Q1 2025 WESCO International Inc Earnings Call
Hello, and welcome to West Coast 2025, first quarter earnings call I'd like to remind you that all lines are in a 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: I will now hand, the call over to Mr. Scott Geffner SVP Investor relations to begin.
Speaker Change: Thank you and good morning, everyone before we get started I want to remind you that certain statements made on this call contains forward looking information.
Speaker Change: Forward looking statements are not guarantees of performance and by their nature are subject to uncertainties.
Speaker Change: Results may differ materially.
Speaker Change: Please see our webcast slides in the company's SEC filings for additional risk factors and disclosures.
Speaker Change: Any forward looking information speaks only as of this date and the company undertakes no obligation to update the information to reflect changed circumstances.
Speaker Change: Additionally, today, we will use certain non-GAAP financial measures.
Speaker Change: The required information on these measures is available on our webcast slides and in our press release.
Speaker Change: Both of which you can find 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 and.
Dave Shull: Dave Shull.
John Engel: Decorative vice President and Chief Financial Officer.
John Engel: Now I'll turn the call over to John.
John Engel: Thank you Scott good morning, everyone. Thanks for joining our call today.
John Engel: We're pleased that our positive sales momentum in the fourth quarter last year carried into 2025, and that's with posting 6% organic sales growth in the first quarter. This was ahead of our expectations coming into the year. Our total data center business was again, a strong driver of our growth and was up 70% along with high.
John Engel: Single digit growth in our OEM and broadband businesses.
John Engel: This was partially offset by continued temporary weakness in utility end markets, which is what we expected.
John Engel: We continue to expect our utility business have returned to growth in the second half of the year.
John Engel: Gross margin was relatively stable on a sequential basis versus the fourth quarter and improved sequentially and CSS also as we expected.
John Engel: We are continuing to focus on effective working capital management as we do always in the first quarter and delivered positive free cash flow that exceeded our expectations to start the year.
John Engel: Our increased inventory will help us manage the potential supply chain impact of global tariffs. We also issued $800 million of new senior notes to redeem redeem our preferred stock in June and repay a portion of our revolving credit facility. This refinancing along with the preferred stock redemption strengthens our balance sheet.
John Engel: It extends our debt maturities and increases our financial flexibility and it's significantly employment proves our earnings and cash flow run rate.
John Engel: Dave will take you through those details shortly.
John Engel: Shortly.
John Engel: Following this preferred stock redemption, we have strong liquidity the liquidity to address our capital allocation priorities reinforcing what we outlined at our last Investor day after.
John Engel: After supporting our common stock dividend payment and continuing stock repurchases to offset the dilution of our annual management equity awards, we have well over 75% of our free cash flow remaining and that provides us with significant optionality.
John Engel: In the near term our capital allocation priorities are focused on debt reduction and stock repurchases.
John Engel: And we continue to invest in our tech enabled business transformation and actively manage our M&A pipeline in parallel.
John Engel: So now let's shift to the second quarter and as we began the second quarter I'm very encouraged that our positive momentum is building.
John Engel: Backlog is up from the prior year and it's up sequentially in all three of our business units CSS E S and UBS.
John Engel: Our positive sales momentum has continued into April and is building with preliminary sales per workday up 7%.
We are reaffirming our full year outlook based on our positive momentum through the first four months of the year.
John Engel: While we recognize the uncertainty of tariffs and their impact on the global economy. We continue to focus on what we can control that is our cross sell initiatives are enterprise wide gross margin expansion program and operational improvements, resulting from our tech enabled business transformation.
John Engel: Like all companies were operating in the current rapidly evolving global trade environment and I want to emphasize what we are doing first wesco is well equipped to address the potential impact of tariffs and changes in the global supply chain, we have successfully address global supply chain challenges in the past.
John Engel: Including tariffs and managing through cycles of increased inflation.
John Engel: This was most recently demonstrated during the global pandemic.
John Engel: We've shown the ability to successfully manage and expand margins during the periods while delivering growth.
John Engel: We're executing our well developed playbook to manage our margins and our business and we're maintaining daily communications with our supplier partners, our customers and our entire sales force to ensure that we're taking all the required actions Dave.
John Engel: Dave will take you through our playbook in much more detail shortly.
John Engel: One final comment on tariffs.
John Engel: Supply chain reengineering and reassuring back to the U S and overall U S MCA markets.
John Engel: It was initiated during the global pandemic I've spoken about this at length.
John Engel: The global pandemic effectively put a spotlight on a significant risks associated with the extended global supply chains that were in place and were established over the last three to four decades and in many cases these extended global supply chains were single sourced.
John Engel: Representing significant risk supply chain reengineering and reassuring has become a secular growth trends and tariffs are already beginning to provide a potential accelerant for even higher reassuring growth.
John Engel: With that I'll hand, it over to David to take you through our first quarter results and our outlook for the rest of the year.
John Engel: Thanks.
David: Thank you John and good morning, everyone.
David: Turning to page four I'll walk you through our first quarter results organic sales in the first quarter were up 6% at the upper end of our outlook for growth of low to mid single digits price was approximately one 5% and volume was up about 4%.
David: <unk> sales were flat as a strong organic growth was offset by the impact of our integrated supply divestiture.
David: Foreign exchange rates and one fewer workday.
David: Recall that we divested the integrated supply business on April 1st of last year. So this will be the last quarter, where we see an impact on our reported year over year growth rate.
David: In the first quarter, our data center business continues to grow rapidly and was up 70% versus the prior year.
