaker Change: Thanks, Dave.
Speaker Change: And your next question today will come from Deane Dray with RBC capital markets. Please go ahead.
Deane Dray: Good morning, everyone.
Speaker Change: Good morning, Dave.
Speaker Change: Can we put the spotlight on the good start to January just.
Speaker Change: Take us through that.
Speaker Change: The composition of the business.
Speaker Change: Stock and flow what kind of mix direct ship.
Speaker Change: Any kind of pricing difference versus what you saw in the fourth quarter, just some color there would be really helpful.
Speaker Change: Yes.
Speaker Change: We're really pleased with once the calendar turned.
Speaker Change: January ended up I will I will mention that it actually started a bit soft. So it was interesting I don't know if this has come out of that any other company.
Speaker Change: Companies that have had their earnings calls, but the softness that we saw kind of a two speed January 2nd haven't yet or defense that was soft.
Speaker Change: January started off a bit soft for a week or so a little longer than a week, but then kicked into gear. So it's really nice to see them a lot of them.
Speaker Change: As we exit January at a five plus percent growth rate that's ex M&A. So it's a good set so there's some headwinds in January two because.
Speaker Change: FX has stepped us has picked up substantially.
Speaker Change: To start Q.
Speaker Change: Q1 of 2025 versus where there's certain Q4 of 2024, so that just I think <unk>.
Speaker Change: <unk> calibrate the 5% of it in terms of overall mix game.
Speaker Change: It's really an extension of what we saw.
Speaker Change: In the fourth quarter, so no material mix changes in January thus far.
Speaker Change: I will say the bookings were very strong.
Speaker Change: So book to Bill was above one data strongly about wombat out.
Speaker Change: And margins.
Speaker Change: Oh very stable so.
Speaker Change: Yeah, very good start and feel good about it.
Speaker Change: That's great color and then just as a follow up but maybe we can visit tariffs. What the risks are you guys have a playbook I know you've been through this before so just what talk about preparation and then anything around the metals.
Speaker Change: This is all laid freight.
Speaker Change: Going to have to keep your spreadsheet open.
Speaker Change: As these changes happen on the fly, but just if you could share with us your current thinking.
Speaker Change: Yes.
Speaker Change: Right.
Speaker Change: We do have a playbook, it's a well developed playbook we've been through this before I think.
Speaker Change: Take you back to the first Trump administration with a look at the tariff.
Speaker Change: Tariffs that were put in place to look at.
Speaker Change: We took all the appropriate actions.
Speaker Change: The volumes are.
Speaker Change: Margins very well through that process.
Speaker Change: I'll just remind everyone that we have very very low alcohol first derivative direct exposure.
Speaker Change: Our private label business is a very small percent of our overall business, so where we see the effect on the supply side.
Speaker Change: Of our of our business is on the is with our supplier partners.
Speaker Change: That's the exposure, we have we work with them.
Speaker Change: With them to push the pricing through.
Speaker Change: Net net for distribution.
Speaker Change: We don't want to have to put the price increases through to our customers, but we absolutely will and we will do that and we'll protect our margins we have a strong history of doing that so.
Speaker Change: To really think about tariffs is to the extent it drives an inflationary effect on.
Speaker Change: On the supply side of our distribution business model, we take that we work it through to our customers continuing to sell our value add capabilities.
Pricing through so I think there's still there's still just speak to an environment where inflation stays.
Speaker Change: Higher than maybe some expected and that is our outlook as we move through 2025.
Speaker Change: Great color. Thank you.
Speaker Change: And your next question today will come from Christopher Glynn with Oppenheimer. Please go ahead.
Christopher Glynn: Thanks, Good morning.
Christopher Glynn: Was curious about comparing the public power of our Seo use at utility John I think the slides called out public is kind of weak.
Speaker Change: We saw in fourth quarter, Chris both public power and Investor owned utilities those those two respective set of an end user customers and utility were down mid single digits. So we actually saw.
Speaker Change: Yeah, similar headwinds with both with both.
Speaker Change: If we take a look on a full year basis.
Speaker Change: Yeah.
I would say that probably a little stronger with industrial and utilities versus public power in general but.
Speaker Change: Yeah look I wouldn't really call out any major differences they get Chile.
Speaker Change: <unk> that we saw are really market driven.
Speaker Change: Driven by customers, but it's kind of a market driven set of effects.
Okay. Thanks, and then on Eni.
Speaker Change: Clients.
Speaker Change: A little steeper was that kind of a noisy.
Speaker Change: Quarter three.
With some of the particular kind of December <unk>.
Speaker Change: Next more acute in that business maybe.
As a kind of an air pocket or do you think the market stepping down a bit more.
Speaker Change: Yeah.
Speaker Change: Your characterization is accurate little a little bit of softness in the second half of December there.
Speaker Change: Look overall CSS really terrific momentum.
Speaker Change: We will build across the year exit the year with very strong data set that will matter with very strong improvement in our return to growth in security.
Speaker Change: Happened in the year, one thing I will call out I don't want to get too.