David: Additionally, we delivered high single digit growth in our OEM and broadband businesses.
David: As expected utility remained soft as customers continued to work through inventory destocking.
David: On the lower half of the page you can see that adjusted EBITDA margin was down 60 basis points.
David: Gross margin was stable sequentially and down 20 basis points year over year, primarily due to project and product mix, which I'll cover in more detail later.
David: SG&A was up about 2% year over year due to normal inflationary pressures, particularly within transportation and facility costs.
David: However, the higher costs on relatively flat reported sales was about a 40 basis point headwind to EBITDA margin in the quarter.
David: Adjusted earnings per share of $2 21 was down 4% from the prior year.
David: Let me walk you through our business unit results beginning with <unk> on slide five first please note that we transferred about $155 million in annual revenue of specialty wire and cable, including $35 million in the first quarter from EES to CSS to better align.
David: The customers we serve in that business.
David: All prior year periods for E S and CSS had been recast to reflect that transfer including those in the table on this page.
David: For a reconciliation of the recast amounts by quarter. Please see the appendix in today's presentation.
David: EES organic sales were up 3% in the first quarter after the impact of foreign exchange headwinds along with one less workday reported sales were flat.
Our OEM business delivered particularly strong growth up high single digits organically, reflecting strong growth in both the U S and Canada, including with our semiconductor customers.
David: Construction was down on a reported basis, but up low single digits organically on increased project sales and industrial was down low single digits on a reported basis and roughly flat organically.
David: I think continued temporary softness with some customers.
David: Backlog was up 3% from the prior year and up 4% sequentially supporting and encouraging start to 2025.
David: EES adjusted EBITA margin was down 90 basis points from the prior year with gross margin a decrease of 60 basis points. This was primarily driven by an increase in project activity in the quarter and a higher mix of low margin products, along with some competitive price pressures in our construction business.
David: Turning to slide six.
David: DSS sales growth accelerated in the first quarter with sales up 18% year over year on an organic basis and up 17% as reported.
David: This strong growth was driven by Wesco datacenter solutions, which was up more than 65% with especially strong growth with Hyperscale data center customers.
David: This growth has significantly increased the mix of data center with within both CSS and West Coast total sales.
David: Within CSS datacenter represented nearly 40% of sales in Q1.
David: Up from a little more than 25% of segment sales in the prior year quarter.
David: Lastly, I'd like to mention that we have not seen any change in order or buying patterns with data center customers.
David: Based on discussions with our customers they have not reduced their capital budgets. We're pleased to report that they have been increasing their level of spend and expanding their scope of supply with wesco.
David: Enterprise network infrastructure was up low single digits in the quarter, reflecting growth with service provider and wireless customers.
David: Security sales were down low single digits, which excludes security sales that are part of Wesco datacenter solutions.
David: Brooding no sales security was a strong performer in Q1 and up mid single digits.
David: GSS backlog was up 32% year over year, and up 18% sequentially, reflecting substantial growth of our data center business.
David: Adjusted EBITDA margin for CSS was up 20 basis points, driven by strong operating leverage on higher sales growth, partially offset by decline in gross margin.
David: Similar to Q4, the mix of large projects, primarily in the datacenter space impacted gross margin versus the prior year.
David: Sequentially CSS gross margin was up 20 basis points consistent with our expectation that margins would improve from the fourth quarter level.
David: Turning to slide seven I want to take a moment to discuss the growth in the broader data center space that we've seen recently and how we participate.
David: We've had several large customers announced changes to leases and proposed AI driven data center builds.
David: Based on conversations with these customers. These changes our impact to out your plans with spending to be allocated to other projects in short we have not seen any change to the level of activity in the datacenter space.
David: Customers continue to partner with Wesco, and our suppliers to meet their evolving needs, including an expanding portfolio of services that we can provide.
David: From a total company perspective data center was approximately 16% of <unk> sales in the quarter and up approximately 14% on a trailing 12 month basis, including sales across all three business units.
David: Note that this is an increase from the comparable 10% of Wesco sales for the trailing 12 months through June of 2024.
David: We first provided the information on the left side of this page at our Investor Day last September.
David: It highlights the two stages of the datacenter construction cycle time to power and the construction period.
David: The key takeaway is that projects that are announced today and have obtained funding will likely take about four to seven years before they are up and running.
David: Our solutions now encompass everything from the electrical distribution systems to advanced IP infrastructure to services that support data center operations, ensuring our customers have comprehensive solutions throughout all phases of the datacenter lifecycle.
David: On the right side of this slide you can see the substantial and accelerating growth that our total data center business delivered over the past five quarters.
David: This growth has been driven by organic initiatives, along with impactful acquisitions, we've made to increase our service capabilities within the space.
David: We want to partner with data center customers from Cradle to cradle, including the initial build onsite services and data center technology upgrades.
David: Yeah.
David: Turning to slide eight organic sales in utility and broadband solutions were down 5% in the quarter and reported sales were down 19%, which includes the divested integrated supply business in the base period.
David: As we've discussed going back to the beginning of 2020 for the utility market continues to experience softness related to customer Destocking and lower project activity levels, which is partly a function of the current interest rate and regulatory environment.
David: We expect these impacts to continue through the first half of 2025 with a return to growth in the second half of the year.
David: We remain highly confident in the future benefit from the secular trends of electrification green energy in grid modernization and believe that these trends will support substantial growth acceleration in our utility business over the long term.
David: We are pleased with the continued growth in broadband the business was up high single digits from the prior year, reflecting particularly strong growth in Canada.
David: UBS backlog was down 13% from the prior year, but up 13% sequentially due to improving water rates and new utility customer wins.
David: Adjusted EBITDA margin was up 10 basis points over the prior year on a margin.
David: The margin benefit from the integrated supply divestiture was partially offset by the impact of lower utility sales.
David: Turning to page nine in the first quarter, we delivered $9 million of free cash flow or 8% of adjusted net income as accounts receivable and inventory increased due to growth offset by an increase in accounts payable.
David: This exceeded our expectation as we anticipated a use of cash in the quarter.
David: You can see on the right side of this page that we reduced net working capital intensity by approximately 50 basis points year over year in the first quarter.
David: We remain focused on making further progress, including reducing inventory as a percentage of sales.
David: Turning to page 10 yesterday, we formally announced our intention to redeem our 540 million series a preferred stock on June 20, <unk>, which is the first opportunity to redeem it at face value.
David: We issued $800 million of senior notes in the first quarter in anticipation of this redemption.
David: This will strengthen our balance sheet and reduce our total financing cost the estimated net income and cash flow benefit of this refinancing is approximately $30 million on an annualized basis or roughly 65 cents per diluted share.
David: In addition to the refinancing we also extended the maturities of our accounts receivable facility and revolver to 2028 and 2030, respectively.
David: As a result, we have no significant maturities on our balance sheet until 2028.
David: Turning to page 11.
David: On this slide will provide an overview of the actions we are taking to manage the potential impacts to our business from the recent tariff announcements.
David: The left side of the chart list of potential impacts first supplier price increase increases, including the significant number of price increase notifications. We have already received over the past few weeks to put this into perspective in the first quarter. The number of price increase notifications was down 11% versus.
David: The prior year.
David: It is up 150% in the second quarter to date.
David: The average price increase announcement in the first quarter was that a mid single digit rate while in the second quarter, it's averaged a high single digit rate.
David: Second we recognized the potential for lower customer demand due to higher costs.
David: And third in an inflationary environment, we recognize the transitional benefit from inventory gains our inventory as valued using average cost meaning in an inflationary environment. Our inventory is below market price, we will see a temporary gain to gross margin assuming higher supplies supplier price increases.
David: Are absorbed in the market.
David: This is a temporary benefit keeping in mind, we turn our inventory every two to three months.
David: Lastly, wesco is the importer of record in less than 4% of our cost of goods sold primarily on goods received into the U S and Canada.
David: In response, we are taking the following actions to mitigate these impacts and protect our margins.
David: We are passing supplier price increases through to customers.
David: Our suppliers to ensure that minimum lead times between announced price increases and effective dates are adhered to.
David: We will continue to leverage our global scale to identify opportunities to purchase locally sourced product or products less impacted by tariffs and we will reduce imports from those countries with the highest tariffs in place.
David: Lastly, we will optimize our supply chain logistics and reengineer, our global supply chains to mitigate risk and manage tariff exposure.
David: In short Wesco has a long operating history and have successfully navigated similar global supply chain challenges.
David: We're executing our playbook to respond to the current volatile and uncertain environment.
David: Turning to slide 12. This slide shows our 2025 outlook by strategic business unit and the individual operating groups.
Speaker Change: As John mentioned, we are reaffirming our 2025 outlook and in general expect the same sales patterns within our strategic business units that we walk through last quarter. However, we've made two adjustments to this slide first.
David: First due to the continuation of exceptionally high growth in our datacenter business.
David: We are increasing our full year outlook for reported sales growth from up mid teens to up about 20%.
David: Second and related to this change we increased our CSS growth expectation for reported sales growth from up mid single digits to up mid to high single digits.
David: We continue to expect that within EES construction will be flat in both industrial and OEM will be up and lastly in UBS. We continue to expect utility will inflect in the second half of the year and delivered growth in 2025, partially offset by broadband, which we expect to be flat.
David: Moving to page 13, we are reaffirming our 2025 outlook the.
David: We acknowledge the uncertainty and volatility surrounding tariffs and the impact of the overall economy.
David: As mentioned earlier organic sales in the first quarter were up 6% and sequential sales were better than our historical trends.
Backlog grew sequentially in all three businesses with CSS up double digits.
David: Momentum continued in April with estimated sales growth up 7%.
We have not experienced significant pre buying from customers to get ahead of proposed tariffs.
David: We are maintaining our ranges for organic and reported sales growth adjusted EBITDA margin adjusted diluted earnings per share and free cash flow.
David: However, based on our first quarter results, we would expect the full year to be above the midpoint of the sales range and below the midpoint of the EBITDA margin range as the project and product mix headwinds we experienced in the first quarter continue in the second quarter.
David: I want to emphasize that our outlook does not include the impact of future pricing actions, including tariffs.
David: This is consistent with our past practice given the lag between when a supplier announcements of price increase and when it begins to impact our revenue.
David: While we have seen a significant uptick in price increase notifications here in the second quarter. Our outlook does not include any potential benefit to sales at this time.
David: We recognize the risk of an impacted demand given tariff related pricing.
David: Any future pricing would help mitigate any demand impact to our revenue outlook.
David: In terms of free cash flow, we expect to deliver between $600 million to $800 million in 2025.
David: As a percentage of adjusted net income this implies a range of approximately 95% to 105%.
David: Our strategy for how we deploy cash flow remains unchanged do you use.
David: Available cash will be allocated to the highest return opportunity and we will continue to make decisions in the best interest of the shareholders over the long term.
David: Our top priority is to invest organically in the business to drive growth and operational efficiency.