Speaker Change: Because we are we are pulling all data center sales related to data centers and we're reporting that as data Center series that includes security.
Speaker Change: Again, we're bundling other CSS products and it includes core enterprise network infrastructure, what classically would be called that so.
Speaker Change: I think when you look at security like for like just as a category. We've got mid single digit growth in Q4. It was a return to growth. So good very good I'll call. It broad based momentum across CSS I would not call out eni as being kind of a real weak spot again, if you look at some of.
Speaker Change: The categories of products that it worked and classically in Eni before we broke out data centers.
Speaker Change: Yes, it would have it would have looked much stronger in the quarter I hope that helps Chris because I think that's.
Speaker Change: Probably makes a lot of question to us yes.
Chris: Appreciate that thanks.
Speaker Change: Your next question today will come from Stephen Volkmann with Jefferies. Please go ahead.
Stephen Volkmann: Great. Thank you guys, David I wanted to dig into something you said I think earlier when you were talking about data centers and large customer projects, which maybe come out a little bit lower margin and provide a little bit of a headwind, but maybe over time theres more service. So I'm curious as we continue to see data centers grew.
Stephen Volkmann: Much faster than the rest of the business is that still kind of a margin headwind as we go forward or do you get that service.
Mark: Mark quickly and it kind of normalizes.
Mark: It normalizes and so just to provide a little bit more color on this one particularly in the fourth quarter. We saw a lot more of the early phases of these data center builds.
Mark: And those were direct ships for many of those larger customers. So just like the balance of our business whenever we have a direct shipment and never touches our warehouse, we don't service. It it basically goes directly from the manufacturer.
Mark: To the job site.
Mark: So that the gross margins on that always tend to be low.
Mark: That's one of the things that impacted our CSS margins in Q4, but as we begin working with the customer to operate that facility. There is that opportunity for more products and services to be sold through to that customer, which will come at the higher margin, particularly if we can attach it to the services portfolio that we have continued.
Mark: To expand including with the acquisitions that we completed in 2024 so.
Mark: It is a margin story that we would expect to normalize that's been our experience with other large customers in the past.
Mark: Got it okay. Thanks, and then just switching over to free cash flow I guess I'm might have expected a little bit more this year just in the sense that.
Mark: We spent a couple of years well below the 100%. It seems like we have some some ground to work to get back.
Mark: To sort of that five year average so maybe the way to think about that as working capital to sales ratio is still quite a bit higher than pre COVID-19 does that does that get meaningfully lower from here, how do we think about that.
Mark: We would expect it to get meaningfully lower in 2025, and we've highlighted that we do there's one of them.
Mark: We do expect continued growth in 2025, consistent with what we provided to you. So if you take a look at just the midpoint of that.
Mark: Where we started with networking capital at the end of 2024, we've highlighted that we would anticipate that our net working capital will grow at half the rate of sales.
Mark: So just looking at the midpoint of our outlook.
Mark: Assign that 1% increase in networking capital that will drive further efficiency overall on net working capital also please keep in mind that from an overall.
Mark: Inventory requirement John mentioned, we've got some new accounts and utility so that will require us to fill inventory requirements. Earlier, then we begin to see the sales. So there will be some lumpiness in our net working capital, particularly in the first quarter as we begin building out for some of those new customers.
Mark: But overall, we would expect continued efficiency to networking capital through the end of 2025.
Mark: Okay. Thank you.
Speaker Change: And your next question today will come from Ken Newman with Keybanc capital markets. Please go ahead.
Ken Newman: Hey, good morning, guys.
Speaker Change: Good morning, Ken.
Speaker Change: Maybe first I just wanted to get a quick clarification.
Speaker Change: Acacia Dave from an earlier question.
Speaker Change: First it is the earnings guidance that you outlined on slide 15 or 14.
Speaker Change: That does include a full year of the preferred dividend or is that not the case.
Speaker Change: That is not the case so it assumes that we have half year of the dividend payout so rough round.
Speaker Change: $14 million a quarter, we'll pay that for the first two quarters of 2025 that is included in our outlook.
Speaker Change: Got it okay.
Speaker Change: And then for my follow up here I, just wanted to run back to the the <unk> organic growth Guide and then just trying to square that against the 5% that you saw in January given that it does look like.
Speaker Change: Do step down sequentially in February and March.
Speaker Change: Do you think January is just a normalization from a snapback from that slower back half of December slower first half of January or just help us kind of understand the.
Speaker Change: Dumps things underlying that first quarter guidance.
Speaker Change: Yes, certainly so the 5% that we talked about for the month of January preliminary sales growth it is against an easier comp.
Speaker Change: It does not include the impact of M&A. So it's.
Speaker Change: It's adjusted for the M&A impact in the month of January.
Speaker Change: As you think about.
Speaker Change: How January shaped up relative to the fourth quarter. The composition of our businesses was about the same we continue to see strong growth from CSS.
Speaker Change: We're still seeing some challenges within UBS, we expect those challenges and UBS to recover in the second half of the year, but in terms of where we're seeing the full quarter.