<unk>, the completion of our business and digital transformation.
David: In the near term given the current economic environment, we expect the deep prior I'm, sorry, we expect to prioritize delevering the balance sheet and share repurchases. However, we will continue to be opportunistic regarding acquisition opportunities to expand our capabilities and better serve our customers, particularly those engage.
David: And high growth end markets.
David: Turning to page 14, this slide shows the year over year monthly and quarterly sales growth comparisons over the past year and our expectations for the second quarter.
David: You can see the return to growth in the last quarter of 2024 and the acceleration in the first quarter.
David: As mentioned, we estimate April sales per workday will be up 7% and expect second quarter reported sales will be will be up mid to high single digits.
David: We expect organic sales will be about a point higher than reported sales primarily due to foreign exchange rates.
David: The second quarter has the same number of workdays as the prior year.
David: We expect adjusted EBITDA margins will be approximately 50 basis points lower than the second quarter of the prior year again, primarily reflecting the projected product mix impacted gross margin discussed earlier.
David: Moving to slide 15, let me briefly recap the key points before we open the call to your questions.
David: Sales in the first quarter were up 6% organically at the high end of our outlook and driven by datacenter broadband and OEM.
David: Utility weakness continued due to customer Destocking gross margin was stable we've taken a number of actions to manage the potential supply chain impacts of global tariffs, including increasing our inventory.
David: We issued $800 million of 2033 notes in anticipation of redeeming our preferred stock in June, which we formerly announced last night and we're pleased with the April momentum we've experienced to date.
David: Lastly, we reaffirmed our 2025 outlook based on the first four months of the year.
David: With that operator, we can now open the call to questions.
Speaker Change: Thank you Sir we will now begin the question and answer session. If anyone who wishes 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.
Speaker Change: Our first question comes from Stephen Volkmann of Jeffries.
Speaker Change: Yeah.
Speaker Change: Hey, good morning, guys. Thanks for taking the question.
Speaker Change: Dave I just wanted to be clear on what's in your revised outlook relative to a couple of things one.
Speaker Change: <unk> is the tariff stuff is.
Speaker Change: All of the announcements that you described in the first quarter the up 11% mid single digit is that in your guide, but the two Qs stuff that you've seen so far is not is that the right way to look at it.
Speaker Change: There are no tariff related price increases incorporated into our outlook.
Speaker Change: Our outlook assumes organic growth rate of two 5% to six 5%.
Speaker Change: Of that about a point and a half as carryover pricing from 2024, we have not incorporated any new pricing that was announced in either of the first quarter or the second quarter to date into our outlook yet let me explain why we generally see a two quarter lag between a price increase effective.
Speaker Change: To date and when it begins hitting our revenue a couple of drivers of that.
Speaker Change: First about half of our revenue was project based those projects have negotiated pricing. So these price increase notifications don't impact those projects most of the impact would be to our stock and flow business and again as we're seeing these price increase notifications were managing that back to meet our commitments with our customer.
Speaker Change: <unk> working back with our supplier. So generally you know.
Speaker Change: And when we see an announced price increase of say 8%.
Speaker Change: For our company, we generally see about half of that benefit flow through to the revenue line on a two quarter lag. So we have not incorporated any of that yet because we're still seeing some of these price increase notifications come through and again that is consistent with our past practices over the years.
Speaker Change: Understood, Okay and is that 8% that you just threw out as that sort of ballpark, where we would be today, if everything was mark to market or was that just illustration.
Speaker Change: Just illustration again, we would only be marking to market.
Speaker Change: Half of our revenue that would be associated with our stock and flow business. The other half is negotiated pricing for specific projects with our suppliers.
Speaker Change: Okay and does your revised guidance include the 65 cents from the preferred and then I'll pass it on.
Speaker Change: The the guidance that we provided did assume that we would be calling the preferred halfway through the year. So when you go back to what we provided back in February and what we've reaffirmed.
Speaker Change: We did assume that there would be a benefit to earnings per share.
Speaker Change: Based on half of the year of the preferred dividend coming out offset partially by the financing cost.
Speaker Change: Got it thank you.
Speaker Change: The next question is from Nigel Coe of Wolfe Research.
Nigel Coe: Thanks, Good morning.
Nigel Coe: Good morning, everybody, Hey morning hate to be a sort of.
Speaker Change: Kind of come back to Hitachi, but can you maybe just give us a flavor of the supplier price increases that you've seen.
Nigel Coe: So far and.
Nigel Coe: Then the.
Nigel Coe: This is stock and flow conversation, but I used to have you seen any surcharges.
Nigel Coe: Why you might have to pass that through quicker than the normal.
Nigel Coe: Any color there would be helpful.
Dave Shull: Yeah. So let me, let me expand a bit on Dave's commentary.
Nigel Coe: In Q1.
Nigel Coe: The number of supplier increases that we saw ended up being down about 15% versus prior year Q1.
Nigel Coe: So.
Nigel Coe: And the average was mid single digit plus mid single digit range. Some are low single digit somewhere mid some a little bit higher than it was in that kind of band, which is more which is nigel is more of a normal pricing increase as part of a normal cycle I think what we saw with some effect where.
Nigel Coe: Some of the supplier delay their normal price increase announcements as they were working through is the carriers are getting announced working through what the impact was the whole supply chain in their operations and figuring out what price increases. They wanted to put there were a few suppliers that posted increases it actually pulled them back.
Nigel Coe: And as I've come back ships, so interesting dynamic for Q1 as we got into Q2 and look we're only only the first month of in the record books April.
Nigel Coe: Thus the number of price increases have stepped up significantly.
Nigel Coe: So far in April what's been announced for Q2.
Nigel Coe: 150% not in price, but a number of increases announced versus Q2 of last year.
Nigel Coe: No, we'll expect to see some more get announced here in may.
Nigel Coe: And in June in the second quarter.
Nigel Coe: And the average price increase has moved up to mid single digit plus the high single digit there are some that are double digit range, depending on the particular SKU set of Skus in a given category. So that gives you a sense of the pricing dynamic.
Nigel Coe: We really really believe that the tariffs are getting announced that we wouldn't see a meaningful impact in terms of announcements in Q1, and you don't we don't see any meaningful impact of the tariffs at all in our Q1 results. We thought Q2 would really where we'd see the ramp and so far that's that's come true relative to.
Nigel Coe: The line item surcharges, there are some suppliers that do that others do not as a matter of process and as a matter of practice I will tell you that we work aggressively with them to try to have them build that into the price increases. So we can provide.
Nigel Coe: Complete transparency into our customers on how the prices are increasing based on the tariff impact. So that's how we try to work it.
Many of the suppliers.
Nigel Coe: He has supported us in that somewhat to have a separate tariff line item pricing or line item surcharges as you described.
Nigel Coe: Typically pushback on that in some cases, we do we do have to show that separately with customers only works out process, but by and large we like to build it into the price.
Nigel Coe: Okay. Thanks, John that was great color and then my follow on I think this is me.
Speaker Change: Maybe for David.
Speaker Change: Yes, the the materials restaurants continued destocking at the utility customers, but the comments. He made seem suggest is a bit more rate sensitive maybe projects pushing out to the right. So just just wanted to understand.
Speaker Change: So kind of a device from a reference from what Youre seeing right now in the utility <unk>.
Speaker Change: Political and your confidence in the inflection of the growth in the back half of the year.
Speaker Change: Yeah, we've not seen a significant change from how we describe the utility market back in February to what we're seeing now we are seeing some customers.
Speaker Change: Begin to increase activity levels, we're still seeing some customers that are behind that but based on the discrete set of customers that we manage these large contracts with now we're in contact with them every day and based on their projects.
Speaker Change: <unk> activity levels, we see a return to growth in the second half of the year. We have seen this this end market over the past three years be tremendously impacted by higher.
Speaker Change: Cost recall in some quarters, we were announcing double digit price increases, which increased the cost of the day to day business increased the cost of projects that.
Speaker Change: That cost has to be approved through the regulators do the local utility commissions and then as part of a capital budget for each of these utility. So we've not seen a dramatic change from February to now the conversations we're having the activity levels that we're seeing plus we've got some new accounts that we won.
Speaker Change: That's providing us with the confidence of a back half recovery.
Speaker Change: I'll add a bit again this is exactly how we thought the year would start out in.
Speaker Change: In Q1 and Q2, we expect in the second half recovery the budgets have been set and now we're gonna maintains our budget. It's a matter of do they have to re prioritize them in any form or fashion. I'll also tell you that the extended lead times that are still in place for Transformers and high voltage apparatus and we are we're working newmar.
Speaker Change: With the opportunities with our customers and securing supply chain and supply.
Speaker Change: Supply for shipments that are going to be impacting out you're in a major positive. So again I think the overall secular growth trends around power generation grid modernization.
Speaker Change: Et cetera that we've talked about at length are intact.
Speaker Change: Okay.
Speaker Change: That's great. Thank you.
Speaker Change: Okay.
Speaker Change: The next question is from Deane Dray of RBC capital markets.
Deane Dray: Thank you and good morning, everyone.
Speaker Change: Good morning.
Speaker Change: I appreciate all the color, you've given on tariffs and pricing and so forth. So.
Speaker Change: I'll ask some questions related to data center, if I can.
Speaker Change: You've put up some.
Speaker Change: Really growth numbers in the past two quarters, 70% last quarter, 65% this quarter, the market's not growing that fast so.
Speaker Change: Maybe you can expand on your point that customers are increasing their scope of business, they're doing with wesco and as you flesh that out maybe talk about the.
Speaker Change: The mix of products versus services that you are engaged in and data center.
Speaker Change: Yes, great question look.
Speaker Change: We're really pleased with the very strong and growing momentum.
Speaker Change: In data centers, our datacenter business.
Speaker Change: Really strong sales.
Speaker Change: Sales results there.
Speaker Change: Backlog is up very strongly as well our bid activity levels are exceptionally strong and youll see that we made it very clear disclosure this quarter I would've pointed out again that we're now showing the EES related data center sales that's into the greatest space portion of the data center and that's it that's now approaching them.
Speaker Change: $400 million trailing 12 month basis run rate.
Speaker Change: And that that's up in the same kind of 70 plus percent range in the quarter. So.
Speaker Change: Okay.
Speaker Change: We are absolutely seeing as we expected we would see we targeted we signaled this field because our customers are looking to increase scope of supply with us.
Speaker Change: That include in the White space. It includes.
Speaker Change: The I'll call it rack power everything around the Iraq, Iraq installation and the services that we now have our acquisitions of <unk>.
Speaker Change: Rohit continues to contribute strongly that with a number of years ago and the recent ones that are interested in a sense are having a very positive impact on our business strongly contributing.
Speaker Change: It allowed us to grow up the value chain, even further and provide solutions across the whole lifecycle customers are absolutely asking us to do more as a one stop shop.