Speaker Change: John mentioned, we've got a couple of new contracts within the utility space. We've got backlog that is still at a near a record high level. So from that perspective, yes, the comps get tougher in February and March but.
Speaker Change: Excluding the M&A impact the low to mid single digit outlook as is appropriate.
Speaker Change: Very good appreciate the color.
Speaker Change: And your next question today will come from Patrick Baumann with Jpmorgan. Please go ahead.
Patrick Baumann: Hi, good morning.
Speaker Change: Good morning calls here.
Speaker Change: I had a question.
Speaker Change: First maybe on the sales cadence through the year it looks to me like the first quarter, you're guiding down about 1% on a workday adjusted basis versus the fourth quarter and historically.
Speaker Change: My math says, it's typically down 4% to 5% on a workday adjusted basis sequentially.
Speaker Change: So what this means I think is you'd need below seasonal trends for the rest of the year to get to the midpoint of your guide.
Speaker Change: Are there any large projects maybe for data center construction that are coming off from the first half to the second half that would cause this or any other color you can provide.
Speaker Change: Why that would be.
Speaker Change: Certainly.
Speaker Change:
Speaker Change: So we provided you our expectations for Q1.
Speaker Change: One of the key drivers to the phasing of the quarters throughout the year as the timing of the recovery on utility.
Speaker Change: We've talked about that being more in the second half so that will influence the growth rates that we would expect to see in the first half of the year with an expansion in the second half of next year.
Speaker Change: So in terms of how the.
Speaker Change: The outlook.
Speaker Change: Would lay out we would expect that.
Speaker Change: From a reported sales perspective will.
Speaker Change: It will be light in Q1 as we've already provided you that information and then we would begin to see an improvement through the Qs two through four primarily driven by continued benefit from that data center growth.
Speaker Change: EES business for the full year being on a reported basis flat to up low single digit in that back half recovery on utility.
Speaker Change: Okay.
Speaker Change: Alright.
Speaker Change: On the.
Speaker Change: On the U S. Construction market for 25 can you talk about that flat outlook that you have.
Speaker Change: Maybe by vertical mentioned solar is a headwind in the fourth quarter any other color you can offer.
Speaker Change: A vertical end markets and then.
Speaker Change: Also with Eni segment I guess, that's also related to construction of why that's flat, maybe just flesh out kind of the construction outlook across the different segments I guess.
Speaker Change: Yes, we're still seeing and have an expectation for considerable growth in the data center space.
Speaker Change: That will impact.
Speaker Change: Our EES business as well.
Speaker Change: Across some of the other verticals within non res construction, we're not expecting there to be any significant growth opportunities.
Speaker Change: In the office space there are some pickups in nonresidential construction related to manufacturing and then also within the health care space. So those are the verticals that right now.
Speaker Change: We're targeting and again most of our business in that in that construction space will be on the non res side, that's where our exposure is we're also comping primarily finished the comparisons that had been negative on solar so.
Speaker Change: So we won't see that downdraft on solar in our construction business as it relates to Eni again that business is influenced by both new construction plus renovation jobs. Some of it is office related some of its manufacturing related. So that's what's also informing our outlook for enterprise network infrastructure those same.
Speaker Change: Impacts to our EES construction business will be impacting our eni business.
Speaker Change: Yes.
Got it and one more just really quick one housekeeping on the on the ascent deal that you guys did.
Speaker Change: You booked I guess $30 million in the quarter, which for one month of ownership seem like a big number.
Speaker Change: Whats the right run rate of sales.
Speaker Change: For this business.
Speaker Change: And why would the fourth quarter have been so high in terms of sales contribution from that business.
Speaker Change: Yes on the <unk>.
Speaker Change: <unk> acquisition that was completed in December.
Speaker Change: One of the things that we had already talked about.
Speaker Change: Publicly was that when we acquired the business. It had run rate sales of about $115 million per year, but it was growing at about a 30% rate. We did have a very strong December within our CSS business contributing.
Speaker Change: With ascent contributing to that growth rate.
Speaker Change: We've not provided any other specifics we do anticipate that that business will continue to grow consistent with what we've already shared I think about it growing double digits.
Speaker Change: The capability that we are providing within the data center space.
Speaker Change: Okay. Thanks, a lot best of luck.
Speaker Change: Concludes our question and answer session I will now turn the conference back over to John Engel for any closing remarks.
John Engel: Thank you all again.
John Engel: And for your support it's much much appreciated we've addressed all the questions that they got teed up during the call I know we have a lot of calls lined up through this afternoon and tomorrow and I think some after the weekend as well so I'll bring the call to a close.
John Engel: In terms of future events, we look forward to speaking with many of you over the over the next two months as well.
John Engel: At the rate, we will be attending the Raymond James Institutional Investor Conference on March 4th.
John Engel: We'll be attending the Jpmorgan Industrial conference on March 12, and will be also.
John Engel: Pending distribute tech conference on March 25th.
John Engel: With that but and we will announce our first quarter earnings on Thursday may <unk>, so with that ill bring the call to a close and thank you and have a good day.
Speaker Change: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Speaker Change: [music].
Speaker Change: Yeah.