Speaker Change: And does it include pulling into great space as well.
Speaker Change: Which we foreshadowed so I think we're very encouraged with the trends, we're not seeing any reduction in our booking your sales rates not one iota I think really it's this is important to understand.
Speaker Change: Then look at the cycle of data center projects, where we play in this space, we're clearly expanding scope of supply and our customers are telling us the following there.
Speaker Change: The priority over the last few months has been on completing projects that have been running as we look out to the next few months in the second quarter into the third quarter and the balance of the year youre going to see increasing priority on the AI driven data center builds versus the I'll call. It the more traditional CPU base builds.
Speaker Change: And the AI driven data center builds.
Speaker Change: GPU based versus CPU based.
Speaker Change: That drives much greater power density and increased white space products, which is good for us so.
Speaker Change: I think that look this is it is the strong data center growth.
Speaker Change: That drove CSS to deliver 18% growth overall.
Speaker Change: The business unit and is having a very positive impact on our overall business and the final point I'd make which you didn't touch on but I want to emphasize that we.
Speaker Change: We think strategically we made the right move with how we're focusing on data centers. You know we had a major uptick in Q4 and some of that was at a different margin level, we were committed and focused on improving both gross and EBITDA margins sequentially for CSS. We did both in Q1 gross margin is up sequentially.
Speaker Change: Versus Q4, so as EBITDA margin. So we're getting the operating cost leverage too and we're still at the front end of this cycle with increasing scope of supply in front of us. So as I said before we see kind of a utility model that we've had.
Speaker Change: It does such a great job with over the last decade, plus playing out in data centers now.
Speaker Change: Got it really appreciate all that color on the data center framing question, especially across the two segments and then just a follow up can we can you address mix and E S.
Speaker Change: Sided in the in the slide deck more project activity.
Speaker Change: Also is there direct.
Speaker Change: Shipments involved in that mix.
Speaker Change: Issue as well because that's usually a high quality problem because it is a fabulous.
Speaker Change: Returns on direct ship, but just low margin, but just help us understand the mix issue.
Speaker Change: Short answer to your question is yes, I will I'll ask David to expand in a minute, but let me give a little color to set the context I think it was fourth quarter last year that he has returned to growth and.
Speaker Change: And now we've got organically low single digit growth in Q1, and the backlog is up nicely both year over year now and sequentially. So I think that's an encouraging start to the year, obviously datacenters are helping there and the day same data center margin impact on the front end of those projects cycles that we saw in CSS is weighing on E.
Speaker Change: But we will work those margins up over time as well as we as we provide the complete data center solution White space Gray space and focus on services, including power.
Speaker Change: And again I think when you look at EES, we've had a few quarters in a row now of strengthening OEM business. That's really a good indicator and then typically a leading indicator of what our industrial business will will do in the coming quarters and so I think we expect that OEM positive momentum to continue and we expect industrial to improve as we move.
Speaker Change: Through the year, which that will have a positive margin mix impacting with that David probably good to double click again on E. S. In the quarter, though certainly so within within the quarter two things that I'll call out.
David: As John mentioned, we had project mix. We also did have some product mix. So we had some large shipments of products that tended to be at a lower margin that impacted the overall gross margin of the business. We also had year over year.
David: Some higher provisions for inventory as we called out the last several quarters.
David: Solar business within EES has been under pressure and there are technology changes within that and so just given some of the inventory that we were holding we took a higher provision for inventory within EES impacting the gross margin here.
David: Here in the first quarter.
Speaker Change: Could you just size that a solar write off.
Speaker Change: I would say that overall some of the adjustments that we had both the write off differences in supplier volume rebates rough round about 25 basis points.
Speaker Change: Got it thank you very much for all that color.
Speaker Change: Thanks.
Speaker Change: The next question is from some of that catch up of Raymond James.
Speaker Change: Good morning, John Good morning, Dave how are you.
Speaker Change: Jim.
Speaker Change: Back to price because of course.
Speaker Change: So is prospective pricing overall.
Speaker Change: Overweight in any of your verticals, so I'm, saying that in light of the fact that you obviously called out some.
Speaker Change: Pricing competition.
Speaker Change: Specific to E S and construction I know Gray bar was mentioning the same sort of thing, but I'm just trying to get a sense of when the where the prices that you're likely to push through.
Speaker Change: Where is that overweight underweight or pretty uniform across your businesses. That's the first question.
Speaker Change: Just one question, Sam and I don't know that we've gone through this.
Speaker Change: Joey.
Speaker Change: Historically, but I'll give you a little sense when.
Speaker Change: When you think of the three business units.
Speaker Change: This is a this is a generalization.
Speaker Change: Yes.
Speaker Change: As a large portion of the supplier base at least some of the biggest supplier partners.
Speaker Change: U S based operations U S based manufacturing.
Speaker Change: One of our largest supplier partners announced yesterday so.
Speaker Change: And so.
Speaker Change: You get a good sense of what tariff impact is proportionally versus others that have greater offshore manufacturing website.
Speaker Change: And I would say that results in a different world.
Speaker Change: And then in the value chain is working differently, just exceptional growth extinction exceptional demand pulling on that capacity. So that creates a certain set of price dynamics, we're not seeing anywhere near the same price increases.
Speaker Change: And the for our CFS business that we are that we expect to see for our EES business.
Speaker Change: These increases have been stepping up here in Q2.
Speaker Change: It's focused.
Predominantly in the EES business, which also impacted our utility business and those supplier partners have a mix of manufacturing that U S. Mexico, somewhat sometimes Canada and other countries, including China. Some of the supply chain changes have been occurring and they've made some changes.
Speaker Change: Meaningful changes over the last three years post pandemic.
Speaker Change: Now they are taking a hard look at that as well given the current tariff environment and what the expectations are for towers going forward.
Dave Shull: We continue to optimize that footprint. So I wanted to give you a little color of that Dave you may want to comment as well, but but the waiting I would say is more electrical and utility versus on an FTE basis, absolutely. So if you think about just here in the first quarter.
Dave Shull: Both CSS and UBS had essentially no pricing benefit to their topline we.
Dave Shull: We talked about our pricing being about a point and a half that was primarily driven by Es. If you take a look at even 2020 for CSS had essentially no pricing benefit to the top line, we saw low single digit benefit into the bolt EES and UBS. So again it goes back down to how some of the supply chain.
<unk> are currently managed the impact of tariffs.
Dave Shull: Obviously, that's going to flow through to us as a price increase and just again want to reiterate.
Dave Shull: We are treating these tariff related price increases like we have always historically treated price increases what we're seeing now come through from our suppliers is a combination of their typical early part of the year price increase to recover inflation and other costs associated with their business plus we're seeing.
Dave Shull: And pass through some of the tariffs it comes to US. It's one price increase in the past we never would include those price increase notifications in our outlook that is the consistent approach that we've taken here in 2025.
Speaker Change: So my follow up question to that would be.
Speaker Change: Remind us how your order contracts are structured, especially when you have tariffs I mean are you do you end up repricing the backlogs are.
Speaker Change: Do you does your vendor eat that because you've already established price and cost do you eat that I guess, what I'm getting at is is there some sort of a rule of thumb, where if you get mid mid single or high single digit pricing how much of a gross margin benefit might be and how much of a potential risk might that be.
Speaker Change: Certainly so for our large projects.
Speaker Change: Generally we either have fixed pricing based on the duration that that project has between order point and when it gets executed if it's a couple of months generally we've got locked in pricing from the supplier. If it is a longer lead time contract many of those contracts have a cost escalator.
Speaker Change: Which would include any tariff impact that the customer has agreed to take so we would work back with our suppliers. We have that true up clause within the contract that we would then be able to execute to protect our overall value on that particular project.
Speaker Change: We have not seen any suppliers reach out to us yet with a confirmation that they are repricing our backlog. So we have not seen that so therefore, we don't see any risk there at this point.
Sam: That answer your question Sam.
Speaker Change: Okay.
Speaker Change: Hmm.
Speaker Change: Thank you and is there a rule.
Speaker Change: Rule of thumb, then Dave in terms of if you get a mid single high single digit price increase how much of a short term benefit that might be to gross margins and a basis point standpoint.
Speaker Change: It varies so much it would be hard for me to give you a rule of thumb, but just thinking from the context of Youre seeing price increases generally theres, a two quarter lag at the company level, we only see about half of that published price increase impacting our revenue at some point in the future.
Speaker Change: As we saw back in like 2022, particularly with some of the raw materials going into commodities and pure commodity products, we did get a slight benefit but you're talking tens of basis points is not hundreds of basis points for that phenomenon with our inventory.
Speaker Change: Very helpful. Thank you.
David Manthey: The next question is from David Manthey of buying.
Thank you and good morning, everyone.
Speaker Change: One Dave first question two parter here first off when you say guidance doesn't anticipate any future pricing and Dave your commentary it sounds like Youre, excluding announced that even expected price increases as a hedge to any potential demand destruction am I reading that right.
Speaker Change: You are and again that is consistent with our past practices. This was a year ago, and we were seeing price increase notifications from our suppliers, we would not be including those price increases into our outlook. So you are correct that we have not incorporated it until we begin to see it recognizing our income statement.
Speaker Change: And we understand that there could be some demand destruction, given higher prices, particularly in some of our more price sensitive businesses and.
We feel that if there is a tariff action that comes through to US we would see a pricing benefit we believe that pricing benefit would mitigate any demand destruction that we would see due to the higher price.
Speaker Change: Okay. So logically the second quarter guidance, if you take a seven 5% reported growth midpoint and $6 eight EBITDA right around $400 million EBITDA give or take which is kind of where the street is but so within that what you are telling us is there may be some price increases that.
Speaker Change: That are hitting April may June that by convention, you're just not including in that outlook correct that is correct.
Speaker Change: Okay Fair enough second question flipping over to SG&A.
Speaker Change: You have a merit increase coming up in the second quarter and maybe you could talk about what that should add in dollars I'm thinking maybe it's 15 or 20 million Bucks, but are there other puts and takes we should consider as we bridge from first quarter SG&A to second quarter.
Speaker Change: The primary driver sequentially from Q1 to Q2 would be the merit increase so to size that I think it would be.
Speaker Change: <unk> with our our Q1 2025, adjusted EBITDA or I'm, sorry, adjusted SG&A, which was right around $829 million about two thirds of that is people cost for which we saw about a 3% increase overall to our costs, both salaries wages plus benefits so that.
Speaker Change: What you should assume for the for the sequential to the second quarter.
Speaker Change: Okay, and then of course volume escalators in that sort of thing, but any any takeaways from that number we should be considering.
Speaker Change: No nothing significant.
Speaker Change: Okay.
Speaker Change: Alright, thank you.
Speaker Change: Thanks, Dave.
Speaker Change: The next question is from Patrick Baumann of Jpmorgan.
Speaker Change: Yes.
Speaker Change: Alright, Thanks, just following up on that.
Speaker Change: Question.
Speaker Change: Outlook for the year I missed the beginning of the call but.
Speaker Change: Have you changed the components.
Speaker Change: The margin guide.
Speaker Change: At the midpoint, you had assumed a little bit of.
Speaker Change: Gross margin benefited from supplier volume rebate initially for the year.
Speaker Change: That would be awesome.
Speaker Change: Some of the incentives.
Speaker Change: Comp.
Speaker Change: Wind in SG&A.
Speaker Change: Now with the guide I think implying something below the mid point any thoughts on those components relative to how you initially kind of done for the year.
Speaker Change: Certainly so on gross margin. We initially thought that the gross margin would be up slightly year over year, given what we experienced in Q1 and our expectations for Q2, we do think that the gross margin would be down year over year.
Speaker Change: On an SG&A perspective.
Speaker Change: Our SG&A assumptions are essentially still holding.
Speaker Change: We will of course have some additional variable costs as we see increases to sales.
Speaker Change: And we have highlighted that we expect sales would be in the upper end of the range with that we would see some operating leverage coming through on the SG&A margin line.
Speaker Change: And you just mentioned second quarter gross margin, what what did you say on that I guess I missed that at the beginning of the call for the full year, we would expect our gross margin would be down versus 2024.
Speaker Change: Call that we did 21, 6% in.
Speaker Change: 2024.
Speaker Change: We initially guided back in February that we expected gross margin to expand slightly.
Speaker Change: That was part of our margin recipe that would be offset by some of these incremental costs due to incentive compensation on the SG&A line.
Speaker Change: So our expectation at this point is that gross margin would be down slightly versus the prior year.
Speaker Change: With the higher sales being in the upper end of the range, we will get some operating leverage though on that SG&A line.
Speaker Change: Right I guess I was talking I thought you had said something about second quarter gross margin EBITDA margin and EBITDA margin. We provided you our expectation that that would be down 50 basis points versus the prior year.
Speaker Change: Understood Okay.
Speaker Change: And then if you can.
Speaker Change: Maybe talk.
Speaker Change: Talk a little bit about what youre seeing.
Speaker Change: In the Canada market.
Speaker Change:
Speaker Change: Kind of a day.
Speaker Change: <unk> exposure for you guys in.
Speaker Change: Curious the macro out there different end markets up there, which youre seeing.
Speaker Change: In your business and your expectations there for the balance of the year.
Speaker Change: Yeah, we are to your point, we have a very strong.
Speaker Change: Canadian business and.
Speaker Change: We had a very strong quarter to start the year very pleased with our Canadian results.
Speaker Change: There is a separate market report that.
Speaker Change: The industry publishers up there.
Speaker Change: That both distributors and suppliers are part of the of that Association.
Speaker Change: And that report shows our performance versus the market was very strong we outperformed the market.
Speaker Change: And.
Speaker Change: Took market share and felt very good about our start to the year.
Speaker Change: And so.
Speaker Change: Backlog grew very strongly as well in the first quarter. So I think we're set up for for really.
Speaker Change: <unk> here.
Speaker Change: Canada with our momentum vector there is a new administration now in Canada, we'll see what the impacts are across their various core industries, including oil and gas and we'll see what happens there but.
Speaker Change: I feel very good about our momentum vector.
Speaker Change: We started the year in our position.
Speaker Change: And what are the key verticals driving that up there.
Speaker Change: So when you look at the structure of the Canadian market and where we're positioned.
Speaker Change: More meaningfully more consolidated in the U S.
Speaker Change: A large margin U S is significantly more fragmented.
Speaker Change: And we are clearly the leader in the Canadian market.
Speaker Change: And it's our entire portfolio of Patrick So we got a strong electrical business the legacy Wesco business. The Big acquisition, we did that was in coal in the western provinces.
Speaker Change: Anixter.
Speaker Change: With their leading wire and cable capabilities that we have a tremendously strong I'll call. It he adds value proposition the full solution portfolio across really from the Pacific Ocean to the Atlantic Ocean, all the way up through the northwest territories, we have a very strong utility business as well.
Speaker Change: And third of all the major utility customers up there.
Speaker Change: Equally strong same value prop that we have in the U S and we have a very strong CSS business.
Speaker Change: Very strong datacom strong broadband our broadband business grew overall.
Speaker Change: In Q1 after growing very strongly in Q2, so we're seeing a little different dynamics of broadband in the U S. But the Canadian brought their business is off to a very good start after a very strong Q4. So.
Speaker Change: The short answer is our entire all three as per user are well represented.
Speaker Change: Overall, we have a very strong leadership position in Canada.
Speaker Change: Okay. Thanks for the color.
Speaker Change: Okay, I think we've wrapped up all the questions. Thank you for those we'll bring the call to a close. Thank you all for your support is very much appreciated.
Speaker Change: We do look forward to speaking with many of you over it over the next couple of days with the follow up calls and that over the next two months, we will be attending the following conferences Oppenheimer industrial growth conference.
Speaker Change: The Wolf transportation and Industrials conference, we'll be participating in the Baird industrial distribution field trip.
Speaker Change: We will be attending the Keybanc industrials and basic minerals conference and the Goldman Sachs leveraged finance and credit conference. So.
Speaker Change: And finally, we expect to announce our second quarter earnings on Thursday July 31, 2025, so with that have a good day. Thank you.
Speaker Change: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Speaker Change: Yeah.
Speaker Change: Okay.
Speaker Change: Yeah.
Speaker Change: [music].